What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-13 compared with 2023-02-09 · 146 added, 226 removed, 326 unchanged (53% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s financial condition and results of operations for the years ended December 31, 2022 and 2021 should be read in conjunction with its audited consolidated financial statements and the related notes to the consolidated financial statements included in this Annual Report on Form 10-K.

Certain risks, uncertainties and other factors, including those set forth under “Risk Factors” in Part I, Item 1A, and elsewhere in this Annual Report on Form 10-K may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis.

Refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2021 Annual Report on Form 10K filed with the SEC on February 9, 2022, for discussion of the Company’s results of operations for the years ended December 31, 2021 and 2020.

Forward-Looking Statements

Certain statements and financial analysis contained in this report that are not historical facts may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on beliefs, assumptions and expectations of future performance taking into account all information available to us at the time such statements are made.

Forward-looking statements may often be identified by the use of words such as “believes,” “projects,” “expects,” “may,” “estimates,” “should,” “plans,” “targets,” “intends,” “could,” “would,” “anticipates,” “potential,” “confident,” “optimistic” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy, objectives, estimates, guidance, expectations and future plans.

Forward-looking statements may include, among other things and without limitation, statements about the credit quality of loan portfolio, liquidity, general economic conditions in the United States and in the Company’s markets, including with respect to interest rates and the market generally, the continued impact on customers from volatility in oil and gas prices, the material risks and uncertainties for the U.S.

and world economies, and for the business, resulting from the COVID-19 pandemic, expectations regarding rates of default and loan losses, volatility in the mortgage industry, business strategies (including new lines of business, products and services) and expectations about future financial performance, future growth and earnings, the appropriateness of the allowance for credit losses and provision for credit losses, the impact of changing regulatory requirements and legislative changes on the business, increased competition, and technologies (including new technologies and information security risks).

Forward-looking statements are subject to various risks and uncertainties, which change over time, are based on management’s expectations and assumptions at the time the statements are made and are not guarantees of future results.

Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the following:

• Deterioration of the credit quality of the loan portfolio or declines in the value of collateral due to external factors or otherwise.

• The unpredictability of economic and business conditions that may impact us or customers.

• The impact of COVID-19 pandemic on us and customers, employees and third-party service providers.

This includes related costs and liabilities associated with legal and regulatory proceedings, investigations, inquiries and related matters with respect to the financial services industry, including those directly involving us or the Bank and arising from the participation in government stimulus programs responding to the economic impact of the COVID-19 pandemic.

• The ability to effectively manage liquidity risk and any growth plans and the availability of capital and funding.

• The ability to effectively manage the information technology systems (including external vendors), on which the Company is highly dependent.

This also includes the ability to, among other things, manage such risks and to prevent cyber-incidents against us, the customers or third-party vendors, or to manage risks from failures, disruptions or security breaches affecting us, customers or third-party vendors.

• The costs and effects of cyber-incidents or other failures, disruptions or security breaches of systems or those of the third-party providers.

• Changes in interest rates.

• Changes in market risk associated primarily with the Company’s sales and trading activities.

• Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate.

• Adverse or unexpected economic or market conditions and other factors in Texas, the United States or internationally that could affect the credit quality of the loan portfolio, operating performance or the ability to access the capital markets or other sources of funding to become less advantageous.

• The failure to effectively balance funding sources with cash demands by depositors and borrowers, the failure to maintain capital ratios as a result of adverse changes in operating performance or financial condition or changes in applicable regulations or interpretations of regulations that impact the business or the characterization or risk weight of assets.

• Material failures of accounting estimates and risk management processes based on management judgment, or the supporting assumptions or models.

• The failure to effectively manage interest rate risk.

• The failure of enterprise risk management framework (including risk management strategies and procedures and related controls), the compliance program, or corporate governance and supervisory oversight functions to timely identify and address emerging risks adequately.

• Uncertainty regarding the upcoming transition away from the London Interbank Offered Rate, or LIBOR, toward new interest rate benchmarks and the ability to successfully implement any new interest rate benchmarks.

• The ability to comply with applicable governmental regulations, including legislative and regulatory changes that may impose further restrictions and costs on the business, any regulatory enforcement actions that may be brought against us and the effect of changes in laws, regulations, policies and guidelines (including, among others, those concerning taxes, banking, accounting, securities and monetary and fiscal policies) with which the Company must generally comply.

• Risks related to the U.S.

federal government actions impacting us, such as the impact of the Tax Cuts and Jobs Act.

• Claims and litigation that may arise in the ordinary course of business, including those that may not be covered by insurers.

• The failure to successfully execute business strategy, which may include expanding into new markets, developing and launching new lines of business or new products and services, completing planned transactions or to successfully manage the risks related to certain aspects of the business strategy.

• The failure to identify, attract and retain key personnel.

• Increased or more effective competition from banks and other financial service providers in Company markets.

• The susceptibility of fraud on the business.

• The failure to maintain adequate regulatory capital to support the business.

• Environmental liability associated with properties related to lending activities.

• Severe weather, natural disasters, acts of war or terrorism and other external events.

• Climate change and related legislative and regulatory initiatives.

• Risks relating to securities, including the volatility of stock price, trading volume, rights of holders of the indebtedness and preferred stock, the decision to not currently pay dividends on common stock, and other related factors.

Actual outcomes and results may differ materially from what is expressed in the Company’s forward-looking statements and from its historical financial results due to the factors discussed elsewhere in this report or disclosed in the Company’s other SEC filings.

Forward-looking statements included herein speak only as of the date hereof and should not be relied upon as representing the Company’s expectations or beliefs as of any date subsequent to the date of this report.

Except as required by law, the Company undertakes no obligation to revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

The factors discussed herein are not intended to be a complete summary of all risks and uncertainties that may affect the Company’s businesses.

Though management strives to monitor and mitigate risk, the Company cannot anticipate all potential economic, operational and financial developments that may adversely impact its operations and the financial results.

Forward-looking statements should not be viewed as predictions and should not be the primary basis upon which investors evaluate an investment in the Company’s securities.

Overview of Business Operations

Early in 2021, the Company embarked on an enterprise-wide transformation which included detailed reviews of the Company’s business lines, operating model, investment spend and overall strategy.

On September 1, 2021 management announced key updates to the Company’s long-term strategy, focused on building a Texas-based full-service financial services firm positioned to serve clients in its markets through the entirety of their life cycle.

This new plan included focusing on building an operating model organized around client delivery and investing in technology.

2022 was a year focused on strategic alignment, including reorganizing the Company’s operating model around client delivery emphasizing client experience;

realigning the expense base and investing in technology;

expanding coverage, products and services;

and enhancing accountability while maintaining financial resiliency.

On September 6, 2022, the Company announced the sale of BankDirect Capital Finance, LLC (“BDCF”), its insurance premium finance subsidiary, to AFCO Credit Corporation, an indirect wholly-owned subsidiary of Truist Financial Corporation.

The sale of BDCF included its business operations and loan portfolio of approximately $3.1 billion.

The sale was an all-cash transaction for a purchase price of $3.4 billion, representing a pre-tax gain of $248.5 million.

This sale was completed on November 1, 2022.

Recent Industry Developments

During 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses, eroding consumer confidence and increased regulatory scrutiny.

Despite these negative industry developments, the Company’s liquidity position and balance sheet remains robust.

Furthermore, the Company’s capital remains at historically high levels with CET1 and total capital ratios of 12.6% and 17.1%, respectively, as of December 31, 2023.

The Company’s total deposits decreased by 2% as compared to December 31, 2022, to $22.4 billion at December 31, 2023.

In response to the industry-wide concerns, the Company took a number of preemptive actions, which included pro-active outreach to clients and an enhanced review of its borrowing and liquidity positions to ensure that the Company’s liquidity and capital positions remain strong and that the Company is positioned to best serve its clients.

Results of Operations

Year ended December 31, 2022 compared to year ended December 31, 2021

Selected income statement data and key performance indicators are presented in the table below:

15 unchanged sentences

Return on average common equity (“ROE”) 6.15 % 11.33 % 8.35 %

Non-interest income to average earning assets 1.12 % 0.37 % 0.56 %

Efficiency ratio(1) 70.4 % 59.4 % 66.0 %

Non-interest income to average earning assets 0.57 % 1.12 % 0.37 %

Non-interest expense to average earning assets 2.66 % 2.34 % 1.61 %

(1) Non-interest expense divided by the sum of net interest income and non-interest income.

The Company reported net income of $332.5 million and net income available to common stockholders of $315.2 million, or $6.18 per diluted common share, for the year ended December 31, 2022, compared to net income of $253.9 million and net income available to common stockholders of $235.2 million, or $4.60 per diluted common share, for 2021.

ROE was 11.33% and ROA was 1.04% for the year ended December 31, 2022, compared to 8.35% and 0.67%, respectively, for 2021.

The increase in net income, ROE and ROA for the year ended December 31, 2022 resulted primarily from a $106.9 million increase in net interest income and a $211.3 million increase in non-interest income, partially offset by a $96.0 million increase in the provision for credit losses and a $128.5 million increase in non-interest expense and a $15.2 million increase in income tax expense.

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

Taxable Equivalent Net Interest Income Analysis(1)

Year ended December 31, 2023 compared to year ended December 31, 2022

The Company reported net income of $189.1 million and net income available to common stockholders of $171.9 million for the year ended December 31, 2023, compared to net income of $332.5 million and net income available to common stockholders of $315.2 million for the same period in 2022.

On a fully diluted basis, earnings per common share were $3.54 for the year ended December 31, 2023, compared to $6.18 for the same period in 2022.

ROE was 6.15% and ROA was 0.64% for the twelve months ended December 31, 2023, compared to 11.33% and 1.04%, respectively, for the same period in 2022.

The decrease in net income for the year ended December 31, 2023 compared to the same period in 2022 resulted primarily from a decrease in non-interest income.

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

Taxable Equivalent Net Interest Income Analysis - Year to Date(1)

Year ended December 31,

33 unchanged sentences

Net interest margin 3.17 % 2.79 % 2.07 %

Net interest spread 1.94 % 1.81 % 2.04 %

(1) Taxable equivalent rates used where applicable.

28 unchanged sentences

Net interest income was $914.1 million for the year ended December 31, 2023 compared to $875.8 million for 2022.

The increase was primarily due to an increase in yields on average earning assets, partially offset by an increase in funding costs.

Average earning assets for the year ended December 31, 2022 decreased $6.1 billion compared to the same period in 2021, which included a $4.6 billion decrease in average interest bearing cash and cash equivalents and a $1.4 billion decrease in average total loans.

The decrease in average interest bearing cash and cash equivalents resulted primarily from the Company’s proactive exit of certain high-cost indexed deposit products beginning in the second half of 2021 and continuing throughout 2022.

The decrease in average total loans resulted from declines in loans held for investment, mortgage finance.

Average interest bearing liabilities decreased $3.8 billion for the year ended December 31, 2022 compared to the same period in 2021, primarily due to a $3.4 billion decrease in average interest bearing deposits and a $569.5 million decrease in average short-term borrowings, partially offset by a $125.7 million increase in average long-term debt.

Average non-interest bearing deposits for the year ended December 31, 2022 decreased to $13.0 billion from $15.2 billion for 2021.

The increase was primarily due to an increase in yields on average earning assets, partially offset by an increase in funding costs and a decrease in average earning assets.

Average earning assets for the year ended December 31, 2023 decreased $2.7 billion compared to the same period in 2022, which included a $1.6 billion decrease in average interest bearing cash and cash equivalents and a $1.7 billion decrease in average total loans, partially offset by a $636.9 million increase in investment securities.

Average interest bearing liabilities increased $453.0 million for the year ended December 31, 2023 compared to the same period in 2022, primarily due to a $1.0 billion increase in average interest bearing deposits, partially offset by a $506.7 million decrease in average short-term borrowings and a $44.9 million decrease in average long-term debt.

Average non-interest bearing deposits for the year ended December 31, 2023 decreased to $9.8 billion from $13.0 billion for the same period in 2022.

Net interest margin for the year ended December 31, 2023 was 3.17% compared to 2.79% for 2022.

The increase was primarily due to an increase in yields on average earning assets and a shift in earning asset composition, partially offset by an increase in funding costs.

The increases in yields on earning assets and funding costs are attributed to the impact of rising interest rates during 2022.

The yield on total loans held for investment, net, increased to 4.55% for the year ended December 31, 2022 compared to 3.56% for 2021 and the yield on earning assets increased to 3.65% for the year ended December 31, 2022 compared to 2.36% for 2021.

The average cost of total deposits increased to 0.74% for 2022 from 0.21% for 2021 and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 0.85% for 2022 compared to 0.28% for 2021.

The increases in yields on earning assets and cost of funds are attributed to the impact of rising interest rates.

The increase was primarily due to the effect of rising interest rates on earning asset yields and a shift in earning asset composition, partially offset by higher funding costs, also as a result of rising interest rates, compared to the same period in 2022.

The yield on total loans held for investment, net, increased to 6.52% for the year ended December 31, 2023 compared to 4.55% for the same period in 2022 and the yield on earning assets increased to 5.65% for the year ended December 31, 2023 compared to 3.65% for the same period in 2022.

The average cost of total deposits increased to 2.47% for 2023 from 0.74% for the same period in 2022 and total funding costs, including all deposits, long-term debt and stockholders' equity, increased to 2.46% for 2023 compared to 0.85% for the same period 2022.

Non-interest Income

4 unchanged sentences

Brokered loan fees 8,918 14,159 27,954

Servicing income 857 15,513 27,029

Investment banking and trading income 86,182 35,054 24,441

Net gain/(loss) on sale of loans held for sale (990) 1,317 58,026

Gain on disposal of subsidiary — 248,526 —

1 unchanged sentence

Total non-interest income $ 161,419 $ 349,522 $ 138,286

Non-interest income increased by $211.3 million during the year ended December 31, 2022 to $349.5 million, compared to $138.2 million for 2021.

The increase was primarily due to a $248.5 million gain recognized on the sale of BDCF and an increase in investment banking and trading income.

Offsetting these increases were decreases in brokered loan fees and servicing income as a result of the sale of the Company’s mortgage servicing rights portfolio and transition of the mortgage correspondent aggregation program in 2021, as well as a decrease in other non-interest income.

Non-interest income decreased by $188.1 million during the year ended December 31, 2023 to $161.4 million, compared to $349.5 million for the same period in 2022.

The decrease was primarily due to a non-recurring $248.5 million gain related to the sale of our premium finance subsidiary recorded in 2022, partially offset by increases in investment banking and trading income and other non-interest income.

Non-interest Expense

6 unchanged sentences

Communications and technology 81,262 69,253 75,185

FDIC insurance assessment 14,344 21,027 25,955

Federal Deposit Insurance Corporation (“FDIC”) insurance assessment 36,775 14,344 21,027

Servicing-related expenses — — 27,765

Merger-related expenses — — 17,756

Other 49,938 56,561 40,448

Total non-interest expense $ 756,947 $ 727,532 $ 599,012

Non-interest expense for the year ended December 31, 2022 increased $128.5 million compared to 2021.

Full-year 2022 included $13.7 million in salaries and benefits expense and $15.9 million in legal and professional expense related to the sale of BDCF.

Also contributing to the increase in non-interest expense were increases in salaries and benefits expense, resulting from an increase in headcount, marketing expense and other non-interest expense, which included an $8.0 million charitable contribution to the newly formed Texas Capital Bank Foundation.

Offsetting these increases was a decrease in servicing-related expenses related to the 2021 sale of the Company’s MSR portfolio and transition of the mortgage correspondent aggregation (“MCA”) program to a third-party.

Non-interest expense for the year ended December 31, 2023 increased $29.4 million compared to the same period in 2022 primarily due to an increase in salaries and benefits, communications and technology and FDIC insurance assessment, which included $19.9 million in special assessment expense in 2023, partially offset by a decrease in legal and professional expense.

Full-year 2022 legal and professional expense included $15.9 million in expenses related to the sale of our premium finance subsidiary.

Analysis of Financial Condition

Loans Held for Investment

The following table summarizes the Company’s loans held for investment on a gross basis by portfolio segment.

As discussed in Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report, in the second quarter of 2023, changes were made to certain estimates used in the Company’s current expected credit loss model which resulted in adjustments being made to the Company’s portfolio segments.

As a result, certain prior period balances below have been reclassified to conform to the current period presentation of portfolio segments.

The following table summarizes the Company’s loans held for investment by portfolio segment.

See Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report for details of these portfolio segments.

(in thousands) 2022 2021

(in thousands) December 31, 2023 December 31, 2022

Commercial $ 10,410,766 $ 9,832,676

Energy 1,159,296 721,373

Mortgage finance 3,978,328 4,090,033

Real estate 5,198,643 4,777,530

Commercial real estate 5,500,774 4,875,363

Consumer 530,948 552,848

Gross loans held for investment 20,420,816 19,350,920

Gross loans held for investment were $19.4 billion at December 31, 2022, a decline of $3.5 billion from 2021.

The decline in commercial loans in 2022 was impacted by the sale of BDCF and its related $3.1 billion commercial loan portfolio, as well as

declines in mortgage finance loans.

Excluding the sale of BDCF and its impact on the loan portfolio, the Company experienced loan growth across all loan categories, except for mortgage finance loans, as the Company executed on its long-term strategy.

Mortgage finance loans relate to the mortgage warehouse lending operations in which the Company purchases mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 21% of total loans held for investment at December 31, 2022 compared to 33% at December 31, 2021.

Unearned income (net of direct origination costs) (80,258) (63,580)

Total loans held for investment $ 20,340,558 $ 19,287,340

Total loans held for investment were $20.3 billion at December 31, 2023, an increase of $1.1 billion from December 31, 2022.

The Company experienced loan growth in the commercial and commercial real estate categories as it has continued to execute on its long-term strategy.

Mortgage finance loans relate to the mortgage warehouse lending operations in which the Company purchases mortgage loan ownership interests that are typically sold within 10 to 20 days and represent 19% and 21% of gross loans held for investment at December 31, 2023 and December 31, 2022, respectively.

Volumes fluctuate based on the level of market demand for the product and the number of days between purchase and sale of the loans, which can be affected by changes in overall market interest rates, and tend to peak at the end of each month.

Mortgage finance loan balances have declined as compared to December 31, 2021 as interest rates have continued to rise during 2022.

The Company originates a substantial majority of all loans held for investment.

The Company also participates in syndicated loan relationships, both as a participant and as an agent.

As of December 31, 2022, the Company had $3.8 billion in syndicated loans, $903.0 million of which the Company administered as agent.

The Company also participates in shared national credits, both as a participant and as an agent.

As of December 31, 2023, the Company had $5.3 billion in shared national credits, $1.2 billion of which the Company administered as agent.

All syndicated loans, whether the Company acts as agent or participant, are underwritten to the same standards as all other loans the Company originates.

As of December 31, 2022, none of syndicated loans were on non-accrual.

As of December 31, 2023, approximately $6.5 million of the Company’s shared national credits were on non-accrual.

Portfolio Concentrations

6 unchanged sentences

Financials (excluding banks) $ 3,950,879 19.4 %

Real estate related services (not secured by real estate) 1,032,180 5.3 %

Oil and gas and pipelines 1,205,100 5.9 %

Technology, telecom and media 1,004,186 4.9 %

Real estate related services (not secured by real estate) 947,494 4.6 %

Commercial services 419,065 2.1 %

Retail 410,162 2.0 %

Machinery, equipment and parts manufacturing 300,606 1.5 %

Commercial services 326,659 1.7 %

Oil & gas support services 265,119 1.4 %

Materials and commodities 253,259 1.3 %

Transportation services 259,213 1.3 %

Entertainment and recreation 291,146 1.4 %

Food and beverage manufacturing and wholesale 177,549 0.9 %

Transportation services 236,100 1.2 %

Healthcare and pharmaceuticals 217,558 1.1 %

Government and education 208,828 1.0 %

Food and beverage manufacturing and wholesale 179,673 0.9 %

Materials and commodities 173,574 0.8 %

Utilities 146,923 0.7 %

Consumer services 137,823 0.7 %

1 unchanged sentence

Total commercial 10,410,766 51.0 %

Energy 1,159,296 6.0 %

Mortgage finance 3,978,328 19.5 %

Real estate 5,198,643 26.9 %

Commercial real estate 5,500,774 26.9 %

Consumer 530,948 2.6 %

Total $ 20,420,816 100.0 %

2 unchanged sentences

This category also includes loans to companies involved in investment management and securities and commodities trading.

The next largest industry concentration of commercial loans held for investment is to commercial borrowers providing services to the real estate industry.

Loans in this category are not secured by real property and are generally made to commercial borrowers that operate within the real estate industry, which include developers, contractors, professional service providers (such as architectural and interior design services), leasing, management, and other support type services.

The Company believes the loans it originates are appropriately collateralized under its credit standards.

5 unchanged sentences

Highly liquid assets 330,767 1.6 %

Government guaranty 1,826 — %

Municipal tax- and revenue-secured 89,079 0.4 %

Rolling stock 30,415 0.1 %

Government guaranty 1,261 — %

Unsecured 773,064 3.8 %

Total commercial 10,410,766 51.0 %

Energy 1,159,296 6.0 %

Mortgage finance 3,978,328 19.5 %

Real estate 5,198,643 26.9 %

Commercial real estate 5,500,774 26.9 %

Consumer 530,948 2.6 %

Total $ 20,420,816 100.0 %

As noted in the tables above, approximately 27% of loans held for investment as of December 31, 2022 are real estate loans that are generally secured by real property.

This portfolio primarily includes market risk real estate loans, consisting of commercial real estate loans and loans made to residential builders and developers.

Loan amounts are determined in part from an analysis of pro forma cash flows.

Loans are also underwritten to comply with product-type specific advance rates against both cost and market value.

The Company extends commercial real estate loans, including both construction/development financing and limited term financing, to professional real estate developers and owners/managers of commercial real estate projects and properties who have a demonstrated record of past success with similar properties.

Collateral properties generally include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings and residential and commercial tract development.

The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral.

Loans to residential builders are typically in the form of uncommitted guidance lines and are for the purpose of developing lots into single-family homes, while loans to developers are typically in the form of borrowing base lines extended for the purpose of acquiring and developing raw land into lots that can be further sold to home builders.

The table below summarizes the total real estate loan portfolio, which includes real estate loans and construction loans, as segregated by the type of property securing the credit.

Property type concentrations are stated as a percentage of year-end total real estate loans as of December 31, 2022:

As noted in the tables above, approximately 27% of loans held for investment as of December 31, 2023 are commercial real estate loans that are generally secured by real property.

The commercial real estate portfolio is comprised primarily of non-owner occupied construction/development financing and limited term financing provided to professional real estate developers, owners/managers of commercial real estate projects and properties, and residential builders/developers.

Collateral properties include office buildings, warehouse/distribution buildings, shopping centers, hotels/motels, senior living, apartment buildings, residential and commercial tract developments, and raw land or lots to be developed into single-family homes.

The primary source of repayment on these loans is generally expected to come from the sale, permanent financing or lease of the real property collateral.

As a result, the performance of these loans is generally impacted by fluctuations in collateral values, the ability of the borrower to obtain permanent financing, and, in the case of loans to residential builder/developers, volatility in consumer demand.

Commercial real estate net charge-offs totaled $5.5 million in 2023, primarily related to a single hospitality loan that was significantly impacted by the COVID-19 pandemic, as compared to $350,000 in 2022.

The table below summarizes the commercial real estate loan portfolio, by property type as of December 31, 2023:

(dollars in thousands) Amount Percent of Total

Property type:

Apartment/condominium buildings $ 2,196,299 39.9 %

Commercial buildings 463,224 8.9 %

Industrial buildings 1,032,647 18.8 %

Office buildings 451,660 8.2 %

1-4 Family dwellings (other than condominium) 340,632 6.2 %

Self-storage building 220,204 4.2 %

Shopping center/mall buildings 265,938 4.8 %

Senior housing buildings 260,656 4.7 %

Residential lots 152,233 2.9 %

Self-storage buildings 212,571 3.9 %

Commercial buildings 166,405 3.0 %

Hotel/motel buildings 162,585 3.0 %

Residential lots 92,037 1.7 %

Student housing 84,003 1.5 %

Commercial lots 78,192 1.4 %

Other 157,149 2.9 %

Other than market risk

Industrial buildings 393,465 7.6 %

1-4 Family dwellings (other than condominium) 323,280 6.2 %

Commercial buildings 215,856 4.2 %

Other 193,800 3.7 %

Total real estate loans $ 5,198,643 100.0 %

The table below summarizes the Company’s market risk real estate portfolio at December 31, 2022 as segregated by the geographic region in which the property is located.

Approximately 58% of the market risk real estate collateral is located in Texas.

Total commercial real estate loans $ 5,500,774 100.0 %

The table below summarizes the Company’s commercial real estate portfolio at December 31, 2023 as segregated by the geographic region in which the property is located.

Approximately 59% of the commercial real estate collateral is located in Texas.

(dollars in thousands) Amount Percent of Total

7 unchanged sentences

Other states 2,278,303 41.4 %

Total market risk real estate loans $ 4,072,242 100.0 %

Total commercial real estate loans

$ 5,500,774 100.0 %

The determination of collateral value is critically important when financing real estate.

9 unchanged sentences

These additional steps of review are undertaken to confirm that the underlying appraisal and the third-party analysis can be relied upon.

If differences arise, management addresses those with the reviewer and determine an appropriate resolution.

If differences arise, management addresses those with the reviewer and determines an appropriate resolution.

Both the appraisal process and the appraisal review process can be less reliable in establishing accurate collateral values during and following periods of economic weakness due to the lack of comparable sales and the limited availability of financing to support an active market of potential purchasers.

Interest Reserve Loans

As of December 31, 2023 and December 31, 2022, the Company had $788.9 million and $854.5 million, respectively, in loans held for investment that included interest reserve arrangements, representing approximately 14% and 18%, respectively, of outstanding commercial real estate loans.

The use of interest reserves is common in construction loans and is carefully controlled by underwriting standards, which consider the feasibility of the project, the creditworthiness of the borrower and guarantors and the loan-to-value coverage of the collateral.

The interest reserve allows the borrower to draw loan funds to pay interest charges on the outstanding balance of the loan when financial condition precedents are met.

When drawn, the interest is capitalized and added to the loan balance, subject to conditions specified during the initial underwriting and at the time the credit is approved.

The Company has ongoing controls for monitoring compliance with loan covenants, advancing funds and determining default conditions.

When the Company finances land on which improvements will be constructed, construction funds are generally not advanced until the borrower has received lease or purchase commitments which will meet cash flow coverage requirements and/or an analysis of market conditions and project feasibility indicates to management’s satisfaction that such lease or purchase commitments are forthcoming or other sources of repayment have been identified to repay the loan.

It is the general policy to require a substantial equity investment by the borrower to complement the Bank's credit commitment.

Any such required borrower investment is first contributed and invested in the project before any draws are allowed under the Bank's credit commitment.

The Company requires current financial statements of the borrowing entity and guarantors, as well as conduct periodic inspections of the project and analysis of whether the project is on schedule or delayed.

Updated appraisals are ordered when necessary to validate the collateral values to support advances, including reserve interest.

Advances of interest reserves are discontinued if collateral values do not support the advances or if the borrower does not comply with other terms and conditions in the loan agreements.

If at any time management believes that the collateral position is jeopardized, the Company

retains the right to stop the use of interest reserves.

As of December 31, 2023 and December 31, 2022, none of the loans with interest reserves were on non-accrual.

Large Credit Relationships

1 unchanged sentence

The legal lending limit of the Bank is approximately $593.9 million.

The Company, however and generally, employs lower house limits which vary by assigned risk grade, product and collateral type.

The Company, however, generally employs lower house limits which vary by assigned risk grade, product and collateral type.

Such house limits, which generally range from $20 million to $60 million, may be exceeded with appropriate authorization for exceptionally strong borrowers and otherwise where business opportunity and assessed credit risk warrant a somewhat larger investment.

13 unchanged sentences

Commercial $ 10,410,766 $ 1,897,320 $ 7,870,372 $ 635,042 $ 8,032

Energy 1,159,296 47,437 1,111,859 — —

Mortgage finance 3,978,328 3,978,328 — — —

Real estate 5,198,643 1,115,349 3,367,345 370,795 345,154

Commercial real estate 5,500,774 1,516,284 3,643,612 303,895 36,983

Consumer 530,948 207,616 19,220 4,242 299,870

Total loans held for investment $ 20,420,816 $ 7,599,548 $ 11,533,204 $ 943,179 $ 344,885

3 unchanged sentences

Total loans held for investment $ 20,420,816 $ 7,599,548 $ 11,533,204 $ 943,179 $ 344,885

Interest Reserve Loans

As of December 31, 2022 and December 31, 2021, the Company had $854.5 million and $456.1 million, respectively, in loans held for investment that included interest reserve arrangements, representing approximately 46% and 25%, respectively, of outstanding construction loans, which are a component of real estate loans.

Interest reserve provisions are common in construction loans.

The use of interest reserves is carefully controlled by underwriting standards, which consider the feasibility of the project, the creditworthiness of the borrower and guarantors and the loan-to-value coverage of the collateral.

The interest reserve allows the borrower to draw loan funds to pay interest charges on the outstanding balance of the loan when financial conditions precedent are met.

When drawn, the interest is capitalized and added to the loan balance, subject to conditions specified during the initial underwriting and at the time the credit is approved.

The Company has ongoing controls for monitoring compliance with loan covenants, advancing funds and determining default conditions.

It is the general policy to require a substantial equity investment by the borrower to complement the Bank's credit commitment.

Any such required borrower investment is first contributed and invested in the project before any draws are allowed under the Bank's credit commitment.

Updated appraisals are ordered when necessary to validate the collateral values to support advances, including reserve interest.

Advances of interest reserves are discontinued if collateral values do not support the advances or if the borrower does not comply with other terms and conditions in the loan agreements.

If at any time management believes that the collateral position is jeopardized, the Company retains the right to stop the use of interest reserves.

As of December 31, 2022 and December 31, 2021, none of the loans with interest reserves were on non-accrual.

Non-performing Assets

Non-performing assets include non-accrual loans and leases and repossessed assets.

The table below summarizes non-accrual loans by type and by type of property securing the credit.

As of December 31,

(dollars in thousands) 2022 2021

The table below summarizes non-accrual loans by portfolio segment and by type of property securing the credit.

(dollars in thousands) December 31, 2023 December 31, 2022

Non-accrual loans held for investment

Assets of the borrowers $ 41,448 $ 18,366

Business assets $ 63,094 $ 41,448

Oil and gas properties 2,543 3,658

Machinery and equipment

Accounts receivable and inventory — 1,405

Other 564 2,045

Total commercial 69,048 47,042

Oil and gas properties 3,658 28,380

Total energy 3,658 28,380

Assets of the borrowers — 13,741

Commercial real estate:

Hotel/motel 12,350 —

Commercial property — 1,263

Single family residences — 1,629

Total real estate 1,263 18,210

Total commercial real estate 12,350 1,263

Total consumer — 33

Total non-accrual loans held for investment 81,398 48,338

8 unchanged sentences

Loans held for sale past due 90 days and accruing $ — $ —

(1) As of December 31, 2022 and 2021, non-accrual loans held for investment included $531,000 and $19.4 million, respectively, in loans that met the criteria for restructured.

(2) Includes loans guaranteed by U.S.

government agencies that were repurchased out of Ginnie Mae securities.

Loans are recorded as loans held for sale and carried at fair value on the balance sheet.

Interest on these past due loans accrues at the debenture rate guaranteed by the U.S.

Summary of Credit Loss Experience

1 unchanged sentence

Below is a discussion of provision for credit losses on loans.

The changes made to the Company’s current expected credit loss model, as discussed in Note 1 - Operations and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report, resulted in a reallocation of the allowance for credit losses between loan portfolio segments and allowance balances allocated to off-balance sheet financial instruments.

The changes made result in a higher allocation of losses to off-balance sheet financial statements.

See Note 9 - Financial Instruments with Off-Balance Sheet Risk in the accompanying notes to the consolidated financial statements included elsewhere in this report for presentation of the activity in the allowance for credit losses for off-balance asset credit losses.

The Company recorded a $66.0 million provision for credit losses on loans for the year ended December 31, 2022 compared to a negative provision of $30.0 million for the year ended December 31, 2021.

The $66.0 million provision for credit losses resulted from updated views on the downside risks to the economic forecast and an increase in net charge-offs.

The Company recorded $19.9 million in net charge-offs during the year ended December 31, 2022 compared to $12.9 million during 2021.

The Company recorded a provision for credit losses on loans of $47.4 million for the year ended December 31, 2023 compared to a provision of $61.5 million for the year ended December 31, 2022.

The provision for credit losses on loans for the year ended December 31, 2023 reflects increases in total loans held for investment, criticized and non-accrual loans and net charge-offs during the year ended December 31, 2023.

The Company recorded $50.9 million in net charge-offs during the year ended December 31, 2023 compared to $19.9 million in net charge-offs during the same period in 2022.

Criticized loans totaled $738.2 million at December 31, 2023, compared to $513.2 million at December 31, 2022.

5 unchanged sentences

Total provision for credit losses to average total loans held for investment 0.36 % 0.31 %

The table below details net charge-offs/(recoveries) as a percentage of average total loans by loan category:

The table below details net charge-offs/(recoveries) as a percentage of average total loans by portfolio segment:

(dollars in thousands) Net

Charge-offs Net Charge-offs

1 unchanged sentence

Commercial $ 45,395 0.44 % $ 19,542 0.18 %

Energy 2,587 0.27 % 4,451 0.65 %

Mortgage finance — — % — — %

Real Estate 350 0.01 % 875 0.02 %

Commercial real estate 5,496 0.10 % 350 0.01 %

Consumer 36 0.01 % (23) — %

Total $ 50,927 0.25 % $ 19,869 0.09 %

3 unchanged sentences

Commercial $ 171,437 51 % $ 185,303 51 %

Energy 49,000 6 % 52,568 3 %

Mortgage finance 4,173 19 % 10,745 21 %

Real estate 56,883 27 % 51,013 21 %

Commercial real estate 71,829 27 % 54,268 25 %

Consumer 2,534 3 % 3,153 3 %

Total $ 249,973 100 % $ 253,469 100 %

The overall increase in the allowance for credit losses on loans at December 31, 2022 compared to 2021 resulted primarily from management’s continued evaluation of changing market conditions and updated views on the downside risks to the economic forecast.

See Note 1 - Operations and Summary of Significant Accounting Policies and Note 4 - Loans and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for details of the allowance for credit losses on loans.

Loans Held for Sale

On April 20, 2021, the Company entered into an agreement to sell its portfolio of MSRs and to transition the MCA program to a third-party.

The sale was completed on June 1, 2021 and the transfer of servicing on the underlying mortgage loans was completed on August 1, 2021.

Transition activities began immediately following the execution of the agreement and were complete prior to December 31, 2021.

The Company sold the remaining MSR balance of $1.2 million, which represented MSRs from loans sold after the cut-off date for the initial sale mentioned above.

The sale of this MSR portfolio and the transfer of servicing on the underlying mortgage loans were completed on October 1, 2021, at which time all remaining MSR hedge positions were closed.

During the fourth quarter of 2022, the Company sold the remaining loans held for sale associated to the MCA program and recorded a $990,000 loss on sale of loans held for sale.

The Company competes for deposits by offering a full suite of deposit products and services to its customers.

3 unchanged sentences

Average total deposits for the year ended December 31, 2023 decreased $2.1 billion compared to 2022.

Average non-interest bearing deposits for the year ended December 31, 2022 decreased $2.2 billion compared to 2021 and average interest bearing deposits decreased $3.4 billion.

Average non-interest bearing deposits for the year ended December 31, 2023 decreased $3.1 billion compared to 2022 and average interest bearing deposits increased $1.0 billion.

The average cost of total deposits increased to 2.47% in 2023 from 0.74% in 2022 primarily due to rising interest rates.

8 unchanged sentences

Estimated uninsured deposits at December 31, 2023 were $9.7 billion (43% of total deposits), compared to $12.4 billion (54% of total deposits) at December 31, 2022.

The insured deposit data for 2022 and 2021 reflect the deposit insurance impact of “combined ownership segregation” of escrow and other accounts at an aggregate level but do not reflect an evaluation of all of the account styling distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations.

The uninsured amounts are estimated based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

The following table shows scheduled maturities of time deposits greater than $250,000:

(in thousands) 2022 2021

(in thousands) December 31, 2023 December 31, 2022

Months to maturity:

9 unchanged sentences

The Company regularly evaluates all of its various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness.

The Company’s principal source of funding is customer deposits, supplemented by short-term borrowings, primarily from federal funds purchased and FHLB borrowings, which are generally used to fund mortgage finance assets and long-term debt.

The Company also relies on the availability of the mortgage secondary market provided by Ginnie Mae and the GSEs to support the liquidity of mortgage finance assets.

During 2020 and into the first half of 2021, the Company significantly increased its interest bearing cash and cash equivalents to ensure that it had the balance sheet strength to serve its clients during the COVID-19 pandemic.

In the second half of 2021 and throughout 2022, these balances have run off as the Company purchased investment securities and proactively exited certain high-cost indexed deposit products.

The following table summarizes these balances:

(dollars in thousands) 2022 2021

The Company’s principal source of funding is customer deposits, supplemented by short-term borrowings, primarily from federal funds purchased and Federal Home Loan Bank (“FHLB”) borrowings, which are generally used to fund mortgage finance assets, and long-term debt.

The Company also relies on the availability of the mortgage secondary market provided by Ginnie Mae and government sponsored entities to support the liquidity of mortgage finance assets.

The following table summarizes the Company’s interest bearing cash and cash equivalents:

(dollars in thousands) December 31, 2023 December 31, 2022

Interest bearing cash and cash equivalents $ 3,042,357 $ 4,778,623

3 unchanged sentences

Total deposits 13.6 % 20.9 %

Liquidity to support growth in loans held for investment has been fulfilled primarily through growth in customer deposits.

The Company’s goal is to obtain as much of its funding for loans held for investment and other earning assets as possible from customer deposits, which are generated principally through development of long-term customer relationships, with a significant

focus on treasury management products.

In addition, the Company also has access to deposits through brokered channels.

The following table summarizes period-end total deposits:

(dollars in thousands) 2022 2021

Balance % of Total Balance % of Total

December 31, 2023 December 31, 2022

(dollars in thousands) Balance % of Total Balance % of Total

Customer deposits $ 21,454,568 95.9 % $ 21,247,999 93.0 %

5 unchanged sentences

The following table summarizes short-term borrowings, all of which mature within one year:

(in thousands) 2022 2021

(in thousands) December 31, 2023 December 31, 2022

Repurchase agreements $ — $ 1,142

2 unchanged sentences

The following table summarizes the Company’s short-term borrowing capacities net of balances outstanding:

(in thousands) 2022 2021

FHLB borrowing capacity relating to loans $ 2,621,218 $ 5,190,703

FHLB borrowing capacity relating to securities 3,539,297 3,352,111

(in thousands) December 31, 2023 December 31, 2022

FHLB borrowing capacity relating to loans and pledged securities $ 2,602,092 $ 2,621,218

FHLB borrowing capacity relating to unencumbered securities 3,737,615 3,539,297

Total FHLB borrowing capacity(1) $ 6,339,707 $ 6,160,515

6 unchanged sentences

The loan agreement contains customary financial covenants and restrictions.

No borrowings were made against this line of credit during 2022 or 2021.

The line of credit was increased to $100.0 million on February 8, 2023.

No borrowings were made against this line of credit during the twelve months ended December 31, 2023 or 2022.

The line of credit was reduced to $75.0 million in the first quarter of 2024.

The Company has long-term debt outstanding of $859.1 million as of December 31, 2023, comprised of trust preferred securities, subordinated notes and senior unsecured credit linked notes with maturity dates ranging from September 2024 to December 2036.

In the second quarter of 2023, the Company partially paid down $75.0 million of the senior unsecured credit-linked notes in accordance with the terms of the notes.

See Note 8 - Short-Term Borrowings and Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information.

The Company may consider raising additional capital, if needed, in public or private offerings of debt or equity securities to supplement deposits and meet its long-term funding needs.

For additional information on short-term borrowings and long-term debt, see Note 9 - Short-Term Borrowings and Long-Term Debt in the accompanying notes to the consolidated financial statements included elsewhere in this report.

As the Company is a holding company and is a separate operating entity from the Bank, the Company’s primary sources of liquidity are dividends received from the Bank and borrowings from outside sources.

Banking regulations may limit the amount of dividends that may be paid by the Bank.

See Note 11 - Regulatory Ratios and Capital in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information regarding dividend restrictions and “Liquidity Risks” included in Part I, Item 1A of this report.

See Note 10 - Regulatory Ratios and Capital in the accompanying notes to the consolidated financial statements included elsewhere in this report for additional information regarding dividend restrictions and “Liquidity Risks” included in Part I, Item 1A of the 2022 Form 10-K.

Periodically, based on market conditions and other factors, and subject to compliance with applicable laws and regulations and the terms of its existing indebtedness, the Company may repay, repurchase, exchange or redeem outstanding indebtedness, or otherwise enter into transactions regarding debt or capital structure.

For example, the Company periodically evaluates and may engage in liability management transactions, including repurchases or redemptions of outstanding subordinated notes, which may be funded by the issuance of, or exchanges of, newly issued unsecured borrowings to actively manage the debt maturity profile and interest cost.

As of December 31, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on liquidity, capital resources or operations.

In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect.

Capital Resources

The Company’s equity capital averaged $3.1 billion for the year ended December 31, 2022 compared to $3.1 billion in 2021.

The Company’s equity capital averaged $3.1 billion for the year ended December 31, 2023 compared to $3.1 billion for the same period in 2022.

The Company has not paid any cash dividends on common stock since operations commenced and has no plans to do so in the foreseeable future.

On April 19, 2022, the Company’s board of directors authorized the Company to repurchase up to $150.0 million of its outstanding shares of common stock.

Any repurchases under the repurchase program have been made in accordance with applicable securities laws in open market or private transactions.

The extent to which the Company repurchases shares, and the timing of such repurchases, will be at management’s discretion and will depend upon a variety of factors, including market conditions, capital position and amount of retained earnings, regulatory requirements and other considerations.

No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time.

During 2022, the Company repurchased 2,083,118 shares of its common stock for an aggregate purchase price of $115.3 million, at a weighted average price of $55.35 per share.

On January 18, 2023, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $150.0 million in shares of outstanding common stock.

For additional information on the Company’s capital and stockholders’ equity, Note 11 - Regulatory Ratios and Capital and Note 19 - Material Transactions Affecting Stockholders' Equity, respectively, in the accompanying notes to the consolidated financial statements included elsewhere in this report.

On April 19, 2022, the Company’s board of directors authorized a share repurchase program under which the Company could repurchase up to $150.0 million in shares of its outstanding common stock.

In January 2023, the Company repurchased 564,206 shares of common stock at a weighted average price of $61.50, completing the full $150.0 million of repurchases authorized under this plan.

A new share repurchase program was approved on January 18, 2023 under which the Company could repurchase up to $150.0 million in shares of outstanding common stock.

From March 2023 through December 2023, the Company repurchased 1,257,326 shares of its common stock for an aggregate purchase price of $69.4 million, at a weighted average price of $55.22 per share under this plan.

The aggregate purchase price and weighted average price per share does not include the effect of excise tax expense incurred on net stock repurchases.

On January 17, 2024, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $150.0 million in shares of its outstanding common stock.

Any repurchases under the repurchase program will be made in accordance with applicable securities laws from time to time in open market or private transactions.

The extent to which the Company repurchases shares, and the timing of such repurchases, will be at management’s discretion and will depend upon a variety of factors, including market conditions, our capital position and amount of retained earnings, regulatory requirements and other considerations.

The share repurchase program is set to expire on January 31, 2025, and the program may be suspended or discontinued at any time.

Remaining repurchase authorization under the January 18, 2023 share repurchase program was terminated upon authorization of this new program.

For additional information on the Company’s capital and stockholders’ equity, see Note 10 - Regulatory Ratios and Capital, in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Critical Accounting Estimates

10 unchanged sentences

The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans.

For purposes of determining the allowance for credit losses, the loan portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades.

Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation.

The allowance for credit losses on off-balance sheet financial instruments is recorded in other liabilities on the consolidated balance sheets.

For purposes of determining the allowance for credit losses, the loan portfolio is segregated into pools first by portfolio segment and then by past due status or credit grade.

Each pool is assigned a loss estimate, reflecting historical loss rates that incorporate probability of default and severity of losses over the estimated remaining life of the loans.

Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective (pool) evaluation.

Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts.

Adjustments to historical loss information are made to incorporate the reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”).

Modifications to loss estimates are made to incorporate a reasonable and supportable forecast of future losses at the pool level, as well as any necessary qualitative adjustments using a Portfolio Level Qualitative Factor (“PLQF”) and/or a Portfolio Segment Level Qualitative Factor (“SLQF”).

A similar process is employed to calculate a reserve assigned to off-balance sheet financial instruments, specifically unfunded loan commitments and letters of credit.

Modified loss estimates are assigned based on the balance of the commitments estimated to be outstanding at the time of default.

The PLQF and SLQF are utilized to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process.

3 unchanged sentences

Within the various economic scenarios considered as of December 31, 2023, the quantitative estimate of the allowance for credit loss would increase by approximately $220.4 million under sole consideration of the most severe downside scenario.

reflect the nature and extent of future changes in the allowance for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.

See “ Summary of Credit Loss Experience” above and Note 4 – Loans and Allowance for Credit Losses on Loans in the accompanying notes to the consolidated unaudited financial statements included elsewhere in this report for further discussion of the risk factors considered by management in establishing the allowance for credit losses.

The quoted sensitivity calculation reflects the sensitivity of the modeled allowance estimate to macroeconomic forecast data, but is absent of qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process and does not necessarily reflect the nature and extent of future changes in the allowance for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis