Published: 2023-11-06 00:00:00 ET

 

2

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2023

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

Commission file number 0-07674

 

First Financial Bankshares, Inc.

(Exact name of registrant as specified in its charter)

 

Texas		75-0944023
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
400 Pine Street, Abilene, Texas		79601
(Address of principal executive offices)		(Zip Code)

 

(325) 627-7155

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.01 par value		FFIN		The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2of the Exchange Act.

 

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2of the Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class		Outstanding at November 6, 2023
Common Stock, $0.01 par value per share		142,709,314

 

 

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TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item					Page
1.		Financial Statements			3
		Consolidated Balance Sheets – Unaudited			4
		Consolidated Statements of Earnings – Unaudited			5
		Consolidated Statements of Comprehensive Earnings (Loss) – Unaudited			6
		Consolidated Statements of Shareholders’ Equity – Unaudited			7
		Consolidated Statements of Cash Flows – Unaudited			9
		Notes to Consolidated Financial Statements – Unaudited			10
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			41
3.		Quantitative and Qualitative Disclosures About Market Risk			56
4.		Controls and Procedures			57
PART II - OTHER INFORMATION
1.		Legal Proceedings			58
1A.		Risk Factors			58
2.		Unregistered Sales of Equity Securities and Use of Proceeds			58
3.		Defaults Upon Senior Securities			58
4.		Mine Safety Disclosures			58
5.		Other Information			58
6.		Exhibits			59
		Signatures			60

 

 

 

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

The consolidated balance sheets of First Financial Bankshares, Inc. and Subsidiaries (the “Company” or “we”) at September 30, 2023 and 2022 (unaudited), and December 31, 2022, and the consolidated statements of earnings, comprehensive earnings (loss) and shareholders’ equity for the three and nine-months ended September 30, 2023 and 2022 (unaudited), and the consolidated statements of cash flows for the nine-months ended September 30, 2023 and 2022 (unaudited) and notes to consolidated financial statements (unaudited), follow on pages 4 through 40.

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

		September 30,								December 31,
		2023				2022				2022
		(Unaudited)
ASSETS
CASH AND DUE FROM BANKS		$	208,277			$	227,298			$	293,286
INTEREST-BEARING DEMAND DEPOSITS IN BANKS			180,008				138,484				37,392
Total cash and cash equivalents			388,285				365,782				330,678
SECURITIES AVAILABLE-FOR-SALE, at fair value (amortized cost of    these securities was $5,463,186, $6,546,471 and $6,152,348 as of     September 30, 2023 and 2022, and December 31, 2022, respectively)			4,652,537				5,745,443				5,474,359
LOANS:
Held-for-investment, excluding PPP loans			6,994,574				6,255,286				6,441,699
PPP loans			122				202				169
Total loans held-for-investment			6,994,696				6,255,488				6,441,868
Less—allowance for credit losses			(89,714	)			(74,108	)			(75,834	)
Net loans held-for-investment			6,904,982				6,181,380				6,366,034
Held-for-sale ($11,908, $15,892 and $10,497 at fair value at       September 30, 2023 and 2022, and December 31, 2022, respectively)			12,229				18,815				11,965
BANK PREMISES AND EQUIPMENT, net			152,936				152,646				152,973
INTANGIBLE ASSETS, net			314,850				315,833				315,534
OTHER ASSETS			351,599				330,445				322,523
Total assets		$	12,777,418			$	13,110,344			$	12,974,066
LIABILITIES AND SHAREHOLDERS’ EQUITY
NONINTEREST-BEARING DEPOSITS		$	3,477,553			$	4,200,792			$	4,061,788
INTEREST-BEARING DEPOSITS			7,238,970				6,941,326				6,943,719
Total deposits			10,716,523				11,142,118				11,005,507
DIVIDENDS PAYABLE			25,730				—				24,278
BORROWINGS			751,544				774,581				642,507
TRADE DATE PAYABLE			2,500				—				—
OTHER LIABILITIES			41,011				61,030				36,037
Total liabilities			11,537,308				11,977,729				11,708,329
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
COMMON STOCK — ($0.01 par value, authorized 200,000,000 shares;    142,677,069, 142,628,163 and 142,657,871 shares issued at    September 30, 2023 and 2022, and December 31, 2022, respectively)			1,427				1,426				1,427
CAPITAL SURPLUS			679,374				676,067				677,593
RETAINED EARNINGS			1,199,243				1,087,543				1,121,945
TREASURY STOCK (shares at cost: 926,723, 933,152 and 929,210 at    September 30, 2023 and 2022, and December 31, 2022, respectively)			(11,658	)			(10,907	)			(11,035	)
DEFERRED COMPENSATION			11,658				10,907				11,035
ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSS), net			(639,934	)			(632,421	)			(535,228	)
Total shareholders’ equity			1,240,110				1,132,615				1,265,737
Total liabilities and shareholders’ equity		$	12,777,418			$	13,110,344			$	12,974,066

 

See notes to consolidated financial statements.

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS—(UNAUDITED)

(Dollars in thousands, except per share amounts)

 

		Three-Months Ended September 30,								Nine-Months Ended September 30,
		2023				2022				2023				2022
INTEREST INCOME:
Interest and fees on loans		$	106,377			$	77,523			$	293,453			$	210,180
Interest on investment securities:
Taxable			19,425				20,799				60,240				57,772
Exempt from federal income tax			8,757				12,974				28,145				41,686
Interest on federal funds sold and interest-bearing demand    deposits in banks			792				1,432				4,026				2,080
Total interest income			135,351				112,728				385,864				311,718
INTEREST EXPENSE:
Interest on deposits			36,165				8,788				85,606				13,123
Interest on borrowings			5,037				784				13,957				1,217
Total interest expense			41,202				9,572				99,563				14,340
Net interest income			94,149				103,156				286,301				297,378
PROVISION FOR CREDIT LOSSES			2,276				3,221				10,631				13,353
Net interest income after provision for credit losses			91,873				99,935				275,670				284,025
NONINTEREST INCOME:
Trust fees			10,050				10,314				29,778				29,873
Service charges on deposit accounts			6,509				6,399				18,855				18,143
Debit card fees			5,041				5,587				16,697				24,381
Credit card fees			694				651				2,014				1,953
Gain on sale and fees on mortgage loans			3,442				4,070				9,950				16,131
Net gain (loss) on sale of available-for-sale securities			(972	)			334				(914	)			2,013
Net gain (loss) on sale of foreclosed assets			(10	)			349				23				1,451
Net gain on sale of other assets			696				526				1,626				522
Interest on loan recoveries			698				664				1,519				2,596
Other			1,922				2,049				6,477				6,078
Total noninterest income			28,070				30,943				86,025				103,141
NONINTEREST EXPENSE:
Salaries, commissions and employee benefits			32,935				33,892				96,162				101,177
Net occupancy expense			3,565				3,440				10,418				9,957
Equipment expense			2,200				2,396				6,525				6,999
FDIC insurance premiums			1,573				917				4,644				2,690
Debit card expense			3,284				3,013				9,704				9,177
Professional and service fees			2,425				2,219				7,187				6,635
Printing, stationery and supplies			512				600				1,962				1,641
Operational and other losses			959				869				2,746				2,247
Software amortization and expense			2,441				2,564				7,271				7,543
Amortization of intangible assets			228				306				684				946
Other			9,417				9,226				27,104				27,988
Total noninterest expense			59,539				59,442				174,407				177,000
EARNINGS BEFORE INCOME TAXES			60,404				71,436				187,288				210,166
INCOME TAX EXPENSE			10,848				12,095				34,291				34,359
NET EARNINGS		$	49,556			$	59,341			$	152,997			$	175,807
NET EARNINGS PER SHARE, BASIC		$	0.35			$	0.42			$	1.07			$	1.23
NET EARNINGS PER SHARE, DILUTED		$	0.35			$	0.41			$	1.07			$	1.23
DIVIDENDS PER SHARE		$	0.18			$	0.17			$	0.53			$	0.49

 

See notes to consolidated financial statements.

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS) —(UNAUDITED)

(Dollars in thousands)

 

		Three-Months Ended September 30,								Nine-Months Ended September 30,
		2023				2022				2023				2022
NET EARNINGS		$	49,556			$	59,341			$	152,997			$	175,807
OTHER ITEMS OF COMPREHENSIVE EARNINGS (LOSS):
Change in unrealized gain (loss) on investment securities available-for-    sale, before income taxes			(190,407	)			(293,219	)			(133,453	)			(924,157	)
Reclassification adjustment for realized (gains) losses on investment    securities included in net earnings, before income taxes			972				(334	)			914				(2,013	)
Total other items of comprehensive earnings (loss)			(189,435	)			(293,553	)			(132,539	)			(926,170	)
Income tax benefit (expense) related to:
Change in unrealized gain (loss) on investment securities available-for-    sale			39,985				61,576				28,025				194,073
Reclassification adjustment for realized gains (losses) on investment    securities included in net earnings			(204	)			70				(192	)			423
Total income tax benefit (expense)			39,781				61,646				27,833				194,496
COMPREHENSIVE EARNINGS (LOSS)		$	(100,098	)		$	(172,566	)		$	48,291			$	(555,867	)

 

See notes to consolidated financial statements.

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars in thousands, except per share amounts)

 

		Common Stock								Capital				Retained				Treasury Stock								Deferred				Accumulated Other Comprehensive Earnings				Total Shareholders’
		Shares				Amount				Surplus				Earnings				Shares				Amounts				Compensation				(Loss)				Equity
Balances at June 30, 2022 (unaudited)			142,586,601			$	1,426			$	675,653			$	1,052,453				(937,924	)		$	(10,656	)		$	10,656			$	(400,514	)		$	1,329,018
Net earnings (unaudited)			—				—				—				59,341				—				—				—				—				59,341
Stock option exercises/   stock unit conversions/   restricted stock activity    (unaudited)			94,134				—				1,628				—				—				—				—				—				1,628
Cash dividends declared, $0.17    per share (unaudited)			—				—				—				(24,251	)			—				—				—				—				(24,251	)
Change in unrealized gain (loss)    in investment securities    available-for-sale, net of related    income taxes (unaudited)			—				—				—				—				—				—				—				(231,907	)			(231,907	)
Shares purchased in connection    with directors’ deferred    compensation plan, net    (unaudited)			—				—				—				—				4,772				(251	)			251				—				—
Stock-based compensation expense    (unaudited)			—				—				830				—				—				—				—				—				359
Shares repurchased under stock   repurchase authorization   (unaudited)			(52,572	)			—				(2,044	)			—				—				—				—				—				(2,044	)
Balances at September 30, 2022 (unaudited)			142,628,163			$	1,426			$	676,067			$	1,087,543				(933,152	)		$	(10,907	)		$	10,907			$	(632,421	)		$	1,132,615
Balances at June 30, 2023 (unaudited)			142,741,196			$	1,427			$	680,676			$	1,175,410				(927,608	)		$	(11,466	)		$	11,466			$	(490,280	)		$	1,367,233
Net earnings (unaudited)			—				—				—				49,556				—				—				—				—				49,556
Stock option exercises/   stock unit conversions/   restricted stock activity    (unaudited)			37,210				1				383				—				—				—				—				—				384
Cash dividends declared, $0.18    per share (unaudited)			—				—				—				(25,723	)			—				—				—				—				(25,723	)
Change in unrealized gain (loss)    in investment securities    available-for-sale, net of related    income taxes (unaudited)			—				—				—				—				—				—				—				(149,654	)			(149,654	)
Shares purchased in connection    with directors’ deferred    compensation plan, net    (unaudited)			—				—				—				—				885				(192	)			192				—				—
Stock-based compensation expense    (unaudited)			—				—				1,049																								1,049
Shares repurchased under stock   repurchase authorization   (unaudited)			(101,337	)			(1	)			(2,734	)																							(2,735	)
Balances at September 30, 2023 (unaudited)			142,677,069			$	1,427			$	679,374			$	1,199,243				(926,723	)		$	(11,658	)		$	11,658			$	(639,934	)		$	1,240,110

 

See notes to consolidated financial statements.

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars in thousands, except per share amounts)

 

		Common Stock								Capital				Retained				Treasury Stock								Deferred				Accumulated Other Comprehensive Earnings				Total Shareholders’
		Shares				Amount				Surplus				Earnings				Shares				Amounts				Compensation				(Loss)				Equity
Balances at December 31, 2021			142,532,116			$	1,425			$	676,871			$	981,675				(936,897	)		$	(10,090	)		$	10,090			$	99,253			$	1,759,224
Net earnings (unaudited)			—				—				—				175,807				—				—				—				—				175,807
Stock option exercises/   stock unit conversions/   restricted stock activity    (unaudited)			340,606				3				5,971				—				—				—				—				—				5,974
Cash dividends declared,    $0.49 per share (unaudited)			—				—				—				(69,939	)			—				—				—				—				(69,939	)
Change in unrealized gain    (loss) in investment    securities available-for-sale,    net of related income taxes    (unaudited)			—				—				—				—				—				—				—				(731,674	)			(731,674	)
Shares purchased in    connection with directors’    deferred compensation    plan, net (unaudited)			—				—				—				—				3,745				(817	)			817				—				—
Stock-based compensation expense    (unaudited)			—				—				2,672				—				—				—				—				—				2,672
Shares repurchased under    stock repurchase    authorization (unaudited)			(244,559	)			(2	)			(9,447	)			—				—				—				—				—				(9,449	)
Balances at September 30, 2022 (unaudited)			142,628,163			$	1,426			$	676,067			$	1,087,543				(933,152	)		$	(10,907	)		$	10,907			$	(632,421	)		$	1,132,615
Balances at December 31, 2022			142,657,871			$	1,427			$	677,593			$	1,121,945				(929,210	)		$	(11,035	)		$	11,035			$	(535,228	)		$	1,265,737
Net earnings (unaudited)			—				—				—				152,997				—				—				—				—				152,997
Stock option exercises/   stock unit conversions/   restricted stock activity    (unaudited)			120,535				1				1,482				—				—				—				—				—				1,483
Cash dividends declared,    $0.53 per share (unaudited)			—				—				—				(75,699	)			—				—				—				—				(75,699	)
Change in unrealized gain    (loss) in investment    securities available-for-sale,    net of related income taxes    (unaudited)			—				—				—				—				—				—				—				(104,706	)			(104,706	)
Shares purchased in    connection with directors’    deferred compensation    plan, net (unaudited)			—				—				—				—				2,487				(623	)			623				—				—
Stock-based compensation expense    (unaudited)			—				—				3,033				—				—				—				—				—				3,033
Shares repurchased under    stock repurchase    authorization (unaudited)			(101,337	)			(1	)			(2,734	)			—				—				—				—				—				(2,735	)
Balances at September 30, 2023 (unaudited)			142,677,069			$	1,427			$	679,374			$	1,199,243				(926,723	)		$	(11,658	)		$	11,658			$	(639,934	)		$	1,240,110

 

See notes to consolidated financial statements.

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS—(UNAUDITED)

(Dollars in thousands)

 

		Nine-Months Ended September 30,
		2023				2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	152,997			$	175,807
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			9,290				9,589
Provision for credit losses			10,631				13,353
Securities premium amortization, net			40,376				55,355
Discount accretion on purchased loans			—				(1,119	)
Gain on sale of securities and other assets, net			(735	)			(3,986	)
Stock-based compensation			3,033				2,672
Net tax benefit from stock-based compensation			269				353
Deferred federal income tax benefit			1,789				—
Change in loans held-for-sale			(312	)			17,967
Change in other assets			(371	)			11,827
Change in other liabilities			9,126				(27,412	)
Total adjustments			73,096				78,599
Net cash provided by operating activities			226,093				254,406
CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities:
Sales			320,419				205,444
Maturities			333,273				2,773,665
Purchases			(3,322	)			(3,131,413	)
Net increase in loans held-for-investment			(553,762	)			(862,636	)
Purchases of bank premises, equipment and software			(13,386	)			(11,970	)
Proceeds from sale of bank premises and equipment and other assets			3,740				1,186
Net cash provided by (used in) investing activities			86,962				(1,025,724	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits			(584,235	)			420,562
Net increase in interest-bearing deposits			295,250				155,068
Net change in borrowings			109,036				103,429
Common stock transactions:
Proceeds from stock option exercises/stock unit conversions/restricted stock activity			1,483				5,974
Dividends paid			(74,247	)			(67,072	)
Repurchases of stock			(2,735	)			(9,449	)
Net cash provided by (used in) financing activities			(255,448	)			608,512
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			57,607				(162,806	)
CASH AND CASH EQUIVALENTS, beginning of period			330,678				528,588
CASH AND CASH EQUIVALENTS, end of period		$	388,285			$	365,782
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS:
Interest paid		$	87,127			$	14,067
Federal income taxes paid			35,529				33,050
Investment securities purchased not settled			2,500				—
Transfer of loans to other real estate			190				—

 

See notes to consolidated financial statements.

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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,” “could,” “may,” or “would” 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 ended December 31, 2022, under the heading “Risk Factors,” and the following:

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In addition, financial markets and global supply chains may continue to be adversely affected by the current or anticipated impact of military conflict, including the current Russian invasion of Ukraine and the conflict in the Middle East, terrorism or other geopolitical events.

 

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 and fees on deposit accounts. Our primary source of funding for our loans and investments are deposits held by our bank subsidiary, First Financial Bank, N.A. Our largest expenses are 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 2022 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 requires 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 million common shares through July 31, 2023. On July 25, 2023, the Company's Board of Directors renewed the prior authorization through July 31, 2024.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. Under the prior authorization, 244,559 shares were repurchased and retired (all during the months of June and July 2022) at an average price of $38.61 per share. Under the current authorization, the Company has repurchased and retired 101,337 shares (all during September 2023) at an average price of $26.99 per share.

 

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Results of Operations

Performance Summary. Net earnings for the third quarter of 2023 were $49.56 million compared to earnings of $59.34 million for the third quarter of 2022. Diluted earnings per share was $0.35 for the third quarter of 2023 and $0.41 for the third quarter of 2022.

The return on average assets was 1.53% for the third quarter of 2023, as compared to 1.76% for the third quarter of 2022. The return on average equity was 14.51% for the third quarter of 2023 as compared to 17.31% for the third quarter of 2022.

Net earnings for the nine-months ended September 30, 2023 were $153.00 million compared to earnings of $175.81 million for the same period in 2022. Diluted earnings per share was $1.07 for the nine-months ended September 30, 2023, as compared to $1.23 for the same period in 2022.

The return on average assets was 1.59% for the nine-months ended September 30, 2023, as compared to 1.77% for the same period a year ago. The return on average equity was 15.22% for the nine-months ended September 30, 2023, as compared to 15.88% for the same period in 2022.

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 $96.97 million for the third quarter of 2023, as compared to $106.96 million for the same period last year. The decrease in 2023 tax equivalent net interest income compared to 2022 was largely attributable to the increases in the rates paid on deposits and borrowings and a change in the mix of interest earning assets primarily derived from a decrease in taxable and tax-exempt investment securities offset by an increase in average loans. Average earning assets were $11.96 billion for the third quarter of 2023, as compared to $12.54 billion during the third quarter of 2022. The decrease of $578.99 million in average earning assets in 2023 when compared to 2022 was primarily a result of (i) a decrease in taxable investment securities of $609.82 million, (ii) a decrease in tax-exempt securities of $586.17 million, (iii) a decrease in short-term investments of $194.42 million, offset by (iv) the increase of average loans of $811.42 million, when compared to the three months ended September 30, 2022 average balances. Average interest-bearing liabilities were $7.88 billion for the third quarter of 2023, as compared to $7.77 billion in the same period in 2022. The yield on earning assets increased 89 basis points while the rate paid on interest-bearing liabilities increased 158 basis points for the third quarter of 2023 compared to the third quarter of 2022.

Tax-equivalent net interest income was $295.20 million for the nine-months ended September 30, 2023, as compared to $309.05 million for the same period last year. The decrease in 2023 tax equivalent net interest income compared to 2022 was largely attributable to the increases in the rates paid on deposits and borrowings and a change in the mix of interest earning assets primarily derived from a decrease in taxable and tax-exempt investment securities offset by an increase in average loans. Average earning assets were $12.03 billion for the nine-months ended September 30, 2023, as compared to $12.51 billion during same period last year. The decrease of $485.85 million in average earning assets in 2023 when compared to 2022 was primarily a result of (i) a decrease in tax-exempt securities of $722.51 million, (ii) the decrease of taxable securities of $560.81 million, (iii) a decrease in short-term investments of $130.68 million, offset by (iv) the increase of average loans of $928.16 million, when compared to the nine-months ended September 30, 2022 average balances. Average interest-bearing liabilities were $7.78 billion for the nine-months ended September 30, 2023, as compared to $7.74 billion for the nine-months ended September 30, 2022, respectively. The yield on earning assets increased 93 basis points while the rate paid on interest-bearing liabilities increased 146 basis points for the nine-months ended September 30, 2023 compared to the nine-months ended September 30, 2022.

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, 2023 Compared to Three-Months Ended September 30, 2022												Nine-Months Ended September 30, 2023 Compared to Nine-Months Ended September 30, 2022
		Change Attributable to								Total				Change Attributable to								Total
		Volume				Rate				Change				Volume				Rate				Change
Short-term investments		$	(1,104	)		$	464			$	(640	)		$	(1,131	)		$	3,077			$	1,946
Taxable investment securities			(3,140	)			1,766				(1,374	)			(7,857	)			10,325				2,468
Tax-exempt investment securities (1)			(4,447	)			(891	)			(5,338	)			(15,890	)			(887	)			(16,777	)
Loans (1) (2)			10,389				18,603				28,992				33,987				49,754				83,741
Interest income			1,698				19,942				21,640				9,109				62,269				71,378
Interest-bearing deposits			320				27,058				27,378				267				72,215				72,482
Short-term borrowings			(150	)			4,403				4,253				(170	)			12,911				12,741
Interest expense			170				31,461				31,631				97				85,126				85,223
Net interest income		$	1,528			$	(11,519	)		$	(9,991	)		$	9,012			$	(22,857	)		$	(13,845	)

 

 

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The net interest margin, on a tax equivalent basis, was 3.22% for the third quarter of 2023, a decrease of 16 basis point from the same period in 2022. The net interest margin, on a tax equivalent basis, was 3.28% for the first nine-months of 2023, a decrease of two basis points from the same period in 2022. We continued to experience downward pressure on our net interest margin in 2023 compared to 2022 primarily due to (i) the effects of the Federal Reserve's accelerated rate of raising interest rates in 2022 and 2023, which was preceded by the extended period of historically low levels of short-term interest rates leading up to the first quarter of 2022, and (ii) the shift in the mix of interest-earning assets and interest-bearing deposits. The Federal Reserve began increasing interest rates by raising rates 25 basis points in March 2022, 50 basis points in May 2022, and 75 basis points in June, July, September and November 2022, respectively, 50 basis points in December 2022, and 25 basis points in February, March, May, and July 2023, respectively, resulting in a target rate range of 5.25% to 5.50% at September 30, 2023.

Loan rates on variable loans have increased as the majority of such loans are indexed to the applicable prime rate (currently 8.50% at September 30, 2023), 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 49).

During 2022, we increased rates on each of the primary depository products in response to the increasing federal funds rate. Additionally, we have approximately $883 million 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 $1.48 billion and $1.45 billion for the nine-months ended September 30, 2023 and 2022, respectively, with an average rate paid of 2.95% and 1.50%, for the respective nine-months 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,
		2023												2022
		Average Balance				Income/ Expense				Yield/ Rate				Average Balance				Income/ Expense				Yield/ Rate
Assets
Short-term investments (1)		$	57,614			$	792				5.45	%		$	252,036			$	1,432				2.25	%
Taxable investment securities (2)			3,429,290				19,425				2.27				4,039,107				20,799				2.06
Tax-exempt investment securities (2)(3)			1,578,660				11,085				2.81				2,164,829				16,423				3.03
Loans (3)(4)			6,894,064				106,872				6.15				6,082,649				77,880				5.08
Total earning assets			11,959,628			$	138,174				4.58	%			12,538,621			$	116,534				3.69	%
Cash and due from banks			227,156												227,206
Bank premises and equipment, net			151,867												150,455
Other assets			243,386												213,094
Goodwill and other intangible assets, net			314,953												315,962
Allowance for credit losses			(86,507	)											(72,737	)
Total assets		$	12,810,483											$	13,372,601
Liabilities and Shareholders’ Equity
Interest-bearing deposits		$	7,259,252			$	36,165				1.98	%		$	7,004,478			$	8,787				0.50	%
Short-term borrowings			621,188				5,037				3.22				768,096				784				0.40
Total interest-bearing liabilities			7,880,440			$	41,202				2.07	%			7,772,574			$	9,571				0.49	%
Noninterest-bearing deposits			3,509,809												4,178,675
Other liabilities			65,094												61,320
Total liabilities			11,455,343												12,012,569
Shareholders’ equity			1,355,140												1,360,032
Total liabilities and shareholders’ equity		$	12,810,483											$	13,372,601
Net interest income (tax equivalent) (5)						$	96,972											$	106,963
Rate Analysis:
Interest income/earning assets											4.58	%											3.69	%
Interest expense/earning assets											(1.36	)											(0.31	)
Net interest margin											3.22	%											3.38	%

 

 

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		Nine-Months Ended September 30,
		2023												2022
		Average Balance				Income/ Expense				Yield/ Rate				Average Balance				Income/ Expense				Yield/ Rate
Assets
Short-term investments (1)		$	108,034			$	4,026				4.98	%		$	238,713			$	2,080				1.16	%
Taxable investment securities (2)			3,562,753				60,240				2.25				4,123,562				57,772				1.87
Tax-exempt investment securities (2)(3)			1,660,241				35,626				2.86				2,382,754				52,403				2.93
Loans (3)(4)			6,694,000				294,875				5.89				5,765,844				211,134				4.90
Total earning assets			12,025,028			$	394,767				4.39	%			12,510,873			$	323,389				3.46	%
Cash and due from banks			230,473												230,427
Bank premises and equipment, net			152,630												149,997
Other assets			234,982												173,061
Goodwill and other intangible assets, net			315,183												316,274
Allowance for credit losses			(81,155	)											(67,931	)
Total assets		$	12,877,141											$	13,312,701
Liabilities and Shareholders’ Equity
Interest-bearing deposits		$	7,126,471			$	85,606				1.61	%		$	6,984,249			$	13,124				0.25	%
Short-term borrowings			653,784				13,957				2.85				759,913				1,216				0.21
Total interest-bearing liabilities			7,780,255			$	99,563				1.71	%			7,744,162			$	14,340				0.25	%
Noninterest-bearing deposits			3,690,190												4,024,731
Other liabilities			62,468												63,919
Total liabilities			11,532,913												11,832,812
Shareholders’ equity			1,344,228												1,479,889
Total liabilities and shareholders’ equity		$	12,877,141											$	13,312,701
Net interest income (tax equivalent) (5)						$	295,204											$	309,049
Rate Analysis:
Interest income/earning assets											4.39	%											3.46	%
Interest expense/earning assets											(1.11	)											(0.16	)
Net interest margin											3.28	%											3.30	%

 

Noninterest Income. Noninterest income for the third quarter of 2023 was $28.07 million compared to $30.94 million in the same quarter of 2022. Debit card fees for the third quarter of 2023 decreased by $546 thousand from the third quarter of 2022 due to the recognition of $988 thousand of volume incentive income in the third quarter of 2022 compared to $375 thousand in the third quarter of 2023. Mortgage related income was $3.44 million in the third quarter of 2023 compared to $4.07 million in the third quarter of 2022 due to lower overall origination volumes and margins on loan sales primarily because of the significant increase in mortgage interest rates. Available for sale securities totaling $113.13 million with an average book yield of 3.53% were sold in the third quarter of 2023 resulting in a loss on sales of securities of $972 thousand compared to a gain on sales of securities of $334 thousand in the third quarter of 2022.The proceeds from the sales of these securities are being used to fund organic loan growth that is yielding around 8%, resulting in an anticipated earn back period of less than six months.

Noninterest income for the nine-months ended September 30, 2023 was $86.03 million compared to $103.14 million in the same period in 2022. Debit card fees for the nine-months ended September 30, 2023 were $16.70 million compared to $24.38 million during the nine-months ended September 30, 2022 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") which became effective for the Company as of July 1, 2022, and is consistent with our previously disclosed expectations. Mortgage related income was $9.95 million in the nine-months ended September 30, 2023 compared to $16.13 million in the nine-months ended September 30, 2022 due to lower overall origination volumes and margins on loan sales as a result of the increases in mortgage interest rates. During the nine-months ended September 30, 2023, losses on sales of available-for-sale securities was $914 thousand, compared to a gain on sales of available-for-sale securities of $2.01 million during the same period in 2022. Net gain on sale of foreclosed assets was $23 thousand for the nine-months ended September 30, 2023, compared to $1.45 million for the same period in 2022. Recoveries of interest on previously charged-off or nonaccrual loans totaled $1.52 million for the nine-months ended September 30, 2023, compared with $2.60 million for the same period in 2022.

 

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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 Board 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. Based on the applicable Federal Reserve Board rules, the Company became subject to the limitation effective July 1, 2022, which reduced debit card fees in 2023 compared to 2022, as discussed above.

 

Table 3 - Noninterest Income (dollars in thousands):

 

		Three-Months Ended September 30,												Nine-Months Ended September 30,
		2023				Increase (Decrease)				2022				2023				Increase (Decrease)				2022
Trust fees		$	10,050			$	(264	)		$	10,314			$	29,778			$	(95	)		$	29,873
Service charges on deposit accounts			6,509				110				6,399				18,855				712				18,143
Debit card fees			5,041				(546	)			5,587				16,697				(7,684	)			24,381
Credit card fees			694				43				651				2,014				61				1,953
Gain on sale and fees on mortgage loans			3,442				(628	)			4,070				9,950				(6,181	)			16,131
Net gain on sale of available-for-sale securities			(972	)			(1,306	)			334				(914	)			(2,927	)			2,013
Net gain (loss) on sale of foreclosed assets			(10	)			(359	)			349				23				(1,428	)			1,451
Net gain (loss) on sale of assets			696				170				526				1,626				1,104				522
Interest on loan recoveries			698				34				664				1,519				(1,077	)			2,596
Other:
Check printing fees			29				—				29				71				(16	)			87
Safe deposit rental fees			176				(16	)			192				643				(28	)			671
Credit life fees			177				(91	)			268				452				(401	)			853
Brokerage commissions			380				25				355				1,114				(16	)			1,130
Wire transfer fees			420				(8	)			428				1,224				(28	)			1,252
Miscellaneous income			740				(37	)			777				2,973				888				2,085
Total other			1,922				(127	)			2,049				6,477				399				6,078
Total Noninterest Income		$	28,070			$	(2,873	)		$	30,943			$	86,025			$	(17,116	)		$	103,141

 

Noninterest Expense. Total noninterest expense for the third quarter of 2023 was $59.54 million, compared to $59.44 million for the same period of 2022. 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 was 47.62% for the third quarter of 2023 compared to 43.10% for the same quarter in 2022.

 

Salaries, commissions and employee benefits for the third quarter of 2023 totaled $32.94 million, compared to $33.89 million for the same period in 2022. The net decrease reflected lower profit sharing expenses of $583 thousand and a $310 thousand decrease in mortgage salaries and incentive compensation expenses.

 

All other categories of noninterest expense for the third quarter of 2023 totaled $26.60 million, compared to $25.55 million in the same quarter a year ago. Noninterest expense, excluding salary related costs, for the three-months ended September 30, 2023 increased primarily due to increases in FDIC insurance premiums of $656 thousand due to the increased FDIC insurance base assessment rate effective January 1, 2023, compared to the three-months ended September 30, 2022.

 

Total noninterest expense for the first nine months of 2023 was $174.41 million, a decrease of $2.59 million, or 1.46%, as compared to the same period in 2022. Our efficiency ratio was 45.75% for the first nine months of 2023 compared to 42.94% for the same period in 2022.

 

Salaries, commissions and employee benefits for the first nine months of 2023 totaled $96.16 million, compared to $101.18 million for the same period in 2022. The net decrease reflected lower profit sharing expenses of $3.49 million, a $2.02 million decrease in mortgage salaries and incentive compensation expenses and a $1.02 million decrease in medical expenses, offset by annual merit-based and other market-based pay increases that were effective March 1, 2023.

 

All other categories of noninterest expense for the first nine months of 2023 totaled $78.25 million, compared to $75.82 million for the same period in 2022. Noninterest expense, excluding salary related costs, for the nine-months ended September 30, 2023 increased primarily due to increases in FDIC insurance premiums of $1.95 million due to the increased FDIC insurance base assessment rate effective January 1, 2023.

 

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Table 4 - Noninterest Expense (dollars in thousands):

 

		Three-Months Ended September 30,												Nine-Months Ended September 30,
		2023				Increase (Decrease)				2022				2023				Increase (Decrease)				2022
Salaries, commissions and incentives (excluding mortgage)		$	23,811			$	(432	)		$	24,243			$	71,170			$	1,218			$	69,952
Mortgage salaries and incentives			2,252				(310	)			2,562				6,362				(2,021	)			8,383
Medical			3,148				139				3,009				7,373				(1,023	)			8,396
Profit sharing			180				(583	)			763				180				(3,487	)			3,667
401(k) match expense			938				41				897				2,870				49				2,821
Payroll taxes			1,732				44				1,688				5,666				91				5,575
Stock based compensation			874				144				730				2,541				158				2,383
Total salaries and employee benefits			32,935				(957	)			33,892				96,162				(5,015	)			101,177
Net occupancy expense			3,565				125				3,440				10,418				461				9,957
Equipment expense			2,200				(196	)			2,396				6,525				(474	)			6,999
FDIC insurance premiums			1,573				656				917				4,644				1,954				2,690
Debit card expense			3,284				271				3,013				9,704				527				9,177
Professional and service fees			2,425				206				2,219				7,187				552				6,635
Printing, stationery and supplies			512				(88	)			600				1,962				321				1,641
Operational and other losses			959				90				869				2,746				499				2,247
Software amortization and expense			2,441				(123	)			2,564				7,271				(272	)			7,543
Amortization of intangible assets			228				(78	)			306				684				(262	)			946
Other:
Data processing fees			485				52				433				1,472				149				1,323
Postage			368				16				352				1,086				93				993
Advertising			808				70				738				2,290				115				2,175
Correspondent bank service charges			212				(53	)			265				648				(149	)			797
Telephone			798				39				759				2,422				144				2,278
Public relations and business development			814				(140	)			954				2,595				34				2,561
Directors’ fees			608				19				589				1,900				(38	)			1,938
Audit and accounting fees			631				118				513				1,894				356				1,538
Legal fees and other related costs			502				179				323				1,114				(140	)			1,254
Regulatory exam fees			333				(66	)			399				954				(234	)			1,188
Travel			484				20				464				1,401				163				1,238
Courier expense			313				6				307				907				21				886
Other real estate owned			68				67				1				79				76				3
Other miscellaneous expense			2,993				(136	)			3,129				8,342				(1,474	)			9,816
Total other			9,417				191				9,226				27,104				(884	)			27,988
Total Noninterest Expense		$	59,539			$	97			$	59,442			$	174,407			$	(2,593	)		$	177,000

 

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, 2023, total loans held-for-investment were $6.99 billion, an increase of $552.83 million, as compared to December 31, 2022. Total PPP loans outstanding were $122 thousand at September 30, 2023, which are included in the Company’s commercial loan totals.

As compared to year-end 2022 balances, total real estate loans increased $363.35 million, total commercial loans increased $188.19 million, agricultural loans increased $4.93 million, and total consumer loans decreased $3.65 million. Loans averaged $6.89 billion for the third quarter of 2023, an increase of $811.42 million over the prior year third quarter average balances. Loans averaged $6.69 billion for the first nine months of 2023, an increase of $928.16 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.

 

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Table 5 outlines the composition of the Company’s held-for-investment loans by portfolio segment.

Table 5 - Composition of Loans Held-for-Investment (dollars in thousands):

 

		September 30,								December 31,
		2023				2022				2022
Commercial:
C&I *		$	1,108,240			$	871,335			$	917,317
Municipal			218,358				214,852				221,090
Total Commercial			1,326,598				1,086,187				1,138,407
Agricultural			81,876				76,937				76,947
Real Estate:
Construction & Development			929,570				938,051				959,426
Farm			341,052				268,139				306,322
Non-Owner Occupied CRE			828,900				717,738				732,089
Owner Occupied CRE			1,002,913				945,665				954,400
Residential			1,788,913				1,536,180				1,575,758
Total Real Estate			4,891,348				4,405,773				4,527,995
Consumer:
Auto			540,382				538,798				550,635
Non-Auto			154,492				147,793				147,884
Total Consumer			694,874				686,591				698,519
Total		$	6,994,696			$	6,255,488			$	6,441,868

 

* 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 $12.23 million, $18.82 million, and $11.97 million at September 30, 2023 and 2022, and December 31, 2022, respectively. At September 30, 2023 and 2022, and December 31, 2022, $321 thousand, $2.92 million and $1.47 million, respectively, are valued using the lower of cost or fair value, and the remaining amounts are valued under the fair value option.

 

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The following tables summarize maturity information of our loan portfolio as of September 30, 2023. The tables also presents the portion 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, 2023 (dollars in thousands):

 

Total Loans Held-for-Investment:		Due in One Year or Less				After One but Within Five Years				After Five but Within Fifteen Years				After Fifteen Years				Total
Commercial:
C&I		$	446,190			$	533,352			$	107,231			$	21,467			$	1,108,240
Municipal			6,096				47,518				112,840				51,904				218,358
Total Commercial			452,286				580,870				220,071				73,371				1,326,598
Agricultural			62,480				17,929				1,467				—				81,876
Real Estate:
Construction & Development			423,079				170,947				215,135				120,409				929,570
Farm			14,639				71,753				173,030				81,630				341,052
Non-Owner Occupied CRE			85,743				235,726				377,957				129,474				828,900
Owner Occupied CRE			40,373				257,848				476,992				227,700				1,002,913
Residential			111,796				141,964				762,385				772,768				1,788,913
Total Real Estate			675,630				878,238				2,005,499				1,331,981				4,891,348
Consumer:
Auto			6,601				518,833				14,948				—				540,382
Non-Auto			29,083				98,817				20,765				5,827				154,492
Total Consumer			35,684				617,650				35,713				5,827				694,874
Total		$	1,226,080			$	2,094,687			$	2,262,750			$	1,411,179			$	6,994,696
% of Total Loans			17.53	%			29.94	%			32.35	%			20.18	%			100.00	%

 

Loans with fixed interest rates:		Due in One Year or Less				After One but Within Five Years				After Five but Within Fifteen Years				After Fifteen Years				Total
Commercial:
C&I		$	93,350			$	318,820			$	12,484			$	—			$	424,654
Municipal			4,904				46,618				81,463				7,276				140,261
Total Commercial			98,254				365,438				93,947				7,276				564,915
Agricultural			14,296				13,067				259				—				27,622
Real Estate:
Construction & Development			159,211				142,806				47,389				10,305				359,711
Farm			5,083				24,301				106,616				1,013				137,013
Non-Owner Occupied CRE			18,110				152,103				71,762				247				242,222
Owner Occupied CRE			22,038				155,129				42,992				180				220,339
Residential			51,839				102,587				478,637				85,396				718,459
Total Real Estate			256,281				576,926				747,396				97,141				1,677,744
Consumer:
Auto			6,574				518,833				14,948				—				540,355
Non-Auto			24,807				96,986				20,451				3,021				145,265
Total Consumer			31,381				615,819				35,399				3,021				685,620
Total		$	400,212			$	1,571,250			$	877,001			$	107,438			$	2,955,901
% of Total Loans			5.72	%			22.46	%			12.54	%			1.54	%			42.26	%

 

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Loans with variable interest rates:		Due in One Year or Less				After One but Within Five Years				After Five but Within Fifteen Years				After Fifteen Years				Total
Commercial:
C&I		$	352,840			$	214,532			$	94,747			$	21,467			$	683,586
Municipal			1,192				900				31,377				44,628				78,097
Total Commercial			354,032				215,432				126,124				66,095				761,683
Agricultural			48,184				4,862				1,208				—				54,254
Real Estate:
Construction & Development			263,868				28,141				167,746				110,104				569,859
Farm			9,556				47,452				66,414				80,617				204,039
Non-Owner Occupied CRE			67,633				83,623				306,195				129,227				586,678
Owner Occupied CRE			18,335				102,719				434,000				227,520				782,574
Residential			59,957				39,377				283,748				687,372				1,070,454
Total Real Estate			419,349				301,312				1,258,103				1,234,840				3,213,604
Consumer:
Auto			27				—				—				—				27
Non-Auto			4,276				1,831				314				2,806				9,227
Total Consumer			4,303				1,831				314				2,806				9,254
Total		$	825,868			$	523,437			$	1,385,749			$	1,303,741			$	4,038,795
% of Total Loans			11.81	%			7.48	%			19.81	%			18.64	%			57.74	%

Of the $4.04 billion of variable interest rate loans shown above, loans totaling $1.6 billion mature or reprice over the next twelve months. Of this amount, approximately $1.4 billion will reprice immediately upon changes in the underlying index rate (primarily U.S. prime rate) with the remaining $188 million being subject to floors above or ceilings below 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 foreclosed assets were $39.70 million at September 30, 2023, as compared to $24.62 million at September 30, 2022 and $24.33 million at December 31, 2022. As a percent of loans held-for-investment and foreclosed assets, these assets were 0.57% at September 30, 2023, 0.39% at September 30, 2022, and 0.38% at December 31, 2022. As a percent of total assets, these assets were 0.31% at September 30, 2023, as compared to 0.19% at September 30, 2022 and December 31, 2022, respectively. 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, 2023.

Table 6 – Nonaccrual, Past Due 90 Days or More and Still Accruing, and Foreclosed Assets (dollars in thousands, except percentages):

 

		September 30,								December 31,
		2023				2022				2022
Nonaccrual loans		$	38,812			$	24,604			$	24,325
Loans still accruing and past due 90 days or more			289				15				—
Total nonperforming loans (1)			39,101				24,619				24,325
Foreclosed assets			597				—				—
Total nonperforming assets		$	39,698			$	24,619			$	24,325
As a % of loans held-for-investment and foreclosed assets			0.57	%			0.39	%			0.38	%
As a % of total assets			0.31				0.19				0.19

(1) With the adoption of ASU 2022-02, effective January 1, 2023, TDR accounting has been eliminated.

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 $963 thousand for the year ended December 31, 2022. If interest on these loans had been recognized on a full accrual basis during the year ended December 31, 2022, such income would have been approximately $2.32 million. Such amounts for the 2023 and 2022 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).

The provision for loan losses of $3.82 million for the three-months ended September 30, 2023 is combined with the reversal of provision for unfunded commitments of $1.55 million and reported in the net aggregate of $2.28 million under the provision for credit losses in the consolidated statements of earnings for the three-months ended September 30, 2023. The provision for loan losses of $15.05 million for the nine-months ended September 30, 2023 is combined with the reversal of provision for unfunded commitments of $4.42 million and reported in the net aggregate of $10.63 million under the provision for credit losses in the consolidated statements of earnings for the nine-months ended September 30, 2023.

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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.

As a percent of average loans, net loan charge-offs were 0.04% for the third quarter of 2023, as compared to net loan recoveries of 0.07% for the third quarter of 2022. As a percent of average loans, net loan charge-offs were 0.02% for the first nine months of 2023, as compared to net loan recoveries of 0.04% for the first nine months of 2022. The allowance for credit losses as a percent of loans held-for-investment was 1.28% as of September 30, 2023, as compared to 1.18% as of September 30, 2022 and December 31, 2022, respectively.

Table 7 - Loan Loss Experience and Allowance for Credit Losses (dollars in thousands, except percentages):

 

		Three-Months Ended September 30,								Nine-Months Ended September 30,
		2023				2022				2023				2022
Allowance for credit losses at period-end		$	89,714			$	74,108			$	89,714			$	74,108
Loans held-for-investment at period-end			6,994,696				6,255,488				6,994,696				6,255,488
Average loans for period			6,894,064				6,082,649				6,694,000				5,765,844
Net charge-offs (recoveries)/average    loans (annualized)			0.04	%			(0.07	)%			0.02	%			(0.04	)%
Allowance for loan losses/period-end    loans held-for-investment			1.28	%			1.18	%			1.28	%			1.18	%
Allowance for loan losses/nonaccrual    loans, past due 90 days still accruing    and restructured loans			229.44	%			301.02	%			229.44	%			301.02	%

 

Interest-Bearing Demand Deposits in Banks. The Company had interest-bearing deposits in banks of $180.01 million at September 30, 2023 compared to $138.48 million at September 30, 2022 and $37.39 million at December 31, 2022, respectively. At September 30, 2023, interest-bearing deposits in banks included $179.18 million maintained at the Federal Reserve Bank of Dallas and $832 thousand on deposit with the FHLB.

Available-for-Sale Securities. At September 30, 2023, securities with a fair value of $4.65 billion were classified as securities available-for-sale. As compared to December 31, 2022, the available-for-sale portfolio at September 30, 2023 reflected (i) an increase of $2.90 million in U.S. Treasury securities, (ii) a decrease of $434.86 million in obligations of states and political subdivisions, and (iv) a decrease of $388.85 million in mortgage-backed securities, and (iv) a decrease of $1.01 million in corporate bonds and other securities. Fluctuations in the available-for-sale securities portfolio balances were primarily driven by sales, calls, and maturities, and changes in unrealized losses during the first nine months of 2023. 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 September 30, 2023 and 2022, and December 31, 2022.

Table 8 - Maturities and Yields of Available-for-Sale Securities Held at September 30, 2023 (dollars in thousands, except percentages):

 

		Maturing by Contractual Maturity
		One Year or Less								After One Year Through Five Years								After Five Years Through Ten Years								After Ten Years								Total
Available-for-Sale:		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
U.S. Treasury securities		$	202,192				2.00	%		$	283,255				1.86	%		$	—				—	%		$	—				—	%		$	485,447				1.91	%
Obligations of states and    political subdivisions			24,805				2.64				91,276				2.60				517,283				2.40				830,390				2.70				1,463,754				2.59
Corporate bonds and other    securities			3,792				3.95				70,440				2.83				26,521				1.74				—				—				100,753				2.58
Mortgage-backed securities			97,123				2.65				769,317				2.16				1,491,063				1.93				245,080				2.27				2,602,583				2.06
Total		$	327,912				2.26	%		$	1,214,288				2.16	%		$	2,034,867				2.05	%		$	1,075,470				2.60	%		$	4,652,537				2.22	%

 

All yields are computed on a tax-equivalent basis assuming a marginal tax rate of 21%. Yields on available-for-sale securities are based on amortized cost. Maturities of mortgage-backed securities are based on contractual maturities and could differ due to prepayments of underlying mortgages. Maturities of other securities are reported at the earlier of maturity date or call date.

As of September 30, 2023, the investment portfolio had an overall tax equivalent yield of 2.22%, a weighted average life of 7.94 years and modified duration of 6.42 years.

 

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Deposits. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were $10.72 billion as of September 30, 2023, as compared to $11.14 billion as of September 30, 2022 and $11.01 billion as of December 31, 2022.

Table 9 provides a breakdown of average deposits and rates paid over the three and nine month periods ended September 30, 2023 and 2022, respectively.

Table 9 - Composition of Average Deposits (dollars in thousands, except percentages):

 

		Three-Months Ended September 30,
		2023								2022
		Average Balance				Average Rate				Average Balance				Average Rate
Noninterest-bearing deposits		$	3,509,809			—%				$	4,178,675			—%
Interest-bearing deposits:
Interest-bearing checking			3,197,961				1.56				3,641,147				0.61
Savings and money market accounts			3,106,443				1.95				2,935,020				0.38
Time deposits under $250,000			352,294				5.71				299,211				0.31
Time deposits of $250,000 or more			602,554				2.16				129,100				0.40
Total interest-bearing deposits			7,259,252				1.98	%			7,004,478				0.50	%
Total average deposits		$	10,769,061							$	11,183,153
Total cost of deposits							1.33	%							0.31	%

 

		Nine-Months Ended September 30,
		2023								2022
		Average Balance				Average Rate				Average Balance				Average Rate
Noninterest-bearing deposits		$	3,690,190			—%				$	4,024,731			—%
Interest-bearing deposits:
Interest-bearing checking			3,319,967				1.23				3,651,259				0.31
Savings and money market accounts			3,002,987				1.64				2,890,585				0.18
Time deposits under $250,000			295,717				4.84				303,663				0.24
Time deposits of $250,000 or more			507,800				1.97				138,742				0.32
Total interest-bearing deposits			7,126,471				1.61	%			6,984,249				0.25	%
Total average deposits		$	10,816,661							$	11,008,980
Total cost of deposits							1.06	%							0.16	%

 

The estimated amount of uninsured and uncollateralized deposits including related accrued and unpaid interest is approximately $5.16 billion as of September 30, 2023.

 

Borrowings. Included in borrowings were federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings of $751.54 million, $774.58 million and $642.51 million at September 30, 2023 and 2022, and December 31, 2022, 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 $621.19 million and $768.10 million in the third quarters of 2023 and 2022, respectively. The weighted average interest rates paid on these borrowings were 3.22% and 0.40% for the third quarters of 2023 and 2022, respectively. The average balance of federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings were $653.78 million and $759.91 million for the nine-months ended September 30, 2023 and 2022, respectively. The weighted average interest rates paid on these borrowings were 2.85% and 0.21% for the nine-months ended September 30, 2023 and 2022, 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.

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.

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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)		2023		2022		2022
+400		3.03%		6.87%		5.13%
+300		2.23%		5.24%		3.86%
+200		1.82%		3.90%		3.13%
+100		1.14%		2.30%		2.09%
-100		(1.76)%		(2.80)%		(2.66)%
-200		(3.45)%		(5.62)%		(5.47)%
-300		(5.76)%		(8.51)%		(8.54)%
-400		(6.31)%		(9.82)%		(10.31)%

 

The results for the net interest income simulations as of September 30, 2023 and 2022, and December 31, 2022 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 $4.65 billion at September 30, 2023. During the nine months ended September 30, 2023, the corresponding unrealized loss before taxes on the portfolio of $677.99 million at December 31, 2022, changed to an unrealized loss before taxes of $810.65 million at September 30, 2023, 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 changes 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, 2023, the 5-year U.S. Treasury rate was 4.60% compared to 4.01% at December 31, 2022, representing a 59 basis point increase during the first nine months of 2023. As of September 30, 2023, an increase of 100 basis points in the 5-year U.S. Treasury rate would result in an increase to unrealized losses by approximately $258 million before taxes, while a 100 basis point decrease in the same rate would result in a decrease to unrealized losses by approximately $246 million before taxes. We believe that we 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 $1.24 billion, or 9.71% of total assets at September 30, 2023, as compared to $1.13 billion, or 8.64% of total assets at September 30, 2022, and $1.27 billion, or 9.76% of total assets at December 31, 2022. Included in shareholders' equity at September 30, 2023, and 2022, and December 31, 2022 were $639.93 million, $632.42 million and $535.23 million, respectively, in unrealized losses 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 2023, total shareholders’ equity averaged $1.36 billion, or 10.58% of average assets, as compared to $1.36 billion, or 10.17% of average assets, during the same period in 2022. For the first nine months of 2023, total shareholders’ equity averaged $1.34 billion, or 10.44% of average assets, as compared to $1.48 billion, or 11.12% of average assets, during the same period in 2022.

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.

Beginning in January 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% on January 1, 2019. As of January 1, 2019, the capital conservation buffer Basel III was fully phased in. 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.

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As of September 30, 2023 and 2022, and December 31, 2022, we had a total risk-based capital ratio of 19.49%, 19.07% and 19.29%, a Tier 1 capital to risk-weighted assets ratio of 18.35%, 18.03% and 18.22%; a common equity Tier 1 to risk-weighted assets ratio of 18.35%, 18.03% and 18.22% and a Tier 1 leverage ratio of 12.00%, 10.79% and 10.96%, respectively. The regulatory capital ratios as of September 30, 2023 and 2022, and December 31, 2022 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:

 

		Actual								Minimum Capital Required-Basel III								Required to be Considered Well- Capitalized
As of September 30, 2023:		Amount				Ratio				Amount				Ratio				Amount				Ratio
Total Capital to Risk-Weighted Assets:
Consolidated		$	1,676,476				19.49	%		$	903,272				10.50	%		$	860,259				10.00	%
First Financial Bank, N.A		$	1,507,129				17.56	%		$	901,009				10.50	%		$	858,104				10.00	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,578,858				18.35	%		$	731,220				8.50	%		$	516,155				6.00	%
First Financial Bank, N.A		$	1,409,511				16.43	%		$	729,388				8.50	%		$	686,483				8.00	%
Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,578,858				18.35	%		$	602,181				7.00	%		$	—			N/A
First Financial Bank, N.A		$	1,409,511				16.43	%		$	600,673				7.00	%		$	557,768				6.50	%
Leverage Ratio:
Consolidated		$	1,578,858				12.00	%		$	344,103				4.00	%		$	—			N/A
First Financial Bank, N.A		$	1,409,511				10.76	%		$	343,242				4.00	%		$	429,052				5.00	%

 

		Actual								Minimum Capital Required-Basel III								Required to be Considered Well- 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	%

 

		Actual								Minimum Capital Required Basel III								Required to be Considered Well- Capitalized
As of December 31, 2022:		Amount				Ratio				Amount				Ratio				Amount				Ratio
Total Capital to Risk-Weighted Assets:
Consolidated		$	1,586,888				19.29	%		$	863,622				10.50	%		$	822,497				10.00	%
First Financial Bank, N.A		$	1,442,902				17.58	%		$	861,860				10.50	%		$	820,819				10.00	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,498,731				18.22	%		$	699,122				8.50	%		$	493,498				6.00	%
First Financial Bank, N.A		$	1,354,745				16.50	%		$	697,696				8.50	%		$	656,655				8.00	%
Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,498,731				18.22	%		$	575,748				7.00	%			—			N/A
First Financial Bank, N.A		$	1,354,745				16.50	%		$	574,573				7.00	%		$	533,532				6.50	%
Leverage Ratio:
Consolidated		$	1,498,731				10.96	%		$	546,983				4.00	%			—			N/A
First Financial Bank, N.A		$	1,354,745				9.95	%		$	544,886				4.00	%		$	681,107				5.00	%

 

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;

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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 on June 30, 2025 (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, 2023, 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 $2.54 billion at September 30, 2023, secured by portions of our loan portfolio and certain investment securities, and (ii) access to the Federal Reserve Bank of Dallas lending program, including the Bank Term Funding Program, secured by portions of certain investment securities. At September 30, 2023, there was $45 million used on the FHLB line advance for undisbursed commitments (letters of credit) used to secure public funds and $100 million in overnight borrowings at the Federal Reserve Bank discount window.

The Company renewed its loan agreement, effective June 30, 2023, 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, 2025, interest is paid quarterly at The Wall Street Journal Prime Rate and the line of credit matures June 30, 2025. If a balance exists at June 30, 2025, 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, 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, 2023. There was no outstanding balance under the line of credit as of September 30, 2023.

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 $133.90 million at September 30, 2023, investment securities which totaled $2.12 million at September 30, 2023 and mature over 6 to 7 years, available dividends from our subsidiaries which totaled $375.18 million at September 30, 2023, 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, 2023, 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 impact to the financial system due to the recent failures of several banks. Given the diversified 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, 2023, the Company’s reserve for unfunded commitments totaled $7.90 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.

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.

 

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Table 10 – Commitments as of September 30, 2023 (dollars in thousands):

 

		Total Notional Amounts Committed
Unfunded lines of credit		$	1,179,616
Unfunded commitments to extend credit			748,354
Standby letters of credit			55,632
Total commercial commitments		$	1,983,602

 

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. Total commercial commitments were $1.98 billion at September 30, 2023, compared to $2.00 billion at September 30, 2022, and $2.06 billion at December 31, 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, 2023, $375.18 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 $97.50 million and $67.50 million for the nine-months ended September 30, 2023 and 2022, 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 49.48% and 39.78% of net earnings for the first nine months of 2023 and 2022, 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 2023, the Board of Directors declared an $0.18 per share cash dividend for the third quarter of 2023, a 5.88% increase over the dividend declared in the third quarter of 2022. The record date for this dividend was September 14, 2023, payable on October 2, 2023.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Management considers interest rate risk to be a significant market risk for the Company. See “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk” for disclosure regarding this market risk.

 

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Item 4. Controls and Procedures.

As of September 30, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934). Our management, which includes our principal executive officer and our principal financial officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Our principal executive officer and principal financial officer have concluded, based on our evaluation of our disclosure controls and procedures, that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2023.

Subsequent to our evaluation, there were no significant changes in internal controls over financial reporting or other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we and our subsidiaries are parties to lawsuits arising in the ordinary course of our banking business. However, there are no material pending legal proceedings to which we, our subsidiaries, or any of their properties, are currently subject.

 

Item 1A. Risk Factors.

There has been no material change in the risk factors previously disclosed under Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and Part II, Item 1A of the Company's Quarterly Report on Form 10-Q for the quarter-ended March 31, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Repurchase of Common Stock

The following table provides information with respect to purchases we made or were made on our behalf or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the three months ended September 30, 2023. Dollar amounts in thousands.

 

Period		(a) Total number of shares purchased				(b) Average price paid per share				(c) Total number of shares purchased as part of publicly announced plans or programs				(d) Maximum number of shares that may yet be purchased under the plans or programs
July 1, 2023 through July 31, 2023			-			$	-				-				5,000,000
August 1, 2023 through August 31, 2023			-			$	-				-				5,000,000
September 1, 2023 through September 30, 2023			101,337			$	26.99				101,337				4,898,663
Total			101,337			$	26.99				101,337				4,898,663

 

Item 3. Defaults Upon Senior Securities.

Not Applicable

Item 4. Mine Safety Disclosures.

Not Applicable

Item 5. Other Information.

Not Applicable

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Item 6. Exhibits.

 

	3.1			—		Amended and Restated Certificate of Formation (incorporated by reference from Exhibit 3.1 of the Registrant’s Form 10-Q filed July 30, 2019).
	3.2			—		Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrant’s Form 8-K filed April 3, 2020).
	3.3			—		Amendment to the Amended and Restated Bylaws of the Registrant, dated July 27, 2021 (incorporated by reference from Exhibit 3.3 to the Registrant's Form 10-Q filed August 2, 2021).
	4.1			—		Specimen certificate of First Financial Common Stock (incorporated by reference from Exhibit 3 of the Registrant’s Amendment No. 1 to Form 8-A filed on Form 8-A/A No. 1 on January 7, 1994).
	4.2			—		Description of Registrant’s Securities (incorporated by reference from Exhibit 4.2 of the Registrant’s Form 10-K filed February 22, 2023).
	10.1			—		2012 Incentive Stock Option Plan (incorporated by reference from Appendix A of the Registrant’s Definitive Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 filed March 1, 2012).++
	10.2			—		2021 Omnibus Stock and Incentive Plan as Amended (incorporated by reference from Exhibit 10 of the Registrant’s Form 8-K filed April 28, 2021).++
	10.3			—		Promissory Note, dated June 30, 2023, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant's Form 8-K filed July 7, 2023).
	10.4			—		Amended and Restated Loan Agreement, dated June 30, 2023, by and between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.2 of the Registrant's Form 8-K filed July 7, 2023).
	10.5			—		2015 Restricted Stock Plan as Amended and Restated April 28, 2020 (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed May 1, 2020).++
	10.6			—		Form of Executive Recognition Agreement (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed August 10, 2022).++
	10.7			—		First Financial Bankshares, Inc. Supplemental Executive Retirement Plan, as amended and restated effective July 26, 2022 (incorporated by reference from Exhibit 10.1 of the Registrant's Form 8-K filed July 29, 2022.)++
	10.8			—		Confidential Separation and Release Agreement , dated January 9, 2023, by and between the Company and James R. Gordon (incorporated by reference from Exhibit 10.1 of the Registrant's Form 8-K filed January 11, 2023).++
	31.1			—		Rule 13a-14(a) / 15(d)-14(a) Certification of Chief Executive Officer of First Financial Bankshares, Inc.*
	31.2			—		Rule 13a-14(a) / 15(d)-14(a) Certification of Chief Financial Officer of First Financial Bankshares, Inc.*
	32.1			—		Section 1350 Certification of Chief Executive Officer of First Financial Bankshares, Inc.+
	32.2			—		Section 1350 Certification of Chief Financial Officer of First Financial Bankshares, Inc.+
	101.INS			—		Inline XBRL Instance Document.- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*
	101.SCH			—		Inline XBRL Taxonomy Extension Schema Document.*
	101.CAL			—		Inline XBRL Taxonomy Extension Calculation Linkbase Document.*
	101.DEF			—		Inline XBRL Taxonomy Extension Definition Linkbase Document.*
	101.LAB			—		Inline XBRL Taxonomy Extension Label Linkbase Document.*
	104			—		Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

* Filed herewith

+ Furnished herewith. This Exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

++ Management contract or compensatory plan or arrangement.

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

				FIRST FINANCIAL BANKSHARES, INC.
Date: November 6, 2023				By:		/s/ F. Scott Dueser
						F. Scott Dueser
						Chairman of the Board, President and Chief Executive Officer
Date: November 6, 2023				By:		/s/ Michelle S. Hickox
						Michelle S. Hickox
						Executive Vice President and
						Chief Financial Officer, Secretary and Treasurer

 

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