The following discussion and analysis of our financial condition and results of operations for the three months endedMarch 31, 2022 and 2021 should be read in conjunction with our audited consolidated financial statements and the related notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Form 10-K"). Operating results for the three months endedMarch 31, 2022 are not necessarily indicative of the results for the year endingDecember 31, 2022 or any future period.
Forward-looking statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information available to us at the time such statements are made. Forward-looking statements may often be identified by the use of words such as "expects," "estimates," "anticipates," "plans," "goals," "objectives," "intends," "seeks," "likely," "should," "may" "could" and other similar expressions. These forward-looking statements are based of the historical performance of the Company or on the Company's current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future plans, estimates or expectations so contemplated will be achieved, and should not be the primary basis upon which investors evaluate an investment in our securities. Certain risks, uncertainties and other factors, including those set forth under "Risk Factors" in Part I, Item 1A of the 2021 Form 10-K and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis and may include factors such as, but not limited to, credit quality and risk, the COVID-19 pandemic, industry and technological changes, cyber incidents or other failures, disruptions or security breaches, interest rates, commercial and residential real estate values, economic and market conditions inTexas ,the United States or internationally, fund availability, accounting estimates and risk management processes, the transition away from the London Interbank Offered Rate (LIBOR), legislative and regulatory changes, business strategy execution, key personnel, competition, mortgage markets, fraud, environmental liability and severe weather, natural disasters, acts of war or terrorism or other external events. The Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
Operating results
Three months completed
Selected income statement data and key performance indicators are presented in
the table below:
For the Three Months Ended
(dollars in thousands except per share data) March 31, 2022 March 31, 2021
Net interest income $ 183,547 $ 194,812
Provision for credit losses (2,000) (6,000)
Non-interest income 20,282 44,353
Non-interest expense 153,092 150,316
Income before income taxes 52,737 94,849
Income tax expense 13,087 22,911
Net income 39,650 71,938
Preferred stock dividends 4,313 3,779
Net income available to common stockholders $ 35,337 $ 68,159
Earnings per common share - basic $ 0.70 $ 1.35
Earnings per common share - diluted $ 0.69 $ 1.33
Net interest margin 2.23 % 2.04 %
Return on average assets 0.47 % 0.73 %
Return on average common equity 4.97 % 10.08 %
Non-interest income to average earning assets 0.25 % 0.46 %
Efficiency ratio(1) 75.1 % 62.9 %
Non-interest expense to average earning assets 1.86 % 1.57 %
(1) Non-interest expenses divided by the sum of net interest income and non-interest income.
21 -------------------------------------------------------------------------------- We reported net income of$39.7 million and net income available to common stockholders of$35.3 million for the first quarter of 2022 compared to net income of$71.9 million and net income available to common stockholders of$68.2 million for the first quarter of 2021. On a fully diluted basis, earnings per common share were$0.69 for the first quarter of 2022, compared to$1.33 for the first quarter of 2021. Return on average common equity ("ROE") was 4.97% and return on average assets ("ROA") was 0.47% for the first quarter of 2022, compared to 10.08% and 0.73%, respectively, for the first quarter of 2021. The decrease in net income for the first quarter of 2022 compared to the first quarter of 2021 resulted primarily from decreases in net interest income and non-interest income.
Details of the changes in the various components of net income are presented below.
22 --------------------------------------------------------------------------------
Analysis of taxable equivalent net interest income
Three months ended March 31,
Three months ended March 31, 2022 2021
Average Income/ Yield/ Average Income/ Yield/
(in thousands except percentages) Balance Expense Rate Balance Expense Rate
Assets
Investment securities(1) $ 3,669,257 $ 17,743 1.96 % $ 3,422,571 $ 10,359 1.23 %
Interest bearing cash and cash
equivalents 8,552,300 3,571 0.17 % 11,845,547 2,933 0.10 %
Loans held for sale 7,633 113 6.01 % 243,326 1,595 2.66 %
Loans held for investment, mortgage
finance 5,732,901 43,466 3.07 % 8,177,759 64,942 3.22 %
Loans held for investment(1)(2) 15,686,319 144,134 3.73 % 15,457,888 143,935 3.78 %
Less: Allowance for credit losses on
loans 212,612 - - 254,697 - -
Loans held for investment, net 21,206,608 187,600 3.59 % 23,380,950 208,877 3.62 %
Total earning assets 33,435,798 209,027 2.54 % 38,892,394 223,764 2.33 %
Cash and other assets 819,486 1,064,679
Total assets $ 34,255,284 $ 39,957,073
Liabilities and Stockholders' Equity
Transaction deposits $ 2,432,687 $ 3,962 0.66 % $ 3,991,966 $ 5,861 0.60 %
Savings deposits 10,420,545 8,583 0.33 % 12,889,974 10,788 0.34 %
Time deposits 1,038,722 1,085 0.42 % 2,204,242 3,355 0.62 %
Total interest bearing deposits 13,891,954 13,630 0.40 % 19,086,182 20,004 0.43 %
Short-term borrowings 1,770,781 758 0.17 % 2,686,398 2,592 0.39 %
Long-term debt 929,005 10,595 4.63 % 464,731 5,743 5.01 %
Total interest bearing liabilities 16,591,740 24,983 0.61 % 22,237,311 28,339 0.52 %
Non-interest bearing deposits 14,235,749 14,421,505
Other liabilities 243,141 309,644
Stockholders' equity 3,184,654 2,988,613
Total liabilities and stockholders'
equity $ 34,255,284 $ 39,957,073
Net interest income(1) $ 184,044 $ 195,425
Net interest margin 2.23 % 2.04 %
Net interest spread 1.93 % 1.81 %
(1)Tax equivalence rates used where applicable. (2) Average balances include outstanding loans which are presented net of unearned income.
23 --------------------------------------------------------------------------------
Volume/rate analysis
The following table shows the variations in net interest income in taxable equivalent and identifies variations due to differences in the average volume of earning assets and interest-bearing liabilities and variations due to differences in the average interest rate on these assets. and passive.
Three months completed
Net Change due to(1) (in thousands) Change Volume Yield/Rate(2) Interest income: Investment securities$ 7,384 $ 748 $ 6,636 Interest bearing cash and cash equivalents 638 (812) 1,450 Loans held for sale (1,482) (1,546) 64 Loans held for investment, mortgage finance loans (21,476) (19,412) (2,064) Loans held for investment 199 2,129 (1,930) Total (22,759) (18,829) (3,930) Interest expense: Transaction deposits (1,899) (2,307) 408 Savings deposits (2,205) (2,070) (135) Time deposits (2,270) (1,782) (488) Short-term borrowings (1,834) (880) (954) Long-term debt 4,852 5,735 (883) Total (3,356) (1,304) (2,052) Net interest income$ (19,403) $ (17,525) $ (1,878)
(1) Yield/rate and volume spreads are allocated to yield/rate. (2) Equivalent tax rates used where applicable assuming a tax rate of 21%.
Net interest income
Net interest income was
Average earning assets for the three months endedMarch 31, 2022 decreased$5.5 billion compared to the same period in 2021, and included a$3.3 billion decrease in average interest-bearing cash and cash equivalents and a$2.4 billion decrease in average loans held for investment, mortgage finance. The decrease in average interest bearing cash and cash equivalents resulted primarily from our proactive exit of certain high-cost indexed deposit products in the second half of 2021. The decrease in average loans held for investment, mortgage finance, was primarily due to reduced volumes as a result of the rising interest rate environment. Average interest-bearing liabilities for the three months endedMarch 31, 2022 decreased$5.6 billion compared to the same period in 2021, primarily due to a$5.2 billion decrease in average interest-bearing deposits. Average demand deposits for the three months endedMarch 31, 2022 decreased$185.8 million compared to the same period in 2021. Net interest margin for the three months endedMarch 31, 2022 was 2.23% compared to 2.04% for the same period in 2021, primarily due to a shift in the composition of earning assets, primarily declines in interest-bearing cash and cash equivalents and LHI, mortgage finance. The yield on total loans held for investment decreased to 3.59% for the three months endedMarch 31, 2022 compared to 3.62% for the same period in 2021, and the yield on earning assets increased to 2.54% for the three months endedMarch 31, 2022 compared to 2.33% for the same period in 2021. The average cost of total deposits decreased to 0.20% for the three months endedMarch 31, 2022 from 0.24% for the same period in 2021, and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 0.30% for the three months endedMarch 31, 2022 compared to 0.29% for the same period in 2021. 24 --------------------------------------------------------------------------------
Non-interest Income
Three months ended
March 31,
(in thousands) 2022 2021
Service charges on deposit accounts $ 6,022 $ 4,716
Wealth management and trust fee income 3,912 2,855
Brokered loan fees 3,970 9,311
Servicing income 237 9,009
Investment banking and trading income 4,179 5,787
Net gain/(loss) on sale of loans held for sale - 5,572
Other 1,962 7,103
Total non-interest income $ 20,282 $ 44,353
Non-interest income decreased $24.1 million during the three months ended
March 31, 2022 compared to the same period in 2021. The decrease was primarily
due to decreases in brokered loan fees, servicing fee income and net gain/(loss)
on sale of loans held for sale all as a result of the sale of our mortgage
servicing rights portfolio and transition of the mortgage correspondent
aggregation program in 2021.
Non-interest Expense
Three months ended March 31,
(in thousands) 2022 2021
Salaries and benefits $ 100,098 $ 87,522
Occupancy expense 8,885 8,274
Marketing 4,977 1,697
Legal and professional 10,302 8,277
Communications and technology 14,700 15,969
FDIC insurance assessment 3,981 6,613
Servicing-related expenses - 12,989
Other 10,149 8,975
Total non-interest expense $ 153,092 $ 150,316
Non-interest expense for the three months ended March 31, 2022 increased $2.8
million compared to the same period in 2021. The increase was primarily due to
increases in salaries and benefits, partially offset by a decrease in
servicing-related expenses. The increase in salaries and benefits expense was
primarily due to an increase in headcount, while the decrease in service-related
expenses resulted primarily from the sale of our mortgage servicing rights
portfolio in 2021.
Analysis of the financial situation
Loans held for investment purposes
The following table summarizes our loans held for investment by portfolio segment:
(in thousands) March 31, 2022 December 31, 2021 Commercial$ 10,175,668 $ 9,897,561 Energy 797,191 721,373 Mortgage finance 5,827,965 7,475,497 Real estate 4,943,195 4,777,530 Gross loans held for investment$ 21,744,019 $ 22,871,961 Deferred income (net of direct origination costs) (66,620) (65,007) Total loans held for investment 21,677,399 22,806,954 Allowance for credit losses on loans (211,151) (211,866) Total loans held for investment, net $
21,466,248
Total loans held for investment were$21.7 billion atMarch 31, 2022 , a decline of$1.1 billion fromDecember 31, 2021 . The decline in total loans held for investment was primarily due to a decline in mortgage finance loans, partially offset by increases in commercial and real estate loans. Mortgage finance loans relate to our mortgage warehouse lending operations in which we purchase mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 27% of total loans held for investment atMarch 31, 2022 compared to 33% atDecember 31, 2021 . Volumes fluctuate based on the level of market 25 -------------------------------------------------------------------------------- demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates, and tend to peak at the end of each month. The balances of mortgage finance loans have continued to decline in the first quarter of 2022 as interest rates have continued to rise. 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 ofMarch 31, 2022 , we had$2.7 billion in syndicated loans,$649.5 million of which we administer as agent. All syndicated loans, whether we act as agent or participant, are underwritten to the same standards as all other loans we originate. As ofMarch 31, 2022 , none of our syndicated loans were on non-accrual.
Portfolio concentrations
Although more than 50% of our total loan exposure is outside ofTexas and more than 50% of our deposits are sourced outside ofTexas , ourTexas concentration remains significant. As ofMarch 31, 2022 , a majority of our loans held for investment, excluding mortgage finance loans and other national lines of business, were to businesses with headquarters or operations inTexas . This geographic concentration subjects the loan portfolio to the general economic conditions within this state. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses.
Non-performing assets
Non-performing assets include unexpired loans and leases and repossessed assets. The table below summarizes our non-performing assets by type and by type of asset securing the credit.
(in thousands) March 31, 2022 December 31, 2021 Non-accrual loans held for investment(1): Commercial: Assets of the borrowers$ 17,927 $ 18,366 Accounts receivable and inventory 5,450 5,501 Other 2,093 2,045 Total commercial 25,470 25,912 Energy: Oil and gas properties 18,267 28,380 Total energy 18,267 28,380 Real estate: Assets of the borrowers 12,666 13,741 Commercial property 2,738 2,840 Single family residences
186 1,629 Total real estate 15,590 18,210 Total non-accrual loans held for investment 59,327 72,502 Non-accrual loans held for sale - - Other real estate owned - - Total non-performing assets $
$59,327 72,502
Unrecognized loans held for investment purposes versus total loans held for investment purposes
0.27 % 0.32 %
Allowance for credit losses on loans to unaccrued loans held for investment purposes
3.6x 2.9x
Loans held for investment purposes 90 days past due and still outstanding(2)
$
6,031 $3,467 Loans held for investment 90 days past due to total loans held for investment
0.03 % 0.02 %
Loans held for sale 90 days past due and still outstanding(3)
(1)As ofMarch 31, 2022 andDecember 31, 2021 , non-accrual loans included$18.0 million and 19.4 million, respectively, in loans that met the criteria for restructured. (2)AtMarch 31, 2022 andDecember 31, 2021 , loans past due 90 days and still accruing includes premium finance loans of$3.2 million and$3.3 million , respectively. (3)Includes loans guaranteed byU.S. government agencies that were repurchased out ofGinnie 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 theU.S. government.
Summary of the credit loss experience
The allowance for credit losses, which consists of an allowance for off-balance sheet loans and credit losses, is charged to income in order to maintain the allowance for credit losses at a level consistent with management’s assessment of expected losses at each Closing Date.
26 -------------------------------------------------------------------------------- We recorded a$2.0 million negative provision for credit losses for the three months endedMarch 31, 2022 , compared to a negative provision of$6.0 million for the three months endedMarch 31, 2021 . The$2.0 million negative provision for credit losses resulted from a decline in criticized loans, partially offset by an increase in loans held for investment, excluding mortgage finance. We recorded$512,000 in net recoveries during the three months endedMarch 31, 2022 , compared to net charge-offs of$6.4 million during the three months endedMarch 31, 2021 . Criticized loans totaled$476.1 million atMarch 31, 2022 , compared to$945.1 million atMarch 31, 2021 .
The table below outlines key metrics related to our credit loss experience:
March 31, 2022 March 31, 2021
Allowance for credit losses on loans to total loans held for 0.97 % 0.99 %
investment
Allowance for credit losses on loans to total average loans 0.99 % 1.03 % held for investment Total provision for credit losses to average total loans held (0.04) % (0.10) % for investment(1) Total allowance for credit losses to total loans held for 1.05 % 1.06 %
investment
(1) Interim period ratios are annualized.
The table below details net charge-offs (recoveries) as a percentage of average
total loans by loan category:
Three months ended March 31,
2022 2021
Net Charge-offs Net Charge-offs
Net Charge-offs to Average Loans(1) Net Charge-offs to Average Loans(1)
Commercial $ (107) - % $ 1,401 0.06 %
Energy (755) (0.40) % 5,017 2.94 %
Mortgage finance - - % - - %
Real estate 350 0.03 % - - %
Total $ (512) (0.01) % $ 6,418 0.11 %
(1) Interim period ratios are annualized.
Cash 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 ourAsset and Liability Management Committee ("ALCO"), which take into account the demonstrated marketability of our assets, the sources and stability of our funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. Our principal source of funding is customer deposits, supplemented by short-term borrowings, primarily federal funds purchased and FHLB borrowings, which are generally used to fund mortgage finance assets, as well as long-term debt. We also rely on the availability of the mortgage secondary market provided byGinnie Mae and the government-sponsored enterprises to support the liquidity of our mortgage finance assets. During 2020 and into the first half of 2021, we significantly increased our interest-bearing cash and cash equivalents to ensure that we had the balance sheet strength to serve our clients during the COVID-19 pandemic. In the second half of 2021 and continuing into the first three months of 2022, these balances have run off as we have purchased investment securities and proactively exited certain high-cost indexed deposit products. The following table summarizes these balances: (in thousands except percentage data)March 31, 2022
Interest-bearing cash and cash equivalents$ 5,136,680 $ 7,765,996 $ 11,212,276 Interest-bearing cash and cash equivalents as a percent of: Total loans held for investment 23.7 % 34.1 % 45.9 % Total earning assets 17.0 % 22.9 % 28.8 % Total deposits 20.2 % 27.6 % 33.6 % 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. 27 -------------------------------------------------------------------------------- We also have access to incremental deposits through brokered retail certificates of deposit, or CDs. These traditional brokered deposits are generally of short maturities and are used to fund temporary differences in the growth in loan balances as compared to customer deposits. The following table summarizes our period-end and average core customer deposits, relationship brokered deposits and traditional brokered deposits: (in thousands) March 31, 2022 December 31, 2021 March 31, 2021 Deposits from core customers$ 24,020,695 $ 25,409,180 $ 30,102,156 Deposits from core customers as a percent of total deposits 94.7 % 90.4 % 90.1 % Relationship brokered deposits$ 812,108 $ 1,855,892 $ 1,933,376 Relationship brokered deposits as a percent of average total deposits 3.2 % 6.6 % 5.8 % Traditional brokered deposits$ 545,135 $ 844,293$ 1,356,438 Traditional brokered deposits as a percent of total deposits 2.1 % 3.0 % 4.1 % Average deposits from core customers(1)$ 25,906,368 $ 28,734,460 $ 29,980,945 Average deposits from core customers as a percent of average total deposits 92.1 % 91.1 % 89.5 %
Average relationship brokerage deposits(1)
1,608,587$ 1,912,099 Average relationship brokered deposits as a percent of average total deposits 5.4 % 5.1 % 5.7 %
Average of traditional intermediated deposits(1)
1,188,544$ 1,614,643 Average traditional brokered deposits as a percent of average total deposits 2.5 % 3.8 % 4.8 % (1) Annual averages presented forDecember 31, 2021 . We have access to sources of traditional brokered deposits that we estimate to be$7.5 billion . Based on our internal guidelines, we have currently chosen to limit our use of these sources to a lesser amount. We have short-term borrowing sources available to supplement deposits and meet our funding needs. Such borrowings are generally used to fund our mortgage finance loans, due to their liquidity, short duration and interest spreads available. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our Bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our Bank), customer repurchase agreements and advances from the FHLB and theFederal Reserve . The following table summarizes the outstanding balance of our short-term borrowings, all of which mature within one year: (in thousands) March 31, 2022 December 31, 2021
Repurchase agreements $ 2,033
2,832
FHLB borrowings 1,425,000
2,200,000
Total short-term borrowings
The following table summarizes our short-term borrowing capacity net of outstanding balances.
(in thousands) December 31,
March 31, 2022 2021
FHLB borrowing capacity relating to loans $ 4,200,346 $ 5,190,703
FHLB borrowing capacity relating to securities 3,378,391 3,352,111
Total FHLB borrowing capacity(1) $ 7,578,737 $ 8,542,814
Unused federal funds lines available from commercial banks $ 1,096,000 $ 892,000
Unused Federal Reserve borrowings capacity $ 2,806,914 $ 2,414,702
Unused revolving line of credit(2) $
75,000
(1) FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans, mortgage finance assets and certain pledged securities. (2) Unsecured revolving, non-amortizing line of credit with maturity date ofFebruary 8, 2023 . Proceeds may be used for general corporate purposes, including funding regulatory capital infusions into the Bank. The loan agreement contains customary financial covenants and restrictions. No borrowings were made against this line of credit during the three months endedMarch 31, 2022 . We also have long-term debt outstanding of$929.4 million as ofMarch 31, 2022 , comprised of trust preferred securities, subordinated notes and senior unsecured credit linked notes with maturity dates ranging fromSeptember 2024 toDecember 2036 . The Company may consider raising additional capital, if needed, in public or private offerings of debt or equity securities to supplement deposits and meet our long-term funding needs.
For more information on our borrowings, see Note 5 – Borrowings in the Notes to the Unaudited Consolidated Financial Statements included elsewhere in this report.
As the Company is a holding company and is a separate operating entity from our
subsidiary bank, our primary sources of liquidity are dividends received from
the Bank and borrowings from outside sources. Banking regulations may limit the
amount of dividends that may be paid by the Bank. See Note 7 - Regulatory
Restrictions in the accompanying notes to the consolidated unaudited financial
statements included elsewhere in this report for additional information
regarding dividend restrictions.
28
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Periodically, based on market conditions and other factors, and subject to
compliance with applicable laws and regulations and the terms of our existing
indebtedness, we or the Bank may repay, repurchase, exchange or redeem
outstanding indebtedness, or otherwise enter into transactions regarding our
debt or capital structure. For example, we and the Bank periodically evaluate
and may engage in liability management transactions, including repurchases or
redemptions of outstanding subordinated notes, which may be funded by the
issuance of, or exchanges of, newly issued unsecured borrowings, as we seek to
actively manage our debt maturity profile and interest cost.
As of March 31, 2022 , management is not aware of any events that are reasonably
likely to have a material adverse effect on our liquidity, capital resources or
operations. In addition, management is not aware of any regulatory
recommendations regarding liquidity that would have a material adverse effect on
us.
Capital Resources
Our equity capital averaged $3.2 billion for the three months ended March 31,
2022 compared to $3.0 billion for the same period in 2021. We have not paid any
cash dividends on our common stock since we commenced operations and have no
plans to do so in the foreseeable future.
On April 19, 2022 , our board of directors authorized a new share repurchase
program under which we may repurchase up to $150.0 million in shares of our
outstanding common stock. Any repurchases under the repurchase program will be
made in accordance with applicable securities laws from time to time in open
market or private transactions. The extent to which we repurchase shares, and
the timing of such repurchases, will be at management's discretion and will
depend upon a variety of factors, including market conditions, our capital
position and amount of retained earnings, regulatory requirements and other
considerations. No time limit was set for the completion of the share repurchase
program, and the program may be suspended or discontinued at any time.
See Note 7 – Regulatory Restrictions in the Notes to the Unaudited Consolidated Financial Statements included elsewhere in this report for additional information regarding dividend restrictions.
Critical accounting estimates
SEC guidance requires disclosure of "critical accounting estimates." TheSEC 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 inthe United States . Certain significant policies are summarized in Note 1 - Operations and Summary of Significant Accounting Policies in the notes to the consolidated unaudited financial statements included elsewhere in this report and in our 2021 Form 10-K. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to be highly dependent on estimates, assumptions and judgments that meet theSEC's definition of a critical accounting estimate.
Provision for credit losses
Management considers the policies related to the allowance for credit losses as
the most critical to the financial statement presentation. The total allowance
for credit losses includes activity related to allowances calculated in
accordance with ASC 326, Credit Losses. The allowance for credit losses is
established through a provision for credit losses charged to current earnings.
The amount maintained in the allowance reflects management's continuing
evaluation of the credit losses expected to be recognized over the life of the
loans in our portfolio. The allowance for credit losses on loans is a valuation
account that is deducted from the loans' amortized cost basis to present the net
amount expected to be collected on the loans. For purposes of determining the
allowance for credit losses, the loan portfolio is segregated by product types
in order to recognize differing risk profiles among categories, and then further
segregated by credit grades. Loans that do not share risk characteristics are
evaluated on an individual basis and are not included in the collective
evaluation. Management estimates the allowance balance using relevant available
information from internal and external sources relating to past events, current
conditions and reasonable and supportable forecasts. Adjustments to historical
loss information are made to incorporate our reasonable and supportable forecast
of future losses at the portfolio segment level, as well as any necessary
qualitative adjustments using a Portfolio Level Qualitative Factor ("PLQF")
and/or a Portfolio Segment Level Qualitative Factor ("SLQF"). The PLQF and SLQF
are utilized to address factors that are not present in historical loss rates
and are otherwise unaccounted for in the quantitative process. A reserve is
recorded upon origination or purchase of a loan. See "Summary of Credit Loss
Experience" above and Note 4 - Loans and Allowance for Credit Losses on Loans in
the accompanying notes to the consolidated unaudited financial statements
included elsewhere in this report for further discussion of the risk factors
considered by management in establishing the allowance for credit losses.
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