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Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Liquidity and Market Risk Management At September 30, 2023, we held $1.78 billion in assets that could be used for liquidity purposes, which we refer to as net available internal liquidity. This balance consisted of $1.38 billion in unpledged investment securities which could be used for additional secured borrowing capacity, $228.1 million in cash on deposit with the Federal Reserve Bank ("FRB") and $172.7 million in other liquid cash accounts. Consistent with our practice of maintaining access to significant external liquidity, we had $4.33 billion in net available sources of borrowed funds, which we refer to as net available external liquidity, as of September 30, 2023. This included $5.09 billion in total borrowing capacity with the Federal Home Loan Bank ("FHLB"), of which $2.00 billion has been drawn upon in the ordinary course of business, resulting in $3.09 billion in net available liquidity with the FHLB as of September 30, 2023. The $2.00 billion consisted of $750.0 million in outstanding FHLB advances and $1.25 billion used for pledging purposes. We also had access to approximately $1.39 billion in liquidity with the FRB as of September 30, 2023, of which $250.0 million has been drawn upon in the ordinary course of business, resulting in $1.14 billion in net available liquidity with the FRB as of September 30, 2023. The $1.14 billion consisted of $80.9 million available borrowing capacity from the Discount Window and $1.06 billion available through the Bank Term Funding Program ("BTFP"). As of September 30, 2023, the Company also had access to $55.0 million from First National Bankers’ Bank ("FNBB"), and $45.0 million from other various external sources. Overall, we had $6.12 billion net available liquidity as of September 30, 2023, which consisted of $1.78 billion of net available internal liquidity and $4.33 billion in net available external liquidity. Details on our available liquidity as of September 30, 2023 is available below. (in thousands) Total Available Amount Used Net Availability Internal Sources Unpledged investment securities (market value) $ 1,382,775 $ — $ 1,382,775 Cash at FRB 228,114 — 228,114 Other liquid cash accounts 172,708 — 172,708 Total Internal Liquidity 1,783,597 — 1,783,597 External Sources FHLB 5,089,340 1,995,990 3,093,350 FRB Discount Window 80,919 — 80,919 BTFP (par value) 1,309,205 250,000 1,059,205 FNBB 55,000 — 55,000 Other 45,000 — 45,000 Total External Liquidity 6,579,464 2,245,990 4,333,474 Total Available Liquidity $ 8,363,061 $ 2,245,990 $ 6,117,071 We have continued to limit our exposure to uninsured deposits and have been actively monitoring this exposure in light of the current banking environment. As of September 30, 2023, we held approximately $7.95 billion in uninsured deposits of which $568.5 million were intercompany subsidiary deposit balances and $2.65 billion were collateralized deposits, for a net position of $4.73 billion. This represents approximately 28.7% of total deposits. In addition, net available liquidity exceeded uninsured and uncollateralized deposits by $1.38 billion. (in thousands) As of September 30, 2023 Uninsured Deposits $ 7,952,922 Intercompany Subsidiary and Affiliate Balances 568,511 Collateralized Deposits 2,650,369 Net Uninsured Position $ 4,734,042 Total Available Liquidity $ 6,117,071 Net Uninsured Position 4,734,042 Net Available Liquidity in Excess of Uninsured Deposits $ 1,383,029 94 Table of Contents Asset/Liability Management . Our management actively measures and manages interest rate risk. The asset/liability committees of the boards of directors of our holding company and bank subsidiary are also responsible for approving our asset/liability management policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviewing our interest rate sensitivity position. Our objective is to manage liquidity in a way that ensures cash flow requirements of depositors and borrowers are met in a timely and orderly fashion while ensuring the reliance on various funding sources does not become so heavily weighted to any one source that it causes undue risk to the bank. Our liquidity sources are prioritized based on availability and ease of activation. Our current liquidity condition is a primary driver in determining our funding needs and is a key component of our asset and liability management. Various sources of liquidity are available to meet the cash flow needs of depositors and borrowers. Our principal source of funds is core deposits, including checking, savings, money market accounts and certificates of deposit. We may also from time to time obtain wholesale funding through brokered deposits. Secondary sources of funding include advances from the Federal Home Loan Bank of Dallas, the Federal Reserve Bank Discount Window and other borrowings, such as through correspondent banking relationships. These secondary sources enable us to borrow funds at rates and terms which, at times, are more beneficial to us. Additionally, as needed, we can liquidate or utilize our available for sale investment portfolio as collateral to provide funds for an intermediate source of liquidity. Interest Rate Sensitivity . Our primary business is banking and the resulting earnings, primarily net interest income, are susceptible to changes in market interest rates. It is management’s goal to maximize net interest income within acceptable levels of interest rate and liquidity risks. A key element in the financial performance of financial institutions is the level and type of interest rate risk assumed. The single most significant measure of interest rate risk is the relationship of the repricing periods of earning assets and interest-bearing liabilities. The more closely the repricing periods are correlated, the less interest rate risk we assume. We use net interest income simulation modeling and economic value of equity as the primary methods in analyzing and managing interest rate risk. One of the tools that our management uses to measure short-term interest rate risk is a net interest income simulation model. This analysis calculates the difference between net interest income forecasted using base market rates and using a rising and a falling interest rate scenario. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and proportional to the change in market rates, depending on their contracted index. Some loans and investments include the opportunity of prepayment (embedded options), and accordingly, the simulation model uses indexes to estimate these prepayments and reinvest their proceeds at current yields. Our non-term deposit products re-price overnight in the model while we project certain other deposits by product type to have stable balances based on our deposit history. This accounts for the portion of our portfolio that moves more slowly than market rates and changes at our discretion. This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet remains static and that its structure does not change over the course of the year. It does not account for all factors that impact this analysis, including changes by management to mitigate the impact of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change. Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income. For the rising and falling interest rate scenarios, the base market interest rate forecast was increased and decreased over twelve months by 200 and 100 basis points, respectively. At September 30, 2023, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us. 95 Table of Contents Table 24 presents our sensitivity to net interest income as of September 30, 2023. Table 24: Sensitivity of Net Interest Income Interest Rate Scenario Percentage Change from Base Up 200 basis points 7.50 % Up 100 basis points 3.80 Down 100 basis points (4.70) Down 200 basis points (9.60)