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What changed in PROSPERITY BANCSHARES INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of PROSPERITY BANCSHARES INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+453 added−410 removedSource: 10-K (2024-02-28) vs 10-K (2023-02-27)

Top changes in PROSPERITY BANCSHARES INC's 2023 10-K

453 paragraphs added · 410 removed · 344 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

78 edited+26 added−19 removed152 unchanged
Biggest changeRisks and exposures related to cybersecurity attacks, including litigation and enforcement risks, are expected to be elevated for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers. 13 Legislative and Regulatory Responses to the COVID-19 Pandemic The lingering effects of the COVID-19 pandemic continue to create disruptions to the global economy, to businesses, and to the lives of individuals and there continues to be uncertainties on the impact to borrowers, financial institutions and their counterparties and the ultimate impact of COVID-19 cannot be reliably estimated at this time.
Biggest changeRisks and exposures related to cybersecurity attacks, including litigation and enforcement risks, are expected to be elevated for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers.
Information contained on the Company’s website is not incorporated by reference into this Annual Report on Form 10-K and is not part of this or any other report. Human Capital The Company’s culture is defined by its corporate values of high standards of soundness, profitability, service, professionalism, integrity, and citizenship.
Information contained on the Company’s website is not incorporated by reference into this Annual Report on Form 10-K and is not part of this or any other report. Human Capital The Company’s culture is defined by its high standards and corporate values of soundness, profitability, service, professionalism, integrity, and citizenship.
The deposits of the Bank are insured up to applicable limits by the DIF, and the Bank must pay deposit insurance assessments to the FDIC for such deposit insurance protection.
Deposit Insurance Assessments. The deposits of the Bank are insured up to applicable limits by the DIF, and the Bank must pay deposit insurance assessments to the FDIC for such deposit insurance protection.
The Community Reinvestment Act of 1977 (“CRA”) and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their communities, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks.
Community Reinvestment Act. The Community Reinvestment Act of 1977 (“CRA”) and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their communities, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks.
The guidance, which covers all 12 employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (1) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (2) be compatible with effective internal controls and risk management and (3) be supported by strong corporate governance, including active and effective oversight by the organization’s Board of Directors.
The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (1) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (2) be compatible with effective internal controls and risk management and (3) be supported by strong corporate governance, including active and effective oversight by the organization’s Board of Directors.
The proposed revised rules would establish general qualitative requirements applicable to all covered institutions, including the Company and the Bank, that have at least $1 billion in total assets, which would include (1) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (2) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (3) establishing requirements for performance measures to appropriately balance risk and reward; (4) requiring Board of Director oversight of incentive arrangements; and (5) mandating appropriate record-keeping.
The proposed revised rules would establish general qualitative requirements applicable to all covered institutions, including the Company and the Bank, that have at least $1 billion in total assets, which would include (1) prohibiting incentive arrangements that encourage 13 inappropriate risks by providing excessive compensation; (2) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (3) establishing requirements for performance measures to appropriately balance risk and reward; (4) requiring Board of Director oversight of incentive arrangements; and (5) mandating appropriate record-keeping.
The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board 7 guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to 7 submit a capital restoration plan.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan.
With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment. 10 As an institution’s capital decreases, the FDIC’s enforcement powers become more severe.
With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment. As an institution’s capital decreases, the FDIC’s enforcement powers become more severe.
Federal Reserve policy also provides that a bank holding company should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company's capital structure.
Federal Reserve Board policy also provides that a bank holding company should inform the Federal Reserve Board reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company's capital structure.
Management believes that this centralized infrastructure can accommodate additional growth while enabling the Company to minimize operational costs through economies of scale. Enhance Cross-Selling. The Company uses incentives and friendly competition to encourage cross-selling efforts and increase cross-selling results among its associates.
Management believes that this centralized infrastructure can accommodate additional growth while enabling the Company to minimize operational costs through economies of scale. 4 Enhance Cross-Selling. The Company uses incentives and friendly competition to encourage cross-selling efforts and increase cross-selling results among its associates.
Any capital 5 loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. As discussed below, a bank holding company, in certain circumstances, could be required to guarantee the capital plan of an undercapitalized banking subsidiary.
Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. As discussed below, a bank holding company, in certain circumstances, could be required to guarantee the capital plan of an undercapitalized banking subsidiary.
Since neither the Company nor the Bank engages in the types of trading or investing covered by the Volcker Rule, the Volcker Rule does not currently have any effect on the operations of the Company or the Bank. The Bank The Bank is a Texas-chartered banking association, the deposits of which are insured by the DIF of the FDIC.
Since neither the Company nor the Bank engages in the types of trading or investing covered by the Volcker Rule, the Volcker Rule does not currently have any effect on the operations of the Company or the Bank. 8 The Bank The Bank is a Texas-chartered banking association, the deposits of which are insured by the DIF of the FDIC.
In certain circumstances, the Company’s repurchases of its common stock may be subject to a prior approval or notice requirement under other regulations, policies or supervisory expectations of the Federal Reserve Board. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board.
In certain circumstances, the Company’s repurchases 5 of its common stock may be subject to a prior approval or notice requirement under other regulations, policies or supervisory expectations of the Federal Reserve Board. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board.
Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of the Company and its subsidiaries cannot be predicted. 14
Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of the Company and its subsidiaries cannot be predicted.
The Company The Company is a financial holding company pursuant to the Gramm-Leach-Bliley Act and a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). Accordingly, the Company is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”).
The Company The Company is a financial holding company pursuant to the Gramm-Leach-Bliley Act and a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). Accordingly, the Company is subject to primary supervision, regulation and examination by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”).
On June 22, 2020, the FDIC issued a final rule that mitigates the deposit insurance assessment effects of participating in the Paycheck Protection Program (“PPP”). Pursuant to the final rule, the FDIC will generally remove the effect of PPP lending in calculating an institution’s deposit insurance assessment.
On June 22, 2020, the FDIC issued a final rule that mitigates the deposit insurance assessment effects of participating in the Paycheck Protection Program (“PPP”). Pursuant to the final rule, the FDIC will generally remove the effect of PPP lending in 11 calculating an institution’s deposit insurance assessment.
The Company has a Warehouse Purchase Program that allows mortgage banking company customers to close one-to-four-family real estate loans in their own name and manage their cash flow needs until the loans are sold to investors.
The Company has a Warehouse Purchase Program that allows 3 mortgage banking company customers to close one-to-four-family real estate loans in their own name and manage their cash flow needs until the loans are sold to investors.
The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or 6 unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
The Basel III Capital Rules define the 6 components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratio calculations and also address risk weights and other issues affecting the denominator.
The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratio calculations and also address risk weights and other issues affecting the denominator.
The Company competes with other commercial banks, savings banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based nonbank lenders and certain other nonfinancial entities, including retail stores that may maintain their own credit programs and certain governmental organizations that may offer more favorable financing than the Company.
The Company competes with other commercial banks, savings banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based nonbank lenders, financial technology companies and certain other nonfinancial entities, including retail stores that may maintain their own credit programs and certain governmental organizations that may offer more favorable financing than the Company.
The Company and the Bank are required to comply with applicable capital adequacy standards adopted by the Federal Reserve and the FDIC (the “Basel III Capital Rules”).
The Company and the Bank are required to comply with applicable capital adequacy standards adopted by the Federal Reserve Board and the FDIC (the “Basel III Capital Rules”).
Through its commitment to a diverse workforce, the Company has implemented the following initiatives: • Creating an inclusive work environment by hiring, training, and retaining associates from diverse backgrounds. • Encouraging associates to recruit new team members through our Referral Reward Program. • Reaching out to organizations that assist women and minorities in job services in order to attract a more diverse group of applicants. • Through its Diversity Officer, working with associates on understanding the importance of diversity and how to actively develop an inclusive work environment. • Participating in a variety of activities that reflect the cultural diversity within the communities the Company serves. • Striving to select vendors/suppliers who reflect the diversity of the communities the Company serves. • Developing strategies to reach multicultural markets. 2 Compensation and Benefits.
Through its commitment to a diverse workforce, the Company has implemented the following initiatives: • Creating an inclusive work environment by hiring, training, and retaining associates from diverse backgrounds. • Encouraging associates to recruit new team members through the Company’s Referral Reward Program. • Reaching out to organizations that assist women and minorities in job services in order to attract a more diverse group of applicants. • Through its Diversity Officer, working with associates on understanding the importance of diversity and how to actively develop an inclusive work environment. • Participating in a variety of activities that reflect the cultural diversity within the communities the Company serves. 2 • Striving to select vendors/suppliers who reflect the diversity of the communities the Company serves. • Developing strategies to reach multicultural markets.
To 8 do so, a bank must be well capitalized, well managed and have a CRA rating of satisfactory or better.
To do so, a bank must be well capitalized, well managed and have a CRA rating of satisfactory or better.
Under the terms of the merger agreement, the Company will issue 2,376,182 shares of its common stock plus $64.1 million in cash for all outstanding shares of Lone Star capital stock, subject to certain conditions and potential adjustments.
Under the terms of the definitive agreement, the Company will issue 2,376,182 shares of its common stock plus $64.1 million in cash for all outstanding shares of Lone Star capital stock, subject to certain conditions and potential adjustments.
The increased assessment is intended to increase the likelihood that the DIF reserve ratio would reach the statutory minimum of 1.35% by the statutory deadline prescribed under the FDIC's amended restoration plan. Interchange Fees.
The increased assessment is intended to increase the likelihood that the DIF reserve ratio would reach the statutory minimum of 1.35% by the statutory deadline prescribed under the FDIC's amended restoration plan.
Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.
Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing if the institution has no tangible capital.
If a concentration is present, management must employ heightened risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. 11 Community Reinvestment Act.
If a concentration is present, management must employ heightened risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending.
At December 31, 2022, the Bank was classified as “well-capitalized” for purposes of the FDIC’s prompt corrective action regulations in effect as of such date.
At December 31, 2023, the Bank was classified as “well-capitalized” for purposes of the FDIC’s prompt corrective action regulations in effect as of such date.
Excluding Warehouse Purchase Program loans, nonperforming assets were 0.15% of total loans and other real estate at December 31, 2022. All Warehouse Purchase Program loans were performing loans at December 31, 2022. Continue Focus on Efficiency. The Company plans to maintain its stringent cost control practices and policies.
Excluding Warehouse Purchase Program loans, nonperforming assets were 0.36% of total loans and other real estate at December 31, 2023. All Warehouse Purchase Program loans were performing loans at December 31, 2023. Continue Focus on Efficiency. The Company plans to maintain its stringent cost control practices and policies.
FirstCapital Bank operates 16 full-service banking offices in 6 different markets in West, North and Central Texas areas, including its main office in Midland, and banking offices in Midland, Lubbock, Amarillo, Wichita Falls, Burkburnett, Byers, Henrietta, Dallas, Horseshoe Bay, Marble Falls and Fredericksburg, Texas.
FirstCapital Bank operated 16 full-service banking offices in six different markets in West, North and Central Texas areas, including its main office in Midland, Texas, and banking offices in Midland, Lubbock, Amarillo, Wichita Falls, Burkburnett, Byers, Henrietta, Dallas, Horseshoe Bay, Marble Falls and Fredericksburg, Texas.
Bank regulators are required to take “prompt corrective action” to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan.
Bank regulators are required to take “prompt corrective action” to resolve problems associated with insured depository institutions whose capital declines below certain levels. If an institution becomes “undercapitalized,” it must submit a capital restoration plan.
Supervision and Regulation The supervision and regulation of bank holding companies and their subsidiaries is intended primarily for the protection of depositors, the Deposit Insurance Fund (“DIF”) of the FDIC and the banking system as a whole, and not for the protection of the bank holding company’s shareholders or creditors.
Supervision and Regulation The supervision and regulation of bank holding companies and their subsidiaries is intended primarily for the protection of depositors, the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”) and the banking system as a whole, and not for the protection of the bank holding company’s shareholders or creditors.
The Company is active in commercial and industrial lending, with commercial loans comprising 13.8% of the Company’s total loans as of December 31, 2022. The Company also offers agricultural loans, loans for automobiles and other consumer durables, home equity loans, debit and credit cards, digital banking solutions, trust and wealth management, retail brokerage services, mortgage services and treasury management.
The Company is active in commercial and industrial lending, with commercial loans comprising 10.9% of the Company’s total loans as of December 31, 2023. The Company also offers agricultural loans, loans for automobiles and other consumer durables, home equity loans, debit and credit cards, digital banking solutions, trust and wealth management, retail brokerage services, mortgage services and treasury management.
The Company intends to continue to employ the strict underwriting guidelines and comprehensive loan review process that have contributed to its low incidence of nonperforming assets and minimal charge-offs in relation to its size. Nonperforming assets were 0.15% of total loans and other real estate at December 31, 2022.
The Company intends to continue to employ the strict underwriting guidelines and comprehensive loan review processes that have contributed to its low incidence of nonperforming assets and minimal charge-offs in relation to its size. Nonperforming assets were 0.34% of total loans and other real estate at December 31, 2023.
As of December 31, 2022, the Company had 3,633 full-time equivalent associates, 1,041 of whom were officers of the Bank. Neither the Company nor the Bank is a party to any collective bargaining agreement. Diversity and Inclusion. The Company is committed to fostering, cultivating and preserving a culture of diversity and inclusion.
As of December 31, 2023, the Company had 3,850 full-time equivalent associates, 1,099 of whom were officers of the Bank. Neither the Company nor the Bank is a party to any collective bargaining agreement. Diversity and Inclusion. The Company is committed to fostering, cultivating and preserving a culture of diversity and inclusion.
By offering certificates of deposit, interest checking accounts, money market accounts and savings accounts at competitive rates, the Company gives its depositors a full range of traditional deposit products. 3 As of December 31, 2022, the Company’s trust department maintained total assets of $2.25 billion, including managed assets of $1.95 billion.
By offering certificates of deposit, interest checking accounts, money market accounts and savings accounts at competitive rates, the Company gives its depositors a full range of traditional deposit products. As of December 31, 2023, the Company’s trust department maintained total assets of $2.67 billion, including managed assets of $2.26 billion.
Banking A ctivities The Company, through the Bank, offers a variety of traditional loan and deposit products to its customers, which consist primarily of consumers and businesses throughout Texas and Oklahoma. At December 31, 2022, the Bank maintained approximately 785,000 separate deposit accounts including certificates of deposit and 68,000 separate loan accounts.
Banking A ctivities The Company, through the Bank, offers a variety of traditional loan and deposit products to its customers, which consist primarily of individual consumers and businesses throughout Texas and Oklahoma. At December 31, 2023, the Bank maintained approximately 813,000 separate deposit accounts including certificates of deposit and 72,500 separate loan accounts.
These three principles are incorporated into the proposed revised rules on incentive-based payment arrangements at specified covered institutions released in May 2016 by a number of federal agencies, including the Federal Reserve Board, FDIC and SEC.
As of December 31, 2023, these proposed rules have not been adopted. These three principles are incorporated into the proposed revised rules on incentive-based payment arrangements at specified covered institutions released in May 2016 by a number of federal agencies, including the Federal Reserve Board, FDIC and SEC.
As of December 31, 2022, the Bank operated 272 full service banking locations: 65 in the Houston area, including The Woodlands; 30 in the South Texas area, including Corpus Christi and Victoria; 62 in the Dallas/Fort Worth area; 22 in the East Texas area; 29 in the Central Texas area, including Austin and San Antonio; 34 in the West Texas area, including Lubbock, Midland-Odessa and Abilene; 16 in the Bryan/College Station area; 6 in the Central Oklahoma area and 8 in the Tulsa, Oklahoma area.
As of December 31, 2023, the Bank operated 285 full service banking locations: 65 in the Houston area, including The Woodlands; 30 in the South Texas area including Corpus Christi and Victoria; 62 in the Dallas/Fort Worth area; 22 in the East Texas area; 32 in the Central Texas area including Austin and San Antonio; 44 in the West Texas area including Lubbock, Midland-Odessa, Abilene; Amarillo and Wichita Falls; 16 in the Bryan/College Station area, 6 in the Central Oklahoma area; and 8 in the Tulsa, Oklahoma area.
The Company has been an active real estate lender, with commercial real estate (including farmland and multi-family residential), 1-4 family residential (including home equity) and construction, land development and other land loans comprising 29.2%, 35.8% and 14.9%, respectively, of the Company’s total loans as of December 31, 2022.
The Company has been an active real estate lender, with commercial real estate (including farmland and multi-family residential), 1-4 family residential (including home equity) and construction, land development and other land loans comprising 29.6%, 38.5% and 14.5%, respectively, of the Company’s total loans as of December 31, 2023.
The Gramm-Leach-Bliley Act, the BHCA and other federal laws subject financial and bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.
The Gramm-Leach-Bliley Act, the BHCA and other federal laws subject financial and bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. Further, as a public company, the Company also files reports with the U.S.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs, and many states, including Texas, have also recently implemented or modified their data breach notification, information security and data privacy requirements.
Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs, and many states, including Texas, have also recently implemented or modified their data breach notification, information security and data privacy requirements.
Because the Company is a legal entity separate and distinct from its subsidiaries, its right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors.
The Bank is also subject to limitations on the payment of dividends under Texas law. Because the Company is a legal entity separate and distinct from its subsidiaries, its right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors.
Construction, land development and other land loans were $2.81 billion and represented 14.9% of the total loan portfolio as of December 31, 2022. Warehouse Purchase Program loans were $740.6 million and represented 3.9% of the total loan portfolio as of December 31, 2022. Maintain Sound Asset Quality.
Construction, land development and other land loans were $3.08 billion and represented 14.5% of the total loan portfolio as of December 31, 2023. Warehouse Purchase Program loans were $822.2 million and represented 3.9% of the total loan portfolio as of December 31, 2023. Maintain Sound Asset Quality.
Under federal law, the Bank cannot pay a dividend if, after paying the dividend, the Bank will be “undercapitalized.” The FDIC may declare a dividend payment to be unsafe and unsound even though the Bank would continue to meet its capital requirements after the dividend. The Bank is also subject to limitations on the payment of dividends under Texas law.
Under federal law, the Bank cannot pay a dividend if, after paying the dividend, the Bank will be 9 “undercapitalized.” The FDIC may declare a dividend payment to be unsafe and unsound even though the Bank would continue to meet its capital requirements after the dividend.
LegacyTexas Bank 2019 42 (1) The number of banking centers added does not include any locations of the acquired entity that were closed and consolidated with existing banking centers of the Company upon consummation of the transaction or closed after consummation of the transaction. Pending Acquisitions Pending Acquisition of First Bancshares of Texas, Inc.
FirstCapital Bank of Texas 2023 16 (1) The number of banking centers added does not include any locations of the acquired entity that were closed and consolidated with existing banking centers of the Company upon consummation of the transaction or closed after consummation of the transaction. Recent Acquisition Merger of First Bancshares of Texas, Inc.
As of December 31, 2022, the Company’s ratio of CET1 to risk-weighted assets was 15.88%, Tier 1 capital to risk-weighted assets was 15.88%, total capital to risk-weighted assets was 16.51% and Tier 1 capital to average quarterly assets was 10.16%.
As of December 31, 2023, the Company’s ratio of CET1 to risk-weighted assets was 15.54%, Tier 1 capital to risk-weighted assets was 15.54%, total capital to risk-weighted assets was 16.56% and Tier 1 capital to average quarterly assets was 10.39%.
The F&M Bank & Trust Company 2014 11 Tradition Bancshares, Inc. Tradition Bank 2016 7 LegacyTexas Financial Group, Inc.
The F&M Bank & Trust Company 2014 11 Tradition Bancshares, Inc. Tradition Bank 2016 7 LegacyTexas Financial Group, Inc. LegacyTexas Bank 2019 42 First Bancshares of Texas, Inc.
Lone Star Bank operates 5 banking offices in the West Texas area, including its main office in Lubbock, and 1 banking center in each of Brownfield, Midland, Odessa and Big Spring, Texas. As of December 31, 2022, Lone Star, on a consolidated basis, reported total assets of $1.43 billion, total loans of $999.6 million and total deposits of $1.28 billion.
Lone Star Bank operates five banking offices in the West Texas area, including its main office in Lubbock, and one banking center in each of Brownfield, Midland, Odessa and Big Spring, Texas. As of December 31, 2023, Lone Star, on a consolidated basis, reported total assets of $1.37 billion, total loans of $1.08 billion and total deposits of $1.21 billion.
The Company offers a variety of benefits to full-time associates, including Medical Insurance, Dental Insurance, Vision Insurance, Basic Life Insurance, Voluntary Life Insurance, Spouse/Dependent Life Insurance, Short Term Disability, Long Term Disability, Worksite Supplemental Benefits, Flexible Spending Account, 401K/Profit Sharing Plan, Vacation Leave, Sick Leave and Paid Holidays. Recruiting, Training, Development and Retention.
The performance of these groups is also reviewed when setting lender compensation. The Company offers a variety of benefits to full-time associates, including Medical Insurance, Dental Insurance, Vision Insurance, Basic Life Insurance, Voluntary Life Insurance, Spouse/Dependent Life Insurance, Short Term Disability, Long Term Disability, Worksite Supplemental Benefits, Flexible Spending Account, 401K/Profit Sharing Plan, Vacation Leave, Sick Leave and Paid Holidays.
If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions.
Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation 14 could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions.
The CFPB can issue cease-and-desist orders against banks and other entities that violate federal consumer financial laws and may also institute a civil action against an entity in violation of federal consumer financial laws in order to impose a civil penalty or injunction. Customer Information Security. The federal banking agencies have adopted guidelines for safeguarding confidential, personal, nonpublic customer information.
The CFPB can issue cease-and-desist orders against banks and other entities that violate federal consumer financial laws and may also institute a civil action against an entity in violation of federal consumer financial laws in order to impose a civil penalty or injunction.
The Company believes in maintaining progressive employment policies, as well as a competitive wage and benefit package. The Company has invested heavily in its officers and associates by recruiting talented officers in its market areas and providing them with economic incentives. The senior management team, including area leadership, has substantial experience in the Company’s business and market areas.
Compensation and Benefits. The Company believes in maintaining progressive employment policies, as well as a competitive wage and benefit package. The Company has invested heavily in its officers and associates by recruiting talented officers in its market areas and providing them with economic incentives.
Officers and associates have access to each customer’s existing and related account relationships and are better able to inform customers of additional products when customers visit or call the various banking centers or use their drive-in facilities.
Officers and associates have access to each customer’s existing and related account relationships and are better able to inform customers of additional products when customers visit or call the various banking centers or use their drive-in facilities. In addition, the Company includes product information on its web page and in monthly statements and other mailings.
Based on the closing price of the Company’s common stock of $69.27 on October 7, 2022, the total consideration was valued at approximately $228.7 million. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval of the shareholders of Lone Star.
Based on the closing price of the Company’s common stock of $69.27 on October 7, 2022, the total consideration was valued at approximately $228.7 million. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals. The shareholders of Lone Star approved the transaction on March 28, 2023. Available I nformation The Company’s website address is www.prosperitybankusa.com.
At December 31, 2022, noninterest-bearing demand deposits were 38.3% of the Bank’s total deposits. For the year ended December 31, 2022, the Company’s average cost of funds was 0.29% and the Company’s average cost of deposits (excluding all borrowings) was 0.23%.
At December 31, 2023, noninterest-bearing demand deposits were 36.0% of the Bank’s total deposits. For the year ended December 31, 2023, the Company’s average cost of funds was 1.54% and the Company’s average cost of deposits (excluding all borrowings) was 1.00%.
As an affirmative action employer, the Company is fully committed to the concept and practice of equal opportunity through diversity and inclusion. In 2022, its workforce, from senior officers to tellers, was 48% minority and 75% female.
The Company is fully committed to the concept and practice of equal opportunity through diversity and inclusion. In 2023, its workforce, from senior officers to tellers, was 49% minority and 74% female.
In addition, the Company includes product information on its web page and in monthly statements and other mailings. 4 Compet ition The banking business is highly competitive, and the profitability of the Company depends principally on its ability to compete in its market areas.
Compet ition The banking business is highly competitive, and the profitability of the Company depends principally on its ability to compete in its market areas.
Commercial real estate loans (including multifamily residential) were $4.99 billion and represented 26.5% of the total portfolio as of December 31, 2022. One-to-four-family residential loans were $5.77 billion and represented 30.7% of the total loan portfolio as of December 31, 2022.
Commercial real estate loans (including multifamily residential and excluding farmland) were $5.66 billion and represented 26.8% of the total portfolio as of December 31, 2023. One-to-four-family residential loans (excluding home equity) were $7.20 billion and represented 34.0% of the total loan portfolio as of December 31, 2023.
The Federal Reserve Board also has rules governing routing and exclusivity that require issuers to offer at least two unaffiliated networks for routing transactions on each debit or prepaid product. Concentrated Commercial Real Estate Lending Regulations. The federal banking agencies, including the FDIC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending.
The Federal Reserve Board also has rules governing routing and exclusivity that require issuers to offer at least two unaffiliated networks for routing transactions on each debit or prepaid product.
As of December 31, 2022, the Bank’s ratio of CET1 to risk-weighted assets was 15.83%, Tier 1 capital to total risk-weighted assets was 15.83% and total capital to total risk-weighted assets was 16.46%. The FDIC’s leverage guidelines require state banks to maintain Tier 1 capital of no less than 4.0% of average total assets.
The FDIC’s leverage guidelines require state banks to maintain Tier 1 capital of no less than 4.0% of average total assets. As of December 31, 2023, the Bank’s ratio of Tier 1 capital to average quarterly assets (leverage ratio) was 10.35%. Corrective Measures for Capital Deficiencies.
Loans at December 31, 2022 were $18.84 billion compared with $18.62 billion at December 31, 2021, an increase of $223.7 million or 1.2%. Commercial and industrial loans were $2.59 billion and represented 13.8% of the total loan portfolio as of December 31, 2022.
Loans at December 31, 2023 were $21.18 billion compared with $18.84 billion at December 31, 2022, an increase of $2.34 billion or 12.4%. Commercial and industrial loans were $2.31 billion and represented 10.9% of the total loan portfolio as of December 31, 2023.
Failure to comply with consumer protection requirements may also result in the Bank’s failure to obtain any required regulatory approval for merger or other acquisition transactions the Bank may wish to pursue or its prohibition from engaging in such transactions even if approval is not required. 9 The Dodd-Frank Act established the CFPB, which has supervisory, examination and enforcement authority over depository institutions with total assets of $10 billion or greater and other providers of consumer financial products or services.
Failure to comply with consumer protection requirements may also result in the Bank’s failure to obtain any required regulatory approval for merger or other acquisition transactions the Bank may wish to pursue or its prohibition from engaging in such transactions even if approval is not required.
In addition to internal growth, the Company completed the following acquisitions within the last ten years (through December 31, 2022): Acquired Entity Acquired Bank Completion Date Number of Banking Centers Acquired (1) Texas Bankers, Inc.
In addition to internal growth, the Company completed the following acquisitions within the last ten years (through December 31, 2023): Acquired Entity Acquired Bank Completion Date Number of Banking Centers Acquired (1) East Texas Financial Services, Inc. Firstbank 2013 4 Coppermark Bancshares, Inc. Coppermark Bank 2013 6 FVNB Corp. First Victoria National Bank 2013 20 F&M Bancorporation Inc.
If the Company fails to observe such regulatory guidance or standards, the Company could be subject to various regulatory sanctions, including financial penalties.
Financial institutions are expected to comply with such guidance and standards and to accordingly develop appropriate security controls and risk management processes. If the Company fails to observe such regulatory guidance or standards, the Company could be subject to various regulatory sanctions, including financial penalties.
As of December 31, 2022, First Bancshares, on a consolidated basis, reported total assets of $2.16 billion, total loans of $1.64 billion and total deposits of $1.80 billion. 1 Under the terms of the merger agreement, the Company will issue 3,583,370 shares of its common stock plus $93.4 million in cash for all outstanding shares of First Bancshares capital stock, subject to certain conditions and potential adjustments.
As of March 31, 2023, First Bancshares, on a consolidated basis, reported total assets of $2.14 billion, total loans of $1.65 billion and total deposits of $1.71 billion. 1 Pursuant to the terms of the definitive agreement, the Company issued 3,583,370 shares of its common stock and approximately $91.5 million in cash for all outstanding shares of First Bancshares capital stock.
Associates are encouraged to explore and achieve a full range of training and development opportunities to personalize career development and to prioritize their unique needs and growth opportunities.
The Company has position specific required training delivered annually, and as industry or bank policy and procedure changes dictate. Associates are encouraged to explore and achieve a full range of training and development opportunities to personalize career development and to prioritize their unique needs and growth opportunities.
In order to provide current associates with the opportunity for advancement, the Company posts job opportunities internally for three calendar days before making them available to the public. The Company recognizes that employee training and development are business imperatives essential to employee retention and providing excellent service.
Recruiting, Training, Development and Retention. In order to provide current associates with the opportunity for advancement, the Company posts job opportunities internally for three calendar days before making them available to the public. Of the approximately 1,545 open positions filled in 2023, 27% were filled by internal associates.
The FDIC’s risk-based capital guidelines generally require state banks to have minimum ratios of CET1 to risk-weighted assets of 4.5%, Tier 1 capital to total risk-weighted assets of 6.0% and total capital to total risk-weighted assets of 8.0%. The capital categories have the same definitions for the Bank as for the Company.
The FDIC may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk. 10 The FDIC’s risk-based capital guidelines generally require state banks to have minimum ratios of CET1 to risk-weighted assets of 4.5%, Tier 1 capital to total risk-weighted assets of 6.0% and total capital to total risk-weighted assets of 8.0%.
Associates receive formal and informal position specific training on various regulatory compliance topics, person to person functional and product training, policy and procedure documentation, online webinars and videos. The Company has position specific required training delivered annually, and as industry or bank policy and procedure changes dictate.
The Company recognizes that employee training and development are business imperatives essential to employee retention and providing excellent service. Associates receive formal and informal position specific training on various regulatory compliance topics, person to person functional and product training, policy and procedure documentation, online webinars and videos.
Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways.
Legislative and Regulatory Initiatives From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system.
These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations. In addition, in March 2022, the SEC proposed rules that would require disclosure of material cybersecurity incidents as well as cybersecurity risk management, strategy and governance.
In addition, in March 2022, the SEC proposed rules that would require disclosure of material cybersecurity incidents as well as cybersecurity risk management, strategy and governance. The federal banking regulators regularly issue new guidance and standards, and update existing guidance and standards, regarding cybersecurity intended to enhance cyber risk management among financial institutions.
Most banking center locations are overseen by a local president or manager with knowledge of the community and lending expertise in the specific industries found in the community. The Company operates each banking center as a separate profit center, maintaining separate data with respect to each banking center’s net interest income, efficiency ratio, deposit growth, loan growth and overall profitability.
The Company operates each banking center as a separate profit center, maintaining separate data with respect to each banking center’s net interest income, efficiency ratio, deposit growth, loan growth and overall profitability. Banking center presidents and managers are accountable for performance in these areas and compensated accordingly. The Company also has lending groups focused on specific business segments.
Further, since the Company has securities registered with the Securities and Exchange Commission ("SEC") and traded on the New York Stock Exchange ("NYSE"), it is also subject to the supervision and regulation of these organizations. Regulatory Restrictions on Dividends and Repurchases. The Company is regarded as a legal entity separate and distinct from the Bank.
Because the Company’s securities are listed on the New York Stock Exchange (“NYSE”), the Company is subject to NYSE's rules for listed companies, including rules relating to corporate governance. Regulatory Restrictions on Dividends and Repurchases. The Company is regarded as a legal entity separate and distinct from the Bank.
As of December 31, 2022, the Bank’s ratio of Tier 1 capital to average quarterly assets (leverage ratio) was 10.12%. Corrective Measures for Capital Deficiencies. The federal banking regulators are required to take “prompt corrective action” with respect to capital-deficient institutions.
The federal banking regulators are required to take “prompt corrective action” with respect to capital-deficient institutions.
(“First Bancshares”) — On October 11, 2022, the Company and First Bancshares jointly announced the signing of a definitive merger agreement whereby First Bancshares, the parent company of FirstCapital Bank of Texas, N.A. (“FirstCapital Bank”), will merge with and into the Company.
(“First Bancshares”) — Effective May 1, 2023, the Company completed the merger of First Bancshares into the Company and the subsequent merger of its wholly owned subsidiary, FirstCapital Bank of Texas, N.A. (“FirstCapital Bank”), into the Bank (collectively, the “Merger”).
The final rule requires the Company to adopt a clawback policy within 60 days after such listing standard becomes effective. Cybersecurity . In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents.
In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.
Removed
Bank of Texas 2012 2 The Bank Arlington The Bank Arlington 2012 1 American State Financial Corporation American State Bank 2012 37 Community National Bank Community National Bank 2012 1 East Texas Financial Services, Inc. Firstbank 2013 4 Coppermark Bancshares, Inc. Coppermark Bank 2013 6 FVNB Corp. First Victoria National Bank 2013 20 F&M Bancorporation Inc.
Added
As of December 31, 2023, the Company recognized goodwill of $164.5 million which does not include all the subsequent fair value adjustments that have not yet been finalized. During the second quarter of 2023, the Company completed the operational conversion of FirstCapital Bank. Pending Acquisition Pending Acquisition of Lone Star State Bancshares, Inc.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

65 edited+45 added−19 removed134 unchanged
Biggest changeAny of the foregoing could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company is subject to claims and litigation pertaining to intellectual property. Banking and other financial services companies, such as the Company, rely on technology companies to provide information technology products and services necessary to support their day-to-day operations.
Biggest changeBanking and other financial services companies, such as the Company, rely on technology companies to provide information technology products and services necessary to support their day-to-day operations. Technology companies frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights.
Further, 17 commercial loans generally will be serviced primarily from the operation of the business, which may not be successful, while commercial real estate loans generally will be serviced from income on the properties securing the loans. As the Company’s various commercial loan portfolios increase, the corresponding risks and potential for losses from these loans will also increase.
Further, commercial loans generally will be serviced primarily from the operation of the business, which may not be successful, while 17 commercial real estate loans generally will be serviced from income on the properties securing the loans. As the Company’s various commercial loan portfolios increase, the corresponding risks and potential for losses from these loans will also increase.
Many factors affect the supply of and demand for crude oil and natural gas and, therefore, influence prices of these commodities, including: • domestic and foreign supply of oil and natural gas, including increased availability of non-traditional energy resources such as shale oil and gas; • prices, and expectations about future prices, of oil and natural gas; • domestic and worldwide economic conditions, and the resulting global demand for oil and natural gas; • the price and quantity of imports of foreign oil and natural gas including the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels for oil, and decisions by OPEC and non-OPEC producers to change production levels; • sanctions imposed by the U.S., the European Union, or other governments against oil producing countries; • the cost of exploring for, developing, producing and delivering oil and natural gas; • the level of excess production capacity, available pipeline, storage and other transportation capacity; • lead times associated with acquiring equipment and products and availability of qualified personnel; • the expected rates of decline in production from existing and prospective wells; • the discovery rates of new oil and gas reserves; • federal, state and local regulation of exploration and drilling activities and oil and gas exports, including climate change regulation; • legislative and regulatory interest within federal, state and local governments to stop, significantly limit or regulate hydraulic fracturing activities (also known as “fracking”) or emissions; 18 • weather conditions, including hurricanes, that can affect oil and natural gas operations over a wide area and severe winter weather that can interfere with oil and gas development and production operations; • political instability and social unrest throughout the world, such as in Ukraine, and particularly in oil and natural gas producing countries; • advances in exploration, development and production technologies or in technologies affecting energy consumption (such as fracking); • the price and availability of alternative fuel and energy sources; • the transition to alternate energy sources, like wind and solar; • uncertainty in capital and commodities markets; and • changes in the value of the U.S. dollar relative to other major global currencies.
Many factors affect the supply of and demand for crude oil and natural gas and, therefore, influence prices of these commodities, including: • domestic and foreign supply of oil and natural gas, including increased availability of non-traditional energy resources such as shale oil and gas; • prices, and expectations about future prices, of oil and natural gas; • domestic and worldwide economic conditions, and the resulting global demand for oil and natural gas; • the price and quantity of imports of foreign oil and natural gas including the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels for oil, and decisions by OPEC and non-OPEC producers to change production levels; • sanctions imposed by the U.S., the European Union, or other governments against oil producing countries; • the cost of exploring for, developing, producing and delivering oil and natural gas; • the level of excess production capacity, available pipeline, storage and other transportation capacity; • lead times associated with acquiring equipment and products and availability of qualified personnel; • the expected rates of decline in production from existing and prospective wells; • the discovery rates of new oil and gas reserves; • federal, state and local regulation of exploration and drilling activities and oil and gas exports, including climate change regulation; 18 • legislative and regulatory interest within federal, state and local governments to stop, significantly limit or regulate hydraulic fracturing activities (also known as “fracking”) or emissions; • weather conditions, including hurricanes, that can affect oil and natural gas operations over a wide area and severe winter weather that can interfere with oil and gas development and production operations; • political instability and social unrest throughout the world, such as in Ukraine and the Middle East, and particularly in oil and natural gas producing countries; • advances in exploration, development and production technologies or in technologies affecting energy consumption (such as fracking); • the price and availability of alternative fuel and energy sources; • the transition to alternate energy sources, like wind and solar; • uncertainty in capital and commodities markets; and • changes in the value of the U.S. dollar relative to other major global currencies.
These provisions include: • a Board of Directors classified into three classes of directors with the directors of each class having staggered three-year terms; • a provision that any special meeting of the Company’s shareholders may be called only by the chairman of the board and chief executive officer, the president, a majority of the Board of Directors or the holders of at least 50% of the Company’s shares entitled to vote at the meeting; and 26 • a provision establishing certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at an annual or special meeting of shareholders.
These provisions include: • a Board of Directors classified into three classes of directors with the directors of each class having staggered three-year terms; • a provision that any special meeting of the Company’s shareholders may be called only by the chairman of the board and chief executive officer, the president, a majority of the Board of Directors or the holders of at least 50% of the Company’s shares entitled to vote at the meeting; and • a provision establishing certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at an annual or special meeting of shareholders.
A material addition to the allowance could cause net income, and possibly capital, to decrease. 16 In addition, federal and state regulators periodically review the Company’s allowance for credit losses and may require the Company to increase its provision for credit losses or recognize further charge-offs, based on judgments different than those of the Company’s management.
A material addition to the allowance could cause net income, and possibly capital, to decrease. In addition, federal and state regulators periodically review the Company’s allowance for credit losses and may require the Company to increase its provision for credit losses or recognize further charge-offs, based on judgments different than those of the Company’s management.
Negative public opinion could result from the Company’s actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in 25 response to that conduct.
Negative public opinion could result from the Company’s actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct.
Financial or operational difficulties of a third-party vendor could also hurt the Company’s operations if those difficulties interfere with the vendor’s ability to provide services. 22 Furthermore, the Company’s vendors could also be sources of operational and information security risk, including from breakdowns or failures of their own systems or capacity constraints, and reputational risk.
Financial or operational difficulties of a third-party vendor could also hurt the Company’s operations if those difficulties interfere with the vendor’s ability to provide services. Furthermore, the Company’s vendors could also be sources of operational and information security risk, including from breakdowns or failures of their own systems or capacity constraints, and reputational risk.
Difficulties associated with potential acquisitions that may result from these factors could have a material adverse effect on the Company’s business, financial condition and results of operations. If the goodwill that the Company recorded in connection with a business acquisition becomes impaired, it could require charges to earnings.
Difficulties associated with potential acquisitions that may result from these factors could have a material adverse effect on the Company’s business, financial condition and results of operations. 22 If the goodwill that the Company recorded in connection with a business acquisition becomes impaired, it could require charges to earnings.
The determination of the appropriate level of the allowance inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks, future trends and general economic conditions, including inflation and recession, all of which may undergo material changes.
The determination of the appropriate level of the allowance inherently involves a high 16 degree of subjectivity and requires the Company to make significant estimates of current credit risks, future trends and general economic conditions, including inflation and recession, all of which may undergo material changes.
Congress and federal regulatory agencies continually review banking laws, regulations and policies for 23 possible changes. Any change in applicable regulations or federal or state legislation could have a substantial impact on the Company, the Bank and their respective operations.
Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Any change in applicable regulations or federal or state legislation could have a substantial impact on the Company, the Bank and their respective operations.
The Company faces a variety of risks and difficulties pursuing its growth strategy, including: • finding suitable markets for expansion; • finding suitable candidates for acquisition; • attracting funding to support additional growth; • maintaining asset quality; • attracting and retaining qualified management; • managing execution risks; • maintaining adequate regulatory capital; and • scaling technology platforms. 20 In addition, in order to manage its growth and maintain adequate information and reporting systems within its organization, the Company must identify, hire and retain additional qualified associates, particularly in the accounting and operational areas of its business.
The Company faces a variety of risks and difficulties pursuing its growth strategy, including: • finding suitable markets for expansion; • finding suitable candidates for acquisition; • attracting funding to support additional growth; • maintaining asset quality; • attracting and retaining qualified management; • managing execution risks; • maintaining adequate regulatory capital; and • scaling technology platforms. 21 In addition, in order to manage its growth and maintain adequate information and reporting systems within its organization, the Company must identify, hire and retain additional qualified associates, particularly in the accounting and operational areas of its business.
Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues the Company has, or may have, with regulatory agencies, including, without limitation, issues related to Bank Secrecy Act compliance, Community Reinvestment Act issues, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations and other similar laws and regulations.
Regulatory approvals have been and could continue to be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues the Company has, or may have, with regulatory agencies, including, without limitation, issues related to Bank Secrecy Act compliance, Community Reinvestment Act issues, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations and other similar laws and regulations.
Human errors, malfeasance and other misconduct, even if promptly discovered and remediated, can result in reputational damage or legal risk and have a material adverse effect on our business, financial condition and results of operations. Legal, Regulatory and Compliance Risks The Company operates in a highly regulated environment and, as a result, is subject to extensive regulation and supervision.
Human errors, malfeasance and other misconduct, even if promptly discovered and remediated, can result in reputational damage or legal risk and have a material adverse effect on the Company’s business, financial condition and results of operations. Legal, Regulatory and Compliance Risks The Company operates in a highly regulated environment and, as a result, is subject to extensive regulation and supervision.
This risk management framework may not be effective under all circumstances, and it may not adequately identify, manage or mitigate all or any risk or loss to the Company.
This 24 risk management framework may not be effective under all circumstances, and it may not adequately identify, manage or mitigate all or any risk or loss to the Company.
The occurrence of any such failures, interruptions or security breaches could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s results of operations, financial condition and cash flows.
The occurrence of any such failures, interruptions or security breaches could result in significant disruptions to the Company’s operations and could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s results of operations, financial condition and cash flows.
The Company also faces competition from many other types of financial institutions, including savings and loans, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation.
The Company also faces competition from many other types of financial institutions, including savings and loans, credit unions, finance companies, brokerage firms, insurance companies, financial technology (fintech) companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation.
The demand for the deposit products the Company offers may also be reduced due to a variety of factors such as demographic patterns, changes in customer preferences, changes in interest rates, payment of interest on demand deposits by other financial institutions, reductions in consumers’ disposable income, regulatory actions that decrease customer access to particular products or the availability of competing products, including from new financial technology competitors or competitors that provide customers with alternate investment options.
The demand for the deposit products the Company offers may also decline due to a variety of factors such as demographic patterns, changes in customer preferences, changes in interest rates, payment of interest on demand deposits by other financial institutions, reductions in consumers’ disposable income, regulatory actions that decrease customer access to particular products or the availability of competing products, including from new financial technology competitors or competitors that provide customers with alternate investment options.
Such events and long-term shifts may damage, destroy or otherwise impact the value or productivity of the Company’s properties and other assets; reduce the availability of insurance; and/or disrupt the Company’s operations and other activities through prolonged outages.
Such events and long-term shifts may damage, destroy or otherwise impact the value or productivity of the Company’s properties and other assets; reduce the availability or increase the cost of insurance; and/or disrupt the Company’s operations and other activities through prolonged outages.
Acquisitions may also result in potential dilution to existing shareholders of the Company’s earnings per share if the Company issues common stock in connection with an acquisition. Acquisitions may be delayed, impeded, or prohibited due to regulatory issues. Acquisitions by financial institutions are subject to approval by a variety of federal and state regulatory agencies.
Acquisitions may also result in potential dilution to existing shareholders of the Company’s earnings per share if the Company issues common stock in connection with an acquisition. Regulatory approvals for acquisitions may be delayed, impeded, or prohibited. Acquisitions by financial institutions are subject to approval by a variety of federal and state regulatory agencies.
A failure to effectively measure and limit the credit risk associated with the Company’s loan portfolio may result in loan defaults, foreclosures and additional charge-offs, and may necessitate that the Company significantly increase its allowance for credit losses, each of which could adversely affect the Company’s net income.
A failure to effectively measure and limit the credit risk associated with the Company’s loan portfolio may result in loan defaults, foreclosures and additional charge-offs, and may require the Company to significantly increase its allowance for credit losses, each of which could adversely affect the Company’s net income.
The Company has customers who operate in carbon-intensive industries, like the oil and gas industry, that are exposed to climate risks, such as those risks related to the transition to a less carbon-dependent economy, as well as customers who operate in low-carbon industries that may be subject to risks associated with new technologies.
The Company has customers who operate in carbon-intensive industries, such as the oil and gas industry, that are exposed to risks related to the transition to a less carbon-dependent economy, as well as customers who operate in low-carbon industries that may be subject to risks associated with new technologies.
An interruption in or breach in security of the Company’s information systems may result in a loss of customer business and have an adverse effect on the Company’s results of operations, financial condition and cash flows. The Company relies heavily on communications and information systems to conduct its business.
An interruption in or breach in security of the Company’s information systems may result in a loss of customer business and have an adverse effect on the Company’s results of operations, financial condition and cash flows. The Company relies heavily on communications and information systems to conduct its business and store sensitive data.
Liquidity Risks Liquidity risk could impair the Company’s ability to fund operations and jeopardize its financial condition. Liquidity is essential to the Company’s business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on its liquidity.
Liquidity Risks Liquidity risk could impair the Company’s ability to fund operations and jeopardize its financial condition. Liquidity is essential to the Company’s business, and it monitors and manages its liquidity daily. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on the Company’s liquidity.
Additional factors related to the credit quality of commercial real estate loans include tenant vacancy rates and the quality of management of the property. In addition, financial markets and global supply chains may be adversely affected by the current or anticipated impact of military conflict, including the current Russian invasion of Ukraine, terrorism or other geopolitical events.
Additional factors related to the credit quality of commercial real estate loans include tenant vacancy rates and the quality of management of the property. In addition, financial markets and global supply chains may be adversely affected by the current or anticipated impact of military conflict, including conflicts in Ukraine and the Middle East, terrorism or other geopolitical events.
Any financial liability or reputation damage could have a material adverse effect on the Company’s business, financial condition and results of operations. Climate Change Risks Severe weather, natural disasters and other adverse external events could significantly impact the Company’s business and customers.
Any financial liability or reputation damage could have a material adverse effect on the Company’s business, financial condition and results of operations. Environmental, Social and Governance Risks Severe weather, natural disasters and other adverse external climate events could significantly impact the Company’s business and customers.
The Company’s programs that are intended to prevent or limit the effects of cybersecurity risk may not be sufficient to eliminate all unauthorized transactions or unauthorized access to customer information. The financial, reputational and regulatory impact of unauthorized transactions or unauthorized access to customer information could be significant.
These technological advances increase cybersecurity risk. The Company’s programs that are intended to prevent or limit the effects of cybersecurity risk may not be sufficient to eliminate all unauthorized transactions or unauthorized access to customer information. The financial, reputational and regulatory impact of unauthorized transactions or unauthorized access to customer information could be significant.
The Company may be adversely affected by weaknesses in the commercial real estate market. As of December 31, 2022, commercial real estate loans (including multifamily residential and excluding farmland) comprised approximately 26.5% of the Company’s loan portfolio.
The Company may be adversely affected by weaknesses in the commercial real estate market. As of December 31, 2023, commercial real estate loans (including multifamily residential and excluding farmland) comprised approximately 26.8% of the Company’s loan portfolio.
The trading price for the Company’s common stock may fluctuate significantly in response to a variety of factors outside the Company’s control, including, among other things: • actual or anticipated variations in quarterly results of operations; • recommendations by securities analysts; • failure to meet analysts’ revenue or earnings estimates; • operating and stock price performance of other companies that investors deem comparable to the Company; • news reports relating to trends, concerns and other issues in the financial services industry; • perceptions in the marketplace regarding the Company and/or its competitors; • new technology used, or services offered, by competitors; • cybersecurity breaches; • actions by institutional shareholders; • significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors; • failure to integrate acquisitions or realize anticipated benefits from acquisitions; • changes in government regulations; • geopolitical conditions such as acts or threats of terrorism or military conflicts, such as the war in Ukraine; • general market conditions, including real or anticipated changes in the strength of the Texas and Oklahoma economies; and • industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, oil price volatility or credit losses. 27 ITEM 1B.
The trading price for the Company’s common stock may fluctuate significantly in response to a variety of factors outside the Company’s control, including, among other things: • actual or anticipated variations in quarterly results of operations; • changes in recommendations by securities analysts; • failure to meet analysts’ revenue or earnings estimates; • changes in ratings from national rating agencies on the securities in the Company’s investment portfolio; • operating and stock price performance of other companies that investors deem comparable to the Company; • news reports relating to trends, concerns and other issues in the financial services industry; • perceptions in the marketplace regarding the Company and/or its competitors; • new technology used, or services offered, by competitors; • cybersecurity breaches; • actions by institutional shareholders; • significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors; • failure to integrate acquisitions or realize anticipated benefits from acquisitions; • changes in government regulations; • geopolitical conditions such as acts or threats of terrorism or military conflicts, such as the wars in Ukraine and the Middle East; • general market conditions, including real or anticipated changes in the strength of the Texas and Oklahoma economies; and • industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, presidential and congressional elections, interest rate changes, oil price volatility or credit losses.
Climate changes presents multi-faceted risks, including (i) operational risk from the physical effects of climate events on the Company’s facilities and other assets as well as those of customers; (ii) credit risk from borrowers with significant exposure to climate risk; and (iii) reputational risk from stakeholder concerns about the Company’s practices related to climate change, the Company’s carbon footprint and the Company’s business relationships with customers who operate in carbon-intensive industries.
These risks include (i) operational risk from the physical effects of climate events on the Company’s facilities and other assets as well as those of customers; (ii) credit risk from borrowers with significant exposure to climate risk; and (iii) reputational risk from stakeholder concerns about the Company’s practices related to climate change, the Company’s carbon footprint and the Company’s business relationships with customers who operate in carbon-intensive industries.
Any such adjustments are reflected in the Company’s results of operations in the periods in which they become known. At December 31, 2022, the Company’s goodwill totaled $3.23 billion.
Any such adjustments are reflected in the Company’s results of operations in the periods in which they become known. At December 31, 2023, the Company’s goodwill totaled $3.40 billion.
Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, financial condition and results of operations.
Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, financial condition and results of operations. ITEM 1B. UNRESOLVED STAFF COMMENTS None.
The Company relies on customer deposits as a significant source of funding. Competition among U.S. banks for customer deposits is intense, may increase the cost of deposits or prevent new deposits, and may otherwise negatively affect the Company’s ability to grow its deposit base.
Competition among U.S. banks for customer deposits is intense, may increase the cost of deposits or prevent new deposits, and may otherwise negatively affect the Company’s ability to grow its deposit base.
As a lender, the Company is exposed to the risk that the principal of, or interest on, a loan will not be repaid timely or at all or that the value of any collateral supporting a loan will be insufficient to cover the Company’s outstanding exposure.
The Company’s business depends on its ability to successfully measure and manage credit risk. As a lender, the Company is exposed to the risk that the principal of, or interest on, a loan will not be repaid timely or at all or that the value of any collateral supporting a loan will be insufficient to cover the Company’s outstanding exposure.
Such events and long-term shifts may also have a significant impact on the Company’s customers, which could amplify credit risk by diminishing borrowers’ repayment capacity or collateral values, and other businesses counterparties of the Company, which could have a broader impact on the economy, supply chains and distribution networks.
Such events and long-term shifts may also have a significant impact on the Company’s customers, which could amplify credit risk by diminishing borrowers’ repayment capacity or collateral values, and other businesses counterparties of the Company, which could have a broader impact on the economy, supply chains and distribution networks. 26 Climate change also exposes the Company to risks associated with the transition to a less carbon-dependent economy.
The Company, while maintaining its conservative approach to lending, has emphasized both new and existing loan products, focusing on managing its commercial real estate (including farmland and multifamily residential) and commercial loan portfolios, and intends to continue to increase its lending activities and acquire loans in possible future acquisitions.
The Company has emphasized both new and existing loan products, focusing on managing its commercial real estate (including farmland and multifamily residential) and commercial loan portfolios, and intends to continue to increase its lending activities and acquire loans in possible future acquisitions. As a result, commercial real estate and commercial loans as a proportion of its portfolio could increase.
Approximately 79.9% of the Company’s total loans as of December 31, 2022 consisted of loans included in the real estate loan portfolio, with 29.2% in commercial real estate (including farmland and multifamily residential), 35.8% in residential real estate (including home equity) and 14.9% in construction, land development and other land loans.
Approximately 82.6% of the Company’s total loans as of December 31, 2023 consisted of loans included in the real estate loan portfolio, with 29.6% in commercial real estate (including farmland and multifamily residential), 38.5% in residential real estate (including home equity) and 14.5% in construction, land development and other land loans.
The Company’s ability to borrow could also be impaired by factors that are not specific to it, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets. 19 The Company relies on customer deposits as a significant source of funding, and its deposits may decrease in the future.
The Company’s ability to borrow could also be impaired by factors that are not specific to it, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the turmoil faced by banking organizations in 2023 and the continued deterioration in credit markets.
A decline in the Texas economy related to oil production decline could impact the Company’s loan portfolios outside of the energy portfolio, if borrowers experience unemployment or loss of income and are unable to make payments on their loans.
A decline in the Texas economy related to oil production decline could impact the Company’s loan portfolios outside of the energy portfolio, if borrowers experience unemployment or loss of income and are unable to make payments on their loans. The Company is subject to losses due to fraudulent and negligent acts. Financial institutions are inherently exposed to fraud risk.
Although the Company has not recorded any such impairment charges since it initially recorded the goodwill, the Company’s future evaluations of goodwill could result in findings of impairment and related write-downs, which may have a material adverse effect on its financial condition and results of operations. 21 Operational Risks The Company’s accounting estimates and risk management processes rely on analytical and forecasting models and tools that may prove to be inaccurate.
Although the Company has not recorded any such impairment charges since it initially recorded the goodwill, the Company’s future evaluations of goodwill could result in findings of impairment and related write-downs, which may have a material adverse effect on its financial condition and results of operations.
Earnings also could be adversely affected if the interest rates received on loans and other investments decrease more quickly than the interest rates paid on deposits and other borrowings.
Earnings also could be adversely affected if the interest rates received on loans and other investments decrease more quickly than the interest rates paid on deposits and other borrowings. Decreasing interest rates reduces the Company’s yield on its variable rate loans and on its new loans, which reduces its net interest income.
General Risks Negative publicity could damage the Company’s reputation and business. Reputation risk, or the risk to earnings and capital from negative public opinion, is inherent in the Company’s business. Negative public opinion could adversely affect the Company’s ability to keep and attract customers and expose it to adverse legal and regulatory consequences.
General Risks Negative publicity could damage the Company’s reputation and business. Reputation risk, or the risk to earnings and capital from negative public opinion, is inherent in the Company’s business.
Such changes could have a material adverse effect on the Company’s business, results of operations, financial condition and/or reputation, in addition to having a similar impact on the Company’s customers.
These transition risks may result from changes in policies, laws and regulations, technologies, and/or market preferences to address climate change. Such changes could have a material adverse effect on the Company’s business, results of operations, financial condition and/or reputation, in addition to having a similar impact on the Company’s customers.
Furthermore, the occurrence of any such event in the future could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations. 24 Climate change could have a material negative impact the Company and its customers The Company’s business, as well as the operations and activities of its customers, could be negatively impacted by climate change.
Furthermore, the occurrence of any such event in the future could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.
Acquisitions of financial institutions, such as the pending acquisitions of First Bancshares and Lone Star, involve operational risks and uncertainties and acquired companies may have unforeseen liabilities, exposure to asset quality problems, key employee and customer retention problems and other problems that could negatively affect the Company’s organization.
Acquired companies may have unforeseen liabilities, exposure to asset quality problems, key employee and customer retention problems and other problems that could negatively affect the Company’s organization.
The Company’s principal source of funds to pay dividends on the shares of common stock is cash dividends that the Company receives from the Bank. Various banking laws applicable to the Bank limit the payment of dividends and other distributions by the Bank to the Company, and may therefore limit the Company’s ability to pay dividends on its common stock.
Various banking laws applicable to the Bank limit the payment of dividends and other distributions by the Bank to the Company, and may therefore limit the Company’s ability to pay dividends on its common stock. 27 There may be substantial fluctuations in the Company’s stock price.
If the Company is unable to manage its growth effectively, its operations and profitability could be negatively affected.
If the Company is not able to continue its historical levels of growth, it may not be able to maintain its historical earnings trends. If the Company is unable to manage its growth effectively, its operations and profitability could be negatively affected.
Further, the Company’s assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets and liabilities. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company’s business, financial condition and results of operations.
Further, the Company’s assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets and liabilities.
Competitors of the Company, the Company’s vendors, or other individuals or companies, have from time to time claimed to hold intellectual property sold to the Company by its vendors. Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions frequently seek injunctions and substantial damages.
Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions frequently seek injunctions and substantial damages.
Further, as technology advances, the ability to initiate transactions and access data has become more widely distributed among mobile devices, personal computers, automated teller machines, remote deposit capture sites and similar access points. These technological advances increase cybersecurity risk.
The Company also may not succeed in anticipating its future technology needs, the technology demands of its customers, or the competitive landscape for technology. Further, as technology advances, the ability to initiate transactions and access data has become more widely distributed among mobile devices, personal computers, automated teller machines, remote deposit capture sites and similar access points.
To achieve its past levels of growth, the Company has focused on both internal growth and acquisitions. The Company may not be able to sustain its historical rate of growth or may not be able to grow at all.
Strategic Risks If the Company is not able to continue its historical levels of growth, it may not be able to maintain its historical earnings trends. To achieve its past levels of growth, the Company has focused on both internal growth and acquisitions.
An increase in the Company’s allowance for credit losses or charge-offs as required by these regulatory agencies could have a material adverse effect on the Company’s operating results and financial condition. The Financial Accounting Standards Board’s accounting standard, ASU 2016-13, which established allowances for credit losses became effective for the Company on January 1, 2020.
An increase in the Company’s allowance for credit losses or charge-offs as required by these regulatory agencies could have a material adverse effect on the Company’s operating results and financial condition. The Company’s profitability depends significantly on local economic conditions.
As a result, the factors that impact the energy sector may have a greater effect on the Company than on more broadly diversified financial institutions. Companies with exposure to the energy sector, whether directly or indirectly, are subject to volatile fluctuations in price and supply of oil and gas.
Companies with exposure to the energy sector, whether directly or indirectly, are subject to volatile fluctuations in price and supply of oil and gas.
Although the Company makes significant efforts to maintain the security and integrity of its information systems and has implemented various measures to manage the risks of a security breach or disruption, there can be no assurance that the Company’s security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging.
The Company’s efforts to maintain the security and integrity of its information systems and its measures to manage the risks of a security breach or disruption may not be effective, and attempted security breaches or disruptions could be successful or damaging. Breaches also may occur as a result of remote working arrangements.
In general, commercial real estate loans and commercial loans yield higher returns and often generate a deposit relationship, but also pose greater credit risks than do owner-occupied residential real estate loans. These types of loans are also typically larger than residential real estate loans.
As of December 31, 2023, commercial real estate (including farmland and multifamily residential) and commercial loans totaled $8.57 billion. In general, commercial real estate loans and commercial loans pose greater credit risks than do owner-occupied residential real estate loans. These types of loans are also typically larger than residential real estate loans.
Climate change presents both immediate and long-term risks to the Company and its customers and these risks are expected to increase over time.
Climate change could have a material negative impact on the Company and its customers The Company’s business, as well as the operations and activities of its customers, could be negatively impacted by climate change. Climate change presents both immediate and long-term risks to the Company and its customers and these risks are expected to increase over time.
More specifically, the Company may not be able to obtain the financing necessary to fund additional growth and may not be able to find suitable acquisition candidates. Various factors, such as economic conditions, competition and heightened regulatory scrutiny, may impede or prohibit the opening of new banking centers and the completion of acquisitions.
Various factors, such as economic conditions, competition and heightened regulatory scrutiny, may impede or prohibit the opening of new banking centers and the completion of acquisitions. Further, the Company may be unable to attract and retain experienced bankers, which could adversely affect its internal growth.
The sources of the misrepresentations are often difficult to locate, and it is often difficult to recover any of the monetary losses the Company may suffer. The Company is subject to environmental liability risk associated with lending activities. A significant portion of the Company’s loan portfolio is secured by real property.
The sources of the misrepresentations are often difficult to locate, and it is often difficult to recover any of the monetary losses the Company may suffer.
An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on the Company’s business, financial condition and results of operations. Strategic Risks If the Company is not able to continue its historical levels of growth, it may not be able to maintain its historical earnings trends.
An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on the Company’s business, financial condition and results of operations. The fair value of the Company’s investment securities can fluctuate due to factors outside of its control.
Negative public opinion could also result from adverse news or publicity that impairs the reputation of the financial services industry generally. Failure to compete effectively for customers could adversely affect the Company’s growth and profitability, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company may incur meaningful costs with respect to its ESG efforts and if such efforts are negatively perceived, the Company’s reputation and stock price may suffer. 28 Failure to compete effectively for customers could adversely affect the Company’s growth and profitability, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Technology companies frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained.
In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of the Company, the Company’s vendors, or other individuals or companies, have from time to time claimed to hold intellectual property sold to the Company by its vendors.
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Company’s ability to conduct business.
A significant portion of the Company’s business is generated from markets that have been, and may continue to be, damaged by hurricanes, floods, tropical storms, tornadoes and other natural disasters and adverse weather, which may grow more severe and could have a significant impact on the Company’s ability to conduct business.
Current economic conditions are significantly affected by elevated levels of inflation and rising interest rates. A prolonged period of inflation may adversely affect the Company’s profitability by causing fixed costs and expenses to increase. Meanwhile, economic and inflationary pressure on consumers and uncertainty regarding the prospects for economic improvement could alter consumer and business spending, borrowing and savings habits.
Sustained higher interest rates by the Federal Reserve Board may be needed to address persistent inflationary price pressures, which could push down asset prices and weaken economic activity. Meanwhile, economic and inflationary pressure on consumers and uncertainty regarding the prospects for economic improvement could alter consumer and business spending, borrowing and savings habits.
Loans to oil and gas production and service companies, which are reported as commercial and industrial loans, totaled $429.5 million (net of discount and excluding PPP loans totaling $3.4 million) at December 31, 2022, representing approximately 2.3% of total loans, excluding Warehouse Purchase Program loans.
As of December 31, 2023, the Company had $368.3 million (net of discount and excluding PPP loans totaling $2.6 million) in funded commitments outstanding to oil and gas production and service companies and $471.7 million in unfunded commitments, for a total of $840.0 million (net of discount and excluding PPP loans totaling $2.6 million).
Credit and Lending Risks The Company’s business depends on its ability to successfully manage credit risk. The Company’s business depends on its ability to successfully measure and manage credit risk.
The Company is unable to predict changes in interest rates, which are affected by factors beyond its control, including inflation, deflation, recession, unemployment, money supply, and other changes in financial markets. Credit and Lending Risks The Company’s business depends on its ability to successfully manage credit risk.
Such conditions could have a material adverse effect on the credit quality of the Company’s loans and on the Company’s business, financial condition and results of operations.
The Company could face increased scrutiny or be viewed as higher risk by regulators or investors, which could have a material adverse effect on the Company’s business, financial condition, and results of operations. 25 The Company is subject to claims and litigation pertaining to intellectual property.
Removed
The Company may be adversely impacted by the transition from LIBOR as a reference rate. The United Kingdom’s Financial Conduct Authority and the administrator of LIBOR have announced that the publication of the most commonly used U.S. dollar London Interbank Offered Rate (“LIBOR”) settings will cease to be published or cease to be representative after June 30, 2023.
Added
Beginning early in 2022, in response to growing signs of inflation, the Federal Reserve Board increased interest rates rapidly. Further, the Federal Reserve Board announced an intention to take further actions to mitigate inflationary pressures. Rapid changes in interest rates may make it difficult for the Company to balance its loan and deposit portfolios.
Removed
The publication of all other LIBOR settings ceased to be published as of December 31, 2021. Given consumer protection, litigation, and reputation risks, the bank regulatory agencies have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and that they will examine bank practices accordingly.
Added
In addition, lower interest rates may reduce the Company’s realized yields on investment securities which would reduce its net interest income and cause downward pressure on net interest margin in future periods.
Removed
The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace U.S. dollar LIBOR with a benchmark rate based on the Secured Overnight Financing Rate (“SOFR”) for contracts governed by U.S. law that have no or ineffective fallbacks, and in December 2022, the Federal Reserve Board adopted related implementing rules.
Added
Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company’s business, financial condition and results of operations. 15 Although the Federal Reserve Board increased the target federal funds rate in 2023 to combat inflationary trends, the Federal Reserve Board held the federal funds rate steady in December 2023 for the third consecutive time and indicated that the rate is likely to be decreased in 2024 and beyond.
Removed
Although governmental authorities have endeavored to facilitate an orderly discontinuation of LIBOR, no assurance can be provided that this aim will be achieved or that the use, level, and volatility of LIBOR or other interest rates or the value of LIBOR-based securities will not be adversely affected.
Added
Current economic conditions are significantly affected by elevated levels of inflation and rising interest rates throughout 2022 and 2023. Continuing inflationary pressures in 2024 could lead to increased costs to the Company’s customers, making it more difficult for them to repay their loans or other obligations, which would increase the Company’s credit risk.
Removed
As a result, and despite the enactment of the LIBOR Act, for the most commonly used LIBOR settings, the use or selection of a successor rate could expose the Company to risks associated with disputes and litigation with the Company’s customers and counterparties and other market participants in connection with implementing LIBOR fallback provisions.
Added
A deterioration in economic conditions in the United States and the Company’s markets could result in an increase in loan delinquencies and nonperforming assets, decreases in loan collateral values and a decrease in demand for its products and services, all of which, in turn, would adversely affect its business, financial condition and results of operations.
Removed
The majority of loans originally priced based on a LIBOR index were converted to either a SOFR or BSBY (Bloomberg Index Services) index prior to December 31, 2022. The remaining LIBOR-priced loans are expected to be converted to an alternative index prior to June 30, 2023.
Added
The market value for real estate can fluctuate significantly over a relatively short period as a result of conditions in the Company’s primary market areas, due to economic downturns, changes in the economic health of industries heavily concentrated in a particular market area, or changes in market interest rates.
Removed
The Bank is coordinating with customers to implement an orderly change of loan pricing indices, without undue disruption to the Bank’s customers or its lending processes. As of December 31, 2022, approximately $291.4 million of the Company’s outstanding loans and certain derivative contracts, borrowings and other financial instruments have attributes that are either directly or indirectly dependent on LIBOR.
Added
The funded commitments to oil and gas production and service companies are reported as commercial and industrial loans and represented 1.7% of total loans, excluding Warehouse Purchase Program loans. As a result, the factors that impact the energy sector may have an effect on the Company.
Removed
The Company is subject to litigation and reputational risks if it is unable to renegotiate and amend the remaining existing contracts with counterparties that are dependent on LIBOR, including contracts that do not have fallback language. The timing and manner in which each customer’s contract transitions to a replacement rate will vary on a case-by-case basis.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeThe following table sets forth specific information regarding the banking centers located in each of the Company’s geographical market areas at December 31, 2022: Geographical Area Number of Banking Centers Number of Leased Banking Centers Deposits at December 31, 2022 (dollars in thousands) Bryan/College Station area 16 — $ 1,672,714 Houston area 65 13 7,694,488 Central Texas area 29 2 2,421,640 Dallas/Fort Worth area 62 23 7,080,437 East Texas area 22 — 1,229,008 West Texas area 34 6 3,200,644 South Texas area 30 3 3,487,836 Central Oklahoma area 6 1 778,446 Tulsa Oklahoma area 8 2 968,318 272 50 $ 28,533,531 ITE M 3.
Biggest changeThe following table sets forth specific information regarding the banking centers located in each of the Company’s geographical market areas at December 31, 2023: Geographical Area Number of Banking Centers Number of Leased Banking Centers Deposits at December 31, 2023 (dollars in thousands) Bryan/College Station area 16 — $ 1,624,562 Houston area 65 13 6,891,540 Central Texas area 32 2 2,246,286 Dallas/Fort Worth area 62 23 6,154,548 East Texas area 22 — 1,134,634 West Texas area 44 10 4,490,869 South Texas area 30 3 3,085,125 Central Oklahoma area 6 1 639,008 Tulsa Oklahoma area 8 2 913,237 285 54 $ 27,179,809 ITE M 3.
The Company also owns or leases various corporate and operations offices. The expiration dates of the leases range from 2023 to 2032 and do not include renewal periods which may be available at the Company’s option.
The Company also owns or leases various corporate and operations offices. The expiration dates of the leases range from 2024 to 2032 and do not include renewal periods which may be available at the Company’s option.
ITEM 2. PROPERTIES As of December 31, 2022, the Company conducted business at 272 full-service banking centers. The Company’s principal executive office is located at Prosperity Bank Plaza, 4295 San Felipe, Houston, Texas. The Company also owns or leases other facilities in which its banking centers are located as listed below by geographical market area.
ITEM 2. PROPERTIES As of December 31, 2023, the Company conducted business at 285 full-service banking centers. The Company’s principal executive office is located at Prosperity Bank Plaza, 4295 San Felipe, Houston, Texas. The Company also owns or leases other facilities in which its banking centers are located as listed below by geographical market area.
MINE SAFETY DISCLOSURES Not applicable. 28 PART II.
MINE SAFETY DISCLOSURES Not applicable. 31 PART II.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeFiscal year ended December 31. 12/17 12/18 12/19 12/20 12/21 12/22 Prosperity Bancshares, Inc. $ 100.00 $ 90.80 $ 107.31 $ 106.87 $ 114.49 $ 118.63 S&P 500 100.00 95.62 125.72 148.85 191.58 156.89 NASDAQ Bank 100.00 75.78 89.41 81.19 114.69 96.14 Copyright© 2022 Standard & Poor's, a division of S&P Global. All rights reserved. ITEM 6. [RESERVED ] 31
Biggest changeFiscal year ended December 31. 12/18 12/19 12/20 12/21 12/22 12/23 Prosperity Bancshares, Inc. $ 100.00 $ 118.19 $ 117.70 $ 126.09 $ 130.65 $ 126.21 S&P 500 100.00 131.49 155.68 200.37 164.08 207.21 NASDAQ Bank 100.00 117.98 107.14 151.35 126.88 135.67 Copyright© 2024 Standard & Poor's, a division of S&P Global. All rights reserved. ITEM 6. [RESERVED ] 34
The historical stock price performance for the Company’s common stock shown on the graph below is not necessarily indicative of future stock performance. * $100 invested on 12/31/17 in stock or index, including reinvestment of dividends.
The historical stock price performance for the Company’s common stock shown on the graph below is not necessarily indicative of future stock performance. * $100 invested on 12/31/18 in stock or index, including reinvestment of dividends.
Dividend reinvestment has been assumed. The Performance Graph assumes $100 invested on December 31, 2017 in the Company’s common stock, the S&P 500 Total Return Index and the Nasdaq Bank Index.
Dividend reinvestment has been assumed. The Performance Graph assumes $100 invested on December 31, 2018 in the Company’s common stock, the S&P 500 Total Return Index and the Nasdaq Bank Index.
Under the 2023 stock repurchase program, the Company may repurchase shares from time to time at prevailing market prices, through open-market purchases or privately negotiated transactions, depending upon market conditions.
Under the 2024 stock repurchase program, the Company may repurchase shares from time to time at prevailing market prices, through open-market purchases or privately negotiated transactions, depending upon market conditions.
As of December 31, 2022, the Company had shares of restricted stock outstanding under its 2020 Stock Incentive Plan, which was approved by the Company’s shareholders: Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Plan Category (a) (b) (c) Equity compensation plans approved by security holders — $ — 1,955,675 (1) Equity compensation plans not approved by security holders — — — — $ — 1,955,675 (1) All of these awards are available under the Company’s 2020 Stock Incentive Plan.
As of December 31, 2023, the Company had shares of restricted stock outstanding under its 2020 Stock Incentive Plan, which was approved by the Company’s shareholders: Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Plan Category (a) (b) (c) Equity compensation plans approved by security holders — $ — 1,923,546 (1) Equity compensation plans not approved by security holders — — — — $ — 1,923,546 (1) All of these awards are available under the Company’s 2020 Stock Incentive Plan.
The cash dividends declared per share by quarter (and paid on the first business day of the subsequent quarter) for the Company’s last two fiscal years were as follows: 2022 2021 Fourth Quarter $ 0.55 $ 0.52 Third Quarter 0.52 0.49 Second Quarter 0.52 0.49 First Quarter 0.52 0.49 Recent Sales of Unregistered Securities None. 29 Securities Authorized for Issuance under Equity Compensation Plans The following table provides information as of December 31, 2022 regarding the Company’s equity compensation plan under which the Company’s equity securities are authorized for issuance.
The cash dividends declared per share by quarter (and paid on the first business day of the subsequent quarter) for the Company’s last two fiscal years were as follows: 2023 2022 Fourth Quarter $ 0.56 $ 0.55 Third Quarter 0.55 0.52 Second Quarter 0.55 0.52 First Quarter 0.55 0.52 Recent Sales of Unregistered Securities None. 32 Securities Authorized for Issuance under Equity Compensation Plans The following table provides information as of December 31, 2023 regarding the Company’s equity compensation plan under which the Company’s equity securities are authorized for issuance.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Share Repurchases” for additional information. 30 Performance Graph The following Performance Graph compares the cumulative total shareholder return on the Company’s common stock for the period beginning at the close of trading on December 31, 2017 to December 31, 2022, with the cumulative total return of the S&P 500 Total Return Index and the Nasdaq Bank Index for the same period.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Share Repurchases” for additional information. 33 Performance Graph The following Performance Graph compares the cumulative total shareholder return on the Company’s common stock for the period beginning at the close of trading on December 31, 2018 to December 31, 2023, with the cumulative total return of the S&P 500 Total Return Index and the Nasdaq Bank Index for the same period.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers On January 18, 2022, the Company announced a stock repurchase program under which up to 5%, or approximately 4.6 million shares of its outstanding common stock may be acquired over a one-year period expiring on January 18, 2023, at the discretion of management.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers On January 17, 2023, Prosperity Bancshares announced a stock repurchase program under which up to 5%, or approximately 4.6 million shares, of its outstanding common stock may be acquired over a one-year period expiring on January 17, 2024, at the discretion of management.
On January 17, 2023, Prosperity Bancshares announced a stock repurchase program under which up to 5%, or approximately 4.6 million shares, of its outstanding common stock may be acquired over a one-year period expiring on January 17, 2024, at the discretion of management.
On January 16, 2024, Prosperity Bancshares announced a stock repurchase program under which up to 5%, or approximately 4.7 million shares, of its outstanding common stock may be acquired over a one-year period expiring on January 16, 2025, at the discretion of management.
Although the Company has declared dividends on its common stock since 1994, and paid quarterly dividends aggregating $2.11 per share for 2022 and $1.99 per share for 2021, the Company could discontinue payment of dividends in the future.
Although the Company has declared dividends on its common stock since 1994, and paid quarterly dividends aggregating $2.21 per share for 2023 and $2.11 per share for 2022, the Company could discontinue payment of dividends in the future.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHA REHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Common Stock Information The Company’s common stock is listed on the New York Stock Exchange under the symbol “PB.” As of February 21, 2023, there were 91,308,615 shares outstanding and 4,322 shareholders of record.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHA REHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Common Stock Information The Company’s common stock is listed on the New York Stock Exchange under the symbol “PB.” As of February 26, 2024, there were 93,529,541 shares outstanding and 4,710 shareholders of record.
The Company repurchased zero shares of its common stock during the fourth quarter of 2022 and 981,884 shares of its common stock at an average weighted price of $66.90 per share during the year ended December 31, 2022.
Under the 2023 stock repurchase program, Prosperity Bancshares repurchased approximately 1.21 million shares of its common stock at an average weighted price of $59.88 per share during the year ended December 31, 2023.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeItem 6. [Reserved] 31 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32 Overview 33 Pending Acquisitions 34 Critical Accounting Estimates 34 Results of Operations 36 Financial Condition 42 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 65 Item 8. Financial Statements and Supplementary Data 65
Biggest changeItem 6. [Reserved] 34 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35 Overview 36 Recent Acquisition 37 Pending Acquisition 37 Critical Accounting Estimates 38 Results of Operations 39 Financial Condition 46 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 70 Item 8. Financial Statements and Supplementary Data 70

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

184 edited+38 added−28 removed169 unchanged
Biggest changeThese possible events or factors include, but are not limited to: • changes in the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations resulting in, among other things, a deterioration in credit quality or reduced demand for credit, including the result and effect on the Company’s loan portfolio and allowance for credit losses; • the effect, impact, potential duration or other implications of the COVID-19 pandemic, including any actions undertaken by federal, state and local governmental authorities in response to the pandemic; • volatility in interest rates and market prices, which could reduce the Company’s net interest margins, asset valuations and expense expectations; • changes in the levels of loan prepayments and the resulting effects on the value of the Company’s loan portfolio; • changes in local economic and business conditions, including fluctuations in the price of oil, natural gas and other commodities, which adversely affect the Company’s customers and their ability to transact profitable business with the company, including the ability of the Company’s borrowers to repay their loans according to their terms or a change in the value of the related collateral; • the potential impacts of climate change; • increased competition for deposits and loans adversely affecting rates and terms; • the timing, impact and other uncertainties of any future acquisitions, including the pending acquisitions of First Bancshares and Lone Star and the Company’s ability to identify suitable future acquisition candidates, the success or failure in the integration of their operations, and the ability to enter new markets successfully and capitalize on growth opportunities; • the possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on the results of operations; • increased credit risk in the Company’s assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of the total loan portfolio; • the concentration of the Company’s loan portfolio in loans collateralized by residential and commercial real estate; • the failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses, including such assumptions related to potential, pending or recent acquisitions; • changes in the availability of funds resulting in increased costs or reduced liquidity; • a deterioration or downgrade in the credit quality and credit agency ratings of the securities in the Company’s securities portfolio; • increased asset levels and changes in the composition of assets and the resulting impact on the Company’s capital levels and regulatory capital ratios; • the Company’s ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes; • the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels; • government intervention in the U.S. financial system; • changes in statutes and government regulations or their interpretations applicable to financial holding companies and the Company’s present and future banking and other subsidiaries, including changes in tax requirements and tax rates; 32 • the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; • poor performance by external vendors; • the cost and effects of a failure, interruption, or breach of security of the Company’s systems; • the failure of analytical and forecasting models and tools used by the Company to estimate expected credit losses and to measure the fair value of financial instruments; • additional risks from new lines of businesses or new products and services; • claims or litigation related to intellectual property or fiduciary responsibilities; • the failure of the Company’s enterprise risk management framework to identify or address risks adequately; • a failure in or breach of operational or security systems of the Company’s infrastructure, or those of its third-party vendors and other service providers, including as a result of cyber-attacks; • potential risk of environmental liability associated with lending activities; • acts of terrorism, an outbreak of hostilities, such as the war between Russia and Ukraine, or other international or domestic calamities, civil unrest, insurrections, other political, economic or diplomatic developments, including those caused by public health issues, outbreaks of diseases and pandemics, such as the COVID-19 pandemic, weather or other acts of God and other matters beyond the Company’s control; and • other risks and uncertainties described in this Annual Report on Form 10-K or in the Company’s other reports and documents filed with the Securities and Exchange Commission.
Biggest changeThese possible events or factors include, but are not limited to: • changes in the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations resulting in, among other things, a deterioration in credit quality or reduced demand for credit, including the result and effect on the Company’s loan portfolio and allowance for credit losses; • adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, the Company’s stock price, liquidity and regulatory responses to these developments (including increases in the cost of the Company’s deposit insurance assessments); • the Company's ability to effectively manage its liquidity risk and the availability of capital and funding; • volatility in interest rates and market prices, which could reduce the Company’s net interest margins, asset valuations and expense expectations; • prolonged periods of high inflation and their effects on our business, profitability, and our stock price; • changes in the levels of loan prepayments and the resulting effects on the value of the Company’s loan portfolio; • changes in local economic and business conditions, including fluctuations in the price of oil, natural gas and other commodities, which adversely affect the Company’s customers and their ability to transact profitable business with the company, including the ability of the Company’s borrowers to repay their loans according to their terms or a change in the value of the related collateral; • the potential impacts of climate change; • increased competition for deposits and loans adversely affecting balances, rates and terms; • the timing, impact and other uncertainties of any future acquisitions, including the pending acquisition of Lone Star, and the Company’s ability to identify suitable future acquisition candidates, the success or failure in the integration of their operations, and the ability to enter new markets successfully and capitalize on growth opportunities; • the risk that the regulatory environment may not be conducive to or may prohibit the consummation of future mergers and/or business combinations, may increase the length of time and amount of resources required to consummate such transactions, and the potential to reduce anticipated benefits from such mergers or combinations; • the possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on the results of operations; • increased credit risk in the Company’s assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of the total loan portfolio; • the concentration of the Company’s loan portfolio in loans collateralized by residential and commercial real estate; • the failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses, including such assumptions related to potential, pending or recent acquisitions; • changes in the availability of funds resulting in increased costs or reduced liquidity; • a deterioration or downgrade in the credit quality and credit agency ratings of the securities in the Company’s securities portfolio; • increased asset levels and changes in the composition of assets and the resulting impact on the Company’s capital levels and regulatory capital ratios; 35 • the Company’s ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes; • the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels; • government intervention in the U.S. financial system; • changes in statutes and government regulations or their interpretations applicable to financial holding companies and the Company’s present and future banking and other subsidiaries, including changes in tax requirements and tax rates; • the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; • the Company’s ability to identify and address cybersecurity risks such as data security breaches, malware, "denial of service" attacks, "hacking", and identity theft, a failure of which could disrupt business and result in significant losses or adverse effects to the Company’s reputation; • poor performance by, or breach of the operational or security systems of, third-party vendors and other service providers; • exposure to potential losses in the event of fraud and/or theft, or in the event that a third-party vendor, obligor, or business partner fails to pay amounts due to the Company under that relationship or under any other arrangement; • the failure of analytical and forecasting models and tools used by the Company to estimate expected credit losses and to measure the fair value of financial instruments; • additional risks from new lines of businesses or new products and services; • risks related to potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings or enforcement actions, including those related to cybersecurity breaches, intellectual property or fiduciary responsibilities; • the failure of the Company’s enterprise risk management framework to identify or address risks adequately; • potential risk of environmental liability associated with lending activities; • acts of terrorism, an outbreak of hostilities, or other international or domestic calamities, civil unrest, insurrections, other political, economic or diplomatic developments, including those caused by public health issues, outbreaks of diseases and pandemics, weather or other acts of God and other matters beyond the Company’s control; and • other risks and uncertainties described in this Annual Report on Form 10-K or in the Company’s other reports and documents filed with the Securities and Exchange Commission.
These fair value estimates associated with acquired loans, and based on a discounted cash flow model, include estimates related to market interest rates and undiscounted projections of future cash flows that incorporate expectations of prepayments and the amount and timing of principal, interest and other cash flows, as well as any shortfalls thereof.
These fair value estimates associated with acquired loans, based on a discounted cash flow model, include estimates related to market interest rates and undiscounted projections of future cash flows that incorporate expectations of prepayments and the amount and timing of principal, interest and other cash flows, as well as any shortfalls thereof.
The factors include current economic metrics, reasonable and supportable forecasted economic metrics, business conditions, delinquency trends, credit concentrations, nature and volume of the portfolio and other 50 adjustments for items not covered by specific reserves and historical lifetime loss experience. Management’s assessment of qualitative factors is a statistically based approach to determine the loss rate adjustment associated with such factors.
The factors include current economic metrics, reasonable and supportable forecasted economic metrics, business conditions, delinquency trends, credit concentrations, nature and volume of the portfolio and other adjustments for items not covered by specific reserves and historical lifetime loss experience. Management’s assessment of qualitative factors is a statistically based approach to determine the loss rate adjustment associated with such factors.
The Company’s allowance for credit losses consists of two elements: (1) specific valuation allowances based on expected losses on impaired loans and purchased credit-deteriorated loans (“PCD”); and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted economic conditions and other qualitative risk factors both internal and external to the Company.
The Company’s allowance for credit losses consists of two elements: (1) specific valuation allowances based on expected losses on impaired loans and certain purchased credit-deteriorated loans (“PCD”); and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted economic conditions and other qualitative risk factors both internal and external to the Company.
If an entity intends to sell or more likely 55 than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the expected credit losses will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.
If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the expected credit losses will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.
In private-label CMOs, losses on underlying mortgages are directed to the most junior of all classes and then to the classes above in order of increasing seniority, which means that the senior classes have enough credit protection to be given the highest credit rating by the rating agencies. Deposits The Company’s lending and investing activities are primarily funded by deposits.
In private-label CMOs, losses on underlying mortgages are directed to the most junior of all classes and then to the classes above in order of increasing seniority, which means that the senior classes have enough credit protection to be given the highest credit rating by the rating agencies. 61 Deposits The Company’s lending and investing activities are primarily funded by deposits.
The increased risk in commercial loans is due to the type of collateral securing these loans as well as the expectation that commercial loans generally will be serviced principally 43 from the operations of the business, and those operations may not be successful. Historical trends have shown these types of loans to have higher delinquencies than mortgage loans.
The increased risk in commercial loans is due to the type of collateral securing these loans as well as the expectation that commercial loans generally will be serviced principally from the operations of the business, and those operations may not be successful. Historical trends have shown these types of loans to have higher delinquencies than mortgage loans.
The Company adopted the option provided by the interim final rule, which delayed the effects of CECL on its regulatory capital through 2021, after which the effects will be phased in over a three-year period from January 1, 2022 through December 31, 2024.
The Company adopted the option provided by the interim final rule, which delayed the effects of CECL on its 68 regulatory capital through 2021, after which the effects will be phased in over a three-year period from January 1, 2022 through December 31, 2024.
The change was primarily due to an increase in average balances and average rates on investment securities, partially offset by a decrease in PPP fees and interest income of $44.6 million, a decrease in loan discount accretion of $31.9 million and an increase in the average rates on interest-bearing liabilities.
The change was primarily due to an increase in average balances and average 39 rates on investment securities, partially offset by a decrease in PPP fees and interest income of $44.6 million, a decrease in loan discount accretion of $31.9 million and an increase in the average rates on interest-bearing liabilities.
For Warehouse Purchase Program loans, the Company has established a maximum purchase facility amount, but reserves the right, at any time, to refuse to buy any mortgage loans offered for sale by its mortgage originator clients for any reason. 62 Commitments to Extend Credit .
For Warehouse Purchase Program loans, the Company has established a maximum purchase facility amount, but reserves the right, at any time, to refuse to buy any mortgage loans offered for sale by its mortgage originator clients for any reason. Commitments to Extend Credit .
Net interest income is the difference between interest income on earning assets such as loans and securities and interest expense on liabilities such as deposits and borrowings which are used to fund those assets. Net interest income is the Company’s largest source of revenue.
Net interest income is the difference between interest income on earning assets such as loans and securities and interest expense on liabilities such as deposits and borrowings which are used to fund those assets. Net 36 interest income is the Company’s largest source of revenue.
Acquired loans with a fair value discount or premium at the date of the business combination that remained at the reporting date are referred to as “fair-valued acquired loans.” All fair-valued acquired loans are further categorized into “PCD Loans” and “Non-PCD loans.” Acquired loans with evidence of more than insignificant credit quality deterioration as of the acquisition date when compared to the origination date are classified as PCD loans. 42 The following tables summarize the Company’s originated and acquired loan portfolios broken out into originated loans, re-underwritten acquired loans, Non-PCD loans and PCD loans as of the dates indicated.
Acquired loans with a fair value discount or premium at the date of the business combination that remained at the reporting date are referred to as “fair-valued acquired loans.” All fair-valued acquired loans are further categorized into “PCD Loans” and “Non-PCD loans.” Acquired loans with evidence of more than insignificant credit quality deterioration as of the acquisition date when compared to the origination date are classified as PCD loans. 46 The following tables summarize the Company’s originated and acquired loan portfolios broken out into originated loans, re-underwritten acquired loans, Non-PCD loans and PCD loans as of the dates indicated.
Because a non-GAAP financial measure is not standardized, it may not be possible to compare this financial measure with other companies’ non-GAAP financial measure having the same or a similar name.
Because a non-GAAP financial measure is not standardized, it may not be possible to compare this financial measure with other companies’ non-GAAP financial measures having the same or a similar name.
While the Company believes no impairment existed at December 31, 2022, under accounting standards applicable at that date, different conditions or assumptions, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company’s impairment evaluation and financial condition or future results of operations.
While the Company believes no impairment existed at December 31, 2023, under accounting standards applicable at that date, different conditions or assumptions, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company’s impairment evaluation and financial condition or future results of operations.
In the future, the Company will continue to analyze impaired Non-PCD loans on a loan-by-loan basis and may use an alternative measurement method to determine the specific reserve, as appropriate and in accordance with applicable accounting standards. PCD loans are individually monitored on a quarterly basis to assess for changes in expected cash flows subsequent to acquisition.
In the future, the Company will continue to analyze impaired Non-PCD loans on a loan-by-loan basis and may use an alternative measurement method to determine the specific reserve, as appropriate and in accordance with applicable accounting standards. PCD loans are monitored individually or on a pooled basis quarterly to assess for changes in expected cash flows subsequent to acquisition.
The Company’s net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a “rate change.” 2022 versus 2021 .
The Company’s net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a “rate change.” 2023 versus 2022 .
Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. As of December 31, 2022, the Company had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.
Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. As of December 31, 2023, the Company had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.
As of December 31, 2022, management does not have the intent to sell any of the securities classified as available for sale before a recovery of cost. In addition, management believes it is more likely than not that the Company will not be required to sell any of its investment securities before a recovery of cost.
As of December 31, 2023, management does not have the intent to sell any of the securities classified as available for sale before a recovery of cost. In addition, management believes it is more likely than not that the Company will not be required to sell any of its investment securities before a recovery of cost.
Loans for which specific reserves are provided are excluded from the general valuation allowance described below. 49 In connection with this review of the loan portfolio, the Company considers risk elements attributable to particular loan types or categories in assessing the quality of individual loans.
Loans for which specific reserves are provided are excluded from the general valuation allowance described below. 53 In connection with this review of the loan portfolio, the Company considers risk elements attributable to particular loan types or categories in assessing the quality of individual loans.
The allowance must reflect changes in the balance of loans subject to the allowance methodology, as well as the estimated lifetime losses associated with those loans. 51 The following table shows the allocation of the allowance for credit losses among various categories of loans and certain other information as of the dates indicated.
The allowance must reflect changes in the balance of loans subject to the allowance methodology, as well as the estimated lifetime losses associated with those loans. 55 The following table shows the allocation of the allowance for credit losses among various categories of loans and certain other information as of the dates indicated.
(2) In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax equivalent adjustment has been computed using a federal income tax rate of 21% and other applicable effective tax rates for the years ended December 31, 2022, 2021 and 2020. 37 The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates.
(2) In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax equivalent adjustment has been computed using a federal income tax rate of 21% and other applicable effective tax rates for the years ended December 31, 2023, 2022 and 2021. 41 The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The allowance for credit losses on off-balance sheet credit exposures estimates expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, except when an obligation is unconditionally cancellable by the Company.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The allowance for credit losses on off-balance sheet credit exposures estimates expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, except when an obligation is unconditionally cancelable by the Company.
Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2022, management believes that there is no potential for credit losses on available for sale securities. Held to maturity securities .
Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2023, management believes that there is no potential for credit losses on available for sale securities. Held to maturity securities .
Although the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, these procedures may not prevent losses from the risks described above. 44 Warehouse Purchase Program.
Although the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, these procedures may not prevent losses from the risks described above. 48 Warehouse Purchase Program.
The Company’s commitments associated with outstanding standby letters of credit, unused capacity on Warehouse Purchase Program loans and commitments to extend credit expiring by period as of December 31, 2022 are summarized below.
The Company’s commitments associated with outstanding standby letters of credit, unused capacity on Warehouse Purchase Program loans and commitments to extend credit expiring by period as of December 31, 2023 are summarized below.
Based on the Company’s annual goodwill impairment test as of October 1, 2022, management does not believe any of its goodwill is impaired as of December 31, 2022, because the fair value of the Company’s equity exceeded its carrying value.
Based on the Company’s annual goodwill impairment test as of October 1, 2023, management does not believe any of its goodwill is impaired as of December 31, 2023, because the fair value of the Company’s equity exceeded its carrying value.
Interest Rate Sensitivity and Market Risk The Company’s asset liability and funds management policy provides management with the guidelines for effective funds management, and the Company has established a measurement system for monitoring its net interest rate sensitivity position. The Company manages its sensitivity position within established guidelines.
Interest Rate Sensitivity and Market Risk The Company’s asset liability and funds management policy provides management with the guidelines for effective funds management, and the Company has established a measurement system for monitoring its net interest rate sensitivity position.
In nearly all cases, the Company’s commercial loans are made in the Company’s market areas and are underwritten on the basis of the borrower's ability to service the debt from income. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets.
In nearly all cases, the Company’s commercial loans are made in the Company’s market areas and are underwritten based on the borrower's ability to service the debt from income. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets.
Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans. 45 Loan Maturities .
Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans. 49 Loan Maturities .
Nevertheless, the Company could sustain losses in future periods that could be substantial in relation to the size of the allowance at December 31, 2022.
Nevertheless, the Company could sustain losses in future periods that could be substantial in relation to the size of the allowance at December 31, 2023.
Credit and debit card, data processing and software amortization expenses were $37.3 million for the year ended December 31, 2022, an increase of $2.2 million or 6.3% compared with 2021, as a result of increase in debit card interchange fees and software maintenance expense.
Credit and debit card, data processing and software amortization expenses were $37.3 million for the year ended December 31, 2022, an increase of $2.2 million or 6.3% compared with 2021, as a result of increase in debit card interchange fees and software maintenance expense. Regulatory Assessments and FDIC Insurance .
If the estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. 35 The Company had no intangible assets with indefinite useful lives at December 31, 2022.
If the estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. The Company had no intangible assets with indefinite useful lives at December 31, 2023.
Because the ratio is a measure of revenues and expenses resulting from the Company’s lending activities and fee-based banking services, net gains and losses on the sale of assets and securities are not included. Additionally, taxes are not part of this calculation. Total assets at December 31, 2022 and 2021 were $37.69 billion and $37.83 billion, respectively.
Because the ratio is a measure of revenues and expenses resulting from the Company’s lending activities and fee-based banking services, net gains and losses on the sale of assets and securities are not included. Additionally, taxes are not part of this calculation. Total assets at December 31, 2023 and 2022 were $38.55 billion and $37.69 billion, respectively.
The assumptions used are inherently uncertain, and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income.
The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income.
FirstCapital Bank operates 16 full-service banking offices in 6 different markets in West, North and Central Texas areas, including its main office in Midland, and banking offices in Midland, Lubbock, Amarillo, Wichita Falls, Burkburnett, Byers, Henrietta, Dallas, Horseshoe Bay, Marble Falls and Fredericksburg, Texas.
FirstCapital Bank operated 16 full-service banking offices in six different markets in West, North and Central Texas areas, including its main office in Midland, Texas and banking offices in Midland, Lubbock, Amarillo, Wichita Falls, Burkburnett, Byers, Henrietta, Dallas, Horseshoe Bay, Marble Falls and Fredericksburg, Texas.
Under the terms of the merger agreement, the Company will issue 2,376,182 shares of its common stock plus $64.1 million in cash for all outstanding shares of Lone Star capital stock, subject to certain conditions and potential adjustments.
Under the terms of the definitive agreement, Bancshares will issue 2,376,182 shares of its common stock plus $64.1 million in cash for all outstanding shares of Lone Star capital stock, subject to certain conditions and potential adjustments.
The Company records an allowance for credit losses on off-balance sheet credit exposure that is adjusted through a charge to provision for credit losses on the Company’s consolidated statement of income. At December 31, 2022 and 2021, this allowance, reported as a separate line item on the Company’s consolidated balance sheet, totaled $29.9 million.
The Company records an allowance for credit losses on off-balance sheet credit exposure that is adjusted through a charge to provision for credit losses on the Company’s consolidated statement of income. At December 31, 2023 and 2022, this allowance, reported as a separate line item on the Company’s consolidated balance sheet, totaled $36.5 million and $29.9 million, respectively.
Other real estate (income) expense was $(122) thousand for the year ended December 31, 2022, a change of $2.1 million compared with $(2.2) million for the year ended December 31, 2021, primarily due to a decrease in sales of other real estate in 2022.
Other real estate (income) expense was $(122) thousand for the year ended December 31, 2022, a change of $2.1 million compared with $(2.2) million for the year ended December 31, 2021, primarily due to a decrease in sales of other real estate in 2022. 44 Merger Related Expenses .
Securities purchased at a discount will obtain higher net yields in a decreasing interest rate environment as prepayments result in an acceleration of discount accretion. At December 31, 2022, 81.4% of the mortgage-backed securities held by the Company had contractual final maturities of more than ten years with a weighted average life of 5.86 years.
Securities purchased at a discount will obtain higher net yields in a decreasing interest rate environment as prepayments result in an acceleration of discount accretion. At December 31, 2023, 81.6% of the mortgage-backed securities held by the Company had contractual final maturities of more than ten years with a weighted average life of 5.54 years.
Pending Acquisition of Lone Star State Bancshares, Inc. — On October 11, 2022, the Company and Lone Star jointly announced the signing of a definitive merger agreement whereby Lone Star, the parent company of Lone Star State Bank of West Texas (“Lone Star Bank”), will merge with and into the Company.
Pending Acquisition Pending Acquisition of Lone Star State Bancshares, Inc. — On October 11, 2022, the Company and Lone Star jointly announced the signing of a definitive merger agreement whereby Lone Star, the parent company of Lone Star State Bank, will merge with and into the Company.
Regulatory assessments and FDIC insurance assessments were $11.4 million for the year ended December 31, 2022, an increase of $743 thousand or 7.0%, compared with $10.6 million for the year ended December 31, 2021.
Regulatory assessments and FDIC insurance assessments were $11.4 million for the year ended December 31, 2022, an increase of $743 thousand or 7.0%, compared with $10.6 million for the year ended December 31, 2021. Core Deposit Intangibles Amortization .
A significant portion are guaranteed or insured by either the Texas Permanent School Fund, Assured Guaranty or Build America Mutual. As of December 31, 2022, the Company’s municipal securities represent 0.8% of the securities portfolio.
A significant portion are guaranteed or insured by either the Texas Permanent School Fund, Assured Guaranty or Build America Mutual. As of December 31, 2023, the Company’s municipal securities represent 0.9% of the securities portfolio.
(2) The FDIC may require the Bank to maintain a leverage ratio above the required minimum. 64
(2) The FDIC may require the Bank to maintain a leverage ratio above the required minimum. 69
At December 31, 2021, the Company had $13.0 million of total outstanding accretable discounts on Non-PCD and PCD loans. The Company believes that the allowance for credit losses on loans at December 31, 2022 is adequate to absorb expected lifetime losses that may be realized from the loan portfolio as of such date.
At December 31, 2022, the Company had $5.6 million of total outstanding accretable discounts on Non-PCD and PCD loans. The Company believes that the allowance for credit losses on loans at December 31, 2023 is adequate to absorb expected lifetime losses that may be realized from the loan portfolio as of such date.
If a deterioration in cash flows is identified, an increase to the specific reserve for that loan is made. PCD loans were recorded at their acquisition date fair values, which were based on expected cash flows and considers estimates of expected future credit losses.
If a deterioration in cash flows is identified, an increase to the PCD reserves for that individual loan or pool of loans is made. PCD loans were recorded at their acquisition date fair values, which were based on expected cash flows and considers estimates of expected future credit losses.
The efficiency ratio, excluding net gains and losses on the sale or write down of assets and taxes, was 42.23% for the year ended December 31, 2022, compared with 41.83% for the year ended December 31, 2021 and 42.58% for the year ended December 31, 2020.
The efficiency ratio, excluding net gains and losses on the sale or write down of assets and taxes, was 50.26% for the year ended December 31, 2023, compared with 42.23% for the year ended December 31, 2022 and 41.83% for the year ended December 31, 2021.
The Company had gross charge-offs on originated loans of $7.3 million during the year ended December 31, 2022 compared with $8.5 million during the year ended December 31, 2021. Partially offsetting these charge-offs were recoveries on originated loans of $2.6 million for the year ended December 31, 2022 compared with $2.9 million for the year ended December 31, 2021.
The Company had gross charge-offs on originated loans of $9.3 million during the year ended December 31, 2023 compared with $7.3 million during the year ended December 31, 2022. Partially offsetting these charge-offs were recoveries on originated loans of $2.4 million for the year ended December 31, 2023 compared with $2.6 million for the year ended December 31, 2022.
Repurchase agreements are generally settled on the following business day; however, approximately $4.2 million of repurchase agreements outstanding at December 31, 2022 have maturity dates ranging from 12 to 24 months. All securities sold under repurchase agreements are collateralized by certain pledged securities.
Repurchase agreements are generally settled on the following business day; however, approximately $3.0 million of repurchase agreements outstanding at December 31, 2023 have maturity dates ranging from 12 to 24 months. All securities sold under repurchase agreements are collateralized by certain pledged securities.
Share Repurchases On January 17, 2023, the Company announced a stock repurchase program under which up to 5%, or approximately 4.6 million shares, of its outstanding common stock may be acquired over a one-year period expiring on January 17, 2024, at the discretion of management.
On January 17, 2023, the Company announced a stock repurchase program under which the Company could repurchase up to 5%, or approximately 4.6 million shares, of its outstanding common stock over a one-year period expiring on January 17, 2024, at the discretion of management.
The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted capital ratios as of December 31, 2022 to the minimum and well-capitalized regulatory standards: Minimum Required For Capital Adequacy Purposes Minimum Required Plus Capital Conservation Buffer To Be Categorized As Well Capitalized Under Prompt Corrective Action Provisions Actual Ratio at December 31, 2022 The Company CET1 capital ratio 4.50 % 7.00 % N/A 15.88 % Tier 1 risk-based capital ratio 6.00 % 8.50 % N/A 15.88 % Total risk-based capital ratio 8.00 % 10.50 % N/A 16.51 % Leverage ratio 4.00 % (1) 4.00 % N/A 10.16 % The Bank CET1 capital ratio 4.50 % 7.00 % 6.50 % 15.83 % Tier 1 risk-based capital ratio 6.00 % 8.50 % 8.00 % 15.83 % Total risk-based capital ratio 8.00 % 10.50 % 10.00 % 16.46 % Leverage ratio 4.00 % (2) 4.00 % 5.00 % 10.12 % (1) The Federal Reserve Board may require the Company to maintain a leverage ratio above the required minimum.
The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted capital ratios as of December 31, 2023 to the minimum and well-capitalized regulatory standards: Minimum Required For Capital Adequacy Purposes Minimum Required Plus Capital Conservation Buffer To Be Categorized As Well Capitalized Under Prompt Corrective Action Provisions Actual Ratio at December 31, 2023 The Company CET1 capital ratio 4.50 % 7.00 % N/A 15.54 % Tier 1 risk-based capital ratio 6.00 % 8.50 % N/A 15.54 % Total risk-based capital ratio 8.00 % 10.50 % N/A 16.56 % Leverage ratio 4.00 % (1) 4.00 % N/A 10.39 % The Bank CET1 capital ratio 4.50 % 7.00 % 6.50 % 15.48 % Tier 1 risk-based capital ratio 6.00 % 8.50 % 8.00 % 15.48 % Total risk-based capital ratio 8.00 % 10.50 % 10.00 % 16.50 % Leverage ratio 4.00 % (2) 4.00 % 5.00 % 10.35 % (1) The Federal Reserve Board may require the Company to maintain a leverage ratio above the required minimum.
Total charge-offs for the year ended December 31, 2022 were $8.5 million, partially offset by total recoveries of $3.7 million. Total charge-offs for the year ended December 31, 2021 were $33.4 million, partially offset by total recoveries of $3.7 million.
Total charge-offs for the year ended December 31, 2023 were $42.8 million, partially offset by total recoveries of $4.8 million. Total charge-offs for the year ended December 31, 2022 were $8.5 million, partially offset by total recoveries of $3.7 million.
On September 30, 2021, the Company began transitioning away from LIBOR to Secured Overnight Financing Rate (“SOFR”) or other alternative variable rate indexes for its interest-rate swaps and loans historically using LIBOR as an index.
LIBOR Transition On September 30, 2021, the Company began transitioning away from London Inter-Bank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) or other alternative variable rate indexes for its interest-rate swaps and loans historically using LIBOR as an index.
On January 26, 2021, the Company announced a stock repurchase program under which the Company could repurchase up to 5%, or approximately 4.65 million shares, of its outstanding common stock over a one-year period expiring on January 26, 2022, at the discretion of management.
On January 18, 2022, the Company announced a stock repurchase program under which the Company could repurchase up to 5%, or approximately 4.6 million shares, of its outstanding common stock over a one-year period expiring on January 18, 2023, at the discretion of management.
The average yield excluding the tax equivalent adjustment was 1.78% for the year ended December 31, 2022 compared with 1.55% for the year ended December 31, 2021 and 2.08% for the year ended December 31, 2020. The overall growth in the average securities portfolio over the comparable periods was primarily funded by average deposit growth.
The average yield excluding the tax equivalent adjustment was 2.06% for the year ended December 31, 2023 compared with 1.78% for the year ended December 31, 2022 and 1.55% for the year ended December 31, 2021. The overall change in the average securities portfolio over the comparable periods was primarily funded by average deposit growth and other borrowings.
(2) Commercial real estate loans include approximately $1.69 billion of owner-occupied loans for the years ended December 31, 2022 and 2021. (3) Includes fair value discounts on acquired loans of $5.6 million and $13.0 million at December 31, 2022 and 2021, respectively.
(2) Commercial real estate loans include approximately $2.03 billion and $1.69 billion of owner-occupied loans for the years ended December 31, 2023 and 2022, respectively. (3) Includes fair value discounts on acquired loans of $27.9 million and $5.6 million at December 31, 2023 and 2022, respectively.
Net interest margin, defined as net interest income divided by average interest-earning assets, was 3.00% on a tax equivalent basis for 2022, a decrease of 14 basis points compared with 3.14% for 2021. 2021 versus 2020 .
Net interest margin, defined as net interest income divided by average interest-earning assets, was 2.78% on a tax equivalent basis for 2023, a decrease of 22 basis points compared with 3.00% for 2022. 2022 versus 2021 .
Total salaries and benefits for the year ended December 31, 2022 include $11.8 million in stock‑based compensation expense compared with $12.6 million recorded for each of the years ended December 31, 2021 and 2020.
Total salaries and benefits for the year ended December 31, 2023 included $12.2 million in stock‑based compensation expense compared with $11.8 million and $12.6 million recorded for each of the years ended December 31, 2022 and 2021, respectively.
Net interest margin, defined as net interest income divided by average interest-earning assets, was 3.14% on a tax equivalent basis for 2021, a decrease of 50 basis points compared with 3.64% for 2020. 36 The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.
Net interest margin was 3.00% on a tax equivalent basis for 2022, a decrease of 14 basis points compared with 3.14% for 2021. 40 The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.
The Company’s efficiency ratio calculated pursuant to GAAP was 42.09% for the year ended December 31, 2022 compared with 41.79% for the year ended December 31, 2021 and 42.78% for the year ended December 31, 2020.
The Company’s efficiency ratio calculated pursuant to GAAP was 50.17% for the year ended December 31, 2023 compared with 42.09% for the year ended December 31, 2022 and 41.79% for the year ended December 31, 2021.
During 2022 and 2021, the Company’s liquidity needs were primarily met by core deposits, security and loan maturities and amortizing investment and loan portfolios. During 2022, the Company also utilized advances from the FHLB of Dallas.
During 2023 and 2022, the Company’s liquidity needs were primarily met by core deposits, security and loan maturities and amortizing investment and loan portfolios. During 2023, the Company also utilized advances from the FHLB of Dallas and Federal Reserve Board’s BTFP.
PPP loans totaling $169.9 million as of December 31, 2021, are fully guaranteed by the SBA and do not carry an allowance. At December 31, 2022, $209.5 million of the allowance for credit losses on loans was attributable to originated loans compared with $186.7 million of the allowance at December 31, 2021, an increase of $22.7 million or 12.2%.
PPP loans totaling $6.2 million as of December 31, 2022, are fully guaranteed by the SBA and do not carry an allowance. At December 31, 2023, $222.4 million of the allowance for credit losses on loans was attributable to originated loans compared with $209.5 million of the allowance at December 31, 2022, an increase of $12.9 million or 6.2%.
Based on the closing price of the Company's common stock of $69.27 on October 7, 2022, the total consideration was valued at approximately $228.7 million. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval of the shareholders of Lone Star.
Based on the closing price of Bancshares' common stock of $69.27 on October 7, 2022, the total consideration was valued at approximately $228.7 million. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals. The shareholders of Lone Star approved the transaction on March 28, 2023.
At December 31, 2022, a projected 200 basis point increase in rates resulted in a projected increase in net interest income of 2.0% compared with a projected 11.0% increase in net interest income at December 31, 2021.
At December 31, 2023, a projected 200 basis point increase in rates resulted in a projected decrease in net interest income of 5.5% compared with a projected 2.0% increase in net interest income at December 31, 2022.
The Company repurchased 767,134 shares of its common stock at an average weighted price of $67.87 per share during the year ended December 31, 2021. Contractual Obligations The Company’s contractual obligations and other commitments to make future payments (other than deposit obligations and securities sold under repurchase agreements) as of December 31, 2022 are summarized below.
The Company repurchased 981,884 shares of its common stock at an average weighted price of $66.90 per share during the year ended December 31, 2022. Contractual Obligations The Company’s contractual obligations and other commitments to make future payments (other than deposit obligations and securities sold under repurchase agreements) as of December 31, 2023 are summarized below.
CDI amortization was $11.6 million for the year ended December 31, 2021, a decrease of $1.6 million or 12.3% compared with $13.2 million for the year ended December 31, 2020. Other Real Estate .
CDI amortization was $10.3 million for the year ended December 31, 2022, a decrease of $1.2 million or 10.5% compared with $11.6 million for the year ended December 31, 2021. Other Real Estate .
At December 31, 2021, of the total nonperforming assets, $21.0 million resulted from originated loans, $747 thousand resulted from re-underwritten acquired loans, $6.2 million resulted from Non-PCD loans and $168 thousand resulted from PCD loans. A PCD loan becomes impaired when there is a deterioration in projected cash flows after acquisition.
At December 31, 2022, of the total nonperforming assets, $18.4 million resulted from originated loans, $2.1 million resulted from re-underwritten acquired loans, $6.8 million resulted from Non-PCD loans and $168 thousand resulted from PCD loans. A PCD loan becomes impaired when there is a deterioration in projected cash flows after acquisition.
Contractual maturities are based on contractual amounts outstanding and do not include loan purchase discounts of $5.6 million.
Contractual maturities are based on contractual amounts outstanding and do not include loan purchase discounts of $27.9 million.
Nonperforming assets were 0.15% of total loans and other real estate at December 31, 2022 and 2021.
Nonperforming assets were 0.34% and 0.15% of total loans and other real estate at December 31, 2023 and 2022, respectively.
Acquired loans were recorded at fair value based on a discounted cash flow valuation methodology that considers, among other things, interest rates, projected default rates, loss given defaults and recovery rates, with no carryover of any existing allowance for credit losses. There was no provision for credit losses for the years ended December 31, 2022 and 2021.
Acquired loans were recorded at fair value based on a discounted cash flow valuation methodology that considers, among other things, interest rates, projected default rates, loss given defaults and recovery rates, with no carryover of any existing allowance for credit losses.
The Company has traditionally managed its business to reduce its overall exposure to changes in interest rates. The Company uses an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and the balance sheet.
The Company has traditionally managed its business to minimize its overall exposure to changes in interest rates. The Company primarily uses an interest rate risk simulation model to evaluate the interest rate sensitivity of net interest income and the balance sheet.
The contractual maturity ranges of the Company’s loan portfolio, excluding loans held for sale of $554 thousand and Warehouse Purchase Program loans of $740.6 million, by type of loan and the amount of such loans with predetermined interest rates and variable rates in each maturity range as of December 31, 2022 are summarized in the following table.
The contractual maturity ranges of the Company’s loan portfolio, excluding loans held for sale of $5.7 million and Warehouse Purchase Program loans of $822.2 million, by type of loan and the amount of such loans with predetermined interest rates and variable rates in each maturity range as of December 31, 2023 are summarized in the following table.
At December 31, 2022, Warehouse Purchase Program loans totaled $740.6 million, compared to an average balance of $1.05 billion. Because the capital ratios above are calculated using ending risk-weighted assets and Warehouse Purchase Program loans are risk-weighted at 100%, the end-of-period increase in these balances can significantly impact the Company’s reported capital ratios.
At December 31, 2023, Warehouse Purchase Program loans totaled $822.2 million, compared to an average balance of $815.9 million. Because the capital ratios above are calculated using ending risk-weighted assets and Warehouse Purchase Program loans are risk-weighted at 100%, the end-of-period increase in these balances can significantly impact the Company’s reported capital ratios.
The Company’s average loans decreased 4.8% for the year ended December 31, 2022 compared with the year ended December 31, 2021. The Company predominantly invests excess deposits in government-backed securities until the funds are needed to fund loan growth.
The Company’s average loans increased 13.0% for the year ended December 31, 2023 compared with the year ended December 31, 2022. The Company predominantly invests excess deposits in government-backed securities until the funds are needed to fund loan growth.
The Company posted returns on average assets of 1.39%, 1.44% and 1.62% and returns on average common equity of 7.97%, 8.21% and 8.85% for the years ended December 31, 2022, 2021 and 2020, respectively. The Company’s efficiency ratio was 42.23% in 2022, 41.83% in 2021 and 42.58% in 2020.
The Company posted returns on average assets of 1.08%, 1.39% and 1.44% and returns on average common equity of 6.03%, 7.97% and 8.21% for the years ended December 31, 2023, 2022 and 2021, respectively. The Company’s efficiency ratio was 50.26% in 2023, 42.23% in 2022 and 41.83% in 2021.
At December 31, 2022, $37.6 million of the allowance for credit losses on loans was attributable to re-underwritten acquired loans compared with $42.6 million of the allowance at December 31, 2021, a decrease of $5.0 million or 11.7%.
At December 31, 2023, $30.0 million of the allowance for credit losses on loans was attributable to re-underwritten acquired loans compared with $37.6 million of the allowance at December 31, 2022, a decrease of $7.7 million or 20.4%.
The Company does not expect a change in the source or use of its funds in the foreseeable future. The Company’s average deposits increased 3.1% for the year ended December 31, 2022 compared with the year ended December 31, 2021.
The Company does not expect a change in the source or use of its funds in the foreseeable future. The Company’s average deposits decreased 8.6% for the year ended December 31, 2023 compared with the year ended December 31, 2022.
At December 31, 2022, the Company had $25.5 million in nonperforming loans, and its allowance for credit losses on loans was $281.6 million compared with $27.2 million in nonperforming loans and an allowance for credit losses on loans of $286.4 million at December 31, 2021. Shareholders’ equity was $6.70 billion and $6.43 billion at December 31, 2022 and 2021, respectively.
At December 31, 2023, the Company had $70.9 million in nonperforming loans, and its allowance for credit losses on loans was $332.4 million compared with $25.5 million in nonperforming loans and an allowance for credit losses on loans of $281.6 million at December 31, 2022. Shareholders’ equity was $7.08 billion and $6.70 billion at December 31, 2023 and 2022, respectively.
At December 31, 2022, the Company had 32 mortgage banking company customers with aggregate uncommitted facilities (“Facilities”) of $2.17 billion and an actual aggregate outstanding balance of $740.6 million; and the Clients’ individual Facilities ranged in size from $3.0 million to $200.0 million.
At December 31, 2023, the Company had 33 mortgage banking company customers with aggregate uncommitted facilities (“Facilities”) of $1.94 billion and an actual aggregate outstanding balance of $822.2 million; and the Clients’ individual Facilities ranged in size from $3.0 million to $200.0 million.
For further discussion of the methodology used in the determination of the allowance for credit losses, see “Accounting for Acquired Loans and the Allowance for Acquired Credit Losses ” , “Financial Condition—Allowance for Credit Losses” sections below and Note 1 to the consolidated financial statements.
For further discussion of the methodology used in the determination of the allowance for credit losses, see “Accounting for Acquired Loans and the Allowance for Acquired Credit Losses ” , “Financial Condition—Allowance for Credit Losses” sections below and Note 1 to the consolidated financial statements. 38 Accounting for Acquired Loans and the Allowance for Acquired Credit Losses — The Company accounts for its acquisitions using the acquisition method of accounting.
As of December 31, 2022, the Company had $209.0 million (net of discount and excluding PPP loans totaling $2.0 million) in funded commitments outstanding to oil and gas production companies and $357.4 million in unfunded commitments, for a total of $566.4 million (net of discount and excluding PPP loans).
As of December 31, 2023, the Company had $80.3 million (net of discount and excluding PPP loans totaling $2.0 million) in funded commitments outstanding to oil and gas production companies and $303.1 million in unfunded commitments, for a total of $383.4 million.

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