SOUTHSIDE BANCSHARES INC

Previous wording

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

Current wording

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

Previous wording

•current or future legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we or our customers or our borrowers are engaged, including the impact of the Dodd-Frank Act, the Federal Reserve’s actions to increase interest rates, the capital requirements promulgated by the Basel Committee, the CARES Act, the Economic Aid Act and other regulatory responses to economic conditions;

Current wording

•current or future legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we or our customers or our borrowers are engaged, including the impact of the Dodd-Frank Act, the Federal Reserve’s actions to manage interest rates, the capital requirements promulgated by the Basel Committee, the CARES Act, the Economic Aid Act, tariffs, trade policies and other regulatory responses to economic conditions;

Previous wording

•economic or other disruptions caused by acts of terrorism, war or other conflicts, including the Russia-Ukraine and Israeli-Hamas conflicts, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate change or other catastrophic events;

Current wording

•acts of terrorism, war or other conflicts, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate change or other catastrophic events that may affect general economic conditions or cause other disruptions and/or increase costs, including, but not limited to, property and casualty and other insurance costs;

Previous wording

•our ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, which may be exacerbated by recent developments in generative artificial intelligence and which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage of our systems, increased costs, significant losses, or adverse effects to our reputation;

Current wording

•our ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, which may be exacerbated by developments in generative artificial intelligence and which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage of our systems, increased costs, significant losses, or adverse effects to our reputation;

Previous wording

•changes in consumer spending, borrowing and saving habits, including as a result of rising inflation and recessionary concerns;

Current wording

•changes in consumer spending, borrowing and saving habits, including as a result of inflation, fluctuating interest rates and recessionary concerns;

Previous wording

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

Current wording

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

Previous wording

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

Current wording

The economic conditions and growth prospects for our markets continue to reflect a solid and positive overall outlook. Higher inflation levels and higher interest rates could have a negative impact on both our consumer and commercial borrowers. Currently, the Texas markets we serve continue to remain healthy due to both job and population growth.

Previous wording

Our deposits increased $351.7 million, or 5.7%, to $6.55 billion at December 31, 2023 from $6.20 billion at December 31, 2022. At December 31, 2023, we had 180,057 total deposit accounts with an average balance of $32,000. Our estimated uninsured deposits was 37.5% of total deposits as of December 31, 2023. When excluding affiliate deposits (Southside-owned deposits) and public fund deposits (all collateralized), our total estimated deposits without insurance or collateral was 19.0% of total deposits as of December 31, 2023.

Current wording

Our deposits were $6.65 billion at December 31, 2024, an increase of $104.6 million, or 1.6%, from December 31, 2023. At December 31, 2024, we had 178,662 total deposit accounts with an average balance of $33,000. Our estimated uninsured deposits were 38.1% of total deposits as of December 31, 2024. When excluding affiliate deposits (Southside-owned deposits) and public fund deposits (all collateralized), our total estimated deposits without insurance or collateral was 19.5% of total deposits as of December 31, 2024.

Previous wording

We continued to increase interest rates paid on deposits during the year in order to retain deposits. Our noninterest bearing deposits represent approximately 21.2% of total deposits. Our cost of interest bearing deposits increased 168 basis points, from 0.66% for the year ended December 31, 2022, to 2.34% for the year ended December 31, 2023. Our cost of total deposits increased 129 basis points, from 0.48% for the year ended December 31, 2022, to 1.77% for the year ended December 31, 2023.

Current wording

Our noninterest bearing deposits represent approximately 20.4% of total deposits. Our cost of interest bearing deposits increased 64 basis points, from 2.34% for the year ended December 31, 2023, to 2.98% for the year ended December 31, 2024. Our cost of total deposits increased 59 basis points, from 1.77% for the year ended December 31, 2023, to 2.36% for the year ended December 31, 2024.

Previous wording

Our capital ratios and contingent liquidity sources remain solid. We utilized the Federal Reserve’s BTFP to reduce our overall funding costs and to enhance our interest rate risk position. Advances can be requested under the BTFP until March 11, 2024. As of December 31, 2023, our BTFP borrowings of $117.7 million were at a cost of 4.37%.

Current wording

Our capital ratios and contingent liquidity sources remain solid. We utilized the Federal Reserve’s BTFP to reduce our overall funding costs and to enhance our interest rate risk position. On March 11, 2024, the Federal Reserve stopped extending new BTFP advances. As of December 31, 2024, we had no remaining BTFP borrowings, compared to $117.7 million at a cost of 4.37% at December 31, 2023.

Previous wording

The table below shows our total lines of credit, current borrowings as of December 31, 2023, total amounts available for future borrowings, and swapped value (in thousands):

Current wording

The table below shows our total lines of credit, borrowings, total amounts available for future liquidity, and swapped value as of December 31, 2024 (in thousands):

Previous wording

During the year ended December 31, 2023, our net income decreased $18.3 million, or 17.5%, to $86.7 million from $105.0 million for the same period in 2022. The decrease in net income was primarily a result of the $10.3 million increase in noninterest expense, the $5.9 million increase in the provision for credit losses and the $5.0 million decrease in noninterest income, partially offset by the $2.7 million increase in net interest income. Earnings per diluted common share decreased $0.44, or 13.5%, to $2.82 for the year ended December 31, 2023, compared to $3.26 for the same period in 2022.

Current wording

During the year ended December 31, 2024, our net income increased $1.8 million, or 2.1%, to $88.5 million from $86.7 million for the same period in 2023. The increase in net income was primarily a result of the $5.9 million increase in noninterest income, a $5.8 million decrease in provision for credit losses and the $1.1 million increase in net interest income, partially offset by the $6.6 million increase in noninterest expense and the $4.4 million increase in income tax expense. Earnings per diluted common share increased $0.09, or 3.2%, to $2.91 for the year ended December 31, 2024, compared to $2.82 for the same period in 2023.

Previous wording

Our total assets increased $726.3 million, or 9.6%, to $8.28 billion at December 31, 2023 from $7.56 billion at December 31, 2022. Our securities portfolio decreased by $22.4 million, or 0.9%, to $2.60 billion, compared to $2.63 billion at December 31, 2022. The decrease in the securities portfolio was due to the sale of municipal bonds, partially offset by purchases of MBS and to a lesser extent, U.S. Treasury Bills during the year ended December 31, 2023. Our FHLB stock increased $2.7 million, or 29.9%, to $11.9 million from $9.2 million at December 31, 2022, due to the increase in our FHLB borrowings during the year ended December 31, 2023.

Current wording

Our total assets increased $232.5 million, or 2.8%, to $8.52 billion at December 31, 2024 from $8.28 billion at December 31, 2023. Our securities portfolio increased by $209.8 million, or 8.1%, to $2.81 billion, compared to $2.60 billion at December 31, 2023. The increase in the securities portfolio was primarily due to purchases of MBS, partially offset by a decrease in municipal bonds during the year ended December 31, 2024. Our FHLB stock increased $21.9 million, or 183.3%, to $33.8 million from $11.9 million at December 31, 2023, due to the increase in our FHLB borrowings during the year ended December 31, 2024.

Previous wording

Loans at December 31, 2023 were $4.52 billion, an increase of $376.8 million, or 9.1%, compared December 31, 2022, due to increases of $230.1 million in construction loans, $180.7 million in commercial real estate loans and $33.2 million in 1-4 family residential loans. The increases were partially offset by decreases of $45.2 million in commercial loans, $13.1 million in loans to individuals and $8.9 million in municipal loans. Loans held for sale increased $10.2 million, or 1,533.3%, to $10.9 million at December 31, 2023 from $667,000 at December 31, 2022, due to the transfer of an $8.1 million commercial real estate loan relationship to loans held for sale that included a write down of $788,000 to fair value.

Current wording

Loans at December 31, 2024 were $4.66 billion, an increase of $137.1 million, or 3.0%, compared to December 31, 2023, due to increases of $411.3 million in commercial real estate loans and $43.7 million in 1-4 family residential loans. The increases were partially offset by decreases of $251.9 million in construction loans, $50.2 million in municipal loans, $12.0 million in loans to individuals and $3.7 million in commercial loans. Loans held for sale decreased $8.9 million, or 82.1%, to $1.9 million at December 31, 2024 from $10.9 million at December 31, 2023 due to the sale of a $7.9 million commercial real estate loan relationship during the first quarter of 2024.

Previous wording

Our nonperforming assets at December 31, 2023 decreased $6.9 million, or 63.2%, to $4.0 million and represented 0.05% of total assets, compared to $10.9 million, or 0.14% of total assets, at December 31, 2022. Nonaccruing loans increased $1.0 million, or 36.6%, to $3.9 million, and the ratio of nonaccruing loans to total loans was 0.09% and 0.07% at December 31, 2023 and December 31, 2022, respectively. Restructured loans were $13,000 as of December 31, 2023, compared to $7.8 million at December 31, 2022. The decrease in restructured loans was due to the adoption of ASU 2022-22 on January 1, 2023, which allowed for the prospective exclusion of loan modifications that are performing but would have previously required disclosure as troubled debt restructures in nonperforming assets. There were no repossessed assets at December 31, 2023 and $74,000 at December 31, 2022. There was $99,000 and $93,000 of OREO at December 31, 2023 and December 31, 2022, respectively.

Current wording

Our nonperforming assets at December 31, 2024 decreased $412,000, or 10.3%, to $3.6 million and represented 0.04% of total assets, compared to $4.0 million, or 0.05% of total assets, at December 31, 2023. Nonaccruing loans decreased $704,000, or 18.1%, to $3.2 million, and the ratio of nonaccruing loans to total loans was 0.07% and 0.09% for December 31, 2024 and December 31, 2023, respectively. There were $2,000 in restructured loans as of December 31, 2024, compared to $13,000 at December 31, 2023. Repossessed assets were $14,000 at December 31, 2024. There were no repossessed assets at December 31, 2023. There was $388,000 and $99,000 of OREO at December 31, 2024 and December 31, 2023, respectively.

Previous wording

Our deposits increased $351.7 million, or 5.7%, to $6.55 billion at December 31, 2023 from $6.20 billion at December 31, 2022, which consisted of an increase of $632.8 million in interest bearing deposits, partially offset by a decrease of $281.2 million in noninterest bearing deposits. The increase in interest bearing deposits was due to the increase in interest rates we paid during 2023 as well as an increase in our brokered deposits of $168.8 million, or 25.6%, to fund our cash flow hedge swaps. Additionally, our public fund deposits increased $305.7 million, or 33.7%, most of which was interest bearing, to $1.21 billion at December 31, 2023, from $907.7 million at December 31, 2022.

Current wording

Our deposits increased $104.6 million, or 1.6%, with a balance of $6.65 billion at December 31, 2024 from $6.55 billion at December 31, 2023, which consisted of an increase of $137.8 million in interest bearing deposits, partially offset by a decrease of $33.3 million in noninterest bearing deposits.

Previous wording

Total FHLB borrowings increased $59.3 million, or 38.7%, to $212.6 million at December 31, 2023, from $153.4 million at December 31, 2022.

Current wording

Total FHLB borrowings increased $519.3 million, or 244.2%, to $731.9 million at December 31, 2024, from $212.6 million at December 31, 2023.

Previous wording

Our total shareholders’ equity at December 31, 2023 increased 3.7%, or $27.3 million, to $773.3 million, or 9.3% of total assets, compared to $746.0 million, or 9.9% of total assets, at December 31, 2022. The increase in shareholders’ equity was the result of net income of $86.7 million, other comprehensive income of $24.0 million, stock compensation expense of $3.6 million, common stock issued under our dividend reinvestment plan of $1.2 million and net issuance of common stock under employee stock plans of $485,000, partially offset by the repurchase of $45.1 million of our common stock and cash dividends paid of $43.6 million.

Current wording

Our total shareholders’ equity at December 31, 2024 increased 5.0%, or $38.7 million, to $811.9 million, or 9.5% of total assets, compared to $773.3 million, or 9.3% of total assets, at December 31, 2023. The increase in shareholders’ equity was the result of net income of $88.5 million, stock compensation expense of $3.5 million, net issuance of common stock under employee stock plans of $2.0 million and common stock issued under our dividend reinvestment plan of $1.2 million, partially offset by cash dividends paid of $43.6 million, other comprehensive loss of $11.4 million and repurchases of $1.5 million of our common stock pursuant to our Stock Repurchase Plan.

Previous wording

Due to disruptions in the banking industry during the first quarter of 2023, we increased the balance of securities pledged as collateral at the FRDW in preparation for potential liquidity needs and utilized the BTFP as a source of wholesale funding to reduce interest cost and interest rate risk. We ended the fourth quarter of 2023 with approximately $213.1 million in available liquidity between the FRDW and the BTFP in addition to the approximately $1.95 billion credit line available from FHLB due primarily to the blanket lien on our loan portfolio and to a lesser extent, securities available as collateral. At December 31, 2023, the estimated deposits, without insurance or collateral, to total deposits, excluding affiliate deposits (Southside-owned deposits) was 19.0%, or $1.24 billion.

Current wording

We ended the fourth quarter of 2024 with approximately $431.7 million in available liquidity from the FRDW, in addition to the approximately $1.72 billion available from the credit line with FHLB due primarily to the blanket lien on our loan portfolio and to a lesser extent, securities available as collateral. At December 31, 2024, the estimated deposits, without insurance or collateral, to total deposits, excluding affiliate deposits (Southside-owned deposits) was 19.5%, or $1.30 billion.

Previous wording

During the year ended December 31, 2023, we entered into $600 million of additional cash flow hedge swaps, $100 million of which were terminated in the second quarter. We also replaced $60 million of brokered deposits with FHLB advances as the funding source for cash flow hedge swaps, bringing this funding source to $210 million. At December 31, 2023, brokered deposits funded $800 million of our $1.01 billion remaining cash flow hedge swaps. As of December 31, 2023, a pre-tax unrealized gain of $17.3 million was recognized in other comprehensive income, and there was no ineffective portion of these hedges. We continue to evaluate the lowest cost funding sources for our cash flow swaps and will utilize either brokered deposits, FHLB advances or FRDW borrowings, or a combination of the three funding sources. At December 31, 2023, the majority of the securities portfolio was funded by non-maturity deposits, some of which are included in wholesale funding that accounts for approximately 55% of the funding source, of which approximately 69% is swapped at a fixed rate, providing protection from rising interest rates.

Current wording

During the year ended December 31, 2024, we entered into an additional $50 million cash flow hedge interest rate swap contract while $150 million cash flow hedge interest rate swap contracts were terminated and $120 million matured. At December 31, 2024, FHLB advances of $310 million and brokered deposits of $480 million were hedged with our $790 million of cash flow swaps. As of December 31, 2024, a pre-tax unrealized gain of $11.5 million was recognized in other comprehensive income, and there was no ineffective portion of these hedges. We continue to evaluate the lowest cost wholesale funding sources and will utilize either brokered deposits, FHLB advances or FRDW borrowings, or a combination of the three funding sources in addition to utilizing cash flow hedges to mitigate the impacts of interest rate movements. At December 31, 2024, the majority of the securities portfolio was funded by non-maturity deposits, some of which are included in wholesale funding that accounts for approximately 51% of the funding source, of which approximately 54% is swapped at a fixed rate, providing protection from rising interest rates.

Previous wording

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

Current wording

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

Previous wording

Our securities portfolio decreased slightly from $2.63 billion at December 31, 2022 to $2.60 billion at December 31, 2023. The decrease in the securities portfolio was due to sales of securities and principal payments during the year ended December 31, 2023, which more than offset securities purchased.

Current wording

Our securities portfolio increased 8.1% from $2.60 billion at December 31, 2023 to $2.81 billion at December 31, 2024. The increase in the securities portfolio was due to securities purchased during the year ended December 31, 2024, which more than offset sales of securities and principal payments.

Previous wording

During the year ended December 31, 2023, the composition of the securities portfolio continued to change as U.S. Treasury Bills and MBS increased while the remaining categories in the portfolio decreased. The increase in MBS was attributable to purchases of U.S. Agency MBS, partially offset by MBS sales and principal payments. During the year ended December 31, 2023, we purchased $1.43 billion in short-term U.S. Treasury Bills, $614.1 million in MBS and $5.8 million in investment grade subordinated corporate debt. Sales during the year ended December 31, 2023, included $422.3 million in municipal securities, $372.7 million in U.S. Treasury Bills and $346.5 million in MBS to align the investment portfolio with the current balance sheet strategy. During the fourth quarter, sales of AFS securities were due to strategic opportunities related to a drop in treasury rates and reinvestment of the proceeds primarily into higher yielding securities and to a lesser extent, into loans. Sales of AFS securities for the year ended December 31, 2023, resulted in a net realized loss of $16.0 million which was partially offset by the sale of equity securities that resulted in a net gain of $5.1 million for the year ended December 31, 2023.

Current wording

During the year ended December 31, 2024, we continued to adjust the composition of the securities portfolio as U.S. Treasury Bills and MBS increased while the remaining categories in the portfolio decreased. The increase in MBS was attributable to purchases of U.S. Agency MBS, partially offset by MBS principal payments. During the year ended December 31, 2024, we purchased $655.6 million in short-term U.S. Treasury Bills to collateralize public fund deposits and $532.3 million in low premium, primarily 5.0% to 6.5% coupon MBS and to a lesser extent, discounted 4.0% to 5.5% coupon MBS. Sales during the year ended December 31, 2024 included $139.0 million in municipal securities and in most instances the unwinding of the related fair value hedges to align the investment portfolio with the current balance sheet strategy. Sales of AFS securities and the related fair value hedge unwinds for the year ended December 31, 2024 resulted in a net realized loss of $2.5 million.

Previous wording

At December 31, 2023, securities as a percentage of assets totaled 31.4%, compared to 34.7% at December 31, 2022, due primarily to a $726.3 million, or 9.6%, increase in the total assets, while cash and cash equivalents increased to 6.77% of total assets at December 31, 2023, compared to 2.64% at December 31, 2022. Our balance sheet management strategy is dynamic and is continually evaluated as market conditions warrant.

Current wording

At December 31, 2024, securities as a percentage of assets totaled 33.0%, compared to 31.4% at December 31, 2023, due to a $209.8 million, or 8.1%, increase in securities, while cash and cash equivalents decreased to 5.0% of total assets at December 31, 2024, compared to 6.8% at December 31, 2023. Our balance sheet management strategy is dynamic and is continually evaluated as market conditions warrant.

Previous wording

During the year ended 2022, we entered into partial term fair value hedges for certain of our fixed rate callable AFS municipal securities. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. As of December 31, 2023, hedged securities with a carrying amount of $460.4 million are included in our AFS securities portfolio in our consolidated balance sheets representing approximately 36% and 81% of the AFS securities portfolio and the AFS municipal portfolio, respectively. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for us making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.

Current wording

During 2022, we entered into partial term fair value hedges for certain of our fixed rate callable AFS municipal securities. During 2024, we entered into partial term fair value hedges of fixed rate AFS MBS and fixed rate municipal loans using the portfolio layer method. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to partially offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. As of December 31, 2024, hedged municipal securities with a carrying amount of $300.3 million are included in our AFS securities portfolio in our consolidated balance sheets representing approximately 72% of the AFS municipal portfolio. As of December 31, 2024, $134.0 million in hedging instruments were used to hedge a layer of the closed portfolio of AFS MBS with a carrying value of $557.8 million, or 60% of the AFS MBS portfolio, and $155.0 million in hedging instruments were used to hedge a layer of the closed portfolio of municipal loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for us making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.

Previous wording

With respect to funding sources, we primarily utilize deposits and to a lesser extent, wholesale funding to achieve our strategy of minimizing cost while achieving overall interest rate risk objectives as well as the liability management objectives of the ALCO. Our primary wholesale funding sources are brokered deposits, FHLB and borrowings from the Federal Reserve through the FRDW and BTFP. Our FHLB borrowings increased 38.7%, or $59.3 million, to $212.6 million at December 31, 2023 from $153.4 million at December 31, 2022.

Current wording

With respect to funding sources, we primarily utilize deposits and to a lesser extent wholesale funding to achieve our strategy of minimizing cost while achieving overall interest rate risk objectives as well as the liability management objectives of the ALCO. Our primary wholesale funding sources are FHLB, brokered deposits and borrowings from the FRDW. Our FHLB borrowings increased 244.2%, or $519.3 million, to $731.9 million at December 31, 2024 from $212.6 million at December 31, 2023. As of December 31, 2024, we had no borrowings from the FRDW. As of December 31, 2023, we had $300.0 million in borrowings from the FRDW and $117.7 million in borrowings from the BTFP.

Previous wording

As of December 31, 2023, our total wholesale funding as a percentage of deposits, not including brokered deposits, increased to 25.5%, from 18.1% at December 31, 2022.

Current wording

As of December 31, 2024, our total wholesale funding as a percentage of deposits, not including brokered deposits, decreased to 24.9% from 25.5% at December 31, 2023.

Previous wording

Our brokered deposits may consist of CDs and non-maturity deposits. We had no brokered CDs at December 31, 2023, compared to $220.9 million at December 31, 2022. Our brokered non-maturity deposits increased to $828.0 million at December 31, 2023, of which $800.0 million are related to our cash flow hedges, from $438.4 million at December 31, 2022, with a weighted average cost of 323 basis points and 126 basis points, respectively. Our wholesale funding policy currently allows for maximum brokered deposits of the lesser of $1.20 billion, or 20% of total deposits. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.

Current wording

Our brokered deposits may consist of CDs and non-maturity deposits which may be raised quickly with terms tailored to our funding needs. We had $115.7 million in brokered CDs at December 31, 2024. We had no brokered CDs at December 31, 2023. At December 31, 2024, our brokered CDs had a weighted average cost of 453 basis points and remaining maturities of less than 5 months. Our brokered non-maturity deposits decreased to $627.1 million at December 31, 2024, of which $480.0 million are related to our cash flow hedges, from $828.0 million at December 31, 2023, with a weighted average cost of 321 and 323 basis points, respectively. Our wholesale funding policy currently allows for maximum brokered deposits of the lesser of $1.05 billion, or 12% of total assets. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.

Previous wording

In connection with $1.01 billion of our wholesale funds, the Bank has entered into various variable rate agreements and fixed or variable rate short-term pay agreements with an interest rate tied to overnight SOFR. In connection with $1.01 billion and $575.0 million of the agreements outstanding at December 31, 2023 and December 31, 2022, respectively, the Bank also entered into various interest rate swap contracts that are treated as cash flow hedges under ASC Topic 815, “Derivatives and Hedging” that are expected to be effective in hedging the variability in future cash flows attributable to fluctuations in the underlying SOFR interest rate. The interest rate swap contracts had an average interest rate of 2.75% with a remaining average weighted maturity of 2.3 years at December 31, 2023. Refer to “Note 11 – Derivative Financial Instruments and Hedging Activities” in our consolidated financial statements included in this report for a detailed description of our hedging policy and methodology related to derivative instruments.

Current wording

In connection with $790.0 million of our wholesale funds, the Bank has entered into various variable rate agreements and fixed or variable rate short-term pay agreements with an interest rate tied to SOFR. In connection with $790.0 million and $1.01 billion of the agreements outstanding at December 31, 2024 and December 31, 2023, respectively, the Bank also entered into various interest rate swap contracts that are treated as cash flow hedges under ASC Topic 815, “Derivatives and Hedging” that are expected to be effective in hedging the variability in future cash flows at 2.63% with a remaining average weighted maturity of 1.6 years at December 31, 2024. Refer to “Note 11 – Derivative Financial Instruments and Hedging Activities” in our consolidated financial statements included in this report for a detailed description of our hedging policy and methodology related to derivative instruments.

Previous wording

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

Current wording

Net interest income is one of the principal sources of a financial institution’s earnings stream and represents the difference or spread between interest and fee income generated from interest earning assets and the interest expense paid on interest bearing liabilities. Fluctuations in interest rates or interest rate yield curves, as well as repricing characteristics and volume and changes in the mix of interest earning assets and interest bearing liabilities, materially impact net interest income. During the year ended December 31, 2023, the Federal Reserve increased the target federal funds rate by 100 basis points to 5.25% to 5.50%. During the last four months of 2024, the Federal Reserve reduced target federal funds rate by 100 basis points to 4.25% to 4.50%. If the federal funds rate remains elevated, it may negatively impact our net interest income.

Previous wording

Net interest income was $215.0 million for the year ended December 31, 2023, compared to $212.3 million for the same period in 2022, an increase of $2.7 million, or 1.3%. The increase in net interest income for the year ended December 31, 2023 was due to the increase in the average yield as well as the average balance of interest earning assets, partially offset by the increase in interest expense on our interest bearing liabilities due to the increase in interest rates and an increase in the average balance of our interest bearing liabilities. Total interest income increased $106.8 million, or 42.2%, to $359.7 million for the year ended December 31, 2023, compared to $253.0 million for the same period in 2022. Total interest expense increased $104.1 million, or 256.1%, to $144.7 million for the year ended December 31, 2023, compared to $40.6 million for the same period in 2022. Our net interest margin and net interest margin (FTE), a non-GAAP measure, decreased to 2.92% and 3.09%, respectively, for the year ended December 31, 2023, compared to 3.11% and 3.32%, respectively, for the same period in 2022, and our net interest spread and net interest spread (FTE), also a non-GAAP measure, decreased to 2.25% and 2.42%, respectively, compared to 2.86% and 3.07%, respectively, for the same period in 2022. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.

Current wording

Net interest income was $216.1 million for the year ended December 31, 2024, compared to $215.0 million for the same period in 2023, an increase of $1.1 million, or 0.5%. The increase in net interest income for the year ended December 31, 2024 was due to increases in the average balance and the average yield of interest earning assets, partially offset by increases in the average rate paid on our interest bearing liabilities and average balance of our interest bearing liabilities. Total interest income increased $54.6 million, or 15.2%, to $414.3 million for the year ended December 31, 2024, compared to $359.7 million for the same period in 2023. Total interest expense increased $53.5 million, or 37.0%, to $198.2 million for the year ended December 31, 2024, compared to $144.7 million for the same period in 2023. Our net interest margin and net interest margin (FTE), a non-GAAP measure, decreased to 2.74% and 2.88%, respectively, for the year ended December 31, 2024, compared to 2.92% and 3.09%, respectively, for the same period in 2023, and our net interest spread and net interest spread (FTE), also a non-GAAP measure, decreased to 2.02% and 2.16%, respectively, compared to 2.25% and 2.42%, respectively, for the same period in 2023. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.

Previous wording

The following table presents on a fully taxable-equivalent basis, a non-GAAP measure, the net change in net interest income and sets forth the dollar amount of increase (decrease) in the average volume of interest earning assets and interest bearing liabilities and from changes in yields/rates. Volume/Yield/Rate variances (change in volume times change in yield/rate) have been allocated to amounts attributable to changes in volumes and to changes in yields/rates in proportion to the amounts directly attributable to those changes (in thousands):

Current wording

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

Previous wording

The increase in total interest income for the year ended December 31, 2023 was attributable to the increase in average yield on interest earning assets to 5.06% from 3.92% for the year ended December 31, 2022, as well as a $538.5 million, or 7.9%, increase in the average balance of interest earning assets for the year ended December 31, 2023, compared to the year ended December 31, 2022. The increase in average earning assets was primarily the result of the increase in loans and taxable investment securities, partially offset by the decrease in tax-exempt investment securities.

Current wording

The increase in total interest income for the year ended December 31, 2024, was attributable to the increase in the average balance of interest earning assets of $513.9 million, or 7.0%, compared to the year ended December 31, 2023, as well as the increase in the average yield on interest earning assets to 5.40% from 5.06% for the year ended December 31, 2023. The increase in average earning assets was primarily the result of the increase in MBS, loans and interest earning deposits, partially offset by the decrease in tax-exempt investment securities.

Previous wording

The increase in total interest expense for the year ended December 31, 2023 was primarily attributable to the increase in interest rates on our interest bearing liabilities to 2.64% from 0.85% for the year ended December 31, 2022, and an increase in the average balance of our interest bearing liabilities of $727.8 million, or 15.3%, when compared to the same period in 2022.

Current wording

The increase in total interest expense for the year ended December 31, 2024, was primarily attributable to the increase in interest rates on our interest bearing liabilities to 3.24% from 2.64% for the year ended December 31, 2023, and an increase in the average balance of our interest bearing liabilities of $633.2 million, or 11.5%, when compared to the same period in 2023.

Previous wording

Interest bearing demand, savings and noninterest bearing demand deposits are considered the lowest cost deposits and decreased to 85.9% of total average deposits for the year ended December 31, 2023 from 90.5% for the year ended December 31, 2022.

Current wording

Interest bearing demand, savings and noninterest bearing demand deposits are considered the lowest cost deposits and decreased to 83.7% of total average deposits for the year ended December 31, 2024, from 85.9% for the year ended December 31, 2023.

Previous wording

At December 31, 2023, we had no brokered CDs, compared to brokered CDs being 3.6% of deposits at December 31, 2022. Our brokered non-maturity deposits increased to 12.6% of deposits at December 31, 2023, compared to 7.1% of deposits at December 31, 2022. Our wholesale funding policy currently allows for maximum brokered deposits of the lesser of $1.20 billion, or 20% of total deposits. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.

Current wording

At December 31, 2024, brokered CDs were 1.7% of deposits. We had no brokered CDs at December 31, 2023. Our brokered non-maturity deposits decreased to 9.4% of deposits at December 31, 2024, compared to 12.6% of deposits at December 31, 2023. Our wholesale funding policy currently allows for maximum brokered deposits of the lesser of $1.05 billion, or 12% of total assets. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.

Previous wording

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

Current wording

(2)For the purpose of calculating the average yield, the average balance of securities do not include unrealized gains and losses on AFS securities.

Previous wording

Note: As of December 31, 2023, 2022 and 2021, loans totaling $3.9 million, $2.8 million and $2.5 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.

Current wording

Note: As of December 31, 2024, 2023 and 2022, loans totaling $3.2 million, $3.9 million and $2.8 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.

Previous wording

For the year ended December 31, 2023, there was a provision for credit losses of $9.2 million, compared to $3.2 million for the year ended December 31, 2022. The increase in provision expense for the year ended December 31, 2023, compared to 2022, was primarily due to increased economic and repricing concerns forecasted in our CECL model.

Current wording

For the year ended December 31, 2024, there was a provision for credit losses of $3.3 million, compared to $9.2 million for the year ended December 31, 2023. The decrease in provision expense for the year ended December 31, 2024, compared to 2023, was primarily due to the uncertainty in the economic environment and its effect on the forecast in our CECL model in 2023.

Previous wording

As of December 31, 2023, and 2022, our reviews of the loan portfolio indicated that loan loss allowances of $42.7 million and $36.5 million, respectively, were appropriate to cover expected credit losses in the portfolio. See the section captioned “Allowance for Credit Losses - Loans” elsewhere in this discussion for further analysis of the provision for credit losses for loans.

Current wording

As of December 31, 2024, and 2023, our reviews of the loan portfolio indicated that loan loss allowances of $44.9 million and $42.7 million, respectively, were appropriate to cover expected credit losses in the portfolio. See the section captioned “Allowance for Credit Losses - Loans” elsewhere in this discussion for further analysis of the provision for credit losses for loans.