What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-20 compared with 2022-07-21 · 93 added, 84 removed, 292 unchanged (38% 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 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.

The following discussion and analysis of our financial condition and results of operations for the three and nine months ended September 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 nine months ended September 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 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.

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, uncertainties related to our sale of BankDirect Capital Finance, LLC, cyber incidents or other failures, disruptions or security breaches, interest rates, commercial and residential real estate values, economic conditions, including inflation, recession, the threat of recession, and market conditions in Texas, the United States or globally, including 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, ratings or interpretations, business strategy execution, key personnel, competition, mortgage markets, fraud, environmental liability and severe weather, natural disasters, acts of war, terrorism, global conflict 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.

Overview of Our Business Operations

On September 6, 2022, we announced the sale of BankDirect Capital Finance (“BDCF” or “disposal group”), our insurance premium finance subsidiary, to AFCO Credit Corporation, an indirect wholly-owned subsidiary of Truist Financial Corp.

The sale of BDCF includes its business operations and loan portfolio of approximately $3.1 billion as of September 30, 2022.

The sale is an all-cash transaction for a purchase price of approximately $3.4 billion, representing an 8.5% asset premium compared to the value of the purchased loan portfolio as of September 30, 2022.

The sale is expected to close in the fourth quarter of 2022, subject to various customary closing conditions.

For additional information, see Note 1 - Operations and Summary of Significant Accounting Policies included elsewhere in this report.

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,

Three months ended September 30, Nine months ended September 30,

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

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Net interest margin 3.05 % 2.11 % 2.64 % 2.06 %

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 %

Return on average assets (“ROA”) 0.52 % 0.47 % 0.47 % 0.66 %

Return on average common equity (“ROE”) 5.36 % 5.41 % 4.90 % 8.35 %

Non-interest income to average earning assets 0.33 % 0.27 % 0.30 % 0.38 %

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(1) Non-interest expense divided by the sum of 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.

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

We reported net income of $41.4 million and net income available to common stockholders of $37.1 million for the third quarter of 2022, compared to net income of $43.4 million and net income available to common stockholders of $39.1 million for the third quarter of 2021.

On a fully diluted basis, earnings per common share were $0.74 for the third quarter of 2022, compared to $0.76 for the third quarter of 2021.

ROE was 5.36% and ROA was 0.52% for the third quarter of 2022, compared to 5.41% and 0.47%, respectively, for the third quarter of 2021.

The decrease in net income for the third quarter of 2022 compared to the third quarter of 2021 resulted primarily from increases in provision for credit losses and non-interest expense, partially offset by an increase in net interest income.

Nine months ended September 30, 2022 compared to nine months ended September 30, 2021

We reported net income of $115.2 million and net income available to common stockholders of $102.3 million for the nine months ended September 30, 2022, compared to net income of $188.8 million and net income available to common stockholders of $174.4 million for the same period in 2021.

On a fully diluted basis, earnings per common share were $2.00 for the nine months ended September 30, 2022, compared to $3.41 for the same period in 2021.

ROE was 4.90% and ROA was 0.47% for the nine months ended September 30, 2022, compared to 8.35% and 0.66%, respectively, for the same period in 2021.

The decrease in net income for the nine months ended September 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, partially offset by an increase in net interest income.

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

Taxable Equivalent Net Interest Income Analysis - Quarterly(1)

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

Three months ended September 30, 2022 Three months ended September 30, 2021

(in thousands except percentages) Average

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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

Nine months ended September 30, 2022 Nine months ended September 30, 2021

(in thousands except percentages) Average

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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

Three months ended September 30, 2022/2021 Nine months ended September 30, 2022/2021

Change Change due to(1) Net

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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.

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.

Net interest income was $239.1 million for the three months ended September 30, 2022, compared to $190.5 million for the same period in 2021.

The increase was primarily due to an increase in yields on average earning assets, partially offset by an increase in funding costs.

Average earning assets for the three months ended September 30, 2022 decreased $5.0 billion compared to the same period in 2021, which included a $4.6 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 beginning in the second half of 2021.

Average interest-bearing liabilities for the three months ended September 30, 2022 decreased $1.7 billion compared to the same period in 2021, primarily due to a $1.3 billion decrease in average interest-bearing deposits.

Average demand deposits for the three months ended September 30, 2022 decreased $3.1 billion compared to the same period in 2021.

Net interest margin for the three months ended September 30, 2022 was 3.05%, compared to 2.11% for the same period in 2021.

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

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

The yield on total loans held for investment increased to 4.91% for the three months ended September 30, 2022, compared to 3.49% for the same period in 2021, and the yield on earning assets increased to 4.10% for the three months ended September 30, 2022, compared to 2.40% for the same period in 2021.

Total cost of deposits increased to 0.93% for the three months ended September 30, 2022 from 0.19% for the same period in 2021, and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 1.04% for the three months ended September 30, 2022, compared to 0.28% for the same period in 2021.

Net interest income was $628.2 million for the nine months ended September 30, 2022, compared to $574.8 million for the same period in 2021.

The increase was primarily due to an increase in yields on earnings assets, partially offset by rising funding costs.

Average earning assets decreased $5.9 billion for the nine months ended September 30, 2022, compared to the same period in 2021, which included a $4.9 billion decrease in average interest-bearing cash and cash equivalents.

Average interest-bearing liabilities decreased $4.3 billion for the nine months ended September 30, 2022, compared to the same period in 2021, primarily due to a $4.0 billion decrease in average interest-bearing deposits.

Average demand deposits for the nine months ended September 30, 2022 decreased to $13.4 billion from $15.0 billion for the same period in 2021.

Net interest margin for the nine months ended September 30, 2022 was 2.64%, compared to 2.06% 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, also as a result of rising interest rates, compared to the same period in 2021.

The yield on total loans held for investment increased to 4.15% for the nine months ended September 30, 2022, compared to 3.58% for the same period in 2021, and the yield on earning assets increased to 3.25% for the nine months ended September 30, 2022, compared to 2.35% for the same period in 2021.

Total cost of deposits increased to 0.48% for the nine months ended September 30, 2022 from 0.21% for the same period in 2021 and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 0.60% for the nine months ended September 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,

Three months ended September 30, Nine months ended September 30,

(in thousands) 2022 2021 2022 2021

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Total non-interest income $ 25,333 $ 24,779 $ 71,857 $ 106,771

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 income increased $554,000 during the three months ended September 30, 2022, compared to the same period in 2021.

The increase was primarily due to increases in service charges on deposit accounts and investment banking and trading income, as well as the elimination of net losses recorded in the prior year on the sale of loans held for sale, partially offset by decreases in brokered loan fees and other non-interest income.

Non-interest income decreased $34.9 million during the nine months ended September 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,

Three months ended September 30, Nine months ended September 30,

(in thousands) 2022 2021 2022 2021

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Total non-interest expense $ 197,047 $ 152,987 $ 514,442 $ 452,363

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.

Non-interest expense for the three months ended September 30, 2022 increased $44.1 million compared to the same period in 2021.

The third quarter of 2022 included $13.7 million in salaries and benefits expense and $3.0 million in legal and professional expense related to the sale of our insurance premium finance subsidiary.

Also contributing to the increase in non-interest expense were increases in salaries and benefits expense, resulting from an increase in headcount, and marketing expense, partially offset by a decrease in communications and technology expense related to the elimination of write-offs of certain software assets recorded in the prior year.

Non-interest expense increased by $62.1 million during the nine months ended September 30, 2022, compared to the same period in 2021.

Year-to-date 2022 expenses included $13.7 million in salaries and benefits expense and $3.0 million in legal and professional expense related to the sale of our insurance premium finance subsidiary.

The increase in non-interest expense also included increases in salaries and benefits expense, driven by 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:

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(in thousands)

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Total loans held for investment, net $ 19,553,168 $ 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.

Total loans held for investment of $19.8 billion at September 30, 2022 decreased $3.0 billion from December 31, 2021, primarily as a result of a $3.1 billion reclassification of our insurance premium finance subsidiary loans from loans held for investment to loans held for sale as of September 30, 2022.

Excluding the reclassification of loans held for investment to loans held for sale, 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 25% of total loans held for investment at September 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.

Mortgage finance loan balances have declined as compared to December 31, 2021 as interest rates have continued to rise during 2022.

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.

As of September 30, 2022, we had $3.6 billion in syndicated loans, $804.9 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.

As of September 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.

As of September 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) June 30, 2022 December 31, 2021

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

Non-accrual loans held for investment(1):

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Non-accrual loans held for investment to total loans held for investment 0.18 % 0.32 %

Total non-performing assets to total assets 0.12 % 0.21 %

Allowance for credit losses on loans to non-accrual loans held for investment 6.5x 2.9x

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Loans held for sale past due 90 days and still accruing(2)(3) $ 4,877 $ 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.

(1) As of September 30, 2022 and December 31, 2021, non-accrual loans include $2.2 million and $19.4 million, respectively, in loans that met the criteria for restructured.

(2) Includes $1.3 million in non-accrual loans and $3.1 million in loans past due 90 days and still accruing associated to our insurance premium finance subsidiary.

(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 $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.

We recorded a $32.0 million provision for credit losses for the nine months ended September 30, 2022, compared to a negative provision of $20.0 million for the same period in 2021.

The $32.0 million provision for credit losses resulted from updated views on the downside risks to the economic forecast, partially offset by a decline in criticized loans.

We recorded $4.9 million in net charge-offs during the nine months ended September 30, 2022, compared to net charge-offs of $11.9 million during the nine months ended September 30, 2021.

Criticized loans totaled $484.0 million at September 30, 2022, compared to $582.9 million and $728.9 million at December 31, 2021 and September 30, 2021, respectively.

The decrease in criticized loans as compared to June 30, 2022 was primarily due to the resolution of one mortgage finance credit that was downgraded in the second quarter of 2022 and resolved in the third quarter of 2022 with no losses recorded.

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

June 30, 2022 June 30, 2021

September 30, 2022 September 30, 2021

Allowance for credit losses on loans to total loans held for investment 1.19 % 0.93 %

Allowance for credit losses on loans to total average loans held for investment(1) 1.04 % 0.96 %

Allowance for credit losses on loans to average total loans held for investment(1) 1.07 % 0.96 %

Total provision for credit losses to average total loans held for investment(1)(2) 0.19 % (0.12) %

Total allowance for credit losses to total loans held for investment 1.30 % 1.01 %

(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.

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

(2) Ratios are annualized utilizing provision for credit losses for the nine months ended September 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,

Nine months ended September 30,

Net Charge-offs Net Charge-offs

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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 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.

In the second half of 2021 and continuing into the first nine 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

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

Interest bearing cash and cash equivalents $ 3,399,638 $ 7,765,996 $ 8,317,926

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Total deposits 13.9 % 27.6 % 27.9 %

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

Our liquidity supports growth in loans held for investment and has 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) June 30, 2022 December 31, 2021 June 30, 2021

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

Deposits from core customers $ 23,209,196 $ 25,409,180 $ 27,339,071

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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) June 30, 2022 December 31, 2021

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

Repurchase agreements $ 1,480 2,832

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

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

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

FHLB borrowing capacity relating to loans $ 3,078,457 $ 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 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.

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

We also have long-term debt outstanding of $930.8 million as of September 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.

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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.

As of September 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.

Average total equity was $3.1 billion for the nine months ended September 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.

During the nine months ended September 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.

These repurchases were all made during the second quarter of 2022.

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.

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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.

Within the various economic scenarios considered as of September 30, 2022, the quantitative estimate of the allowance for credit loss would increase by approximately $73.0 million under sole consideration of the most severe downside scenario.

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