TEXAS CAPITAL BANCSHARES, INC. The following discussion and analysis of our financial condition as ofSeptember 30, 2021 andDecember 31, 2020 and results of operations for the three and nine month periods endedSeptember 30, 2021 andSeptember 30, 2020 should be read in conjunction with our consolidated financial statements and the related notes to the consolidated financial statements for the year endedDecember 31, 2020 , and the other information included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Form 10-K"). Certain risks, uncertainties and other factors, including those set forth under "Risk Factors" in Part I, Item 1A of the 2020 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. 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, general economic conditions inthe United States and in our markets, including the continued impact on our customers from volatility in oil and gas prices, the material risks and uncertainties for theU.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 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, interest rate risk, new lines of business, new product or service offerings and new technologies. 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 related to external factors such as commodity prices, real estate values or interest rates, increased default rates and loan losses or adverse changes in the industry concentrations of our loan portfolio attributed to changes in theU.S. economy in general or theTexas economy specifically. •The adverse effect of the COVID-19 pandemic on us and our customers, employees and third-party service providers; the material adverse impacts of the COVID-19 pandemic on our business, financial position, operations and prospects. 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. This also includes the incurrence of material 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. •Operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent. This also includes the failure to manage information systems risk or 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, which risks have been materially enhanced by our increased reliance on technology to support associates working outside our offices. •The costs and effects of cyber-incidents or other failures, disruptions or security breaches of our systems or those our third-party providers. •Changes in interest rates, which may affect our net income and other future cash flows, or the market value of our assets, including the market value of investment securities. •Changes in the value of commercial and residential real estate securing our loans or in the demand for credit to support the purchase and ownership of such assets. •Changing economic conditions or other developments adversely affecting our commercial, entrepreneurial and professional customers. 26 -------------------------------------------------------------------------------- •Adverse economic or market conditions and other factors inTexas ,the United States or internationally that could affect the credit quality of our loan portfolio or our operating performance, including any conditions or factors affecting our middle market customers and their ability to continue to meet their loan obligations. •The failure to correctly assess and model the assumptions supporting our allowance for credit losses, causing it to become inadequate in the event of deteriorations in loan quality and increases in charge-offs, or increases or decreases to our allowance for credit losses as a result of the implementation of CECL. •Changes in theU.S. economy in general or theTexas economy specifically resulting in deterioration of credit quality, increases in non-performing assets or charge-offs or reduced demand for credit or other financial services we offer, including the effects from declines in the level of drilling and production related to volatility in oil and gas prices and the effects of the COVID-19 pandemic. •Adverse changes in economic or market conditions, inTexas ,the United States or internationally, that could affect the credit quality of our loan portfolio or our operating performance. •Unexpected market conditions, regulatory changes or changes in our credit ratings that could, among other things, cause access to capital market transactions and other sources of funding to become more difficult to obtain on terms and conditions that are acceptable to us. •The inadequacy of our available funds to meet our deposit, debt and other obligations as they become due, or our failure to maintain our capital ratios as a result of adverse changes in our operating performance or financial condition, or changes in applicable regulations or regulator interpretation of regulations impacting our business or the characterization or risk weight of our assets. •The failure to effectively balance our funding sources with cash demands by depositors and borrowers. •Material failures of our accounting estimates and risk management processes based on management judgment, or the supporting analytical and forecasting models. •Failure of our risk management strategies and procedures, including failure or circumvention of our controls. •The failure to effectively manage our interest rate risk resulting from unexpectedly large or sudden changes in interest rates, maturity imbalances in our assets and liabilities, potential adverse effects to our borrowers including their inability to repay loans with increased interest rates and the impact to our net interest income from the increasing cost of interest-bearing deposits. •The failure of our enterprise risk management framework, our compliance program, or our corporate governance and supervisory oversight functions to timely identify and address emerging risks adequately, which may result in unexpected losses. •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. •Legislative and regulatory changes imposing further restrictions and costs on our business, a failure to maintain well capitalized or well managed status or any regulatory enforcement actions brought against us and uncertainty related to future implementation and enforcement of regulatory requirements resulting from the current political environment. •The effect of changes in laws, regulations, policies and guidelines (including, among others, laws, regulations, policies and guidelines concerning taxes, banking, accounting, securities and monetary and fiscal policies) with which we and our subsidiaries must generally comply, including those promulgated by theU.S. government,U.S. Department of Treasury and theFederal Reserve and any changes made by the newBiden Administration and the effects of any such changes on our business and results of operations. •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 within the expected timeframes and budgets, completing planned merger, acquisition or sale transactions or to successfully manage the risks related to the development and implementation of these new businesses, products or services. •The failure to identify, attract and retain key personnel or the loss of key individuals or groups of employees. •Increased or more effective competition from banks and other financial service providers in our markets. •Structural changes in the markets for origination, sale and servicing of residential mortgages. •Uncertainty in the pricing of mortgage loans that we purchase, and later sell or securitize, as well as competition for the mortgage servicing rights related to these loans and related interest rate risk or price risk resulting from retaining mortgage servicing rights, and the potential effects of higher interest rates on our Mortgage Correspondent Aggregation loan volumes. 27 -------------------------------------------------------------------------------- •Credit risk resulting from our exposure to counterparties. •An increase in the incidence or severity of fraud, illegal payments, security breaches and other illegal acts impacting our subsidiary,Texas Capital Bank (the "Bank") and our customers. •The failure to maintain adequate regulatory capital to support our business, including the unavailability of funds obtained from borrowing or capital transactions or from our Bank to fund our obligations. •Environmental liability associated with properties related to our lending activities. •Severe weather, natural disasters, acts of war or terrorism and other external events. 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 above or elsewhere in this report or disclosed in our otherU.S. Securities and Exchange Commission ("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. Overview of Our Business Operations We commenced our banking operations inDecember 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 inTexas , 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 theSeptember 1, 2021 announcement by management of our new long-term strategy. This new long-term strategy will ensure that we are best positioned to serve clients and capitalize on business opportunities going forward. This new plan includes focusing on building a technology-enabled 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, which will include the establishment of a broker-dealer service. InMay 2021 the Bank applied to theTexas Department of Banking to convert from a national association to aTexas state-chartered bank. The application was approved during the third quarter and the conversion was effective at open of business onSeptember 15, 2021 . Effective as of the date of conversion, theTexas Department of Banking is the Bank's primary regulator, theFederal Deposit Insurance Corporation is the Bank's primary federal regulator and theFederal Reserve will continue to be the Company's primary federal regulator. Significant transactions affecting our financial statements during the nine months endedSeptember 30, 2021 included: •Issuance of 5.75% fixed rate non-cumulative perpetual preferred stock, Series B (the "Series B Preferred Stock" 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 may be used to redeem, in whole or in part and subject to receipt of all applicable regulatory approvals, 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 onSeptember 30, 2024 . The net proceeds of the offering will be used to expand the Bank's warehouse lending program and better serve our clients in all market environments; •Sale of our portfolio of mortgage servicing rights ("MSRs") and transition of the Mortgage Correspondent Aggregation ("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 6 - Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report; 28 -------------------------------------------------------------------------------- •Redemption of our 6.50% non-cumulative perpetual preferred stock, Series A (the "Series A Preferred Stock"). For additional information, see Note 12 - 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 6 - Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report; and •$12.0 million write-off 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 and related restrictive measures taken by governments, businesses and individuals have caused and continue to cause unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity inthe United States and globally, including the markets that we serve. As the restrictive measures began to be eased during the latter part of 2020 and continue to be eased during 2021, theU.S. economy has begun to improve from 2020, and with the availability and distribution of COVID-19 vaccines, we anticipate continued improvements in commercial and consumer activity and theU.S. economy. During the first quarter of 2021, the governor ofTexas removed all restrictions initially set in place which has allowed businesses, including ours as well as our clients' businesses, to reopen at full capacities. While positive tailwinds exist, we recognize that our business and consumer customers are continuing to experience varying degrees of financial distress, which we expect to continue, though to a lesser degree, throughout 2021. Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the COVID-19 pandemic, which may result in our customers' inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic have seemingly resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries such as energy, hotel/lodging, restaurants, entertainment, retail and commercial real estate, which have been significantly impacted by the COVID-19 pandemic. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the COVID-19 pandemic. We continue to monitor these customers closely. We have taken deliberate actions to meet 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 endedDecember 31, 2020 and while uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment. EffectiveJune 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. Results of Operations Summary of Performance We reported net income of$43.4 million and net income available to common stockholders of$39.1 million for the third quarter of 2021 compared to net income of$57.1 million and net income available to common stockholders of$54.7 million for the third quarter of 2020. On a fully diluted basis, earnings per common share were$0.76 for the third quarter of 2021, compared to$1.08 for the third quarter of 2020. Return on average common equity ("ROE") was 5.41% and return on average assets ("ROA") was 0.47% for the third quarter of 2021, compared to 8.24% and 0.59%, respectively, for the third quarter of 2020. The decrease in net income for the third quarter of 2021 resulted primarily from decreases in net interest income and non-interest income, partially offset by decreases in provision for credit losses and non-interest expense. The decrease in net income was the primary driver in the decreases in ROE and ROA. 29 -------------------------------------------------------------------------------- Net income and net income available to common stockholders for the nine months endedSeptember 30, 2021 totaled$188.8 million and$174.4 million , respectively, compared to net income and net loss available to common stockholders of$6.1 million and$1.2 million , respectively, for the same period in 2020. On a fully diluted basis, earnings per common share were$3.41 for the nine months endedSeptember 30, 2021 , compared to a loss per common share of$0.02 for the same period in 2020. ROE was 8.35% and ROA was 0.66% for the nine months endedSeptember 30, 2021 , compared to a negative 0.06% and 0.02%, respectively, for the same period in 2020. The increase in net income, ROE and ROA for the nine months endedSeptember 30, 2021 resulted primarily from a$246.0 million decrease in provision for credit losses as compared to the same period in 2020 Details of the changes in the various components of net income are discussed below. 30 -------------------------------------------------------------------------------- QUARTERLY FINANCIAL SUMMARIES - UNAUDITED Consolidated Daily Average Balances, Average Yields and Rates Three months ended September 30, 2021 Three months ended September 30, 2020 Average Revenue/ Yield/ Average Revenue/ Yield/ (in thousands except percentages) Balance Expense Rate Balance Expense Rate
Assets
Investment securities - taxable
0.94 %$ 525,149 $ 1,905 1.44 % Investment securities - non-taxable(2) 185,221 2,138 4.58 % 190,797 2,239 4.67 % Federal funds sold and securities purchased under resale agreements 653 - 0.12 % 12,051 1 0.04 % Interest-bearing deposits in other banks 9,045,442 3,606 0.16 % 11,028,962 2,877 0.10 % Loans held for sale 18,791 54 1.14 % 543,606 3,867 2.83 % Loans held for investment, mortgage finance 7,987,521 58,913 2.93 % 9,061,984 76,464 3.36 % Loans held for investment(1)(2) 15,266,167 147,423 3.83 % 16,286,036 157,230 3.84 % Less reserve for credit losses on loans 220,984 - - 264,769 - - Loans held for investment, net 23,032,704 206,336 3.55 % 25,083,251 233,694 3.71 % Total earning assets 35,873,402 220,680 2.44 % 37,383,816 244,583 2.60 % Cash and other assets 855,555 1,037,760 Total assets$ 36,728,957 $ 38,421,576 Liabilities and Stockholders' Equity Transaction deposits$ 3,012,547 $ 4,737 0.62 %$ 4,275,574 $ 6,652 0.62 % Savings deposits 10,044,995 8,262 0.33 % 12,786,719 12,808 0.40 % Time deposits 1,640,562 1,720 0.42 % 2,844,083 8,370 1.17 % Total interest-bearing deposits 14,698,104 14,719 0.40 % 19,906,376 27,830 0.56 % Other borrowings 2,299,692 748 0.13 % 2,811,435 3,493 0.49 % Long-term debt 927,626 10,586 4.53 % 395,749 4,839 4.87 % Total interest-bearing liabilities 17,925,422 26,053 0.58 % 23,113,560 36,162 0.62 % Demand deposits 15,363,568 12,202,065 Other liabilities 275,317 314,500 Stockholders' equity 3,164,650 2,791,451 Total liabilities and stockholders' equity$ 36,728,957 $ 38,421,576 Net interest income(2)$ 194,627 $ 208,421 Net interest margin 2.15 % 2.22 % Net interest spread 1.86 % 1.98 % Loan spread(3) 3.36 % 3.33 % (1)The loan averages include non-accrual loans and are stated net of unearned income. (2)Taxable equivalent rates used where applicable. (3)Yield on loans, net of reserves, less funding cost including all deposits and borrowed funds. 31 -------------------------------------------------------------------------------- Nine months ended September 30, 2021 Nine months ended September 30, 2020 Average Revenue/ Yield/ Average Revenue/ Yield/ (in thousands except percentages) Balance Expense Rate Balance Expense Rate
Assets
Investment securities - taxable
1.02 %$ 203,437 $ 2,364 1.55 % Investment securities - non-taxable(2) 187,817 6,532 4.65 % 194,049 6,983 4.81 % Federal funds sold and securities purchased under resale agreements 1,976 1 0.09 % 151,892 692 0.61 % Interest-bearing deposits in other banks 10,812,903 9,499 0.12 % 9,265,177 24,777 0.36 % Loans held for sale 117,604 2,430 2.76 % 1,350,581 33,894 3.35 % Loans held for investment, mortgage finance 7,875,138 181,256 3.08 % 8,267,307 206,306 3.33 % Loans held for investment(1)(2) 15,321,641 449,134 3.92 % 16,632,017 529,981 4.26 % Less reserve for loan losses 238,996 - - 234,587 - - Loans held for investment, net 22,957,783 630,390 3.67 % 24,664,737 736,287 3.99 % Total earning assets 37,472,111 674,732 2.41 % 35,829,873 804,997 3.00 % Cash and other assets 971,628 1,030,076 Total assets$ 38,443,739 $ 36,859,949 Liabilities and Stockholders' Equity Transaction deposits$ 3,596,301 $ 15,993 0.59 %$ 3,991,908 $ 26,232 0.88 % Savings deposits 11,400,029 28,040 0.33 % 12,133,598 62,279 0.69 % Time deposits 1,864,867 6,961 0.50 % 3,039,619 33,787 1.48 % Total interest-bearing deposits 16,861,197 50,994 0.40 % 19,165,125 122,298 0.85 % Other borrowings 2,443,853 3,842 0.21 % 3,146,756 18,489 0.78 % Long-term debt 759,584 27,052 4.76 % 395,659 15,146 5.11 % Total interest-bearing liabilities 20,064,634 81,888 0.55 % 22,707,540 155,933 0.92 % Demand deposits 14,978,324 11,028,119 Other liabilities 286,328 293,101 Stockholders' equity 3,114,453 2,831,189 Total liabilities and stockholders' equity$ 38,443,739 $ 36,859,949 Net interest income(2)$ 592,844 $ 649,064 Net interest margin 2.12 % 2.42 % Net interest spread 1.86 % 2.08 % Loan spread(3) 3.46 % 3.39 % (1)The loan averages include non-accrual loans and are stated net of unearned income. (2)Taxable equivalent rates used where applicable. (3)Yield on loans, net of reserves, less funding cost including all deposits and borrowed funds. 32 -------------------------------------------------------------------------------- Volume/Rate Analysis The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to differences in the average interest rate on those assets and liabilities. Three months ended September 30, 2021/2020 Nine months ended September 30, 2021/2020 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 $ 6,540$ 17,690 $ (11,150) $ 23,065 $ 89,089 $ (66,024) Loans held for sale (3,813) (3,733) (80) (31,464) (30,976) (488) Loans held for investment, mortgage finance loans (17,551) (9,075) (8,476) (25,050) (10,695) (14,355) Loans held for investment (9,807) (9,844) 37 (80,847) (41,515) (39,332) Federal funds sold and securities purchased under resale agreements (1) (1) - (691) (682)
(9)
Interest-bearing deposits in other banks 729 (499) 1,228 (15,278) 17,469 (32,747) Total (23,903) (5,462) (18,441) (130,265) 22,690 (152,955) Interest expense: Transaction deposits (1,915) (1,968) 53 (10,239) (1,374) (8,865) Savings deposits (4,546) (2,757) (1,789) (34,239) 1,846 (36,085) Time deposits (6,650) (3,540) (3,110) (26,826) (12,641) (14,185) Other borrowings (2,745) (630) (2,115) (14,647) (3,431) (11,216) Long-term debt 5,747 6,511 (764) 11,906 13,625 (1,719) Total (10,109) (2,384) (7,725) (74,045) (1,975) (72,070) Net interest income$ (13,794) $ (3,078) $ (10,716) $ (56,220) $ 24,665 $ (80,885) (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$194.1 million for the three months endedSeptember 30, 2021 , compared to$207.6 million for the same period in 2020. The decrease was primarily due to declines in total average loans and earning asset yields, partially offset by increases in average investment securities and loan fees, as well as declining cost of funds. Average earning assets for the three months endedSeptember 30, 2021 decreased$1.5 billion compared to the same period in 2020, and included a$3.1 billion increase in average total investment securities, reflecting the deployment of excess liquidity into higher-yielding investment securities, partially offset by a$2.0 billion decrease in average liquidity assets and a$2.6 billion decrease in average total loans. Throughout 2020, management took deliberate actions to increase liquidity balances to ensure we had the balance sheet strength to serve our clients during the COVID-19 pandemic. Through the first nine months of 2021 these balances have remained elevated, although they are beginning to run off as we have purchased investment securities and proactively exited certain high-cost indexed deposit products. The decrease in average loans held for sale compared to the third quarter of 2020 resulted from the transition of the MCA program to a third-party. Average interest-bearing liabilities for the three months endedSeptember 30, 2021 decreased$5.2 billion compared to the same period in 2020, primarily due to a$5.2 billion decrease in average interest-bearing deposits and a$511.7 million decrease in average other borrowings, partially offset by a$531.9 million increase in average long-term debt. Average demand deposits for the three months endedSeptember 30, 2021 increased to$15.4 billion from$12.2 billion for the three months endedSeptember 30, 2020 . Net interest margin for the three months endedSeptember 30, 2021 was 2.15% compared to 2.22% for the same period in 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, partially offset by increases in loan fees and lower funding costs compared to the third quarter of 2020. The yield on total loans held for investment decreased to 3.55% for the three months endedSeptember 30, 2021 compared to 3.71% for the same period in 2020, and the yield on earning assets decreased to 2.44% for the three months endedSeptember 30, 2021 compared to 2.60% for the same period in 2020. The average cost of total deposits decreased to 0.19% for the third quarter of 2021 from 0.34% for the third quarter of 2020 and total funding costs, including all deposits, long-term debt and stockholders' equity, decreased to 0.28% for the third quarter of 2021 compared to 0.38% for the third quarter of 2020. 33 -------------------------------------------------------------------------------- Net interest income was$591.2 million for the nine months endedSeptember 30, 2021 compared to$645.8 million for the same period in 2020. The decrease was primarily due to declines in total average loans and earning asset yields, partially offset by increases in average investment securities and loan fees, as well as declining cost of funds. Average earning assets increased$1.6 billion for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, and included a$3.2 billion increase in average total investment securities, reflecting the deployment of excess liquidity into higher-yielding investment securities and a$1.4 billion increase in average liquidity assets, partially offset by a$2.9 billion decrease in average total loans. The increases in average total investment securities and liquidity assets were the result of deliberate actions taken by management to enhance the strength of our balance sheet as described above. Average interest-bearing liabilities decreased$2.6 billion for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, primarily due to a$2.3 billion decrease in average interest-bearing deposits and a$702.9 million decrease in average other borrowings, partially offset by a$363.9 million increase in average long-term debt. Average demand deposits for the nine months endedSeptember 30, 2021 increased to$15.0 billion from$11.0 billion for the same period in 2020. Net interest margin for the nine months endedSeptember 30, 2021 was 2.12% compared to 2.42% for the same period of 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 the increases in lower-yielding investment securities and liquidity assets, partially offset by lower funding costs compared to the same period in 2020. The yield on total loans held for investment decreased to 3.67% for the nine months endedSeptember 30, 2021 , compared to 3.99% for the same period in 2020, and the yield on earning assets decreased to 2.41% for the nine months endedSeptember 30, 2021 , compared to 3.00% for the same period in 2020. The average cost of total deposits decreased to 0.21% for the nine months endedSeptember 30, 2021 from 0.54% for the same period in 2020 and total funding costs, including all deposits, long-term debt and stockholders' equity, decreased to 0.29% for the nine months endedSeptember 30, 2021 , compared to 0.57% for the same period in 2020. Non-interest Income Three months ended
2021 2020 2021 2020
Service charges on deposit accounts $ 4,622 $ 2,864 $ 13,972 $ 8,616
Wealth management and trust fee income 3,382 2,502 9,380 7,317
Brokered loan fees 6,032 15,034 22,276 33,813
Servicing income 292 7,329 15,236 18,195
Swap fees 568 484 1,628 4,709
Net gain/(loss) on sale of loans held for
sale (1,185) 25,242 1,317 51,265
Other 7,509 6,893 26,605 18,698
Total non-interest income $ 21,220 $ 60,348 $ 90,414 $ 142,613
Non-interest income decreased by $39.1 million during the three months ended
September 30, 2021 compared to the same period in 2020. The 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.
Non-interest income decreased by $52.2 million during the nine months ended
September 30, 2021 compared to the same period in 2020. The 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.
34
--------------------------------------------------------------------------------Non-interest Expense
Three months ended September 30, Nine months ended September 30,
(in thousands) 2021 2020 2021 2020
Salaries and employee benefits $ 87,503 $ 84,096 $ 261,855 $ 262,080
Net occupancy expense 8,324 8,736 24,463 26,582
Marketing 2,123 3,636 5,720 20,146
Legal and professional 11,055 11,207 28,479 40,003
Communications and technology 28,374 31,098 58,695 87,649
FDIC insurance assessment 4,500 6,374 16,339 19,363
Servicing-related expenses 2,396 12,287 27,740 48,741
Merger-related expenses - - - 17,756
Other 8,712 8,307 29,072 31,173
Total non-interest expense $ 152,987 $
165,741
Non-interest expense for the three months endedSeptember 30, 2021 decreased$12.8 million compared to the same period in 2020. The decrease was primarily due to decreases in communications and technology expense and servicing-related expenses, partially offset by an increase in salaries and employee benefits. 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. Communication and technology expenses for the three months endedSeptember 30, 2021 included a$12.0 million write-off of certain software assets, as is discussed above, compared to$15.4 million included in the same period of 2020. Non-interest expense for the nine months endedSeptember 30, 2021 decreased$101.1 million compared to the same period in 2020. The decrease was primarily due to decreases in marketing expense, legal and professional expense, communications and technology expense, servicing-related expenses and merger-related expenses. Analysis of Financial Condition Loans Held for Investment The following table summarizes our loans held for investment on a gross basis by portfolio segment: (in thousands) September 30, 2021 December 31, 2020 Commercial $ 9,377,274$ 8,861,580 Energy 697,888 766,217 Mortgage finance 8,528,313 9,079,409 Real estate 5,212,364 5,794,624 Gross loans held for investment$ 23,815,839 $ 24,501,830 Deferred income (net of direct origination costs) (66,122) (70,970) Allowance for credit losses on loans (221,957) (254,615) Total loans held for investment, net $
23,527,760
Total gross loans held for investment were$23.8 billion atSeptember 30, 2021 , a decline of$686.0 million fromDecember 31, 2020 due to declines in energy, mortgage finance and real estate loans, offset by an increase in commercial loans. The decline in the energy portfolio is consistent with our strategy of planned reductions in this portfolio as it has experienced higher historic losses. 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. 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 the first nine months of 2021, balances in this portfolio remain elevated related to increases in volumes driven by continued lower long-term interest rates. 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 ofSeptember 30, 2021 , we had$2.3 billion in syndicated loans,$628.3 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 ofSeptember 30, 2021 ,$11.5 million of our syndicated loans were on non-accrual. Portfolio Geographic and Industry Concentrations Although more than 50% of our total loan exposure is outside ofTexas and more than 50% of our deposits are sourced outside ofTexas , ourTexas concentration remains significant. As ofSeptember 30, 2021 , a majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, were to businesses with headquarters or operations in 35 --------------------------------------------------------------------------------Texas . This geographic concentration subjects the loan portfolio to the general economic conditions within this state. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses. Non-performing Assets Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes our non-performing assets by type and by type of property securing the credit: September 30, December 31, September 30, (in thousands) 2021 2020 2020 Non-accrual loans(1) Commercial Assets of the borrowers$ 13,849 $ 18,776 $ 35,829 Inventory 8,990 3,547 15,266 Other 4,235 9,773 11,416 Total commercial 27,074 32,096 62,511 Energy Oil and gas properties 40,040 51,724 73,811 Total energy 40,040 51,724 73,811 Real estate Assets of the borrowers 13,929 14,496 14,663 Commercial property 4,854 13,569 5,437 Hotel/motel - 4,619 - Single family residences 1,635 218 218 Other - 5,267 5,306 Total real estate 20,418 38,169 25,624 Total non-performing assets$ 87,532
Loans held for investment past due 90 days and accruing(2) 3,405 12,541 15,896 Loans held for sale non-accrual(3) - 6,966 -
Loans held for sale past due 90 days and accruing(4) 3,808
16,667 15,631
(1)As of September 30, 2021 , December 31, 2020 and September 30, 2020 ,
non-accrual loans included $23.7 million , $45.4 million and $47.7 million ,
respectively, in loans that met the criteria for restructured.
(2)At September 30, 2021 , December 31, 2020 and September 30, 2020 , loans past
due 90 days and still accruing includes premium finance loans of $2.3 million ,
$6.4 million and $11.9 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 and September 30, 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-performing assets at September 30, 2021 decreased $34.5 million from
December 31, 2020 and decreased $74.4 million compared to September 30, 2020 .
The decrease from December 31, 2020 was primarily due to declines in energy and
real estate non-accrual loans, and the decrease from September 30, 2020 was
primarily due to declines in commercial and energy non-accrual loans.
Potential problem loans consist of loans that are performing in accordance with
contractual terms, but for which we have concerns about the borrower's ability
to comply with repayment terms because of the borrower's potential financial
difficulties. We monitor these loans closely and review their performance on a
regular basis. At September 30, 2021 , we had $68.0 million in loans of this
type, compared to $193.2 million at December 31, 2020 and $129.5 million at
September 30, 2020 . The decline in potential problem loans is consistent with
the continued economic recovery from the impacts of the COVID-19 pandemic.
Summary of Credit Loss Experience
The provision for credit losses, which includes a provision for losses on
unfunded commitments, 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. We recorded a $20.0
million negative provision for credit losses for the nine months ended
September 30, 2021 , compared to a provision of $226.0 million in the same period
of 2020. The year-over-year decrease resulted primarily from decreases in net
charge-offs and non-accrual loans, as well as improvement in the economic
outlook as the economy continues to recover from the impacts of the COVID-19
pandemic. We recorded $11.9 million in net charge-offs
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during the nine months ended September 30, 2021 , compared to $133.4 million
during the same period of 2020. Criticized loans totaled $728.9 million at
September 30, 2021 , compared to $918.4 million at December 31, 2020 and $1.1
billion at September 30, 2020 .
The table below presents a summary of our loan loss experience:
Nine months Year ended Nine months
ended September December 31, ended September
(in thousands except percentage and multiple data) 30, 2021 2020 30, 2020
Allowance for credit losses on loans:
Beginning balance $ 254,615 $ 195,047 $ 195,047
Impact of CECL adoption - 8,585 8,585
Loans charged-off:
Commercial 8,211 73,360 35,376
Energy 6,418 133,522 100,239
Real estate 1,192 180 -
Total charge-offs 15,821 207,062 135,615
Recoveries:
Commercial 2,462 1,277 883
Energy 1,366 6,999 1,303
Real estate 112 - -
Total recoveries 3,940 8,276 2,186
Net charge-offs 11,881 198,786 133,429
Provision for credit losses on loans (20,777) 249,769 219,962
Ending balance $ 221,957 $ 254,615 $ 290,165
Allowance for off-balance sheet credit losses:
Beginning balance $ 17,434 8,640 $ 8,640
Impact of CECL adoption - 563 563
Provision for off-balance sheet credit losses 777 8,231 6,038
Ending balance $ 18,211 $ 17,434 $ 15,241
Total allowance for credit losses $ 240,168 $ 272,049 $ 305,406
Total provision for credit losses $ (20,000) $ 258,000 $ 226,000
Allowance for credit losses on loans to LHI 0.93 % 1.04 % 1.15 %
Net charge-offs to average LHI 0.07 % 0.80 % 0.72 %
Total provision for credit losses to average LHI (0.12) % 1.03 % 1.21 %
Recoveries to total charge-offs 24.91 % 4.00 % 1.61 %
Allowance for off-balance sheet credit losses to
off-balance sheet credit commitments 0.21 % 0.20 % 0.18 %
Total allowance for credit losses to LHI 1.01 % 1.11 % 1.21 %
Allowance for credit losses on loans as a multiple of non-performing loans
2.5 x 2.1 x 1.8 x
The allowance for credit losses, including the allowance for losses on unfunded
commitments reported on the consolidated balance sheets in other liabilities,
totaled $240.2 million at September 30, 2021 , $272.0 million at December 31,
2020 and $305.4 million at September 30, 2020 . The total allowance for credit
losses as a percentage of loans held for investment was 1.01% at September 30,
2021 , compared to 1.11% at December 31, 2020 and 1.21% at September 30, 2020 .
The total allowance for credit losses as a percentage of loans held for
investment, excluding mortgage finance, was 1.58% at September 30, 2021 ,
compared to 1.77% at December 31, 2020 and 1.93% at September 30, 2020 . The
decrease in the total allowance as a percentage of loans held for investment at
September 30, 2021 , compared to September 30, 2020 , is due primarily to a
decrease in the allowance for credit losses, resulting from reserve releases
during the first nine months of 2021 driven by a decrease in net charge-offs and
improvement in the economic outlook as the economy continues to recover from the
impacts of the COVID-19 pandemic.
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Loans Held for Sale
Through the MCA program we commit to purchase residential mortgage loans from
independent correspondent lenders and deliver those loans into the secondary
market via whole loan sales to independent third parties or in securitization
transactions to Ginnie Mae and Government Sponsored Enterprises ("GSEs") such as
Fannie Mae and Freddie Mac. 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 are significantly
complete as of September 30, 2021 . On October 1, 2021 , we completed the sale of
the remaining MSRs to the same third-party. For additional information on these
sales and the winding down of this line of business, see Note 5 - Certain
Transfers of Financial Assets in the accompanying notes to the consolidated
financial statements included elsewhere in this report.
Liquidity and Capital Resources
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 Federal Home Loan Bank ("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 liquidity assets to ensure that
we had the balance sheet strength to serve our clients during the COVID-19
pandemic. Through the first nine months of 2021 these balances have remained
elevated, 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 the composition of liquidity assets:
(in thousands except percentage data) September
30, 2021
$ - $ - $ -
Interest-bearing deposits 8,317,926 9,032,807 10,461,544
Total liquidity assets $
8,317,926
35.0 % 37.0 % 42.1 %
Total earning assets 23.4 % 24.6 % 28.0 %
Total deposits 27.9 % 29.1 % 32.7 %
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.
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We also have access to incremental deposits through brokered retail certificates
of deposit, or CDs. These traditional brokered deposits are generally of short
maturities and are used to fund temporary differences in the growth in loan
balances, including growth in loans held for sale or other specific categories
of loans as compared to customer deposits. The following table summarizes our
period-end and average core customer deposits, relationship brokered deposits
and traditional brokered deposits:
(in thousands) September 30, 2021 $ 27,339,071
91.7 % 89.0 % 85.5 %
Relationship brokered deposits $ 1,488,066
5.0 % 5.7 % 7.2 %
Traditional brokered deposits $ 986,531
3.3 % 5.3 % 7.3 %
Average deposits from core customers(1) $ 28,930,264
90.8 % 86.0 % 84.7 %
Average relationship brokered deposits(1) $ 1,516,026
4.8 % 6.8 % 6.9 %
Average traditional brokered deposits(1) $ 1,393,231
4.4 % 7.2 % 8.4 %
(1) Annual averages presented for December 31, 2020 .
We have access to sources of traditional brokered deposits that we estimate to
be $7.5 billion . Based on our internal guidelines, we have currently chosen to
limit our use of these sources to a lesser amount.
We have short-term borrowing sources available to supplement deposits and meet
our funding needs. Such borrowings are generally used to fund our mortgage
finance loans, due to their liquidity, short duration and interest spreads
available. These borrowing sources include federal funds purchased from our
downstream correspondent bank relationships (which consist of banks that are
smaller than our Bank) and from our upstream correspondent bank relationships
(which consist of banks that are larger than our Bank), customer repurchase
agreements and advances from the FHLB and the Federal Reserve . The following
table summarizes our short-term and other borrowings:
(in thousands) September 30, 2021
Federal funds purchased $ -
Repurchase agreements 3,470
FHLB borrowings 2,200,000
Line of credit -
Total short-term borrowings $ 2,203,470
Maximum short-term borrowings outstanding at any month-end during 2021 $ 2,907,202
The following table summarizes our other borrowing capacities net of balances outstanding. As ofSeptember 30, 2021 , all are scheduled to mature within one year. (in thousands)September 30, 2021 FHLB borrowing capacity relating to loans $
6,168,920
FHLB borrowing capacity relating to securities
3,421,807
Total FHLB borrowing capacity(1) $
9,590,727
Unused federal funds lines available from commercial banks $ 1,235,000 Unused Federal Reserve borrowings capacity
$ 2,271,220
Unused revolving line of credit(2) $
130,000
(1) FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans, mortgage finance assets and also certain pledged securities. (2) Unsecured revolving, non-amortizing line of credit with maturity date ofDecember 14, 2021 . Proceeds may be used for general corporate purposes, including funding regulatory capital infusions into the Bank. The loan agreement contains customary financial covenants and restrictions. No borrowings were made against this line of credit during the nine months endedSeptember 30, 2021 . Periodically, based on market conditions and other factors, and subject to compliance with applicable laws and regulations and the terms of our existing indebtedness, we or the Bank may repay, repurchase, exchange or redeem outstanding indebtedness, or otherwise enter into transactions regarding our debt or capital structure. For example, we and the Bank periodically evaluate 39 -------------------------------------------------------------------------------- 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. For additional information regarding our borrowings and our capital and stockholders' equity, see Note 6 - Long-Term Debt, Note 8 - Regulatory Restrictions and Note 12 - Material Transactions Affecting Stockholders' Equity, respectively, in the accompanying notes to the consolidated financial statements included elsewhere in this report. Commitments and Contractual Obligations The following table presents, as ofSeptember 30, 2021 , significant fixed and determinable contractual obligations to third parties by payment date. Amounts in the table do not include accrued or accruing interest. Less than 1 1-3 More than 5 (in thousands) Year Years 3-5 Years Years Total Deposits without a stated maturity$ 28,382,890 $
- $ - $ -
1,273,741 153,804 3,228 5 1,430,778
Federal funds purchased and customer
repurchase agreements 3,470 - - - 3,470
FHLB borrowings 2,200,000 - - - 2,200,000
Operating lease obligations 17,404 32,930 12,435 22,159 84,928
Long-term debt - 269,985 173,870 484,207 928,062
Total contractual obligations $ 31,877,505 $
456,719
Off-Balance Sheet Arrangements We enter into commitments to extend credit and standby letters of credit in the ordinary course of business, details of which are described in Note 1 - Operations and Summary of Significant Accounting Policies in our 2020 Form 10-K. For additional information, see Note 7 - Financial Instruments with Off-Balance Sheet Risk in the accompanying notes to the consolidated financial statements included elsewhere in this report. Critical Accounting PoliciesSEC guidance requires disclosure of "critical accounting policies." TheSEC defines "critical accounting policies" as those that are most important to the presentation of a company's financial condition and results, and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted inthe United States ("GAAP"). Certain significant 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 and in our 2020 Form 10-K. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to meet theSEC'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 ("ASC") 326, Credit Losses. The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management's continuing evaluation of the credit losses expected to be recognized over the life of the loans in our portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. For purposes of determining the allowance for credit losses, the loan portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor ("PLQF") and/or a Portfolio Segment Level Qualitative Factor ("SLQF"). The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. A reserve is recorded upon origination or purchase of a loan. See "Summary of Credit Loss Experience" above and Note 4 - Loans Held for Investment and Allowance for Credit 40 -------------------------------------------------------------------------------- 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. Impact of Inflation and Changing Prices The preparation of financial statements in conformity with GAAP requires management to measure the company's financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on our operations is reflected in increased operating expenses. Management considers changes in interest rates to impact our financial condition and results of operations to a far greater degree than changes in prices due to inflation. Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. We manage our interest rate risk in several ways. Refer to "Interest Rate Risk Management" in Item 3 for further discussion. There can be no assurance that we will not be materially adversely affected by future changes in interest rates, as interest rates are highly sensitive to many factors that are beyond our control. 41
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