Item 2. Management’s Discussion and Analysis
ITEM 2. 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 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
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information available to us at the time such statements are made. Forward-looking statements may often be identified by the use of words such as “expects,” “estimates,” “anticipates,” “plans,” “goals,” “objectives,” “intends,” “seeks,” “likely,” “should,” “may” “could” and other similar expressions. These forward-looking statements are based of the historical performance of the Company or on the Company’s current plans, estimates and expectations. 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 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
Selected income statement data and key performance indicators are presented in the table below:
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
Provision for credit losses 22,000 (19,000) 20,000 (25,000)
Non-interest income 26,242 37,639 46,524 81,992
Non-interest expense 164,303 149,060 317,395 299,376
Income before income taxes 45,470 97,036 98,207 191,885
Income tax expense 11,311 23,555 24,398 46,466
Net income 34,159 73,481 73,809 145,419
Preferred stock dividends 4,312 6,317 8,625 10,096
Net income available to common stockholders $ 29,847 $ 67,164 $ 65,184 $ 135,323
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 %
Return on average assets 0.44 % 0.76 % 0.45 % 0.75 %
Return on average common equity 4.35 % 9.74 % 4.67 % 9.91 %
Non-interest income to average earning assets 0.34 % 0.40 % 0.29 % 0.43 %
Efficiency ratio(1) 70.9 % 65.6 % 72.9 % 64.2 %
Non-interest expense to average earning assets 2.16 % 1.59 % 2.00 % 1.58 %
(1) Non-interest expense divided by the sum of net interest income and non-interest income.
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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.
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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
Balance Income/
Expense Yield/
Rate Average
Balance Income/
Expense Yield/
Rate
Assets
Investment securities(2) $ 3,543,576 $ 15,065 1.60 % $ 3,543,270 $ 11,369 1.29 %
Interest-bearing cash and cash equivalents 4,747,377 9,394 0.79 % 11,583,759 2,961 0.10 %
Loans held for sale 8,123 62 3.07 % 93,164 781 3.36 %
Loans held for investment, mortgage finance 5,858,599 49,914 3.42 % 7,462,223 57,401 3.09 %
Loans held for investment(3) 16,616,234 168,407 4.07 % 15,242,975 144,978 3.81 %
Less: Allowance for credit losses on loans 211,385 — — 241,676 — —
Loans held for investment, net 22,263,448 218,321 3.93 % 22,463,522 202,379 3.61 %
Total earning assets 30,562,524 242,842 3.16 % 37,683,715 217,490 2.31 %
Cash and other assets 870,396 996,946
Total assets $ 31,432,920 $ 38,680,661
Liabilities and Stockholders’ Equity
Transaction deposits $ 1,671,729 $ 3,920 0.94 % $ 3,795,152 $ 5,395 0.57 %
Savings deposits 8,696,819 15,462 0.71 % 11,296,382 8,990 0.32 %
Time deposits 877,399 1,184 0.54 % 1,755,993 1,886 0.43 %
Total interest bearing deposits 11,245,947 20,566 0.73 % 16,847,527 16,271 0.39 %
Short-term borrowings 2,232,119 4,859 0.87 % 2,349,718 502 0.09 %
Long-term debt 929,616 11,393 4.92 % 881,309 10,723 4.88 %
Total interest bearing liabilities 14,407,682 36,818 1.02 % 20,078,554 27,496 0.55 %
Non-interest bearing deposits 13,747,876 15,139,546
Other liabilities 227,701 274,401
Stockholders’ equity 3,049,661 3,188,160
Total liabilities and stockholders’ equity $ 31,432,920 $ 38,680,661
Net interest income $ 206,024 $ 189,994
Net interest margin 2.68 % 2.02 %
Net interest spread 2.14 % 1.76 %
(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 included non-accrual loans.
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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/
Rate Average
Balance Revenue/
Expense Yield/
Rate
Assets
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 %
Less: 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.
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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 June 30, 2022/2021 Six months ended June 30, 2022/2021
Net
Change Change due to(1) Net
Change Change Due To(1)
(in thousands) Volume Yield/Rate(2) Volume Yield/Rate(2)
Interest income:
Investment securities $ 3,696 $ 1 $ 3,695 $ 11,081 $ 749 $ 10,332
Interest bearing cash and cash equivalents 6,433 (1,705) 8,138 7,071 (2,516) 9,587
Loans held for sale (719) (712) (7) (2,201) (2,258) 57
Loans held for investment, mortgage finance loans (7,487) (12,354) 4,867 (28,964) (31,766) 2,802
Loans held for investment 23,429 13,044 10,385 23,629 15,173 8,456
Total 25,352 (1,726) 27,078 10,616 (20,618) 31,234
Interest expense:
Transaction deposits (1,475) (3,018) 1,543 (3,373) (5,325) 1,952
Savings deposits 6,472 (2,074) 8,546 4,266 (4,144) 8,410
Time deposits (702) (942) 240 (2,972) (2,724) (248)
Short-term borrowings 4,357 (26) 4,383 2,523 (906) 3,429
Long-term debt 670 588 82 5,522 6,323 (801)
Total 9,322 (5,472) 14,794 5,966 (6,776) 12,742
Net interest income $ 16,030 $ 3,746 $ 12,284 $ 4,650 $ (13,842) $ 18,492
(1) Yield/rate and volume variances are allocated to yield/rate.
(2) Taxable equivalent rates used where applicable assuming a 21% tax rate.
Net Interest Income
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. 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.
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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 June 30, Six months ended June 30,
(in thousands) 2022 2021 2022 2021
Service charges on deposit accounts $ 6,003 $ 4,634 $ 12,025 $ 9,350
Wealth management and trust fee income 4,051 3,143 7,963 5,998
Brokered loan fees 4,133 6,933 8,103 16,244
Servicing income 228 5,935 465 14,944
Investment banking and trading income 11,126 8,071 15,305 13,858
Net gain/(loss) on sale of loans held for sale — (3,070) — 2,502
Other 701 11,993 2,663 19,096
Total non-interest income $ 26,242 $ 37,639 $ 46,524 $ 81,992
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. 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, as well as a decrease in other non-interest income.
Non-interest Expense
Three months ended June 30, Six months ended June 30,
(in thousands) 2022 2021 2022 2021
Salaries and benefits $ 103,885 $ 86,830 $ 203,983 $ 174,352
Occupancy expense 8,874 7,865 17,759 16,139
Marketing 8,506 1,900 13,483 3,597
Legal and professional 11,288 9,147 21,590 17,424
Communications and technology 15,649 14,352 30,349 30,321
FDIC insurance assessment 3,318 5,226 7,299 11,839
Servicing-related expenses — 12,355 — 25,344
Other 12,783 11,385 22,932 20,360
Total non-interest expense $ 164,303 $ 149,060 $ 317,395 $ 299,376
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.
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Analysis of Financial Condition
Loans Held for Investment
The following table summarizes our loans held for investment by portfolio segment:
June 30, 2022 December 31, 2021
(in thousands)
Commercial $ 11,511,532 $ 9,897,561
Energy 962,239 721,373
Mortgage finance 6,549,507 7,475,497
Real estate 5,118,849 4,777,530
Gross loans held for investment $ 24,142,127 $ 22,871,961
Deferred income (net of direct origination costs) (74,754) (65,007)
Total loans held for investment 24,067,373 22,806,954
Allowance for credit losses on loans (229,013) (211,866)
Total loans held for investment, net $ 23,838,360 $ 22,595,088
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 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 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 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. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses.
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Non-performing Assets
Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes our non-performing assets by type and by type of property securing the credit.
(in thousands) June 30, 2022 December 31, 2021
Non-accrual loans held for investment(1):
Commercial:
Assets of the borrowers $ 14,454 $ 18,366
Accounts receivable and inventory 4,136 5,501
Other 1,783 2,045
Total commercial 20,373 25,912
Energy:
Oil and gas properties 17,572 28,380
Total energy 17,572 28,380
Real estate:
Assets of the borrowers 12,210 13,741
Commercial property 190 2,840
Single family residences 181 1,629
Total real estate 12,581 18,210
Total non-accrual loans held for investment 50,526 72,502
Non-accrual loans held for sale — —
Other real estate owned — —
Total non-performing assets $ 50,526 $ 72,502
Non-accrual loans held for investment to total loans held for investment 0.21 % 0.32 %
Allowance for credit losses on loans to non-accrual loans held for investment 4.5x 2.9x
Loans held for investment past due 90 days and still accruing(2) $ 3,206 $ 3,467
Loans held for investment past due 90 days to total loans held for investment 0.01 % 0.02 %
Loans held for sale past due 90 days and still accruing(3) $ 1,602 $ 3,986
(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. government agencies that were repurchased out of Ginnie Mae securities. Loans are recorded as loans held for sale and carried at fair value on the balance sheet. Interest on these past due loans accrues at the debenture rate guaranteed by the U.S. government.
Summary of Credit Loss Experience
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 $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.
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The table below presents key metrics related to our credit loss experience:
June 30, 2022 June 30, 2021
Allowance for credit losses on loans to total loans held for investment 0.95 % 0.93 %
Allowance for credit losses on loans to total average loans held for investment(1) 1.04 % 0.96 %
Total provision for credit losses to average total loans held for investment(1)(2) 0.18 % (0.22) %
Total allowance for credit losses to total loans held for investment 1.03 % 1.00 %
(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:
Six months ended June 30,
2022 2021
Net Charge-offs Net Charge-offs
Net to Average Net to Average
Charge-offs Loans(1) Charge-offs Loans(1)
Commercial $ 2,542 0.05 % $ 2,505 0.06 %
Energy (755) (0.05) % 5,094 1.57 %
Mortgage finance — — % — — %
Real estate 350 0.01 % 1,192 0.04 %
Total $ 2,137 0.02 % $ 8,791 0.08 %
(1) Interim period ratios are annualized.
Liquidity and Capital Resources
Liquidity
In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objectives in managing our liquidity are to maintain our ability to meet loan commitments, repurchase investment securities and repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, formulated and monitored by our senior management and our Asset and Liability Management Committee (“ALCO”), which take into account the demonstrated marketability of our assets, the sources and stability of our funding and the level of unfunded commitments. 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 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 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) June 30, 2022 December 31, 2021 June 30, 2021
Interest-bearing cash and cash equivalents $ 4,032,931 $ 7,765,996 $ 6,768,650
Interest-bearing cash and cash equivalents as a percent of:
Total loans held for investment 16.8 % 34.1 % 28.3 %
Total earning assets 12.8 % 22.9 % 19.7 %
Total deposits 15.9 % 27.6 % 23.5 %
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. These deposits are generated principally through development of long-term customer relationships, with a significant focus on treasury management products. In addition to deposits from our core customers, we also have access to deposits through brokered customer relationships.
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We also have access to incremental deposits through brokered retail certificates of deposit, or CDs. These traditional brokered deposits are generally of short maturities and are used to fund temporary differences in the growth in loan balances as compared to customer deposits. The following table summarizes our period-end and average core customer deposits, relationship brokered deposits and traditional brokered deposits:
(in thousands) June 30, 2022 December 31, 2021 June 30, 2021
Deposits from core customers $ 24,176,479 $ 25,409,180 $ 26,309,504
Deposits from core customers as a percent of total deposits 95.1 % 90.4 % 91.2 %
Relationship brokered deposits $ 113,142 $ 1,855,892 $ 1,373,763
Relationship brokered deposits as a percent of average total deposits 0.4 % 6.6 % 4.8 %
Traditional brokered deposits $ 1,150,400 $ 844,293 $ 1,156,296
Traditional brokered deposits as a percent of total deposits 4.5 % 3.0 % 4.0 %
Average deposits from core customers(1) $ 24,993,505 $ 28,734,460 $ 29,545,933
Average deposits from core customers as a percent of average total deposits 94.2 % 91.1 % 90.2 %
Average relationship brokered deposits(1) $ 909,565 $ 1,608,587 $ 1,804,015
Average relationship brokered deposits as a percent of average total deposits 3.4 % 5.1 % 5.5 %
Average traditional brokered deposits(1) $ 649,036 $ 1,188,544 $ 1,393,231
Average traditional brokered deposits as a percent of average total deposits 2.4 % 3.8 % 4.3 %
(1) Annual averages presented for December 31, 2021.
We have access to sources of traditional brokered deposits that we estimate to be $7.5 billion. Based on our internal guidelines, we have currently chosen to limit our use of these sources to a lesser amount.
We have short-term borrowing sources available to supplement deposits and meet our funding needs. Such borrowings are generally used to fund our mortgage finance loans, due to their liquidity, short duration and interest spreads available. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our Bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our Bank), customer repurchase agreements and advances from the FHLB and the Federal Reserve. The following table summarizes the outstanding balance of our short-term borrowings, all of which mature within one year:
(in thousands) June 30, 2022 December 31, 2021
Repurchase agreements $ 1,536 2,832
FHLB borrowings 2,650,000 2,200,000
Total short-term borrowings $ 2,651,536 2,202,832
The following table summarizes our short-term borrowing capacities net of balances outstanding.
(in thousands) June 30, 2022 December 31, 2021
FHLB borrowing capacity relating to loans $ 3,019,254 $ 5,190,703
FHLB borrowing capacity relating to securities 3,416,759 3,352,111
Total FHLB borrowing capacity(1) $ 6,436,013 $ 8,542,814
Unused federal funds lines available from commercial banks $ 1,456,000 $ 892,000
Unused Federal Reserve borrowings capacity $ 3,479,343 $ 2,414,702
Unused revolving line of credit(2) $ 75,000 $ 75,000
(1) FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans, mortgage finance assets and certain pledged securities.
(2) Unsecured revolving, non-amortizing line of credit with maturity date of February 8, 2023. Proceeds may be used for general corporate purposes, including funding regulatory capital infusions into the Bank. The loan agreement contains customary financial covenants and restrictions. 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 - 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 Ratios and Capital in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report for additional information regarding dividend restrictions.
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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 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
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.
On April 19, 2022, our board of directors authorized a new share repurchase program under which we may repurchase up to $150.0 million in shares of our outstanding common stock. Any repurchases under the repurchase program will be made in accordance with applicable securities laws from time to time in open market or private transactions. The extent to which we repurchase shares, and the timing of such repurchases, will be at management’s discretion and will depend upon a variety of factors, including market conditions, our capital position and amount of retained earnings, regulatory requirements and other considerations. 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
SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.
We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. Certain significant policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the notes to the consolidated unaudited financial statements included elsewhere in this report and in our 2021 Form 10-K. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to be highly dependent on estimates, assumptions and judgments that meet the SEC’s definition of a critical accounting estimate.
Allowance for Credit Losses
Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes activity related to allowances calculated in accordance with ASC 326, Credit Losses . The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in our portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. For purposes of determining the allowance for credit losses, the loan portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”). The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. 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
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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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.