IBTX Independent Bank Group, Inc. - 10-K

ITEM 1A. RISK FACTORS

An investment in the Company’s common stock involves risks. The following is a description of the material risks and uncertainties that the Company believes affect its business and an investment in the common stock. Additional risks and uncertainties that the Company is unaware of, or that it currently deems immaterial, also may become important factors that affect the Company and its business. If any of the risks described in this Annual Report on Form 10-K were to occur, the Company’s financial condition, results of operations and cash flows could be materially and adversely affected. If this were to happen, the value of the common stock could decline significantly and you could lose all or part of your investment.

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Summarized below are the most significant risks and uncertainties that we believe could adversely affect our business, financial condition or results of operations. Following this summary, we discuss each risk in greater detail under each risk’s respective headings, organized by Risks Related to the Company’s Business and Risks Related to an Investment in the Company’s Common Stock. You should read both the summary and the detailed descriptions of each risk before investing in the Company’s securities.

RISKS RELATED TO THE COMPANY’S BUSINESS

Strategic Risk

• The Company may not be able to continue to grow.

• The Company may not be able to continue its acquisition strategy.

• The Company must effectively manage risk associated with its acquisition strategy.

• The Company has a geographic concentration in Texas and Colorado.

Operational Risk

• Workforce disruption may inhibit the Company's ability to attract and retain talent.

• The Company must effectively manage the need for technological change.

• The Company may experience system failure or cybersecurity breaches.

• The Company is reliant on third party service providers.

• The Company m ay be subj ect to data processing failures, control failures and fraud.

• New lines of business or new products and services subject the Company to additional risks.

• The Company’s accounting estimates and risk management programs rely on analytical and forecasting models.

• The Company is subject to counterparty risk.

• The value of the Company’s goodwill could become impaired.

Credit Risk

• The Company must manage credit risk.

• The Company has a significant concentration in commercial real estate loans.

• The Company has exposure to credit risk related to the energy industry.

• The Company’s Allowance for Credit Losses may be insufficient.

• The Company’s mortgage business subjects the Company to additional risk.

Interest Rate Risk

• The Company must manage interest rate risk.

• The replacement of LIBOR may subject the Company to additional risk.

• The Company could experience losses on its investment securities in volatile rate environments.

Legal, Regulatory and Compliance Risk

• The Company is subject to legal and regulatory risk.

• The Company operates in a highly regulated environment and, as a result, is subject to extensive regulation and supervision.

• The Company must devote significant resources to compliance.

• The Company is subject to continuous examination.

• The Company may be required to pay significantly higher FDIC deposit insurance assessments in the future.

• The Company faces a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

• There are substantial regulatory limitations on changes of control of bank holding companies.

Liquidity and Capital Risk

• The Company is subject to liquidity risk.

• The Company must maintain adequate capital.

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• The Federal Reserve may require the Company to commit capital resources to support the Bank.

Other Risks Affecting Our Business

• Volatile market conditions and macro economic trends.

• The Company operates in a competitive environment.

• The Company is reliant on deposits as a significant source of funding.

• The Company may be adversely impacted by natural disasters, health pandemics, and other local and worldwide events beyond the Company’s control.

• The Company is subject to growing risk from changing environmental conditions.

• Reputational risk is heightened by emerging environmental, social and governance concerns.

• Monetary policies and regulations of the Federal Reserve could adversely affect the Company’s business, financial condition and results of operations.

RISKS RELATED TO AN INVESTMENT IN THE COMPANY’S COMMON STOCK

• The Company’s stock price can be volatile.

• The Company is dependent upon the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted.

• The Company’s dividend policy may change without notice, and the Company’s future ability to pay dividends is subject to restrictions.

• The Company’s largest shareholder and board of directors have historically, and currently, exert a controlling influence on the Company.

• The Company’s corporate organizational documents and the provisions of Texas law make it more difficult or prevent an attempted acquisition of the Company that you may favor.

• Other debt and equity instruments have priority over the Company’s common stock.

• An investment in the Company’s common stock is not an insured deposit.

RISKS RELATED TO THE COMPANY’S BUSINESS

Strategic Risk

The Company may not be able to continue to grow.

To achieve its past levels of growth, the Company has focused on both internal growth and acquisitions. The Company may not be able to sustain its historical rate of growth or may not be able to grow at all. More specifically, the Company may not be able to grow earning assets, specifically loans, and the Company may not be able to find suitable acquisition candidates. Various factors, such as economic conditions and competition, may impede or prohibit loan growth and the completion of acquisitions. As further discussed below, the Company may be unable to attract and retain new talent, which could adversely affect its internal growth. If the Company is not able to continue its historical levels of growth, it may not be able to maintain its historical earnings trends. If the Company does not manage the Company’s growth effectively, the Company’s business, financial condition, results of operations and future prospects could be negatively affected, and the Company may not be able to continue to implement the Company’s business strategy and successfully conduct the Company’s operations.

The Company may not be able to continue its acquisition strategy.

The Company has been pursuing a growth strategy that includes the acquisition of other financial institutions in target markets. The Company has completed several acquisitions since 2010, with its last acquisition completed on January 1, 2019 of Guaranty Bancorp. The Company intends to continue its acquisition strategy. Such an acquisition strategy, involves significant risks, including the following:

• finding suitable markets for expansion;

• finding suitable candidates for acquisition;

• attracting funding to support additional growth;

• maintaining asset quality;

• attracting and retaining qualified management; and

• maintaining adequate regulatory capital.

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Accordingly, the Company may be unable to find suitable acquisition candidates in the future that fit its acquisition and growth strategy. In addition, the Company’s previous acquisitions may make it more difficult for investors to evaluate historical trends in the Company’s financial results and operating performance, as the impact of such acquisitions make it more difficult to identify organic trends that would be reflected absent such acquisitions. If the Company is unable to continue to grow through acquisitions, the Company’s business, financial condition, results of operation and future prospects could be negatively impacted.

The Company must effectively manage risk associated with its acquisition strategy.

Acquisitions of financial institutions also involve operational risks and uncertainties, and acquired companies may have unknown or contingent liabilities with no available manner of recourse, exposure to unexpected asset quality problems, key employee and customer retention problems and other problems that could negatively affect the Company’s organization. The Company may not be able to complete future acquisitions or, if completed, the Company may not be able to successfully integrate the operations, management, products and services of the entities that the Company acquires and eliminate redundancies. Acquisition activities and the integration process may also require significant time and attention from the Company’s management that they would otherwise direct toward servicing existing business and developing new business. Further, the integration process could result in the loss of key employees, disruption of the combined entity’s ongoing business, or inconsistencies in standards, controls, procedures and policies that adversely affect the Company’s ability to maintain relationships with customers or employees or to achieve the anticipated benefits of the transaction. Failure to successfully integrate the entities the Company acquires into the Company’s existing operations may increase the Company’s operating costs significantly and adversely affect the Company’s business and earnings. Acquisitions typically involve the payment of a premium over book and market values and, therefore, some dilution of the Company’s tangible book value and net income per common share may occur in connection with any future transaction.

The Company has a geographic concentration in Texas and Colorado.

The Company conducts its operations almost exclusively in Texas and Colorado. This geographic concentration imposes risks from lack of geographic diversification. The economic conditions in Texas and Colorado affect the Company’s business, financial condition, results of operations, and future prospects, where adverse economic developments, among other things, could affect the volume of loan originations, increase the level of nonperforming assets, increase the rate of foreclosure losses on loans and reduce the value of the Company’s loans and loan servicing portfolio. Moreover, if the population or income growth in the Company’s market areas is slower than projected, income levels, deposits and housing starts could be adversely affected and could result in a reduction of the Company’s expansion, growth and profitability. Any regional or local economic downturn that affects Texas or Colorado, or existing or prospective borrowers or property values in such areas, may affect the Company and the Company’s profitability more significantly and more adversely than the Company’s competitors whose operations are less geographically concentrated.

Operational Risk

Workforce disruption may inhibit the Company's ability to attract and retain talent.

The Company’s business and growth strategies depend significantly on the Company’s ability to recruit and retain management and employees with expertise, experience and business relationships within the Company's market areas. The Company’s ability to attract and retain key management and employees is dependent upon its compensation, incentive and benefits programs, its response to emerging workplace trends and practices, such as the current demand for flexible work schedules and remote work options that have arisen from the COVID-19 pandemic, its reputation for rewarding and promoting qualified employees, and its implementation of diversity and inclusion initiatives. The competitive nature of the current labor market could increase the Company's noninterest expense, as well as cause significant difficulty and delay in replacing departed management and employees with qualified candidates, who are experienced in the specialized aspects of the Company’s business or who have ties to the communities within the Company’s market areas. The unexpected loss of any of the Company’s key personnel could, therefore, have an adverse impact on the Company’s productivity and growth. This in turn makes the Company's success dependent upon the strength of its recruitment efforts, as well as its succession plans and procedures.

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The Company must effectively manage the need for technological change.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Company’s future success will depend in part upon the Company’s ability to address the needs of the Company’s customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in the Company’s operations as it continues to grow and expand the Company’s market area. The Company may experience operational challenges as it implements these new technology enhancements or products, which could result in the Company not fully realizing the anticipated benefits from such new technology or require the Company to incur significant costs to remedy any such challenges in a timely manner.

The Company may experience system failure or cybersecurity breaches.

The Company is highly dependent on its computer systems and network infrastructure to conduct its operations, including the s ecure processing, storage and transmission of vital and sensitive data, exposing the Company to potential cyber incidents resulting from deliberate attacks or unintentional events. As a financial institution, the Company processes, stores and transmits a significant amount of personal customer information. The Company also maintains important internal data such as personally identifiable information about employees and customers, and information relating to the Company’s operations. The Company relies on third-party service providers for significant portions of its computer systems, network infrastructure and information security, and failure or misconduct by any of those third parties or their systems could have a material adverse effect on the Company. The secure maintenance and transmission of confidential information, as well as execution of transactions over the Company’s computer systems, are essential to protect the Company and its customers against fraud and cybersecurity breaches and for the Company to maintain customer confidence. The computer systems and network infrastructure the Company uses could fail or be subject to unforeseen problems or a material cybersecurity incident. The Company’s operations are dependent upon its ability to protect its computer systems and network against damage from physical theft, fire, power loss, telecommunications failure, or a similar catastrophic event, as well as from cybersecurity breaches, cyberattacks, ransomware attacks, viruses, worms, and other unauthorized or hostile acts which are becoming increasingly diverse and sophisticated. Any action, damage or failure that causes or results in breakdowns, disruptions, or unauthorized activities in the Company’s computer systems or network infrastructure, including customer relationship management, general ledger, deposit, loan or other systems, could disrupt the Company’s ability to properly operate its business, damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, investigations or fines, violate privacy or other applicable laws or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company. External or internal actors could obtain unauthorized access to the Company’s computer systems or network infrastructure or information stored in and transmitted through the Company’s computer systems and network infrastructure, which may result in the theft or unauthorized use of personal information, which could cause significant liability to the Company and may cause existing and potential customers to refrain from doing business with the Company. These factors are compounded by the continued trend to leverage cloud computing and support hybrid remote work strategies. The financial services industry has faced a notable increase in both the sophistication and frequency of cyberattacks leveraging phishing, exploitable vulnerabilities, and third-party service providers. The pervasiveness of cybersecurity incidents and the risks of cybersecurity breaches are complex and continue to evolve. In addition, advances in computer capabilities, such as artificial intelligence, and the increased sophistication of threat actors could result in a compromise or breach of the systems the Company and the Company’s third-party service providers use to encrypt and protect customer data and transactions. A failure or compromise of such security measures could have a material adverse effect on the Company’s business, financial condition and results of operations. See Item 1C. Cybersecurity for further discussion of risk management and governance related to cybersecurity..

As of February 20, 2024, the Company has not discovered any material cybersecurity incidents that have adversely affected our business, financial condition or results of operations. However, the Company can give no assurance that it will not have a material cybersecurity incident in the future.

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The Company is reliant on third party service providers.

The Company depends on a number of relationships with third-party service providers. Specifically, the Company receives core systems processing, essential web hosting and other Internet systems, cloud technologies, deposit processing, mobile banking and other processing services from third-party service providers. If these third-party service providers experience difficulties, interruptions, or terminate their services, and the Company is unable to replace them with other comparable service providers, particularly on a timely basis, the Company’s operations could be interrupted. If an interruption were to continue for a significant period of time, the Company’s business, financial condition and results of operations could be adversely affected, perhaps materially. Even if the Company is able to replace third party service providers, it may be at a higher cost to the Company, which could adversely affect the Company’s business, financial condition and results of operations.

The Company may be subject to data processing failures, control failures and fraud.

Employee errors and employee and customer fraud or misconduct could subject the Company to financial losses or regulatory sanctions and seriously harm the Company’s reputation. Misconduct by the Company’s employees could include hiding unauthorized activities from the Company, improper or unauthorized activities on behalf of the Company’s customers, or improper use of, or unauthorized access to confidential information. Customers are also subject to financial crimes, including fraud, wire fraud, and cyber-crimes, which could adversely impact their ability to pay loans or result in a fraudulent removal of funds from their deposit accounts or other unauthorized activities. It is not always possible to prevent employee errors and misconduct, or fraudulent and other criminal schemes impacting customers, and the precautions the Company takes to prevent and detect this activity may not be effective in all cases. Employee errors could also subject the Company to financial claims for negligence.

The Company maintains a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors, cybersecurity breaches, and employee, customer, or third party fraud. However, if the Company’s internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on the Company’s business, financial condition and results of operations.

In addition, the Company relies heavily upon information supplied by third parties, including the information contained in credit applications, property appraisals, title information, equipment pricing and valuation and employment and income documentation, in deciding which loans the Company will originate, as well as the terms of those loans. If any of the information upon which the Company relies is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset funding, the value of the asset may be significantly lower than expected, or the Company may fund a loan that the Company would not have funded or on terms the Company would not have extended. Whether a misrepresentation is made by the applicant or another third party, the Company generally bears the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is typically unsellable or subject to repurchase if it is sold prior to detection of the misrepresentation. The sources of the misrepresentations are often difficult to locate, and it is often difficult to recover any of the monetary losses that the Company may suffer.

New lines of business or new products and services subject the Company to additional risks.

From time to time, the Company may implement or may acquire new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, financial condition and results of operations.

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The Company’s accounting estimate and risk management programs rely on analytical and forecasting models.

The Company utilizes analytical and forecasting models across various areas of the Company's operations to manage risk. Many of these models rely upon certain assumptions, which, if inaccurate or inadequate, could impact the Company in materials ways. In addition, the models themselves may prove to be inadequate or inaccurate because of other flaws in their design or their implementation.

By way of example, the Company uses forecasting and analytical models to estimate its expected credit losses and to measure the fair value of financial instruments. It also uses models to estimate the effects of changing interest rates and other market measures on the Company’s financial condition and results of operations. If the models the Company uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models the Company uses for determining its expected credit losses are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If the models the Company uses to measure the fair value of financial instruments is inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what the Company could realize upon sale or settlement of such financial instruments. Any such failure in the Company’s analytical or forecasting models could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company is subject to counterparty risk.

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional customers. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or customer. In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse effect on the Company.

The value of the Company’s goodwill could become impaired.

Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets that the Company acquired in connection with the purchase of another financial institution. The Company reviews goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of the asset might be impaired. Significant and sustained decline in the Company’s stock price and material adverse changes in economic conditions may result in taking future write downs related to the impairment of goodwill.

The Company determines impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in the Company’s results of operations in the periods in which they become known. As of December 31, 2023, the Company had approximately $1.0 billion of goodwill and other intangible assets. While the Company has not recorded any such impairment charges since the Company initially recorded the goodwill, there can be no assurance that the Company’s future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on the Company’s financial condition and results of operations.

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Credit Risk

The Company must manage credit risk.

Making any loan involves risk, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt, and risks resulting from changes in economic and market conditions. The Company’s credit risk approval and monitoring procedures may fail to identify or reduce these credit risks, and they cannot completely eliminate all credit risks related to the Company’s loan portfolio. The Company faces a variety of risk related to its types of loans. Adverse developments affecting commercial real estate values in the Company’s market areas could increase the credit risk associated with commercial real estate loans, impair the value of the property pledged as collateral for these loans, and affect the Company’s ability to sell the collateral upon foreclosure without a loss. For commercial real estate loans that are larger than average, the Company faces risk that losses incurred on a small number of commercial real estate loans could have a material adverse effect on the Company’s financial condition and results of operations. The Company’s commercial real estate and commercial loans also have the risk that repayment is subject to the ongoing business operations of the borrower. Commercial loans are often secured by personal property, such as inventory, and intangible property, such as accounts receivable, which if the business is unsuccessful, typically have values insufficient to satisfy the loan without a loss. If the overall economic climate in the United States, generally, or the Company’s market areas in Texas and Colorado, specifically, experience material disruption, the Company’s borrowers may experience difficulties in repaying their loans, the collateral the Company holds may decrease in value or become illiquid, and the level of nonperforming loans, charge-offs and delinquencies could rise and require additional provisions for credit losses, which would cause the Company’s net income and return on equity to decrease.

The Company has a significant concentration in commercial real estate loans.

As of December 31, 2023, approximately 79.7% of the Company’s loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral, excluding agricultural loans secured by real estate. As a result, adverse developments affecting real estate values in the Company’s market areas could increase the credit risk associated with the Company’s real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of the Company’s markets could increase the credit risk associated with the Company’s loan portfolio, and could result in losses that would adversely affect credit quality, financial condition, and results of operation. Negative changes in the economy affecting real estate values and liquidity in the Company’s market areas could significantly impair the value of property pledged as collateral on loans and affect the Company’s ability to sell the collateral upon foreclosure without a loss or additional losses. Collateral may have to be sold for less than the outstanding balance of the loan, which could result in losses on such loans. In addition, the COVID-19 pandemic has increased demand for remote work opportunities and continues to cause supply chain disruption, which could have a particularly adverse impact on the Company's commercial real estate portfolio. Such declines and losses would have a material adverse impact on the Company’s business, results of operations and growth prospects. If real estate values decline, it is also more likely that the Company would be required to increase the Company’s allowance for credit losses, which could adversely affect the Company’s financial condition, results of operations and cash flows. Refer to Loan Portfolio within Management's Discussion and Analysis for more information.

The Company has exposure to credit risk related to the energy industry.

As of December 31, 2023, approximately 4.4% of the Company’s loans held for investment portfolio (excluding mortgage warehouse loans) was comprised of loans made to companies engaged in oil production and oilfield services. A significant decline in oil prices could adversely effect some of these borrowers’ ability to repay these loans and may impair the value of collateral securing some of these loans. While the Company's energy portfolio remains well managed, the decline and volatility in oil prices could have an impact on other segments of the economy generally, including real estate, and particularly for the Texas and Colorado economies. The Houston market economy specifically could be adversely affected given its high concentration of energy related businesses. The Company’s asset quality and results of operations could be adversely impacted by the direct and indirect effects of current and future conditions in the energy industry and geopolitical conflicts. The Company's energy portfolio is also more susceptible to operational and environmental related disruption, such as on the job injuries, oil spills, explosions, severe weather, and heightened pressure to implement environmental, social and governance driven initiatives, and particularly initiatives that align with the Biden Administration's goals to reduce greenhouse gas emissions.

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The Company’s Allowance for Credit Losses may be insufficient.

The Company evaluates the adequacy of allowances for credit losses on loans, securities and off-balance sheet credit exposures. The Company has implemented controls and procedures to measure and estimate the lifetime expected credit loss at the time a financial asset is initially added to the balance sheet and periodically thereafter. The Company's amount of each allowance account represents management's best estimate of current expected credit losses on such financial instruments at each balance sheet date using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The actual amount of credit losses is affected by changes in economic, operating and other conditions within the Company’s markets, as well as changes in the financial condition, cash flows, and operations of the Company’s borrowers, all of which are beyond the Company’s control, and such losses may exceed current estimates. As a result, the determination of the appropriate level of allowance for credit losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates related to current and expected future credit risks and trends, all of which may undergo material changes. The Company’s current expected credit losses (CECL) model has increased the complexity, and associated risk, of the analysis and processes relying on management judgment, which could negatively impact the Company’s financial condition and results of operations.

Credit losses will likely occur in the future and may occur at a rate greater than the Company has previously experienced. The Company may be required to take additional provisions for credit losses in the future to further supplement the allowance for credit losses, either due to management’s decision to do so or requirements by the Company’s banking regulators. In addition, bank regulatory agencies will periodically review the Company’s allowance for credit losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure. Based on their judgments or interpretations, which may be different than management’s, regulators may require the Company to change classifications or grades of loans or recognize further loan charge-offs. If the assessment of credit losses is inaccurate, or if economic and market conditions materially deteriorate as a result of occurrences, such as, natural disasters, global pandemics, or if anticipated climate change regulations impact the Company's CECL model, then the Company may need to increase or decrease its allowance for credits losses, which, in turn, will increase or decrease the Company’s reported income, and introduce additional volatility into its reported earnings, and possibly capital. See also Item 7. Management’s Discussion and Analysis of Financial Condition - Allowance for Credit Losses for additional discussion of financial impact of the allowance for credit losses.

The Company’s mortgage business subjects the Company to additional risk.

The Company originates and sells residential mortgage loans through the Bank’s mortgage division and purchases and sells residential mortgages through its mortgage warehouse business. Mortgage lending and mortgage warehouse purchase lending include credit risk associated with commercial bank lending. This line of business is also subject to market volatility, changes in interest rates, volume volatility and changing appetite of investors for certain mortgage products.

Through its mortgage warehouse business, the Company provides guidance lines of credit to mortgage companies that originate and sell residential mortgages. As part of this process, the Bank funds and purchases the mortgage at closing, the mortgage company sells the mortgage to an institutional buyer, and the proceeds from that sale are the primary source of repurchase of the mortgage from the Bank. This process exposes the Bank to market and interest rate risk in the event that the mortgage is not sold. The Bank is also subject to risk of fraud by mortgage company employees and customers. While the Company has insurance against fraud in the mortgage process, fraud loss in excess of insurance limits or which is not covered by insurance could have an adverse effect on the Company’s business, financial condition and results of operation.

The Company has entered into loan purchase commitments and forward sales commitments to mitigate the interest rate risk related to mortgage origination activities. While the Company believes that its hedging strategies will be successful in mitigating exposure to interest rate risk associated with the origination and purchase of mortgage loans, no hedging strategy can completely mitigate risk. Poorly designed strategies, improperly executed transactions, or inaccurate assumptions regarding future interest rates or market conditions could have a material adverse effect on the Company’s financial condition and results of operations.

Mortgage lending and mortgage warehouse purchase lending is subject to counterparty risk. The Company is from time to time required to hold or repurchase mortgage loans or reimburse investors as a result of breaches in contractual representations and warranties under the agreements pursuant to which it purchases and sells mortgage loans. While agreements with the originators and sellers of mortgage loans provide legal recourse that may allow the Company to recover some or all of losses, these companies are frequently not financially capable of paying large amounts of damages and as a result the Company can offer no assurance that it will not suffer loss as a result of these arrangements.

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The Company may incur other costs and losses as a result of actual or alleged violations of regulations related to the origination and purchase of residential mortgage loans. The origination of residential mortgage loans is governed by a variety of federal and state laws and regulations, which are frequently changing. The Company sells residential mortgage loans that it has purchased or that it originated to various parties, including Ginnie Mae and GSEs such as Fannie Mae or Freddie Mac and other financial institutions that purchase mortgage loans for investment or private label securitization. These types of costs and losses arising from the Company’s mortgage business would negatively impact the Company’s business, financial condition and results of operation.

Interest Rate Risk

The Company must manage interest rate risk.

The majority of the Company’s banking assets are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, the Company’s earnings are significantly dependent on the Company’s net interest income, the principal component of the Company’s earnings, which is the difference between interest earned by the Company from the Company’s interest-earning assets, such as loans and investment securities, and interest paid by the Company on the Company’s interest-bearing liabilities, such as deposits and borrowings. The Company expects that it will periodically experience “gaps” in the interest rate sensitivities of the Company’s assets and liabilities, meaning that either its interest-bearing liabilities will be more sensitive to changes in market interest rates than the Company’s interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to the Company’s position, this “gap” will negatively impact the Company’s earnings. The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates. Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply, and international disorder and instability in domestic and foreign financial markets.

Interest rate increases often result in larger payment requirements for the Company’s borrowers, which increase the potential for default. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates.

Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on the Company’s results of operations and cash flows. Further, when the Company places a loan on nonaccrual status, the Company reverses any accrued but unpaid interest receivable, which decreases interest income. At the same time, the Company continues to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income.

Rising interest rates in prior periods have increased interest expense, which in turn has adversely affected net interest income, and may do so in the future if the Federal Reserve raises rates. In a rising interest rate environment, competition for cost-effective deposits increases, making it more costly to fund loan growth. In addition, a rising rate environment could cause mortgage and mortgage warehouse lending volumes to substantially decline. Any rapid and unexpected volatility in interest rates creates uncertainty and potential for unexpected material adverse effects. The Company actively monitors and manages the balances of maturing and repricing assets and liabilities to reduce the adverse impact of changes in interest rates, but there can be no assurances that the Company can avoid all material adverse effects that such interest rate changes may have on the Company's net interest margin and overall financial condition.

The replacement of LIBOR may subject the Company to additional risk.

On March 5, 2021, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that (i) 24 LIBOR settings would cease to exist immediately after December 31, 2021 (all seven euro LIBOR settings; all seven Swiss franc LIBOR settings; the Spot Next, 1-week, 2-month,and 12-month Japanese yen LIBOR settings; the overnight, 1-week, 2-month, and 12-month sterling LIBOR settings; and the 1-week and 2-month US dollar LIBOR settings); and (ii) the 1-month, 3-month, 6-month and 12-month US LIBOR settings would cease to exist after June 30, 2023. In response to this, the federal banking agencies issued guidance on November 30, 2020 encouraging banks to (i) stop using LIBOR in new financial contracts no later than December 31, 2021; and (ii) either use a rate other than LIBOR or include clear language defining the alternative rate that will be applicable after LIBOR’s discontinuation.

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As a result of the preceding, the Company discontinued offering LIBOR-based products on October 31, 2021. The Company also required all LIBOR-based loans and renewals entered into on or prior to October 31, 2021 to close and fund by no later than December 31, 2021. As of November 1, 2021, the Company negotiates loans and loan renewals that would have been tied to LIBOR using the Wall Street Journal's U.S. Prime Rate ("WSJ Prime") or CME Term Secured Overnight Financing Rates ("SOFR”).

While not anticipated, the transition to LIBOR could present additional risk, including, but not limited to, litigation and reputational risks if challenges are made to LIBOR fallback language within existing contracts. In addition, there continues to be uncertainty as to the ultimate effects of the LIBOR transition, including variations in the replacement benchmark rate designated and accepted by financial institutions. The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could also have an adverse impact on the market for or value of any LIBOR-linked securities, loan, swaps, and other financial obligations or extension of credit held by or due to us or on our overall financial condition or results of operations. These variations also inject potential for greater competition with financial institutions whose LIBOR replacement rates and procedures may be more favorable or flexible than those adopted by the Company. The transition has also required changes to the Company's risk and pricing models, valuation tools, product design and hedging strategies. Failures to adequately manage the transition process also poses greater operational and reputational risks that could create material adverse effects on the Company's business, financial condition and results of operations.

Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations. Any failure to adequately manage this transition process with our customers could also adversely impact out reputation. We continue to monitor and evaluate the related risks.

The Company could experience losses on its investment securities in volatile rate environments.

While the Company attempts to invest a significant percentage of its assets in loans, the Company invests a percentage of its total assets in investment securities as part of its overall liquidity strategy.

Factors beyond the Company’s control can significantly influence the fair value of securities in its portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities are generally subject to decreases in market value when market interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual borrowers with respect to the underlying securities, and continued instability in the credit markets. Any of the foregoing factors could cause an impairment in future periods and result in realized losses. The process for determining impairment usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting market interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, the Company may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on the Company’s financial condition and results of operations.

Legal, Regulatory and Compliance Risk

The Company is subject to legal and regulatory risk.

The Company, like all financial institutions, has been and may in the future become involved in legal and regulatory proceedings. Litigation arises in a variety of contexts, including lending and deposit operations, intellectual property claims related to the technology used in business operations, employment practices, operating activities, and other general business matters. The Company considers most of these proceedings to be in the normal course of business or typical for the industry. However, it is inherently difficult to assess the outcome of these matters. Any material legal or regulatory proceeding could impose substantial cost and cause management to divert its attention from the Company’s business and operations. Any adverse determination in a legal or regulatory proceeding could have a material adverse effect on the Company’s business, financial condition and results of operations. See Item 3. Legal Proceedings .

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The Company operates in a highly regulated environment and, as a result, is subject to extensive regulation and supervision.

The Company and the Bank are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not the Company’s shareholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Any change in applicable regulations or federal or state legislation could have a substantial impact on the Company, the Bank and their respective operations.

The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Additional legislation and regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could significantly affect the Company’s powers, authority and operations, or the powers, authority and operations of the Bank in substantial and unpredictable ways. The Dodd-Frank Act created the Consumer Financial Protection Bureau, or the CFPB, with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority, including the authority to prohibit unfair, deceptive, and abusive acts and practices. These rules may result in increased regulatory compliance costs and subject the Company to increased potential liabilities related to its consumer banking business and residential mortgage lending activities.

Policies and regulations that may flow from the regulators could materially impact the Company's business, credit assessments, financial condition and/or operations. Regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of this regulatory discretion and power could have a negative impact on the Company. Failure to comply with laws, regulations or policies could also result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company must devote significant resources to compliance.

Various federal banking laws and regulations, including rules adopted by the Federal Reserve Board pursuant to the requirements of the Dodd-Frank Act, impose certain heightened requirements on and greater supervision of banks and bank holding companies that maintain total consolidated assets of at least $10 billion, like the Company. The imposition of these regulatory requirements and increased supervision has and will continue to require commitment of additional financial resources to maintain regulatory compliance, which has increased the Company’s noninterest expense, and has and will continue to otherwise have an impact on the Company’s financial condition and results of operations.

For example, the Company is subject to the Durbin Amendment to the Dodd-Frank Act regarding limits on debit card interchange fees. The Durbin Amendment gives the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of $0.21 and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs. Accordingly, deposit insurance assessments and expenses related to regulatory compliance may increase, while any decrease in the amount of interchange fees that the Company receives would reduce the Company’s revenue.

Further, on October 11, 2023, the FDIC issued a proposed rule and guidelines that would require all FDIC-supervised insured depository institutions with consolidated assets of over $10 billion to adopt corporate governance and risk management standards that are comparable to those expected of banking organizations with $100 billion or more in total consolidated assets. The proposed guidelines set forth requirements, expectations, and obligations of the board of directors (including composition, duties, and committees), Board and management responsibility regarding risk management and audits, and expectations with respect to identifying and addressing violations of law or regulations. If the proposed rule is adopted and implemented, this could result in substantial added expense to comply with the recordkeeping, reporting, and disclosure requirements. The comment period for the proposed rule and guidelines expired on February 9, 2024.

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The Company is subject to continuous examination.

Texas and federal banking agencies periodically conduct examinations of the Company’s business, including compliance with laws and regulations. If, as a result of an examination, a Texas or federal banking agency were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Company’s operations had become unsatisfactory, or that the Company or its management was in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in the Company’s capital, to restrict the Company’s growth, to assess civil monetary penalties against the Company, the Company’s officers or directors, to remove officers and directors and/or, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Company’s deposit insurance. If the Company becomes subject to such regulatory actions, the Company could be materially and adversely affected.

The Company may be required to pay significantly higher FDIC deposit insurance assessments in the future.

Previous economic conditions and the Dodd-Frank Act caused the FDIC to increase deposit insurance assessments and may result in increased assessments in the future. In November 2023, the FDIC issued a final rule to implement a special assessment to recover losses to the DIF incurred as a result of recent bank failures and the FDIC's use of the systemic risk exception to cover certain deposits that were otherwise uninsured. The special assessment was based on estimated uninsured deposits as of December 31, 2022 (excluding the first $5.0 billion) over eight quarterly assessment periods, beginning in the first quarter of 2024. Under the final rule, the estimated loss pursuant to the systemic risk determination will be periodically adjusted, and the FDIC has retained the ability to cease collection early, extend the special assessment collection period and impose a final shortfall special assessment on a one-time basis. Further, it is possible that further increases in deposit insurance are adopted by the FDIC Board. According to the FDIC’s published materials in November 2023, there were 43 institutions on the FDIC’s Problem Bank List as of the second quarter of 2023. The extent to which economic or other factors cause the FDIC Board to increase deposit insurance assessments and the impact any such increased assessments will have on our future deposit insurance expense is currently uncertain. An increase or change in the assessment rates imposed on the Bank could materially and adversely affect the Company. Refer to I tem 1. Busine ss - Deposit Insurance Assessments and Item 7. Management's Discussion and Analysis - FDIC assessmen t for further discussion and the impact to the Company.

The Company faces a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or Patriot Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If the Company’s policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that the Company has already acquired or may acquire in the future are deficient, the Company would be subject to liability, including fines and regulatory actions such as restrictions on the Company’s ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of the Company’s business plan (including the Company’s acquisition plans), which would negatively impact the Company’s business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for the Company.

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There are substantial regulatory limitations on changes of control of bank holding companies.

With certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of the Company’s voting stock or obtaining the ability to control in any manner the election of a majority of the Company’s directors or otherwise direct the management or policies of the Company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any such purchase of shares of the Company’s common stock. These provisions effectively inhibit certain mergers or other business combinations, which, in turn, could adversely affect the market price of the Company’s common stock.

Liquidity and Capital Risk

The Company is subject to liquidity risk.

Liquidity is essential to the Company’s business. The Company relies on its ability to generate deposits and effectively manage the repayment and maturity schedules of the Company’s loans and investment securities, respectively, to ensure that the Company has adequate liquidity to fund the Company’s operations. An inability to raise funds through deposits, borrowings, the sale of the Company’s investment securities, Federal Home Loan Bank advances, the sale of loans, and other sources could have a substantial negative effect on the Company’s liquidity. The Company’s most important source of funds consists of deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments or other financial institutions, the Company would lose a relatively low-cost source of funds, increasing the Company’s funding costs and reducing the Company’s net interest income and net income.

Other primary sources of funds consist of cash flows from operations, investment maturities and sales of investment securities, and proceeds from the issuance and sale of the Company’s equity and debt securities to investors. Additional liquidity is provided by the ability to borrow from the Federal Reserve Bank and the Federal Home Loan Bank. The Company also may borrow funds from third-party lenders, such as other financial institutions. The Company’s access to funding sources in amounts adequate to finance or capitalize the Company’s activities, or on terms that are acceptable to the Company, could be impaired by factors that affect the Company directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

Unrealized losses on our available for sale securities portfolio have increased as interest rates have increased. Unrealized losses related to available for sale securities reduce tangible common equity but do not impact regulatory capital ratios. While we do not currently expect to sell securities for liquidity purposes, our access to liquidity sources could be impacted by unrealized losses if securities are sold at a loss. Additionally, unrealized losses could negatively impact market and/or customer perceptions which could lead to a reputational harm of the Company and/or deposit withdrawal, particularly among uninsured depositors.

Any decline in available funding could adversely impact the Company’s ability to originate loans, invest in securities, meet the Company’s expenses, pay dividends to the Company’s shareholders, or to fulfill obligations such as repaying the Company’s borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on the Company’s liquidity, business, financial condition and results of operations.

The Company must maintain adequate capital.

The Company faces significant capital and other regulatory requirements as a financial institution. The Company may need to raise additional capital in the future to provide the Company with sufficient capital resources and liquidity to meet the Company’s commitments and business needs, which could include the possibility of financing acquisitions. In addition, the Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. The Company faces significant capital and other regulatory requirements as a financial institution. The Company’s ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on the Company’s financial condition and performance. In the future, the Company may not be able to raise additional capital if needed or on terms acceptable to the Company. If the Company fails to maintain capital to meet regulatory requirements, the Company’s financial condition, liquidity and results of operations would be materially and adversely affected.

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The Federal Reserve may require the Company to commit capital resources to support the Bank.

The Federal Reserve, which examines the C ompany and the Bank, req uires a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under these requirements, in the future, the Company could be required to provide financial assistance to the Bank if it experiences financial distress.

A capital injection may be required at times when the Company does not have the resources to provide it, and therefore the Company may be required to borrow the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s cash flows, financial condition, results of operations and prospects.

Other Risks Affecting Our Business

Volatile market conditions and macro economic trends.

The Company is operating in a dynamic and challenging economic environment, including uncertain global, national and local market conditions. In particular, Texas and Colorado based financial institutions are affected by volatility in the energy markets and the potential impact of that volatility on real estate and other markets. The Company is also subject to uncertain interest rate conditions. These volatile economic conditions could adversely affect borrowers and their businesses as well as the value of collateral (particularly real estate collateral) securing loans, which could adversely affect the Company’s business, financial condition and results of operation.

The Company operates in a competitive environment.

The Company conducts its operations almost exclusively in Texas and Colorado. Many of the Company’s competitors offer the same, or a wider variety of, banking services within the Company’s market areas. These competitors include banks with nationwide operations, regional banks and other community banks.

The Company also faces competition from many other types of financial institutions, including savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In addition, a number of out-of-state financial intermediaries have opened production offices, or otherwise solicit deposits, in the Company’s market areas. Furthermore, many of the Company’s larger competitors have substantially greater resources to invest in technological improvement, resulting in additional or superior product offerings not offered by the Company.

Also, the rise of “FinTech" and popular derivations arising from the "FinTech" boom, such as cryptocurrency, have created both competitive and operational challenges. The Company’s ability to successfully compete will depend on a number of factors, including its ability to maintain long-term customer relationships and customer satisfaction with the Company’s products and services, the scope, relevance and pricing of the products and services the Company offers, industry and general economic trends, and the Company’s ability to invest in and effectively implement new technology, procedures and methodology that promote the security of financial transactions in a digital world. If the Company's operations are unable to keep pace with customers' evolving financial needs and demands, then the Company may be unable to continue to grow its loan and deposit portfolios, or may be required to increase the rates the Company pays on deposits or lower the rates it offers on loans, which could reduce the Company’s profitability.

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The Company is reliant on deposits as a significant source of funding.

The Company relies on customer deposits as a significant source of funding. Competition among U.S. banks for customer deposits is intense, and may increase the cost of deposits or prevent new deposits, and may otherwise negatively affect the Company’s ability to grow its deposit base. The Company’s deposit accounts may decrease in the future, and any such decrease could have an adverse impact on the Company’s sources of funding, which impact could be material. Any changes the Company makes to the rates offered on its deposit products to remain competitive with other financial institutions may adversely affect the Company’s profitability and liquidity. The demand for the deposit products the Company offers may also be reduced due to a variety of factors, such as digital banking technology, demographic patterns, stability of other financial institutions, changes in customer preferences, reductions in consumers’ disposable income, regulatory actions that decrease customer access to particular products or the availability of competing products. In addition, a portion of the Company’s deposits are brokered deposits and FDIC uninsured deposits. The levels of these types of deposits that the Company holds may be more volatile during changing economic conditions. Refer to Item 7. Management's Discussion and A nalysis of Financial Condition and Results of Operations , Deposits for more information.

The Company may be adversely impacted by natural disasters, health pandemics, and other local and worldwide events beyond the Company’s control.

Natural disasters, health pandemics, severe weather events, including those prominent in Texas and Colorado and those prominent in the geographic areas of vendors and business partners, together with worldwide hostilities, terrorist attacks, and other external events could have a significant impact on the Company’s ability to conduct business. These events could also affect the stability of the Company’s deposit base, borrowers’ ability to repay loans, impair collateral, result in a loss of revenue or an increase in expenses. Although the Company has established disaster recovery and business continuity procedures and plans, the occurrence of any such event may adversely affect the Company’s business, which in turn could have a material adverse effect on the Company’s financial condition and results of operations.

Hurricanes, tornadoes, wildfires, earthquakes and other natural disasters and severe weather events have caused, and in the future may cause, widespread property damage and significantly and negatively affect the local economies in which the Company operates. The effect of catastrophic weather events if they were to occur, could have a materially adverse impact on the Company’s financial condition, results of operations and business, as well as potentially increase the Company’s exposure to credit losses and liquidity risks.

The Company is subject to growing risk from changing environmental conditions.

The Company is subject to growing risk from changing environmental conditions. Among the risks associated with “climate change” are more frequent severe weather events. As discussed in the previous factors, severe weather events subject the Company to significant risks and more frequent severe weather events magnify those risks. Governmental policy actions to address climate change, such as efforts to reduce reliance on fossil fuels and green energy initiatives, could have a significant impact on the Texas and Colorado economies, in particular. While the Texas and Colorado economies are more diversified than in the past and energy companies are working to adapt to climate change initiatives, the oil and gas industry has had, and continues to have, a significant impact on the overall Texas and Colorado economies. Further, banking regulators are beginning to consider the risk presented by climate change on the financial system and may pass new regulations, such as climate related stress testing, to address this risk. The potential losses and costs associated with climate change related risks could have a material adverse effect upon the Company’s business, financial condition and results of operation.

In addition, given that a significant portion of the Company’s loan portfolio is secured by real property, the Company has sensitivity to other environmental risks. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability. Although the Company has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s financial condition and results of operations.

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Reputational risk is heightened by emerging environmental, social and governance concerns.

While reputational risk has always been inherent in the financial services sector, the emergence of the concept of environmental, social and governance (ESG) initiatives has heightened reputational risk for many industries, and particularly for publicly traded entities, like the Company. Pressure to conform operations and practices around ESG factors could have pervasive impact on the Company's lending practices, branching strategy, product and service offerings, corporate governance, mergers and acquisition strategy, and disclosures. The lack of formalized requirements framing how entities should implement ESG and to what degree creates uncertainty that could have materially adverse effects on the Company's business, financial condition and operations.

Monetary policies and regulations of the Federal Reserve could adversely affect the Company’s business, financial condition and results of operations.

In addition to being affected by general economic conditions, the Company’s earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The Company cannot predict the effects of such policies upon the Company’s business, financial condition and results of operations.

RISKS RELATED TO AN INVESTMENT IN THE COMPANY’S COMMON STOCK

The Company’s stock price can be volatile.

Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. The Company’s stock price can fluctuate significantly in response to a variety of factors including, among other things:

• actual or anticipated variations in quarterly results of operations;

• recommendations by securities analysts;

• operating and stock price performance of other companies that investors deem comparable to the Company;

• new reports relating to trends, concerns and other issues in the financial services industry;

• perceptions in the marketplace regarding the Company and/or its competitors;

• new technology used, or services offered, by competitors;

• significant acquisitions or business combinations involving the Company or its competitors;

• the public float and trading volumes for the Company’s common stock;

• changes in government regulations, including tax laws; and

• volatility in economic conditions, including changes in interest rates, significant local or global events, disruption in energy markets and changes in the global economy.

In addition, although the Company’s common stock is listed for trading on the Nasdaq Global Select Market, the trading volume of the Company’s common stock is less than that of other, larger financial institutions. Given the lower trading volume, significant sales of Company common stock, or the expectation of such sales, could cause the stock price to fall.

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The Company is dependent upon the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted.

The Company’s primary tangible asset is the Bank. As such, the Company depends upon the Bank for cash distributions (through dividends on the Bank’s stock) that the Company uses to pay the Company’s operating expenses, satisfy the Company’s obligations (including the Company’s senior indebtedness, subordinated debentures, and junior subordinated indebtedness issued in connection with trust preferred securities), and to pay dividends on the Company’s common stock. There are numerous laws and banking regulations that limit the Bank’s ability to pay dividends to the Company. If the Bank is unable to pay dividends to the Company, the Company will not be able to satisfy the Company’s obligations or pay dividends on the Company’s common stock. Federal and state statutes and regulations restrict the Bank’s ability to make cash distributions to the Company. These statutes and regulations require, among other things, that the Bank maintain certain levels of capital in order to pay a dividend. Further, state and federal banking authorities have the ability to restrict the payment of dividends by supervisory action.

The Company’s dividend policy may change without notice, and the Company’s future ability to pay dividends is subject to restrictions.

The Company may change its dividend policy at any time without notice to the Company’s shareholders. Holders of the Company’s common stock are entitled to receive only such dividends as the Company’s board of directors may declare out of funds legally available for such payments. Any declaration and payment of dividends on common stock will depend upon the Company’s earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, the Company’s ability to service any equity or debt obligations senior to the common stock and other factors deemed relevant by its board of directors. Furthermore, consistent with the Company’s strategic plans, growth initiatives, capital availability, projected liquidity needs, and other factors, the Company has made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends, if any, paid to the Company’s common shareholders.

The Federal Reserve has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s overall asset quality, level of current and prospective earnings and level, composition and quality of capital. The guidance provides that the Company inform and consult with the Federal Reserve prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to the Company’s capital structure, including interest on senior debt, subordinated debt and the subordinated debentures underlying the Company’s trust preferred securities. If required payments on the Company’s outstanding senior debt, subordinated debt and junior subordinated debentures, held by its unconsolidated subsidiary trusts, are not made or are suspended, the Company would be prohibited from paying dividends on its common stock.

The Company’s largest shareholder and board of directors have historically, and currently, exert a controlling influence on the Company.

Collectively, as of February 16, 2024, Messrs. Vincent Viola and David Brooks owned 11.5% of the Company’s outstanding common stock on a fully diluted basis. Vincent Viola, the largest shareholder of the Company, currently owns 9.9% of the Company’s outstanding common stock, and David Brooks, the Company’s Chairman of the Board and Chief Executive Officer, currently owns 1.6% of the Company’s common stock, each calculated on a fully diluted basis. Further, as of the date hereof, the Company’s other directors and executive officers currently own collectively approximately 1.8% of the Company’s outstanding common stock. These individuals have historically, and currently, exert controlling influence in the Company’s management and policies.

In addition, Michael Viola, a director of the Company, is the son of Vincent Viola. Further, David Brooks, the Company’s Chairman and Chief Executive Officer, has a 36 year history of ownership and operation of the Bank with Vincent Viola; and he has a joint investment with Vincent. Viola outside of the Company. Given these close relationships, even though he does not serve on the Company’s board, Vincent Viola has and will continue to have an influence over the direction and operation of the Company.

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The Company’s corporate organizational documents and the provisions of Texas law make more difficult or prevent an attempted acquisition of the Company that you may favor.

The Company’s certificate of formation and bylaws contain various provisions that could have an anti-takeover effect and may delay, discourage or prevent an attempted acquisition or change in control of the Company. These provisions include the following:

• staggered terms of directors until shareholder approved declassification of the board is complete at the 2025 annual meeting of shareholders;

• a provision that directors cannot be removed except for cause;

• a provision that any special meeting of the Company’s shareholders may be called only by a majority of the Company’s board of directors, the Chairman or a holder or group of holders of at least 20% of the Company’s shares entitled to vote at such special meeting; and

• a provision establishing certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered only at an annual or special meeting of shareholders.

The Company’s certificate of formation provides for noncumulative voting for directors and authorizes the board of directors to issue shares of its preferred stock without shareholder approval and upon such terms as the board of directors may determine. The issuance of the Company’s preferred stock, while providing desirable flexibility in connection with possible acquisitions, financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a controlling interest in the Company . In addition, certain provisions of Texas law, including a requirement that two-thirds of the shares outstanding must approve major corporate actions, such as an amendment to the Company’s certificate of formation or the approval of a merger, and a provision which restricts certain business combinations between a Texas corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control of the Company. Also, the Company’s certificate of formation prohibits shareholder action by written consent.

Other debt and equity instruments have priority over the Company’s common stock.

In the event of any winding up and termination of the Company, the Company common stock would rank below all claims of the holders of the Company’s debt and any preferred stock then outstanding. Upon the winding up and termination of the Company, holders of the Company’s common stock will not be entitled to receive any payment or other distribution of assets until after all of the Company’s obligations to the Company’s debt holders have been satisfied and holders of the Company’s senior debt, subordinated debt, and junior subordinated debentures issued in connection with trust preferred securities have received any payments and other distributions due to them. In addition, the Company is required to pay interest on the Company’s senior debt, subordinated debt and subordinated debentures and junior subordinated debentures issued in connection with the Company’s trust preferred securities before the Company pays any dividends on the Company’s common stock. Furthermore, the Company’s board of directors may also, in its sole discretion, designate and issue one or more series of preferred stock from the Company’s authorized and unissued preferred stock, which may have preferences with respect to common stock in dissolution, dividends, liquidation or otherwise.

An investment in the Company’s common stock is not an insured deposit .

An investment in the Company’s common stock is not a bank deposit and, therefore, is not insured against loss or guaranteed by the FDIC, any other deposit insurance fund or by any other public or private entity. An investment in the Company’s common stock is inherently risky for the reasons described in this report and shareholders who acquire the Company’s common stock could lose some or all of their investment.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes included elsewhere 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 those projected results discussed in the forward-looking statements appearing in this discussion and analysis.

Cautionary Note Regarding Forward Looking Statements

This Annual Report on Form 10-K, our other filings with the SEC, and other press releases, documents, reports and announcements that we make, issue or publish may contain statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties and are made pursuant to the safe harbor provisions of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and other related federal security laws. These forward-looking statements include information about our possible or assumed future results of operations, including our future revenues, income, expenses, provision for taxes, effective tax rate, earnings per share and cash flows, our future capital expenditures and dividends, our future financial condition and changes therein, including changes in our loan portfolio and allowance for credit losses, our future capital structure or changes therein, the plan and objectives of management for future operations, our future or proposed acquisitions, the future or expected effect of acquisitions on our operations, results of operations and financial condition, our future economic performance and the statements of the assumptions underlying any such statement. Such statements are typically, but not exclusively, identified by the use in the statements of words or phrases such as “aim,” “anticipate,” “estimate,” “expect,” “goal,” “guidance,” “intend,” “is anticipated,” “is estimated,” “is expected,” “is intended,” “objective,” “plan,” “projected,” “projection,” “will affect,” “will be,” “will continue,” “will decrease,” “will grow,” “will impact,” “will increase,” “will incur,” “will reduce,” “will remain,” “will result,” “would be,” variations of such words or phrases (including where the word “could,” “may” or “would” is used rather than the word “will” in a phrase) and similar words and phrases indicating that the statement addresses some future result, occurrence, plan or objective. The forward-looking statements that we make are based on the Company’s current expectations and assumptions regarding its business, the economy, and other future conditions. Because forward-looking statements relate to future results and occurrences, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. The Company’s actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Many possible events or factors could affect our future financial results and performance and could cause those results or performance to differ materially from those expressed in the forward-looking statements. These possible events or factors include, but are not limited to:

• our ability to sustain our current internal growth rate and total growth rate;

• changes in geopolitical, business and economic events, occurrences and conditions, including changes in rates of inflation or deflation, nationally, regionally and in our target markets, particularly in Texas and Colorado;

• worsening business and economic conditions nationally, regionally and in our target markets, particularly in Texas and Colorado, and the geographic areas in those states in which we operate;

• our dependence on our management team and our ability to attract, motivate and retain qualified personnel;

• the concentration of our business within our geographic areas of operation in Texas and Colorado;

• changes in asset quality, including increases in default rates on loans and higher levels of nonperforming loans and loan charge-offs generally;

• concentration of the loan portfolio of the Bank, before and after the completion of acquisitions of financial institutions, in commercial and residential real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate;

• the ability of the Bank to make loans with acceptable net interest margins and levels of risk of repayment and to otherwise invest in assets at acceptable yields and that present acceptable investment risks;

• inaccuracy of the assumptions and estimates that the management of our Company and the financial institutions that we acquire make in establishing reserves for credit losses and other estimates generally;

• lack of liquidity, including as a result of a reduction in the amount of sources of liquidity we currently have;

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• material increases or decreases in the amount of insured and/or uninsured deposits held by the Bank or other financial institutions that we acquire and the cost of those deposits;

• adverse developments in the banking industry related to soundness of other financial institutions, and the potential impact of such developments on customer confidence, liquidity, and regulatory responses, including regulatory oversight, examinations, and any potential related findings and actions;

• our access to the debt and equity markets and the overall cost of funding our operations;

• regulatory requirements to maintain minimum capital levels or maintenance of capital at levels sufficient to support our anticipated growth;

• changes in market interest rates that affect the pricing of the loans and deposits of each of the Bank and the financial institutions that we acquire and that affect the net interest income, other future cash flows, or the market value of the assets of each of the Bank and the financial institutions that we acquire, including investment securities;

• fluctuations in the market value and liquidity of the securities we hold for sale, including as a result of changes in market interest rates;

• effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

• the effects of infectious disease outbreaks and the significant impact and associated efforts to limit such spread has had or may have on economic conditions and the Company's business, employees, customers, asset quality and financial performance;

• changes in economic and market conditions that affect the amount and value of the assets of the Bank and of financial institutions that we acquire;

• the institution and outcome of, and costs associated with, litigation and other legal proceedings against one or more of the Company, the Bank and financial institutions that we acquire or to which any of such entities is subject;

• the occurrence of market conditions adversely affecting the financial industry generally;

• the impact of recent and future legislative regulatory changes, including changes in banking, securities, and tax laws and regulations and their application by the Company’s regulators, and changes in federal government policies, as well as regulatory requirements applicable to, and resulting from regulatory supervision of, the Company and the Bank as a financial institution with total assets greater than $10 billion;

• changes in accounting policies, practices, principles and guidelines, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the SEC and the Public Company Accounting Oversight Board, as the case may be;

• governmental monetary and fiscal policies;

• changes in the scope and cost of FDIC insurance and other coverage;

• the effects of war or other conflicts, including, but not limited to, the current conflicts between Russia and the Ukraine and Israel and Hamas, acts of terrorism (including cyber attacks) or other catastrophic events, including natural disasters such as storms, droughts, tornadoes, hurricanes and flooding, that may affect general economic conditions;

• our actual cost savings resulting from previous or future acquisitions are less than expected, we are unable to realize those cost savings as soon as expected, or we incur additional or unexpected costs;

• our revenues after previous or future acquisitions are less than expected;

• the liquidity of, and changes in the amounts and sources of liquidity available to us, before and after the acquisition of any financial institutions that we acquire;

• deposit attrition, operating costs, customer loss and business disruption during the normal course of business, and before and after any completed acquisitions, including, without limitation, difficulties in maintaining relationships with employees, may be greater than we expected;

• the effects of the combination of the operations of financial institutions that we have acquired in the recent past or may acquire in the future with our operations and the operations of the Bank, the effects of the integration of such operations being unsuccessful, and the effects of such integration being more difficult, time consuming, or costly than expected or not yielding the cost savings we expect;

• the impact of investments that the Company may have made or may make and the changes in the value of those investments;

• the quality of the assets of financial institutions and companies that we have acquired in the recent past or may acquire in the future being different than we determined or determine in our due diligence investigation in connection with the acquisition of such financial institutions and any inadequacy of credit loss reserves relating to, and exposure to unrecoverable losses on, loans acquired;

• our ability to continue to identify acquisition targets and successfully acquire desirable financial institutions to sustain our growth, to expand our presence in our markets and to enter new markets;

• changes in general business and economic conditions in the markets in which we currently operate and may operate in the future;

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• changes occur in business conditions and inflation generally;

• an increase in the rate of personal or commercial customers’ bankruptcies generally;

• technology-related changes are harder to make or are more expensive than expected;

• physical or cyber attacks on the security of, and breaches of, the Company's digital information systems, the costs we or the Bank incur to provide security against such attacks and any costs and liability the Company or the Bank incurs in connection with any breach of those systems;

• the potential impact of technology and “FinTech” entities on the banking industry generally;

• the potential impact of climate change and related government regulation on the Company and its customers;

• other economic, competitive, governmental, regulatory, technological and geopolitical factors affecting the Company’s operations, pricing and services; and

• the other factors that are described or referenced in Part I, Item 1A , of the Annual Report on Form 10-K under the caption "Risk Factors."

We urge you to consider all of these risks, uncertainties and other factors carefully in evaluating all such forward-looking statements made by us. As a result of these and other matters, including changes in facts and assumptions not being realized or other factors, the actual results relating to the subject matter of any forward-looking statement may differ materially from the anticipated results expressed or implied in that forward-looking statement. Any forward-looking statement made in this 10-K or made by us in any report, filing, document, or information incorporated by reference in this 10-K speaks only as of the date on which it is made. The Company undertakes no obligation to update any such forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

A forward looking-statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes that these assumptions or bases have been chosen in good faith and that they are reasonable. However, the Company cautions you that assumptions as to future occurrences or results almost always vary from actual future occurrences or results, and the differences between assumptions and actual occurrences and results can be material. Therefore, the Company cautions you not to place undue reliance on the forward-looking statements contained in this 10-K or incorporated by reference herein.

Overview

The Company was organized as a bank holding company in 2002 and, since that time, has pursued a strategy to create long-term shareholder value through organic growth of our community banking franchise in our market areas and through selective acquisitions of complementary banking institutions with operations in the Company’s market areas or in new market areas. On April 8, 2013, the Company consummated the initial public offering, or IPO, of its common stock which is traded on the Nasdaq Global Select Market.

The Company’s principal business is lending to and accepting deposits from businesses, professionals and individuals. The Company conducts all of the Company’s banking operations through its principal bank subsidiary. The Company derives its income principally from interest earned on loans and, to a lesser extent, income from securities available for sale and securities held to maturity. The Company also derives income from noninterest sources, such as fees received in connection with various deposit services, mortgage banking operations and investment advisory services. From time to time, the Company also realizes gains or losses on the sale of assets. The Company’s principal expenses include interest expense on interest-bearing customer deposits, advances from the Federal Home Loan Bank of Dallas (FHLB) and other borrowings, operating expenses such as salaries and employee benefits, occupancy costs, communication and technology costs, expenses associated with other real estate owned, other administrative expenses, amortization of intangibles, provisions for credit losses and the Company’s assessment for FDIC deposit insurance.

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The Company intends for this discussion and analysis to provide the reader with information that will assist in understanding the Company’s financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes. This discussion relates to the Company and its consolidated subsidiaries and should be read in conjunction with the Company’s consolidated financial statements as of December 31, 2023 and 2022 and for the years ended December 31, 2023, 2022 and 2021, and the accompanying notes, appearing elsewhere in this Annual Report on Form 10-K. The Company’s fiscal year ends on December 31. The following discussion and analysis presents the more significant factors that affected our financial condition as of December 31, 2023 and 2022 and results of operations for each of the years then ended. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Annual Report on Form 10-K, filed with the SEC on February 21, 2023 for discussion of our results of operations for the years ended December 31, 2022 and 2021.

Recent Developments

Stanford Litigation

As more fully discussed in Part I, Item 3. Legal Proceedings , in first quarter 2023, the Bank entered into a settlement agreement with the plaintiffs to settle all claims of the ongoing lawsuit and will pay $100.0 million under the terms of the settlement. While the Company denies any liability or wrongdoing with respect to this matter, it believes the settlement is in the best interest of the Company and its shareholders as it eliminates risk, ongoing expense and uncertainty. The $100.0 million settlement, along with $2.5 million in legal and other fees, is recorded to litigation settlement expense in the consolidated income statement. The recognition of this settlement has negatively affected the Company's earnings for the twelve months ended December 31, 2023, reducing net income by $80.1 million or $1.94 per diluted share.

Recent Banking Environment

In light of recent events in the banking sector during 2023, including high-profile bank failures as well as other industry challenges such as liquidity, volatility in deposit balances and interest rate uncertainty among other factors, the Company has proactively positioned the balance sheet to mitigate the risks affecting the Company and the overall banking industry in order to serve its clients and communities.

• Liquidity remains strong, with cash and available for sale securities representing approximately 12.2% of assets and a loan to deposit ratio of 93.6% at December 31, 2023. Deposits are the Company’s primary source of liquidity. In addition, the Company maintains the ability to access considerable sources of contingent liquidity at the Federal Home Loan Bank and the Federal Reserve Bank, among other sources. Management considers the Company's current liquidity position to be adequate to meet both short-term and long-term liquidity needs. Refer to the sections Deposits and Liquidity Management for additional information.

• Capital remains healthy, with ratios of the Company, and its subsidiary bank, well above the standards to be considered well-capitalized under regulatory requirements. Refer to Note 20. Re gulatory Matters , included elsewhere in this report for additional details.

• Asset quality remains solid, with a non-performing asset ratio of 0.32% of total assets at December 31, 2023 and net charge-offs of 0.01% for the year ended December 31, 2023, reflecting the Company's disciplined underwriting and conservative lending philosophy which has supported the Company's strong credit performance during prior financial crises. Refer to the section Asset Quality for additional information.

The duration of this crisis has been short but impactful to the Company. The Company will continue its safe and sound banking practices, but the continuing impact of the crisis and further extent on the Company's operations and financial results for future periods is uncertain and cannot be predicted.

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Discussion and Analysis of Results of Operations

Selected income statement data and key performance metrics are summarized in the table below:

As of and for the Years Ended December 31,

(dollars in thousands except per share data)

Selected Income Statement Data

Net interest income

Provision for credit losses

Noninterest income

Noninterest expense

Income tax expense

Net income available to common shareholders

Per Share Data (Common Stock)

Earnings per common share:

Basic

Diluted

Dividends

Selected Performance Metrics

Return on average assets

Return on average equity

Net interest margin

Efficiency ratio

Dividend payout ratio

The following discussion and analysis of the Company’s results of operations compares its results of operations for the years ended December 31, 2023 and 2022.

The Company’s net income available to common shareholders decreased by $153.1 million, or 78.0%, to $43.2 million ($1.04 per common share on a diluted basis) for the year ended December 31, 2023, from $196.3 million ($4.70 per common share on a diluted basis) for the year ended December 31, 2022. The decrease in net income for 2023 over 2022 was most impacted by the $318.0 million increase in interest expense as well as the $92.7 million increase in noninterest expense, offset by a $216.7 million increase in interest income and a decrease of $40.9 million in income tax expense. Net interest income before provision from loan losses was lower in the current year mainly due to increased funding costs on our deposit products and FHLB advances due to Fed rate increases over the last year offset to a lesser extent by increased earnings on interest earning assets, primarily loans and interest-bearing cash accounts. As mentioned in Recent Developments , the increase in noninterest expense was due to the non-recurring $100.0 million settlement of litigation. The Company posted returns on average common equity of 1.83% and 8.04%, returns on average assets of 0.23% and 1.09%, and efficiency ratios of 86.44% and 56.82% for the years ended December 31, 2023 and 2022, respectively. The efficiency ratio is calculated by dividing total noninterest expense (which does not include the provision for credit losses and the amortization of core deposits intangibles) by net interest income plus noninterest income. The Company’s dividend payout ratio was 146.15% and 32.34% for the years ended December 31, 2023 and 2022, respectively, due to the decrease in diluted earnings per share from $4.70 per share in 2022 to $1.04 per share in 2023.

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

Net Interest Income

The Company’s net interest income is its interest income, net of interest expenses. Changes in the balances of the Company’s interest-earning assets and its interest-bearing liabilities, as well as changes in the market interest rates, affect the Company’s net interest income. The difference between the Company’s average yield on earning assets and its average rate paid for interest-bearing liabilities is its net interest spread. Noninterest-bearing sources of funds, such as demand deposits and stockholders’ equity, also support the Company’s earning assets. The impact of the noninterest-bearing sources of funds is reflected in the Company’s net interest margin, which is calculated as annualized net interest income divided by average earning assets.

The Company earned net interest income of $456.9 million for the year ended December 31, 2023, a decrease of $101.3 million, or 18.2%, from $558.2 million for the year ended December 31, 2022. The decrease was primarily driven by increased funding costs on deposit products, brokered deposits, and FHLB advances due to Fed fund rate increases over the year in addition to higher average balances for those interest-bearing liabilities year over year. Offset to a lesser extent were increased earnings on interest-earning assets, primarily loans and interest-bearing cash accounts. The year ended December 31, 2023 includes $3.6 million of acquired loan accretion compared to $9.1 million for the year ended December 31, 2022. The Company’s net interest margin for 2023 decreased to 2.74% from 3.46% in 2022, and the Company’s interest rate spread for 2023 decreased to 1.77% from the 3.13% interest rate spread for 2022. The average balance of interest-earning assets for 2023 increased by $579.7 million, or 3.6%, to $16.7 billion from an average balance of $16.1 billion for 2022. The increase from the prior year was primarily related to organic loan growth for the year offset by decreases in average balances of interest-bearing deposits and securities. Average interest-bearing liabilities increased $1.6 billion, or 15.2% primarily due to increased average deposits and FHLB advances mentioned above. The Company’s net interest margin for the year ended December 31, 2023 was negatively impacted by a 252 basis point increase in the weighted-average cost of funds on interest-bearing liabilities to 3.45% for the year ended December 31, 2023, from 0.93% for the year ended December 31, 2022 related to the increase in rates over the year. This was slightly offset by a 116 basis point increase in the weighted-average yield on interest-earning assets to 5.22% for the year ended December 31, 2023, from 4.06% for the year ended December 31, 2022. The increase from the prior year is due primarily to overall higher yields on all interest-earning assets due to the increasing rate environment as well as higher earnings on loans due to organic growth for the year over year period.

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Average Balance Sheet Amounts, Interest Earned and Yield Analysis.  The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2023, 2022 and 2021. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances.

For the Years Ended December 31,

(dollars in thousands)

Average

Outstanding

Balance

Interest

Yield/

Rate

Average

Outstanding

Balance

Interest

Yield/

Rate

Average

Outstanding

Balance

Interest

Yield/

Rate

Interest-earning assets:

Loans (1)

Taxable securities

Nontaxable securities

Interest-bearing deposits and other

Total interest-earning assets

Noninterest-earning assets

Total assets

Interest-bearing liabilities:

Checking accounts

Savings accounts

Money market accounts

Certificates of deposit

Total deposits

FHLB advances

Other borrowings - short-term

Other borrowings - long-term

Junior subordinated debentures

Total interest-bearing liabilities

Noninterest-bearing demand accounts

Noninterest-bearing liabilities

Stockholders’ equity

Total liabilities and equity

Net interest income

Interest rate spread

Net interest margin (2)

Net interest income and margin (tax equivalent basis) (3)

Average interest earning assets to interest-bearing liabilities

(1)      Average loan balances include nonaccrual loans.

(2)      Net interest margins for the periods presented represent: (i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period.

(3)      A tax-equivalent adjustment has been computed using a federal income tax rate of 21%.

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Interest Rates and Operating Interest Differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on the Company’s interest-earning assets and the interest incurred on the Company’s interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous year’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the prior year’s volume. For purpose of the following table, changes attributable to both volume and rate, which cannot be segregated, have been allocated to the changes due to volume and the changes due to rate in proportion to the relationship of the absolute dollar amount of change in each.

For the Year Ended December 31, 2023 v. 2022

For the Year Ended December 31, 2022 v. 2021

Increase (Decrease) Due to

Total Increase (Decrease)

Increase (Decrease) Due to

Total Increase (Decrease)

(dollars in thousands)

Volume

Rate

Volume

Rate

Interest-earning assets

Loans

Taxable securities

Nontaxable securities

Interest-bearing deposits and other

Total interest-earning assets

Interest-bearing liabilities

Checking accounts

Savings accounts

Money market accounts

Certificates of deposit

Total deposits

FHLB advances

Other borrowings - short-term

Other borrowings - long-term

Junior subordinated debentures

Total interest-bearing liabilities

Net interest income

Provision for Credit Losses

The measurement of expected credit losses under the Current Expected Credit Losses (CECL) methodology is applicable to financial assets measured at amortized cost. Provision for credit losses is determined by management as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, held to maturity debt securities and off-balance sheet credit exposure, after net charge-offs have been deducted, to bring the allowance to a level deemed appropriate by management to absorb expected credit losses over the lives of the respective financial instruments. Management actively monitors the Company’s asset quality and provides appropriate provisions based on such factors as historical loss experience, current conditions and reasonable and supportable forecasts.

Financial instruments are charged-off against the allowance for credit losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for credit losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the determination.

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The following table presents the components of provision for credit losses:

For the Years Ended December 31,

Provision for credit losses related to:

Loans

Held to maturity securities

Off-balance sheet credit exposures

Total provision for credit losses

The Company recorded a provision for credit losses on loans totaling $4.2 million during the year ended December 31, 2023. This is a decrease of $1.1 million, or 20.7% compared to the $5.3 million provision for credit losses on loans recorded in 2022. Provision expense for loans is generally reflective of organic loan growth as well as charge-offs or specific credit allocations taken during the respective period. Provision expense is also impacted by the economic outlook and changes in macroeconomic variables. The provision recorded for both years ended December 31, 2023 and 2022 was primarily related to loan growth.

As discussed in Note 4. Securities , the Company reclassified a portion of its available for sale state and municipal portfolio to held to maturity during 2022 to limit future volatility due to expected increases in interest rates. The majority of securities in the held to maturity portfolio are guaranteed and have highly rated credit ratings. Therefore, there was no provision for credit losses on held to maturity securities recorded during 2023 or 2022.

The Company recorded $47 thousand in negative provision for off-balance sheet credit exposures for the year ended December 31, 2023, compared to $778 thousand negative provision for the same period in 2022. Changes in the allowance for unfunded commitments are generally driven by the remaining unfunded amount and the expected utilization rate of a given loan segment.

Noninterest Income

The following table sets forth the major components of noninterest income for the years ended December 31, 2023, 2022 and 2021 and the period-over-period variations in such categories of noninterest income:

For the Years Ended December 31,

Variance

Variance

(dollars in thousands)

Noninterest income:

Service charges on deposit accounts

Investment management fees

Mortgage banking revenue

Mortgage warehouse purchase program fees

(Loss) gain on sale of loans

(Loss) gain on sale of other real estate

Gain on sale of securities available for sale

Gain (loss) on sale and disposal of premises and equipment

Increase in cash surrender value of BOLI

Other

Total noninterest income

N/M - Not meaningful

Noninterest income decreased $357 thousand, or 0.7%, to $51.1 million for the year ended 2023 from $51.5 million for the year ended 2022. Significant changes in the components of noninterest income are discussed below.

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Service charges on deposit accounts. Service charges on deposit accounts increased $1.8 million, or 14.4%, for the year ended December 31, 2023, as compared to the same period in 2022. The increase is primarily due to higher account analysis charges of $1.7 million due to increases in our commercial treasury products.

Mortgage banking revenue. Mortgage banking revenue decreased $1.9 million, or 21.6% for the year ended December 31, 2023, compared to the same period in 2022. The decrease was primarily market driven, resulting in a lower fair value gain on derivative hedging instruments of $104 thousand in 2023 compared to $1.9 million in 2022.

(Loss) gain on sale of loans. The Company recognized $1.8 million loss on sale of loans during 2022, primarily due to a $1.5 million loss on the sale of a commercial real estate loan, which was sold at a discount.

(Loss) gain on sale of other real estate. In 2023, the Company recognized a $1.8 million loss on sale of one other real estate property.

Noninterest Expense

The following table sets forth the major components of the Company’s noninterest expense for the years ended December 31, 2023, 2022 and 2021 and the period-over-period variations in such categories of noninterest expense:

For the Years Ended December 31,

Variance

Variance

(dollars in thousands)

Noninterest expense:

Salaries and employee benefits

Occupancy

Communications and technology

FDIC assessment

Advertising and public relations

Other real estate owned (income) expenses, net

Impairment of other real estate

Amortization of other intangible assets

Litigation settlement

Professional fees

Other

Total noninterest expense

N/M - not meaningful

Noninterest expense increased $92.7 million, or 25.8%, to $451.5 million for the year ended 2023 from $358.9 million for the year ended 2022. Significant changes in the components of noninterest expense are discussed below.

Salaries and employee benefits.   Salaries and employee benefits expense, which historically has been the largest component of the Company’s noninterest expense, decreased $30.6 million, or 14.4%, for the year ended December 31, 2023, compared to the year ended December 31, 2022. The change is primarily due to lower combined salaries, bonus, employee insurance, payroll taxes and 401(k) expenses of $18.1 million in 2023 compared to the prior year, due to overall strategic efforts to manage expenses, which began in fourth quarter 2022 with the targeted reduction-in-force related to departmental and business line restructurings. Additionally, severance and stock amortization expenses were elevated in 2022 by $13.7 million, primarily due to the aforementioned reduction-in-force and the separation of two executive officers during the year. Contributing to the year over year decrease was lower stock amortization in 2023 due to downward adjustments to performance-based executive compensation equity awards as well as a $4.2 million decrease in contract labor costs. Offsetting these changes was $4.7 million lower deferred salaries expense in 2023, which reduces overall salaries expense.

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Occupancy.  Occupancy expenses increased $4.5 million, or 10.5% for the year ended December 31, 2023, compared to the same period in 2022. The increase was primarily due to higher depreciation, maintenance and property tax expense due to the opening of the second phase of the Company's headquarters campus in second quarter 2022.

Communications and technology. Communications and technology expense increased $3.8 million, or 15.1%, for the year ended December 31, 2023, compared to the same period in 2022. Increased communications and technology expenses in the current year were primarily related to various technology improvements.

FDIC assessment. FDIC assessment increased $15.3 million for the year ended December 31, 2023, compared to the same period in 2022. The increase was due to an increase in the FDIC initial base deposit insurance assessment rate schedules which took effect in first quarter 2023, as well as $8.3 million recorded in fourth quarter for a special assessment charged by the FDIC to recover uninsured deposit losses due to bank failures in early 2023.

Impairment of other real estate. Impairment of other real estate expense was $5.2 million for the year ended December 31, 2023, compared to none for the same period in 2022. The increase was due to write-downs of $4.2 million on one commercial real estate property still held in other real estate at year-end, as well as a $1.0 million write-down on another commercial real estate property that was sold in late 2023.

Litigation settlement. Litigation settlement of $102.5 million was recognized in the first quarter 2023 due to the settlement of the ongoing litigation that was acquired by the Company in 2014, as discussed elsewhere in this report.

Professional fees.  Professional fees expense for the year ended December 31, 2023 decreased by $7.6 million, or 48.9%, compared to the same period in 2022. The decrease was due primarily to lower consulting fees of $3.4 million as well as $3.3 million lower legal fees.

Income Tax Expense

Income tax expense was $9.1 million for the year ended December 31, 2023, which is an effective tax rate of 17.4%. Income tax expense was $50.0 million for the year ended December 31, 2022, which is an effective tax rate of 20.3%. The effective income tax rates differed from the U.S. statutory federal income tax rate of 21% during 2023 and 2022 primarily due to tax exempt interest income earned on certain investment securities and loans, the nontaxable earnings on bank owned life insurance, disallowed FDIC assessment and nondeductible compensation, among other things, and their relative proportion to total pre-tax net income. The lower effective rate for 2023 is due primarily to lower pre-tax net income as a result of the Stanford litigation settlement recorded in early 2023 as discussed elsewhere in this report. Refer to Note 14. Income Taxe s , in the notes to the Company's audited consolidated financial statements included elsewhere in this report for additional details.

Discussion and Analysis of Financial Condition

The following discussion and analysis summarizes the financial condition of the Company as of December 31, 2023 and 2022 and details certain changes between those periods.

Assets

The Company's total assets increased by $776.7 million, or 4.3%, to $19.0 billion as of December 31, 2023 from $18.3 billion at December 31, 2022. The significant components of the total change are discussed below.

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Loan Portfolio

The Company’s loan portfolio is the largest category of the Company’s earning assets. The following table presents the balance and associated percentage of each major category in the Company’s loan portfolio as of December 31, 2023 and 2022:

(dollars in thousands)

Amount

% of Total

Amount

% of Total

Commercial

Mortgage warehouse purchase loans

Real estate:

Commercial

Commercial construction, land and land development

Residential (1)

Single-family interim construction

Agricultural

Consumer

Total gross loans

(1)     Includes loans held for sale of $16.4 million and $11.3 million at December 31, 2023 and 2022, respectively.

As of December 31, 2023, the Company's loan portfolio, before the allowance for credit losses, totaled $14.7 billion, which is an increase of $806.3 million or 5.8% over total gross loans as of December 31, 2022. Loans held for investment, excluding mortgage warehouse purchase loans and net of loan sales, increased $569.9 million, or 4.2% for the year over year period. See Note 5. Loans, Net and Allowance for Credit Losses on Loans for more details on the Company's loan portfolio.

Most of the Company’s lending activity occurs within the state of Texas, primarily in the north, central and southeast Texas regions and the state of Colorado, specifically along the Front Range area. As of December 31, 2023, loans in the North Texas region represented about 36% of the total portfolio, followed by the Colorado Front Range region at 26%, the Houston region at 25% and the Central Texas region at 13%. A large percentage of the Company’s portfolio consists of commercial and residential real estate loans. As of December 31, 2023 and 2022, there were no concentrations of loans related to a single industry in excess of 10% of total loans.

The principal categories and changes in the loan portfolio are discussed below.

Commercial loans. The Company provides a mix of variable and fixed rate commercial loans. The loans are typically made to small-and medium-sized manufacturing, wholesale, retail, energy related service businesses and medical practices for working capital needs and business expansions. Commercial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with operating cash flows as the primary source of repayment, but may also include collateralization by inventory, accounts receivable, equipment and/or personal guarantees. Additionally, a portion of the commercial loan portfolio includes participations purchased from other financial institutions in larger transactions considered Shared National Credits (SNC). Almost all purchased SNCs are in the Commercial loan portfolio with the largest single industry concentration in energy. Loans in the commercial portfolio are monitored for credit quality at least annually, while energy loans are subject to review semi-annually and other loans in the specialized lending portfolio are reviewed quarterly.

The Company’s commercial loan portfolio increased $25.9 million, or 1.2%, to $2.3 billion as of December 31, 2023, from $2.2 billion as of December 31, 2022. The net increase in this portfolio type is primarily due to growth in the energy portfolio increasing to $ 621,883 at December 31, 2023, compared to $ 574,698 at December 31, 2022.

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Mortgage warehouse purchase loans. The Company’s mortgage warehouse purchase loan portfolio increased $237.6 million, or 76.1%, to $549.7 million as of December 31, 2023, from $312.1 million as of December 31, 2022, while average balances for the year declined to $386.8 million for 2023 from $428.4 million for 2022. The increase in this portfolio at December 31, 2023 was due to increased mortgage activity due to declines in mortgage interest rates late in the fourth quarter 2023. The decrease in average balances for the year was due to overall lower volumes resulting from the higher rate environment throughout 2023, compared to 2022.

Commercial real estate loans (CRE) . The commercial real estate loan portfolio has historically been the Company's largest category of loans, representing 56.3% and 56.2% of the total portfolio as of December 31, 2023 and 2022, respectively. Such loans generally involve less risk than other loans in the portfolio, but may be more adversely affected by conditions in the real estate markets or in the general economy. The Company expects that commercial real estate loans will continue to be a significant portion of the Company’s total loan portfolio and an area of emphasis in the Company’s lending operations.

Commercial real estate loans increased $471.7 million, or 6.0%, to $8.3 billion as of December 31, 2023 from $7.8 billion as of December 31, 2022. The increase was due to organic loan growth in this loan type during the year.

Despite the Company's concentration in commercial real estate, the properties securing this portfolio are diversified in terms of type and geographic location. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry. As a matter of policy, the commercial real estate portfolio is subject to risk exposure limits by individual asset classes as well as geographic collateral locations outside of our market areas. We regularly assess these concentration levels, monitor economic conditions in major real estate markets in which we lend, and conduct stress testing and sensitivity analysis on the portfolio as a whole.

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The following tables summarizes a) the property type and b) geographic region in which the loans were originated. Concentrations are stated by total loan balance and as a percentage of total commercial real estate loans as of December 31, 2023 and 2022:

As of December 31,

Amount

Percent of Total

Amount

Percent of Total

Property Type

Retail

Office and Office Warehouse

Multifamily

Industrial

Healthcare

Hotel/Motel

Convenience Store

Daycare/School

Restaurant

RV & Mobile Home Parks

Church

Mini Storage

Dealerships

Mixed Use (Non-Retail)

Miscellaneous

Total commercial real estate loans

Geographic Region

North Texas

Central Texas

Houston

Colorado Front Range

Total

Additional information related to the granularity in the commercial real estate portfolio is presented in the table below as of December 31, 2023 and 2022:

As of December 31,

Average loan amount

$1.9 million

$1.8 million

Number of loans > $5 million

Largest loan in the portfolio

$33.1 million

$32.6 million

Owner-occupied percentage

Commercial construction, land and land development loans. The Company’s commercial construction, land and land development loans comprise of loans to fund commercial construction, land acquisition and real estate development construction. Although the Company continues to make commercial construction loans, land acquisition and land development loans on a selective basis, the Company does not expect the Company’s lending in this area to result in this category of loans being a significantly greater portion of the Company’s total loan portfolio.

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Commercial construction, land and land development loans increased slightly by $413 thousand, or 0.0% to $1.2 billion at December 31, 2023 from $1.2 billion at December 31, 2022.

Additional information related to the granularity in the commercial construction, land and land development portfolio based on current balance outstanding is presented in the table below as of December 31, 2023 and 2022:

As of December 31,

Total loans > $5 million

Average loan amount

$1.1 million

$954 thousand

Largest loan in the portfolio

$22.5 million

$25.8 million

Residential Real Estate Loans . The Company’s residential real estate loans, excluding mortgage loans held for sale, are primarily made with respect to and secured by single-family homes, which are both owner-occupied and investor owned and include a limited amount of home equity loans, with a relatively small average loan balance spread across many individual borrowers. The Company offers a variety of mortgage loan portfolio products which generally are amortized over five to thirty years. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts of no more than 80% of appraised value. The Company requires mortgage title insurance and hazard insurance. The Company incurs interest rate risk as well as the risks associated with nonpayment on such loans.

The Company’s residential real estate loan portfolio increased by $82.0 million, or 5.1%, to a balance of $1.7 billion as of December 31, 2023 from $1.6 billion as of December 31, 2022. The increase in this category was primarily a result of organic loan growth.

Single-Family Interim Construction Loans. The Company makes single-family interim construction loans to home builders and individuals to fund the construction of single-family residences with the understanding that such loans will be repaid from the proceeds of the sale of the homes by builders or, in the case of individuals building their own homes, with the proceeds of a permanent mortgage loan. Such loans are secured by the real property being built and are made based on the Company’s assessment of the value of the property on an as-completed basis. The Company expects to continue to make single-family interim construction loans so long as demand for such loans continues and the market for single-family housing and the values of such properties remain stable or continue to improve in the Company’s markets.

The balance of single-family interim construction loans in the Company’s loan portfolio increased by $9.1 million, or 1.8%, to $517.9 million as of December 31, 2023 from $508.8 million as of December 31, 2022. The increase in this category was due to organic origination activity that exceeded repayments during the year.

Other Categories of Loans . Other categories of loans in the Company’s loan portfolio include agricultural loans made to farmers and ranchers relating to their operations and consumer loans made to individuals for personal purposes, including automobile purchase loans and personal loans. None of these categories of loans represents more than 1% of the Company’s total loan portfolio as of December 31, 2023 and 2022 and such categories continue to be a very small percentage of the Company's total loan portfolio.

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Loans by Maturity and Interest Rate Sensitivity

The following table sets forth the contractual maturities of the Company’s loan portfolio, including scheduled principal repayments and the distribution between fixed and adjustable interest rate loans as of December 31, 2023:

Within One Year

One Year to Five Years

After Five Years to Fifteen Years

After Fifteen Years

Total

(dollars in thousands)

Fixed Rate

Adjustable Rate

Fixed Rate

Adjustable Rate

Fixed Rate

Adjustable Rate

Fixed Rate

Adjustable Rate

Fixed Rate

Adjustable Rate

Commercial

Mortgage warehouse purchase loans

Real estate:

Commercial real estate

Commercial construction, land and land development

Residential real estate

Single-family interim construction

Agricultural

Consumer

Total loans

At December 31, 2023, the average duration of the Company's loan portfolio was 3.5 years. The Company generally structures certain loans, like commercial and commercial real estate, with shorter-term loan maturities in order to match funding sources that will enable the Company to effectively manage the portfolio by providing the flexibility to respond to liquidity needs, changes in interest rates and changes in underwriting standards and loan structures, among other things. Due to the shorter-term nature of such loans, from time to time in the ordinary course of business and without any contractual obligation, the Company will renew or extend maturing lines of credit or refinance existing loans at their maturity dates based on customer practice and need. These renewals, extensions and refinancings are made in the ordinary course of business for customers that meet the normal level of credit standards. These requests are typically made by the customer to support their working capital needs for operations. Such borrowers are generally not experiencing financial difficulties and could obtain similar financing elsewhere. In connection with each renewal, extension or refinancing, the Company may require a principal reduction or an adjustment to the terms and structure to reflect the current market pricing/structuring for such loans or to remain competitive with other financial institutions.

Asset Quality

Nonperforming Assets . The Company has established procedures to assist the Company in maintaining the overall quality of the Company’s loan portfolio. In addition, the Company has adopted underwriting guidelines to be followed by the Company’s lending officers and require significant senior management review of proposed extensions of credit exceeding certain thresholds. When delinquencies exist, the Company rigorously monitors the levels of such delinquencies for any negative or adverse trends. The Company’s loan review procedures include approval of lending policies and underwriting guidelines by the Company’s board of directors, ongoing risk-based independent internal and external loan reviews, approval of large credit relationships by the Bank’s Executive Loan Committee and loan quality documentation procedures. The Company, like other financial institutions, is subject to the risk that its loan portfolio will be subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

The Company classifies nonperforming assets as nonperforming loans, including nonaccrual loans and loans past due 90 days or more and still accruing interest, as well as other real estate owned and other repossessed assets. Further information regarding the Company's accounting policies related to past due loans, nonaccrual loans, collateral dependent loans and loan modifications to borrowers experiencing financial difficulty is presented in Note 5 . Loans, Net and Allowance for Credit Losses on Loans .

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The following table sets forth the allocation of the Company’s nonperforming assets among the Company’s different asset categories and key credit-related metrics as of the dates indicated. The balances of nonperforming loans reflect the net investment in these assets.

As of December 31,

(dollars in thousands)

Nonaccrual loans

Commercial

Commercial real estate

Commercial construction, land and land development

Residential real estate

Single-family interim construction

Agricultural

Consumer

Total nonaccrual loans (1)

Total loans delinquent 90 days or more and still accruing

Total troubled debt restructurings, not included in nonaccrual loans

Total nonperforming loans

Total other real estate owned and other repossessed assets

Total nonperforming assets

Total allowance for credit losses on loans

Total loans held for investment (2)

Total assets

Credit Ratios

Ratio of nonperforming loans to total loans held for investment

Ratio of nonperforming assets to total assets

Ratio of nonaccrual loans to total loans held for investment

Ratio of allowance for credit losses on loans to total loans held for investment

Ratio of allowance for credit losses on loans to nonaccrual loans

Ratio of allowance for credit losses on loans to total nonperforming loans

(1)    Nonaccrual loans include troubled debt restructurings of $929 thousand as of December 31, 2022. With the adoption of ASU 2022-02, effective January 1, 2023, TDR accounting has been eliminated.

(2)     Excluding mortgage warehouse purchase loans of $549.7 million and $312.1 million and loans held for sale of $16.4 million and $11.3 million as of December 31, 2023 and 2022, respectively.

The Company had $50.3 million and $37.8 million in loans on nonaccrual status as of December 31, 2023 and 2022, respectively. The increase from December 31, 2022 to December 31, 2023 was primarily due to the addition of a $13.3 million commercial real estate loan to nonaccrual during the year.

The allowance for credit losses on loans as a percentage of nonperforming loans decreased from 371.14% at December 31, 2022, to 293.17% at December 31, 2023, due primarily to the increase in nonperforming loans as discussed above.

As of December 31, 2023, the Company had other real estate owned and other repossessed assets of $9.6 million, which is a decrease of $14.4 million from $24.0 million at December 31, 2022, due to write-downs on properties totaling $5.2 million during the year and the sale of an other real estate owned property totaling $10.0 million. Offsetting this was a $805 thousand branch facility that was closed and moved to other real estate during the year.

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Allowance for Credit Losses

The measurement of expected credit losses under CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables, held to maturity debt securities and off-balance sheet credit exposures. The CECL model requires the measurement of all expected credit losses on applicable financial assets based on historical experience, current conditions, and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance accounts is dependent upon a variety of factors beyond the Company's control, including the performance of the portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. For additional information regarding our accounting policies related to credit losses, refer to Note 1. Summary of Significant Accounting Policies and Note 5. Loan s , Net and All owance for Cr edit L osse s on Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.

The economy and other risk factors are minimized by the Company’s underwriting standards which include the following principles: 1) financial strength of the borrower including strong earnings, high net worth, significant liquidity and acceptable debt to worth ratio, 2) managerial business competence, 3) ability to repay, 4) loan to value, 5) projected cash flow and 6) guarantor financial statements as applicable.

Analysis of the Allowance for Credit Losses - Loans

The following table sets forth the allowance for credit losses by category of loans:

As of December 31,

(dollars in thousands)

Amount

Total Loans (1)

Amount

Total Loans (1)

Commercial loans

Mortgage warehouse purchase loans

Real estate:

Commercial real estate

Construction, land and land development

Residential real estate

Single-family interim construction

Agricultural

Consumer

Total allowance for credit losses

(1)    Represents the percentage of the Company’s total loans included in each loan category.

As of December 31, 2023, the allowance for credit losses amounted to $151.9 million, or 1.07%, of total loans held for investment, excluding mortgage warehouse purchase loans, compared with $148.8 million, or 1.09%, as of December 31, 2022.

As of December 31, 2023, the Company had specific credit loss allocations of $15.2 million on individually evaluated loans totaling $47.3 million, compared with specific credit loss allocations of $9.6 million on individually evaluated loans totaling $34.5 million as of December 31, 2022. The majority of the increase in individually evaluated loans and specific credit loss allocations was due to the addition of a commercial real estate loan totaling $13.3 million with specific credit loss allocation of $2.2 million. Additionally, there was a $3.5 million increase in specific credit allocation on a commercial loan relationship during the year.

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The factors driving significant changes in credit loss allocations by segment over the year are discussed below.

The allowance allocated to commercial loans totaled $34.8 million, or 1.5% of total commercial loans as of December 31, 2023, compared to $54.0 million, or 2.4% of commercial loans as of December 31, 2022. The allowance for credit losses decreased $19.2 million, or 35.6% for the period despite an increase of $25.9 million in the commercial loan portfolio. Modeled expected credit losses decreased $12.7 million and qualitative factors and other qualitative adjustments related to commercial loans decreased $9.9 million. The change in modeled losses was due to model changes applied during the second quarter, most notably the change to consolidate energy loans for modeling purposes into the commercial portfolio and by expanding the macroeconomic variables (MEVs) used for this portfolio. The decrease in qualitative factors was due to improvement in classified loan trends. Specific allocations for commercial loans that were evaluated for expected credit losses on an individual basis increased $3.3 million from $8.4 million at December 31, 2022 to $11.7 million at December 31, 2023. The increase in specific allocations for commercial loans was primarily related to the increase in specific allocation on a commercial loan relationship as mentioned above.

The allowance allocated to commercial real estate totaled $60.1 million, or 0.7% of total commercial real estate loans as of December 31, 2023, compared to $61.1 million, or 0.8% of commercial real estate loans as of December 31, 2022. The allowance for credit losses decreased $982 thousand, or 1.6% over the year. Modeled expected credit losses decreased $4.7 million, while qualitative factors and other qualitative adjustments increased $1.4 million. The decrease in modeled losses was primarily related to new MEVs incorporated such as certain CRE price indices offset by changes related to the economic forecast, which included downward adjustments affecting office and multifamily commercial real estate. The increase in qualitative factors was due to an increase in risk-grade credit trends, specifically in the non-owner occupied pool within this segment. Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis increased $2.4 million from $1.2 million at December 31, 2022 to $3.6 million at December 31, 2023 primarily due to the $2.2 million credit allocation on the commercial real estate loan discussed above.

The allowance allocated to construction, land and land development loans totaled $31.5 million, or 2.6% of total construction, land and land development loans as of December 31, 2023, compared to $17.7 million, or 1.4% of construction, land and land development loans as of December 31, 2022. The allowance for credit losses increased $13.8 million, or 78.0% over the year. Modeled expected credit losses increased $13.7 million and qualitative factors and other qualitative adjustments increased $67 thousand. The increase in modeled losses was due to the new MEVs utilized to more closely align with the risks within this portfolio as well as a declining economic forecast over the year. There were no specific allocations for construction, land and land development loans that were evaluated for expected credit losses on a individual basis at December 31, 2022 or December 31, 2023.

The allowance allocated to residential real estate loans totaled $6.9 million, or 0.4% of total residential real estate loans as of December 31, 2023, compared to $3.5 million, or 0.2% of residential real estate loans as of December 31, 2022. The allowance for credit losses increased $3.5 million, or 100.5% for the period. Modeled expected credit losses increased $1.8 million while qualitative factors related to residential real estate loans increased $1.7 million. The increase in modeled losses was primarily related to changes in the economic forecast which take into consideration the current environment and inflationary pressures, as well as expanded MEVs including certain price indices. The increase in qualitative factors was due primarily to changes made to the model during the year. There were no specific allocations for residential real estate loans that were evaluated for expected credit losses on a individual basis at December 31, 2022 or December 31, 2023.

The allowance allocated to single-family construction loans totaled $17.4 million, or 3.4% of total single-family construction loans as of December 31, 2023, compared to $11.8 million, or 2.3% of single-family construction loans as of December 31, 2022. The allowance for credit losses increased $5.6 million, or 47.6%. Modeled expected credit losses increased $5.6 million while qualitative factor and other qualitative adjustments related to single-family construction loans increased $30 thousand. The increase in modeled losses was due to the new MEVs utilized in the calculation to more closely align with the risks within this portfolio as well as a declining economic forecast within this segment over the period. Specific allocations for single family construction loans that were evaluated for expected credit losses on an individual basis decreased $43 thousand from $43 thousand at December 31, 2022 to zero at December 31, 2023.

Refer to Note 5. Loans, Net and Allowance for Credit Losses on Loans , in the notes to the Company's audited consolidated financial statements included elsewhere in this report for additional details of the allowance for credit losses on loans.

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Additional information related to net charge-offs (recoveries) by loan type is presented in the table below.

Net Charge-offs (Recoveries)

Average Loans

Ratio of Annualized Net Charge-offs (Recoveries) to Average Loans

Commercial

Mortgage warehouse purchase loans

Real estate:

Commercial

Commercial construction, land and land development

Residential

Single-family interim construction

Agricultural

Consumer

Total

Commercial

Mortgage warehouse purchase loans

Real estate:

Commercial

Commercial construction, land and land development

Residential

Single-family interim construction

Agricultural

Consumer

Total

Commercial

Mortgage warehouse purchase loans

Real estate:

Commercial

Commercial construction, land and land development

Residential

Single family-interim construction

Agricultural

Consumer

Total

For the year ended December 31, 2023, net charge-offs totaled $1.1 million, which is 0.01% of the Company's average loans outstanding during the period, compared to net charge-offs of $5.2 million, or 0.04% of average loans for the year ended December 31, 2022. The higher level of charge-offs in 2022 was primarily due to net charge-offs recorded at the foreclosure of two commercial real estate properties totaling $3.4 million and a $773 thousand partial charge-off of a commercial loan that was paid off.

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Allowance for Credit Losses - Off-Balance Sheet Credit Exposures

The allowance for credit losses on off-balance sheet credit exposures is calculated under the CECL model, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. Off-balance sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed in Note 13. Off-Balance Sheet Arrangements, Commitments and Contingencies . The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur based on historical utilization rates. For both December 31, 2023 and 2022, the allowance for credit losses on off-balance sheet credit exposures was $3.9 million.

Securities

The Company’s investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit, interest rate and duration risk. The types and maturities of securities purchased are primarily based on the Company’s current and projected liquidity and interest rate sensitivity positions. Refer to Note 4. Securities for more details on the Company's security portfolio.

The fair value of the Company's available for sale securities decreased $98.0 million, or 5.8%, to $1.6 billion at December 31, 2023 from $1.7 billion at December 31, 2022. The decrease was due to net paydowns, maturities and calls during the year. The amortized cost of held to maturity securities decreased $1.8 million, or 0.9%, to $205.2 million as of December 31, 2023 from $207.1 million as of December 31, 2022.

Total securities represented 9.5% and 10.4% of the Company’s total assets at December 31, 2023 and December 31, 2022, respectively. There were no sales of securities for the years ended December 31, 2023 and 2022.

Certain investment securities are valued at less than their amortized cost. At December 31, 2023, the Company's review of all securities at an unrealized loss position determined that the losses resulted from factors not related to credit quality. This conclusion is based on the Company's analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors for each security type in the portfolio. The unrealized losses are generally due to increases in market interest rates. Furthermore, the Company has the intent to hold these securities until maturity or a forecasted recovery, and it is more likely than not that the Company will not have to sell the securities before the recovery of their cost basis. The fair value is expected to recover as the securities approach their maturity date. As such, there is no allowance for credit losses on available for sale or held to maturity securities recognized as of December 31, 2023. Refer to Note 4. Securities for more information on the Company's analysis of credit losses on securities available for sale and held to maturity.

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The following table sets forth the amount, scheduled maturities and weighted average yields for the Company’s investment portfolio as of December 31, 2023. Available for sale securities are presented at fair value and held to maturity securities are presented at amortized cost.

Within One Year

One Year to Five Years

After Five Years to Ten Years

After Ten Years

Total

(dollars in thousands)

Amount

Weighted Average Yield (1)

Amount

Weighted Average Yield (1)

Amount

Weighted Average Yield (1)

Amount

Weighted Average Yield (1)

Amount

Weighted Average Yield (1)

Securities Available for Sale

U.S. treasuries

Government agency securities

Obligations of state and municipal subdivisions

Corporate bonds

Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA

Other securities

Total

Securities Held to Maturity

Obligations of state and municipal subdivisions

(1) Yields are based on amortized cost and calculated on a tax-equivalent basis assuming a 21% tax rate

Cash and Cash Equivalents

Cash and cash equivalents increased by $67.7 million, or 10.3% to $722.0 million at December 31, 2023 from $654.3 million at December 31, 2022. Cash and cash equivalent balances can vary due to cash needs and volatility of several large title company and commercial accounts. In addition, the increase in balances as of December 31, 2023 is primarily due to maintaining healthy excess liquidity in response to the challenging banking environment.

Liabilities

Total liabilities increased $759.5 million, or 4.8%, to $16.6 billion as of December 31, 2023, from $15.9 billion as of December 31, 2022 with significant components discussed below.

Deposits

Total deposits increased $601.6 million, or 4.0%, to $15.7 billion as of December 31, 2023 from $15.1 billion as of December 31, 2022. The increase is primarily due to the Company's increased use of brokered deposits as a source of liquidity due to deposit attrition during the year. Brokered deposits totaled $2.5 billion and $528.9 million at December 31, 2023 and 2022, respectively. Noninterest-bearing demand deposits totaled $3.5 billion, or 22.5% of total deposits, as of December 31, 2023, compared with $4.7 billion, or 31.3% of total deposits, as of December 31, 2022.

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The following table summarizes the Company’s average deposit balances and weighted average rates for the periods presented:

For the Years Ended December 31,

(dollars in thousands)

Average Balance

Weighted Average Rate

Average Balance

Weighted Average Rate

Average Balance

Weighted Average Rate

Deposit Type

Noninterest-bearing demand accounts

Interest-bearing accounts

Checking accounts

Savings accounts

Money market accounts

Certificates of deposit and individual retirement accounts (IRA)

Total interest-bearing accounts

Total deposits

In 2023, there was a significant shift in average deposit balances by type, moving from noninterest-bearing, interest-bearing checking and money market accounts to higher yielding certificates of deposit accounts. This shift was due to the higher rates offered on these products resulting from Fed rate increases over the year. The Bank offered several promotional campaigns during the year on short duration certificates of deposit. Furthermore, average total brokered deposits increased to $1.5 billion for 2023 from $493.9 million in 2022, an increase of $1.0 billion, or 212%, with the majority of brokered accounts concentrated in certificates of deposit representing average balances of $969.4 million, or approximately one-third of the average balance of total certificates of deposit for the year.

The total cost of deposits increased 188 basis points from 0.52% for the year ended December 31, 2022 to 2.40% for the year ended December 31, 2023. The average cost of interest-bearing deposits was 3.27% for 2023 compared with 0.78% for 2022. The increase in deposit cost of funds is reflective of higher rates on deposit products as a result of Fed Funds rate increases over the year as well as the increased level of brokered deposits, as discussed above. Interest expense on brokered deposits totaled approximately $80.6 million in 2023, compared to $8.1 million in 2022 and had a weighted average interest rate paid of 5.23% for 2023, compared to 1.64% in 2022. Therefore, the combination of the shift from noninterest-bearing to interest-bearing accounts as well as the use of higher-cost brokered funds and overall rising rate environment in 2023 had a negative effect on the Company's net interest income during 2023.

The following table sets forth the maturity of time deposits (including IRA deposits) greater than $250 thousand as of December 31, 2023:

Maturity within:

(dollars in thousands)

Three Months

Three to Six Months

Six to Twelve Months

After Twelve Months

Total

Individual retirement accounts

Certificates of deposit

Total

The estimated amount of uninsured and uncollateralized deposits including related accrued interest is approximately $6.3 billion (40.2% of total deposits) and $8.1 billion (53.6% of total deposits) as of December 31, 2023 and 2022, respectively. Estimated uninsured deposits, excluding public funds deposits totaled $4.6 billion (29.1% of total deposits) and $6.5 billion (42.9% of total deposits) as of December 31, 2023 and 2022, respectively.

FHLB Advances

The Company’s FHLB borrowings totaled $350.0 million as of December 31, 2023, compared with $300.0 million as of December 31, 2022. The change in FHLB borrowings from prior year reflects the use of short-term FHLB advances as needed

for liquidity. See further details of FHLB advances, including collateral and letters of credit in Note 9. Federal Home Loan Bank Advances .

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Other Borrowings

As of December 31, 2023 and 2022, the Company had $238.1 million and $267.1 million, respectively, of long-term indebtedness (other than FHLB advances and junior subordinated debentures) outstanding, which included subordinated debentures. The decrease from December 31, 2022 to December 31, 2023 was due to the redemption of $30.0 million of subordinated debentures in first quarter 2023.

In addition, the Company had $33.8 million and zero of short-term borrowings outstanding on its $100.0 million revolving line of credit as of December 31, 2023 and 2022, respectively. The $33.8 million in borrowings remained outstanding as of February 20, 2024. See Note 10. Other Borrowings for further details of the Company's other borrowings.

Other Liabilities

Other liabilities increased $102.9 million, or 79.1%, to $233.0 million at December 31, 2023 from $130.1 million at December 31, 2022. The increase is due to primarily to the accruals of the $100.0 million litigation settlement and the $8.3 million FDIC special assessment as discussed elsewhere in this report, offset by decreases in other various year end accruals.

Capital Resources and Liquidity Management

Capital Resources

The Company’s stockholders’ equity is influenced by the Company’s earnings, common stock repurchased by the Company, common stock granted and forfeited, stock based compensation expense, the dividends the Company pays on its common stock, and any changes in other comprehensive income relating to available for sale securities and cash flow hedges.

Total stockholder’s equity was $2.4 billion at December 31, 2023 and December 31, 2022, an increase of approximately $17.2 million. The increase was primarily due to net income earned for the year totaling $43.2 million, an improvement of $31.3 million in other comprehensive income and stock based compensation of $7.5 million offset by stock repurchased by the Company totaling $2.2 million and dividends paid of $62.7 million.

Regulatory Capital Requirements

The Company’s capital management consists of providing equity to support the Company’s current and future operations. The Company is subject to various regulatory capital requirements administered by state and federal banking agencies, including the TDB, Federal Reserve and the FDIC. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s financial condition and results of operations. Please refer to Note 20. Regulatory Matters , in the notes to the Company's audited consolidated financial statements included elsewhere in this report for additional details.

Stock Repurchase Program. In January 2023, the Company's Board approved the 2023 Stock Repurchase Plan, which provides for the repurchase of common stock up to $125.0 million through December 31, 2023. There were no shares repurchased under the 2023 Plan through December 31, 2023.

See Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities , in this report for additional information.

In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted. Among other things, the IRA imposes a new 1% excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S. corporations. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements.

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Liquidity Management

Liquidity refers to the measure of the Company’s ability to meet current and future cash flow requirements as they become due, while at the same time meeting the Company’s operating, capital and strategic cash flow needs, all at a reasonable cost. The Company's Asset Liability Committee (ALCO) is responsible for the oversight of liquidity. ALCO is a management subcommittee of the Board Risk Oversight Committee. The Company utilizes its Liquidity Risk Management Policy, Contingency Funding Plan (CFP), and Liquidity Risk Management Framework to monitor and manage liquidity risk. The Policy establishes liquidity monitoring ratios and their respective limits. The CFP identifies Key Risk Indicators and defines triggers to determine the level of risk on a sliding scale: Normal, Early Warning, Advanced Warning, and Crisis. The CFP further outlines appropriate action steps to be taken by management to remedy an increase in liquidity risk based on the level of risk determined in the framework. Additionally, the CFP outlines appropriate additional monitoring, reporting, and communication for each level of risk within the framework.

The Company’s asset and liability management policy is intended to maintain adequate liquidity and, therefore, enhance the Company’s ability to raise funds to support asset growth, meet deposit withdrawals and lending needs, maintain reserve requirements, and otherwise sustain operations. The Company accomplishes this through management of the maturities of its interest-earning assets and interest-bearing liabilities. The Company believes that its present position is adequate to meet the current and future liquidity needs.

The Company continuously monitors its liquidity position to ensure that assets and liabilities are managed in a manner that will meet all of the Company’s short-term and long-term cash requirements. The Company manages its liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of the Company’s shareholders. The Company also monitors its liquidity requirements in light of interest rate trends, changes in the economy, and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits.Liquidity risk management is an important element in the Company’s asset/liability management process. The Company's liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. The Company’s short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of pre-paid and maturing balances in the Company’s loan and investment portfolios, debt financing and increases in customer deposits. The Company’s liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest-bearing deposits in banks, federal funds sold, securities available for sale and maturing or prepaying balances in the Company’s investment and loan portfolios. Liquid liabilities include core deposits, brokered deposits, federal funds purchased and other borrowings. Other sources of liquidity include the sale of loans, the issuance of additional collateralized borrowings such as FHLB advances, the issuance of debt securities, borrowings through the Federal Reserve’s discount window and the Bank Term Funding Program through the program's expiration date and the issuance of equity securities. In addition to the liquidity provided by the sources described above, the Company maintains correspondent relationships with other banks in order to sell loans or purchase overnight funds should additional liquidity be needed. The Company's $100.0 million line of credit also provides an additional source of liquidity. For additional information regarding the Company’s operating, investing and financing cash flows, see the Consolidated Statements of Cash Flows provided in the Company’s consolidated financial statements.

Deposits represent the Company’s primary source of funds. The Company continues to focus on growing core deposits through the Company’s relationship driven banking philosophy and community-focused marketing programs. During 2023, the Company increased the use of higher-cost brokered deposits to secure additional liquidity due to the competitive deposit environment resulting from the interest rate increases over the year. To avoid concentrations with any one broker, brokered deposits can be accessed from a variety of brokers acting as intermediaries, typically larger money-center financial institutions as well as broker networks including Certificate of Deposit Account Registry Service (CDARS), IntraFi Cash Service (ICS) & Total Bank Solutions (TBS) among other sources.

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The following table summarizes the Company’s short-term borrowing capacities net of balances outstanding as of December 31, 2023:

Unsecured fed funds lines available from commercial banks

American Financial Exchange (overnight borrowings)

Unused borrowing capacity from FHLB

Unused borrowing capacity under Fed Discount window

Unused borrowing capacity under Fed BTFP (based on unencumbered securities at par value)

Unused portion of line of credit

In the ordinary course of the Company’s operations, the Company has entered into certain contractual obligations and has made other commitments to make future payments. The Company believes that it will be able to meet its contractual obligations as they come due through the maintenance of adequate cash levels. The Company expects to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. The Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs. Refer to the accompanying notes to consolidated financial statements elsewhere in this report for the expected timing of such obligations and borrowing capacity, as applicable, as of December 31, 2023. These include payments related to (a) time deposits with stated maturity dates (Note 8. Deposits ), (b) short and long term borrowings (Note 9. Federal Home Loan Bank Advances , Note 10. Other Borrowings and Note 11. Junior Subordinated Debentures ), (c) operating leases (Note 12. Leases ) and (d) commitments to extend credit and standby letters of credit (Note 13. Off-Balance Sheet Arrangements, Commitments and Contingencies ).

As discussed elsewhere in this report, the Company has accrued $100.0 million in connection with the settlement of the Stanford lawsuit. Once the litigation is dismissed by the Court, the Company expects to pay the obligation as described in the settlement agreement. Refer to Part I. Item 3. Legal Proceedings for more information.

Other than normal changes in the ordinary course of business, there have been no significant changes in the types of contractual obligations or amounts due since December 31, 2023, except as described in Note 22 . Subsequent Events .

The Company is a corporation separate and apart from the Bank and, therefore, the Company must provide for the Company’s own liquidity. The Company’s main source of funding is dividends declared and paid to the Company by the Bank. Statutory and regulatory limitations exist that affect the ability of the Bank to pay dividends to the Company. Management believes that these limitations will not impact the Company’s ability to meet the Company’s ongoing short-term cash obligations. For additional information regarding dividend restrictions, see “ Supervision and Regulation ” under Part I, Item 1. “Business.”

Critical Accounting Policies and Estimates

The preparation of the Company’s consolidated financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires the Company to make estimates and judgments that affect the Company’s reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. The Company evaluates its estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

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Accounting policies, as described in detail in the notes to the Company’s audited consolidated financial statements are an integral part of the Company’s financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and the Company’s financial position. The Company has deemed the accounting policy and estimate discussed below as most critical and require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain. Changes in these estimates, which are likely to occur from period to period, or the use of different estimates that the Company could have reasonably used in the current period, would have a material impact on the Company’s financial position, results of operations or liquidity. The Company has other significant accounting policies and continues to evaluate the materiality of their impact on its consolidated financial statements, but management believes these other policies either do not generally require them to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on the Company's reported results for a given period.

Allowance For Credit Losses. Management considers policies related to the allowance for credit losses on financial instruments for loans and off-balance sheet credit exposures to be critical to the financial statements. The Company's policies for the allowance for credit losses are accounted for under ASC 326, Financial Instruments - Credit Losses. In accordance with ASC 326, the allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans are charged against the allowance for credit losses when management believes that collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance is increased (decreased) by provisions (or reversals of) reported in the income statement as a component of provisions for credit loss. Under the guidance, the allowance for credit losses on off-balance sheet credit exposures is a liability account representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit.

The amount of each allowance account represents management's best estimate of current expected credit losses on such financial instruments using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, gross domestic product, property values or other relevant factors. The Company utilizes Moody’s Analytics economic forecast scenarios and assigns probability weighting to those scenarios which best reflect management’s views on the economic forecast.

The allowance for credit losses for loans is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. For determining the appropriate allowance for credit losses on a collective basis, the loan portfolio is segmented into pools based upon similar risk characteristics and a lifetime loss-rate model is utilized. The measurement of expected credit losses is impacted by loan/borrower attributes and certain macroeconomic variables. Management has determined that they are reasonably able to forecast the macroeconomic variables used in the modeling processes with an acceptable degree of confidence for a total of two years then encompassing a reversion process whereby the forecasted macroeconomic variables are reverted to their historical mean utilizing a rational, systematic basis. Management qualitatively adjusts model results for risk factors that are not considered within the modeling processes but are nonetheless relevant in assessing the expected credit losses within the loan pools. These qualitative factor (Q-Factor) adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of r isk.

Due to the subjective nature of these estimates in general and more so due to the multiple variables used in the calculation, the estimate for determining current expected credit losses is subject to uncertainty. The various components of the calculation require significant management judgement and certain assumptions are highly subjective. Volatility in certain credit metrics and variations between expected and actual outcomes are likely.

Further information regarding Company policies and methodology used to estimate the allowance for credit losses is presented in Note 1. Summary of Significant Accounting Policies , Note 5. Loans, Net and Allowance for Credit Losses on Loans and Note 13. Off-Balance Sheet Arrangements, Commitments and Contingencies .

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Goodwill. The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely an impairment has occurred. The Company first assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative impairment test is unnecessary. If the Company concludes otherwise, then it is required to perform an impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. The Company performs its impairment test annually as of December 31. During the year ended December 31, 2023, the economic uncertainty and market volatility resulting from the rising interest rate environment and the recent banking crisis resulted in a decrease in the Company's stock price and market capitalization. Management believed such decrease was a triggering indicator requiring goodwill impairment quantitative assessments at each interim period in addition to the annual impairment test performed as of December 31, 2023, all of which resulted in no impairment charges. Refer to Note 1. Summary of Significant Accounting Policies , in the notes to the Company's consolidated financial statements included elsewhere in this report for additional information.

Determining the fair value of a reporting unit is considered a critical accounting estimate because it requires significant management judgment and the use of subjective measurements. Variability in the market and changes in assumptions or subjective measurements used to allocate fair value are reasonably possible and may have a material impact on the Company’s financial position, liquidity or results of operations.

Recently Issued Accounting Standards

The Company has evaluated new accounting standards that have recently been issued and have determined that there are no new accounting standards that should be described in this section that will materially impact the Company’s operations, financial condition or liquidity in future periods. Refer to Note 2. Recent Accounting Standards , of the Company’s audited consolidated financial statements for a discussion of recent accounting standards and their expected impact on the consolidated financial statements.