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Item 2. Management’s Discussion and Analysis

2022-07-21 compared with 2022-04-21 · 131 added, 69 removed, 245 unchanged (45% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2022 and 2021 should be read in conjunction with our audited consolidated financial statements and the related notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).

Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results for the year ending December 31, 2022 or any future period.

The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2022 and 2021 should be read in conjunction with our audited consolidated financial statements and the related notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).

Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results for the year ending December 31, 2022 or any future period.

Forward-Looking Statements

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The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future plans, estimates or expectations so contemplated will be achieved, and should not be the primary basis upon which investors evaluate an investment in our securities.

Certain risks, uncertainties and other factors, including those set forth under “Risk Factors” in Part I, Item 1A of the 2021 Form 10-K and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis and may include factors such as, but not limited to, credit quality and risk, the COVID-19 pandemic, industry and technological changes, cyber incidents or other failures, disruptions or security breaches, interest rates, commercial and residential real estate values, economic and market conditions in Texas, the United States or internationally, fund availability, accounting estimates and risk management processes, the transition away from the London Interbank Offered Rate (LIBOR), legislative and regulatory changes, business strategy execution, key personnel, competition, mortgage markets, fraud, environmental liability and severe weather, natural disasters, acts of war or terrorism or other external events.

Certain risks, uncertainties and other factors, including those set forth under “Risk Factors” in Part I, Item 1A of the 2021 Form 10-K and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis and may include factors such as, but not limited to, credit quality and risk, the COVID-19 pandemic, industry and technological changes, cyber incidents or other failures, disruptions or security breaches, interest rates, commercial and residential real estate values, economic conditions, including inflation and the threat of recession, as well as market conditions in Texas, the United States or internationally as well as governmental and consumer responses to those economic and market conditions, fund availability, accounting estimates and risk management processes, the transition away from the London Interbank Offered Rate (LIBOR), legislative and regulatory changes, business strategy execution, key personnel, competition, mortgage markets, fraud, environmental liability and severe weather, natural disasters, acts of war or terrorism or other external events.

The Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Results of Operations

Three months ended March 31, 2022 compared to three months ended March 31, 2021

Selected income statement data and key performance indicators are presented in the table below:

For the Three Months Ended

(dollars in thousands except per share data) March 31, 2022 March 31, 2021

Three months ended June 30, Six months ended June 30,

(dollars in thousands except per share data) 2022 2021 2022 2021

Net interest income $ 205,531 $ 189,457 $ 389,078 $ 384,269

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Net income available to common stockholders $ 29,847 $ 67,164 $ 65,184 $ 135,323

Earnings per common share - basic $ 0.70 $ 1.35

Earnings per common share - diluted $ 0.69 $ 1.33

Basic earnings per common share $ 0.59 $ 1.33 $ 1.29 $ 2.68

Diluted earnings per common share $ 0.59 $ 1.31 $ 1.28 $ 2.65

Net interest margin 2.68 % 2.02 % 2.45 % 2.03 %

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(1) Non-interest expense divided by the sum of net interest income and non-interest income.

We reported net income of $39.7 million and net income available to common stockholders of $35.3 million for the first quarter of 2022 compared to net income of $71.9 million and net income available to common stockholders of $68.2 million for the first quarter of 2021.

On a fully diluted basis, earnings per common share were $0.69 for the first quarter of 2022, compared to $1.33 for the first quarter of 2021.

Return on average common equity (“ROE”) was 4.97% and return on average assets (“ROA”) was 0.47% for the first quarter of 2022, compared to 10.08% and 0.73%, respectively, for the first quarter of 2021.

The decrease in net income for the first quarter of 2022 compared to the first quarter of 2021 resulted primarily from decreases in net interest income and non-interest income.

Three months ended June 30, 2022 compared to three months ended June 30, 2021

We reported net income of $34.2 million and net income available to common stockholders of $29.8 million for the second quarter of 2022, compared to net income of $73.5 million and net income available to common stockholders of $67.2 million for the second quarter of 2021.

On a fully diluted basis, earnings per common share were $0.59 for the second quarter of 2022, compared to $1.31 for the second quarter of 2021.

Return on average common equity (“ROE”) was 4.35% and return on average assets (“ROA”) was 0.44% for the second quarter of 2022, compared to 9.74% and 0.76%, respectively, for the second quarter of 2021.

The decrease in net income for the second quarter of 2022 compared to the second quarter of 2021 resulted primarily from an increase in provision for credit losses.

Six months ended June 30, 2022 compared to six months ended June 30, 2021

We reported net income of $73.8 million and net income available to common stockholders of $65.2 million for the six months ended June 30, 2022, compared to net income of $145.4 million and net income available to common stockholders of $135.3 million for the same period in 2021.

On a fully diluted basis, earnings per common share were $1.28 for the six months ended June 30, 2022, compared to $2.65 for the same period in 2021.

ROE was 4.67% and ROA was 0.45% for the six months ended June 30, 2022, compared to 9.91% and 0.75%, respectively, for the same period in 2021.

The decrease in net income for the six months ended June 30, 2022 compared to the same period in 2021 resulted primarily from a decrease in non-interest income coupled with increases in provision for credit losses and non-interest expense.

Details of the changes in the various components of net income are discussed below.

Taxable Equivalent Net Interest Income Analysis

Three months ended March 31, 2022 Three months ended March 31, 2021

Taxable Equivalent Net Interest Income Analysis - Quarterly(1)

Three months ended June 30, 2022 Three months ended June 30, 2021

(in thousands except percentages) Average

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(1) Taxable equivalent rates used where applicable.

(2) Average balances include non-accrual loans which are stated net of unearned income.

(2) Yields on investment securities are calculated using available-for-sale securities at amortized cost.

(3) Average balances included non-accrual loans.

Taxable Equivalent Net Interest Income Analysis - Year to Date(1)

Six months ended June 30, 2022 Six months ended June 30, 2021

(in thousands except percentages) Average

Balance Revenue/

Expense Yield/

Balance Revenue/

Expense Yield/

Investment securities(2) $ 3,606,069 $ 32,809 1.75 % $ 3,483,254 $ 21,728 1.25 %

Interest-bearing cash and cash equivalents 6,639,327 12,965 0.39 % 11,713,931 5,894 0.10 %

Loans held for sale 7,880 175 4.49 % 167,830 2,376 2.85 %

Loans held for investment, mortgage finance 5,796,097 93,379 3.25 % 7,818,014 122,343 3.16 %

Loans held for investment(3) 16,153,845 312,542 3.90 % 15,349,838 288,913 3.80 %

Allowance for credit losses on loans 211,995 — — 248,151 — —

Loans held for investment, net 21,737,947 405,921 3.77 % 22,919,701 411,256 3.62 %

Total earning assets 31,991,223 451,870 2.83 % 38,284,716 441,254 2.32 %

Cash and other assets 845,082 1,030,625

Total assets $ 32,836,305 $ 39,315,341

Liabilities and Stockholders’ Equity

Transaction deposits $ 2,050,106 $ 7,883 0.78 % $ 3,893,015 $ 11,256 0.58 %

Savings deposits 9,553,920 24,044 0.51 % 12,088,776 19,778 0.33 %

Time deposits 957,615 2,269 0.48 % 1,978,879 5,241 0.53 %

Total interest-bearing deposits 12,561,641 34,196 0.55 % 17,960,670 36,275 0.41 %

Short-term borrowings 2,002,724 5,617 0.57 % 2,517,128 3,094 0.25 %

Long-term debt 929,312 21,988 4.77 % 674,171 16,466 4.93 %

Total interest-bearing liabilities 15,493,677 61,801 0.80 % 21,151,969 55,835 0.53 %

Non-interest bearing deposits 13,990,465 14,782,509

Other liabilities 235,378 291,925

Stockholders’ equity 3,116,785 3,088,938

Total liabilities and stockholders’ equity $ 32,836,305 $ 39,315,341

Net interest income $ 390,069 $ 385,419

Net interest margin 2.45 % 2.03 %

Net interest spread 2.03 % 1.79 %

(1) Taxable equivalent rates used where applicable.

(2) Yields on investment securities are calculated using available-for-sale securities at amortized cost.

(3) Average balances include non-accrual loans.

Volume/Rate Analysis

The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to differences in the average interest rate on those assets and liabilities.

Three months ended March 31, 2022/2021

Three months ended June 30, 2022/2021 Six months ended June 30, 2022/2021

Change Change due to(1) Net

Change Change Due To(1)

(in thousands) Volume Yield/Rate(2)

(in thousands) Volume Yield/Rate(2) Volume Yield/Rate(2)

Interest income:

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Net Interest Income

Net interest income was $183.5 million for the three months ended March 31, 2022, compared to $194.8 million for the same period in 2021.

The decrease was primarily due to a decrease in average loans held for investment, mortgage finance, partially offset by an increase in investment securities yields.

Average earning assets for the three months ended March 31, 2022 decreased $5.5 billion compared to the same period in 2021, and included a $3.3 billion decrease in average interest-bearing cash and cash equivalents and a $2.4 billion decrease in average loans held for investment, mortgage finance.

Net interest income was $205.5 million for the three months ended June 30, 2022, compared to $189.5 million for the same period in 2021.

The increase was primarily due to an increase in yields on total average earning assets, partially offset by an increase in funding costs, both attributed to the impact of rising interest rates.

Average earning assets for the three months ended June 30, 2022 decreased $7.1 billion compared to the same period in 2021 and included a $6.8 billion decrease in average interest-bearing cash and cash equivalents.

The decrease in average interest bearing cash and cash equivalents resulted primarily from our proactive exit of certain high-cost indexed deposit products in the second half of 2021.

The decrease in average loans held for investment, mortgage finance, was primarily due to reduced volumes as a result of the rising interest rate environment.

Average interest-bearing liabilities for the three months ended March 31, 2022 decreased $5.6 billion compared to the same period in 2021, primarily due to a $5.2 billion decrease in average interest-bearing deposits.

Average demand deposits for the three months ended March 31, 2022 decreased $185.8 million compared to the same period in 2021.

Net interest margin for the three months ended March 31, 2022 was 2.23% compared to 2.04% for the same period in 2021, primarily due to a shift in the composition of earning assets, primarily declines in interest-bearing cash and cash equivalents and LHI, mortgage finance.

The yield on total loans held for investment decreased to 3.59% for the three months ended March 31, 2022 compared to 3.62% for the same period in 2021, and the yield on earning assets increased to 2.54% for the three months ended March 31, 2022 compared to 2.33% for the same period in 2021.

The average cost of total deposits decreased to 0.20% for the three months ended March 31, 2022 from 0.24% for the same period in 2021, and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 0.30% for the three months ended March 31, 2022 compared to 0.29% for the same period in 2021.

Average interest-bearing liabilities for the three months ended June 30, 2022 decreased $5.7 billion compared to the same period in 2021, primarily due to a $5.6 billion decrease in average interest-bearing deposits.

Average demand deposits for the three months ended June 30, 2022 decreased $1.4 billion compared to the same period in 2021.

Net interest margin for the three months ended June 30, 2022 was 2.68% compared to 2.02% for the same period in 2021.

The increase in net interest margin was primarily due to a shift in the composition of earning assets coupled with an increase in yields on average earnings assets, partially offset by an increase in funding costs.

The yield on total loans held for investment increased to 3.93% for the three months ended June 30, 2022 compared to 3.61% for the same period in 2021 and the yield on earning assets increased to 3.16% for the three months ended June 30, 2022 compared to 2.31% for the same period in 2021.

Total cost of deposits increased to 0.33% for the three months ended June 30, 2022 from 0.20% for the same period in 2021, and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 0.47% for the three months ended June 30, 2022 compared to 0.29% for the same period in 2021.

Net interest income was $389.1 million for the six months ended June 30, 2022 compared to $384.3 million for the same period in 2021.

The increase was primarily due to an increase in yields on earnings assets, partially offset by a decrease in average total loans and rising cost of funds.

The increases in yields on earning assets and cost of funds are attributable to the impact of rising interest rates.

Average earning assets decreased $6.3 billion for the six months ended June 30, 2022, compared to the same period in 2021 and included a $5.1 billion decrease in average interest-bearing cash and cash equivalents.

Average interest-bearing liabilities decreased $5.7 billion for the six months ended June 30, 2022, compared to the same period in 2021, primarily due to a $5.4 billion decrease in average interest-bearing deposits.

Average demand deposits for the six months ended June 30, 2022 decreased to $14.0 billion from $14.8 billion for the same period in 2021.

Net interest margin for the six months ended June 30, 2022 was 2.45% compared to 2.03% for the same period of 2021.

The increase was primarily due to the effect of rising interest rates on earning asset yields and a shift in earning asset composition, partially offset by higher funding costs compared to the same period in 2021.

The yield on total loans held for investment increased to 3.77% for the six months ended June 30, 2022, compared to 3.62% for the same period in 2021 and the yield on earning assets increased to 2.83% for the six months ended June 30, 2022, compared to 2.32% for the same period in 2021.

Total cost of deposits increased to 0.26% for the six months ended June 30, 2022 from 0.22% for the same period in 2021 and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 0.38% for the six months ended June 30, 2022, compared to 0.29% for the same period in 2021.

Non-interest Income

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

(in thousands) 2022 2021 2022 2021

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Total non-interest income $ 26,242 $ 37,639 $ 46,524 $ 81,992

Non-interest income decreased $24.1 million during the three months ended March 31, 2022 compared to the same period in 2021.

The decrease was primarily due to decreases in brokered loan fees, servicing fee income and net gain/(loss) on sale of loans held for sale all as a result of the sale of our mortgage servicing rights portfolio and transition of the mortgage correspondent aggregation program in 2021.

Non-interest income decreased $11.4 million during the three months ended June 30, 2022, compared to the same period in 2021.

The decrease was primarily due to decreases in servicing fee income, as a result of the sale of our mortgage servicing rights portfolio in 2021, and other non-interest income, partially offset by an increase in investment banking and trading income and the elimination of net losses recorded in the prior year on the sale of loans held for sale.

Non-interest income decreased $35.5 million during the six months ended June 30, 2022, compared to the same period in 2021.

Non-interest Expense

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

(in thousands) 2022 2021 2022 2021

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Total non-interest expense $ 164,303 $ 149,060 $ 317,395 $ 299,376

Non-interest expense for the three months ended March 31, 2022 increased $2.8 million compared to the same period in 2021.

The increase was primarily due to increases in salaries and benefits, partially offset by a decrease in servicing-related expenses.

The increase in salaries and benefits expense was primarily due to an increase in headcount, while the decrease in service-related expenses resulted primarily from the sale of our mortgage servicing rights portfolio in 2021.

Non-interest expense for the three months ended June 30, 2022 increased $15.2 million compared to the same period in 2021.

The increase was primarily due to an increase in salaries and benefits expense, resulting primarily from an increase in headcount, as well as an increase in marketing expense, partially offset by a decrease in servicing-related expenses related to the sale of our mortgage servicing rights portfolio in 2021.

Non-interest expense increased by $18.0 million during the six months ended June 30, 2022, compared to the same period in 2021.

The increase was primarily due to increases in salaries and benefits expense, resulting primarily from an increase in headcount, and marketing expense, partially offset by a decrease in servicing-related expenses resulting from the sale of our mortgage servicing rights portfolio in 2021.

Analysis of Financial Condition

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The following table summarizes our loans held for investment by portfolio segment:

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

(in thousands)

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Total loans held for investment, net $ 23,838,360 $ 22,595,088

Total loans held for investment were $21.7 billion at March 31, 2022, a decline of $1.1 billion from December 31, 2021.

The decline in total loans held for investment was primarily due to a decline in mortgage finance loans, partially offset by increases in commercial and real estate loans.

Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 27% of total loans held for investment at March 31, 2022 compared to 33% at December 31, 2021.

Volumes fluctuate based on the level of market

demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates, and tend to peak at the end of each month.

The balances of mortgage finance loans have continued to decline in the first quarter of 2022 as interest rates have continued to rise.

Total loans held for investment were $24.1 billion at June 30, 2022, an increase of $1.3 billion from December 31, 2021.

We experienced loan growth across all loan categories, except for mortgage finance loans, as we executed on our long-term strategy.

Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 27% of total loans held for investment at June 30, 2022 compared to 33% at December 31, 2021.

Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates, and tend to peak at the end of each month.

Mortgage finance loans experienced seasonal growth of 12% during the second quarter of 2022 compared to the first quarter of 2022, however overall balances are lower than at December 31, 2021 as interest rates have continued to rise.

We originate a substantial majority of all loans held for investment.

We also participate in syndicated loan relationships, both as a participant and as an agent.

As of March 31, 2022, we had $2.7 billion in syndicated loans, $649.5 million of which we administer as agent.

As of June 30, 2022, we had $3.2 billion in syndicated loans, $721.6 million of which we administer as agent.

All syndicated loans, whether we act as agent or participant, are underwritten to the same standards as all other loans we originate.

As of March 31, 2022, none of our syndicated loans were on non-accrual.

As of June 30, 2022, none of our syndicated loans were on non-accrual.

Portfolio Concentrations

Although more than 50% of our total loan exposure is outside of Texas and more than 50% of our deposits are sourced outside of Texas, our Texas concentration remains significant.

As of March 31, 2022, a majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, were to businesses with headquarters or operations in Texas.

As of June 30, 2022, a majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, were to businesses with headquarters or operations in Texas.

This geographic concentration subjects the loan portfolio to the general economic conditions within this state.

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The table below summarizes our non-performing assets by type and by type of property securing the credit.

(in thousands) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

Non-accrual loans held for investment(1):

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Loans held for sale past due 90 days and still accruing(3) $ 1,602 $ 3,986

(1) As of March 31, 2022 and December 31, 2021, non-accrual loans included $18.0 million and 19.4 million, respectively, in loans that met the criteria for restructured.

(2) At March 31, 2022 and December 31, 2021, loans past due 90 days and still accruing includes premium finance loans of $3.2 million and $3.3 million, respectively.

(1) As of June 30, 2022 and December 31, 2021, non-accrual loans include $17.3 million and $19.4 million, respectively, in loans that met the criteria for restructured.

(2) At June 30, 2022 and December 31, 2021, loans past due 90 days and still accruing includes premium finance loans of $3.1 million and $3.3 million, respectively.

(3) Includes loans guaranteed by U.S.

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The provision for credit losses, comprised of a provision for loans and off-balance sheet credit losses, is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected losses at each balance sheet date.

We recorded a $2.0 million negative provision for credit losses for the three months ended March 31, 2022, compared to a negative provision of $6.0 million for the three months ended March 31, 2021.

The $2.0 million negative provision for credit losses resulted from a decline in criticized loans, partially offset by an increase in loans held for investment, excluding mortgage finance.

We recorded $512,000 in net recoveries during the three months ended March 31, 2022, compared to net charge-offs of $6.4 million during the three months ended March 31, 2021.

Criticized loans totaled $476.1 million at March 31, 2022, compared to $945.1 million at March 31, 2021.

We recorded a $20.0 million provision for credit losses for the six months ended June 30, 2022, compared to a negative provision of $25.0 million for the same period in 2021.

The $20.0 million provision for credit losses resulted from an increase in total loans held for investment.

We recorded $2.1 million in net charge-offs during the six months ended June 30, 2022, compared to net charge-offs of $8.8 million during the six months ended June 30, 2021.

Criticized loans totaled $603.5 million at June 30, 2022, compared to $582.9 million and $891.6 million at December 31, 2021 and June 30, 2021, respectively.

The increase in criticized loans as compared to March 31, 2022 was primarily due to one mortgage finance credit which is adequately reserved for as of June 30, 2022, and is expected to be resolved in the third quarter of 2022.

The table below presents key metrics related to our credit loss experience:

March 31, 2022 March 31, 2021

June 30, 2022 June 30, 2021

Allowance for credit losses on loans to total loans held for investment 0.95 % 0.93 %

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Total allowance for credit losses to total loans held for investment 1.03 % 1.00 %

(1) Interim period ratios are annualized.

(1) Ratios are calculated using average balance for the six months ended June 30, 2022 and 2021, respectively.

(2) Ratios are annualized utilizing provision for credit losses for the six months ended June 30, 2022 and 2021, respectively.

The table below details net charge-offs (recoveries) as a percentage of average total loans by loan category:

Three months ended March 31,

Six months ended June 30,

Net Charge-offs Net Charge-offs

Net Charge-offs to Average Loans(1) Net Charge-offs to Average Loans(1)

Net to Average Net to Average

Charge-offs Loans(1) Charge-offs Loans(1)

Commercial $ 2,542 0.05 % $ 2,505 0.06 %

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We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness.

Our principal source of funding is customer deposits, supplemented by short-term borrowings, primarily federal funds purchased and FHLB borrowings, which are generally used to fund mortgage finance assets, as well as long-term debt.

Our principal source of funding is customer deposits, supplemented by short-term borrowings, primarily federal funds purchased and Federal Home Loan Banks (“FHLB”) borrowings, which are generally used to fund mortgage finance assets, as well as long-term debt.

We also rely on the availability of the mortgage secondary market provided by Ginnie Mae and the government-sponsored enterprises to support the liquidity of our mortgage finance assets.

During 2020 and into the first half of 2021, we significantly increased our interest-bearing cash and cash equivalents to ensure that we had the balance sheet strength to serve our clients during the COVID-19 pandemic.

In the second half of 2021 and continuing into the first three months of 2022, these balances have run off as we have purchased investment securities and proactively exited certain high-cost indexed deposit products.

In the second half of 2021 and continuing into the first six months of 2022, these balances have run off as we have purchased investment securities and proactively exited certain high-cost indexed deposit products.

The following table summarizes these balances:

(in thousands except percentage data) March 31, 2022 December 31, 2021 March 31, 2021

(in thousands except percentage data) June 30, 2022 December 31, 2021 June 30, 2021

Interest-bearing cash and cash equivalents $ 4,032,931 $ 7,765,996 $ 6,768,650

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Total deposits 15.9 % 27.6 % 23.5 %

Our liquidity needs to support growth in loans held for investment have been fulfilled primarily through growth in our core customer deposits.

Our liquidity needs to support growth in loans held for investment, which have been fulfilled primarily through growth in our core customer deposits.

Our goal is to obtain as much of our funding for loans held for investment and other earning assets as possible from deposits of these core customers.

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The following table summarizes our period-end and average core customer deposits, relationship brokered deposits and traditional brokered deposits:

(in thousands) March 31, 2022 December 31, 2021 March 31, 2021

(in thousands) June 30, 2022 December 31, 2021 June 30, 2021

Deposits from core customers $ 24,176,479 $ 25,409,180 $ 26,309,504

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The following table summarizes the outstanding balance of our short-term borrowings, all of which mature within one year:

(in thousands) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

Repurchase agreements $ 1,536 2,832

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The following table summarizes our short-term borrowing capacities net of balances outstanding.

(in thousands) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

FHLB borrowing capacity relating to loans $ 3,019,254 $ 5,190,703

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The loan agreement contains customary financial covenants and restrictions.

No borrowings were made against this line of credit during the three months ended March 31, 2022.

We also have long-term debt outstanding of $929.4 million as of March 31, 2022, comprised of trust preferred securities, subordinated notes and senior unsecured credit linked notes with maturity dates ranging from September 2024 to December 2036.

No borrowings were made against this line of credit during the six months ended June 30, 2022.

We also have long-term debt outstanding of $917.1 million as of June 30, 2022, comprised of trust preferred securities, subordinated notes and senior unsecured credit linked notes with maturity dates ranging from September 2024 to December 2036.

The Company may consider raising additional capital, if needed, in public or private offerings of debt or equity securities to supplement deposits and meet our long-term funding needs.

For additional information regarding our borrowings see Note 5 - Borrowings in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report.

As the Company is a holding company and is a separate operating entity from our subsidiary bank, our primary sources of liquidity are dividends received from the Bank and borrowings from outside sources.

For additional information regarding our borrowings see Note 5 - Short-term Borrowings and Long-term Debt in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report.

As the Company is a holding company and is a separate operating entity from the Bank, our primary sources of liquidity are dividends received from the Bank and borrowings from outside sources.

Banking regulations may limit the amount of dividends that may be paid by the Bank.

See Note 7 - Regulatory Restrictions in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report for additional information regarding dividend restrictions.

See Note 7 - Regulatory Ratios and Capital in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report for additional information regarding dividend restrictions.

Periodically, based on market conditions and other factors, and subject to compliance with applicable laws and regulations and the terms of our existing indebtedness, we or the Bank may repay, repurchase, exchange or redeem outstanding indebtedness, or otherwise enter into transactions regarding our debt or capital structure.

For example, we and the Bank periodically evaluate and may engage in liability management transactions, including repurchases or redemptions of outstanding subordinated notes, which may be funded by the issuance of, or exchanges of, newly issued unsecured borrowings, as we seek to actively manage our debt maturity profile and interest cost.

As of March 31, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

As of June 30, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.

Capital Resources

Our equity capital averaged $3.2 billion for the three months ended March 31, 2022 compared to $3.0 billion for the same period in 2021.

Average total equity was $3.1 billion for the six months ended June 30, 2022.

We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the foreseeable future.

3 unchanged sentences

No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time.

During the three months ended June 30, 2022, the Company repurchased 941,879 shares of its common stock for an aggregate purchase price of $50.0 million, at a weighted average price of $53.11 per share.

See Note 7 - Regulatory Ratios and Capital in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report for additional information regarding capital.

Critical Accounting Estimates

16 unchanged sentences

A reserve is recorded upon origination or purchase of a loan.

Management considers a range of macroeconomic scenarios in connection with the allowance estimation process.

Within the various economic scenarios considered as of June 30, 2022, the quantitative estimate of the allowance for credit loss would increase by approximately $107 million under sole consideration of the most severe downside scenario.

The quoted sensitivity calculation reflects the sensitivity of the modeled allowance estimate to macroeconomic forecast data, but is absent of

qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process and does not necessarily reflect the nature and extent of future changes in the allowance for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.

See “ Summary of Credit Loss Experience” above and Note 4 – Loans and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis