TEXAS CAPITAL BANCSHARES INC/TX MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)


The following discussion and analysis of our financial condition and results of
operations for the years ended December 31, 2021 and 2020 should be read in
conjunction with our audited consolidated financial statements and the related
notes to the consolidated financial statements included in this Annual Report on
Form 10-K. Certain risks, uncertainties and other factors, including those set
forth under "Risk Factors" in Part I, Item 1A, and elsewhere in this Annual
Report on Form 10-K may cause actual results to differ materially from the
results discussed in the forward-looking statements appearing in this discussion
and analysis. Refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our 2020 Annual Report on Form 10K filed
with the SEC on February 9, 2021, for discussion of our results of operations
for the years ended December 31, 2020 and 2019.
Forward-Looking Statements
Certain statements and financial analysis contained in this report that are not
historical facts may constitute "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.
Forward-looking statements may include, among other things and without
limitation, statements about the credit quality of our loan portfolio, our
liquidity, general economic conditions in the United States and in our markets,
including with respect to interest rates and the market generally, the continued
impact on our customers from volatility in oil and gas prices, the material
risks and uncertainties for the U.S. and world economies, and for our business,
resulting from the COVID-19 pandemic, expectations regarding rates of default
and loan losses, volatility in the mortgage industry, our business strategies
(including new lines of business, products and services) and our expectations
about future financial performance, future growth and earnings, the
appropriateness of our allowance for credit losses and provision for credit
losses, the impact of changing regulatory requirements and legislative changes
on our business, increased competition, and technologies (including new
technologies and information security risks).
Forward-looking statements are subject to various risks and uncertainties, which
change over time, are based on management's expectations and assumptions at the
time the statements are made and are not guarantees of future results. Important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements include, but are not
limited to, the following:
•Deterioration of the credit quality of our loan portfolio or declines in the
value of collateral due to external factors or otherwise.
•The unpredictability of economic and business conditions that may impact us or
our customers.
•The COVID-19 pandemic on us and our customers, employees and third-party
service providers. It is not possible to accurately predict the extent, severity
or duration of the COVID-19 pandemic or to what level and when normal economic
and operational conditions will return and remain. This includes related costs
and liabilities associated with legal and regulatory proceedings,
investigations, inquiries and related matters with respect to the financial
services industry, including those directly involving us or our Bank and arising
from our participation in government stimulus programs responding to the
economic impact of the COVID-19 pandemic.
•Our ability to effectively manage our liquidity risk and any growth plans and
the availability of capital and funding to us.
•Our ability to effectively manage our information technology systems (including
external vendors), on which we are highly dependent. This also includes our
ability to, among other things, manage such risks and to prevent cyber-incidents
against us, our customers or our third-party vendors, or to manage risks from
failures, disruptions or security breaches affecting us, our customers or our
third-party vendors.
•The costs and effects of cyber-incidents or other failures, disruptions or
security breaches of our systems or those of our third-party providers.
•Changes in interest rates.
•Changes in the method of determining LIBOR, or the replacement of LIBOR with an
alternative reference rate.
•Adverse or unexpected economic or market conditions and other factors in Texas,
the United States or internationally that could affect the credit quality of our
loan portfolio, our operating performance or our ability to access the capital
markets or other sources of funding to become less advantageous.
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•The failure to effectively balance our funding sources with cash demands by
depositors and borrowers, the failure to maintain capital ratios as a result of
adverse changes in our operating performance or financial condition or changes
in applicable regulations or interpretations of regulations that impact our
business or the characterization or risk weight of our assets.
•Material failures of our accounting estimates and risk management processes
based on management judgment, or the supporting assumptions or models.
•The failure to effectively manage our interest rate risk.
•The failure of our enterprise risk management framework (including our risk
management strategies and procedures and related controls), our compliance
program, or our corporate governance and supervisory oversight functions to
timely identify and address emerging risks adequately.
•Uncertainty regarding the upcoming transition away from the London Interbank
Offered Rate, or LIBOR, toward new interest rate benchmarks and our ability to
successfully implement any new interest rate benchmarks.
•Our ability to comply with applicable governmental regulations, including
legislative and regulatory changes that may impose further restrictions and
costs on our business, any regulatory enforcement actions that may be brought
against us and the effect of changes in laws, regulations, policies and
guidelines (including, among others, those concerning taxes, banking,
accounting, securities and monetary and fiscal policies) with which we must
generally comply.
•Risks related to the U.S. federal government actions impacting us, such as a
participating lender in the Small Business Administration's PPP and the impact
of the Tax Cuts and Jobs Act on us and our customers.
•Claims and litigation that may arise in the ordinary course of business,
including those that may not be covered by our insurers.
•The failure to successfully execute our business strategy, which may include
expanding into new markets, developing and launching new lines of business or
new products and services, completing planned transactions or to successfully
manage the risks related to certain aspects of our business strategy.
•The failure to identify, attract and retain key personnel.
•Increased or more effective competition from banks and other financial service
providers in our markets.
•The susceptibility of fraud on our business.
•The failure to maintain adequate regulatory capital to support our business.
•Environmental liability associated with properties related to our lending
activities.
•Severe weather, natural disasters, acts of war or terrorism and other external
events.
•Risks relating to our securities, including the volatility of our stock price,
trading volume, rights of holders of our indebtedness and preferred stock, our
decision to not currently pay dividends on our common stock, and other related
factors.
Actual outcomes and results may differ materially from what is expressed in our
forward-looking statements and from our historical financial results due to the
factors discussed elsewhere in this report or disclosed in our other SEC
filings. Forward-looking statements included herein speak only as of the date
hereof and should not be relied upon as representing our expectations or beliefs
as of any date subsequent to the date of this report. Except as required by law,
we undertake no obligation to revise any forward-looking statements contained in
this report, whether as a result of new information, future events or otherwise.
The factors discussed herein are not intended to be a complete summary of all
risks and uncertainties that may affect our businesses. Though we strive to
monitor and mitigate risk, we cannot anticipate all potential economic,
operational and financial developments that may adversely impact our operations
and our financial results. Forward-looking statements should not be viewed as
predictions and should not be the primary basis upon which investors evaluate an
investment in our securities.
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Overview of Our Business Operations
We commenced our banking operations in December 1998. An important aspect of our
growth strategy has been our ability to effectively service and manage a large
number of loans and deposit accounts in multiple markets in Texas, as well as
several lines of business serving a regional or national clientele of commercial
borrowers. Early in 2021, we embarked on an enterprise-wide transformation which
included detailed reviews of all of our business lines, our operating model, our
investment spend and our overall strategy, which resulted in the September 1,
2021 announcement by management of our new long-term strategy. This new
long-term strategy is intended to ensure that we are best positioned to serve
clients and capitalize on business opportunities going forward. This new plan
includes focusing on building an operating model organized around client
delivery and investing in technology. To achieve these goals we are pursuing an
aggressive hiring plan to significantly increase the number of client-facing
professionals by 2025, and we are also investing in new technologies and lines
of business to become a full-service financial services firm for our clients,
with the goal of improving client relationships and fee income. We are investing
in treasury solutions product and service offerings, building on our existing
private wealth business and expanding the scope of our investment banking
product and service offerings.
In May 2021 the Bank applied to the Texas Department of Banking to convert from
a national association to a Texas state-chartered bank. The application was
approved during the third quarter and the conversion was effective at open of
business on September 15, 2021. Effective as of the date of conversion, the
Texas Department of Banking is the Bank's primary regulator, the Federal Deposit
Insurance Corporation is the Bank's primary federal regulator and the Federal
Reserve will continue to be the Company's primary federal regulator.
In December 2021, the Company received approval from the SEC and FINRA for
registration and FINRA membership of TCBI Securities, a wholly owned non-bank
subsidiary of the Bank. TCBI Securities will provide investment banking products
and services to our customers.
Significant transactions affecting our financial statements during the year
ended December 31, 2021 included:
•Issuance of 5.75% fixed rate non-cumulative perpetual preferred stock, Series B
and issuance and sale of 12,000,000 depositary shares, each representing a
1/40th interest in a share of the Series B Preferred Stock. Net proceeds from
the sale totaled $289.7 million. The additional equity is being used for general
corporate purposes, including funding regulatory capital infusions into the
Bank, and was used to redeem our 6.5% non-cumulative perpetual preferred stock
Series A, par value $0.01 per share, in accordance with its terms;
•Issuance of $275.0 million in senior unsecured credit-linked notes that mature
on September 30, 2024. The net proceeds of the offering are being used to expand
the Bank's warehouse lending program and better serve our clients in all market
environments;
•Sale of our portfolio of MSRs and transition of the MCA program to a
third-party. For additional information, see Note 5 - Certain Transfers of
Financial Assets in the accompanying notes to the consolidated financial
statements included elsewhere in this report;
•Issuance and sale of $375.0 million of 4.00% fixed-to-fixed rate subordinated
notes due 2031. For additional information, see Note 11 - Long-Term Debt in the
accompanying notes to the consolidated financial statements included elsewhere
in this report;
•Redemption of our 6.50% non-cumulative perpetual preferred stock, Series A. For
additional information, see Note 20 - Material Transactions Affecting
Stockholders' Equity in the accompanying notes to the consolidated financial
statements included elsewhere in this report;
•Redemption of our 6.50% subordinated notes due 2042. For additional
information, see Note 11 - Long-Term Debt in the accompanying notes to the
consolidated financial statements included elsewhere in this report;
•Negative provision for credit losses of $30.0 million for full year 2021,
primarily reflecting improvements in the economic outlook as the economy
recovered from the impacts of the COVID-19 pandemic during 2021 combined with a
decrease in criticized loans; and
•Write-off of $12.0 million of certain software assets to reposition our
capitalized technology investment to align with the long-term strategy as
announced by management in the third quarter of 2021.
Impact of COVID-19 Pandemic
The COVID-19 pandemic has had, and continues to have, a significant impact on
the global community. The related restrictive measures taken by governments,
businesses and individuals have caused and continue to cause uncertainty,
volatility and disruption in financial markets and in governmental, commercial
and consumer activity in the United States and globally, including the markets
that we serve. As the restrictive measures began to be eased during 2021, the
U.S. economy has begun to
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improve from 2020, and with the availability and distribution of COVID-19
vaccines, we anticipate continued improvements in commercial and consumer
activity and the U.S. economy.
Effective June 1, 2021, we returned to pre-pandemic business operations and
brought 100% of our workforce back into the office. Our branch locations are
currently open and operating during normal business hours. We continue to take
additional precautions within our branch locations, including enhanced cleaning
procedures, to ensure the safety of our customers and our employees.
We have taken deliberative actions toward our goal of ensuring that we have the
balance sheet strength to serve our clients and communities, including by
seeking to increase our liquidity and manage our assets and liabilities in order
to maintain a strong capital position; however, future economic conditions are
subject to significant uncertainty. Uncertainties associated with the COVID-19
pandemic include the duration of any COVID-19 outbreaks and any related
variants, the availability and effectiveness of COVID-19 vaccines, the impact to
our customers, employees and vendors and the impact to the economy as a whole.
COVID-19 had a significant adverse impact on our business, financial position
and operating results for the year ended December 31, 2020. While the economy
began to recover in 2021, uncertainty still exists, but we believe we are
well-positioned to operate effectively through the present economic environment.
Results of Operations
Year ended December 31, 2021 compared to year ended December 31, 2020
Selected income statement data and key performance indicators are presented in
the table below:
                                                        For the Year Ended December 31
(dollars in thousands except per share data)         2021            2020   

2019

Net interest income                              $ 768,837$ 851,321$ 969,231
Provision for credit losses                        (30,000)        258,000          75,000
Non-interest income                                138,230         202,981         102,368
Non-interest expense                               599,012         704,356         600,289
Income before income taxes                         338,055          91,946         396,310
Income tax expense                                  84,116          25,657          84,295
Net income                                         253,939          66,289         312,015
Preferred stock dividends                           18,721           9,750  

9,750

Net income available to common stockholders $ 235,218$ 56,539

      $ 302,265
Earnings per common share - basic                $    4.65$    1.12$    6.01
Earnings per common share - diluted              $    4.60$    1.12$    5.99
Net interest margin                                   2.07  %         2.34  %         3.24  %
Return on average assets                              0.67  %         0.18  %         1.01  %
Return on average common equity                       8.35  %         2.10  %        11.95  %
Non-interest income to average earning assets         0.37  %         0.56  %         0.34  %
Efficiency ratio(1)                                   66.0  %         66.8  

% 56.0 %
Non-interest expense to average earning assets 1.61 % 1.93 % 2.00 %



(1)  Non-interest expense divided by the sum of net interest income and
non-interest income.
We reported net income of $253.9 million and net income available to common
stockholders of $235.2 million, or $4.60 per diluted common share, for the year
ended December 31, 2021, compared to net income of $66.3 million and net income
available to common stockholders of $56.5 million, or $1.12 per diluted common
share, for 2020. Return on average common equity ("ROE") was 8.35% and return on
average assets ("ROA") was 0.67% for the year ended December 31, 2021, compared
to 2.10% and 0.18%, respectively, for 2020. The increase in net income, ROE and
ROA for the year ended December 31, 2021 resulted primarily from a $288.0
million decrease in the provision for credit losses and a $105.3 million
decrease in non-interest expense, partially offset by decreases of $82.5 million
and $64.8 million in net interest income and non-interest income, respectively,
and a $58.5 million increase in income tax expense.
Details of the changes in the various components of net income are discussed in
detail below.
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Consolidated Daily Average Balances, Taxable-Equivalent Net Interest Income, and
Yields/Rates
                                                                                                             Year ended December 31,
                                                                       2021                                           2020                                            2019
                                                      Average      Revenue /        Yield /          Average       Revenue /        Yield /          Average       Revenue /        Yield /
(dollars in thousands)                                Balance       Expense          Rate            Balance        Expense          Rate            Balance        Expense          Rate
Assets
Investment Securities-taxable                     $  3,401,558$  35,985              1.06  % $    689,590$   10,112              1.47  % $     37,574$    1,611              4.29  %
Investment Securities-non-taxable(2)                   187,007        8,651              4.63  %      195,741         9,320              4.76  %      176,328         8,915              5.06  %
Federal funds sold                                       1,511            1              0.09  %      114,141           693              0.61  %       73,946         1,529              2.07  %
Interest-bearing deposits in other banks            10,547,642       13,232              0.13  %    9,653,129        27,569              0.29  %    3,483,254        71,093              2.04  %
Loans held for sale                                     90,066        2,481              2.75  %    1,114,311        36,369              3.26  %    2,688,677       112,526              4.19  %

Loans held for investment, mortgage finance 7,881,791 239,205

              3.03  %    8,589,762       285,212              3.32  %    6,999,585       241,665              3.45  %
Loans held for investment(1)(2)                     15,328,390      579,213              3.78  %   16,377,733       674,226              4.12  %   16,803,930       923,739              5.50  %
Less reserve for loan losses                           234,973            -                 -         248,563             -                 -         200,283             -                 -
Loans held for investment, net                      22,975,208      818,418              3.56  %   24,718,932       959,438              3.88  %   23,603,232     1,165,404              4.94  %
Total earning assets                                37,202,992      878,768              2.36  %   36,485,844     1,043,501              2.86  %   30,063,011     1,361,078              4.53  %
Cash and other assets                                  937,264                                      1,030,357                                         952,994
Total assets                                      $ 38,140,256$ 37,516,201$ 31,016,005
Liabilities and stockholders' equity
Transaction deposits                              $  3,447,849$  20,657              0.60  % $  4,090,591$   32,836              0.80  % $  3,535,282$   68,908              1.95  %
Savings deposits                                    11,180,645       36,459              0.33  %   12,346,904        74,950              0.61  %    9,780,532       168,856              1.73  %
Time deposits                                        1,716,642        8,391              0.49  %    2,867,579        38,331              1.34  %    2,351,698        55,773              2.37  %

Total interest-bearing deposits                     16,345,136       65,507              0.40  %   19,305,074       146,117              0.76  %   15,667,512       293,537              1.87  %
Other borrowings(3)                                  2,399,280        4,613              0.19  %    3,115,416        22,006              0.71  %    3,038,095        70,265              2.31  %
Long-term debt                                         802,112       37,628              4.69  %      395,705        19,963              5.05  %      395,342        21,790              5.51  %

Total interest-bearing liabilities                  19,546,528      107,748              0.55  %   22,816,195       188,086              0.82  %   19,100,949       385,592              2.02  %
Demand deposits                                     15,186,455                                     11,567,549                                       8,989,104
Other liabilities                                      274,357                                        295,710                                         246,931
Stockholders' equity                                 3,132,916                                      2,836,747                                       

2,679,021

Total liabilities and stockholders' equity        $ 38,140,256$ 37,516,201$ 31,016,005

Net interest income(2)                                            $ 771,020$  855,415$  975,486
Net interest margin                                                                      2.07  %                                         2.34  %                                         3.24  %
Net interest spread                                                                      1.81  %                                         2.04  %                                         2.51  %
Loan spread(4)                                                                           3.35  %                                         3.36  %                                         3.55  %


(1)Average balances include non-accrual loans which are stated net of unearned
income. Loan interest income includes loan fees totaling $47.8 million, $43.8
million and $46.6 million for the years ended December 31, 2021, 2020 and 2019,
respectively.
(2)Taxable equivalent rates used where applicable.
(3)Includes federal funds purchased, repurchase agreements and FHLB borrowings.
For additional details see Note 10 - Short-Term and Other Borrowings in the
accompanying notes to the consolidated financial statements included elsewhere
in this report.
(4)Yield on loans, net of reserves, less funding cost including all deposits and
borrowed funds.
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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.
                                                                                      Years Ended December 31,
                                                              2021/2020                                                     2020/2019
                                            Net                     Change Due To(1)                      Net                     Change Due To(1)
(in thousands)                             Change            Volume            Yield/Rate(2)            Change             Volume            Yield/Rate(2)
Interest income:
Investment securities(2)                $  25,204$ 94,581$      (69,377)$    8,906$ 34,391$      (25,485)
Loans held for sale                       (33,888)          (33,403)                   (485)            (76,157)          (61,542)                (14,615)
Loans held for investment, mortgage
finance                                   (46,007)          (24,329)                (21,678)             43,547            56,230                 

(12,683)

Loans held for investment(2)              (95,013)          (43,539)                (51,474)           (249,513)          (22,700)               (226,813)
Federal funds sold                           (692)             (683)                     (9)               (836)            1,092                  (1,928)
Interest-bearing deposits in other
banks                                     (14,337)           17,206                 (31,543)            (43,524)          133,964                (177,488)
Total                                    (164,733)            9,833                (174,566)           (317,577)          141,435                (459,012)
Interest expense:
Transaction deposits                      (12,179)           (3,451)                 (8,728)            (36,072)           10,856                 (46,928)
Savings deposits                          (38,491)             (558)                (37,933)            (93,906)           45,495                (139,401)
Time deposits                             (29,940)          (14,728)                (15,212)            (17,442)           12,330                 (29,772)

Other borrowings                          (17,393)           (4,304)                (13,089)            (48,259)            1,741                 (50,000)
Long-term debt                             17,665            20,103                  (2,438)             (1,827)               20                  (1,847)
Total                                     (80,338)           (2,938)                (77,400)           (197,506)           70,442                (267,948)
Net interest income(2)                  $ (84,395)$ 12,771$      (97,166)$ (120,071)$ 70,993$     (191,064)


(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 $768.8 million for the year ended December 31, 2021
compared to $851.3 million for 2020. The decrease was primarily due to decreases
in total average loans and earning asset yields, partially offset by an increase
in average investment securities as well as declining cost of funds.
Average earning assets for the year ended December 31, 2021 increased by $717.1
million compared to the same period in 2020, and included a $2.7 billion
increase in average total investment securities, reflecting the deployment of
excess liquidity into higher-yielding investment securities, and an $894.5
million increase in average interest-bearing deposits in other banks, partially
offset by a $2.8 billion decrease in average total loans. Throughout 2020,
management took deliberate actions to increase the balance of interest-bearing
deposits in other banks to ensure we had the balance sheet strength to serve our
clients during the COVID-19 pandemic. In 2021, balances remained elevated,
although began to run off in the later part of the year as we purchased
investment securities and proactively exited certain high-cost indexed deposit
products. The decrease in average loans held for sale resulted from the
transition of the MCA program to a third-party in 2021. Average interest-bearing
liabilities decreased $3.3 billion for the year ended December 31, 2021 compared
to the same period in 2020, primarily due to a $3.0 billion decrease in average
interest-bearing deposits and a $716.1 million decrease in other borrowings,
partially offset by a $406.4 million increase in average long-term debt. Average
demand deposits for the year ended December 31, 2021 increased to $15.2 billion
from $11.6 billion for 2020.
Net interest margin for the year ended December 31, 2021 was 2.07% compared to
2.34% for 2020. The decrease was primarily due to the effect of declining
interest rates on earning asset yields and a shift in earning asset composition,
primarily increases in lower-yielding investment securities and interest-bearing
deposits in other banks, partially offset by lower funding costs compared to
2020.
The yield on total loans held for investment, net, decreased to 3.56% for the
year ended December 31, 2021 compared to 3.88% for 2020 and the yield on earning
assets decreased to 2.36% for the year ended December 31, 2021 compared to 2.86%
for 2020. The average cost of total deposits decreased to 0.21% for 2021 from
0.47% for 2020 and total funding costs, including all deposits, long-term debt
and stockholders' equity decreased to 0.28% for 2021 compared to 0.51% for 2020.
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Non-interest Income
                                                          Year ended December 31,
(in thousands)                                      2021           2020           2019
Service charges on deposit accounts              $  18,674$  11,620$  11,320
Wealth management and trust fee income              13,173          9,998          8,810

Brokered loan fees                                  27,954         46,423         29,738
Servicing income                                    15,513         27,029         13,439
Investment banking and trading income               24,441         22,687   

14,876

Net gain/(loss) on sale of loans held for sale 1,317 58,026

     (20,259)
Other                                               37,158         27,198         44,444
Total non-interest income                        $ 138,230$ 202,981$ 102,368


Non-interest income decreased by $64.8 million during the year ended
December 31, 2021 to $138.2 million, compared to $203.0 million for 2020. This
decrease was primarily due to decreases in net gain/(loss) on sale of loans held
for sale, brokered loan fees and servicing income, all resulting from the 2021
sale of our MSR portfolio and transition of the MCA program to a third-party.
Offsetting these decreases were increases in service charges, related to a
change in fee structure for our deposits on analysis, wealth management and
trust fee income, related to increases in assets under management and market
values, and in other non-interest income, primarily related to a gain on the
sale of a foreclosed asset.
Non-interest Expense
                                          Year ended December 31,
(in thousands)                      2021           2020           2019

Salaries and employee benefits $ 350,930$ 340,529$ 328,483
Net occupancy expense

               33,232         34,955         32,989
Marketing                           10,006         23,581         53,355
Legal and professional              41,152         52,132         52,460
Communications and technology       75,185        103,054         44,826
FDIC insurance assessment           21,027         25,955         20,093
Servicing-related expenses          27,765         64,585         22,012
Merger-related expenses                  -         17,756          1,370

Other                               39,715         41,809         44,701
Total non-interest expense       $ 599,012$ 704,356$ 600,289


Non-interest expense for the year ended December 31, 2021 decreased $105.3
million compared to 2020. The decrease was primarily due to decreases in
marketing, legal, communication and technology expenses, servicing-related
expenses and merger-related expenses, partially offset by an increase in
salaries and employee benefits, resulting primarily from increased headcount in
2021. The decrease in servicing-related expenses resulted from the 2021 sale of
our MSR portfolio and transition of the MCA program to a third-party.
Communications and technology expense for the year ended December 31, 2021
included a $12.0 million write-off of certain software assets, as is discussed
above, compared to $36.0 million included in the same period of 2020.
Analysis of Financial Condition
Loans Held for Investment
The following table summarizes our loans held for investment on a gross basis by
portfolio segment. See Note 1 - Operations and Summary of Significant Accounting
Policies in the accompanying notes to the consolidated financial statements
included elsewhere in this report for details of these portfolio segments.
                                            December 31,
(in thousands)                         2021              2020
Commercial                        $  9,897,561$  8,861,580
Energy                                 721,373           766,217
Mortgage finance                     7,475,497         9,079,409
Real estate                          4,777,530         5,794,624

Gross loans held for investment $ 22,871,961$ 24,501,830

Gross loans held for investment were $22.9 billion at December 31, 2021, a
decline of $1.6 billion from 2020, primarily due to declines in mortgage finance
and real estate loans, partially offset by an increase in commercial loans.
Mortgage finance loans

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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 33% of total loans held for investment at December 31, 2021
compared to 37% at December 31, 2020. 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. Despite the decline in 2021, balances
in this portfolio remain elevated related to increases in volumes driven by
continued lower long-term interest rates. The decline in the real estate loan
portfolio was primarily due to above-average payoffs during 2021.
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 December 31, 2021, we had $2.5 billion in syndicated loans, $688.2
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 December 31, 2021, $9.6 million 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 December 31, 2021, 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 our 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.
The table below summarizes the industry concentrations of our loans held for
investment on a gross basis at December 31, 2021:
(dollars in thousands)                                                   Amount              Percent of Total

Commercial:

Financials (excluding banks)(1)                                      $  5,733,059                       25.0  %
Real estate related services (not secured by real estate)               1,021,030                        4.4  %
Technology, telecom and media                                             428,699                        1.9  %
Retail                                                                    372,467                        1.6  %
Commercial services                                                       295,332                        1.3  %
Oil & gas support services                                                236,277                        1.0  %
Machinery, equipment and parts manufacturing                              225,156                        1.0  %
Materials and commodities                                                 210,093                        0.9  %
Food and beverage manufacturing and wholesale                             189,723                        0.8  %
Consumer services                                                         182,349                        0.8  %
Transportation services                                                   133,150                        0.6  %
Entertainment and recreation                                              129,321                        0.6  %
Government and education                                                  127,229                        0.6  %
Healthcare and pharmaceuticals                                             71,457                        0.3  %
Diversified or miscellaneous                                              542,219                        2.4  %
Total commercial                                                        9,897,561                       43.2  %
Energy                                                                    721,373                        3.2  %
Mortgage finance                                                        7,475,497                       32.7  %
Real estate                                                             4,777,530                       20.9  %
Total                                                                $ 22,871,961                      100.0  %


(1)Includes premium finance loans that are generally secured by obligations of
insurance carriers.
Our largest concentration of commercial loans held for investment in any single
industry is in financials excluding banks. Loans extended to borrowers in the
financials excluding banks category are comprised largely of loans to companies
who loan money to businesses and consumers for various purposes including, but
not limited to, insurance, consumer goods and real estate. This category also
includes loans to companies involved in investment management and securities and
commodities trading. The next largest industry concentration of commercial loans
held for investment is to commercial borrowers providing services to the real
estate industry. Loans in this category are not secured by real property and are
generally made to commercial borrowers that operate within the real estate
industry, which include developers, contractors, professional service providers
(such as architectural and interior design services), leasing, management, and
other support type services.
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We believe the loans we originate are appropriately collateralized under our
credit standards. Approximately 96% of our loans held for investment are secured
by collateral. The table below sets forth information regarding the distribution
of our loans held for investment on a gross basis among various types of
collateral at December 31, 2021:
(dollars in thousands)                    Amount         Percent of Total
Commercial:
Business assets                       $  8,035,080                 35.0  %
Other assets                               441,261                  1.9  %
Highly liquid assets                       436,345                  1.9  %
U. S. Government guaranty                   83,462                  0.4  %
Municipal tax- and revenue-secured          67,613                  0.3  %
Rolling stock                               19,844                  0.1  %
Unsecured                                  813,956                  3.6  %
Total commercial                         9,897,561                 43.2  %
Energy                                     721,373                  3.2  %
Mortgage finance                         7,475,497                 32.7  %
Real estate                              4,777,530                 20.9  %
Total                                 $ 22,871,961                100.0  %


As noted in the tables above, approximately 21% of our loans held for investment
as of December 31, 2021 are real estate loans that are generally secured by real
property. This portfolio primarily includes market risk real estate loans,
consisting of commercial real estate loans and loans made to residential
builders and developers. Loan amounts are determined in part from an analysis of
pro forma cash flows. Loans are also underwritten to comply with product-type
specific advance rates against both cost and market value. We extend commercial
real estate loans, including both construction/development financing and limited
term financing, to professional real estate developers and owners/managers of
commercial real estate projects and properties who have a demonstrated record of
past success with similar properties. Collateral properties generally include
office buildings, warehouse/distribution buildings, shopping centers,
hotels/motels, senior living, apartment buildings and residential and commercial
tract development. The primary source of repayment on these loans is expected to
come from the sale, permanent financing or lease of the real property
collateral. Loans to residential builders are typically in the form of
uncommitted guidance lines and are for the purpose of developing lots into
single-family homes, while loans to developers are typically in the form of
borrowing base lines extended for the purpose of acquiring and developing raw
land into lots that can be further sold to home builders. The table below
summarizes our total real estate loan portfolio, which includes real estate
loans and construction loans, as segregated by the type of property securing the
credit. Property type concentrations are stated as a percentage of year-end
total real estate loans as of December 31, 2021:
(dollars in thousands)                             Amount         Percent of Total
Property type:
Market risk
Apartment/condominium buildings                 $   870,506                 18.1  %
Commercial buildings                                543,341                 11.4  %
1-4 Family dwellings (other than condominium)       427,808                  9.0  %
Senior housing buildings                            352,384                  7.4  %
Self-storage building                               254,128                  5.3  %
Residential lots                                    247,781                  5.2  %
Industrial buildings                                244,138                  5.1  %
Shopping center/mall buildings                      214,145                  4.5  %
Hotel/motel buildings                               205,974                  4.3  %
Commercial lots                                      45,129                  0.9  %
Other                                               152,957                  3.2  %
Other than market risk
Industrial buildings                                405,817                  8.5  %
1-4 Family dwellings (other than condominium)       325,618                  6.8  %
Commercial buildings                                255,657                  5.4  %
Other                                               232,147                  4.9  %
Total real estate loans                         $ 4,777,530                100.0  %


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The table below summarizes our market risk real estate portfolio at December 31,
2021 as segregated by the geographic region in which the property is located.
Approximately 56% of the market risk real estate collateral is located in Texas.
(dollars in thousands)                    Amount         Percent of Total
Texas geographic region:
Dallas/Fort Worth                      $   780,795                 21.9  %
Houston                                    475,531                 13.4  %
San Antonio                                309,215                  8.7  %
Austin                                     327,243                  9.2  %
Other Texas cities                          86,849                  2.4  %
Total Texas                              1,979,633                 55.6  %
Other states                             1,578,658                 44.4  %
Total market risk real estate loans    $ 3,558,291                100.0  %


The determination of collateral value is critically important when financing
real estate. As a result, obtaining current and objectively prepared appraisals
is a major part of our underwriting and monitoring processes. We engage a
variety of professional firms to supply appraisals, market studies and
feasibility reports, environmental assessments and project site inspections to
complement our internal resources to underwrite and monitor these credit
exposures. Generally, our policy requires a new appraisal every three years.
However, in periods of economic uncertainty where real estate market conditions
may change rapidly, more current appraisals are obtained when warranted by
conditions such as a borrower's deteriorating financial condition, their
possible inability to perform on the loan or other indicators of increasing risk
of reliance on collateral value as the sole source of repayment of the loan.
Annual appraisals are generally obtained for loans graded substandard or worse
where real estate is a material portion of the collateral value and/or the
income from the real estate or sale of the real estate is the primary source of
debt service.
Appraisals are, in substantially all cases, reviewed by a third party to
determine the reasonableness of the appraised value. The third party reviewer
will challenge whether or not the data used is appropriate and relevant, form an
opinion as to the appropriateness of the appraisal methods and techniques used,
and determine if overall the analysis and conclusions of the appraiser can be
relied upon. Additionally, the third party reviewer provides a detailed report
of that analysis. Further review may be conducted by our credit officers, as
well as by the Bank's managed asset committee as conditions warrant. These
additional steps of review are undertaken to confirm that the underlying
appraisal and the third party analysis can be relied upon. If we have
differences, we address those with the reviewer and determine an appropriate
resolution. Both the appraisal process and the appraisal review process can be
less reliable in establishing accurate collateral values during and following
periods of economic weakness due to the lack of comparable sales and the limited
availability of financing to support an active market of potential purchasers.
Large Credit Relationships
We originate and maintain large credit relationships with numerous customers in
the ordinary course of business. The legal lending limit of our Bank is
approximately $536.7 million. We employ much lower house limits which vary by
assigned risk grade, product and collateral type. Such house limits, which
generally range from $20 million to $60 million, may be exceeded with
appropriate authorization for exceptionally strong borrowers and otherwise where
business opportunity and assessed credit risk warrant a somewhat larger
investment. We consider large credit relationships to be those with commitments
equal to or in excess of $20.0 million. The following table provides additional
information on our large held for investment credit relationships, excluding
mortgage finance, outstanding at year-end:
                                                    December 31, 2021                                                      December 31, 2020
                                                                  Period End Balances                                                    Period End Balances
                                   Number of                                                              Number of
(dollars in thousands)           Relationships              Committed           Outstanding             Relationships              Committed           Outstanding
$30.0 million and greater                    201          $ 9,447,783$ 5,359,040                          190          $ 8,650,588$ 4,252,488$20.0 million to $29.9                       177            4,253,093            2,440,560                          167            4,095,449            2,414,768
million


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Growth in period-end outstanding balances related to large credit relationships
primarily resulted from an increase in the number of commitments. The following
table summarizes the average committed and outstanding loan balances per
relationship related to our large held for investment credit relationships,
excluding mortgage finance, at year-end:
                                                   2021 Average Balance per                   2020 Average Balance per
                                                         Relationship                               Relationship
(in thousands)                                 Committed            Outstanding           Committed            Outstanding
$30.0 million and greater                    $    47,004$     26,662$    45,529$     22,382$20.0 million to $29.9 million                    24,029                13,788               24,524                14,460


Loan Maturities and Interest Rate Sensitivity

                                                                                December 31, 2021
(in thousands)                           Total             Within 1 Year           1-5 Years            5-15 Years           After 15 Years
Loan maturity:
Commercial                          $  9,897,561$   4,725,249$ 4,578,297$   579,267$        14,748
Energy                                   721,373                178,721              542,652                    -                        -
Mortgage finance                       7,475,497              7,475,497                    -                    -                        -
Real estate                            4,777,530              1,255,544            2,734,023              444,034                  343,929

Total loans held for investment $ 22,871,961$ 13,635,011

      $ 7,854,972$ 1,023,301$       358,677
Interest rate sensitivity for
selected loans with:
Fixed interest rates                $  2,564,192$   1,523,439

$ 518,870$ 491,121$ 30,762
Floating or adjustable interest 20,307,769

             12,111,572            7,336,102              532,180                  327,915

rates

Total loans held for investment $ 22,871,961$ 13,635,011

$ 7,854,972$ 1,023,301$ 358,677



Interest Reserve Loans
As of December 31, 2021 and December 31, 2020, we had $456.1 million and $549.1
million, respectively, in loans held for investment that included interest
reserve arrangements, representing approximately 25% and 23%, respectively, of
outstanding construction loans, which are a component of real estate loans.
Interest reserve provisions are common in construction loans. The use of
interest reserves is carefully controlled by our underwriting standards, which
consider the feasibility of the project, the creditworthiness of the borrower
and guarantors and the loan-to-value coverage of the collateral. The interest
reserve allows the borrower to draw loan funds to pay interest charges on the
outstanding balance of the loan when financial conditions precedent are met.
When drawn, the interest is capitalized and added to the loan balance, subject
to conditions specified during the initial underwriting and at the time the
credit is approved. We have ongoing controls for monitoring compliance with loan
covenants, advancing funds and determining default conditions.
When we finance land on which improvements will be constructed, construction
funds are generally not advanced until the borrower has received lease or
purchase commitments which will meet cash flow coverage requirements and/or our
analysis of market conditions and project feasibility indicates to our
satisfaction that such lease or purchase commitments are forthcoming or other
sources of repayment have been identified to repay the loan. It is our general
policy to require a substantial equity investment by the borrower to complement
the Bank's credit commitment. Any such required borrower investment is first
contributed and invested in the project before any draws are allowed under the
Bank's credit commitment. We require current financial statements of the
borrowing entity and guarantors, as well as conduct periodic inspections of the
project and analysis of whether the project is on schedule or delayed. Updated
appraisals are ordered when necessary to validate the collateral values to
support advances, including reserve interest. Advances of interest reserves are
discontinued if collateral values do not support the advances or if the borrower
does not comply with other terms and conditions in the loan agreements. In
addition, most of our construction lending is performed in Texas and our lenders
are very familiar with trends in local real estate. If at any time we believe
that our collateral position is jeopardized, we retain the right to stop the use
of interest reserves. As of December 31, 2021 and December 31, 2020, none of our
loans with interest reserves were on non-accrual.
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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-accrual loans by type and by type of
property securing the credit. We did not have repossessed assets balances at
December 31, 2021 or 2020.
                                                                               As of December 31,
(dollars in thousands)                                                       2021               2020
Non-accrual loans held for investment(1)
Commercial
Assets of the borrowers                                                  $  18,366$  18,776
Accounts receivable and inventory                                            5,501              3,547
Other                                                                        2,045              9,773
Total commercial                                                            25,912             32,096
Energy
Oil and gas properties                                                      28,380             51,724
Total energy                                                                28,380             51,724
Real estate
Assets of the borrowers                                                     13,741             14,496
Commercial property                                                          2,840             13,569
Hotel/motel                                                                      -              4,619
Single family residences                                                     1,629                218
Other                                                                            -              5,267
Total real estate                                                           18,210             38,169
Total non-accrual loans held for investment                              $  

72,502 $ 121,989


Loans held for investment past due 90 days and accruing(2)               $   3,467$  12,541
Loans held for sale non-accrual(3)                                       $       -          $   6,966
Loans held for sale past due 90 days and accruing(4)                     $   3,986$  16,667
Non-accrual loans held for investment to total loans held for investment      0.32  %            0.50  %

Allowance for credit losses on loans to non-accrual loans held for

      2.9x               2.1x

investment



(1)As of December 31, 2021 and 2020, non-accrual loans held for investment
included $19.4 million and $45.4 million, respectively, in loans that met the
criteria for restructured.
(2)At December 31, 2021 and 2020, loans past due 90 days and still accruing
includes premium finance loans of $3.3 million and $6.4 million, respectively.
(3)Includes one non-accrual loan previously reported in loans held for
investment that was transferred to loans held for sale as of December 31, 2020
and subsequently sold at carrying value.
(4)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. Balances as of
December 31, 2020 also include loans that, pursuant to Ginnie Mae servicing
guidelines, we have the unilateral right, but not the obligation, to repurchase
if defined delinquent loan criteria are met and therefore must record as loans
held for sale on our balance sheet regardless of whether the repurchase option
has been exercised.
Total non-accrual loans at December 31, 2021 decreased $49.5 million from
December 31, 2020. The decrease during 2021 primarily related to declines in
energy and real estate non-accrual loans.
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 in the loan portfolio at the balance sheet date. Below is a
discussion of provision for credit losses on loans. See Note 12 - Financial
Instruments with Off-Balance Sheet Risk in the accompanying notes to the
consolidated financial statements included elsewhere in this report for
presentation of the activity in the allowance for credit losses for off-balance
asset credit losses.
We recorded a negative $29.8 million provision for credit losses on loans for
the year ended December 31, 2021 compared to a $249.8 million provision for the
year ended December 31, 2020. The year-over-year decrease resulted primarily
from decreases in net charge-offs and criticized loans, as well as improvements
in the economic outlook as the economy recovered from the impacts of the
COVID-19 pandemic during 2021. We recorded $12.9 million in net charge-offs
during the year ended December 31, 2021 compared to $198.8 million during 2020.
Criticized loans totaled $582.9 million at December 31, 2021, compared to
$918.4 million at December 31, 2020.
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The table below presents a summary of our credit loss experience on loans for
the past two years:
                                                                          Mortgage      Real
(dollars in thousands)                           Commercial    Energy      Finance     Estate          Total
Year ended December 31, 2021
Beginning balance                               $  73,061$ 84,064$  4,699$ 92,791$ 254,615
Provision for credit losses on loans               36,733     (27,045)      1,384     (40,903)        (29,831)
Charge-offs                                        11,987       6,418           -       1,192          19,597
Recoveries                                          4,395       1,967           -         317           6,679
Net charge-offs                                     7,592       4,451           -         875          12,918
Ending balance                                  $ 102,202$ 52,568$  6,083$ 51,013$ 211,866
Net charge-offs to average loans held for            0.08  %     0.65  %        -  %     0.02  %         0.06  %
investment
Allowance for credit losses on loans to loans                                                            0.93  %
held for investment
Allowance for credit losses on loans to average                                                          0.91  %
loans held for investment
Total provision for credit losses to average                                                            (0.13) %
loans held for investment(1)
Total allowance for credit losses to loans held                                                          1.00  %
for investment(2)
Year ended December 31, 2020
Beginning balance                               $ 102,254$ 60,253$  2,265$ 30,275$ 195,047
Impact of CECL adoptions                          (15,740)     24,154       2,031      (1,860)          8,585
Provision for credit losses on loans               58,630     126,180         403      64,556         249,769
Charge-offs                                        73,360     133,522           -         180         207,062
Recoveries                                          1,277       6,999           -           -           8,276
Net charge-offs                                    72,083     126,523           -         180         198,786
Ending balance                                  $  73,061$ 84,064$  4,699$ 92,791$ 254,615
Net charge-offs to average loans held for            0.78  %    12.02  %        -  %        -  %         0.80  %
investment
Allowance for credit losses on loans to loans                                                            1.04  %
held for investment
Allowance for credit losses on loans to average                                                          1.02  %
loans held for investment
Total provision for credit losses to average                                                             1.03  %
loans held for investment(1)
Total allowance for credit losses to loans held                                                          1.11  %

for investment(2)



(1)  Includes negative provision for off-balance sheet credit losses of $169,000
and provision for off-balance sheet credit losses of $8.2 million for the year
ended December 31, 2021 and 2020, respectively.
(2)  Includes allowance for off-balance sheet credit losses of $17.3 million and
$17.4 million at December 31, 2021 and 2020, respectively.
The allowance for credit losses on loans totaled $211.9 million at December 31,
2021 and $254.6 million at December 31, 2020. The allowance for credit losses on
loans as a percentage of loans held for investment decreased to 0.93% at
December 31, 2021 from 1.04% at December 31, 2020. The decrease in the allowance
for credit losses on loans as a percentage of loans held for investment at
December 31, 2021, compared to December 31, 2020, is due primarily to a decrease
in the allowance for credit losses on loans, resulting primarily from decreases
in net charge-offs and criticized loans, as well as improvements in the economic
outlook as the economy recovered from the impacts of the COVID-19 pandemic
during 2021.
The following table presents a summary of our allowance for credit losses on
loans by portfolio segment for the past two years:
                                                                                    December 31,
                                                              2021                                                 2020
                                           Allowance for           % of Loans in each           Allowance for           % of Loans in each
                                          Credit Losses on          Category to Total          Credit Losses on          Category to Total
(dollars in thousands)                         Loans                      Loans                     Loans                      Loans
Loan category:
Commercial                               $       102,202                          43  %       $        73,061                          36  %
Energy                                            52,568                           3  %                84,064                           3  %
Mortgage finance                                   6,083                          33  %                 4,699                          37  %
Real estate                                       51,013                          21  %                92,791                          24  %

Total allowance for credit losses
on loans                                 $       211,866                         100  %       $       254,615                         100  %


The overall decrease in the allowance for credit losses on loans at December 31,
2021 compared to 2020 resulted primarily from an overall decrease in loans held
for investment balances, coupled with reserve releases related to the improved
credit quality and economic factors discussed above.
See Note 1 - Operations and Summary of Significant Accounting Policies and Note
4 - Loans Held for Investment and Allowance for Credit Losses on Loans in the
accompanying notes to the consolidated financial statements included elsewhere
in this report for details of the allowance for credit losses on loans.
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Loans Held for Sale
On April 20, 2021, we entered into an agreement to sell our portfolio of MSRs
and to transition the MCA program to a third-party. The sale was completed on
June 1, 2021 and the transfer of servicing on the underlying mortgage loans was
completed on August 1, 2021. Transition activities began immediately following
the execution of the agreement and were complete prior to December 31, 2021. We
sold the remaining MSR balance of $1.2 million, which represented MSRs from
loans sold after the cut-off date for the initial sale mentioned above. The sale
of this MSR portfolio and the transfer of servicing on the underlying mortgage
loans were completed on October 1, 2021, at which time all remaining MSR hedge
positions were closed. At December 31, 2021, we have $8.1 million in loans held
for sale remaining on our balance sheet. For additional information on our loans
held for sale portfolio, see Note 1 - Operations and Summary of Significant
Accounting Policies and Note 5 - Certain Transfers of Financial Assets in the
accompanying notes to the consolidated financial statements included elsewhere
in this report.
Deposits
We compete for deposits by offering a broad range of products and services to
our customers. While this includes offering competitive interest rates and fees,
the primary means of competing for deposits is convenience and service to our
customers, tailored to our strategy of maintaining a branch-lite network. Our
Bank offers banking centers, courier services and online and mobile banking.
BankDirect and Bask Bank, our online banking divisions, serve customers on a 24
hours-a-day, 7 days-a-week basis solely through online banking.
Average total deposits for the year ended December 31, 2021 increased $659.0
million compared to 2020. Average demand deposits for the year ended
December 31, 2021 increased $3.6 billion compared to 2020 and average
interest-bearing deposits decreased $3.0 billion. The average cost of total
deposits decreased to 0.21% in 2021 from 0.47% in 2020 as we proactively exited
certain high-cost indexed deposit products in 2021.
The following table discloses our average deposits and weighted-average cost of
deposits by type:
                                                                                               Year Ended December 31,
                                                                                 2021                                           2020
                                                                 Average Balance          Average Rate          Average Balance          Average Rate
(dollars in thousands)                                                                        Paid                                           Paid
Non-interest-bearing                                           $     15,186,455                    -  %       $     11,567,549                    -  %
Interest-bearing transaction                                          3,447,849                 0.60  %              4,090,591                 0.80  %
Savings                                                              11,180,645                 0.33  %             12,346,904                 0.61  %
Time deposits                                                         1,716,642                 0.49  %              2,867,579                 1.34  %

Total average deposits                                         $     31,531,591                 0.21  %       $     30,872,623                 0.47  %


Estimated uninsured deposits at December 31, 2021 were $16.1 billion (56% of
total deposits), compared to $16.2 billion (52% of total deposits) at
December 31, 2020. The insured deposit data for 2021 and 2020 reflect the
deposit insurance impact of "combined ownership segregation" of escrow and other
accounts at an aggregate level but do not reflect an evaluation of all of the
account styling distinctions that would determine the availability of deposit
insurance to individual accounts based on FDIC regulations.
The following table shows scheduled maturities of time deposits greater than
$250,000:
                                 December 31,
(in thousands)               2021           2020
Months to maturity:
Three or less             $  70,736$ 107,334
Over three through six       18,013         93,207
Over six through twelve      86,223        140,484
Over twelve                  11,059         34,644
Total                     $ 186,031$ 375,669


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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 and long-term borrowings, primarily from federal
funds purchased and FHLB borrowings, which are generally used to fund mortgage
finance assets. We also rely on the availability of the mortgage secondary
market provided by Ginnie Mae and the GSEs to support the liquidity of our
mortgage finance assets.
Throughout 2020 we significantly increased our interest-bearing deposits in
other banks to ensure that we have the balance sheet strength to serve our
clients during the COVID-19 pandemic. These balances have remained elevated
during 2021, although they are beginning to run off as we have purchased
investment securities and proactively exited certain high-cost indexed deposit
products. The following table summarizes these balances:
                                                                                     December 31,
(dollars in thousands)                                                         2021                 2020

Interest-bearing deposits in other banks                                  $ 

7,765,996 $ 9,032,807

Interest-bearing deposits in other banks as a percent of:
Total loans held for investment

     34.1  %              37.0  %
Total earning assets                                                             22.9  %              24.6  %
Total deposits                                                                   27.6  %              29.1  %


Our liquidity needs to support growth in loans held for investment 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.
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:
                                                                                  December 31,
(dollars in thousands)                                                     2021                  2020
Deposits from core customers                                          $ 25,409,180$ 27,581,532
Deposits from core customers as a percent of total deposits                   90.4  %               89.0  %
Relationship brokered deposits                                        $  1,855,892$  1,771,883
Relationship brokered deposits as a percent of average total deposits          6.6  %                5.7  %
Traditional brokered deposits                                         $    844,293$  1,643,174
Traditional brokered deposits as a percent of total deposits                   3.0  %                5.3  %
Average deposits from core customers                                  $ 28,734,460$ 26,537,612
Average deposits from core customers as a percent of average total            91.1  %               86.0  %

deposits

Average relationship brokered deposits                                $  1,608,587$  2,099,652
Average relationship brokered deposits as a percent of average total           5.1  %                6.8  %

deposits

Average traditional brokered deposits                                 $  1,188,544$  2,235,359
Average traditional brokered deposits as a percent of average total            3.8  %                7.2  %

deposits



We have access to sources of traditional brokered deposits that we estimate to
be $7.5 billion. Based on our internal guidelines, we have chosen to limit our
use of these sources to a lesser amount.
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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 our short-term and other borrowings, all of which mature within
one year:
                                                             December 31,
         (in thousands)                                   2021          2020
         Federal funds purchased                      $         -   $   107,600
         Repurchase agreements                              2,832         4,151
         FHLB borrowings                                2,200,000     3,000,000
         Line of credit                                         -           

Total short-term and other borrowings $ 2,202,832$ 3,111,751



For additional information on our short-term borrowings, see Note 10 -
Short-Term and Other Borrowings in the accompanying notes to the consolidated
financial statements included elsewhere in this report.
We also have long-term debt outstanding of $928.7 million as of December 31,
2021, comprised of trust preferred securities, subordinated notes and senior
unsecured credit linked notes with maturity dates ranging from September 2024 to
December 2036. See Note 11 - Long-Term Debt in the accompanying notes to the
consolidated financial statements included elsewhere in this report for
additional information. 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.
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. Banking regulations may limit the
amount of dividends that may be paid by the Bank. See Note 13 - Regulatory
Restrictions in the accompanying notes to the consolidated financial statements
included elsewhere in this report for additional information regarding dividend
restrictions and "Liquidity Risks" included in Part I, Item 1A of this report.
As of December 31, 2021, 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 $3.1 billion for the year ended December 31, 2021
compared to $2.8 billion in 2020. 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.
For additional information on our capital and stockholders' equity, Note 13 -
Regulatory Restrictions and Note 20 - Material Transactions Affecting
Stockholders' Equity, respectively, in the accompanying notes to the
consolidated financial statements included elsewhere in this report.
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. The more
significant of these policies are summarized in Note 1 - Operations and Summary
of Significant Accounting Policies in the notes to the consolidated financial
statements included elsewhere in this report. Not all significant accounting
policies require management to make difficult, subjective or complex judgments.
However, the policy noted below could be deemed to meet the SEC's definition of
a critical accounting policy.
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 Accounting Standards Codification 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
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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. See "Summary of Credit Loss Experience" above and Note 4 - Loans Held
for Investment and Allowance for Credit Losses on Loans in the accompanying
notes to the consolidated 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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