Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project," and similar expressions, as they relate to us or our management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited, to those discussed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , under the heading "Risk Factors," and the following:
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general economic conditions, including our local, state and national real estate markets and employment trends;
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effect of the coronavirus ("COVID") on our Company, the communities where we
have our branches, the state of
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government and regulatory responses to the COVID pandemic;
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effect of severe weather conditions, including hurricanes, tornadoes, flooding and droughts;
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volatility and disruption in national and international financial and commodity markets;
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government intervention in theU.S. financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the Jumpstart Our Business Startups Act, theConsumer Financial Protection Bureau ("CFPB"), the capital ratios of Basel III as adopted by the federal banking authorities and the Tax Cuts and Jobs Act;
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political or social unrest and economic instability;
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the ability of the Federal government to address the national economy;
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changes in our competitive environment from other financial institutions and financial service providers;
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the effects of and changes in trade, monetary and fiscal policies and laws,
including interest rate policies of the
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the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as thePublic Company Accounting Oversight Board ("PCAOB"), theFinancial Accounting Standards Board ("FASB") and other accounting standard setters;
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the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we and our subsidiaries must comply;
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changes in the demand for loans, including loans originated for sale in the secondary market;
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fluctuations in the value of collateral securing our loan portfolio and in the level of the allowance for credit losses;
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the accuracy of our estimates of future credit losses;
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the accuracy of our estimates and assumptions regarding the performance of our securities portfolio, including securities with a current unrealized loss;
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soundness of other financial institutions with which we have transactions;
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inflation, interest rate, market and monetary fluctuations;
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changes in consumer spending, borrowing and savings habits;
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changes in commodity prices (e.g., oil and gas, cattle, and wind energy);
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our ability to attract deposits and maintain and/or increase market share;
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changes in our liquidity position;
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changes in the reliability of our vendors, internal control system or information systems;
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cyber-attacks on our technology information systems, including fraud from our customers and external third-party vendors;
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our ability to attract and retain qualified employees together with increasing wage costs in our markets;
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acquisitions and integration of acquired businesses;
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the possible impairment of goodwill and other intangibles associated with our acquisitions;
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consequences of continued bank mergers and acquisitions in our market area, resulting in fewer but much larger and stronger competitors;
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expansion of operations, including branch openings, new product offerings and expansion into new markets;
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changes in our compensation and benefit plans;
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acts of God or of war or terrorism;
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the impact of changes to the global climate and its effects on our operations and customers;
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potential risk of environmental liability associated with lending activities; and
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our success at managing the risk involved in the foregoing items.
Such forward-looking statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategies and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise (except as required by law). Introduction As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, gain on sale of mortgage loans and service charges. Our primary source of funding for our loans and investments are deposits held by our subsidiary,First Financial Bank, N.A . Our largest expense is salaries and related employee benefits. We measure our performance by calculating our return on average assets, return on average equity, regulatory capital ratios, net interest margin and efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income. The following discussion and analysis of operations and financial condition should be read in conjunction with the financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as those included in the Company's 2021 Annual Report on Form 10-K.
Critical Accounting Policies
We prepare consolidated financial statements based on generally accepted accounting principles ("GAAP") and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions. We deem a policy critical if (i) the accounting estimate required us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (ii) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements. We deem our most critical accounting policies to be (i) our allowance for credit losses and our provision for credit losses and (ii) our valuation of financial instruments. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period. A discussion of (i) our allowance for credit losses and our provision for credit losses and (ii) our valuation of financial instruments is included in Note 1 to our Consolidated Financial Statements beginning on page 10. Stock Repurchase OnJuly 27, 2021 , the Company's Board of Directors authorized the repurchase of up to 5.00 million common shares throughJuly 31, 2023 . The stock repurchase plan authorizes management to repurchase and retire the stock at such time as repurchases are considered beneficial to the Company and its stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Subsequent toJuly 27, 2021 and through the date of this report, 244,559 shares were repurchased and retired totaling$9.45 million under this repurchase plan.
Results of Operations
Performance Summary. Net earnings for the second quarter of 2022 were$60.49 million compared with earnings of$56.38 million for the second quarter of 2021. Diluted earnings per share was$0.42 for the second quarter of 2022 compared with$0.39 in the same quarter a year ago. The return on average assets was 1.82% for the second quarter of 2022, as compared to 1.89% for the second quarter of 2021. The return on average equity was 17.26% for the second quarter of 2022 as compared to 13.38% for the second quarter of 2021. Net earnings for the six-month period endedJune 30, 2022 were$116.47 million compared to earnings of$113.30 million for the same period in 2021. Diluted earnings per share was$0.81 for the first six months of 2022 as compared to$0.79 for the same period in 2021. The return on average assets was 1.77% for the first six months of 2022 as compared to 1.97% for the same period a year ago. The return on average equity was 15.24% for the first six months of 2022 as compared to 13.61% for the same period in 2021. 42 --------------------------------------------------------------------------------
Net Interest Income. Net interest income is the difference between interest income on earning assets and interest expense on liabilities incurred to fund those assets. Our earning assets consist primarily of loans and investment securities. Our liabilities to fund those assets consist primarily of noninterest-bearing and interest-bearing deposits.
Tax-equivalent net interest income was$102.15 million for the second quarter of 2022, as compared to$94.58 million for the same period last year. The increase in 2022 tax equivalent net interest income compared to 2021 was largely attributable to the increases in and change in the mix of interest earning assets primarily derived from an increase in loans and investment securities held partially offset by the lower amortization of PPP origination fees which totaled$313 thousand in the second quarter of 2022 compared to$5.24 million in the second quarter of 2021. PPP loan balances totaled$2.30 million atJune 30, 2022 . Average earning assets were$12.49 billion for the second quarter of 2022, as compared to$11.30 billion during the second quarter of 2021. The increase of$1.19 billion in average earning assets in 2022 when compared to 2021 was primarily a result of increases of taxable securities of$1.45 billion offset by decreases in short-term investments of$509.63 million and tax-exempt securities of$85.60 million when compared toJune 30, 2021 balances. Additionally, average loans increased$337.02 million from a year ago and the mix shifted from PPP loans which earned 1.00% excluding origination fees, to other loan categories with higher yields. Average interest-bearing liabilities were$7.78 billion for the second quarter of 2022, as compared to$6.76 billion in the same period in 2021. The increase in average interest-bearing liabilities primarily resulted from continued organic growth. The yield on earning assets decreased four basis points while the rate paid on interest-bearing liabilities increased six basis points for the second quarter of 2022 compared to the second quarter of 2021. Tax-equivalent net interest income was$201.37 million for the first six months of 2022 as compared to$186.95 million for the same period last year. The increase in 2022 tax equivalent net interest income compared to 2021 was largely attributable to the increases in and change in the mix of interest earning assets primarily derived from an increase in loans and investment securities held partially offset by the lower amortization of PPP origination fees which totaled$1.69 million for the first half of 2022 compared to$11.49 million for the first half of 2021. Average earning assets were$12.50 billion for the first six months of 2022, as compared to$10.93 billion during the first six months of 2021. The increase of$1.57 billion in average earning assets in 2022 when compared to 2021 was primarily a result of increases of taxable securities of$1.71 billion and tax-exempt securities of$78.00 million offset by decreases in short-term investments of$487.98 million when compared toJune 30, 2021 balances. Additionally, average loans increased$264.61 million when compared to a year ago and the mix shifted from PPP loans, which earned 1.00%, excluding origination fees, to other loan categories with higher yields. Average interest-bearing liabilities were$7.73 billion for the first six months of 2022, as compared to$6.57 billion in the same period in 2021. The increase in average interest-bearing liabilities primarily resulted from continued organic growth. The yield on earning assets decreased 18 basis points while the rate paid on interest-bearing liabilities increased one basis point for the first six months of 2022 compared to the first six months of 2021.
Table 1 allocates the change in tax-equivalent net interest income between the amount of change attributable to volume and to rate.
Table 1 - Changes in Interest Income and Interest Expense (dollars in thousands): Three-Months Ended June 30, 2022 Six-Months Ended June 30, 2022 Compared to Three-Months Ended Compared to Six-Months Ended June 30, 2021 June 30, 2021 Change Attributable to Total Change Attributable to Total Volume Rate Change Volume Rate Change Short-term investments$ (137 ) $ 474 $
337
6,231 1,471 7,702 15,137 125 15,262 Tax-exempt investment securities (1) (605 ) 361 (244 ) 1,113 (226 ) 887 Loans (1) (2) 4,205 (2,888 ) 1,317 6,632 (7,306 ) (674 ) Interest income 9,694 (582 ) 9,112 22,627 (6,881 ) 15,746 Interest-bearing deposits 205 1,202 1,407 484 597 1,081 Short-term borrowings 30 109 139 99 150 249 Interest expense 235 1,311 1,546 583 747 1,330 Net interest income$ 9,459 $ (1,893 ) $ 7,566 $ 22,044 $ (7,628 ) $ 14,416 (1)
Computed on a tax-equivalent basis assuming a marginal tax rate of 21%. (2) Nonaccrual loans are included in loans.
The net interest margin, on a tax equivalent basis, was 3.28% for the second quarter of 2022, a decrease of eight basis points from the same period in 2021. The net interest margin, on a tax equivalent basis, was 3.25% for the first six months of 2022, a decrease of 20 basis points from the same period in 2021. We experienced downward pressure on our net interest margin during 2021 primarily due to (i) the extended period of historically low levels of short-term interest rates, (ii) the shift in the mix of interest-earning assets and (iii) the impact of the overall level of excess liquidity, which totaled$465.56 million and$844.59 million atJune 30, 2022 and 2021, respectively. We have been able to somewhat mitigate the impact of these lower short-term interest rates by establishing minimum interest rates on certain of our loans, improving the pricing for loan risk and reducing the rates paid on our interest-bearing liabilities. TheFederal Reserve increased rates 150 basis points during the first half of 2022 resulting in a target rate range of 150 to 175 basis points. Most recently, onJuly 27, 2022 , theFederal Reserve increased rates 75 basis points resulting in a current target rate range of 225 to 250 basis points. However, short-term and long-term treasury interest rates have remained flat and the rate curve has continued to become inverted recently, which may impact our ongoing net interest income and net interest margin. 43 -------------------------------------------------------------------------------- Loan rates on variable loans have increased as the majority of such loans are indexed to the applicable prime rate (currently 4.75% atJune 30, 2022 ), subject to underlying floors. With the latest increase in the federal funds rate, the majority of variable rate loans have increased with approximately$1 billion subject to floors as shown below on page 50. Subsequent toJune 30, 2022 , onJuly 28, 2022 , the applicable prime rate increased to 5.50%. DuringJune 2022 , we increased rates on each of the primary depository products in response to the increasing federal funds rate and expect those rates will continue to move upward in the foreseeable future. Additionally, we have approximately$1.1 billion of municipal and related deposits which are indexed to short-term treasury rates which have continued to increase with the changes in the applicable rate index.
The net interest margin, which measures tax-equivalent net interest income as a percentage of average earning assets, is illustrated in Table 2.
Table 2 - Average Balances and Average Yields and Rates (dollars in thousands, except percentages): Three-Months Ended June 30, 2022 2021 Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets Short-term investments (1)$ 290,250 $ 552 0.76 %$ 799,884 $ 215 0.11 % Taxable investment securities (2) 4,101,751 19,151 1.87 2,656,211 11,449 1.72 Tax-exempt investment securities (2)(3) 2,376,324 17,166 2.89 2,461,924 17,410 2.83 Loans (3)(4) 5,720,804 68,478 4.80 5,383,781 67,161 5.00 Total earning assets 12,489,129$ 105,347 3.38 % 11,301,800$ 96,235 3.42 % Cash and due from banks 233,621 197,412 Bank premises and equipment, net 149,887 144,671 Other assets 193,308 95,575 Goodwill and other intangible assets, net 316,278 317,721 Allowance for credit losses (67,383 ) (63,097 ) Total assets$ 13,314,840 $ 11,994,082 Liabilities and Shareholders' Equity Interest-bearing deposits$ 7,049,041 $ 2,967 0.17 %$ 6,229,991 $ 1,560 0.10 % Short-term borrowings 730,477 232 0.13 527,669 93 0.07 Total interest-bearing liabilities 7,779,518$ 3,199 0.16 % 6,757,660$ 1,653 0.10 % Noninterest-bearing deposits 4,064,207 3,439,683 Other liabilities 65,475 106,994 Total liabilities 11,909,200 10,304,337 Shareholders' equity 1,405,640 1,689,745 Total liabilities and shareholders' equity$ 13,314,840 $ 11,994,082 Net interest income$ 102,148 $ 94,582 Rate Analysis: Interest income/earning assets 3.38 % 3.42 % Interest expense/earning assets (0.10 ) (0.06 ) Net interest margin 3.28 % 3.36 % (1) Short-term investments are comprised of federal funds sold, interest-bearing deposits in banks and interest-bearing time deposits in banks. (2) Average balances include unrealized gains and losses on available-for-sale securities. (3) Includes tax equivalent yield adjustment of approximately$3.37 million and$3.63 million in the second quarters of 2022 and 2021, respectively, using an effective tax rate of 21% for both periods. (4) Nonaccrual loans are included in loans. 44 --------------------------------------------------------------------------------
Six-Months Ended June 30, 2022 2021 Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets Short-term investments (1)$ 231,941 $ 648 0.56 %$ 719,922 $ 377 0.11 % Taxable investment securities (2) 4,166,490 36,974 1.77 2,454,933 21,712 1.77 Tax-exempt investment securities (2)(3) 2,493,523 35,276 2.83 2,415,527 34,389 2.85 Loans (3)(4) 5,604,815 133,240 4.79 5,340,207 133,914 5.06 Total earning assets 12,496,769$ 206,138 3.33 % 10,930,589$ 190,392 3.51 % Cash and due from banks 232,063 203,392 Bank premises and equipment, net 149,764 143,293 Other assets 152,715 96,931 Goodwill and other intangible assets, net 316,432 317,930 Allowance for credit losses (65,488 ) (65,153 ) Total assets$ 13,282,255 $ 11,626,982 Liabilities and Shareholders' Equity Interest-bearing deposits$ 6,973,967 $ 4,336 0.13 %$ 6,073,981 $ 3,255 0.11 % Short-term borrowings 755,755 433 0.12 492,341 184 0.08 Total interest-bearing liabilities 7,729,722$ 4,769 0.12 % 6,566,322$ 3,439 0.11 % Noninterest-bearing deposits 3,946,483 3,278,067 Other liabilities 65,239 103,307 Total liabilities 11,741,444 9,947,696 Shareholders' equity 1,540,811 1,679,286 Total liabilities and shareholders' equity$ 13,282,255 $ 11,626,982 Net interest income (tax equivalent)$ 201,369 $ 186,953 Rate Analysis: Interest income/earning assets 3.33 % 3.51 % Interest expense/earning assets (0.08 ) (0.06 ) Net interest margin 3.25 % 3.45 % (1) Short-term investments are comprised of federal funds sold, interest-bearing deposits in banks and interest-bearing time deposits in banks. (2) Average balances include unrealized gains and losses on available-for-sale securities. (3) Includes tax equivalent yield adjustment of approximately$7.15 million and$7.18 million in the first six months of 2022 and 2021, respectively, using an effective tax rate of 21% for both periods. (4) Nonaccrual loans are included in loans. Noninterest Income. Noninterest income for the second quarter of 2022 was$37.32 million compared to$34.67 million in the same quarter of 2021. Increases in certain categories of noninterest income included (i) trust fees of$1.05 million , (ii) service charges on deposit accounts of$1.11 million and, (iii) ATM, interchange and credit card fees of$715 thousand , (iv) net gain on sale of available-for-sale securities of$1.64 million and (v) recoveries of interest on previously charged-off or nonaccrual loans of$945 thousand when compared to the second quarter of 2021. Mortgage related income was$5.73 million in the second quarter of 2022 compared to$8.29 million in the second quarter of 2021 due to lower overall origination volumes. The increase in trust fees was driven mainly by the continued increase in oil and gas revenue. The increase in ATM, interchange and credit card fees were driven by continued growth in the number of net new accounts and debit cards issued and overall customer utilization. Noninterest income for the six-month period endedJune 30, 2022 was$72.20 million compared to$69.55 million compared to the same period in 2021. Increases in certain categories of noninterest income included (i) trust fees of$2.57 million , (ii) service charges on deposit accounts of$2.02 million , (iii) ATM, interchange and credit card fees of$1.57 million , (iv) net gain on sale of available-for-sale securities of$866 thousand , (v) net gain on sale of foreclosed assets of$1.05 million and (vi) recoveries of interest on previously charged-off or nonaccrual loans of$846 thousand when compared to the same period of 2021. Mortgage related income was$12.06 million for the six-month period endedJune 30, 2022 compared to$18.19 million in the same period of 2021 due to lower overall origination volumes. The increase in trust fees was driven mainly by the continued increase in oil and gas revenue. ATM and interchange fees are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. ATM and interchange fees consist of income from debit card usage, point of sale income for debit card transactions and ATM service fees.Federal Reserve rules applicable to financial institutions that have assets of$10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is limited to the sum of21 cents per transaction plus 5 basis points multiplied by the value of the transaction. Management has estimated the impact of this reduction in interchange fees to approximate$18 million annually (pre-tax). Based on the applicableFederal Reserve rules, as amended, the Company became subject to the limitation effectiveJuly 1, 2022 and forward. 45
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Table 3 - Noninterest Income (dollars in thousands):
Three-Months Ended June 30, Six-Months Ended June 30, Increase Increase 2022 (Decrease) 2021 2022 (Decrease) 2021 Trust fees$ 9,742 $ 1,050 $ 8,692 $ 19,559 $ 2,568 $ 16,991 Service charges on deposit accounts 6,038 1,110 4,928 11,744 2,023 9,721 ATM, interchange and credit card fees 10,568 715 9,853 20,096 1,566 18,530 Gain on sale and fees on mortgage loans 5,728 (2,563 ) 8,291 12,061 (6,124 ) 18,185 Net gain on sale of available-for-sale securities 1,648 1,643 5 1,679 866 813 Net gain on sale of foreclosed assets 18 17 1 1,102 1,046 56 Net gain on sale of assets 6 (68 ) 74 (4 ) (223 ) 219 Interest on loan recoveries 1,649 945 704 1,932 846 1,086
Other:
Check printing fees 31 (2 ) 33 58 (9 ) 67 Safe deposit rental fees 189 (3 ) 192 478 (20 ) 498 Credit life fees 366 2 364 585 6 579 Brokerage commissions 401 44 357 775 73 702 Wire transfer fees 436 82 354 824 154 670 Miscellaneous income 497 (328 ) 825 1,309 (122 ) 1,431 Total other 1,920 (205 ) 2,125 4,029 82 3,947 Total Noninterest Income$ 37,317 $ 2,644 $ 34,673 $ 72,198 $ 2,650 $ 69,548 Noninterest Expense. Total noninterest expense for the second quarter of 2022 was$58.33 million , a decrease of$1.04 million , or 1.75%, as compared to the same period of 2021. An important measure in determining whether a financial institution effectively manages noninterest expense is the efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax-equivalent basis and noninterest income. Lower ratios indicate better efficiency since more income is generated with a lower noninterest expense total. Our efficiency ratio improved to 41.83% for the second quarter of 2022 compared to 45.94% for the same quarter in 2021. Salaries, commissions and employee benefits for the second quarter of 2022 totaled$33.15 million , compared to$35.05 million for the same period in 2021. The net decrease reflected lower mortgage compensation expenses of$1.49 million and a decrease of$803 thousand in profit sharing expenses offset by annual merit-based and other market-based pay increases that were effectiveMarch 1, 2022 for the second quarter of 2022. All other categories of noninterest expense for the second quarter of 2022 totaled$25.19 million , up from$24.33 million in the same quarter a year ago. Noninterest expense, excluding salary related costs, for the three-months endedJune 30, 2022 increased primarily due to increases inFDIC insurance, deposit account charge-offs and interchange processing costs compared to the three-months endedJune 30, 2021 . Total noninterest expense for the first six months of 2022 was$117.56 million , an increase of$460 thousand , or 0.39%, as compared to the same period of 2021. Our efficiency ratio for the first six months of 2022 was 42.97% compared to 45.65% for the same period in 2021. Salaries, commissions and employee benefits for the first six months of 2022 totaled$67.29 million , compared to$69.98 million for the same period in 2021. The net decrease reflected lower mortgage compensation expenses of$2.89 million and a decrease of$1.50 million in profit sharing expenses offset by annual merit-based and other market-based pay increases that were effectiveMarch 1, 2022 for the first six months of 2022. All other categories of noninterest expense for the first six months of 2022 totaled$50.27 million , up from$47.12 million in the same period a year ago. Noninterest expense, excluding salary related costs, for the six-months endedJune 30, 2022 , increased primarily due to increases inFDIC insurance, deposit account charge-offs and interchange processing costs compared to the six-months endedJune 30, 2021 . 46
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Table 4 - Noninterest Expense (dollars in thousands):
Three-Months Ended June 30, Six-Months Ended June 30, Increase Increase 2022 (Decrease) 2021 2022 (Decrease) 2021 Salaries and commissions$ 25,772 $ (1,106 ) $ 26,878 $ 51,530 $ (1,442 ) $ 52,972 Medical 2,496 (259 ) 2,755 5,388 (207 ) 5,595 Profit sharing 1,307 (803 ) 2,110 2,905 (1,500 ) 4,405 401(k) match expense 942 15 927 1,924 34 1,890 Payroll taxes 1,719 6 1,713 3,887 43 3,844 Stock based compensation 911 248 663 1,651 380 1,271 Total salaries and employee benefits 33,147 (1,899 ) 35,046 67,285 (2,692 ) 69,977 Net occupancy expense 3,292 51 3,241 6,517 129 6,388 Equipment expense 2,346 169 2,177 4,603 262 4,341 FDIC assessment fees 904 138 766 1,773 306 1,467 ATM, interchange and credit card expense 3,201 162 3,039 6,169 358 5,811 Professional and service fees 2,191 (201 ) 2,392 4,415 (116 ) 4,531 Printing, stationery and supplies 501 12 489 1,041 227 814 Operational and other losses 782 248 534 1,378 557 821 Software amortization and expense 2,522 (307 ) 2,829 4,979 (469 ) 5,448 Amortization of intangible assets 320 (92 ) 412 640 (184 ) 824 Other: Data processing fees 445 7 438 890 46 844 Postage 332 43 289 640 (26 ) 666 Advertising 739 134 605 1,439 113 1,326 Correspondent bank service charges 278 18 260 532 42 490 Telephone 754 (68 ) 822 1,519 (579 ) 2,098 Public relations and business development 815 28 787 1,608 154 1,454 Directors' fees 629 33 596 1,349 137 1,212 Audit and accounting fees 513 32 481 1,025 39 986 Legal fees and other related costs 260 (649 ) 909 930 (501 ) 1,431 Regulatory exam fees 395 58 337 789 115 674 Travel 461 109 352 774 177 597 Courier expense 314 56 258 579 115 464 Other real estate owned 2 (9 ) 11 2 (37 ) 39 Other 3,190 886 2,304 6,682 2,287 4,395 Total other 9,127 678 8,449 18,758 2,082 16,676 Total Noninterest Expense$ 58,333 $ (1,041 ) $ 59,374 $ 117,558 $ 460 $ 117,098 Balance Sheet Review Loans. Our portfolio is comprised of loans made to businesses, professionals, individuals, and farm and ranch operations located in the primary trade areas served by our subsidiary bank. As ofJune 30, 2022 , total loans held-for-investment were$5.88 billion , an increase of$489.61 million , as compared toDecember 31, 2021 . Total PPP loans outstanding were$2.30 million atJune 30, 2022 , which are included in the Company's commercial loan totals. PPP loan balances accounted for$4.55 million and$19.47 million in average balances for the three and six-months endedJune 30, 2022 . As compared to year-end 2021 balances, total real estate loans increased$390.61 million , total commercial loans increased$25.53 million , agricultural loans decreased$7.67 million and total consumer loans increased$81.15 million . Loans averaged$5.72 billion for the second quarter of 2022, an increase of$337.02 million over the prior year second quarter average balances. Loans averaged$5.60 billion for the first six months of 2022, an increase of$264.61 million from the prior year six-month period average balances. Our loan portfolio segments include C&I, Municipal, Agricultural, Construction and Development, Farm, Non-Owner Occupied and Owner Occupied CRE, Residential, Consumer Auto and Consumer Non-Auto. This segmentation allows for a more precise pooling of loans with similar credit risk characteristics and credit monitor procedures for the Company's calculation of its allowance for credit losses.
The loans originated as a result of the Company's participation in the PPP
program are included in the C&I loan portfolio segment as of
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Table 5 outlines the composition of the Company's held-for-investment loans by portfolio segment.
Table 5 - Composition of Loans Held-for-Investment (dollars in thousands):
June 30, December 31, 2022 2021 2021 Commercial: C&I *$ 839,928 $ 983,103 $ 837,075 Municipal 200,577 179,356 177,905 Total Commercial 1,040,505 1,162,459 1,014,980 Agricultural 90,420 95,212 98,089 Real Estate: Construction & Development 928,644 550,928 749,793 Farm 250,028 185,288 217,220 Non-Owner Occupied CRE 636,432 673,608 623,434 Owner Occupied CRE 909,899 820,055 821,653 Residential 1,412,125 1,328,474 1,334,419Total Real Estate 4,137,128 3,558,353 3,746,519 Consumer: Auto 468,147 383,764 405,416 Non-Auto 142,382 104,814 123,968 Total Consumer 610,529 488,578 529,384 Total$ 5,878,582 $ 5,304,602 $ 5,388,972 * All disclosures for the C&I loan segment include PPP loan balances, net of deferred fees and costs, as disclosed on the face of the consolidated balance sheet. Loans held-for-sale, consisting of secondary market mortgage loans, totaled$26.45 million ,$61.80 million , and$37.81 million atJune 30, 2022 and 2021, andDecember 31, 2021 , respectively. AtJune 30, 2022 and 2021, andDecember 31, 2021 ,$2.60 million ,$5.55 million and$3.69 million , respectively, are valued using the lower of cost or fair value, and the remaining amounts are valued under the fair value option. 48 -------------------------------------------------------------------------------- The following tables summarize maturity information of our loan portfolio as ofJune 30, 2022 . The table also presents the portions of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index. Maturity Distribution and Interest Sensitivity of Loans atJune 30, 2022 (dollars in thousands): After One but After Five but After Due in One Within Five Within Fifteen Fifteen Total Loans Held-for-Investment: Year or Less Years Years Years Total Commercial: C&I$ 310,414 $ 416,815 $ 88,800 $ 21,598 $ 837,627 PPP - 2,301 - - 2,301 Municipal 4,139 48,569 111,026 36,843 200,577 Total Commercial 314,553 467,685 199,826 58,441 1,040,505 Agricultural 67,765 20,852 1,803 - 90,420 Real Estate: Construction & Development 462,479 178,723 174,936 112,506 928,644 Farm 23,092 24,805 131,929 70,202 250,028 Non-Owner Occupied CRE 22,048 165,880 316,298 132,206 636,432 Owner Occupied CRE 30,382 203,760 466,544 209,213 909,899 Residential 115,259 100,270 646,545 550,051 1,412,125Total Real Estate 653,260 673,438 1,736,252 1,074,178 4,137,128 Consumer: Auto 5,707 439,885 22,555 - 468,147 Non-Auto 25,802 96,053 14,464 6,063 142,382 Total Consumer 31,509 535,938 37,019 6,063 610,529 Total$ 1,067,087 $ 1,697,913 $ 1,974,900 $ 1,138,682 $ 5,878,582 % of Total Loans 18.15 % 28.88 % 33.60 % 19.37 % 100.00 % Due in One After One but After Five but After Year or Within Five Within Fifteen Fifteen Loans with fixed interest rates: Less Years Years Years Total Commercial: C&I$ 55,587 $ 244,429 $ 8,168 $ -$ 308,184 PPP - 2,301 - - 2,301 Municipal 3,670 47,112 87,847 7,594 146,223 Total Commercial 59,257 293,842 96,015 7,594 456,708 Agricultural 7,877 13,654 515 - 22,046 Real Estate: Construction & Development 176,235 82,124 47,485 458 306,302 Farm 5,823 19,740 73,397 949 99,909 Non-Owner Occupied CRE 8,591 111,167 71,950 - 191,708 Owner Occupied CRE 14,916 143,508 52,110 224 210,758 Residential 40,910 83,609 428,792 37,809 591,120Total Real Estate 246,475 440,148 673,734 39,440 1,399,797 Consumer: Auto 5,707 439,885 22,555 - 468,147 Non-Auto 20,527 94,191 14,044 5,682 134,444 Total Consumer 26,234 534,076 36,599 5,682 602,591 Total$ 339,843 $ 1,281,720 $ 806,863 $ 52,716 $ 2,481,142 % of Total Loans 5.78 % 21.80 % 13.73 % 0.90 % 42.21 % 49
-------------------------------------------------------------------------------- Due in One After One After Five but After Loans with variable interest Year or but Within Within Fifteen Fifteen rates: Less Five Years Years Years Total Commercial: C&I$ 254,827 $ 172,386 $ 80,632 $ 21,598 $ 529,443 PPP - - - - - Municipal 469 1,457 23,179 29,249 54,354 Total Commercial 255,296 173,843 103,811 50,847 583,797 Agricultural 59,888 7,198 1,288 - 68,374 Real Estate: Construction & Development 286,244 96,599 127,451 112,048 622,342 Farm 17,269 5,065 58,532 69,253 150,119 Non-Owner Occupied CRE 13,457 54,713 244,348 132,206 444,724 Owner Occupied CRE 15,466 60,252 414,434 208,989 699,141 Residential 74,349 16,661 217,753 512,242 821,005Total Real Estate 406,785 233,290 1,062,518 1,034,738 2,737,331 Consumer: Auto - - - - - Non-Auto 5,275 1,862 420 381 7,938 Total Consumer 5,275 1,862 420 381 7,938 Total$ 727,244 $ 416,193 $ 1,168,037 $ 1,085,966 $ 3,397,440 % of Total Loans 12.37 % 7.08 % 19.87 % 18.47 % 57.79 % Of the$3.40 billion of variable interest rate loans shown above, loans totaling$1.34 billion mature or reprice over the next twelve months. Of this amount, approximately$1 billion will reprice immediately upon changes in the underlying index rate (primarilyU.S. prime rate) with the remaining$300 million being subject to floors above the current index (however, with the recent 75 basis point increase in prime rate the majority of these are now at or above their stated floors). Asset Quality. Our loan portfolio is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by bank regulatory agencies. Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were$25.52 million atJune 30, 2022 , as compared to$30.11 million atJune 30, 2021 and$34.16 million atDecember 31, 2021 . As a percent of loans held-for-investment and foreclosed assets, these assets were 0.43% atJune 30, 2022 , as compared to 0.57% atJune 30, 2021 and 0.63% atDecember 31, 2021 . As a percent of total assets, these assets were 0.19% atJune 30, 2022 , as compared to 0.24% atJune 30, 2021 and 0.26% atDecember 31, 2021 . We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming atJune 30, 2022 .
Table 6 - Nonaccrual, Past Due 90 Days or More and Still Accruing, Restructured Loans and Foreclosed Assets (dollars in thousands, except percentages):
June 30, December 31, 2022 2021 2021 Nonaccrual loans$ 25,475 $ 29,786 $ 31,652 Loans still accruing and past due 90 days or more 22 - 8 Troubled debt restructured loans* 20 23 21 Nonperforming loans 25,517 29,809 31,681 Foreclosed assets - 305 2,477 Total nonperforming assets$ 25,517 $ 30,114 $ 34,158 As a % of loans held-for-investment and foreclosed assets 0.43 % 0.57 % 0.63 % As a % of total assets 0.19 0.24 0.26 * Troubled debt restructured loans of$2.24 million ,$7.31 million and$6.72 million , respectively, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in nonaccrual loans as ofJune 30, 2022 and 2021, andDecember 31, 2021 , respectively. We record interest payments received on nonaccrual loans as reductions of principal. Prior to the loans being placed on nonaccrual, we recognized interest income on these loans of approximately$1.35 million for the year endedDecember 31, 2021 . If interest on these loans had been recognized on a full accrual basis during the year endedDecember 31, 2021 , such income would have approximated$2.61 million . Such amounts for the 2022 and 2021 interim periods were not significant. Allowance for Credit Losses. The allowance for credit losses is the amount we determine as of a specific date to be appropriate to absorb current expected credit losses on existing loans. For a discussion of our methodology, see our accounting policies in Note 1 to the Consolidated Financial Statements (unaudited). 50 -------------------------------------------------------------------------------- The provision for loan losses of$4.10 million for the three-months endedJune 30, 2022 is combined with the provision for unfunded commitments of$1.25 million and reported in the aggregate of$5.35 million under the provision for credit losses in the consolidated statements of earnings for the three-months endedJune 30, 2022 . The provision for loan losses of$7.85 million for the six-months endedJune 30, 2022 is combined with the provision for unfunded commitments of$2.28 million and reported in the aggregate of$10.13 million under the provision for credit losses in the consolidated statements of earnings for the six-months endedJune 30, 2022 . The increase in the Company's provision for credit losses during the second quarter of 2022 was primarily driven by strong organic loan growth and a slight decline in the projected economic forecast. The$1.04 million reversal of the provision for loan losses for the three-months endedJune 30, 2021 is combined with the reversal of the provision for unfunded commitments of$167 thousand and reported in the aggregate of a reversal of$1.21 million under the provision for credit losses for the three-months endedJune 30, 2021 . The$4.47 million reversal of the provision for loan losses for the six-months endedJune 30, 2021 is combined with the provision for unfunded commitments$1.27 million and reported in the net aggregate reversal of$3.20 million under the provision for credit losses for the six-months endedJune 30, 2021 . The increase in the Company's provision for credit losses during the first half of 2022 was primarily driven by strong organic loan growth and a slight decline in the projected economic forecast. As a percent of average loans, net loan recoveries were 0.06% for the second quarter of 2022, as compared to 0.02% for the second quarter of 2021. As a percent of average loans, net loan recoveries were 0.02% for the first half of 2022, as compared to net charge-offs of zero percent for the first half of 2021. The allowance for credit losses as a percent of loans held-for-investment was 1.22% as ofJune 30, 2022 , as compared to 1.17% and 1.18% as ofJune 30, 2021 andDecember 31, 2021 , respectively.
Table 7 - Loan Loss Experience and Allowance for Credit Losses (dollars in thousands, except percentages):
Three-Months Ended Six-Months Ended June 30, June 30, 2022 2021 2022 2021 Allowance for credit losses at period-end$ 71,932 $ 62,138 $ 71,932 $ 62,138 Loans held-for-investment at period-end 5,878,582 5,304,602 5,878,582 5,304,602 Average loans for period 5,720,804 5,383,781 5,604,815 5,340,207 Net charge-offs (recoveries)/average loans (annualized) (0.06 )% (0.02 )% (0.02 )% - Allowance for loan losses/period-end loans held-for-investment 1.22 % 1.17 % 1.22 % 1.17 % Allowance for loan losses/nonaccrual loans, past due 90 days still accruing and restructured loans 281.90 % 208.45 % 281.90 % 208.45 % Interest-Bearing Demand Deposits in Banks. The Company had interest-bearing deposits in banks of$222.90 million atJune 30, 2022 compared to$654.53 million atJune 30, 2021 and$323.54 million atDecember 31, 2021 , respectively. AtJune 30, 2022 , interest-bearing deposits in banks included$222.46 million maintained at theFederal Reserve Bank of Dallas and$443 thousand on deposit with the FHLB.Available-for-Sale Securities . AtJune 30, 2022 , securities with a fair value of$6.22 billion were classified as securities available-for-sale. As compared toDecember 31, 2021 , the available-for-sale portfolio atJune 30, 2022 reflected (i) an increase of$359.52 million inU.S. Treasury securities, (ii) a decrease of$508.87 million in obligations of states and political subdivisions, (iii) an increase of$36.05 million and in corporate bonds and other securities, and (iv) a decrease of$244.84 million in mortgage-backed securities. Our mortgage related securities are backed by GNMA,FNMA or FHLMC or are collateralized by securities backed by these agencies.
See the below table and Note 2 to the Consolidated Financial Statements
(unaudited) for additional disclosures relating to the maturities and fair
values of the investment portfolio at
Table 8 - Maturities and Yields of Available-for-Sale Securities Held at
Maturing by Contractual Maturity
After One Year After Five Years One Year Through Through After or Less Five Years Ten Years Ten Years Total Available-for-Sale: Amount Yield Amount Yield Amount Yield Amount Yield Amount YieldU.S. Treasury securities $ - - %$ 486,358 1.86 % $ - - % $ - - %$ 486,358 1.86 % Obligations of states and political subdivisions 139,895 4.38 504,141 3.76
1,450,796 2.59 149,772 2.76 2,244,604 2.98 Corporate bonds and other
securities 4,078 1.17 58,235 2.93 42,032 1.96 - - 104,345 2.47
Mortgage-backed
securities 95,667 2.47 1,731,459 1.88 1,137,913 1.79 414,690 2.22 3,379,729 1.91 Total$ 239,640 3.56 %$ 2,780,193 2.24 %$ 2,630,741 2.24 %$ 564,462 2.36 %$ 6,215,036 2.30 % 51
-------------------------------------------------------------------------------- All yields are computed on a tax-equivalent basis assuming a marginal tax rate of 21%. Yields on available-for-sale securities are based on amortized cost. Maturities of mortgage-backed securities are based on contractual maturities and could differ due to prepayments of underlying mortgages. Maturities of other securities are reported at the earlier of maturity date or call date.
As of
Deposits. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were$11.12 billion as ofJune 30, 2022 , as compared to$9.78 billion as ofJune 30, 2021 and$10.57 billion as ofDecember 31, 2021 .
Table 9 provides a breakdown of average deposits and rates paid over the three
and six month periods ended
Table 9 - Composition of Average Deposits (dollars in thousands, except percentages): Three-Months Ended June 30, 2022 2021 Average Average Average Average Balance Rate Balance Rate Noninterest-bearing deposits$ 4,064,207 -%$ 3,439,683 -% Interest-bearing deposits: Interest-bearing checking 3,690,920 0.22 3,045,255 0.08 Savings and money market accounts 2,911,318 0.10 2,705,925 0.08 Time deposits under$250,000 303,759 0.19
319,705 0.28
Time deposits of
Total interest-bearing deposits 7,049,041 0.17 % 6,229,991 0.10 % Total average deposits$ 11,113,248 $ 9,669,674 Total cost of deposits 0.11 % 0.06 % Six-Months Ended June 30, 2022 2021 Average Average Average Average Balance Rate Balance Rate Noninterest-bearing deposits$ 3,946,483 -%$ 3,278,067 -% Interest-bearing deposits: Interest-bearing checking 3,656,398 0.15 2,973,933 0.08 Savings and money market accounts 2,868,000 0.08 2,621,171 0.09 Time deposits under$250,000 305,926 0.20 322,217 0.31 Time deposits of$250,000 or more 143,643 0.28 156,660 0.55 Total interest-bearing deposits 6,973,967 0.13 % 6,073,981 0.11 % Total average deposits$ 10,920,450 $ 9,352,048 Total cost of deposits 0.08 % 0.07 %
The estimated amount of uninsured and uncollateralized deposits including
related accrued and unpaid is approximately
Borrowings. Included in borrowings were federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings of$768.36 million ,$549.97 million and$671.15 million atJune 30, 2022 and 2021, andDecember 31, 2021 , respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the short-term borrowings. The average balance of federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings were$730.48 million and$527.67 million in the second quarters of 2022 and 2021, respectively. The weighted average interest rates paid on these borrowings were 0.13% and 0.07% for the second quarters of 2022 and 2021, respectively. The average balance of federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings were$755.76 million and$492.34 million for the six-months endedJune 30, 2022 andJune 30, 2021 , respectively. The weighted average interest rates paid on these borrowings were 0.12% and 0.08% for the six-month periods endedJune 30, 2022 andJune 30, 2021 , respectively.
Interest Rate Risk
Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. Our exposure to interest rate risk is managed primarily through our strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities that generate favorable earnings while limiting the potential negative effects of changes in market interest rates. We use no off-balance-sheet financial instruments to manage interest rate risk.
52 -------------------------------------------------------------------------------- Our subsidiary bank has an asset liability management committee that monitors interest rate risk and compliance with investment policies. The subsidiary bank utilizes an earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next twelve months. The model measures the impact on net interest income relative to a base case scenario of hypothetical fluctuations in interest rates over the next twelve months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the re-pricing and maturity characteristics of the existing and projected balance sheet. The following analysis depicts the estimated impact on net interest income of immediate changes in interest rates at the specified levels for the periods presented. Percentage change in net interest income: Change in interest rates: June 30, December 31, (in basis points) 2022 2021 2021 +400 7.34% 11.19% 10.56% +300 5.80% 8.94% 8.52% +200 4.36% 6.41% 6.13% +100 2.63% 3.57% 3.42% -100 (2.85)% (4.98)% (5.64)% -200 (6.67)% (7.85)% (9.06)% The results for the net interest income simulations as ofJune 30, 2022 and 2021, andDecember 31, 2021 resulted in an asset sensitive position. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each year-end will remain constant over the relevant twelve-month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics on specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. We believe these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities reprice in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material. Should we be unable to maintain a reasonable balance of maturities and repricing of our interest-earning assets and our interest-bearing liabilities, we could be required to dispose of our assets in an unfavorable manner or pay a higher than market rate to fund our activities. Our asset liability committee oversees and monitors this risk. The fair value of our investment securities classified as available-for-sale totaled$6.22 billion atJune 30, 2022 . During the six months endedJune 30, 2022 , the corresponding unrealized gain before taxes on the portfolio of$125.67 million atDecember 31, 2021 , moved into an unrealized loss before taxes of$507.30 million atJune 30, 2022 , which is recorded net of taxes in accumulated other comprehensive earnings (loss) in shareholders' equity. The unrealized gains or losses, net of taxes, on the portfolio are excluded from the calculation of all regulatory capital ratios. The changes in the fair value were driven by increases in interest rates based on expected actions by theFederal Reserve Board and other market conditions. The overall valuation of the portfolio is most correlated to the 5-yearU.S. Treasury rates based on the composition and duration of the portfolio. AtJune 30, 2022 , the 5-yearU.S. Treasury rate was 3.01% compared to 1.26% atDecember 31, 2021 , representing a 175 basis point increase during the first six months of 2022. As ofJune 30, 2022 , an additional 100 basis point increase in the 5-yearU.S. Treasury rate would result in an increase to unrealized losses by approximately$300 million before taxes, while a 100 basis point decrease in the same rate would result in a decrease to unrealized losses by approximately$270 million before taxes. We currently have the ability to hold these securities based on our overall liquidity and intent to hold the portfolio.
Capital and Liquidity
Capital. We evaluate capital resources by our ability to maintain adequate regulatory capital ratios to do business in the banking industry. Issues related to capital resources arise primarily when we are growing at an accelerated rate but not retaining a significant amount of our profits or when we experience significant asset quality deterioration. Total shareholders' equity was$1.33 billion , or 10.02% of total assets atJune 30, 2022 , as compared to$1.72 billion , or 13.95% of total assets atJune 30, 2021 , and$1.76 billion , or 13.43% of total assets atDecember 31, 2021 . Included in shareholders' equity atJune 30, 2022 were$400.51 million in unrealized losses on investment securities available-for-sale, net of related income taxes. Included in shareholders' equity atJune 30, 2021 andDecember 31, 2021 were$136.49 million and$99.25 million , respectively, in unrealized gains on investment securities available-for-sale, net of related income taxes, although such amount is excluded from and does not impact regulatory capital. For the second quarter of 2022, total shareholders' equity averaged$1.41 billion , or 10.56% of average assets, as compared to$1.69 billion , or 14.09% of average assets, during the same period in 2021. For the first six months of 2022, total shareholders' equity averaged$1.54 billion , or 11.60% of average assets, as compared to$1.68 billion , or 14.44% of average assets, during the same period in 2021. Banking regulators measure capital adequacy by means of the risk-based capital ratios and the leverage ratio under the Basel III rules and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and off-balance-sheet commitments and contingencies according to prescribed risk categories. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders' equity less intangible assets by quarter-to-date average assets less intangible assets. 53 -------------------------------------------------------------------------------- Beginning inJanuary 2015 , under the Basel III rules, the implementation of the capital conservation buffer was effective for the Company starting at the 0.625% level and increasing 0.625% each year thereafter, until it reached 2.50% onJanuary 1, 2019 . The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the amount of the buffer will result in restrictions on the Company's ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers. As ofJune 30, 2022 and 2021, andDecember 31, 2021 , we had a total risk-based capital ratio of 19.54%, 21.12% and 20.34%, a Tier 1 capital to risk-weighted assets ratio of 18.50%, 20.04% and 19.35%; a common equity Tier 1 to risk-weighted assets ratio of 18.50%, 20.04% and 19.35% and a Tier 1 leverage ratio of 10.65%, 11.10% and 11.13%, respectively. The regulatory capital ratios as ofJune 30, 2022 and 2021, andDecember 31, 2021 were calculated underBasel III rules.
The regulatory capital ratios of the Company and Bank under the Basel III regulatory capital framework are as follows:
Required to be Minimum Capital Considered Well- Actual Required-Basel III Capitalized
As of June 30, 2022: Amount Ratio Amount Ratio Amount Ratio Total Capital to Risk-Weighted Assets: Consolidated$ 1,507,098 19.54 %$ 809,783 10.50 %$ 771,222 10.00 % First Financial Bank, N.A$ 1,379,750 17.93 %$ 808,070 10.50 %$ 769,591 10.00 % Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,426,448 18.50 %$ 655,538 8.50 %$ 462,733 6.00 % First Financial Bank, N.A$ 1,299,100 16.88 %$ 654,152 8.50 %$ 615,672 8.00 % Common Equity Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,426,448 18.50 %$ 539,855 7.00 % - N/A First Financial Bank, N.A$ 1,299,100 16.88 %$ 538,713 7.00 %$ 500,234 6.50 % Leverage Ratio: Consolidated$ 1,426,448 10.65 %$ 535,975 4.00 % - N/A First Financial Bank, N.A$ 1,299,100 9.73 %$ 534,178 4.00 %$ 667,723 5.00 % Required to be Minimum Capital Considered Well- Actual Required-Basel III Capitalized As of June 30, 2021: Amount Ratio Amount Ratio Amount Ratio Total Capital to Risk-Weighted Assets: Consolidated$ 1,347,772 21.12 %$ 669,931 10.50 %$ 638,030 10.00 % First Financial Bank, N.A$ 1,227,741 19.28 %$ 668,612 10.50 %$ 636,773 10.00 % Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,278,883 20.04 %$ 542,325 8.50 %$ 382,818 6.00 % First Financial Bank, N.A$ 1,158,852 18.20 %$ 541,257 8.50 %$ 509,418 8.00 % Common Equity Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,278,883 20.04 %$ 446,621 7.00 % - N/A First Financial Bank, N.A$ 1,158,852 18.20 %$ 445,741 7.00 %$ 413,902 6.50 % Leverage Ratio: Consolidated$ 1,278,883 11.10 %$ 460,851 4.00 % - N/A First Financial Bank, N.A$ 1,158,852 10.09 %$ 459,483 4.00 %$ 574,353 5.00 % Required to be Minimum Capital Considered Well- Actual Required Basel III Capitalized As of December 31, 2021: Amount Ratio Amount Ratio Amount Ratio Total Capital to Risk-Weighted Assets: Consolidated$ 1,425,907 20.34 %$ 736,003 10.50 %$ 700,955 10.00 % First Financial Bank, N.A$ 1,258,965 17.99 %$ 734,604 10.50 %$ 699,623 10.00 % Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,356,006 19.35 %$ 595,812 8.50 %$ 420,573 6.00 % First Financial Bank, N.A$ 1,189,064 17.00 %$ 594,679 8.50 %$ 559,698 8.00 % Common Equity Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,356,006 19.35 %$ 490,669 7.00 % - N/A First Financial Bank, N.A$ 1,189,064 17.00 %$ 489,736 7.00 %$ 454,755 6.50 % Leverage Ratio: Consolidated$ 1,356,006 11.13 %$ 487,459 4.00 % - N/A First Financial Bank, N.A$ 1,189,064 9.79 %$ 485,926 4.00 %$ 607,407 5.00 % 54
-------------------------------------------------------------------------------- In connection with the adoption of the Basel III regulatory capital framework, our subsidiary bank made the election to continue to exclude accumulated other comprehensive income from available-for-sale securities ("AOCI") from capital in connection with its quarterly financial filing and, in effect, to retain the AOCI treatment under the prior capital rules. Liquidity. Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. The potential need for liquidity arising from these types of financial instruments is represented by the contractual notional amount of the instrument. Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. Liquid assets include cash, federal funds sold, and short-term investments in time deposits in banks. Liquidity is also provided by access to funding sources, which include core depositors and correspondent banks that maintain accounts with and sell federal funds to our subsidiary bank. Other sources of funds include our ability to borrow from short-term sources, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and other borrowings (see below) and an unfunded$25.00 million revolving line of credit established withFrost Bank , a nonaffiliated bank, which matures inJune 2023 (see next paragraph). Our subsidiary bank also has federal funds purchased lines of credit with two non-affiliated banks totaling$130.00 million . AtJune 30, 2022 , there were no amounts drawn on these lines of credit. Our subsidiary bank also has (i) an available line of credit with the FHLB totaling$2.09 billion atJune 30, 2022 , secured by portions of our loan portfolio and certain investment securities and (ii) access to theFederal Reserve Bank of Dallas lending program secured by portions of certain investment securities. AtJune 30, 2022 , the Company did not have any balances under this line of credit. The Company renewed its loan agreement, effectiveJune 30, 2021 , withFrost Bank . Under the loan agreement, as renewed and amended, we are permitted to draw up to$25.00 million on a revolving line of credit. Prior toJune 30, 2023 , interest is paid quarterly at The Wall Street Journal Prime Rate and the line of credit maturesJune 30, 2023 . If a balance exists atJune 30, 2023 , the principal balance converts to a term facility payable quarterly over five years and interest is paid quarterly at The Wall Street Journal Prime Rate. The line of credit is unsecured. Among other provisions in the credit agreement, we must satisfy certain financial covenants during the term of the loan agreement, including, without limitation, covenants that require us to maintain certain capital, tangible net worth, loan loss reserve, non-performing asset and cash flow coverage ratios. In addition, the credit agreement contains certain operational covenants, which among others, restricts the payment of dividends above 55% of consolidated net income, limits the incurrence of debt (excluding any amounts acquired in an acquisition) and prohibits the disposal of assets except in the ordinary course of business. Since 1995, we have historically declared dividends as a percentage of our consolidated net income in a range of 36% (low) in 2021 and 2020 to 53% (high) in 2003 and 2006. The Company was in compliance with the financial and operational covenants atJune 30, 2022 . There was no outstanding balance under the line of credit as ofJune 30, 2022 and 2021, orDecember 31, 2021 . In addition, we anticipate that future acquisitions of financial institutions, expansion of branch locations or offerings of new products could also place a demand on our cash resources. Available cash and cash equivalents at our parent company which totaled$89.10 million atJune 30, 2022 , investment securities which totaled$2.26 million atJune 30, 2022 and mature over 8 to 9 years, available dividends from our subsidiaries which totaled$375.31 million atJune 30, 2022 , utilization of available lines of credit, and future debt or equity offerings are expected to be the source of funding for these potential acquisitions or expansions. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed potentially problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As ofJune 30, 2022 , management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. We are monitoring closely the economic impact of the coronavirus on our customers and the communities we serve. Given the strong core deposit base and relatively low loan to deposit ratios maintained at our subsidiary bank, we consider our current liquidity position to be adequate to meet our short-term and long-term liquidity needs. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us. Off-Balance Sheet ("OBS")/Reserve for Unfunded Commitments. We are a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of our customers. These financial instruments include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheets. AtJune 30, 2022 , the Company's reserve for unfunded commitments totaled$8.72 million which is recorded in other liabilities. Our exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. We generally use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, as we deem necessary upon extension of credit, is based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment and income-producing commercial properties. 55 -------------------------------------------------------------------------------- Standby letters of credit are conditional commitments we issue to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The average collateral value held on letters of credit usually exceeds the contract amount.
Table 10 - Commitments as of
Total Notional Amounts Committed Unfunded lines of credit$ 1,020,918 Unfunded commitments to extend credit 845,774 Standby letters of credit 37,986 Total commercial commitments$ 1,904,678 We believe we have no other OBS arrangements or transactions with unconsolidated, special purpose entities that would expose us to liability that is not reflected on the face of the financial statements. The above table does not include balances related to the Company's IRLC and forward mortgage-backed security trades. Parent Company Funding. Our ability to fund various operating expenses, dividends, and cash acquisitions is generally dependent on our own earnings (without giving effect to our subsidiaries), cash reserves and funds derived from our subsidiaries. These funds historically have been produced by intercompany dividends and management fees that are limited to reimbursement of actual expenses. We anticipate that our recurring cash sources will continue to include dividends and management fees from our subsidiaries. AtJune 30, 2022 ,$375.31 million was available for the payment of intercompany dividends by our subsidiaries without the prior approval of regulatory agencies. Our subsidiaries paid aggregate dividends of$7.50 million and$9.00 million for the six-months endedJune 30, 2022 and 2021, respectively. Dividends. Our long-term dividend policy is to pay cash dividends to our shareholders of approximately 35% to 40% of annual net earnings while maintaining adequate capital to support growth. We are also restricted by a loan covenant within our line of credit agreement withFrost Bank to dividend no greater than 55% of net income, as defined in such loan agreement. The cash dividend payout ratios have amounted to 39.23% and 35.18% of net earnings for the first six months of 2022 and 2021, respectively. Given our current capital position, projected earnings and asset growth rates, we do not anticipate any significant change in our current dividend policy. OnApril 26, 2022 , the Board of Directors declared a$0.17 per share cash dividend for the second quarter of 2022, a 13.33% increase over the dividend declared in the second quarter of 2021. The record date for this dividend wasJune 16, 2022 , payable onJuly 1, 2022 (although such amount was prefunded with our transfer agent prior toJune 30, 2022 ). Our bank subsidiary, which is a national banking association and a member of theFederal Reserve System , is required by federal law to obtain the prior approval of the OCC to declare and pay dividends if the total of all dividends declared in any calendar year would exceed the total of (i) such bank's net profits (as defined and interpreted by regulation) for that year plus (ii) its retained net profits (as defined and interpreted by regulation) for the preceding two calendar years, less any required transfers to surplus. To pay dividends, we and our subsidiary bank must maintain adequate capital above regulatory guidelines. In addition, if the applicable regulatory authority believes that a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the authority may require, after notice and hearing, that such bank cease and desist from the unsafe practice. TheFederal Reserve , theFDIC and the OCC have each indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsafe and unsound banking practice. TheFederal Reserve , the OCC and theFDIC have issued policy statements that recommend that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.
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