# Southside Bancshares Inc: Form 10-Q for the period ended Jun 30, 2024

- Company: [Southside Bancshares Inc](/companies/sbsi.md) (CIK 705432)
- Form: 10-Q
- Filed: 2024-07-26
- Accepted by EDGAR: Jul 26, 2024, 14:33 ET
- Period: 2024-06-30
- Accession: 0000705432-24-000175
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/705432/000070543224000175/sbsi-20240630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/705432/000070543224000175/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2024-04-01 to 2024-06-30 | $50.6m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2024-01-01 to 2024-06-30 | $100.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-04-01 to 2024-06-30 | $5.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2024-01-01 to 2024-06-30 | $9.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | $24.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2024-01-01 to 2024-06-30 | $46.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | $0.81 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2024-01-01 to 2024-06-30 | $1.52 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | $0.81 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | $1.52 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 30,312,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2024-01-01 to 2024-06-30 | 30,310,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | $74.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2024-01-01 to 2024-06-30 | $3.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2024-01-01 to 2024-06-30 | $21.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2024-01-01 to 2024-06-30 | $1.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-06-30 | $452.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2024-06-30 | $8.36bn | us-gaap:Assets |
| Total liabilities | at 2024-06-30 | $7.56bn | us-gaap:Liabilities |
| Long-term debt | at 2024-06-30 | $152.2m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2024-06-30 | $801.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 88,310 characters.

The following is a discussion of our consolidated financial condition, changes in our financial condition and results of our operations, and should be read and reviewed in conjunction with the financial statements, and the notes thereto, in this Quarterly Report on Form 10-Q, and in our 2023 Form 10-K. Certain risks, uncertainties and other factors, including those set forth under “Risk Factors” in Part I, Item 1A. of the 2023 Form 10-K and elsewhere in this Quarterly Report on Form 10-Q, may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis.

#### Forward-Looking Statements

Certain statements of other than historical fact that are contained in this report may be considered to be “forward-looking statements” within the meaning of and subject to the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. These statements may include words such as “expect,” “estimate,” “project,” “anticipate,” “appear,” “believe,” “could,” “should,” “may,” “might,” “will,” “would,” “seek,” “intend,” “probability,” “risk,” “goal,” “target,” “objective,” “plans,” “potential,” and similar expressions. Forward-looking statements are statements with respect to our beliefs, plans, expectations, objectives, goals, anticipations, assumptions, estimates, intentions and future performance and are subject to significant known and unknown risks and uncertainties, which could cause our actual results to differ materially from the results discussed in the forward-looking statements. For example, discussions of the effect of our expansion, benefits of the Share Repurchase Plan, trends in asset quality, capital, liquidity, our ability to sell nonperforming assets, expense reductions, planned operational efficiencies and earnings from growth and certain market risk disclosures, including the impact of interest rates and our expectations regarding rate increases, tax reform, inflation, the impacts related to or resulting from other economic factors are based upon information presently available to management and are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. Accordingly, our results could materially differ from those that have been estimated. The most significant factor that could cause future results to differ materially from those anticipated by our forward-looking statements include the ongoing impact of higher inflation levels, prolonged elevated interest rates and general economic and recessionary concerns, all of which could impact economic growth and could cause a reduction in financial transactions and business activities, including decreased deposits and reduced loan originations, our ability to manage liquidity in a rapidly changing and unpredictable market, labor shortages and changes in interest rates by the Federal Reserve. Other factors that could cause actual results to differ materially from those indicated by forward-looking statements include, but are not limited to, the following:

- general (i) political conditions, including, without limitation, governmental action and uncertainty resulting from U.S. and global political trends and (ii) economic conditions, either globally, nationally, in the State of Texas, or in the specific markets in which we operate, including, without limitation, the deterioration of the commercial real estate, residential real estate, construction and development, energy, oil and gas, credit or liquidity markets, which could cause an adverse change in our net interest margin, or a decline in the value of our assets, which could result in realized losses, as well as the risk of an economic slowdown or recession;
- inflation and fluctuations in interest rates that reduce our margins and yields, the fair value of financial instruments, the level of loan originations or prepayments on loans we have made and make, and the cost we pay to retain and attract deposits and secure other types of funding;
- current or future legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we or our customers or our borrowers are engaged, including the impact of the Dodd-Frank Act, the Federal Reserve’s actions to increase interest rates, the capital requirements promulgated by the Basel Committee, the CARES Act, the Economic Aid Act and other regulatory responses to economic conditions;
- the impact of prolonged elevated interest rates on our financial projections, models and guidance;
- acts of terrorism, war or other conflicts, including the Russia-Ukraine and Israeli-Hamas conflicts, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate change or other catastrophic events that may affect general economic conditions or cause other disruptions and/or increase costs, including, but not limited to, property and casualty and other insurance costs;
- potential impacts of the adverse developments in the banking industry highlighted by high-profile bank failures, including impacts on customer confidence, deposit outflows, liquidity and the regulatory response thereto;
- technological changes, including potential cyber-security incidents and other disruptions, or innovations to the financial services industry, including as a result of the increased telework environment;
- our ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, which may be exacerbated by developments in generative artificial intelligence and which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage of our systems, increased costs, significant losses, or adverse effects to our reputation;
- changes in the interest rate yield curve such as flat, inverted or steep yield curves, or changes in the interest rate environment that impact net interest margins and may impact prepayments on our MBS portfolio;
- the risk that our enterprise risk management framework, compliance program or our corporate governance and supervisory oversight functions may not identify or address risks adequately, which may result in unexpected losses;
- the effect of compliance with legislation or regulatory changes;
- credit risks of borrowers, including any increase in those risks due to changing economic conditions;
- increases in our nonperforming assets;
- risks related to environmental liability as a result of certain lending activity;
- our ability to maintain adequate liquidity to fund operations and growth;
- our ability to control interest rate risk;
- any applicable regulatory limits or other restrictions on the Bank and its ability to pay dividends to us;
- the failure of our assumptions underlying our allowance for credit losses and other estimates;
- the failure to maintain an effective system of controls and procedures, including internal control over financial reporting;
- the effectiveness of our derivative financial instruments and hedging activities to manage risk;
- unexpected outcomes of, and the costs associated with, existing or new litigation involving us;
- potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions;
- changes impacting our balance sheet strategy;
- risks related to actual mortgage prepayments diverging from projections;
- risks related to fluctuations in the price per barrel of crude oil;
- significant increases in competition in the banking and financial services industry;
- changes in consumer spending, borrowing and saving habits, including as a result of rising inflation, elevated interest rates and recessionary concerns;
- execution of future acquisitions, reorganization or disposition transactions, including the risk that the anticipated benefits of such transactions are not realized;
- our ability to increase market share and control expenses;
- our ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by our customers;
- the effect of changes in federal or state tax laws;
- the effect of changes in accounting policies and practices;
- adverse changes in the status or financial condition of the GSEs which impact the GSEs’ guarantees or ability to pay or issue debt;
- adverse changes in the credit portfolios of other U.S. financial institutions relative to the performance of certain of our investment securities;
- risks related to actual U.S. agency MBS prepayments exceeding projected prepayment levels;
- risks related to U.S. agency MBS prepayments increasing due to U.S. government programs designed to assist homeowners to refinance their mortgage that might not otherwise have qualified;
- risks related to loans secured by real estate, including the risk that the value and marketability of collateral could decline;
- risks associated with our common stock and our other securities, including fluctuations in our stock price and general volatility in the stock market; and
- other risks and uncertainties discussed in “Part I – Item 1A. Risk Factors” in the 2023 Form 10-K.

All written or oral forward-looking statements made by us or attributable to us are expressly qualified by this cautionary notice. We disclaim any obligation to update any factors or to announce publicly the result of revisions to any of the forward-looking statements included herein to reflect future events or developments, unless otherwise required by law.

#### Critical Accounting Estimates

Our accounting and reporting estimates conform with U.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We consider accounting estimates that can (1) be replaced by other reasonable estimates and/or (2) changes to an estimate from period to period that have a material impact on the presentation of our financial condition, changes in financial condition or results of operations as well as (3) those estimates that require significant and complex assumptions about matters that are highly uncertain to be critical accounting estimates. We consider our critical accounting estimates to include allowance for credit losses on loans and off-balance-sheet credit exposure.

Critical accounting estimates include a high degree of uncertainty in the underlying assumptions. Management bases its estimates on historical experience, current information and other factors deemed relevant. The development, selection and disclosure of our critical accounting estimates are reviewed with the Audit Committee of the Company’s Board of Directors. Actual results could differ from these estimates. For additional information regarding critical accounting policies, refer to “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates,” “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Allowance for Credit Losses – Loans and Allowance for Credit Losses – Off-Balance-Sheet Credit Exposures,” “Note 1 – Summary of Significant Accounting and Reporting Policies,” “Note 5 – Loans and Allowance for Loan Losses” and “Note 17 – Off-Balance-Sheet Arrangements, Commitments and Contingencies” in the 2023 Form 10-K. As of June 30, 2024, there have been no significant changes to our critical accounting estimates.

#### Non-GAAP Financial Measures

Certain non-GAAP measures are used by management to supplement the evaluation of our performance. These include the following fully taxable-equivalent measures: Net interest income (FTE), net interest margin (FTE) and net interest spread (FTE), which include the effects of taxable-equivalent adjustments using a federal income tax rate of 21% to increase tax-exempt interest income to a tax-equivalent basis. Interest income earned on certain assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments.

*Net interest income (FTE), net interest margin (FTE) and net interest spread (FTE).* Net interest income (FTE) is a non-GAAP measure that adjusts for the tax-favored status of net interest income from certain loans and investments and is not permitted under GAAP in the consolidated statements of income. We believe this measure to be the preferred industry measurement of net interest income, and that it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is our net interest income. Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets. The most directly comparable financial measure calculated in accordance with GAAP is our net interest margin. Net interest spread (FTE) is the difference in the average yield on average earning assets on a tax-equivalent basis and the average rate paid on average interest bearing liabilities. The most directly comparable financial measure calculated in accordance with GAAP is our net interest spread.

These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements and other bank holding companies may define or calculate these non-GAAP measures or similar measures differently. Whenever we present a non-GAAP financial measure in an SEC filing, we are also required to present the most directly comparable financial measure calculated and presented in accordance with GAAP and reconcile the differences between the non-GAAP financial measure and such comparable GAAP measure.

In the following table we present the reconciliation of net interest income to net interest income adjusted to a fully taxable-equivalent basis assuming a 21% marginal tax rate for interest earned on tax-exempt assets such as municipal loans and investment securities (dollars in thousands), along with the calculation of net interest margin (FTE) and net interest spread (FTE).

| Non-GAAP Reconciliations | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net interest income (GAAP) | $53,608 | $53,916 | $106,956 | $107,269 |
| Tax equivalent adjustments: |  |  |  |  |
| Loans | 633 | 673 | 1,289 | 1,370 |
| Tax-exempt investment securities | 2,051 | 2,462 | 4,131 | 5,012 |
| Net interest income (FTE) (1) | $56,292 | $57,051 | $112,376 | $113,651 |
| Average earning assets | $7,881,919 | $7,225,168 | $7,882,128 | $7,193,677 |
| Net interest margin | 2.74% | 2.99% | 2.73% | 3.01% |
| Net interest margin (FTE) (1) | 2.87% | 3.17% | 2.87% | 3.19% |
| Net interest spread | 2.00% | 2.37% | 2.01% | 2.40% |
| Net interest spread (FTE) (1) | 2.13% | 2.55% | 2.15% | 2.58% |

(1) These amounts are presented on a fully taxable-equivalent basis and are non-GAAP measures.

Management believes adjusting net interest income, net interest margin and net interest spread to a fully taxable-equivalent basis is a standard practice in the banking industry as these measures provide useful information to make peer comparisons. Tax-equivalent adjustments are reported in the respective earning asset categories as listed in the “Average Balances with Average Yields and Rates” tables under Results of Operations.

OVERVIEW

#### ECONOMIC CONDITIONS

The economic conditions and growth prospects for our markets, even against the headwinds of slightly elevated inflation, continued higher interest rates and potential recessionary concerns, continue to reflect a solid and positive overall outlook. Ongoing inflation levels and continued higher interest rates could have a negative impact on both our consumer and commercial borrowers. Currently, the Texas markets we serve continue to remain healthy due to both job and population growth.

#### DEPOSITS

Our deposits were $6.50 billion at June 30, 2024, a decrease of $53.7 million, or 0.8%, from December 31, 2023. At June 30, 2024, we had 179,536 total deposit accounts with an average balance of $32,000. Our estimated uninsured deposits were 36.4% of total deposits as of June 30, 2024. When excluding affiliate deposits (Southside-owned deposits) and public fund deposits (all collateralized), our total estimated deposits without insurance or collateral was 19.4% of total deposits as of June 30, 2024.

Our noninterest bearing deposits represent approximately 21.0% of total deposits. During the three months ended June 30, 2024, our cost of interest bearing deposits increased 98 basis points from 2.03% for the three months ended June 30, 2023 to 3.01%. Our cost of total deposits for the second quarter of 2024 increased 89 basis points from 1.50% for the three months ended June 30, 2023 to 2.39%.

Our cost of interest bearing deposits increased 107 basis points, from 1.92% for the six months ended June 30, 2023, to 2.99% for the six months ended June 30, 2024. Our cost of total deposits increased 95 basis points, from 1.42% for the six months ended June 30, 2023, to 2.37% for the six months ended June 30, 2024.

#### CAPITAL RESOURCES AND LIQUIDITY

Our capital ratios and contingent liquidity sources remain solid. We utilized the Federal Reserve’s BTFP to reduce our overall funding costs and to enhance our interest rate risk position. On March 11, 2024, the Federal Reserve stopped extending new BTFP advances. As of June 30, 2024, our BTFP borrowings totaled $113.4 million at a cost of 5.40%, compared to $117.7 million at a cost of 4.37% at December 31, 2023.

The table below shows our total lines of credit, borrowings, total amounts available for future liquidity, and swapped value as of June 30, 2024 (in thousands):

|  | June 30, 2024 Line of Credit | Borrowings | Total Available for Future Liquidity | Swapped |
| --- | ---: | ---: | ---: | ---: |
| FHLB advances | $2,344,153 | $562,282 | $1,781,871 | $310,000 |
| Federal Reserve discount window | 377,381 | — | 377,381 | — |
| Correspondent bank lines of credit | 80,000 | — | 80,000 | — |
| Federal Reserve Bank Term Funding Program | 113,415 | 113,415 | — | — |
| Total liquidity lines | $2,914,949 | $675,697 | $2,239,252 | $310,000 |

#### Operating Results

Net income decreased $220,000, or 0.9%, to $24.7 million for the three months ended June 30, 2024, compared to the same period in 2023. The decrease in net income was a result of the $772,000 increase in noninterest expense, the $644,000 increase in income tax expense and the $308,000 decrease in net interest income, partially offset by the $1.1 million increase in noninterest income and the $411,000 increase in the reversal of provision for credit losses. Earnings per diluted common share was $0.81 for both of the three month periods ended June 30, 2024 and 2023.

During the six months ended June 30, 2024, our net income decreased $4.7 million, or 9.3%, to $46.2 million from $50.9 million for the same period in 2023. The decrease in net income was primarily a result of the $2.8 million increase in noninterest expense, the $1.2 million decrease in noninterest income and the $723,000 increase in income tax expense. Earnings per diluted common share decreased $0.12, or 7.3%, to $1.52 for the six months ended June 30, 2024, compared to $1.64 for the same period in 2023.

#### Financial Condition

Our total assets increased $72.8 million, or 0.9%, to $8.36 billion at June 30, 2024 from $8.28 billion at December 31, 2023. Our securities portfolio increased by $108.6 million, or 4.2%, to $2.71 billion, compared to $2.60 billion at December 31, 2023. The increase in the securities portfolio was due to purchases of MBS, partially offset by a decrease in municipal bonds during the six months ended June 30, 2024. Our FHLB stock increased $21.1 million, or 176.4%, to $33.0 million from $11.9 million at December 31, 2023, due to the increase in our FHLB borrowings during the six months ended June 30, 2024.

Loans at June 30, 2024 were $4.59 billion, an increase of $64.9 million, or 1.4%, compared to December 31, 2023, due to increases of $304.3 million in commercial real estate loans and $41.3 million in 1-4 family residential loans. The increases were partially offset by decreases of $243.7 million in construction loans, $24.2 million in municipal loans, $7.1 million in commercial loans, and $5.8 million in loans to individuals. Loans held for sale decreased $9.5 million, or 87.6%, to $1.4 million at June 30, 2024 from $10.9 million at December 31, 2023 due to the sale of a $7.9 million commercial real estate loan relationship during the first quarter of 2024.

Our nonperforming assets at June 30, 2024 increased $2.9 million, or 72.9%, to $6.9 million and represented 0.08% of total assets, compared to $4.0 million, or 0.05% of total assets, at December 31, 2023. Nonaccruing loans increased $2.2 million, or 57.1%, to $6.1 million, and the ratio of nonaccruing loans to total loans was 0.13% and 0.09% for June 30, 2024 and December 31, 2023, respectively. The increase in nonaccrual loans was primarily due to one commercial real estate loan and one commercial loan relationship that were put on nonaccrual during the first quarter of 2024. Restructured loans were $145,000 as of June 30, 2024, compared to $13,000 at December 31, 2023. Repossessed assets were $15,000 at June 30, 2024. There were no repossessed assets at December 31, 2023. There was $648,000 and $99,000 of OREO at June 30, 2024 and December 31, 2023, respectively.

Our deposits decreased $53.7 million, or 0.8%, with a balance of $6.50 billion at June 30, 2024 from $6.55 billion at December 31, 2023, which consisted of decreases of $30.3 million in interest bearing deposits and $23.5 million in noninterest bearing deposits.

Total FHLB borrowings increased $349.6 million, or 164.4%, to $562.3 million at June 30, 2024 from $212.6 million at December 31, 2023.

Other borrowings decreased $308.4 million, or 60.5%, to $201.4 million at June 30, 2024, from $509.8 million at December 31, 2023, which was primarily due to a $300.0 million decrease in borrowings from the FRDW.

Our total shareholders’ equity at June 30, 2024 increased 3.6%, or $27.7 million, to $801.0 million, or 9.6% of total assets, compared to $773.3 million, or 9.3% of total assets, at December 31, 2023. The increase in shareholders’ equity was the result of net income of $46.2 million, other comprehensive income of $2.5 million, stock compensation expense of $1.5 million, common stock issued under our dividend reinvestment plan of $596,000 and net issuance of common stock under employee stock plans of $184,000, partially offset by cash dividends paid of $21.8 million and repurchases of $1.5 million of our common stock.

Key financial indicators management follows include, but are not limited to, numerous interest rate sensitivity and interest rate risk indicators, credit risk, operations risk, liquidity risk, capital risk, regulatory risk, inflation risk, competition risk, yield curve risk, U.S. agency MBS prepayment risk and economic risk indicators.

#### Balance Sheet Strategy

Determining the appropriate size of the balance sheet is one of the critical decisions any bank makes. Our balance sheet is not merely the result of a series of micro-decisions, but rather the size is controlled based on the economics of assets compared to the economics of funding and funding sources. Changing interest rate environments and economic conditions require that we monitor the interest rate sensitivity of the assets, the funding driving our growth and closely align ALCO objectives accordingly.

We ended the second quarter of 2024 with approximately $377.4 million in available liquidity from the FRDW, in addition to the approximately $1.78 billion credit line available from FHLB due primarily to the blanket lien on our loan portfolio and to a lesser extent, securities available as collateral. At June 30, 2024, the estimated deposits, without insurance or collateral, to total deposits, excluding affiliate deposits (Southside-owned deposits) was 19.4%, or $1.26 billion.

During the six months ended June 30, 2024, we entered into an additional $50 million cash flow hedge swap while $120 million of cash flow hedge swaps matured. At June 30, 2024, FHLB advances of $310 million and brokered deposits of $630 million were hedged with our $940 million of cash flow swaps. As of June 30, 2024, a pre-tax unrealized gain of $23.1 million was recognized in other comprehensive income, and there was no ineffective portion of these hedges. We continue to evaluate the lowest cost wholesale funding sources and will utilize either brokered deposits, FHLB advances or FRDW borrowings, or a combination of the three funding sources in addition to utilizing cash flow hedges to mitigate the impacts of interest rate movements. At June 30, 2024, the majority of the securities portfolio was funded by non-maturity deposits, some of which are included in wholesale funding that accounts for approximately 49% of the funding source, of which approximately 69% is swapped at a fixed rate, providing protection from rising interest rates.

We utilize wholesale funding and securities to enhance overall profitability to determine the appropriate leverage of our capital, determining acceptable levels of credit, interest rate and liquidity risk consistent with prudent capital management. This balance sheet strategy currently consists of borrowing funds from the brokered market, FHLB and the Federal Reserve through the FRDW and BTFP. These funds are invested primarily in U.S. agency MBS and long-term municipal securities and to a lesser extent, U.S. Treasury Bills and corporate securities. Although the securities purchased often carry lower yields than loans we make, these securities generally (i) increase the overall quality of our assets because of either the implicit or explicit guarantees of the U.S. Government, and the guarantees of the municipalities, (ii) are more liquid than individual loans and (iii) may be used to collateralize our borrowings or other obligations.

Risks associated with this asset structure include a potentially lower net interest rate spread and margin when compared to our peers, changes in the slope of the yield curve, increased interest rate risk, the length of interest rate cycles, changes in volatility or spreads associated with the MBS, municipal and corporate securities, the unpredictable nature of MBS prepayments and credit risks associated with the municipal and corporate securities. See “Part I - Item 1A. Risk Factors – Risks Related to Our Business” in the 2023 Form 10-K for a discussion of risks related to interest rates. An additional risk is significant increases in interest rates, especially long-term interest rates, which could adversely impact the fair value of the AFS securities portfolio and could also impact our equity capital. Due to the unpredictable nature of MBS prepayments, the length of interest rate cycles and the slope of the interest rate yield curve, net interest income could fluctuate more than simulated under the scenarios modeled by our ALCO and described under “Item 3. Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q.

Our securities portfolio increased from $2.60 billion at December 31, 2023 to $2.71 billion at June 30, 2024. The increase in the securities portfolio was due to securities purchased during the six months ended June 30, 2024, which more than offset sales of securities and principal payments.

During the six months ended June 30, 2024, we continued to adjust the composition of the securities portfolio as U.S. Treasury Bills and MBS increased while the remaining categories in the portfolio decreased. The increase in MBS was attributable to purchases of U.S. Agency MBS, partially offset by MBS principal payments. During the six months ended June 30, 2024, we purchased $408.9 million in short-term U.S. Treasury Bills to collateralize public fund deposits and $249.5 million in low premium, primarily 6.0% and 6.5% coupon MBS and to a lesser extent, discounted 5.5% coupon MBS. Sales during the six months ended June 30, 2024 included $100.8 million in municipal securities and in some instances the unwinding of the related hedged items to align the investment portfolio with the current balance sheet strategy. Sales of AFS securities for the three and six months ended June 30, 2024 resulted in a net realized loss of $563,000 and $581,000, respectively.

At June 30, 2024, securities as a percentage of assets totaled 32.4%, compared to 31.4% at December 31, 2023, due to a $108.6 million, or 4.2%, increase in securities, while cash and cash equivalents decreased to 5.41% of total assets at June 30, 2024, compared to 6.77% at December 31, 2023. Our balance sheet management strategy is dynamic and is continually evaluated as market conditions warrant.

During 2022, we entered into partial term fair value hedges for certain of our fixed rate callable AFS municipal securities. During 2024, we entered into partial term fair value hedges of fixed rate AFS MBS and fixed rate loans using the portfolio layer method. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to partially offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. As of June 30, 2024, hedged municipal securities with a carrying amount of $358.0 million are included in our AFS securities portfolio in our consolidated balance sheets representing approximately 25% and 78% of the AFS securities portfolio and the AFS municipal portfolio, respectively. As of June 30, 2024, $201.0 million in hedging instruments were used to hedge a layer of the closed portfolio of AFS MBS, and $155.0 million in hedging instruments were used to hedge a layer of the closed portfolio of municipal loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for us making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.

With respect to funding sources, we primarily utilize deposits and to a lesser extent wholesale funding to achieve our strategy of minimizing cost while achieving overall interest rate risk objectives as well as the liability management objectives of the ALCO. Our primary wholesale funding sources are brokered deposits, FHLB and borrowings from the Federal Reserve through the FRDW and BTFP. Our FHLB borrowings increased 164.4%, or $349.6 million, to $562.3 million at June 30, 2024 from $212.6 million at December 31, 2023.

As of June 30, 2024, our total wholesale funding as a percentage of deposits, not including brokered deposits, decreased to 23.3% from 25.5% at December 31, 2023 and 25.2% at June 30, 2023.

Our brokered deposits may consist of CDs and non-maturity deposits. We had $23.5 million in brokered CDs at June 30, 2024. We had no brokered CDs at December 31, 2023. At June 30, 2024, our brokered CDs had a weighted average cost of 532 basis points and remaining maturities of approximately less than 10 months. Our brokered non-maturity deposits decreased to $658.2 million at June 30, 2024, of which $630.0 million are related to our cash flow hedges, from $828.0 million at December 31, 2023, with a weighted average cost of 321 and 323 basis points, respectively. Our wholesale funding policy currently allows for maximum brokered deposits of the lesser of $1.05 billion, or 12% of total deposits. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.

In connection with $940.0 million of our wholesale funds, the Bank has entered into various variable rate agreements and fixed or variable rate short-term pay agreements with an interest rate tied to overnight SOFR. In connection with $940.0 million and $1.01 billion of the agreements outstanding at June 30, 2024 and December 31, 2023, respectively, the Bank also entered into various interest rate swap contracts that are treated as cash flow hedges under ASC Topic 815, “Derivatives and Hedging” that are expected to be effective in hedging the variability in future cash flows at 3.08% with a remaining average weighted maturity of 2.1 years at June 30, 2024. Refer to “Note 11 – Derivative Financial Instruments and Hedging Activities” in our consolidated financial statements included in this report for a detailed description of our hedging policy and methodology related to derivative instruments.

#### Results of Operations

Our results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on assets (loans and investments) and interest expense due on our funding sources (deposits and borrowings) during a particular period. Results of operations are also affected by our noninterest income, provision for credit losses, noninterest expenses and income tax expense. General economic and competitive conditions, particularly changes in interest rates, changes in interest rate yield curves, prepayment rates of MBS and loans, repricing of loan relationships, government policies and actions of regulatory authorities also significantly affect our results of operations. Future changes in applicable law, regulations or government policies may also have a material impact on us.

The following table presents net interest income for the periods presented (in thousands):

| Interest income: | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Loans | $69,684 | $58,684 | $137,895 | $113,460 |
| Taxable investment securities | 7,009 | 8,773 | 13,976 | 14,485 |
| Tax-exempt investment securities | 10,710 | 13,720 | 21,798 | 27,636 |
| MBS | 11,084 | 3,830 | 21,203 | 8,159 |
| FHLB stock and equity investments | 573 | 379 | 906 | 624 |
| Other interest earning assets | 5,126 | 1,490 | 11,166 | 3,360 |
| Total interest income | 104,186 | 86,876 | 206,944 | 167,724 |
| Interest expense: |  |  |  |  |
| Deposits | 38,466 | 21,679 | 76,664 | 41,585 |
| FHLB borrowings | 6,455 | 1,032 | 12,405 | 4,173 |
| Subordinated notes | 936 | 994 | 1,892 | 1,993 |
| Trust preferred subordinated debentures | 1,171 | 1,100 | 2,346 | 2,131 |
| Repurchase agreements | 955 | 883 | 1,922 | 1,375 |
| Other borrowings | 2,595 | 7,272 | 4,759 | 9,198 |
| Total interest expense | 50,578 | 32,960 | 99,988 | 60,455 |
| Net interest income | $53,608 | $53,916 | $106,956 | $107,269 |

#### Net Interest Income

Net interest income is one of the principal sources of a financial institution’s earnings stream and represents the difference or spread between interest and fee income generated from interest earning assets and the interest expense paid on interest bearing liabilities. Fluctuations in interest rates or interest rate yield curves, as well as repricing characteristics and volume and changes in the mix of interest earning assets and interest bearing liabilities, materially impact net interest income. During the year ended December 31, 2023, the Federal Reserve increased the target federal funds rate by 100 basis points to 5.25% to 5.50%. During the six months ended June 30, 2024, the Federal Reserve held the rate steady but has indicated it may cut interest rates in 2024. The increase in the federal funds rate has resulted in a slight decrease in our net interest income. If the federal funds rate remains elevated or increases further and the yield curve remains inverted, it may continue to negatively impact our net interest income.

Net interest income for the three months ended June 30, 2024, declined slightly when compared to the same period in 2023. The decrease in net interest income for the three months ended June 30, 2024, was largely due to increases in the average rate paid on our interest bearing liabilities and average balance of our interest bearing liabilities, partially offset by the increase in the average balance of interest earning assets and average yield of interest earning assets. Total interest income increased $17.3 million, or 19.9%, to $104.2 million for the three months ended June 30, 2024, compared to $86.9 million during the same period in 2023. Total interest expense increased $17.6 million, or 53.5%, to $50.6 million for the three months ended June 30, 2024, compared to $33.0 million for the same period in 2023. Our net interest margin and net interest margin (FTE), a non-GAAP measure, decreased to 2.74% and 2.87%, respectively, for the three months ended June 30, 2024, compared to 2.99% and 3.17%, respectively, for the same period in 2023, and our net interest spread and net interest spread (FTE), also a non-GAAP measure, decreased to 2.00% and 2.13%, respectively, compared to 2.37% and 2.55%, respectively, for the same period in 2023. See “Non-GAAP Financial Measures” for more information and a reconciliation to GAAP.

Net interest income was $107.0 million for the six months ended June 30, 2024, compared to $107.3 million for the same period in 2023, a decrease of $0.3 million, or 0.3%. The decrease in net interest income for the six months ended June 30, 2024 was due to increases in the average rate paid on our interest bearing liabilities and average balance of our interest bearing liabilities, partially offset by the increase in the average balance of interest earning assets and average yield of interest earning assets. Total interest income increased $39.2 million, or 23.4%, to $206.9 million for the six months ended June 30, 2024, compared to $167.7 million for the same period in 2023. Total interest expense increased $39.5 million, or 65.4%, to $100.0 million for the six months ended June 30, 2024, compared to $60.5 million for the same period in 2023. Our net interest margin and net interest margin (FTE), a non-GAAP measure, decreased to 2.73% and 2.87%, respectively, for the six months ended June 30, 2024, compared to 3.01% and 3.19%, respectively, for the same period in 2023, and our net interest spread and net interest spread (FTE), also a non-GAAP measure, decreased to 2.01% and 2.15%, respectively, compared to 2.40% and 2.58%, respectively, for the same period in 2023. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.

#### Quarterly Analysis of Changes in Interest Income and Interest Expense

The following table presents on a fully taxable-equivalent basis, a non-GAAP measure, the net change in net interest income and sets forth the dollar amount of increase (decrease) in the average volume of interest earning assets and interest bearing liabilities and from changes in yields/rates. Volume/Yield/Rate variances (change in volume times change in yield/rate) have been allocated to amounts attributable to changes in volumes and to changes in yields/rates in proportion to the amounts directly attributable to those changes (in thousands). The comparison between the quarters includes an additional change factor that shows the effect of the difference in the number of days in each period for assets and liabilities that accrue interest based upon the actual number of days in the period.

| Fully Taxable-Equivalent Basis: Interest income on: | Three Months Ended June 30, 2024 Compared to 2023 Change Attributable to Average Volume | Average Yield/Rate | Number of Days | Total Change |
| --- | ---: | ---: | ---: | ---: |
| Loans (1) | $5,886 | $5,073 | $— | $10,959 |
| Loans held for sale | (3) | 4 | — | 1 |
| Taxable investment securities | (1,287) | (477) | — | (1,764) |
| Tax-exempt investment securities (1) | (3,140) | (281) | — | (3,421) |
| Mortgage-backed and related securities | 5,283 | 1,971 | — | 7,254 |
| FHLB stock, at cost, and equity investments | 281 | (87) | — | 194 |
| Interest earning deposits | 3,329 | 34 | — | 3,363 |
| Federal funds sold | 217 | 56 | — | 273 |
| Total earning assets | 10,566 | 6,293 | — | 16,859 |
| Interest expense on: |  |  |  |  |
| Savings accounts | (100) | 124 | — | 24 |
| CDs | 2,071 | 3,194 | — | 5,265 |
| Interest bearing demand accounts | 3,798 | 7,700 | — | 11,498 |
| FHLB borrowings | 3,328 | 2,095 | — | 5,423 |
| Subordinated notes, net of unamortized debt issuance costs | (59) | 1 | — | (58) |
| Trust preferred subordinated debentures, net of unamortized debt issuance costs | — | 71 | — | 71 |
| Repurchase agreements | (95) | 167 | — | 72 |
| Other borrowings | (7,476) | 2,799 | — | (4,677) |
| Total interest bearing liabilities | 1,467 | 16,151 | — | 17,618 |
| Net change | $9,099 | $(9,858) | $— | $(759) |

(1) Interest yields on loans and securities that are nontaxable for federal income tax purposes are presented on a fully taxable-equivalent basis. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.

The increase in total interest income for the three months ended June 30, 2024, was attributable to a $656.8 million, or 9.1%, increase in the average balance of interest earning assets for the three months ended June 30, 2024, compared to the same period in 2023, as well as an increase in the average yield on interest earning assets to 5.45% from 5.00% for the same period in 2023. The increase in total interest expense for the three months ended June 30, 2024, was primarily attributable to the increase in interest rates on our interest bearing liabilities to 3.32% from 2.45% for the same period in 2023, and an increase in the average balance of our interest bearing liabilities of $741.1 million, or 13.8%, for the three months ended June 30, 2024, compared to the same period in 2023. The increase in average earning assets was primarily the result of the increase in loans, MBS and interest earning deposits, partially offset by the decrease in tax-exempt and taxable investment securities.

The “Average Balances with Average Yields and Rates” table that follows shows average earning assets and interest bearing liabilities together with the average yield on the earning assets and the average rate of the interest bearing liabilities (dollars in thousands) for the three months ended June 30, 2024 and 2023. The interest and related yields presented are on a fully taxable-equivalent basis and are therefore non-GAAP measures. See “Non-GAAP Financial Measures” for more information, and for a reconciliation to GAAP.

*(unaudited)*

| ASSETS | Average Balances with Average Yields and Rates (Annualized) Three Months Ended June 30, 2024 Average Balance | Interest | Average Yield/Rate | June 30, 2023 Average Balance | Interest | Average Yield/Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans (1) | $4,595,980 | $70,293 | 6.15% | $4,197,130 | $59,334 | 5.67% |
| Loans held for sale | 1,489 | 24 | 6.48% | 1,664 | 23 | 5.54% |
| Securities: |  |  |  |  |  |  |
| Taxable investment securities (2) | 783,856 | 7,009 | 3.60% | 925,445 | 8,773 | 3.80% |
| Tax-exempt investment securities (2) | 1,254,097 | 12,761 | 4.09% | 1,562,232 | 16,182 | 4.15% |
| Mortgage-backed and related securities (2) | 830,504 | 11,084 | 5.37% | 401,427 | 3,830 | 3.83% |
| Total securities | 2,868,457 | 30,854 | 4.33% | 2,889,104 | 28,785 | 4.00% |
| FHLB stock, at cost, and equity investments | 40,467 | 573 | 5.69% | 21,480 | 379 | 7.08% |
| Interest earning deposits | 300,047 | 4,105 | 5.50% | 56,604 | 742 | 5.26% |
| Federal funds sold | 75,479 | 1,021 | 5.44% | 59,186 | 748 | 5.07% |
| Total earning assets | 7,881,919 | 106,870 | 5.45% | 7,225,168 | 90,011 | 5.00% |
| Cash and due from banks | 110,102 |  |  | 103,559 |  |  |
| Accrued interest and other assets | 424,323 |  |  | 419,420 |  |  |
| Less: Allowance for loan losses | (43,738) |  |  | (36,512) |  |  |
| Total assets | $8,372,606 |  |  | $7,711,635 |  |  |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |
| Savings accounts | $604,753 | 1,454 | 0.97% | $648,560 | 1,430 | 0.88% |
| CDs | 1,020,099 | 11,630 | 4.59% | 797,992 | 6,365 | 3.20% |
| Interest bearing demand accounts | 3,513,068 | 25,382 | 2.91% | 2,841,818 | 13,884 | 1.96% |
| Total interest bearing deposits | 5,137,920 | 38,466 | 3.01% | 4,288,370 | 21,679 | 2.03% |
| FHLB borrowings | 606,851 | 6,455 | 4.28% | 211,309 | 1,032 | 1.96% |
| Subordinated notes, net of unamortized debt issuance costs | 92,017 | 936 | 4.09% | 97,804 | 994 | 4.08% |
| Trust preferred subordinated debentures, net of unamortized debt issuance costs | 60,271 | 1,171 | 7.81% | 60,266 | 1,100 | 7.32% |
| Repurchase agreements | 88,007 | 955 | 4.36% | 97,915 | 883 | 3.62% |
| Other borrowings | 143,169 | 2,595 | 7.29% | 631,447 | 7,272 | 4.62% |
| Total interest bearing liabilities | 6,128,235 | 50,578 | 3.32% | 5,387,111 | 32,960 | 2.45% |
| Noninterest bearing deposits | 1,346,274 |  |  | 1,490,445 |  |  |
| Accrued expenses and other liabilities | 101,399 |  |  | 84,252 |  |  |
| Total liabilities | 7,575,908 |  |  | 6,961,808 |  |  |
| Shareholders’ equity | 796,698 |  |  | 749,827 |  |  |
| Total liabilities and shareholders’ equity | $8,372,606 |  |  | $7,711,635 |  |  |
| Net interest income (FTE) |  | $56,292 |  |  | $57,051 |  |
| Net interest margin (FTE) |  |  | 2.87% |  |  | 3.17% |
| Net interest spread (FTE) |  |  | 2.13% |  |  | 2.55% |

(1) Interest on loans includes net fees on loans that are not material in amount.

(2) For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.

*Note: As of June 30, 2024 and 2023, loans totaling $6.1 million and $3.0 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.*

#### Year-to-date Analysis of Changes in Interest Income and Interest Expense

The following table presents on a fully taxable-equivalent basis, a non-GAAP measure, the net change in net interest income and sets forth the dollar amount of increase (decrease) in the average volume of interest earning assets and interest bearing liabilities and from changes in yields/rates. Volume/Yield/Rate variances (change in volume times change in yield/rate) have been allocated to amounts attributable to changes in volumes and to changes in yields/rates in proportion to the amounts directly attributable to those changes (in thousands). The comparison between the years includes an additional change factor that shows the effect of the difference in the number of days in each period for assets and liabilities that accrue interest based upon the actual number of days in the period.

| Fully Taxable-Equivalent Basis: Interest income on: | Six Months Ended June 30, 2024 Compared to 2023 Change Attributable to Average Volume | Average Yield/Rate | Number of Days | Total Change |
| --- | ---: | ---: | ---: | ---: |
| Loans (1) | $11,993 | $11,598 | $764 | $24,355 |
| Loans held for sale | 44 | (45) | — | (1) |
| Taxable investment securities | (475) | (111) | 77 | (509) |
| Tax-exempt investment securities (1) | (7,246) | 384 | 143 | (6,719) |
| Mortgage-backed and related securities | 8,911 | 4,017 | 116 | 13,044 |
| Federal Home Loan Bank stock, at cost, and equity investments | 311 | (34) | 5 | 282 |
| Interest earning deposits | 7,272 | 209 | 51 | 7,532 |
| Federal funds sold | 79 | 185 | 10 | 274 |
| Total earning assets | 20,889 | 16,203 | 1,166 | 38,258 |
| Interest expense on: |  |  |  |  |
| Savings accounts | (230) | 349 | 16 | 135 |
| CDs | 3,241 | 6,837 | 121 | 10,199 |
| Interest bearing demand accounts | 7,143 | 17,317 | 285 | 24,745 |
| FHLB borrowings | 5,411 | 2,753 | 68 | 8,232 |
| Subordinated notes, net of unamortized debt issuance costs | (107) | (4) | 10 | (101) |
| Trust preferred subordinated debentures, net of unamortized debt issuance costs | — | 202 | 13 | 215 |
| Repurchase agreements | 150 | 386 | 11 | 547 |
| Other borrowings | (7,320) | 2,855 | 26 | (4,439) |
| Total interest bearing liabilities | 8,288 | 30,695 | 550 | 39,533 |
| Net change | $12,601 | $(14,492) | $616 | $(1,275) |

(1) Interest yields on loans and securities that are nontaxable for federal income tax purposes are presented on a fully taxable-equivalent basis. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.

The increase in total interest income was attributable to the increase in average earning assets of $688.5 million, or 9.6%, for the six months ended June 30, 2024, compared to the same period in 2023, as well as the increase in the average yield on earning assets to 5.42% from 4.88% for the same period in 2023. The increase in total interest expense for the six months ended June 30, 2024 was primarily attributable to the increase in interest rates on our interest bearing liabilities to 3.27% from 2.30% for the same period in 2023 and an increase in the average balance of our interest bearing liabilities of $854.9 million, or 16.1%, when compared to the same period in 2023. The increase in average earning assets was primarily the result of the increase in loans, MBS and interest earning deposits, partially offset by the decrease in tax-exempt investment securities.

The “Average Balances with Average Yields and Rates” table that follows shows average earning assets and interest bearing liabilities together with the average yield on the earning assets and the average rate of the interest bearing liabilities (dollars in thousands) for the six months ended June 30, 2024 and 2023. The interest and related yields presented are on a fully taxable-equivalent basis and are therefore non-GAAP measures. See “Non-GAAP Financial Measures” for more information, and for a reconciliation to GAAP.

*(unaudited)*

| ASSETS | Average Balances with Average Yields and Rates (Annualized) Six Months Ended June 30, 2024 Average Balance | Interest | Average Yield/Rate | June 30, 2023 Average Balance | Interest | Average Yield/Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans (1) | $4,577,791 | $139,142 | 6.11% | $4,163,141 | $114,787 | 5.56% |
| Loans held for sale | 5,162 | 42 | 1.64% | 1,663 | 43 | 5.21% |
| Securities: |  |  |  |  |  |  |
| Taxable investment securities (2) | 782,139 | 13,976 | 3.59% | 808,803 | 14,485 | 3.61% |
| Tax-exempt investment securities (2) | 1,270,010 | 25,929 | 4.11% | 1,627,105 | 32,648 | 4.05% |
| Mortgage-backed and related securities (2) | 797,608 | 21,203 | 5.35% | 428,469 | 8,159 | 3.84% |
| Total securities | 2,849,757 | 61,108 | 4.31% | 2,864,377 | 55,292 | 3.89% |
| FHLB stock, at cost, and equity investments | 40,265 | 906 | 4.52% | 26,448 | 624 | 4.76% |
| Interest earning deposits | 340,114 | 9,307 | 5.50% | 72,177 | 1,775 | 4.96% |
| Federal funds sold | 69,039 | 1,859 | 5.41% | 65,871 | 1,585 | 4.85% |
| Total earning assets | 7,882,128 | 212,364 | 5.42% | 7,193,677 | 174,106 | 4.88% |
| Cash and due from banks | 112,241 |  |  | 105,650 |  |  |
| Accrued interest and other assets | 432,904 |  |  | 408,908 |  |  |
| Less: Allowance for loan losses | (43,356) |  |  | (36,601) |  |  |
| Total assets | $8,383,917 |  |  | $7,671,634 |  |  |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |
| Savings accounts | $604,641 | 2,878 | 0.96% | $657,192 | 2,743 | 0.84% |
| CDs | 981,023 | 21,971 | 4.50% | 792,967 | 11,772 | 2.99% |
| Interest bearing demand accounts | 3,574,001 | 51,815 | 2.92% | 2,912,127 | 27,070 | 1.87% |
| Total interest bearing deposits | 5,159,665 | 76,664 | 2.99% | 4,362,286 | 41,585 | 1.92% |
| FHLB borrowings | 606,942 | 12,405 | 4.11% | 307,221 | 4,173 | 2.74% |
| Subordinated notes, net of unamortized debt issuance costs | 92,956 | 1,892 | 4.09% | 98,246 | 1,993 | 4.09% |
| Trust preferred subordinated debentures, net of unamortized debt issuance costs | 60,271 | 2,346 | 7.83% | 60,266 | 2,131 | 7.13% |
| Repurchase agreements | 90,092 | 1,922 | 4.29% | 81,765 | 1,375 | 3.39% |
| Other borrowings | 140,228 | 4,759 | 6.82% | 385,440 | 9,198 | 4.81% |
| Total interest bearing liabilities | 6,150,154 | 99,988 | 3.27% | 5,295,224 | 60,455 | 2.30% |
| Noninterest bearing deposits | 1,342,329 |  |  | 1,539,313 |  |  |
| Accrued expenses and other liabilities | 100,558 |  |  | 82,833 |  |  |
| Total liabilities | 7,593,041 |  |  | 6,917,370 |  |  |
| Shareholders’ equity | 790,876 |  |  | 754,264 |  |  |
| Total liabilities and shareholders’ equity | $8,383,917 |  |  | $7,671,634 |  |  |
| Net interest income (FTE) |  | $112,376 |  |  | $113,651 |  |
| Net interest margin (FTE) |  |  | 2.87% |  |  | 3.19% |
| Net interest spread (FTE) |  |  | 2.15% |  |  | 2.58% |

(1) Interest on loans includes net fees on loans that are not material in amount.

(2) For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.

*Note: As of June 30, 2024 and 2023, loans totaling $6.1 million and $3.0 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.*

#### Noninterest Income

Noninterest income consists of revenue generated from a broad range of financial services and activities and other fee-generating services that we either provide or in which we participate.

The following table details the categories included in noninterest income (dollars in thousands):

|  | Three Months Ended June 30, 2024 | Change From 2023 | 2024 2023 |  |
| --- | ---: | ---: | ---: | ---: |
| Deposit services | $6,157 | $6,291 | $(134) | (2.1)% |
| Net gain (loss) on sale of securities AFS | (563) | (3,455) | 2,892 | 83.7% |
| Net gain on sale of equity securities | — | 2,642 | (2,642) | (100.0)% |
| Gain (loss) on sale of loans | 220 | 185 | 35 | 18.9% |
| Trust fees | 1,456 | 1,490 | (34) | (2.3)% |
| BOLI | 1,767 | 756 | 1,011 | 133.7% |
| Brokerage services | 1,081 | 904 | 177 | 19.6% |
| Other noninterest income | 1,439 | 1,651 | (212) | (12.8)% |
| Total noninterest income | $11,557 | $10,464 | $1,093 | 10.4% |

|  | Six Months Ended June 30, 2024 | Change From 2023 | 2024 2023 |  |
| --- | ---: | ---: | ---: | ---: |
| Deposit services | $12,142 | $12,713 | $(571) | (4.5)% |
| Net gain (loss) on sale of securities AFS | (581) | (5,601) | 5,020 | 89.6% |
| Net gain on sale of equity securities | — | 5,058 | (5,058) | (100.0)% |
| Gain (loss) on sale of loans | (216) | 289 | (505) | (174.7)% |
| Trust fees | 2,792 | 2,957 | (165) | (5.6)% |
| BOLI | 2,551 | 2,431 | 120 | 4.9% |
| Brokerage services | 2,095 | 1,601 | 494 | 30.9% |
| Other noninterest income | 2,498 | 3,049 | (551) | (18.1)% |
| Total noninterest income | $21,281 | $22,497 | $(1,216) | (5.4)% |

The 10.4% increase in noninterest income for the three months ended June 30, 2024, when compared to the same period in 2023, was primarily due to a decrease in net loss on sale of securities AFS and an increase in BOLI income, partially offset by a $2.6 million net gain on sale of equity securities during the three months ended June 30, 2023. The decrease in noninterest income for the six months ended June 30, 2024, when compared to the same period in 2023, was due to decreases in the net gain on sale of equity securities, deposit services income, other noninterest income and loss on sale of loans. These decreases were partially offset by a decrease in net loss on sale of securities AFS and an increase in brokerage services income.

During the three and six months ended June 30, 2024, we sold municipal securities that resulted in a net loss on sale of AFS securities of $563,000 and $581,000, respectively.

During the three and six months ended June 30, 2023, we sold equity securities that resulted in a net gain of $2.6 million and $5.1 million, respectively.

The gain on sale of loans for the three months ended June 30, 2024 and the loss on sale of loans for the six months ended June 30, 2024, was primarily due to a $100,000 recovery in the second quarter of 2024 related to the $512,000 loss on the sale of a commercial real estate loan relationship during the first quarter of 2024.

The increase in BOLI income for the three months ended June 30, 2024, when compared to the same period in 2023, was primarily due to a death benefit of $962,000 realized in the second quarter of 2024 for a former covered officer.

Brokerage services income increased for the three and six months ended June 30, 2024, when compared to the same periods in 2023, due to an increase in assets under management.

Other noninterest income decreased for the three months ended June 30, 2024, when compared to the same period in 2023, primarily due to a decrease in gain recognized on the repurchase of our subordinated notes at a discount, partially offset by increases in mortgage derivative income, equity investment income and swap fee income. Other noninterest income decreased for the six months ended June 30, 2024, when compared to the same period in 2023, due to a decrease in gain recognized on the repurchase of our subordinated notes at a discount and decreases in swap fee income, other recoveries and equity investment income, partially offset by an increase in mortgage derivative income.

#### Noninterest Expense

We incur certain types of noninterest expenses associated with the operation of our various business activities. The following table details the categories included in noninterest expense (dollars in thousands):

|  | Three Months Ended June 30, 2024 | Change From 2023 | 2024 2023 |  |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $21,984 | $21,376 | $608 | 2.8% |
| Net occupancy | 3,750 | 3,690 | 60 | 1.6% |
| Advertising, travel & entertainment | 795 | 854 | (59) | (6.9)% |
| ATM expense | 368 | 320 | 48 | 15.0% |
| Professional fees | 1,075 | 1,192 | (117) | (9.8)% |
| Software and data processing | 2,860 | 2,264 | 596 | 26.3% |
| Communications | 410 | 348 | 62 | 17.8% |
| FDIC insurance | 977 | 1,220 | (243) | (19.9)% |
| Amortization of intangibles | 307 | 442 | (135) | (30.5)% |
| Other noninterest expense | 3,239 | 3,287 | (48) | (1.5)% |
| Total noninterest expense | $35,765 | $34,993 | $772 | 2.2% |

|  | Six Months Ended June 30, 2024 | Change From 2023 | 2024 2023 |  |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $45,097 | $43,232 | $1,865 | 4.3% |
| Net occupancy | 7,112 | 7,424 | (312) | (4.2)% |
| Advertising, travel & entertainment | 1,745 | 1,904 | (159) | (8.4)% |
| ATM expense | 693 | 675 | 18 | 2.7% |
| Professional fees | 2,229 | 2,564 | (335) | (13.1)% |
| Software and data processing | 5,716 | 4,319 | 1,397 | 32.3% |
| Communications | 859 | 675 | 184 | 27.3% |
| FDIC insurance | 1,920 | 1,764 | 156 | 8.8% |
| Amortization of intangibles | 644 | 920 | (276) | (30.0)% |
| Other noninterest expense | 6,631 | 6,365 | 266 | 4.2% |
| Total noninterest expense | $72,646 | $69,842 | $2,804 | 4.0% |

The increase in noninterest expense for the three months ended June 30, 2024, when compared to the same period in 2023, was due to increases in salaries and employee benefits and software and data processing expense, partially offset by decreases in FDIC insurance, amortization of intangibles and professional fees. The increase in noninterest expense for the six months ended June 30, 2024, when compared to the same period in 2023, was due to increases in salaries and employee benefits and software and data processing expense, partially offset by decreases in professional fees and net occupancy expense.

Salaries and employee benefits expense increased during the three months ended June 30, 2024, compared to the same period in 2023, due to increases in direct salary expense, retirement expense and health insurance expense. Salaries and employee benefits expense increased during the six months ended June 30, 2024, compared to the same period in 2023, due to increases in direct salary expense and retirement expense, partially offset by a decrease in health insurance expense.

For the three and six months ended June 30, 2024, direct salary expense increased $357,000, or 1.9%, and $1.6 million, or 4.3%, respectively, when compared to the same periods in 2023, primarily due to normal salary increases effective in the first quarter of 2024 and approximately $618,000 associated with future cost reductions.

Retirement expense, included in salaries and employee benefits, increased $127,000, or 15.6%, and $301,000, or 19.8%, for the three and six months ended June 30, 2024, respectively, when compared to the same periods in 2023. This increase was due to increases in our deferred compensation expense, 401(k) matching expense, split dollar expense and post-retirement benefits expense.

Health and life insurance expense, included in salaries and employee benefits, increased $123,000, or 6.0%, for the three months ended June 30, 2024, compared to the same period in 2023, primarily due to an increase in health claims expense. Health and life insurance expense decreased $43,000, or 1.0%, for the six months ended June 30, 2024 compared to the same period in 2023, due to decreases in health plan administration cost and health claims expense. We have a self-insured health plan which is supplemented with a stop loss policy.

Net occupancy expense decreased for the six months ended June 30, 2024, when compared to the same period in 2023, due to decreases in repairs and depreciation expense.

ATM expense increased for the three months ended June 30, 2024, when compared to the same period in 2023, due primarily to an increase in ATM maintenance expense.

Professional fees decreased for the three and six months ended June 30, 2024, when compared to the same periods in 2023, due to a decrease in consulting and legal fees.

Software and data processing expense increased for the three and six months ended June 30, 2024, when compared to the same periods in 2023, due to new software contracts and increases in existing contract renewal costs.

Communications expense increased for the three and six months ended June 30, 2024, when compared to the same periods in 2023, driven by initial costs related to a project to improve network management efficiency.

FDIC insurance decreased for the three months ended June 30, 2024, when compared to the same period in 2023, due to an increase in the rate assessed by the FDIC in 2023 that we adjusted for during the second quarter of 2023.

Amortization of intangibles decreased for the three and six months ended June 30, 2024, when compared to the same periods in 2023, due primarily to a decrease in core deposit intangible amortization which is recognized on an accelerated method resulting in a decline in expense over the amortization period.

#### Income Taxes

Pre-tax income for the three and six months ended June 30, 2024 was $29.9 million and $56.0 million, respectively, an increase of 1.4%, compared to $29.5 million for the three months ended June 30, 2023 and a decrease of 6.7% compared to $60.0 million for the six months ended June 30, 2023. We recorded income tax expense of $5.2 million and $9.8 million for the three and six months ended June 30, 2024, respectively, compared to income tax expense of $4.6 million and $9.1 million for the same periods in 2023. The ETR as a percentage of pre-tax income was 17.4% and 17.6% for the three and six months ended June 30, 2024, compared to an ETR as a percentage of pre-tax income of 15.5% and 15.2% for the same periods in 2023. The increase in the ETR for the three and six months ended June 30, 2024 was primarily a result of a decrease in net tax-exempt income as a percentage of pre-tax income as compared to the same periods in 2023. The increase in income tax expense is due to the higher ETR for the three and six months ended June 30, 2024 compared to the same periods in 2023.

The ETR differs from the statutory rate of 21% primarily due to the effect of tax-exempt income from municipal loans and securities, as well as BOLI. The net deferred tax asset totaled $29.7 million at June 30, 2024, compared to $30.4 million at December 31, 2023. The slight decrease in the net deferred tax asset is primarily the result of an increase in the estimated fair value of the hedging derivatives.

See “Note 11 – Income Taxes” to our consolidated financial statements included in this report. No valuation allowance was recorded at June 30, 2024 or December 31, 2023, as management believes it is more likely than not that all of the deferred tax asset items will be realized in future years.

#### Composition of Loans

One of our main objectives is to seek attractive lending opportunities in Texas, primarily in the market areas in which we operate. Refer to “Part I – Item 1. Business – Market Area” in the 2023 Form 10-K for a discussion of our primary market area and the geographic concentration of our loan portfolio as of December 31, 2023. There were no substantial changes in these concentrations during the six months ended June 30, 2024. The majority of our loan originations are made to borrowers who live in and/or conduct business in the market areas of Texas in which we operate or adjoin, with the exception of municipal loans, which are made primarily throughout the state of Texas. Municipal loans are made to municipalities, counties, school districts and colleges.

The following table sets forth loan totals by class as of the dates presented (dollars in thousands):

| Real estate loans: | June 30, 2024 | December 31, 2023 | June 30, 2023 | Compared to December 31, 2023 Change (%) | June 30, 2023 Change (%) |
| --- | ---: | ---: | ---: | ---: | ---: |
| Construction | $546,040 | $789,744 | $657,354 | (30.9)% | (16.9)% |
| 1-4 family residential | 738,037 | 696,738 | 684,878 | 5.9% | 7.8% |
| Commercial | 2,472,771 | 2,168,451 | 2,100,338 | 14.0% | 17.7% |
| Commercial loans | 359,807 | 366,893 | 383,724 | (1.9)% | (6.2)% |
| Municipal loans | 416,986 | 441,168 | 435,211 | (5.5)% | (4.2)% |
| Loans to individuals | 55,724 | 61,516 | 67,538 | (9.4)% | (17.5)% |
| Total loans | $4,589,365 | $4,524,510 | $4,329,043 | 1.4% | 6.0% |

Our total loan portfolio increased $64.9 million, or 1.4%, and $260.3 million, or 6.0%, at June 30, 2024 compared to December 31, 2023 and June 30, 2023, respectively, with net increases in commercial real estate and 1-4 family loans, partially offset by decreases in construction, commercial loans, municipal loans and loans to individuals.

At June 30, 2024, our real estate loans represented 81.9% of our loan portfolio and were comprised of commercial real estate loans of 65.8%, 1-4 family residential loans of 19.7% and construction loans of 14.5%. Commercial real estate loans primarily include loans collateralized by retail, commercial office buildings, multi-family residential buildings, medical facilities and offices, senior living, assisted living and skilled nursing facilities, warehouse facilities, hotels and churches. Our 1-4 family residential loans consist primarily of loans secured by first mortgages on owner occupied 1-4 family residences. Our construction loans are collateralized by property located primarily in or near the market areas we serve. A number of our construction loans will be owner occupied upon completion. Construction loans for non-owner occupied projects are financed, but these typically have cash flows from leases with tenants, secondary sources of repayment, and in some cases, additional collateral.

#### Nonperforming Assets

Nonperforming assets consist of delinquent loans 90 days or more past due, nonaccrual loans, OREO, repossessed assets and restructured loans. Nonaccrual loans are loans 90 days or more delinquent and collection in full of both the principal and interest is not expected. Additionally, some loans that are not delinquent or that are delinquent less than 90 days may be placed on nonaccrual status if it is probable that we will not receive contractual principal and interest payments in accordance with the terms of the respective loan agreements. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any accrued balance is reversed for financial statement purposes. OREO represents real estate taken in full or partial satisfaction of debts previously contracted. The dollar amount of OREO is based on a current evaluation of the OREO at the time it is recorded on our books, net of estimated selling costs. Updated valuations are obtained as needed and any additional impairments are recognized. We actively market all OREO properties and do not hold them for investment purposes. Restructured loans represent loans that have been modified due to the borrower experiencing financial difficulty to provide interest rate reductions or below market interest rates, restructuring amortization schedules and other actions intended to minimize potential losses. Categorization of a loan as nonperforming is not in itself a reliable indicator of potential loan loss. Other factors, such as the value of collateral securing the loan and the financial condition of the borrower are considered in judgments as to potential loan loss.

The following table sets forth nonperforming assets for the periods presented (dollars in thousands):

|  | June 30, 2024 | December 31, 2023 | June 30, 2023 | Compared to December 31, 2023 Change (%) | June 30, 2023 Change (%) |
| --- | ---: | ---: | ---: | ---: | ---: |
| Nonaccrual loans | $6,110 | $3,889 | $3,017 | 57.1% | 102.5% |
| Accruing loans past due more than 90 days | — | — | — | — | — |
| Restructured loans (1) | 145 | 13 | — | 1,015.4% | 100.0% |
| OREO | 648 | 99 | — | 554.5% | 100.0% |
| Repossessed assets | 15 | — | 42 | 100.0% | (64.3)% |
| Total nonperforming assets | $6,918 | $4,001 | $3,059 | 72.9% | 126.2% |
| Total loans | $4,589,365 | $4,524,510 | $4,329,043 |  |  |
| Allowance for loan losses at end of period | 42,407 | 42,674 | 36,303 |  |  |

| Ratio of nonaccruing loans to: |  |  |  |
| --- | ---: | ---: | ---: |
| Total loans | 0.13% | 0.09% | 0.07% |
| Ratio of nonperforming assets to: |  |  |  |
| Total assets | 0.08% | 0.05% | 0.04% |
| Total loans | 0.15% | 0.09% | 0.07% |
| Total loans and OREO | 0.15% | 0.09% | 0.07% |
| Ratio of allowance for loan losses to: |  |  |  |
| Nonaccruing loans | 694.06% | 1,097.30% | 1,203.28% |
| Nonperforming assets | 613.00% | 1,066.58% | 1,186.76% |
| Total loans | 0.92% | 0.94% | 0.84% |
| Net charge-offs to average loans outstanding | 0.02% | 0.06% | 0.03% |

#### Allowance for Credit Losses – Loans

In accordance with ASC 326, the allowance for credit losses on loans is estimated and recognized upon origination of the loan based on expected credit losses. The CECL model uses historical experience and current conditions for homogeneous pools of loans, and reasonable and supportable forecasts about future events. The impact of varying economic conditions and portfolio stress factors are a component of the credit loss models applied to each portfolio. Reserve factors are specific to the loan segments that share similar risk characteristics based on the probability of default assumptions and loss given default assumptions, over the contractual term. The forecasted periods gradually mean-revert the economic inputs to their long-run historical trends. Management evaluates the economic data points used in the Moody’s forecasting scenarios on a quarterly basis to determine the most appropriate impact to the various portfolio characteristics based on management’s view and applies weighting to various forecasting scenarios as deemed appropriate based on known and expected economic activities. Management also considers and may apply relevant qualitative factors, not previously considered, to determine the appropriate allowance level. The use of the CECL model includes significant judgment by management and may differ from those of our peers due to different historical loss patterns, economic forecasts, and the length of time of the reasonable and supportable forecast period and reversion period.

We utilize Moody’s Analytics economic forecast scenarios and assign probability weighting to those scenarios which best reflect management’s views on the economic forecast. The probability weighting and scenarios utilized for the estimate of the allowance were generally reflective of continued economic and repricing uncertainty forecasted in our CECL model as of June 30, 2024.

When determining the appropriate allowance for credit losses on our loan portfolio, our commercial construction and real estate loans, commercial loans and municipal loans utilize the probability of default/loss given default discounted cash flow approach. Reserves on these loans are based upon risk factors including the loan type and structure, collateral type, leverage ratio, refinancing risk and origination quality, among others. Our consumer construction real estate loans, 1-4 family residential loans and our loans to individuals use a loss rate based upon risk factors including loan types, origination year and credit scores.

Loans evaluated collectively in a pool are monitored to ensure they continue to exhibit similar risk characteristics with other loans in the pool. If a loan does not share similar risk characteristics with other loans, expected credit losses for that loan are evaluated individually.

As of June 30, 2024, our review of the loan portfolio indicated that an allowance for loan losses of $42.4 million was appropriate to cover expected losses in the portfolio. Changes in economic and other conditions, including the application of the CECL model may require future adjustments to the allowance for loan losses.

During the six months ended June 30, 2024, the allowance for loan losses decreased $267,000, or 0.6%, to $42.4 million, or 0.92% of total loans, when compared to $42.7 million, or 0.94% of total loans at December 31, 2023.

For the three and six months ended June 30, 2024, loan charge-offs were $721,000 and $1.4 million, respectively, and recoveries were $444,000 and $791,000, respectively. For the three and six months ended June 30, 2023, loan charge-offs were $737,000 and $1.4 million, respectively, and recoveries were $430,000 and $792,000, respectively. For the three months ended June 30, 2024, we recorded a reversal of provision for credit losses for loans of $873,000. For the six months ended June 30, 2024, we recorded a provision for credit losses for loans of $297,000. For the three and six months ended June 30, 2023, we recorded a provision for credit losses for loans of $278,000 and $366,000, respectively.

#### Allowance for Credit Losses – Off-Balance-Sheet Credit Exposures

Allowance for off-balance-sheet credit exposures were as follows (in thousands):

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | $2,820 | $3,559 | $3,932 | $3,687 |
| Provision for (reversal of) off-balance-sheet credit exposures | 388 | (352) | (724) | (480) |
| Balance at end of period | $3,208 | $3,207 | $3,208 | $3,207 |

Our off-balance-sheet credit exposures include contractual commitments to extend credit and standby letters of credit. For these credit exposures we evaluate the expected credit losses using usage given defaults and credit conversion factors depending on the type of commitment and based upon historical usage rates. These assumptions are reevaluated on an annual basis and adjusted if necessary. For additional information regarding our methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures, see “Note 12 – Off-Balance-Sheet Arrangements, Commitments and Contingencies” to our consolidated financial statements included in this report.

#### Capital Resources and Liquidity

Our total shareholders’ equity at June 30, 2024 increased 3.6%, or $27.7 million, to $801.0 million, or 9.6% of total assets, compared to $773.3 million, or 9.3% of total assets, at December 31, 2023. The increase in shareholders’ equity was the result of net income of $46.2 million, other comprehensive income of $2.5 million, stock compensation expense of $1.5 million, common stock issued under our dividend reinvestment plan of $596,000 and net issuance of common stock under employee stock plans of $184,000, partially offset by cash dividends paid of $21.8 million and repurchases of $1.5 million of our common stock.

The Company’s Common Equity Tier 1 capital includes common stock and related paid-in capital, net of treasury stock, and retained earnings. The Bank’s Common Equity Tier 1 capital includes common stock and related paid-in capital, and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include accumulated other comprehensive income in Common Equity Tier 1. We also elected, for a five-year transitional period, the effects of credit loss accounting under CECL from Common Equity Tier 1, as further discussed below. Common Equity Tier 1 for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities.

Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. For the Company, additional Tier 1 capital at June 30, 2024 included $58.5 million of trust preferred securities. For bank holding companies that had assets of less than $15 billion as of December 31, 2009, trust preferred securities issued prior to May 19, 2010 can be treated as Tier 1 capital to the extent that they do not exceed 25% of Tier 1 capital after the application of capital deductions and adjustments. The Bank did not have any additional Tier 1 capital beyond Common Equity Tier 1 at June 30, 2024.

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both the Company and the Bank includes a permissible portion of the allowance for credit losses on loans and off-balance sheet exposures. Tier 2 capital for the Company also includes $92.0 million of qualified subordinated debt as of June 30, 2024. The permissible portion of qualified subordinated notes decreases 20% per year during the final five years of the term of the notes.

In April 2020, the FDIC, Federal Reserve, and the Office of the Comptroller of the Currency issued supplemental instructions allowing banking organizations that implement CECL before the end of 2020, the option to delay for two years an estimate of the CECL methodologies’ effect on regulatory capital, relative to the incurred loss methodologies effect on capital, followed by a three-year transition period. We elected to adopt the five-year transition option. In accordance with CECL guidance, a CECL transitional amount totaling $2.0 million has been added back to CET1 as of June 30, 2024, representing 25% of the $8.2 million transitional amount at December 31, 2023.

Management believes that, as of June 30, 2024, we met all capital adequacy requirements to which we were subject. It is management’s intention to maintain our capital at a level acceptable to all regulatory authorities and future dividend payments will be determined accordingly. Regulatory authorities require that any dividend payments made by either us or the Bank not exceed earnings for that year. Accordingly, shareholders should not anticipate a continuation of the cash dividend payments simply because of the existence of a dividend reinvestment program. The payment of dividends will depend upon future earnings, our financial condition and other related factors including the discretion of the Board.

To be categorized as well capitalized we must maintain minimum Common Equity Tier 1 risk-based, Tier 1 risk-based, Total capital risk-based and Tier 1 leverage ratios as set forth in the following table (dollars in thousands):

| June 30, 2024 Common Equity Tier 1 (to Risk-Weighted Assets) | Actual Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Actions Provisions Amount | Amount |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | $713,966 | 12.72% | $252,619 | 4.50% | N/A | N/A |
| Bank Only | $856,653 | 15.26% | $252,600 | 4.50% | $364,867 | 6.50% |
| Tier 1 Capital (to Risk-Weighted Assets) |  |  |  |  |  |  |
| Consolidated | $772,427 | 13.76% | $336,825 | 6.00% | N/A | N/A |
| Bank Only | $856,653 | 15.26% | $336,801 | 6.00% | $449,067 | 8.00% |
| Total Capital (to Risk-Weighted Assets) |  |  |  |  |  |  |
| Consolidated | $907,439 | 16.16% | $449,100 | 8.00% | N/A | N/A |
| Bank Only | $899,695 | 16.03% | $449,067 | 8.00% | $561,334 | 10.00% |
| Tier 1 Capital (to Average Assets) (1) |  |  |  |  |  |  |
| Consolidated | $772,427 | 9.40% | $328,845 | 4.00% | N/A | N/A |
| Bank Only | $856,653 | 10.42% | $328,751 | 4.00% | $410,938 | 5.00% |

| December 31, 2023 Common Equity Tier 1 (to Risk-Weighted Assets) | Actual Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Actions Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | $690,296 | 12.28% | $252,954 | 4.50% | N/A | N/A |
| Bank Only | $836,228 | 14.88% | $252,865 | 4.50% | $365,249 | 6.50% |
| Tier 1 Capital (to Risk-Weighted Assets) |  |  |  |  |  |  |
| Consolidated | $748,755 | 13.32% | $337,273 | 6.00% | N/A | N/A |
| Bank Only | $836,228 | 14.88% | $337,153 | 6.00% | $449,537 | 8.00% |
| Total Capital (to Risk-Weighted Assets) |  |  |  |  |  |  |
| Consolidated | $884,095 | 15.73% | $449,697 | 8.00% | N/A | N/A |
| Bank Only | $877,691 | 15.62% | $449,537 | 8.00% | $561,922 | 10.00% |
| Tier 1 Capital (to Average Assets) (1) |  |  |  |  |  |  |
| Consolidated | $748,755 | 9.39% | $318,906 | 4.00% | N/A | N/A |
| Bank Only | $836,228 | 10.49% | $318,814 | 4.00% | $398,517 | 5.00% |

(1) Refers to quarterly average assets as calculated in accordance with policies established by bank regulatory agencies.

As of June 30, 2024, Southside Bancshares and Southside Bank met all capital adequacy requirements under the Basel III Capital Rules that became fully phased-in as of January 1, 2019. Refer to the Supervision and Regulation section in the 2023 Form 10-K for further discussion of our capital requirements.

The table below summarizes our key equity ratios for the periods presented:

|  | Three Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Return on average assets | 1.19% | 1.29% |
| Return on average shareholders’ equity | 12.46% | 13.32% |
| Dividend payout ratio – Basic | 44.44% | 43.21% |
| Dividend payout ratio – Diluted | 44.44% | 43.21% |
| Average shareholders’ equity to average total assets | 9.52% | 9.72% |
|  | Six Months Ended June 30, |  |
|  | 2024 | 2023 |
| Return on average assets | 1.11% | 1.34% |
| Return on average shareholders’ equity | 11.74% | 13.62% |
| Dividend payout ratio – Basic | 47.37% | 42.68% |
| Dividend payout ratio – Diluted | 47.37% | 42.68% |
| Average shareholders’ equity to average total assets | 9.43% | 9.83% |

#### Management of Liquidity

Liquidity management involves our ability to convert assets to cash with minimum risk of loss while enabling us to meet our current and future obligations to our customers at any time. This means addressing (1) the immediate cash withdrawal requirements of depositors and other fund providers; (2) the funding requirements of lines and letters of credit; and (3) the short-term credit needs of customers. Liquidity is provided by cash, interest earning deposits and short-term investments that can be readily liquidated with a minimum risk of loss. At June 30, 2024, these investments were 7.8% of total assets, as compared with 8.9% for December 31, 2023 and 6.0% for June 30, 2023. The decrease to 7.8% at June 30, 2024 as compared to December 31, 2023, is reflective of a decrease in interest earning deposits and cash and due from banks, as well as an increase in total assets, partially offset by an increase in short-term investment portfolio. Liquidity is further provided through the matching, by time period, of rate sensitive interest earning assets with rate sensitive interest bearing liabilities. The Bank has three unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, Amegy Bank and TIB – The Independent Bankers Bank for $40.0 million, $25.0 million and $15.0 million, respectively. There were no federal funds purchased at June 30, 2024 or December 31, 2023. To provide more liquidity in response to economic conditions in recent years, the Federal Reserve has encouraged broader use of the discount window. At June 30, 2024, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately $377.4 million. There were no borrowings from the FRDW at June 30, 2024, and $300.0 million at December 31, 2023. To provide more stability and to assure banks have the ability to meet the needs of all of their depositors, the Federal Reserve created the BTFP in the first quarter of 2023. On March 11, 2024, the Federal Reserve stopped extending new BTFP advances. There were $113.4 million in borrowings from the BTFP at June 30, 2024. At June 30, 2024, the amount of additional funding the Bank could obtain from FHLB, collateralized by securities, FHLB stock and nonspecified loans and securities, was approximately $1.78 billion, net of FHLB stock purchases required. The Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit, and at June 30, 2024, the line had one outstanding letter of credit for $155,000. The Bank currently has no outstanding letters of credit from FHLB held as collateral for its public fund deposits.

Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The ALCO closely monitors various liquidity ratios and interest rate spreads and margins. The ALCO utilizes a simulation model to perform interest rate simulation tests that apply various interest rate scenarios including immediate shocks and MVPE to assist in determining our overall interest rate risk and the adequacy of our liquidity position. In addition, the ALCO utilizes this simulation model to determine the impact on net interest income of various interest rate scenarios. By utilizing this technology, we can determine changes that need to be made to the asset and liability mix to minimize the change in net interest income under these various interest rate scenarios.

Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs.

#### Branch Closures

In April 2024, we announced our plan to close a retail grocery store branch location in Kingwood on November 2, 2024.

On May 3, 2024, we closed a traditional branch location in Jasper due to close proximity to another Southside branch.

#### Recent Accounting Pronouncements

See “Note 1 – Summary of Significant Accounting and Reporting Policies” in our consolidated financial statements included in this Quarterly Report on Form 10-Q.

## Market risk

As filed, 5,137 characters.

The disclosures set forth in this item are qualified by the section captioned “Forward-Looking Statements” included in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report and other cautionary statements set forth elsewhere in this Quarterly Report on Form 10-Q.

Refer to the discussion of market risks included in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the 2023 Form 10-K.

In the banking industry, a major risk exposure is changing interest rates. The primary objective of monitoring our interest rate sensitivity, or risk, is to provide management the tools necessary to manage the balance sheet to minimize adverse changes in net interest income as a result of changes in the direction and level of interest rates. Federal Reserve monetary control efforts, the effects of deregulation, economic uncertainty and legislative changes have been significant factors affecting the task of managing interest rate sensitivity positions in recent years.

In an attempt to manage our exposure to changes in interest rates, management closely monitors our exposure to interest rate risk through our ALCO. Our ALCO meets regularly and reviews our interest rate risk position and makes recommendations to our board for adjusting this position. In addition, our board regularly reviews our asset/liability position. We primarily use two methods for measuring and analyzing interest rate risk: net income simulation analysis and MVPE modeling. We utilize the net income simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. This model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next 12 months. The model is used to measure the impact on net interest income relative to a base case scenario of rates immediately increasing 100 and 200 basis points or decreasing 50, 100 and 200 basis points over the next 12 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate-related risks such as prepayment, basis and option risk are also considered. The model has interest rate floors and no interest rates are assumed to go negative. We continue to monitor interest rates and anticipate rate changes during the remainder of 2024.

The following table reflects the noted increases and decreases in interest rates under the model simulations and the anticipated impact on net interest income relative to the base case over the next 12 months for the periods presented.

| Rate projections: Increase: | Anticipated impact over the next 12 months June 30, 2024 | 2023 |
| --- | ---: | ---: |
| 100 basis points | 3.78% | 4.38% |
| 200 basis points | 7.13% | 9.11% |
| Decrease: |  |  |
| 50 basis points | (3.00)% | (3.04)% |
| 100 basis points | (4.85)% | (6.29)% |
| 200 basis points | (6.95)% | (12.81)% |

As part of the overall assumptions, certain assets and liabilities are given reasonable floors. This type of simulation analysis requires numerous assumptions including but not limited to changes in balance sheet mix, prepayment rates on mortgage-related assets and fixed rate loans, cash flows and repricing of all financial instruments, changes in volumes and pricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread and deposit sensitivity. Assumptions are based on management’s best estimates but may not accurately reflect actual results under certain changes in interest rates.

Economic conditions and growth prospects are currently impacted by record inflation, continued higher interest rates and potential recessionary concerns. Furthermore, worker shortages and inflationary conditions have had some impact on the level of economic growth in our market areas. Ongoing inflation levels and higher interest rates could have a negative impact on the financial condition of both our consumer and commercial borrowers.

The ALCO monitors various liquidity ratios to ensure a satisfactory liquidity position for us. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to determine the types of investments that should be made and at what maturities. Using this analysis, management from time to time assumes calculated interest sensitivity gap positions to maximize net interest income based upon anticipated movements in the general level of interest rates. Regulatory authorities also monitor our gap position along with other liquidity ratios. In addition, as described above, we utilize a simulation model to determine the impact of net interest income under several different interest rate scenarios. By utilizing this model, we can determine changes that need to be made to the asset and liability mixes to mitigate the change in net interest income under these various interest rate scenarios.

## Controls and procedures

As filed, 1,255 characters.

#### Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), undertook an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report, and, based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, in recording, processing, summarizing and reporting in a timely manner the information that the Company is required to disclose in its reports under the Exchange Act and in accumulating and communicating to the Company’s management, including the Company’s CEO and CFO, such information as appropriate to allow timely decisions regarding required disclosure.

#### Changes in Internal Control Over Financial Reporting

No changes were made to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed Jul 26, 2024.
Source: SEC EDGAR, the filing index for accession 0000705432-24-000175. Last ingested by Listed: Nov 6, 2026, 13:09 ET. No prices; not investment advice.