The following discussion should be read in conjunction with our consolidated financial statements, and notes thereto, for the year endedDecember 31, 2022 , which are included in our 2022 Annual Report. Operating results for the three months endedMarch 31, 2023 are not necessarily indicative of the results for the year endingDecember 31, 2023 , or any future period.
Special Cautionary Notice Regarding Forward Looking Information
Certain matters discussed in this report, excluding historical information, include forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by these sections. Although we believe such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached. The words "estimate," "expect," "intend," "believe" and "project," as well as other words or expressions of a similar meaning are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. Such statements are based on current expectations, are inherently uncertain, are subject to risks and should be viewed with caution. Actual results and experience may differ materially from the forward-looking statements as a result of many factors. Risk factors that could cause actual results to differ materially from any results that we project, forecast, estimate or budget in forward-looking statements include those disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 , filed with theSEC onFebruary 23, 2023 (our "2022 Form 10-K"), among others, the following:
Local, regional, national and international economic business conditions and
the impact they may have on us, our customers, and our customers' ability to
? transact profitable business with us, including the ability of our borrowers to
repay their loans according to their terms or a change in the value of the
related collateral.
? Volatility and disruption in national and international financial markets.
? Government intervention in the
The unavailability of funding from the FHLB, the
? sources in the future which could adversely impact our growth strategy,
prospects and performance.
? Changes in consumer spending, borrowing and saving habits.
? Changes in interest rates and market prices, including, changes in federal
regulations on the payment of interest on demand deposits.
Changes in our ability to retain or access deposits due to changes in public
confidence in the banking system and the potential threat of bank-run contagion
? fueled by, among other factors, economic instability, inflationary pressures,
the public's increased exposure to social media and the rapid speed at which
communication and coordination via social media can occur.
? Changes in the capital markets we utilize, including changes in the interest
rate environment that may reduce margins.
Changes in state and/or federal laws and regulations, including the impact of
the
? institutions, changes in the accounting, tax and regulatory treatment of trust
preferred securities, as well as changes in banking, tax, securities,
insurance, employment, environmental and immigration laws and regulations and
the risk of litigation that may follow. 32
Changes in
? commerce, integration and implementation of
Agreement and the possible imposition of tariffs on imported goods.
? Political instability in
General instability of economic and political conditions in
? including inflationary pressures, increased interest rates, economic slowdown
or recession, and escalating geopolitical tensions.
The reduction of deposits from nonresident alien individuals due to the
? Internal Revenue Service rules requiring
deposit interest payments made to such individuals.
? The loss of senior management or operating personnel.
The timing, impact and other uncertainties of potential future acquisitions as
? well as our ability to maintain our current branch network and enter new
markets to capitalize on growth opportunities.
? Changes in estimates of future reserve requirements based upon periodic review
thereof under relevant regulatory and accounting requirements.
? Additions to our allowance for credit loss as a result of changes in local,
national or international conditions which adversely affect our customers.
? Greater than expected costs or difficulties related to the development and
integration of new products and lines of business.
? Increased labor costs and effects related to health care reform and other laws,
regulations and legal developments impacting labor costs.
? Impairment of carrying value of goodwill could negatively impact our earnings
and capital.
? Changes in the soundness of other financial institutions with which we
interact.
Technological changes, system failures or breaches of our network security, as
? well as other cyber security risks that could subject us to increased operating
costs, litigation and other liabilities.
? Acts of war or terrorism.
? Natural disasters or other adverse external events such as pandemics or
endemics.
? Reduced earnings resulting from the write down of the carrying value of
securities held in our securities available-for-sale portfolios.
The effect of changes in accounting policies and practices by the Public
? Company Accounting Oversight Board, the
and other accounting standards setters.
The costs and effects of regulatory developments or regulatory or other
? governmental, the results of regulatory examinations or reviews, and the
process of obtaining required regulatory approvals.
The effect of any supervisory and enforcement efforts by the
Regulation E, which prohibits financial institutions from charging consumer
? fees for paying overdrafts on ATM and one-time debit card transactions, as well
as the effect of any other regulatory or legal developments that limit
overdraft services.
? Monetary and fiscal policies of the
The reduction of income and possible increase in required capital levels
related to the adoption of legislation and the implementing rules and
? regulations, including those that establish debit card interchange fee
standards and prohibit network exclusivity arrangements and routing
restrictions.
The increase in required capital levels related to the implementation of
? capital and liquidity rules of the federal banking agencies that address or are
impacted by the Basel III capital and liquidity standards.
? The enhanced due diligence burden imposed on banks related to the banks'
inability to rely on credit ratings under Dodd-Frank.
? Our failure or circumvention of our internal controls and risk management,
policies and procedures.
Forward-looking statements speak only as of the date on which such statements are made. It is not possible to foresee or identify all such factors. We make no commitment to update any forward-looking statement, or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement, unless required by law. 33
Overview
We are headquartered inLaredo, Texas with 167 facilities and 257 ATMs, and provide banking services for commercial, consumer and international customers of North, South, Central andSoutheast Texas and theState of Oklahoma . We are one of the largest independent commercial bank holding companies headquartered inTexas . We, through our Subsidiary Banks, are in the business of gathering funds from various sources and investing those funds in order to earn a return. We, either directly or through aSubsidiary Bank , own an insurance agency, a liquidating subsidiary, a fifty percent interest in an investment banking unit that owns a broker/dealer, a controlling interest in four merchant banking entities, and a majority ownership in a real-estate development partnership. Our primary earnings come from the spread between the interest earned on interest-bearing assets and the interest paid on interest-bearing liabilities. In addition, we generate income from fees on products offered to commercial, consumer and international customers. The sales team of each of our Subsidiary Banks aims to match the right mix of products and services to each customer to best serve the customer's needs. That process entails spending time with customers to assess those needs and servicing the sales arising from those discussions on a long-term basis. The Subsidiary Banks have various compensation plans, including incentive based compensation, for fairly compensating employees. The Subsidiary Banks also have a robust process in place to review sales that support the incentive based compensation plan to monitor the quality of the sales and identify any significant irregularities, a process that has been in place for many years. We are very active in facilitating trade alongthe United States border withMexico . We do a large amount of business with customers domiciled inMexico . Deposits from persons and entities domiciled inMexico comprise a large and stable portion of the deposit base of our Subsidiary Banks. We also serve the growing Hispanic population through our facilities located throughout South, Central andSoutheast Texas and theState of Oklahoma . Future economic conditions remain uncertain and the impact of those conditions on our business also remains uncertain. Our business depends on the willingness and ability of our customers to conduct banking and other financial transactions. Our revenue streams including service charges on deposits and banking and non-banking service charges and fees (ATM and Interchange Income) have been impacted and may continue to be impacted in the future if economic conditions do not improve. Expense control has been a long-time focus and essential element to our long-term profitability. We have kept that focus in mind as we continue to look at operations and create efficiencies and institute cost-control protocols at all levels. We will continue to monitor our efficiency ratio, a measure of non-interest expense to net interest income plus non-interest income and our overhead burden ratio, a ratio of our operating expenses against total assets, closely. We use these measures in determining if we are accomplishing our long-term goals of controlling our costs in order to provide superior returns to our shareholders. 34 Results of Operations Summary
Consolidated Statements of Condition Information
March 31, 2023 December 31, 2022 Percent Increase (Decrease) (Dollars in Thousands) Assets$ 15,134,951 $ 15,501,476 (2.4) % Net loans 7,398,216 7,304,631 1.3 Deposits 12,280,779 12,660,007 (3.0) Securities sold under repurchase agreements 383,502 431,191 (11.1) Other borrowed funds 10,895 10,944 (0.4) Junior subordinated deferrable interest debentures 134,642 134,642 - Shareholders' equity 2,156,408 2,044,759 5.5
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