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 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 , 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 over the contractual period for which the Company is 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 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 resulted in a decrease in the Company's stock price and market capitalization. Management believed such decrease was a triggering indicator requiring goodwill quantitative assessments at each interim period in addition to the annual test performed as of December 31, 2023, all of which resulted in no 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.
