FIRST FINANCIAL BANKSHARES, INC. 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 Inflation Reduction Act of 2022, 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;
42
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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
On July 27, 2021 , the Company's Board of Directors authorized the repurchase of
up to 5.00 million common shares through July 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 to July 27, 2021 and
through September 30, 2022 , 244,559 shares were repurchased and retired at an
average price of $38.61 .
Results of Operations
Performance Summary. Net earnings for the third quarter of 2022 were
The return on average assets was 1.76% for the third quarter of 2022, as compared to 1.90% for the third quarter of 2021. The return on average equity was 17.31% for the third quarter of 2022 as compared to 13.43% for the third quarter of 2021. Net earnings for the nine-month period endedSeptember 30, 2022 were$175.81 million compared to earnings of$172.23 million for the same period in 2021. Diluted earnings per share was$1.23 for the first nine months of 2022 as compared to$1.20 for the same period in 2021. The return on average assets was 1.77% for the first nine months of 2022 as compared to 1.94% for the same period a year ago. The return on average equity was 15.88% for the first nine months of 2022 as compared to 13.55% for the same period in 2021. 43 --------------------------------------------------------------------------------
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$104.89 million for the third quarter of 2022, as compared to$99.45 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 average loans and investment securities held with lower cash and cash equivalents partially offset by increases in the rates paid on deposits and borrowings and lower PPP origination fees and interest which totaled$62 thousand in the third quarter of 2022 compared to$8.25 million in the third quarter of 2021. PPP loan balances totaled$202 thousand atSeptember 30, 2022 . Average earning assets were$12.54 billion for the third quarter of 2022, as compared to$11.58 billion during the third quarter of 2021. The increase of$962.89 million in average earning assets in 2022 when compared to 2021 was primarily a result of (i) the increase of taxable securities of$957.89 million , (ii) the increase of average loans of$744.84 million and offset by (iii) a decrease in short-term investments of$362.07 million and (iv) a decrease in tax-exempt securities of$377.78 million when compared toSeptember 30, 2021 balances. Additionally, the mix of loans shifted from PPP loans, which earned 1.00% excluding origination fees, to other loan categories with higher yields. Average interest-bearing liabilities were$7.77 billion for the third quarter of 2022, as compared to$6.95 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 increased 16 basis points while the rate paid on interest-bearing liabilities increased 41 basis points for the third quarter of 2022 compared to the third quarter of 2021. Tax-equivalent net interest income was$306.26 million for the first nine months of 2022 as compared to$286.41 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 average loans and investment securities held partially offset by increases in the rates paid on deposits and borrowings and lower PPP origination fees and interest which totaled$1.83 million for the first nine months of 2022 compared to$22.18 million for the first nine months of 2021. Average earning assets were$12.51 billion for the first nine months of 2022, as compared to$11.15 billion during the first nine months of 2021. The increase of$1.36 billion in average earning assets in 2022 when compared to 2021 was primarily a result of (i) the increase of taxable securities of$1.46 billion , (ii) the increase of average loans of$426.45 million and offset by (iii) a decrease in short-term investments of$445.55 million and (iv) a decrease in tax-exempt securities of$75.60 million when compared toSeptember 30, 2021 average balances. Additionally, the mix of loans shifted from PPP loans, which earned 1.00%, excluding origination fees, to other loan categories with higher yields. Average interest-bearing liabilities were$7.74 billion for the first nine months of 2022, as compared to$6.69 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 six basis points while the rate paid on interest-bearing liabilities increased 15 basis points for the first nine months of 2022 compared to the first nine 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 September 30, 2022 Nine-Months Ended September 30, 2022
Compared to Three-Months Ended Compared to Nine-Months Ended
September 30, 2021 September 30, 2021
Change Attributable to Total Change Attributable to Total
Volume Rate Change Volume Rate Change
Short-term investments $ (138 ) $ 1,332 $ 1,194 $ (397 ) $ 1,862 $ 1,465
Taxable investment securities 3,769 4,908 8,677 18,498 5,440 23,938
Tax-exempt investment securities (1) (2,630 ) (689 ) (3,319 ) (1,602 ) (833 ) (2,435 )
Loans (1) (2) 9,880 (2,836 ) 7,044 16,350 (9,976 ) 6,374
Interest income 10,881 2,715 13,596 32,849 (3,507 ) 29,342
Interest-bearing deposits 139 7,308 7,447 610 7,919 8,529
Short-term borrowings 21 687 708 114 842 956
Interest expense 160 7,995 8,155 724 8,761 9,485
Net interest income $ 10,721 $ (5,280 ) $ 5,441 $ 32,125 $ (12,268 ) $ 19,857
(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 3.32% for the third quarter of 2022, a decrease of nine basis points from the same period in 2021. The net interest margin, on a tax equivalent basis, was 3.27% for the first nine months of 2022, a decrease of 16 basis points from the same period in 2021. We continued to experience downward pressure on our net interest margin into the early part of 2022 primarily due to (i) the extended period of historically low levels of short-term interest rates and (ii) the shift in the mix of interest-earning assets. However, theFederal Reserve began increasing interest rates by raising rates 25 basis points inMarch 2022 , 50 basis points inMay 2022 , and 75 basis points in June, July andSeptember 2022 , respectively, resulting in a target rate range of 300 to 325 atSeptember 30, 2022 . Loan rates on variable loans have increased as the majority of such loans are indexed to the applicable prime rate (currently 6.25% atSeptember 30, 2022 ), subject to underlying floors. With the latest increase in the federal funds rate, the majority of variable rate loans have increased (see additional discussion beginning on page 51). 44 -------------------------------------------------------------------------------- During 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. Average municipal and related deposits totaled$1.45 billion and$1.42 billion for the three-months endedSeptember 30, 2022 and 2021, respectively, with an average rate paid of 1.50% and 0.14%, for the respective quarters then ended.
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 September 30,
2022 2021
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Assets
Short-term investments (1) $ 252,036 $ 1,432 2.25 % $ 614,105 $ 238 0.15 %
Taxable investment
securities (2) 4,039,107 20,799 2.06 3,081,215 12,122 1.57
Tax-exempt investment
securities (2)(3) 2,164,829 14,382 2.66 2,542,606 17,701 2.78
Loans (3)(4) 6,082,649 77,851 5.08 5,337,807 70,807 5.26
Total earning assets 12,538,621 $ 114,464 3.62 % 11,575,733 $ 100,868 3.46 %
Cash and due from banks 227,206 205,929
Bank premises and equipment,
net 150,455 147,071
Other assets 213,094 97,827
Goodwill and other
intangible assets, net 315,962 317,327
Allowance for credit losses (72,737 ) (63,055 )
Total assets $ 13,372,601 $ 12,280,832
Liabilities and
Shareholders' Equity
Interest-bearing deposits $ 7,004,478 $ 8,787 0.50 % $ 6,346,267 $ 1,340 0.08 %
Short-term borrowings 768,096 784 0.40 599,934 76 0.05
Total interest-bearing
liabilities 7,772,574 $ 9,571 0.49 % 6,946,201 $ 1,416 0.08 %
Noninterest-bearing deposits 4,178,675 3,490,685
Other liabilities 61,320 103,446
Total liabilities 12,012,569 10,540,332
Shareholders' equity 1,360,032 1,740,500
Total liabilities and
shareholders' equity $ 13,372,601 $ 12,280,832
Net interest income $ 104,893 $ 99,452
Rate Analysis:
Interest income/earning
assets 3.62 % 3.46 %
Interest expense/earning
assets (0.30 ) (0.05 )
Net interest margin 3.32 % 3.41 %
(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 $1.74 million and
$3.67 million in the third quarters of 2022 and 2021, respectively, using an
effective tax rate of 21% for both periods.
(4)
Nonaccrual loans are included in loans.
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Nine-Months Ended September 30,
2022 2021
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Assets
Short-term investments (1) $ 238,713 $ 2,080 1.16 % $ 684,263 $ 615 0.12 %
Taxable investment
securities (2) 4,123,562 57,772 2.80 2,665,988 33,834 1.69
Tax-exempt investment
securities (2)(3) 2,382,754 49,655 2.78 2,458,352 52,090 2.83
Loans (3)(4) 5,765,844 211,095 4.89 5,339,398 204,721 5.13
Total earning assets 12,510,873 $ 320,602 3.43 % 11,148,001 $ 291,260 3.49 %
Cash and due from banks 230,427 204,246
Bank premises and equipment,
net 149,997 144,566
Other assets 173,061 97,234
Goodwill and other
intangible assets, net 316,274 317,726
Allowance for credit losses (67,931 ) (64,446 )
Total assets $ 13,312,701 $ 11,847,327
Liabilities and
Shareholders' Equity
Interest-bearing deposits $ 6,984,249 $ 13,124 0.25 % $ 6,165,740 $ 4,595 0.10 %
Short-term borrowings 759,913 1,216 0.21 528,599 260 0.07
Total interest-bearing
liabilities 7,744,162 $ 14,340 0.25 % 6,694,339 $ 4,855 0.10 %
Noninterest-bearing deposits 4,024,731 3,349,719
Other liabilities 63,919 103,354
Total liabilities 11,832,812 10,147,412
Shareholders' equity 1,479,889 1,699,915
Total liabilities and
shareholders' equity $ 13,312,701 $ 11,847,327
Net interest income (tax
equivalent) $ 306,262 $ 286,405
Rate Analysis:
Interest income/earning
assets 3.43 % 3.49 %
Interest expense/earning
assets (0.16 ) (0.06 )
Net interest margin 3.27 % 3.43 %
(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 $8.88 million and
$10.85 million in the first nine 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 third quarter of 2022 was $30.94
million compared to $37.73 million in the same quarter of 2021. Increases in
certain categories of noninterest income included (i) trust fees of $830
thousand , (ii) service charges on deposit accounts of $726 thousand , (iii) net
gain on sale of assets of $532 thousand , (iv) net gain on sale of
available-for-sale securities of $333 thousand and (v) net gain on sale of
foreclosed assets of $322 thousand when compared to the third quarter of
2021.The increase in trust fees was driven mainly by the continued increase in
oil and gas revenue. Mortgage related income was $4.07 million in the third
quarter of 2022 compared to $8.79 million in the third quarter of 2021 due to
lower overall origination volumes and margins as a result of the changes in
interest rates during the quarter. Debit card fees for the third quarter of 2022
decreased by $3.61 million from the third quarter of 2021 due to the impact of
the Bank becoming subject to regulations imposed by the Federal Reserve that
limits debit card interchange revenue (also known as the "Durbin Amendment")
effective July 1, 2022 , which is consistent with our prior disclosures.
Recoveries of interest on previously charged-off or nonaccrual loans was $664
thousand for the third quarter of 2022 compared to $1.75 million during the same
period of 2021.
Noninterest income for the nine-month period ended September 30, 2022 was
$103.14 million compared to $107.27 million compared to the same period in 2021.
Increases in certain categories of noninterest income included (i) trust fees of
$3.40 million , (ii) service charges on deposit accounts of $2.75 million , (iii)
net gain on sale of foreclosed assets of $1.37 million , and (iv) net gain on
sale of available-for-sale securities of $1.20 million when compared to the same
period of 2021. The increase in trust fees was driven mainly by the continued
increase in oil and gas revenue. Mortgage related income was $16.13 million for
the nine-month period ended September 30, 2022 compared to $26.97 million in the
same period of 2021 due to lower overall origination volumes and margins as a
result of the changes in interest rates during the year. Debit card fees were
$24.38 for the first nine months of 2022 compared to $26.55 million compared to
the first nine months of 2021 due to the impact of the Bank becoming subject to
regulations imposed by the Federal Reserve that limits debit card interchange
revenue under the Durbin Amendment effective July 1, 2022 , which is consistent
with our prior disclosures of $18 million annually.
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Debit card fees are charges that merchants pay to us and other card-issuing
banks for processing electronic payment transactions. Debit card 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 of 21
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
applicable Federal Reserve rules, as amended, the Company became subject to the
limitation effective July 1, 2022 , which reduced debit card fees during the
third quarter of 2022, as discussed above.
Table 3 - Noninterest Income (dollars in thousands):
Three-Months Ended September 30, Nine-Months Ended September 30,
Increase Increase
2022 (Decrease) 2021 2022 (Decrease) 2021
Trust fees $ 10,314 $ 830 $ 9,484 $ 29,873 $ 3,398 $ 26,475
Service charges on deposit
accounts 6,399 726 5,673 18,143 2,749 15,394
Debit card fees 5,587 (3,611 ) 9,198 24,381 (2,171 ) 26,552
Credit card fees 651 56 595 1,953 182 1,771
Gain on sale and fees on mortgage
loans 4,070 (4,718 ) 8,788 16,131 (10,842 ) 26,973
Net gain on sale of
available-for-sale securities 334 333 1 2,013 1,199 814
Net gain on sale of foreclosed
assets 349 322 27 1,451 1,368 83
Net gain (loss) on sale of assets 526 532 (6 ) 522 309 213
Interest on loan recoveries 664 (1,082 ) 1,746 2,596 (236 ) 2,832
Other:
Check printing fees 29 (59 ) 88 87 (68 ) 155
Safe deposit rental fees 192 - 192 671 (19 ) 690
Credit life fees 268 12 256 853 18 835
Brokerage commissions 355 18 337 1,130 91 1,039
Wire transfer fees 428 61 367 1,252 215 1,037
Miscellaneous income 777 (203 ) 980 2,085 (325 ) 2,410
Total other 2,049 (171 ) 2,220 6,078 (88 ) 6,166
Total Noninterest Income $ 30,943 $ (6,783 ) $ 37,726 $ 103,141 $ (4,132 ) $ 107,273
Noninterest Expense. Total noninterest expense for the third quarter of 2022 was
$59.44 million , a decrease of $3.50 million , or 5.56%, 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 43.76% for the third quarter of
2022 compared to 45.88% for the same quarter in 2021.
Salaries, commissions and employee benefits for the third quarter of 2022
totaled $33.89 million , compared to $37.09 million for the same period in 2021.
The net decrease reflected lower mortgage compensation expenses of $1.25 million
and a decrease of $1.87 million in profit sharing expenses offset by annual
merit-based and other market-based pay increases that were effective March 1,
2022 for the third quarter of 2022.
All other categories of noninterest expense for the third quarter of 2022
totaled $25.55 million , down from $25.85 million in the same quarter a year ago.
Noninterest expense, excluding salary related costs, for the three-months ended
September 30, 2022 decreased primarily due to decreases in software amortization
and expense and operational other losses compared to the three-months ended
September 30, 2021 .
Total noninterest expense for the first nine months of 2022 was $177.00 million ,
a decrease of $3.04 million , or 1.69%, as compared to the same period of 2021.
Our efficiency ratio for the first nine months of 2022 improved to 43.23%
compared to 45.73% for the same period in 2021.
Salaries, commissions and employee benefits for the first nine months of 2022
totaled $101.18 million , compared to $107.07 million for the same period in
2021. The net decrease reflected lower mortgage compensation expenses of $4.14
million and a decrease of $3.37 million in profit sharing expenses offset by
annual merit-based and other market-based pay increases that were effective
March 1, 2022 for the first nine months of 2022.
All other categories of noninterest expense for the first nine months of 2022
totaled $75.82 million , up from $72.97 million in the same period a year ago.
Noninterest expense, excluding salary related costs, for the nine-months ended
September 30, 2022 , increased compared to the nine-months ended September 30,
2021 , primarily due to $743 thousand of foreclosed asset expenses together with
increases in debit card expense, FDIC assessment fees and printing, stationary
and supplies and loan processing costs.
47
--------------------------------------------------------------------------------Table 4 - Noninterest Expense (dollars in thousands):
Three-Months Ended September 30, Nine-Months Ended September 30,
Increase Increase
2022 (Decrease) 2021 2022 (Decrease) 2021
Salaries and commissions $ 26,805 $ (1,302 ) $ 28,107 $ 78,335 $ (2,744 ) $ 81,079
Medical 3,009 (191 ) 3,200 8,396 (399 ) 8,795
Profit sharing 763 (1,867 ) 2,630 3,667 (3,368 ) 7,035
401(k) match expense 897 16 881 2,821 50 2,771
Payroll taxes 1,688 61 1,627 5,575 104 5,471
Stock based compensation 730 85 645 2,383 467 1,916
Total salaries and employee
benefits 33,892 (3,198 ) 37,090 101,177 (5,890 ) 107,067
Net occupancy expense 3,440 152 3,288 9,957 281 9,676
Equipment expense 2,396 (54 ) 2,450 6,999 208 6,791
FDIC assessment fees 917 102 815 2,690 408 2,282
Debit card expense 3,013 84 2,929 9,177 441 8,736
Professional and service fees 2,219 (187 ) 2,406 6,635 (301 ) 6,936
Printing, stationery and
supplies 600 168 432 1,641 395 1,246
Operational and other losses 869 (218 ) 1,087 2,247 339 1,908
Software amortization and
expense 2,564 (291 ) 2,855 7,543 (760 ) 8,303
Amortization of intangible
assets 306 (92 ) 398 946 (276 ) 1,222
Other:
Data processing fees 433 (68 ) 501 1,323 (22 ) 1,345
Postage 352 (68 ) 420 993 (93 ) 1,086
Advertising 738 (118 ) 856 2,175 (7 ) 2,182
Correspondent bank service
charges 265 (2 ) 267 797 40 757
Telephone 759 80 679 2,278 (499 ) 2,777
Public relations and business
development 954 64 890 2,561 217 2,344
Directors' fees 589 1 588 1,938 138 1,800
Audit and accounting fees 513 (2 ) 515 1,538 37 1,501
Legal fees and other related
costs 323 (115 ) 438 1,254 (615 ) 1,869
Regulatory exam fees 399 25 374 1,188 140 1,048
Travel 464 116 348 1,238 293 945
Courier expense 307 73 234 886 188 698
Other real estate owned 1 (9 ) 10 3 (46 ) 49
Other 3,129 60 3,069 9,816 2,348 7,468
Total other 9,226 37 9,189 27,988 2,119 25,869
Total Noninterest
Expense $ 59,442 $ (3,497 ) $ 62,939 $ 177,000 $ (3,036 ) $ 180,036
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 of September 30, 2022 , total loans
held-for-investment were $6.26 billion , an increase of $866.52 million , as
compared to December 31, 2021 . Total PPP loans outstanding were $202 thousand at
September 30, 2022 , which are included in the Company's commercial loan totals.
As compared to year-end 2021 balances, total real estate loans increased $659.25
million , total consumer loans increased $157.21 million , total commercial loans
increased $71.21 million and agricultural loans decreased $21.15 million . Loans
averaged $6.08 billion for the third quarter of 2022, an increase of $744.84
million over the prior year third quarter average balances. Loans averaged $5.77
billion for the first nine months of 2022, an increase of $426.45 million from
the prior year nine-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.
48
--------------------------------------------------------------------------------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):
September 30, December 31,
2022 2021 2021
Commercial:
C&I * $ 871,335 $ 819,597 $ 837,075
Municipal 214,852 165,847 177,905
Total Commercial 1,086,187 985,444 1,014,980
Agricultural 76,937 98,947 98,089
Real Estate:
Construction & Development 938,051 656,530 749,793
Farm 268,139 203,064 217,220
Non-Owner Occupied CRE 717,738 674,958 623,434
Owner Occupied CRE 945,665 824,231 821,653
Residential 1,536,180 1,328,798 1,334,419
Total Real Estate 4,405,773 3,687,581 3,746,519
Consumer:
Auto 538,798 394,072 405,416
Non-Auto 147,793 120,450 123,968
Total Consumer 686,591 514,522 529,384
Total $ 6,255,488 $ 5,286,494 $ 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
$18.82 million , $47.72 million , and $37.81 million at September 30, 2022 and
2021, and December 31, 2021 , respectively. At September 30, 2022 and 2021, and
December 31, 2021 , $2.92 million , $1.64 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.
49
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The following tables summarize maturity information of our loan portfolio as of
September 30, 2022 . The tables 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 at September 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 $ 336,198 $ 422,103 $ 95,439 $ 17,393 $ 871,133
PPP - 202 - - 202
Municipal 3,599 50,008 124,815 36,430 214,852
Total Commercial 339,797 472,313 220,254 53,823 1,086,187
Agricultural 56,040 19,155 1,742 - 76,937
Real Estate:
Construction & Development 491,989 189,822 165,097 91,143 938,051
Farm 18,005 27,830 136,376 85,928 268,139
Non-Owner Occupied CRE 27,597 197,675 358,562 133,904 717,738
Owner Occupied CRE 45,283 209,925 458,600 231,857 945,665
Residential 120,532 118,750 682,916 613,982 1,536,180
Total Real Estate 703,406 744,002 1,801,551 1,156,814 4,405,773
Consumer:
Auto 5,860 495,483 37,455 - 538,798
Non-Auto 28,989 96,328 16,484 5,992 147,793
Total Consumer 34,849 591,811 53,939 5,992 686,591
Total $ 1,134,092 $ 1,827,281 $ 2,077,486 $ 1,216,629 $ 6,255,488
% of Total Loans 18.13 % 29.21 % 33.21 % 19.45 % 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 $ 55,976 $ 272,468 $ 12,669 $ - $ 341,113
PPP - 202 - - 202
Municipal 3,104 48,690 94,149 14,553 160,496
Total Commercial 59,080 321,360 106,818 14,553 501,811
Agricultural 8,110 13,071 477 - 21,658
Real Estate:
Construction & Development 180,442 81,221 39,992 562 302,217
Farm 5,238 18,307 79,343 945 103,833
Non-Owner Occupied CRE 10,959 142,347 70,904 - 224,210
Owner Occupied CRE 30,365 143,375 48,599 218 222,557
Residential 47,287 99,737 451,276 39,583 637,883
Total Real Estate 274,291 484,987 690,114 41,308 1,490,700
Consumer:
Auto 5,860 495,483 37,455 - 538,798
Non-Auto 23,978 94,078 16,070 5,627 139,753
Total Consumer 29,838 589,561 53,525 5,627 678,551
Total $ 371,319 $ 1,408,979 $ 850,934 $ 61,488 $ 2,692,720
% of Total Loans 5.94 % 22.52 % 13.60 % 0.98 % 43.04 %
50
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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 $ 280,222 $ 149,635 $ 82,770 $ 17,393 $ 530,020
PPP - - - - -
Municipal 495 1,318 30,666 21,877 54,356
Total Commercial 280,717 150,953 113,436 39,270 584,376
Agricultural 47,930 6,084 1,265 - 55,279
Real Estate:
Construction & Development 311,547 108,601 125,105 90,581 635,834
Farm 12,767 9,523 57,033 84,983 164,306
Non-Owner Occupied CRE 16,638 55,328 287,658 133,904 493,528
Owner Occupied CRE 14,918 66,550 410,001 231,639 723,108
Residential 73,245 19,013 231,640 574,399 898,297
Total Real Estate 429,115 259,015 1,111,437 1,115,506 2,915,073
Consumer:
Auto - - - - -
Non-Auto 5,011 2,250 414 365 8,040
Total Consumer 5,011 2,250 414 365 8,040
Total $ 762,773 $ 418,302 $ 1,226,552 $ 1,155,141 $ 3,562,768
% of Total Loans 12.19 % 6.69 % 19.61 % 18.47 % 56.96 %
Of the $3.56 billion of variable interest rate loans shown above, loans totaling
$1.4 billion mature or reprice over the next twelve months with floating rates
subject to floors in many cases. Of this amount, approximately $1.37 billion
will reprice immediately upon changes in the underlying index rate (primarily
U.S. prime rate) with the remaining $30 million being subject to floors above
the current index.
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 $24.62 million at
September 30, 2022 , as compared to $25.28 million at September 30, 2021 and
$34.16 million at December 31, 2021 . As a percent of loans held-for-investment
and foreclosed assets, these assets were 0.39% at September 30, 2022 , as
compared to 0.48% at September 30, 2021 and 0.63% at December 31, 2021 . As a
percent of total assets, these assets were 0.19% at September 30, 2022 , as
compared to 0.20% at September 30, 2021 and 0.26% at December 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 at September
30, 2022 .
Table 6 - Nonaccrual, Past Due 90 Days or More and Still Accruing, Restructured Loans and Foreclosed Assets (dollars in thousands, except percentages):
September 30, December 31,
2022 2021 2021
Nonaccrual loans $ 24,585 $ 25,210 $ 31,652
Loans still accruing and past due 90 days or
more 15 23 8
Troubled debt restructured loans* 19 22 21
Nonperforming loans 24,619 25,255 31,681
Foreclosed assets - 28 2,477
Total nonperforming assets $ 24,619 $ 25,283 $ 34,158
As a % of loans held-for-investment and
foreclosed assets 0.39 % 0.48 % 0.63 %
As a % of total assets 0.19 % 0.20 % 0.26 %
* Troubled debt restructured loans of $1.95 million , $4.73 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 of September 30, 2022 and 2021, and December 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 ended December
31, 2021 . If interest on these loans had been recognized on a full accrual basis
during the year ended December 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).
51
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The provision for loan losses of $1.06 million for the three-months ended
September 30, 2022 is combined with the provision for unfunded commitments of
$2.16 million and reported in the aggregate of $3.22 million under the provision
for credit losses in the consolidated statements of earnings for the
three-months ended September 30, 2022 . The provision for loan losses of $8.91
million for the nine-months ended September 30, 2022 is combined with the
provision for unfunded commitments of $4.44 million and reported in the
aggregate of $13.35 million under the provision for credit losses in the
consolidated statements of earnings for the nine-months ended September 30,
2022 .
There was no provision for loan losses or unfunded commitments for the
three-months ended September 30, 2021 . The $4.47 million reversal of the
provision for loan losses for the nine-months ended September 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 nine-months ended September 30, 2021 . The increase in the
Company's provision for credit losses during 2022 was primarily driven by strong
organic loan growth, increases in unfunded commitments and a slight decline in
the projected economic forecast metrics offset by loan recoveries and lower
classified loan specific reserves.
As a percent of average loans, net loan recoveries were 0.07% for the third
quarter of 2022, as compared to 0.09% for the third quarter of 2021. As a
percent of average loans, net loan recoveries were 0.04% for the first
nine-months of 2022, as compared to 0.03% for the first nine-months of 2021. The
allowance for credit losses as a percent of loans held-for-investment was 1.18%
as of September 30, 2022 , as compared to 1.20% and 1.18% as of September 30,
2021 and December 31, 2021 , respectively.
Table 7 - Loan Loss Experience and Allowance for Credit Losses (dollars in thousands, except percentages):
Three-Months Ended Nine-Months Ended
September 30, September 30,
2022 2021 2022 2021
Allowance for credit losses at
period-end $ 74,108 $ 63,370 $ 74,108 $ 63,370
Loans held-for-investment at
period-end 6,255,488 5,286,494 6,255,488 5,286,494
Average loans for period 6,082,649 5,337,807 5,765,844 5,339,398
Net charge-offs
(recoveries)/average
loans (annualized) (0.07 )% (0.09 )% (0.04 )% (0.03 )%
Allowance for loan
losses/period-end
loans held-for-investment 1.18 % 1.20 % 1.18 % 1.20 %
Allowance for loan
losses/nonaccrual
loans, past due 90 days
still accruing
and restructured loans 301.02 % 250.92 % 301.02 % 250.92 %
Interest-Bearing Demand Deposits in Banks. The Company had interest-bearing
deposits in banks of $138.48 million at September 30, 2022 compared to $359.24
million at September 30, 2021 and $323.54 million at December 31, 2021 ,
respectively. At September 30, 2022 , interest-bearing deposits in banks included
$137.02 million maintained at the Federal Reserve Bank of Dallas and $1.46
million on deposit with the FHLB.
Available-for-Sale Securities . At September 30, 2022 , securities with a fair
value of $5.75 billion were classified as securities available-for-sale. As
compared to December 31, 2021 , the available-for-sale portfolio at September 30,
2022 reflected (i) an increase of $350.34 million in U.S. Treasury securities,
(ii) a decrease of $669.66 million in obligations of states and political
subdivisions, (iii) an increase of $31.93 million in corporate bonds and other
securities, and (iv) a decrease of $540.34 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
Yield
U.S. Treasury securities $ - - %$ 477,176 1.88 % $ - - % $ - - %$ 477,176 1.88 % Obligations of states and
political subdivisions 141,345 4.43 427,680 3.71 692,341 2.55 822,446 2.69 2,083,812 2.97 Corporate bonds and other
securities 3,906 1.31 60,720 2.84 35,602 1.98 - - 100,228 2.48 Mortgage-backed securities 93,260 2.71 1,090,832 2.14 1,323,904 1.76 576,231 2.23 3,084,227 2.01 Total$ 238,511 3.70 %$ 2,056,408 2.43 %$ 2,051,847 2.03 %$ 1,398,677 2.50 %$ 5,745,443 2.36 % 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. 52 -------------------------------------------------------------------------------- As ofSeptember 30, 2022 , the investment portfolio had an overall tax equivalent yield of 2.36%, a weighted average life of 7.96 years and modified duration of 6.44 years.
Deposits. Deposits held by our subsidiary bank represent our primary source of
funding. Total deposits were
Table 9 provides a breakdown of average deposits and rates paid over the three
and nine month periods ended
Table 9 - Composition of Average Deposits (dollars in thousands, except
percentages):
Three-Months Ended September 30,
2022 2021
Average Average Average Average
Balance Rate Balance Rate
Noninterest-bearing deposits $ 4,178,675 -% $ 3,490,685 -%
Interest-bearing deposits:
Interest-bearing checking 3,641,147 0.61 3,142,769 0.07
Savings and money market accounts 2,935,020 0.38 2,732,149 0.06
Time deposits under $250,000 299,211 0.31
317,843 0.26
Time deposits of
Total interest-bearing deposits 7,004,478 0.50 % 6,346,267 0.08 % Total average deposits$ 11,183,153 $ 9,836,952 Total cost of deposits 0.31 % 0.05 % Nine-Months Ended September 30, 2022 2021 Average Average Average Average Balance Rate Balance Rate Noninterest-bearing deposits$ 4,024,731 -%$ 3,349,719 -% Interest-bearing deposits: Interest-bearing checking 3,651,259 0.31 3,030,830 0.08 Savings and money market accounts 2,890,585 0.18 2,658,570 0.08 Time deposits under$250,000 303,663 0.24 320,743 0.29 Time deposits of$250,000 or more 138,742 0.32 155,597 0.51 Total interest-bearing deposits 6,984,249 0.25 % 6,165,740 0.10 % Total average deposits$ 11,008,980 $ 9,515,459 Total cost of deposits 0.16 % 0.06 %
The estimated amount of uninsured and uncollateralized deposits including
related accrued and unpaid interest is approximately
Borrowings. Included in borrowings were federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings of$774.58 million ,$648.68 million and$671.15 million atSeptember 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$768.10 million and$599.93 million in the third quarters of 2022 and 2021, respectively. The weighted average interest rates paid on these borrowings were 0.40% and 0.05% for the third 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$759.91 million and$528.60 million for the nine-months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The weighted average interest rates paid on these borrowings were 0.21% and 0.07% for the nine-month periods endedSeptember 30, 2022 andSeptember 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.
53
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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: September 30, December 31,
(in basis points) 2022 2021 2021
+400 6.87% 8.60% 10.56%
+300 5.24% 7.13% 8.52%
+200 3.90% 5.23% 6.13%
+100 2.30% 3.04% 3.42%
-100 (2.80)% (5.57)% (5.64)%
-200 (5.62)% (8.24)% (9.06)%
The results for the net interest income simulations as of September 30, 2022 and
2021, and December 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 management committee
oversees and monitors this risk.
The fair value of our investment securities classified as available-for-sale
totaled $5.75 billion at September 30, 2022 . During the nine months ended
September 30, 2022 , the corresponding unrealized gain before taxes on the
portfolio of $125.67 million at December 31, 2021 , moved into an unrealized loss
before taxes of $801.03 million at September 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 the Federal Reserve Board and other market conditions. The overall
valuation of the portfolio is most correlated to the 5-year U.S. Treasury rates
based on the composition and duration of the portfolio. At September 30, 2022 ,
the 5-year U.S. Treasury rate was 4.06% compared to 1.26% at December 31, 2021 ,
representing a 280 basis point increase during the first nine months of 2022. As
of September 30, 2022 , an additional 100 basis point increase in the 5-year U.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 $280 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$1.13 billion , or 8.64% of total assets atSeptember 30, 2022 , as compared to$1.73 billion , or 13.82% of total assets atSeptember 30, 2021 , and$1.76 billion , or 13.43% of total assets atDecember 31, 2021 . Included in shareholders' equity atSeptember 30, 2022 were$632.42 million in unrealized losses on investment securities available-for-sale, net of related income taxes. Included in shareholders' equity atSeptember 30, 2021 andDecember 31, 2021 were$109.45 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 third quarter of 2022, total shareholders' equity averaged$1.36 billion , or 10.17% of average assets, as compared to$1.74 billion , or 14.17% of average assets, during the same period in 2021. For the first nine months of 2022, total shareholders' equity averaged$1.48 billion , or 11.12% of average assets, as compared to$1.70 billion , or 14.35% 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. 54 -------------------------------------------------------------------------------- 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 ofSeptember 30, 2022 and 2021, andDecember 31, 2021 , we had a total risk-based capital ratio of 19.07%, 20.76% and 20.34%, a Tier 1 capital to risk-weighted assets ratio of 18.03%, 19.71% and 19.35%; a common equity Tier 1 to risk-weighted assets ratio of 18.03%, 19.71% and 19.35% and a Tier 1 leverage ratio of 10.79%, 11.19% and 11.13%, respectively. The regulatory capital ratios as ofSeptember 30, 2022 and 2021, andDecember 31, 2021 were calculated under Basel 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 September 30, 2022: Amount Ratio Amount Ratio Amount Ratio
Total Capital to
Risk-Weighted Assets:
Consolidated $ 1,547,369 19.07 % $ 851,796 10.50 % $ 811,234 10.00 %
First Financial Bank, N.A $ 1,383,653 17.09 % $ 850,038 10.50 % $ 809,560 10.00 %
Tier 1 Capital to
Risk-Weighted Assets:
Consolidated $ 1,462,382 18.03 % $ 689,549 8.50 % $ 486,740 6.00 %
First Financial Bank, N.A $ 1,298,666 16.04 % $ 688,126 8.50 % $ 647,648 8.00 %
Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated $ 1,462,382 18.03 % $ 567,864 7.00 % - N/A
First Financial Bank, N.A $ 1,298,666 16.04 % $ 566,692 7.00 % $ 526,214 6.50 %
Leverage Ratio:
Consolidated $ 1,462,382 10.79 % $ 542,094 4.00 % - N/A
First Financial Bank, N.A $ 1,298,666 9.62 % $ 540,211 4.00 % $ 675,263 5.00 %
Required to be
Minimum Capital Considered Well-
Actual Required-Basel III Capitalized
As of September 30, 2021: Amount Ratio Amount Ratio Amount Ratio
Total Capital to
Risk-Weighted Assets:
Consolidated $ 1,389,929 20.76 % $ 702,959 10.50 % $ 669,485 10.00 %
First Financial Bank, N.A $ 1,246,266 18.65 % $ 701,572 10.50 % $ 668,164 10.00 %
Tier 1 Capital to
Risk-Weighted Assets:
Consolidated $ 1,319,809 19.71 % $ 569,062 8.50 % $ 401,691 6.00 %
First Financial Bank, N.A $ 1,176,146 17.60 % $ 567,939 8.50 % $ 534,531 8.00 %
Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated $ 1,319,809 19.71 % $ 468,639 7.00 % $ - N/A
First Financial Bank, N.A $ 1,176,146 17.60 % $ 467,715 7.00 % $ 434,306 6.50 %
Leverage Ratio:
Consolidated $ 1,319,809 11.19 % $ 471,745 4.00 % $ - N/A
First Financial Bank, N.A $ 1,176,146 10.00 % $ 470,355 4.00 % $ 587,944 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 %
55
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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 with Frost Bank , a nonaffiliated
bank, which matures in June 2023 (see next paragraph). Our subsidiary bank also
has federal funds purchased lines of credit with two non-affiliated banks
totaling $130.00 million . At September 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 $2.26 billion at September 30, 2022 , secured by
portions of our loan portfolio and certain investment securities, subject to
certain requirements including maintaining positive tangible equity as defined
by the FHLB, and (ii) access to the Federal Reserve Bank of Dallas lending
program secured by portions of certain investment securities. At September 30,
2022 , the Company did not have any balances under this line of credit.
The Company renewed its loan agreement, effective June 30, 2021 , with Frost
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 to June 30, 2023 ,
interest is paid quarterly at The Wall Street Journal Prime Rate and the line of
credit matures June 30, 2023 . If a balance exists at June 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 at September 30, 2022 .
There was no outstanding balance under the line of credit as of September 30,
2022 and 2021, or December 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 $143.32 million at September 30, 2022 , investment
securities which totaled $2.17 million at September 30, 2022 and mature over 7
to 8 years, available dividends from our subsidiaries which totaled $376.67
million at September 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 of September 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. At September 30, 2022 , the
Company's reserve for unfunded commitments totaled $10.88 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.
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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 $ 1,077,595
Unfunded commitments to extend credit 868,816
Standby letters of credit 51,474
Total commercial commitments $ 1,997,885
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. At December 31 , 20221, total commercial commitments were $1.70
billion compared to the $2.00 billion above at September 30, 2022 .
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. At September 30,
2022 , $376.67 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 $67.50 million and $53.50 million for
the nine-months ended September 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 with Frost Bank to dividend no
greater than 55% of net income, as defined in such loan agreement. The cash
dividend payout ratios have amounted to 39.78% and 35.55% of net earnings for
the first nine 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. In July 2022 , the Board of
Directors declared a $0.17 per share cash dividend for the third quarter of
2022, a 13.33% increase over the dividend declared in the third quarter of 2021.
The record date for this dividend was September 15, 2022 , payable on October 3,
2022 .
Our bank subsidiary, which is a national banking association and a member of the
Federal 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 and comply with the general requirements applicable
to a Texas corporation. Generally, a Texas corporation may not pay a dividend to
its shareholders if (i) after giving effect to the dividend, the corporation
would be insolvent, or (ii) the amount of the dividend would exceed the surplus
of the corporation. 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.
The Federal Reserve , the FDIC 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. The Federal Reserve , the OCC and the FDIC
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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