PROSPERITY BANCSHARES, INC. Special Cautionary Notice Regarding Forward-Looking Statements
Statements and financial discussion and analysis contained in this quarterly report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and involve a number of risks and uncertainties, many of which are beyond the Company's control. Forward-looking statements can be identified by words such as "believes," "intends," "expects," "plans," "will" and similar references to future periods. Many possible events or factors could affect the future financial results and performance of the Company and could cause such results or performance to differ materially from those expressed in the forward-looking statements. These possible events or factors include, but are not limited to:
• changes in the strength of
strength of the local economies in which the Company conducts operations
resulting in, among other things, a deterioration in credit quality or
reduced demand for credit, including the result and effect on the
Company's loan portfolio and allowance for credit losses;
• the effect, impact, potential duration or other implications of the
COVID-19 pandemic, including any actions undertaken by federal, state and
local governmental authorities in response to the pandemic;
• volatility in interest rates and market prices, which could reduce the
Company's net interest margins, asset valuations and expense expectations;
• changes in the levels of loan prepayments and the resulting effects on the
value of the Company's loan portfolio;
• changes in local economic and business conditions, including fluctuations
in the price of oil, natural gas and other commodities, which adversely
affect the Company's customers and their ability to transact profitable
business with the company, including the ability of the Company's
borrowers to repay their loans according to their terms or a change in the
value of the related collateral;
• the potential impacts of climate change;
• increased competition for deposits and loans adversely affecting rates and
terms;
• the timing, impact and other uncertainties of any future acquisitions,
including the Company's ability to identify suitable future acquisition
candidates, the success or failure in the integration of their operations,
and the ability to enter new markets successfully and capitalize on growth
opportunities;
• the possible impairment of goodwill associated with an acquisition and
possible adverse short-term effects on the results of operations;
• increased credit risk in the Company's assets and increased operating risk
caused by a material change in commercial, consumer and/or real estate
loans as a percentage of the total loan portfolio;
• the concentration of the Company's loan portfolio in loans collateralized
by residential and commercial real estate;
• the failure of assumptions underlying the establishment of and provisions
made to the allowance for credit losses, including such assumptions
related to potential, pending or recent acquisitions;
• changes in the availability of funds resulting in increased costs or
reduced liquidity;
• a deterioration or downgrade in the credit quality and credit agency
ratings of the securities in the Company's securities portfolio;
• increased asset levels and changes in the composition of assets and the
resulting impact on the Company's capital levels and regulatory capital
ratios;
• the Company's ability to acquire, operate and maintain cost effective and
efficient systems without incurring unexpectedly difficult or expensive
but necessary technological changes;
• the loss of senior management or operating personnel and the potential
inability to hire qualified personnel at reasonable compensation levels;
• government intervention in theU.S. financial system;
• changes in statutes and government regulations or their interpretations
applicable to financial holding companies and the Company's present and
future banking and other subsidiaries, including changes in tax
requirements and tax rates;
29--------------------------------------------------------------------------------
• the effect of changes in accounting policies and practices, as may be
adopted by the regulatory agencies, as well as the
Accounting Oversight Board, the
other accounting standard setters;
• poor performance by external vendors;
• the cost and effects of a failure, interruption, or breach of security of
the Company's systems;
• the failure of analytical and forecasting models and tools used by the
Company to estimate expected credit losses and to measure the fair value
of financial instruments;
• additional risks from new lines of businesses or new products and services;
• claims or litigation related to intellectual property or fiduciary
responsibilities;
• the failure of the Company's enterprise risk management framework to
identify or address risks adequately;
• a failure in or breach of operational or security systems of the Company's
infrastructure, or those of its third-party vendors and other service
providers, including as a result of cyber-attacks;
• potential risk of environmental liability associated with lending activities;
• acts of terrorism, an outbreak of hostilities, such as the war between
unrest, insurrections, other political, economic or diplomatic
developments, including those caused by public health issues, outbreaks of
diseases and pandemics, such as the COVID-19 pandemic, weather or other
acts of God and other matters beyond the Company's control; and
• other risks and uncertainties described in the Company's Annual Report on
Form 10-K for the year ended
reports and documents filed with the
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes it has chosen these assumptions or bases in good faith and that they are reasonable. However, the Company cautions that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. Therefore, the Company cautions against placing undue reliance on its forward-looking statements. The forward-looking statements speak only as of the date the statements are made. The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise. Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company's balance sheets and statements of income. This section should be read in conjunction with the Company's consolidated financial statements and accompanying notes included in Part I, Item 1 of this report and with the consolidated financial statements and accompanying notes and other detailed information appearing in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 .
OVERVIEW
Prosperity Bancshares, Inc. , aTexas corporation ("Bancshares"), is a registered financial holding company that derives substantially all of its revenues and income from the operation of its bank subsidiary,Prosperity Bank (the "Bank," and together with Bancshares, the "Company"). The Bank provides a wide array of financial products and services to businesses and consumers throughoutTexas andOklahoma . As ofMarch 31, 2022 , the Bank operated 272 full-service banking locations; with 65 in theHouston area includingThe Woodlands ; 30 in theSouth Texas area includingCorpus Christi andVictoria ; 62 in theDallas/Fort Worth area; 22 in theEast Texas area; 29 in theCentral Texas area includingAustin andSan Antonio ; 34 in theWest Texas area includingLubbock ,Midland -Odessa andAbilene ; 16 in theBryan/College Station area; 6 in theCentral Oklahoma area; and 8 in theTulsa, Oklahoma area. The Company's principal executive office is located atProsperity Bank Plaza , 4295 San Felipe inHouston, Texas , and its telephone number is (281) 269-7199. The Company's website address is www.prosperitybankusa.com. Information contained on the Company's website is not incorporated by reference into this quarterly report on Form 10-Q and is not part of this or any other report. The Company generates the majority of its revenues from interest income on loans, service charges and fees on customer accounts and income from investment in securities. The revenues are partially offset by interest expense paid on deposits and other borrowings and noninterest expenses such as administrative and occupancy expenses. Net interest income is the difference between interest income on earning assets such as loans and securities and interest expense on liabilities such as deposits and borrowings which are used to fund those assets. Net interest income is the Company's largest source of revenue. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and margin. 30 -------------------------------------------------------------------------------- Three principal components of the Company's growth strategy are internal growth, efficient operations and acquisitions, including strategic merger transactions. The Company focuses on continual internal growth. The Company maintains separate data with respect to each banking center's net interest income, efficiency ratio, deposit growth and loan growth for purposes of measuring its overall profitability. The Company also focuses on maintaining efficiency and stringent cost control practices and policies. The Company has centralized many of its critical operations, such as data processing and loan processing. Management believes that this centralized infrastructure can accommodate substantial additional growth and achieve necessary controls while enabling the Company to minimize operational costs through certain economies of scale. The Company also intends to continue to seek expansion opportunities. Total assets were$38.27 billion atMarch 31, 2022 compared with$37.83 billion atDecember 31, 2021 , an increase of$437.2 million or 1.2%. Total loans were$18.07 billion atMarch 31, 2022 compared with$18.62 billion atDecember 31, 2021 , a decrease of$548.6 million or 2.9%. Total deposits were$31.07 billion atMarch 31, 2022 compared with$30.77 billion atDecember 31, 2021 , an increase of$296.5 million or 1.0%. Total shareholders' equity was$6.50 billion atMarch 31, 2022 compared with$6.43 billion atDecember 31, 2021 , an increase of$77.2 million or 1.2%.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are integral to understanding the results reported. The Company's accounting policies are described in detail in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity: Business Combinations-Generally, acquisitions are accounted for under the acquisition method of accounting in accordance withFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805, Business Combinations. A business combination occurs when the Company acquires net assets that constitute a business and obtains control over that business. Business combinations are effected through the transfer of consideration consisting of cash and/or common stock and are accounted for using the acquisition method. Accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values at the acquisition date. Determining the fair value of assets and liabilities, especially the loan portfolio, is a process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the acquisition as information relative to closing date fair values becomes available. The results of operations of an acquired entity are included in the Company's consolidated results from acquisition date, and prior periods are not restated. Allowance for Credit Losses- The allowance for credit losses is accounted for in accordance with FASB ASC 326, Measurement of Credit Losses on Financial Instruments which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. CECL requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is an allowance available for losses on loans and held-to-maturity securities. The allowance for credit losses is adjusted through charges to earnings in the form of a provision for credit losses. All losses are charged to the allowance when the loss actually occurs or when a determination is made that such a loss is likely and can be reasonably estimated. Recoveries are credited to the allowance at the time of recovery. The Company's allowance for credit losses consists of two elements: (1) specific valuation allowances based on expected losses on impaired loans and PCD loans; and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted economic conditions and other qualitative risk factors both internal and external to the Company. Management has established an allowance for credit losses which it believes is adequate for estimated losses in the Company's loan portfolio. Based on an evaluation of the portfolio, management presents a quarterly review of the allowance for credit losses to the Bank's Board of Directors, indicating any change in the allowance since the last review and any recommendations as to adjustments in the allowance. In making its evaluation, management considers factors such as historical lifetime loan loss experience, the amount of nonperforming assets and related collateral, the volume, growth and composition of the portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect the borrower's ability to pay and the value of collateral, the evaluation of the portfolio through its internal loan review process and other relevant factors. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management's judgment, should be charged off. Charge-offs occur when loans are deemed to be uncollectible. For further discussion of the methodology used in the determination of the allowance for credit losses on loans, see "Accounting for Acquired Loans and the Allowance for Acquired Credit Losses" and "Financial Condition-Allowance for Credit Losses on Loans" below. 31 -------------------------------------------------------------------------------- Accounting for Acquired Loans and the Allowance for Acquired Credit Losses - The Company accounts for its acquisitions using the acquisition method of accounting. Accordingly, the assets, including loans, and liabilities of the acquired entity are recorded at their fair values at the acquisition date. The fair value estimates associated with acquired loans, and based on a discounted cash flow model, include estimates related to market interest rates and undiscounted projections of future cash flows that incorporate expectations of prepayments and the amount and timing of principal, interest and other cash flows, as well as any shortfalls thereof. For further discussion of the methodology used in the determination of the allowance for credit losses for acquired loans, see "Financial Condition-Allowance for Credit Losses on Loans" below. For further discussion of the Company's acquisition and loan accounting, see Note 5 to the consolidated financial statements.
COVID-19 PANDEMIC
The Company continues to monitor the latest developments regarding a novel
strain of coronavirus disease ("COVID-19"). Although the restrictions previously
imposed on businesses and activities by the states of Texas and Oklahoma
remained lifted as of March 31, 2022 , it is possible that some restrictions
could be re-introduced if the number of cases were to increase due to the
emergence of a new variant of COVID-19 or otherwise. The COVID-19 pandemic has
resulted in significant economic uncertainties that have had, and could continue
to have, an adverse impact on the Company's operating income, financial
condition and cash flows. The extent to which the COVID-19 pandemic will impact
the Company's operations and financial results during 2022 cannot be reasonably
or reliably estimated at this time.
Since the implementation of the Paycheck Protection Program ("PPP") in 2020, the
Company has obtained Small Business Administration approvals on approximately
18,700 loans totaling $2.036 billion and, as of March 31, 2022 , had an
outstanding balance of 819 loans totaling $86.3 million .
In response to the COVID-19 pandemic, the Company provided relief to its loan
customers through loan extensions and deferrals beginning in March 2020 to
selected borrowers on a case-by-case basis. The Company's troubled debt
restructurings do not include loan modifications related to COVID-19. As of
March 31, 2022 , the Company had approximately $29.0 million in outstanding loans
subject to deferral and modification agreements.
RESULTS OF OPERATIONS
Net income available to common shareholders was$122.3 million for the quarter endedMarch 31, 2022 compared with$133.3 million for the same period in 2021, a decrease of$11.0 million or 8.2%. Net income per diluted common share was$1.33 for the quarter endedMarch 31, 2022 compared with$1.44 for the same period in 2021, a decrease of 7.6%. The Company posted annualized returns on average common equity of 7.54% and 8.60%, annualized returns on average assets of 1.29% and 1.54% and efficiency ratios of 43.68% and 41.25% for the quarters endedMarch 31, 2022 and 2021, respectively. The efficiency ratio is calculated by dividing total noninterest expense by the sum of net interest income and noninterest income. Because the ratio is a measure of revenues and expenses resulting from the Company's lending activities and fee-based banking services, net gains and losses on the sale or write down of assets and securities are not included. Additionally, taxes are not part of this calculation.
Net Interest Income
The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a "volume change." It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a "rate change."
For the Three Months Ended
Net interest income before the provision for credit losses was$239.9 million for the quarter endedMarch 31, 2022 , a decrease of$14.6 million or 5.7%, compared with$254.6 million for the same period in 2021. The change was primarily due to a decrease in the average balance and average rate on loans and a decrease in loan discount accretion of$11.1 million , partially offset by an increase in the average investment securities balance and a decrease in the average rate on interest-bearing liabilities. Interest income on loans was$193.0 million for the quarter endedMarch 31, 2022 , a decrease of$40.1 million or 17.2%, compared with$233.1 million for the same period in 2021. The change was primarily due to a decrease in the average balance and average rate on loans and a$11.1 million decrease in loan discount accretion. 32 -------------------------------------------------------------------------------- Interest income on securities was$55.0 million for the quarter endedMarch 31, 2022 , an increase of$16.3 million or 42.2%, compared with$38.7 million for the same period in 2021, primarily due to an increase in the average investment securities balance. Average interest-bearing liabilities were$20.74 billion for the quarter endedMarch 31, 2022 , an increase of$1.79 billion or 9.5%, compared with$18.94 billion for the same period in 2021, primarily due to an increase in interest-bearing demand deposits and savings and money market deposits partially offset by a decrease in certificates and other time deposits. The net interest margin on a tax-equivalent basis was 2.88% for the quarter endedMarch 31, 2022 , a decrease of 53 basis points or 15.5% compared to 3.41% for the same period in 2021. The change was primarily due to lower average rates on loans, a decrease in loan discount accretion of$11.1 million and an increase in the average balance on investment securities, partially offset by a decrease in the average rate on interest-bearing liabilities. 33 -------------------------------------------------------------------------------- The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities and the resultant rates. Except as indicated in the footnotes, no tax-equivalent adjustments were made and all average balances are daily average balances. Any nonaccruing loans have been included in the table as loans carrying a zero yield. Three Months Ended March 31, 2022 2021 Average Average Outstanding Interest Average Outstanding Interest Average Balance Earned/Paid Yield/Rate (1) Balance Earned/Paid Yield/Rate (1) (Dollars in thousands) Assets Interest-Earning Assets: Loans held for sale$ 4,611 $ 40 3.52 %$ 33,327 $ 238 2.90 % Loans held for investment 16,712,690 183,033 4.44 % 17,279,066 213,978 5.02 % Loans held for investment - Warehouse Purchase Program 1,268,715 9,952 3.18 % 2,369,601 18,859 3.23 % Total loans 17,986,016 193,025 4.35 % 19,681,994 233,075 4.80 % Investment securities 13,772,974 55,011 1.62 % 9,148,841 38,677 1.71 % Federal funds sold and other earning assets 2,135,503 847 0.16 % 1,506,645 351 0.09 % Total interest-earning assets 33,894,493 248,883 2.98 % 30,337,480 272,103 3.64 % Allowance for credit losses on loans (285,692 ) (315,590 ) Noninterest-earning assets 4,458,669 4,522,470 Total assets$ 38,067,470 $ 34,544,360 Liabilities and Shareholders' Equity Interest-Bearing Liabilities: Interest-bearing demand deposits$ 6,775,114 $ 2,452 0.15 %$ 6,112,469 $ 5,943 0.39 % Savings and money market deposits 10,870,461 4,026 0.15 % 9,420,064 5,753 0.25 % Certificates and other time deposits 2,637,529 2,276 0.35 % 3,031,621 5,666 0.76 % Securities sold under repurchase agreements 452,054 185 0.17 % 376,662 159 0.17 % Total interest-bearing liabilities 20,735,158 8,939 0.17 % 18,940,816 17,521 0.38 % Noninterest-Bearing Liabilities: Noninterest-bearing demand deposits 10,636,624 9,206,791 Allowance for credit losses on off-balance sheet credit exposures 29,947 29,947 Other liabilities 176,360 169,138 Total liabilities 31,578,089 28,346,692 Shareholders' equity 6,489,381 6,197,668 Total liabilities and shareholders' equity$ 38,067,470 $ 34,544,360 Net interest rate spread 2.81 % 3.26 % Net interest income and margin (2) (3)$ 239,944 2.87 %$ 254,582 3.40 % Net interest income and margin (tax equivalent) (4)$ 240,416 2.88 %$ 255,217 3.41 %
(1) Annualized and based on average balances on an actual 365-day basis for the
three months ended
(2) Yield is based on amortized cost and does not include any component of
unrealized gains or losses.
(3) The net interest margin is equal to net interest income divided by average
interest-earning assets.
(4) In order to make pretax income and resultant yields on tax-exempt investments
and loans comparable to those on taxable investments and loans, a
tax-equivalent adjustment has been computed using a federal income tax rate
of 21% and other applicable effective tax rates.
34
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The following table presents information regarding the dollar amount of changes
in interest income and interest expense for the periods indicated for each major
component of interest-earning assets and interest-bearing liabilities and
distinguishes between the changes attributable to changes in volume and changes
in interest rates. For purposes of this table, changes in interest income and
interest expense related to purchase accounting adjustments and changes
attributable to both rate and volume which cannot be segregated have been
allocated to rate.
Three Months Ended March 31,
2022 vs. 2021
Increase
(Decrease)
Due to Change in
Volume Rate Total
(Dollars in thousands)
Interest-Earning Assets:
Loans held for sale $ (205 ) $ 7 $ (198 )
Loans held for investment (1) (7,014 ) (23,931 ) (30,945 )
Loans held for investment - Warehouse
Purchase Program (8,762 ) (145 ) (8,907 )
Investment securities (1) 19,549 (3,215 ) 16,334
Federal funds sold and other earning assets 147 349
496
Total increase (decrease) in interest income 3,715 (26,935 )
(23,220 )
Interest-Bearing Liabilities: Interest-bearing demand deposits 644 (4,135 ) (3,491 ) Savings and money market deposits 886 (2,613 ) (1,727 ) Certificates and other time deposits (1) (737 ) (2,653 ) (3,390 ) Securities sold under repurchase agreements 32 (6 ) 26 Total increase (decrease) in interest expense 825 (9,407 ) (8,582 ) Increase (decrease) in net interest income$ 2,890 $ (17,528 ) $ (14,638 )
(1) Includes impact of purchase accounting adjustments.
Provision for Credit Losses
Management actively monitors the Company's asset quality and provides specific loss provisions when necessary. Provisions for credit losses are charged to income to bring the total allowance for credit losses on loans and off-balance sheet credit exposures to a level deemed appropriate by management of the Company based on such factors as historical lifetime credit loss experience, the amount of nonperforming loans and related collateral, the volume growth and composition of the loan portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect the borrower's ability to pay and the value of collateral, the evaluation of the loan portfolio through the internal loan review process and other relevant factors. Loans are charged off against the allowance for credit losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for credit losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations.
The Company had no provision for credit losses for the quarters ended
Net charge-offs were$1.2 million for the quarter endedMarch 31, 2022 compared with net charge-offs of$8.9 million for the quarter endedMarch 31, 2021 . Net charge-offs for the three months endedMarch 31, 2022 did not include any purchased credit deteriorated ("PCD") loans and$553 thousand of specific reserves on resolved PCD loans was released to the general reserve.
Noninterest Income
The Company's primary sources of recurring noninterest income are credit, debit
and ATM card income, nonsufficient funds ("NSF") fees and service charges on
deposit accounts. Additionally, the Company generates recurring noninterest
income from its various additional products and services, including trust
services, mortgage lending, brokerage and independent sales organization
sponsorship operations. Noninterest income does not include loan origination
fees, which are recognized over the life of the related loan as an adjustment to
yield using the interest method.
35
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Noninterest income totaled $35.1 million for the three months ended March 31,
2022 compared with $34.0 million for the same period in 2021, an increase of
$1.1 million or 3.3%. This change was primarily due to increases in NSF fees and
other noninterest income and a net gain on the sale of assets, partially offset
by a decrease in mortgage income.
The following table presents, for the periods indicated, the major categories of
noninterest income:
Three Months Ended March 31,
2022 2021
(Dollars in thousands)
Nonsufficient funds (NSF) fees $ 8,124 $ 6,687
Credit card, debit card and ATM card income 8,179
8,031
Service charges on deposit accounts 6,211 5,978 Trust income 2,703 2,837 Mortgage income 455 3,307 Brokerage income 892 711 Bank owned life insurance income 1,283
1,292
Net gain (loss) on sale or write down of assets 689 (79 ) Other 6,586 5,244 Total noninterest income$ 35,122 $ 34,008 Noninterest Expense Noninterest expense totaled$119.9 million for the quarter endedMarch 31, 2022 compared with$119.1 million for the quarter endedMarch 31, 2021 , an increase of$774 thousand or 0.7%. The following table presents, for the periods indicated, the major categories of noninterest expense: Three Months Ended March 31, 2022 2021 (Dollars in thousands) Salaries and employee benefits (1)$ 79,411 $ 80,037 Non-staff expenses: Net occupancy and equipment 7,848 7,833
Credit and debit card, data processing and software amortization
8,849 8,233
Regulatory assessments and FDIC insurance 2,850 2,670
Core deposit intangibles amortization 2,620 2,931
Depreciation 4,547 4,540
Communications (2) 2,919 2,899
Net other real estate income (3) (407 ) (643 )
Other 11,213 10,576
Total noninterest expense $ 119,850 $ 119,076 (1) Includes stock-based compensation expense of
for the three months ended
(2) Communications expense includes telephone, data circuits, postage and courier
expenses.
(3) Net other real estate income is comprised of rental expense, rental income
and gains and losses on sales of real estate.
Income Taxes
The amount of federal and state income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible expenses. Income tax expense totaled$32.9 million for the three months endedMarch 31, 2022 compared with$36.2 million for the same period in 2021, a decrease of$3.3 million or 9.2%. The Company's effective tax rate for the three months endedMarch 31, 2022 and 2021 was 21.2% and 21.4%, respectively. 36 --------------------------------------------------------------------------------
FINANCIAL CONDITION Loan Portfolio The Company separates its loan portfolio into two general categories of loans: (1) "originated loans," which are loans originated byProsperity Bank and made pursuant to the Company's loan policy and procedures in effect at the time the loan was made, and (2) "acquired loans," which are loans acquired in a business combination and preliminarily recorded at fair value at acquisition date. Those acquired loans that are renewed or substantially modified after the date of the business combination are referred to as "re-underwritten acquired loans." If a renewal or substantial modification of an acquired loan is underwritten by the Company with a new credit analysis, the loan may no longer be categorized as an acquired loan. For example, acquired loans to one borrower may be combined into a new loan with a new loan number and categorized as an originated loan. Acquired loans with a fair value discount or premium at the date of the business combination that remained at the reporting date are referred to as "fair-valued acquired loans." All fair-valued acquired loans are further categorized into purchased credit-deteriorated loans ("PCD loans") and "Non-PCD loans." Acquired loans with evidence of credit quality deterioration as of the acquisition date when compared to the origination date are classified as PCD loans.
The following tables summarize the Company's originated and acquired loan portfolios broken out into originated loans, re-underwritten acquired loans, Non-PCD loans and PCD loans, as of the dates indicated.
March 31, 2022
Acquired Loans
Re-Underwritten
Originated Loans Acquired Loans Non-PCD Loans PCD Loans Total Loans
(Dollars in thousands)
Residential mortgage loans held
for sale $ 2,810 $ - $ - $ - $ 2,810
Commercial and industrial 1,526,790 799,954 196,029 17,217 2,539,990
Warehouse purchase program 1,344,541 - - - 1,344,541
Real estate:
Construction, land development and
other land loans 2,197,487 122,061 8,042 247 2,327,837
1-4 family residential (includes
home equity) 4,769,045 273,456 795,280 159 5,837,940
Commercial real estate (includes
multi-family residential) 3,834,752 431,720 835,574 48,509 5,150,555
Farmland 415,561 8,441 16,308 1,136 441,446
Agriculture 143,153 32,727 92 - 175,972
Consumer and other 213,639 17,670 13,717 1,407 246,433
Total loans held for investment 14,444,968 1,686,029 1,865,042 68,675 18,064,714
Total $ 14,447,778 $ 1,686,029 $ 1,865,042 $ 68,675 $ 18,067,524
December 31, 2021
Acquired Loans
Re-Underwritten
Originated Loans Acquired Loans Non-PCD Loans PCD Loans Total Loans
(Dollars in thousands)
Residential mortgage loans held for
sale $ 7,274 $ - $ - $ - $ 7,274
Commercial and industrial 1,658,807 763,745 263,461 25,807 2,711,820
Warehouse purchase program 1,775,699 - - - 1,775,699
Real estate:
Construction, land development and
other land loans 2,163,895 126,886 8,661 273 2,299,715
1-4 family residential (includes home
equity) 4,524,726 287,451 849,084 173 5,661,434
Commercial real estate (includes
multi-family residential) 3,807,192 465,588 928,336 50,252 5,251,368
Farmland 411,818 9,176 20,190 1,159 442,343
Agriculture 145,516 32,363 116 - 177,995
Consumer and other 251,441 19,600 16,048 1,407 288,496
Total loans held for investment 14,739,094 1,704,809 2,085,896 79,071 18,608,870
Total $ 14,746,368 $ 1,704,809 $ 2,085,896 $ 79,071 $ 18,616,144
37-------------------------------------------------------------------------------- AtMarch 31, 2022 , total loans were$18.07 billion , a decrease of$548.6 million or 2.9%, compared with$18.62 billion atDecember 31, 2021 . Loans atMarch 31, 2022 included$2.8 million of loans held for sale and$1.34 billion of Warehouse Purchase Program loans compared with$7.3 million of loans held for sale and$1.78 billion of Warehouse Purchase Program loans atDecember 31, 2021 . AtMarch 31, 2022 , loans represented 47.2% of total assets compared with 49.2% of total assets atDecember 31, 2021 .
The loan portfolio consists of various types of loans categorized by major type as follows:
(i) Commercial and Industrial Loans. In nearly all cases, the Company's commercial loans are made in the Company's market areas and are underwritten on the basis of the borrower's ability to service the debt from income. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. As a general practice, term loans are secured by any available real estate, equipment or other assets owned by the borrower. Both working capital and term loans are typically supported by a personal guaranty of a principal. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and, therefore, usually yield a higher return. The increased risk in commercial loans is due to the type of collateral securing these loans as well as the expectation that commercial loans generally will be serviced principally from the operations of the business, and those operations may not be successful. Historical trends have shown these types of loans to have higher delinquencies than mortgage loans. As a result of these additional complexities, variables and risks, commercial loans require more thorough underwriting and servicing than other types of loans. Included in commercial and industrial loans are (1) commitments to oil and gas producers largely secured by proven, developed and producing reserves and (2) commitments to service, equipment and midstream companies secured mainly by accounts receivable, inventory and equipment. Mineral reserve values supporting commitments to producers are normally re-determined semi-annually using reserve studies prepared by a third-party or the Company's oil and gas engineer. Accounts receivable and inventory borrowing bases for service companies are typically re-determined monthly. Funding requests by both producers and service companies are monitored relative to the most recently determined borrowing base. As ofMarch 31, 2022 , oil and gas loans totaled$445.9 million (net of discount and excluding PPP loans totaling$17.0 million ) or 2.5% of total loans, compared with total oil and gas loans of$491.3 million (net of discount and excluding PPP loans totaling$27.9 million ) or 2.6% of total loans as ofDecember 31, 2021 . In addition, as ofMarch 31, 2022 , the Company had total unfunded commitments to oil and gas companies of$417.0 million compared with total unfunded commitments to oil and gas companies of$419.0 million as ofDecember 31, 2021 . Total unfunded commitments to producers include letters of credit issued in lieu of oil well plugging bonds. (ii)Commercial Real Estate . The Company makes commercial real estate loans collateralized by owner-occupied and nonowner-occupied real estate to finance the purchase of real estate. The Company's commercial real estate loans are collateralized by first liens on real estate, typically have variable interest rates (or five year or less fixed rates) and amortize over a 15- to 25-year period. Payments on loans secured by nonowner-occupied properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. The Company seeks to minimize these risks in a variety of ways, including giving careful consideration to the property's operating history, future operating projections, current and projected occupancy, location and physical condition, in connection with underwriting these loans. The underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of the financial condition of the borrower and guarantor. Loans to hotels and restaurants are included in commercial real estate loans. As ofMarch 31, 2022 , loans to hotels totaled$392.0 million (excluding PPP loans totaling$512 thousand ) or 2.2% of total loans, compared to$386.4 million (excluding PPP loans totaling$920 thousand ) or 2.1% of total loans atDecember 31, 2021 . As ofMarch 31, 2022 , loans to restaurants totaled$193.2 million (excluding PPP loans totaling$12.3 million ) or 1.1% of total loans, compared to$201.7 million (excluding PPP loans totaling$29.3 million ) or 1.1% of total loans atDecember 31, 2021 . (iii) 1-4 Family Residential Loans. The Company's lending activities also include the origination of 1-4 family residential mortgage loans (including home equity loans) collateralized by owner-occupied and nonowner-occupied residential properties located in the Company's market areas. The Company offers a variety of mortgage loan portfolio products which generally are amortized over five to 30 years. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts of no more than 89% of appraised value. The Company requires mortgage title insurance, as well as hazard, wind and/or flood insurance as appropriate. The Company prefers to retain residential mortgage loans for its own account rather than selling them into the secondary market. By doing so, the Company incurs interest rate risk as well as the risks associated with non-payments on such loans. The Company's mortgage department also offers a variety of mortgage loan products which are generally amortized over 30 years, including FHA andVA loans, which are sold to secondary market investors. (iv) Construction,Land Development and Other Land Loans. The Company makes loans to finance the construction of residential and nonresidential properties. Construction loans generally are collateralized by first liens on real estate and have variable interest rates. The Company conducts periodic inspections, either directly or through an agent, prior to approval of periodic draws on 38 -------------------------------------------------------------------------------- these loans. Underwriting guidelines similar to those described above are also used in the Company's construction lending activities, with heightened analysis of construction and/or development costs. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to foreclose on a project prior to completion, the Company may not be able to recover all of the unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. Although the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, these procedures may not prevent losses from the risks described above. (v) Warehouse Purchase Program. The Warehouse Purchase Program allows unaffiliated mortgage originators ("Clients") to close 1-4 family real estate loans in their own name and manage their cash flow needs until the loans are sold to investors. The Company's Clients are strategically targeted for their experienced management teams and analyzed for the expected profitability of each Client's business model over the long term. The Clients are located across theU.S. and originate mortgage loans primarily through traditional retail and/or wholesale business models using underwriting standards as required byUnited States government-sponsored enterprise agencies, "Agencies" such as Fannie Mae, private investors to which the mortgage loans are ultimately sold and/or mortgage insurers. Although not subject to any legally binding commitment, when the Company makes a purchase decision, it acquires a 100% participation interest in the mortgage loans originated by its Clients. Individual mortgage loans are warehoused in the Company's portfolio only for a short duration, averaging less than 30 days. When instructed by a Client that a warehoused loan has been sold to an investor, the Company delivers the note to the investor that pays the Company, which in turn remits the net sales proceeds to the Client. (vi) Agriculture Loans. The Company provides agriculture loans for short-term livestock and crop production, including rice, cotton, milo and corn, farm equipment financing and agriculture real estate financing. The Company evaluates agriculture borrowers primarily based on their historical profitability, level of experience in their particular industry segment, overall financial capacity and the availability of secondary collateral to withstand economic and natural variations common to the industry. Because agriculture loans present a higher level of risk associated with events caused by nature, the Company routinely makes on-site visits and inspections in order to identify and monitor such risks. (vii) Consumer Loans. Consumer loans made by the Company include direct "A"-credit automobile loans, recreational vehicle loans, boat loans, home improvement loans, personal loans (collateralized and uncollateralized) and deposit account collateralized loans. The terms of these loans typically range from 12 to 180 months and vary based upon the nature of collateral and size of loan. Generally, consumer loans entail greater risk than do real estate secured loans, particularly in the case of consumer loans that are unsecured or collateralized by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness, personal bankruptcy or death. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans. The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company's policies and procedures.
Nonperforming Assets
Nonperforming assets include loans on nonaccrual status, accruing loans 90 days
or more past due, repossessed assets and real estate which has been acquired
through foreclosure and is awaiting disposition. Nonperforming assets do not
include PCD loans unless the loan has deteriorated since the acquisition date.
PCD loans are reported as nonperforming assets when a deterioration in projected
cash flows is identified.
The Company generally places a loan on nonaccrual status and ceases accruing
interest when the payment of principal or interest is delinquent for 90 days, or
earlier in some cases, unless the loan is in the process of collection and the
underlying collateral
39
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fully supports the carrying value of the loan. A loan may be returned to accrual
status when all the principal and interest amounts contractually due are brought
current and future principal and interest amounts contractually due are
reasonably assured, which is typically evidenced by a sustained period (at least
six months) of repayment performance by the borrower.
Nonperforming assets decreased
The following tables present information regarding nonperforming assets differentiated among originated loans, re-underwritten acquired loans, Non-PCD loans and PCD loans, as of the dates indicated:
March 31, 2022
Acquired Loans
Re-Underwritten
Originated Loans Acquired Loans Non-PCD Loans PCD Loans Total
(Dollars in thousands)
Nonaccrual loans (1)(2) $ 14,535 $ 1,099 $ 5,963 $ 168 $ 21,765
Accruing loans 90 or more days past
due 1,195 2,500 - - 3,695
Total nonperforming loans 15,730 3,599 5,963 168 25,460
Repossessed assets 19 - - - 19
Other real estate 1,705 - - - 1,705
Total nonperforming assets $ 17,454 $ 3,599 $ 5,963 $ 168 $ 27,184
Nonperforming assets to total loans
and other real estate by category 0.12 % 0.21 % 0.32 % 0.24 % 0.15 %
Nonperforming assets to total loans,
excluding Warehouse Purchase Program
loans, and other real estate by
category 0.13 % 0.21 % 0.32 % 0.24 % 0.16 %
Nonaccrual loans to total loans 0.10 % 0.07 % 0.32 % 0.24 % 0.12 %
Nonaccrual loans to total loans,
excluding Warehouse Purchase Program
loans 0.11 % 0.07 % 0.32 % 0.24 % 0.13 %
December 31, 2021
Acquired Loans
Re-Underwritten
Originated Loans AcquiredLoans Non-PCD Loans PCD Loans Total
(Dollars in thousands)
Nonaccrual loans (1)(2) $ 19,712 $ 630 $ 5,759 $ 168 $ 26,269
Accruing loans 90 or more days past
due 770 117 - - 887
Total nonperforming loans 20,482 747 5,759 168 27,156
Repossessed assets 310 - - - 310
Other real estate 223 - 399 - 622
Total nonperforming assets $ 21,015 $ 747 $ 6,158 $ 168 $ 28,088
Nonperforming assets to total loans
and other real estate by category 0.14 % 0.04 % 0.30 % 0.21 % 0.15 %
Nonperforming assets to total
loans, excluding Warehouse Purchase
Program loans, and other real
estate by category 0.16 % 0.04 % 0.30 % 0.21 % 0.17 %
Nonaccrual loans to total loans 0.13 % 0.04 % 0.28 % 0.21 % 0.14 %
Nonaccrual loans to total loans,
excluding Warehouse Purchase
Program loans 0.15 % 0.04 % 0.28 % 0.21 % 0.16 %
(1) Includes troubled debt restructurings of
(2) There were no nonperforming or troubled debt restructurings of Warehouse
Purchase Program loans or Warehouse Purchase Program lines of credit for the
periods presented.
Nonperforming assets were 0.15% of total loans and other real estate at
40
--------------------------------------------------------------------------------Allowance for Credit Losses on Loans
The allowance for credit losses is adjusted through charges to earnings in the form of a provision for credit losses. Management has established an allowance for credit losses on loans which it believes is adequate as ofMarch 31, 2022 for estimated losses in the Company's loan portfolio. The amount of the allowance for credit losses on loans is affected by the following: (1) charge-offs of loans that occur when loans are deemed uncollectible and decrease the allowance, (2) recoveries on loans previously charged off that increase the allowance, (3) provisions for credit losses charged to earnings that increase the allowance, and (4) provision releases returned to earnings that decrease the allowance. Based on an evaluation of the loan portfolio and consideration of the factors listed below, management presents a quarterly review of the allowance for credit losses to the Bank's Board of Directors, indicating any change in the allowance since the last review and any recommendations as to adjustments in the allowance. Although management believes it uses the best information available to make determinations with respect to the allowance for credit losses, future adjustments may be necessary if economic conditions or the borrower's performance differ from the assumptions used in making the initial determinations. The Company's allowance for credit losses consists of two components: (1) a specific valuation allowance based on expected lifetime losses on specifically identified loans and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted economic conditions and other qualitative risk factors both internal and external to the Company. In setting the specific valuation allowance, the Company follows a loan review program to evaluate the credit risk in the total loan portfolio and assigns risk grades to each loan. Through this loan review process, the Company maintains an internal list of impaired loans which, along with the delinquency list of loans, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses. All loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific reserve is required. For certain impaired loans, the Company allocates a specific loan loss reserve primarily based on the value of the collateral securing the impaired loan. The specific reserves are determined on an individual loan basis. Loans for which specific reserves are provided are excluded from the general valuation allowance described below. In determining the amount of the general valuation allowance, management considers factors such as historical lifetime loan loss experience, concentration risk of specific loan types, the volume, growth and composition of the Company's loan portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect the borrower's ability to pay and the value of collateral, the evaluation of the Company's loan portfolio through its internal loan review process, other qualitative risk factors both internal and external to the Company and other relevant factors. Historical lifetime loan loss experience is determined by utilizing an open-pool ("cumulative loss rate") methodology. Adjustments to the historical lifetime loan loss experience are made for differences in current loan pool risk characteristics such as portfolio concentrations, delinquency, non-accrual, and watch list levels, as well as changes in current and forecasted economic conditions such as unemployment rates, property and collateral values, and other indices relating to economic activity. The utilization of reasonable and supportable forecasts includes an immediate reversion to lifetime historical loss rates. Based on a review of these factors for each loan type, the Company applies an estimated percentage to the outstanding balance of each loan type, excluding any loan that has a specific reserve. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
A change in the allowance for credit losses can be attributable to several factors, most notably (1) specific reserves identified for impaired loans, (2) historical lifetime credit loss information, (3) changes in current and forecasted environmental factors and (4) growth in the balance of loans.
Changes in the Company's asset quality are reflected in the allowance in several
ways. Specific reserves that are calculated on a loan-by-loan basis and the
qualitative assessment of all other loans reflect current changes in the credit
quality of the loan portfolio. Historical lifetime credit losses, on the other
hand, are based on an open-pool ("cumulative loss rate") methodology, which is
then applied to estimate lifetime credit losses in the loan portfolio. A
deterioration in the credit quality of the loan portfolio in the current period
would increase the historical lifetime loss rate to be applied in future
periods, just as an improvement in credit quality would decrease the historical
lifetime loss rate.
41
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The allowance for credit losses is further determined by the size of the loan
portfolio subject to the allowance methodology and environmental factors that
include Company-specific risk indicators and general economic conditions, both
of which are constantly changing. The Company evaluates the economic and
portfolio-specific factors on a quarterly basis to determine a qualitative
component of the general valuation allowance. The factors include current
economic metrics, reasonable and supportable forecasted economic metrics,
business conditions, delinquency trends, credit concentrations, nature and
volume of the portfolio and other adjustments for items not covered by specific
reserves and historical lifetime loss experience. Management's assessment of
qualitative factors is a statistically based approach to determine the loss rate
adjustment associated with such factors. Based on the Company's actual
historical lifetime loan loss experience relative to economic and loan
portfolio-specific factors at the time the losses occurred, management is able
to identify the expected level of lifetime losses as of the date of measurement.
The correlation of historical loss experience with current and forecasted
economic conditions provides an estimate of lifetime losses that has not been
previously factored into the general valuation allowance by the determination of
specific reserves and lifetime historical losses. Additionally, the Company
considers qualitative factors not easily quantified and the possibility of model
imprecision.
Utilizing the aggregation of specific reserves, historical loss experience and a
qualitative component, management is able to determine the valuation allowance
to reflect the full lifetime loss.
The Company accounts for its acquisitions using the acquisition method of
accounting. Accordingly, the assets, including loans, and liabilities of the
acquired entity are recorded at their fair values at the acquisition date. These
fair value estimates associated with acquired loans, and based on a discounted
cash flow model, include estimates related to market interest rates and
undiscounted projections of future cash flows that incorporate expectations of
prepayments and the amount and timing of principal, interest and other cash
flows, as well as any shortfalls thereof.
Non-PCD loans that were not deemed impaired subsequent to the acquisition date
are considered non-impaired and are evaluated as part of the general valuation
allowance.
Non-PCD loans that have deteriorated to an impaired status subsequent to
acquisition are evaluated for a specific reserve on a quarterly basis which,
when identified, is added to the allowance for credit losses. The Company
reviews impaired Non-PCD loans on a loan-by-loan basis and determines the
specific reserve based on the difference between the recorded investment in the
loan and one of three factors: expected future cash flows, observable market
price or fair value of the collateral. Because essentially all of the Company's
impaired Non-PCD loans have been collateral-dependent, the amount of the
specific reserve historically has been determined by comparing the fair value of
the collateral securing the Non-PCD loan with the recorded investment in such
loan. In the future, the Company will continue to analyze impaired Non-PCD loans
on a loan-by-loan basis and may use an alternative measurement method to
determine the specific reserve, as appropriate and in accordance with applicable
accounting standards.
PCD loans are individually monitored on a quarterly basis to assess for changes
in expected cash flows subsequent to acquisition. If a deterioration in cash
flows is identified, an increase to the specific reserve for that loan is made.
PCD loans were recorded at their acquisition date fair values, which were based
on expected cash flows and considers estimates of expected future credit losses.
The Company's estimates of loan fair values at the acquisition date may be
adjusted for a period of up to one year as the Company continues to evaluate its
estimate of expected future cash flows at the acquisition date. If the Company
determines that losses arose after the acquisition date, the additional losses
will be reflected as a provision for credit losses. See "Critical Accounting
Policies" above for more information.
As described in the section captioned "Critical Accounting Policies" above, the
Company's determination of the allowance for credit losses involves a high
degree of judgment and complexity. The Company's analysis of qualitative, or
environmental, factors on pools of loans with common risk characteristics, in
combination with the quantitative historical lifetime loss information and
specific reserves, provides the Company with an estimate of lifetime losses. The
allowance must reflect changes in the balance of loans subject to the allowance
methodology, as well as the estimated lifetime losses associated with those
loans. The allowance for credit losses on loans as of March 31, 2022 totaled
$285.2 million or 1.58% of total loans, including acquired loans with discounts,
a decrease of $1.2 million or 0.4% compared to the allowance for credit losses
on loans totaling $286.4 million or 1.54% of total loans, including acquired
loans with discounts, as of December 31, 2021 . For further discussion on the
provision for credit losses, see "Results of Operations-Provision for Credit
Losses" above.
42
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The following tables present, as of and for the periods indicated, information
regarding the allowance for credit losses on loans differentiated between
originated loans and acquired loans. Reported net charge-offs may include those
from Non-PCD loans and PCD loans, but only if the total charge-off required is
greater than the remaining discount.
As of and for the Three
Months Ended
Originated Loans Acquired Loans Total
(Dollars in thousands)
Average loans outstanding $ 13,356,719 $ 4,629,297 $ 17,986,016
Gross loans outstanding at end of period $ 14,447,778 $ 3,619,746 $ 18,067,524
Allowance for credit losses on loans at
beginning of period $ 186,736 $ 99,644 $ 286,380
Provision for credit losses 3,984 (3,984 ) -
Charge-offs:
Commercial and industrial (453 ) (19 ) (472 ) Real estate and agriculture (686 ) (43 ) (729 ) Consumer and other (1,337 ) (70 ) (1,407 ) Recoveries: Commercial and industrial 370 88 458 Real estate and agriculture 278 403 681 Consumer and other 230 22 252 Net charge-offs(1) (1,598 ) 381 (1,217 ) Allowance for credit losses on loans at end of period $ 189,122 $ 96,041$ 285,163 Ratio of allowance to end of period loans 1.31 % 2.65 % 1.58 % Ratio of allowance to end of period loans, excluding Warehouse Purchase Program 1.44 % 2.65 % 1.71 % Ratio of net charge-offs to average loans (annualized) 0.05 % (0.03 %) 0.03 % Ratio of allowance to end of period nonperforming loans 1202.3 % 987.1 % 1120.0 % Ratio of allowance to end of period nonaccrual loans 1301.1 % 1328.4 % 1310.2 % As of and for the Three Months Ended March 31, 2021 Originated Loans Acquired Loans Total (Dollars in thousands) Average loans outstanding$ 13,966,961 $ 5,715,033 $ 19,681,994 Gross loans outstanding at end of period$ 14,250,069 $ 5,388,817 $ 19,638,886 Allowance for credit losses on loans at beginning of period $ 150,630$ 165,438 $ 316,068 Provision for credit losses 10,946 (10,946 ) -
Charge-offs:
Commercial and industrial (1,153 ) (601 ) (1,754 ) Real estate and agriculture (92 ) (6,589 ) (6,681 ) Consumer and other (754 ) (181 ) (935 )
Recoveries:
Commercial and industrial 134 36 170 Real estate and agriculture 17 - 17 Consumer and other 312 13 325 Net charge-offs (1) (1,536 ) (7,322 ) (8,858 ) Allowance for credit losses on loans at end of period $ 160,040$ 147,170 $ 307,210 Ratio of allowance to end of period loans 1.12 % 2.73 % 1.56 % Ratio of allowance to end of period loans, excluding Warehouse Purchase Program 1.34 % 2.73 % 1.77 % Ratio of net charge-offs to average loans (annualized) 0.04 % 0.51 % 0.18 % Ratio of allowance to end of period nonperforming loans 544.7 % 1054.5 % 708.9 % Ratio of allowance to end of period nonaccrual loans 546.2 % 1072.4 % 714.0 %
(1) There was no net charge-off activity on Warehouse Purchase Program loans
during the periods presented.
The Company had gross charge-offs on originated loans of$2.5 million during the three months endedMarch 31, 2022 . Partially offsetting these charge-offs were recoveries on originated loans of$878 thousand . Gross charge-offs on acquired loans were$132 thousand during the three months endedMarch 31, 2022 . Partially offsetting these charge-offs were recoveries on acquired loans 43 --------------------------------------------------------------------------------
of
The following table shows the allocation of the net charge-offs among various categories of loans as of the dates indicated.
March 31, 2022 March 31, 2021
Ratio of Net Ratio of Net
Charge-offs to Charge-offs to
Total Total
Average Loans Average Loans
Amount (Annualized) Amount (Annualized)
(Dollars in thousands)
Balance of net (charge-offs) recoveries
applicable to:
Commercial and industrial $ (14 ) 0.00 % $ (1,584 ) 0.03 %
Real estate:
Construction, land development and other
land loans (430 ) 0.01 % 5 0.00 %
1-4 family residential (including home
equity) (87 ) 0.00 % (47 ) 0.00 %
Commercial real estate (including
multi-family residential) 366 (0.01 %) (6,589 ) 0.14 %
Agriculture (includes farmland) 103 0.00 % (33 ) 0.00 %
Consumer and other (1,155 ) 0.03 % (610 ) 0.01 %
Total net charge-offs $ (1,217 ) 0.03 % $ (8,858 ) 0.18 %
The following tables show the allocation of the allowance for credit losses on
loans among various categories of loans disaggregated between originated loans,
re-underwritten acquired loans, Non-PCD loans and PCD loans at the dates
indicated. The allocation is made for analytical purposes and is not necessarily
indicative of the categories in which future losses may occur. The total
allowance is available to absorb losses from any loan category, regardless of
whether allocated to an originated loan or an acquired loan.
March 31, 2022
Acquired Loans
Re-Underwritten Total Percent of Loans to
Originated Loans Acquired Loans Non-PCD Loans PCD Loans Allowance Total Loans(1)
(Dollars in thousands)
Balance of allowance for credit losses
on loans applicable to:
Commercial and industrial $ 29,991 $ 31,403 $ 8,169 $ 6,740 $ 76,303 15.2 %
Real estate 148,009 11,164 18,733 16,572 194,478 79.6 %
Agriculture and agriculture real estate 6,810 940 141 12 7,903 3.7 %
Consumer and other 4,312 417 343 1,407 6,479 1.5 %
Total allowance for credit losses on
loans $ 189,122 $ 43,924 $ 27,386 $ 24,731 $ 285,163 100.0 %
December 31, 2021
Acquired Loans
Re-Underwritten Total Percent of Loans to
Originated Loans Acquired Loans Non-PCD Loans PCD Loans Allowance Total Loans(1)
(Dollars in thousands)
Balance of allowance for credit losses
on loans applicable to:
Commercial and industrial $ 32,977 $ 29,525 $ 10,944 $ 6,966 $ 80,412 16.1 %
Real estate 141,801 11,630 20,282 16,899 190,612 78.5 %
Agriculture and agriculture real estate 6,636 943 168 12 7,759 3.7 %
Consumer and other 5,322 471 397 1,407 7,597 1.7 %
Total allowance for credit losses on
loans $ 186,736 $ 42,569 $ 31,791 $ 25,284 $ 286,380 100.0 %
(1) Loans outstanding as of a percentage of total loans, excluding Warehouse
Purchase Program loans.
44
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The allowance for credit losses totaled $285.2 million at March 31, 2022 and
$286.4 million at December 31, 2021 . The allowance for credit losses totaled
1.58% of total loans at March 31, 2022 and 1.54% of total loans at December 31,
2021 .
At March 31, 2022 , $189.1 million of the allowance for credit losses was
attributable to originated loans, an increase of $2.4 million or 1.3% compared
with $186.7 million of the allowance at December 31, 2021 . At March 31, 2022 ,
$43.9 million of the allowance for credit losses was attributable to
re-underwritten acquired loans compared with $42.6 million of the allowance at
December 31, 2021 , an increase of $1.4 million or 3.2%. At March 31, 2022 , $27.4
million of the allowance for credit losses was attributable to Non-PCD loans
compared with $31.8 million of the allowance at December 31, 2021 , a decrease of
$4.4 million or 13.9%. At March 31, 2022 , $24.7 million of the allowance for
credit losses was attributable to PCD loans compared with $25.3 million of the
allowance at December 31, 2021 , a decrease of $553 thousand or 2.2%.
At
The Company believes that the allowance for credit losses on loans atMarch 31, 2022 is adequate to absorb expected lifetime losses that may be realized from the loan portfolio as of such date. Nevertheless, the Company could sustain losses in future periods which could be substantial in relation to the size of the allowance atMarch 31, 2022 .
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The allowance for credit losses on off-balance sheet credit exposures estimates expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, except when an obligation is unconditionally cancellable by the Company. The allowance is adjusted by provisions for credit losses charged to earnings that increase the allowance, or by provision releases returned to earnings that decrease the allowance. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is affected by historical analysis of utilization rates. The expected credit loss rates applied to the commitments expected to fund are affected by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. As ofMarch 31, 2022 andDecember 31, 2021 , the Company had$29.9 million in allowance for credit losses on off-balance sheet credit exposures. The allowance for credit losses on off-balance sheet credit exposures is a separate line item on the Company's consolidated balance sheet.
Securities
The carrying cost of securities totaled
The amortized cost and fair value of investment securities were as follows:
March 31, 2022
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
(Dollars in thousands)
Available for Sale
Collateralized mortgage obligations $ 432,627 $ 1,721 $ (26 ) $ 434,322
Mortgage-backed securities 26,650 453 (33 ) 27,070
Total $ 459,277 $ 2,174 $ (59 ) $ 461,392
Held to Maturity
States and political subdivisions $ 124,379 $ 3,022 $ (1,736 ) $ 125,665
Corporate debt securities 12,000 - - 12,000
Collateralized mortgage obligations 231,661 1 (3,801 ) 227,861
Mortgage-backed securities 13,968,695 9,315 (714,370 ) 13,263,640
Total $ 14,336,735 $ 12,338 $ (719,907 ) $ 13,629,166
45--------------------------------------------------------------------------------
December 31, 2021 Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
(Dollars in thousands)
Available for Sale
Collateralized mortgage obligations $ 483,761 $ 1,942 $ (32 ) $ 485,671
Mortgage-backed securities 28,881 550 (170 ) 29,261
Total $ 512,642 $ 2,492 $ (202 ) $ 514,932
Held to Maturity
States and political subdivisions $ 132,620 $ 5,968 $ (114 ) $ 138,474
Collateralized mortgage obligations 39,675 483 (78 ) 40,080
Mortgage-backed securities 12,131,674 87,967 (146,982 ) 12,072,659
Total $ 12,303,969 $ 94,418 $ (147,174 ) $ 12,251,213
The investment securities portfolio is measured for expected credit losses by
segregating the portfolio into two general segments and applying the appropriate
expected credit losses methodology. Investment securities classified as
available for sale or held to maturity are evaluated for expected credit losses
under FASB ASC 326, "Financial Instruments - Credit Losses."
Available for sale securities. For available for sale securities in an
unrealized loss position, the amount of the expected credit losses recognized in
earnings depends on whether an entity intends to sell the security or more
likely than not will be required to sell the security before recovery of its
amortized cost basis less any current-period credit loss. If an entity intends
to sell or more likely than not will be required to sell the security before
recovery of its amortized cost basis less any current-period credit loss, the
expected credit losses will be recognized in earnings equal to the entire
difference between the investment's amortized cost basis and its fair value at
the balance sheet date. If an entity does not intend to sell the security and it
is not more likely than not that the entity will be required to sell the
security before recovery of its amortized cost basis less any current-period
loss, the expected credit losses will be separated into the amount representing
the credit-related portion of the impairment loss ("credit loss") and the
noncredit portion of the impairment loss ("noncredit portion"). The amount of
the total expected credit losses related to the credit loss is determined based
on the difference between the present value of cash flows expected to be
collected and the amortized cost basis, and such difference is recognized in
earnings. The amount of the total expected credit losses related to the
noncredit portion is recognized in other comprehensive income, net of applicable
taxes. The previous amortized cost basis less the expected credit losses
recognized in earnings will become the new amortized cost basis of the
investment.
As of March 31, 2022 , management does not have the intent to sell any of the
securities classified as available for sale before a recovery of cost. In
addition, management believes it is more likely than not that the Company will
not be required to sell any of its investment securities before a recovery of
cost. The unrealized losses are largely due to changes in market interest rates
and spread relationships since the time the underlying securities were
purchased. The fair value is expected to recover as the securities approach
their maturity date or repricing date or if market yields for such investments
decline. Management does not believe any of the securities are impaired due to
reasons of credit quality. Accordingly, as of March 31, 2022 , management
believes that there is no potential for credit losses on available for sale
securities.
Held to maturity securities. The Company's held to maturity investments include
mortgage-related bonds issued by either the Government National Mortgage
Corporation ("Ginnie Mae"), Federal National Mortgage Association ("Fannie Mae")
or Federal Home Loan Mortgage Corporation ("Freddie Mac"). Ginnie Mae issued
securities are explicitly guaranteed by the U.S. government, while Fannie Mae
and Freddie Mac issued securities are fully guaranteed by those respective
United States government-sponsored agencies, and conditionally guaranteed by the
full faith and credit of the United States . The Company's held to maturity
securities also include taxable and tax-exempt municipal securities issued
primarily by school districts, utility districts and municipalities located in
Texas . The Company's investment in municipal securities is exposed to credit
risk. The securities are highly rated by major rating agencies and regularly
reviewed by management. A significant portion are guaranteed or insured by
either the Texas Permanent School Fund , Assured Guaranty or Build America
Mutual. As of March 31, 2022 , the Company's municipal securities represent 0.8%
of the securities portfolio. Management has the ability and intent to hold the
securities classified as held to maturity until they mature, at which time the
Company will receive full value for the securities. Accordingly, as of March 31,
2022 , management believes that there is no potential for material credit losses
on held to maturity securities.
46
--------------------------------------------------------------------------------Deposits
Total deposits were$31.07 billion atMarch 31, 2022 compared with$30.77 billion atDecember 31, 2021 , an increase of$296.5 million or 1.0%. AtMarch 31, 2022 , noninterest-bearing deposits totaled$10.78 billion , an increase of$26.6 million or 0.2% compared with$10.75 billion atDecember 31, 2021 . Interest-bearing deposits totaled$20.29 billion atMarch 31, 2022 compared with$20.02 billion atDecember 31, 2021 , an increase of$269.9 million or 1.3%. Average deposits for the three months endedMarch 31, 2022 were$30.92 billion , an increase of$3.15 billion or 11.3%, compared with$27.77 billion for the three months endedMarch 31, 2021 . The ratio of average interest-bearing deposits to total average deposits was 65.6% and 66.8% during the first three months of 2022 and 2021, respectively.
The following table summarizes the daily average balances and weighted average rates paid on deposits for the periods indicated below:
Three Months Ended March 31,
2022 2021
Average Average
Average Balance Rate (1) Average Balance Rate (1)
(Dollars in thousands)
Interest-bearing demand deposits $ 6,775,114 0.15 % $ 6,112,469 0.39 %
Regular savings 3,445,108 0.11 % 2,939,970 0.11 %
Money market savings 7,425,353 0.17 % 6,480,094 0.31 %
Certificates, IRAs and other time deposits 2,637,529 0.35 % 3,031,621 0.76 %
Total interest-bearing deposits 20,283,104 0.18 % 18,564,154 0.38 %
Noninterest-bearing demand deposits 10,636,624 9,206,791
Total deposits $ 30,919,728 0.11 % $ 27,770,945 0.25 %
(1) Annualized and based on average balances on an actual 365-day basis for the
three months ended
Other Borrowings
The following table presents the Company's borrowings as of the dates indicated:
March 31, 2022 December 31, 2021
(Dollars in thousands)
Securities sold under repurchase agreements $ 440,891 $ 448,099
Total $ 440,891 $ 448,099
FHLB advances and long-term notes payable- The Company has an available line of
credit with the FHLB of Dallas , which allows the Company to borrow on a
collateralized basis. The Company's FHLB advances are typically considered
short-term borrowings and are used to manage liquidity as needed. Maturing
advances are replaced by drawing on available cash, making additional borrowings
or through increased customer deposits. At March 31, 2022 , the Company had total
funds of $14.26 billion available under this line. At March 31, 2022 and
December 31, 2021 , the Company had no FHLB advances or long-term notes payable
balances.
Securities sold under repurchase agreements- At March 31, 2022 , the Company had
$440.9 million in securities sold under repurchase agreements with banking
customers compared with $448.1 million at December 31, 2021 , a decrease of $7.2
million or 1.6%. Repurchase agreements are generally settled on the following
business day; however, approximately $5.5 million of the repurchase agreements
outstanding at March 31, 2022 have maturity dates ranging from 6 to 24 months.
All securities sold under repurchase agreements are collateralized by certain
pledged securities.
LIBOR Transition
As of March 31, 2022 and December 31, 2021 , LIBOR was used as an index rate for
the Company's interest-rate swaps and approximately 6.7% and 11.4% of the
Company's loan portfolio, respectively. On September 30, 2021 , the Company began
transitioning away from LIBOR to Secured Overnight Financing Rate ("SOFR") or
other alternative variable rate indexes for its interest-rate swaps and loans
historically using LIBOR as an index.
47
--------------------------------------------------------------------------------Liquidity
Liquidity involves the Company's ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate the Company on an ongoing basis and manage unexpected events. The Company's largest source of funds is deposits and its largest use of funds is loans. The Company does not expect a change in the source or use of its funds in the future. Although access to purchased funds from correspondent banks is available and has been utilized on occasion to take advantage of investment opportunities, the Company does not generally rely on this external funding source. The cash and federal funds sold position, supplemented by amortizing investment and loan portfolios, has generally created an adequate liquidity position. As ofMarch 31, 2022 , the Company had outstanding$4.75 billion in commitments to extend credit,$95.3 million in commitments associated with outstanding standby letters of credit and$1.50 billion in commitments associated with unused capacity on Warehouse Purchase Program loans. Since commitments associated with letters of credit, unused capacity on Warehouse Purchase Program loans and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.
The Company has no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.
Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. As ofMarch 31, 2022 , the Company had cash and cash equivalents of$1.56 billion compared with$2.55 billion atDecember 31, 2021 , a decrease of$987.4 million or 38.8%. The decrease was primarily due to the purchases of investment securities of$4.13 billion and payment of cash dividends of$47.9 million , partially offset by maturities of investment securities of$2.14 billion , a decrease in total loans of$546.5 million , an increase in deposits of$296.6 million and net cash provided by operating activities of$235.7 million .
Share Repurchases
OnJanuary 18, 2022 , Bancshares announced a stock repurchase program that authorized the repurchase of up to 5%, or approximately 4.6 million shares, of its outstanding common stock over a one-year period expiring onJanuary 18, 2023 , at the discretion of management. Under the stock repurchase program, Bancshares may repurchase shares from time to time at prevailing market prices, through open-market purchases or privately negotiated transactions, depending upon market conditions. Repurchases under this program may also be made in transactions outside the safe harbor during a pending merger, acquisition or similar transaction. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. Shares of stock repurchased are held as authorized but unissued shares. Bancshares is not obligated to purchase any particular number of shares, and Bancshares may suspend, modify or terminate the program at any time and for any reason without prior notice. No repurchases were made during the first quarter of 2022.
Leases
The Company's leases relate primarily to operating leases for office space and banking centers. The Company determines if an arrangement is a lease or contains a lease at inception. The Company's leases have remaining lease terms of 1 to 17 years, which may include the option to extend the lease when it is reasonably certain for the Company to exercise that option. Operating lease right-of-use (ROU) assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses its incremental collateralized borrowing rate to determine the present value of lease payments. Short-term leases and leases with variable lease costs are immaterial, and the Company has one sublease arrangement. Sublease income for the three months endedMarch 31, 2022 and 2021, was$798 thousand and$450 thousand , respectively. As ofMarch 31, 2022 , operating lease ROU assets and lease liabilities were approximately$46.7 million . ROU assets and lease liabilities were classified as other assets and other liabilities, respectively. As ofMarch 31, 2022 , the weighted average of remaining lease terms of the Company's operating leases was 5.9 years. The weighted average discount rate used to determine the lease liabilities as ofMarch 31, 2022 for the Company's operating leases was 2.16%. Cash paid for the Company's operating leases for the three months endedMarch 31, 2022 and 2021 was$2.8 million and$3.5 million , respectively. The Company obtained$397 thousand in ROU assets in exchange for lease liabilities for one operating lease during the three months endedMarch 31, 2022 . 48 --------------------------------------------------------------------------------
The Company's future undiscounted cash payments associated with its operating
leases as of
Remaining 2022$ 8,036 2023 9,992 2024 9,189 2025 8,641 2026 7,620 2027 4,759 Thereafter 6,331
Total undiscounted lease payments
Off-Balance Sheet Items
In the normal course of business, the Company enters into various transactions that, in accordance with GAAP, are not included in its consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company's commitments associated with outstanding standby letters of credit, unused capacity of Warehouse Purchase Program loans and commitments to extend credit expiring by period as ofMarch 31, 2022 are summarized below. Since commitments associated with letters of credit, unused capacity of Warehouse Purchase Program loans and commitments to extend credit may expire unused, the amounts shown may not necessarily reflect the actual future cash funding requirements. More than 1 3 years or year but less more but less than 1 year or less than 3 years 5 years 5 years or more Total (Dollars in thousands) Standby letters of credit $ 88,107 $ 4,262 $ 2,926 $ -$ 95,295 Unused capacity on Warehouse Purchase Program loans 1,497,459 - - - 1,497,459 Commitments to extend credit 1,642,851 1,437,549 182,033 1,482,762 4,745,195 Total$ 3,228,417 $ 1,441,811 $ 184,959$ 1,482,762 $ 6,337,949 Allowance for Credit Losses on Off-balance Sheet Credit Exposures. The Company records an allowance for credit losses on off-balance sheet credit exposure that is adjusted through a charge to provision for credit losses on the Company's consolidated statement of income. AtMarch 31, 2022 andDecember 31, 2021 , this allowance, reported as a separate line item on the Company's consolidated balance sheet, totaled$29.9 million .
Capital Resources
Total shareholders' equity was$6.50 billion atMarch 31, 2022 compared with$6.43 billion atDecember 31, 2021 , an increase of$77.2 million or 1.2%. The increase was primarily the result of net income of$122.3 million partially offset by dividend payments of$47.9 million . The Basel III Capital Rules adopted by the federal regulatory authorities in 2013 substantially revised the risk-based capital requirements applicable to the Company and the Bank. The Basel III Capital Rules became effective for the Company onJanuary 1, 2015 , subject to a phase-in period for certain provisions. The Basel III Capital Rules require a capital conservation buffer with respect to each of the Common Equity Tier 1, Tier 1 risk-based and total risk-based capital ratios, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. The capital conservation buffer of 2.5% was fully phased-in onJanuary 1, 2019 . A financial institution with a conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers. In response to the COVID-19 pandemic, inMarch 2020 the joint federal bank regulatory agencies issued an interim final rule that allows banking organizations that implement CECL in 2020 to mitigate the effects of the CECL accounting standard in their regulatory capital for two years. This two-year delay is in addition to the three-year transition period that the agencies had already made available. The Company adopted the option provided by the interim final rule, which delayed the effects of CECL on its regulatory capital through 2021, after which the effects will be phased-in over a three-year period fromJanuary 1, 2022 throughDecember 31, 2024 . Under the interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period 49 -------------------------------------------------------------------------------- include both the initial impact of the Company's adoption of CECL atJanuary 1, 2020 and 25% of subsequent changes in the Company's allowance for credit losses during each quarter of the two-year period endingDecember 31, 2021 . OnJanuary 1, 2022 , the cumulative amount of the transition adjustments began being phased in over the three-year transition period, with 75% to be recognized in 2022, 50% to be recognized in 2023, and 25% to be recognized in 2024. Financial institutions are categorized by theFDIC based on minimum Common Equity Tier 1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios. As ofMarch 31, 2022 , the Bank's capital ratios were above the levels required for the Bank to be designated as "well capitalized."
The following table provides a comparison of the Company's and the Bank's
risk-weighted and leverage capital ratios to the minimum and well-capitalized
regulatory standards as of
To Be Categorized As
Minimum Required Minimum Required Plus Well Capitalized Under
For Capital Capital Prompt Corrective Action Actual Ratio as of
Adequacy Purposes Conservation Buffer Provisions March 31, 2022
The Company
CET1 capital (to risk weighted assets) 4.50 % 7.00 % N/A 15.32 %
Tier 1 capital (to risk weighted assets) 6.00 % 8.50 % N/A 15.32 %
Total capital (to risk weighted assets) 8.00 % 10.50 % N/A 15.99 %
Tier 1 capital (to average assets) 4.00 % (1) 4.00 % N/A 9.44 %
The Bank CET1 capital (to risk weighted assets) 4.50 % 7.00 % 6.50 % 15.26 % Tier 1 capital (to risk weighted assets) 6.00 % 8.50 % 8.00 % 15.26 % Total capital (to risk weighted assets) 8.00 % 10.50 % 10.00 % 15.92 % Tier 1 capital (to average assets) 4.00 % (2) 4.00 % 5.00 % 9.40 %
(1) The
ratio above the required minimum.
(2) The
minimum.
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