Published: 2022-05-06 00:00:00 ET

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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 March 31, 2022

 

☐	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 May 6, 2022
Common Stock, $0.01 par value per share		142,719,164

 

 

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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			8
		Notes to Consolidated Financial Statements – Unaudited			9
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			39
3.		Quantitative and Qualitative Disclosures About Market Risk			53
4.		Controls and Procedures			54
PART II - OTHER INFORMATION
1.		Legal Proceedings			55
1A.		Risk Factors			55
2.		Unregistered Sales of Equity Securities and Use of Proceeds			55
3.		Defaults Upon Senior Securities			55
4.		Mine Safety Disclosures			55
5.		Other Information			55
6.		Exhibits			56
		Signatures			57

 

2

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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 March 31, 2022 and 2021 (unaudited) and December 31, 2021, and the consolidated statements of earnings, comprehensive earnings and shareholders’ equity for the three-months ended March 31, 2022 and 2021 (unaudited), and the consolidated statements of cash flows for the three-months ended March 31, 2022 and 2021 (unaudited) and notes to consolidated financial statements (unaudited), follow on pages 4 through 38.

3

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

		March 31,								December 31,
		2022				2021				2021
		(Unaudited)
ASSETS
CASH AND DUE FROM BANKS		$	203,187			$	190,350			$	205,053
INTEREST-BEARING DEMAND DEPOSITS IN BANKS			394,566				893,221				323,535
Total cash and cash equivalents			597,753				1,083,571				528,588
SECURITIES AVAILABLE-FOR-SALE, at fair value (amortized cost of    these securities was $6,767,967, $4,961,438 and $6,447,510 as of    March 31, 2022 and 2021 and December 31, 2021, respectively)			6,502,495				5,109,631				6,573,179
LOANS:
Held-for-investment, excluding PPP loans			5,550,430				4,790,752				5,336,179
PPP loans			15,739				531,810				52,793
Total loans held-for-investment			5,566,169				5,322,562				5,388,972
Less—allowance for credit losses			(66,913	)			(62,974	)			(63,465	)
Net loans held-for-investment			5,499,256				5,259,588				5,325,507
Held-for-sale ($22,382, $61,511 and $34,122 at fair value at       March 31, 2022 and 2021 and December 31, 2021, respectively)			27,670				65,405				37,810
BANK PREMISES AND EQUIPMENT, net			150,168				142,415				149,764
INTANGIBLE ASSETS, net			316,459				317,980				316,779
OTHER ASSETS			220,399				124,297				170,834
Total assets		$	13,314,200			$	12,102,887			$	13,102,461
LIABILITIES AND SHAREHOLDERS’ EQUITY
NONINTEREST-BEARING DEPOSITS		$	3,978,724			$	3,350,145			$	3,780,230
INTEREST-BEARING DEPOSITS			7,021,101				6,063,302				6,786,258
Total deposits			10,999,825				9,413,447				10,566,488
DIVIDENDS PAYABLE			21,411				18,500				21,388
BORROWINGS			758,595				548,604				671,152
TRADE DATE PAYABLE			—				381,871				—
OTHER LIABILITIES			45,620				75,037				84,209
Total liabilities			11,825,451				10,437,459				11,343,237
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
COMMON STOCK — ($0.01 par value, authorized 200,000,000 shares;    142,704,495, 142,285,611 and 142,532,116 shares issued at    March 31, 2022 and 2021 and December 31, 2021, respectively)			1,427				1,423				1,425
CAPITAL SURPLUS			680,665				671,849				676,871
RETAINED EARNINGS			1,016,239				875,147				981,675
TREASURY STOCK (shares at cost: 936,847, 938,004 and 936,897 at    March 31, 2022 and 2021 and December 31, 2021, respectively)			(10,404	)			(9,385	)			(10,090	)
DEFERRED COMPENSATION			10,404				9,385				10,090
ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSS), net			(209,582	)			117,009				99,253
Total shareholders’ equity			1,488,749				1,665,428				1,759,224
Total liabilities and shareholders’ equity		$	13,314,200			$	12,102,887			$	13,102,461

 

See notes to consolidated financial statements.

4

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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 March 31,
		2022				2021
INTEREST INCOME:
Interest and fees on loans		$	64,499			$	66,435
Interest on investment securities:
Taxable			17,823				10,264
Exempt from federal income tax			14,593				13,749
Interest on federal funds sold and interest-bearing demand    deposits in banks			94				162
Total interest income			97,009				90,610
INTEREST EXPENSE:
Interest on deposits			1,370				1,695
Other			200				91
Total interest expense			1,570				1,786
Net interest income			95,439				88,824
PROVISION FOR CREDIT LOSSES			4,782				(1,997	)
Net interest income after provision for credit losses			90,657				90,821
NONINTEREST INCOME:
Trust fees			9,817				8,299
Service charges on deposit accounts			5,706				4,793
ATM, interchange and credit card fees			9,528				8,677
Gain on sale and fees on mortgage loans			6,333				9,894
Net gain on available-for-sale securities			31				808
Net gain on sale of foreclosed assets			1,084				55
Net gain (loss) on sale of assets			(10	)			145
Interest on loan recoveries			283				382
Other			2,109				1,821
Total noninterest income			34,881				34,874
NONINTEREST EXPENSE:
Salaries, commissions and employee benefits			34,138				34,931
Net occupancy expense			3,225				3,147
Equipment expense			2,257				2,164
FDIC insurance premiums			869				701
ATM, interchange and credit card expenses			2,968				2,772
Professional and service fees			2,225				2,139
Printing, stationery and supplies			540				325
Operational and other losses			596				287
Software amortization and expense			2,457				2,619
Amortization of intangible assets			320				412
Other			9,630				8,226
Total noninterest expense			59,225				57,723
EARNINGS BEFORE INCOME TAXES			66,313				67,972
INCOME TAX EXPENSE			10,341				11,054
NET EARNINGS		$	55,972			$	56,918
NET EARNINGS PER SHARE, BASIC		$	0.39			$	0.40
NET EARNINGS PER SHARE, DILUTED		$	0.39			$	0.40
DIVIDENDS PER SHARE		$	0.15			$	0.13

 

See notes to consolidated financial statements.

5

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

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

(Dollars in thousands)

 

		Three-Months Ended March 31,
		2022				2021
NET EARNINGS		$	55,972			$	56,918
OTHER ITEMS OF COMPREHENSIVE EARNINGS (LOSS):
Change in unrealized gain (loss) on investment securities available-for-sale,    before income taxes			(390,899	)			(66,770	)
Reclassification adjustment for realized gains (loss) on investment securities    included in net earnings, before income taxes			(31	)			(808	)
Total other items of comprehensive earnings (loss)			(390,930	)			(67,578	)
Income tax benefit (expense) related to:
Change in unrealized gain (loss) on investment securities available-for-sale			82,088				14,022
Reclassification adjustment for realized gains (loss) on investment securities    included in net earnings			7				170
Total income tax benefit (expense)			82,095				14,192
COMPREHENSIVE EARNINGS (LOSS)		$	(252,863	)		$	3,532

 

See notes to consolidated financial statements.

6

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars in thousands, except per share amounts)

 

		Common Stock																Treasury Stock												Accumulated Other				Total
		Shares				Amount				Capital Surplus				Retained Earnings				Shares				Amounts				Deferred Compensation				Comprehensive Earnings (Loss)				Shareholders’ Equity
Balances at December 31, 2020			142,161,834			$	1,422			$	669,644			$	836,729				(938,591	)		$	(9,126	)		$	9,126			$	170,395			$	1,678,190
Net earnings (unaudited)			—				—				—				56,918				—				—				—				—				56,918
Stock option exercises (unaudited)			124,524				1				1,903				—				—				—				—				—				1,904
Restricted stock grant/forfeiture,    net (unaudited)			(747	)			—				(17	)			—				—				—				—				—				(17	)
Cash dividends declared, $0.13 per    share (unaudited)			—				—				—				(18,500	)			—				—				—				—				(18,500	)
Change in unrealized gain (loss) in    investment securities    available-for-sale, net of    related income taxes    (unaudited)			—				—				—				—				—				—				—				(53,386	)			(53,386	)
Shares purchased in connection    with directors’ deferred    compensation plan, net    (unaudited)			—				—				—				—				587				(259	)			259				—				—
Stock option expense (unaudited)			—				—				319				—				—				—				—				—				319
Balances at March 31, 2021 (unaudited)			142,285,611			$	1,423			$	671,849			$	875,147				(938,004	)		$	(9,385	)		$	9,385			$	117,009			$	1,665,428
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)			—				—				—				55,972				—				—				—				—				55,972
Stock option exercises (unaudited)			172,751				2				2,919				—				—				—				—				—				2,921
Restricted stock grant/forfeiture,    net (unaudited)			(372	)			—				559				—				—				—				—				—				559
Cash dividends declared, $0.15    per share (unaudited)			—				—				—				(21,408	)			—				—				—				—				(21,408	)
Change in unrealized gain (loss) in    investment securities available-    for-sale, net of related income    taxes (unaudited)			—				—				—				—				—				—				—				(308,835	)			(308,835	)
Shares purchased in connection    with directors’ deferred    compensation plan, net    (unaudited)			—				—				—				—				50				(314	)			314				—				—
Stock option expense (unaudited)			—				—				316				—				—				—				—				—				316
Balances at March 31, 2022 (unaudited)			142,704,495			$	1,427			$	680,665			$	1,016,239				(936,847	)		$	(10,404	)		$	10,404			$	(209,582	)		$	1,488,749

 

See notes to consolidated financial statements.

 

7

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS—(UNAUDITED)

(Dollars in thousands)

 

		Three-Months Ended March 31,
		2022				2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	55,972			$	56,918
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			3,231				3,171
Provision for credit losses			4,782				(1,997	)
Securities premium amortization, net			19,836				14,105
Discount accretion on purchased loans			(373	)			(591	)
Gain on sale of assets, net			(1,074	)			(910	)
Change in loans held-for-sale			9,367				16,365
Change in other assets			9,434				8,868
Change in other liabilities			(14,490	)			840
Total adjustments			30,713				39,851
Net cash provided by operating activities			86,685				96,769
CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities:
Sales			—				10,631
Maturities			211,266				7,839,968
Purchases			(551,559	)			(8,280,926	)
Net increase in loans held-for-investment			(176,350	)			(148,615	)
Purchases of bank premises and equipment			(3,193	)			(3,322	)
Proceeds from sale of bank premises and equipment and other assets			—				420
Net cash used in investing activities			(519,836	)			(581,844	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits			198,494				367,448
Net increase in interest-bearing deposits			234,843				370,182
Net increase in borrowings			87,443				118,511
Common stock transactions:
Proceeds from stock option exercises			2,921				1,904
Dividends paid			(21,385	)			(18,483	)
Net cash provided by financing activities			502,316				839,562
NET INCREASE IN CASH AND CASH EQUIVALENTS			69,165				354,487
CASH AND CASH EQUIVALENTS, beginning of period			528,588				729,084
CASH AND CASH EQUIVALENTS, end of period		$	597,753			$	1,083,571
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS:
Interest paid		$	1,523			$	1,843
Transfer of loans to other real estate			—				255
Investment securities purchased but not settled			—				381,871
Restricted stock grant (forfeiture)			559				(17	)

 

See notes to consolidated financial statements.

 

8

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

30

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31

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32

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34

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38

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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,” 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, 2021, under the heading “Risk Factors,” and the following:

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Such forward-looking statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategies and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise (except as required by law).

 

Introduction

 

As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, gain on sale of mortgage loans and service charges. Our primary source of funding for our loans and investments are deposits held by our subsidiary, First Financial Bank, N.A. Our largest expense is salaries and related employee benefits. We measure our performance by calculating our return on average assets, return on average equity, regulatory capital ratios, net interest margin and efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income.

 

The following discussion and analysis of operations and financial condition should be read in conjunction with the financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as those included in the Company’s 2021 Annual Report on Form 10-K.

Critical Accounting Policies

We prepare consolidated financial statements based on generally accepted accounting principles (“GAAP”) and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions.

We deem a policy critical if (1) the accounting estimate required us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (2) 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 (1) our allowance for credit losses and our provision for credit losses and (2) 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 (1) our allowance for credit losses and our provision for credit losses and (2) our valuation of financial instruments is included in Note 1 to our Consolidated Financial Statements beginning on page 9.

Stock Repurchase

On July 27, 2021, the Company’s Board of Directors authorized the repurchase of up to 5.00 million common shares through July 31, 2023. The stock repurchase plan authorizes management to repurchase and retire the stock at such time as repurchases are considered beneficial to the Company and its stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Subsequent to July 27, 2021 and through the date of this report, no shares were repurchased under the plan.

Results of Operations

Performance Summary. Net earnings for the first quarter of 2022 were $55.97 million compared with earnings of $56.92 million for the first quarter of 2021. Diluted earnings per share was $0.39 for the first quarter of 2022 compared with $0.40 in the same quarter a year ago.

The return on average assets was 1.71% for the first quarter of 2022, as compared to 2.05% for the first quarter of 2021. The return on average equity was 13.53% for the first quarter of 2022 as compared to 13.83% for the first quarter of 2021.

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 $99.22 million for the first quarter of 2022, as compared to $92.37 million for the same period last year. The increase in 2022 tax equivalent net interest income compared to 2021 was largely attributable to the increases in interest earning assets primarily derived from an increase in loans and investment securities held partially offset by the lower amortization of PPP origination fees of $4.88 million. Average earning assets were $12.50 billion for the first quarter of 2022, as compared to $10.56 billion during the first quarter of 2021. The increase of $1.95 billion in average earning assets in 2022 when compared to 2021 was primarily a result of increases of taxable securities of $1.98 billion and

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tax-exempt securities of $243.41 million offset by a decrease in interest-bearing deposits in nonaffiliated banks of $465.16 million when compared to March 31, 2021 balances. Average interest-bearing liabilities were $7.68 billion for the first quarter of 2022, as compared to $6.37 billion in the same period in 2021. The increase in average interest-bearing liabilities primarily resulted from continued organic growth. The yield on earning assets decreased 35 basis points while the rate paid on interest-bearing liabilities decreased three basis points for the first quarter of 2022 compared to the first quarter of 2021.

Table 1 allocates the change in tax-equivalent net interest income between the amount of change attributable to volume and to rate.

Table 1 - Changes in Interest Income and Interest Expense (dollars in thousands):

 

		Three-Months Ended March 31, 2022 Compared to Three-Months Ended March 31, 2021
		Change Attributable to								Total
		Volume				Rate				Change
Short-term investments		$	(117	)		$	50			$	(67	)
Taxable investment securities			9,029				(1,470	)			7,559
Tax-exempt investment securities (1)			1,745				(617	)			1,128
Loans (1) (2)			2,412				(4,399	)			(1,987	)
Interest income			13,069				(6,436	)			6,633
Interest-bearing deposits			281				(608	)			(327	)
Short-term borrowings			65				45				110
Interest expense			346				(563	)			(217	)
Net interest income		$	12,723			$	(5,873	)		$	6,850

 

The net interest margin, on a tax equivalent basis, was 3.22% for the first quarter of 2022, a decrease of 33 basis points from the same period in 2021. We have continued to experience downward pressures on our net interest margin in 2022 and 2021 primarily due to (i) the extended period of historically low levels of short-term interest rates, (ii) the flat to inverted yield curve being experienced in the bond market, (iii) the shift in the mix of interest earning assets and (iv) the impact of the overall level of excess liquidity, which totaled $597.75 million and $528.59 million at March 31, 2022 and 2021, respectively. We have been able to somewhat mitigate the impact of these lower short-term interest rates and the flat/inverted yield curve by establishing minimum interest rates on certain of our loans, improving the pricing for loan risk and reducing the rates paid on our interest-bearing liabilities. During the first quarter of 2022, the Federal Reserve increased rates 25 basis points resulting in a target rate range of 25 to 50 basis points. Most recently, on May 5, 2022, the Federal Reserve increased rates 50 basis points resulting in a current target rate range of 75 to 100 basis points.

 

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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 March 31,
		2022												2021
		Average Balance				Income/ Expense				Yield/ Rate				Average Balance				Income/ Expense				Yield/ Rate
Assets
Short-term investments (1)		$	172,985			$	95				0.22	%		$	639,071			$	162				0.10	%
Taxable investment securities (2)			4,231,949				17,823				1.68				2,251,419				10,264				1.82
Tax-exempt investment securities (2)(3)			2,612,025				18,107				2.77				2,368,615				16,979				2.87
Loans (3)(4)			5,487,538				64,766				4.79				5,296,149				66,753				5.11
Total earning assets			12,504,497			$	100,791				3.27	%			10,555,254			$	94,158				3.62	%
Cash and due from banks			230,490												209,438
Bank premises and equipment, net			149,639												141,901
Other assets			111,669												98,301
Goodwill and other intangible assets, net			316,589												318,141
Allowance for credit losses			(63,577	)											(67,231	)
Total assets		$	13,249,307											$	11,255,804
Liabilities and Shareholders’ Equity
Interest-bearing deposits		$	6,898,059			$	1,369				0.08	%		$	5,916,237			$	1,696				0.12	%
Short-term borrowings			781,314				201				0.10				456,620				91				0.08
Total interest-bearing liabilities			7,679,373			$	1,570				0.08	%			6,372,857			$	1,787				0.11	%
Noninterest-bearing deposits			3,827,451												3,114,656
Other liabilities			64,999												99,581
Total liabilities			11,571,823												9,587,094
Shareholders’ equity			1,677,484												1,668,710
Total liabilities and shareholders’ equity		$	13,249,307											$	11,255,804
Net interest income (tax equivalent)						$	99,221											$	92,371
Rate Analysis:
Interest income/earning assets											3.27	%											3.62	%
Interest expense/earning assets											(0.05	)											(0.07	)
Net interest margin											3.22	%											3.55	%

 

Noninterest Income. Noninterest income for the first quarter of 2022 was $34.88 million compared to $34.87 million in the same quarter of 2021. Increases in certain categories of noninterest income included (1) trust fees of $1.52 million, (2) service charges on deposit accounts of $913 thousand, (3) ATM, interchange and credit card fees of $851 thousand and (4) net gain on sale of foreclosed assets of $1.03 million when compared to the first quarter of 2021. Mortgage related income was $6.33 million in the first quarter of 2022 compared to $9.89 million in the first quarter of 2021 due to lower overall origination volumes. The increase in trust fees resulted from an increase in the fair value of assets under management over the prior quarters. The fair value of trust assets managed, which are not reflected in our consolidated balance sheets, totaled $8.63 billion at March 31, 2022, up 14.59% when compared to $7.54 billion at March 31, 2021. The increase in ATM, interchange and credit card fees were driven by continued growth in the number of net new accounts and debit cards issued and overall customer utilization.

ATM and interchange fees are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. ATM and interchange fees consist of income from debit card usage, point of sale income for debit card transactions and ATM service fees.

Federal Reserve rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is limited to the sum of 21 cents per transaction plus 5 basis points multiplied by the value of the transaction. Management has estimated the impact of this reduction in ATM and interchange fees to approximate $18 million annually (pre-tax) once the Federal Reserve rules apply to the Company. Federal Reserve requirements stipulate that these rules would go into effect on July 1st following the year-end in which a financial institution’s total assets exceeded $10 billion at December 31st. This effect was delayed to 2021 by the Federal Reserve in late 2020; however, will become effective for the Company on July 1, 2022.

 

 

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Table 3 - Noninterest Income (dollars in thousands):

 

		Three-Months Ended March 31,
		2022				Increase (Decrease)				2021
Trust fees		$	9,817			$	1,518			$	8,299
Service charges on deposit accounts			5,706				913				4,793
ATM, interchange and credit card fees			9,528				851				8,677
Gain on sale and fees on mortgage loans			6,333				(3,561	)			9,894
Net gain on sale of available-for-sale securities			31				(777	)			808
Net gain on sale of foreclosed assets			1,084				1,029				55
Net gain on sale of assets			(10	)			(155	)			145
Interest on loan recoveries			283				(99	)			382
Other:
Check printing fees			27				(7	)			34
Safe deposit rental fees			290				(16	)			306
Credit life fees			219				4				215
Brokerage commissions			374				29				345
Wire transfer fees			388				73				315
Miscellaneous income			811				205				606
Total other			2,109				288				1,821
Total Noninterest Income		$	34,881			$	7			$	34,874

 

Noninterest Expense. Total noninterest expense for the first quarter of 2022 was $59.23 million, an increase of $1.50 million, or 2.60%, as compared to the same period of 2021. An important measure in determining whether a financial institution effectively manages noninterest expense is the efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax-equivalent basis and noninterest income. Lower ratios indicate better efficiency since more income is generated with a lower noninterest expense total. Our efficiency ratio improved to 44.16% for the first quarter of 2022 compared to 45.36% for the same quarter in 2021.

Salaries, commissions and employee benefits for the first quarter of 2022 totaled $34.14 million, compared to $34.93 million for the same period in 2021. The decrease reflected annual merit-based pay increases that were effective March 1, 2022 and offset by lower mortgage compensation expenses of $1.40 million and a decrease of $697 thousand in profit sharing expenses for the first quarter of 2022.

All other categories of noninterest expense for the first quarter of 2022 totaled $25.09 million, up from $22.79 million in the same quarter a year ago. Included in other noninterest expense for the three-months ended March 31, 2022 was $600 thousand of foreclosed asset expenses compared to $23 thousand for the three-months ended March 31, 2021.

 

 

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Table 4 - Noninterest Expense (dollars in thousands):

 

		Three-Months Ended March 31,
		2022				Increase (Decrease)				2021
Salaries and commissions		$	25,756			$	(338	)		$	26,094
Medical			2,891				51				2,840
Profit sharing			1,598				(697	)			2,295
401(k) match expense			982				19				963
Payroll taxes			2,169				38				2,131
Stock based compensation			742				134				608
Total salaries and employee benefits			34,138				(793	)			34,931
Net occupancy expense			3,225				78				3,147
Equipment expense			2,257				93				2,164
FDIC assessment fees			869				168				701
ATM, interchange and credit card expense			2,968				196				2,772
Professional and service fees			2,225				86				2,139
Printing, stationery and supplies			540				215				325
Operational and other losses			596				309				287
Software amortization and expense			2,457				(162	)			2,619
Amortization of intangible assets			320				(92	)			412
Other:
Data processing fees			445				39				406
Postage			308				(69	)			377
Advertising			699				(22	)			721
Correspondent bank service charges			254				24				230
Telephone			765				(511	)			1,276
Public relations and business development			794				127				667
Directors’ fees			720				104				616
Audit and accounting fees			513				8				505
Legal fees and other related costs			670				148				522
Regulatory exam fees			395				58				337
Travel			313				68				245
Courier expense			265				59				206
Other real estate owned			—				(28	)			28
Other			3,489				1,399				2,090
Total other			9,630				1,404				8,226
Total Noninterest Expense		$	59,225			$	1,502			$	57,723

 

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 March 31, 2022, total loans held-for-investment were $5.57 billion, an increase of $177.20 million, as compared to December 31, 2021. Total PPP loans outstanding were $15.74 million at March 31, 2022, which are included in the Company’s commercial loan totals. PPP loan balances accounted for $33.46 million in average balances for the quarter ended March 31, 2022.

As compared to year-end 2021 balances, total real estate loans increased $155.14 million, total commercial loans increased $14.87 million, agricultural loans decreased $15.21 million and total consumer loans increased $22.40 million. Loans averaged $5.49 billion for the first quarter of 2022, an increase of $191.39 million over the prior year first quarter 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 additional segmentation allows for a more precise pooling of loans with similar credit risk characteristics and credit monitor procedures for the Company’s calculation of its allowance for credit losses.

The loans originated as a result of the Company’s participation in the PPP program are included in the C&I loan portfolio segment as of March 31, 2022, and 2021 and December 31, 2021.

 

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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):

 

		March 31,								December 31,
		2022				2021				2021
Commercial:
C&I *		$	838,049			$	1,178,126			$	837,075
Municipal			191,799				176,949				177,905
Total Commercial			1,029,848				1,355,075				1,014,980
Agricultural			82,883				90,366				98,089
Real Estate:
Construction & Development			806,211				587,928				749,793
Farm			225,942				162,046				217,220
Non-Owner Occupied CRE			636,160				650,144				623,434
Owner Occupied CRE			881,181				759,906				821,653
Residential			1,352,162				1,254,727				1,334,419
Total Real Estate			3,901,656				3,414,751				3,746,519
Consumer:
Auto			419,818				370,027				405,416
Non-Auto			131,964				92,343				123,968
Total Consumer			551,782				462,370				529,384
Total		$	5,566,169			$	5,322,562			$	5,388,972

 

* All disclosures for the C&I loan segment include PPP loan balances, net of deferred fees and costs, as disclosed on the face of the consolidated balance sheet.

 

Loans held-for-sale, consisting of secondary market mortgage loans, totaled $27.67 million, $65.41 million, and $37.81 million at March 31, 2022 and 2021, and December 31, 2021, respectively. At March 31, 2022 and 2021, and December 31, 2021, $5.29 million, $3.89 million and $3.69 million, respectively, are valued using the lower of cost or fair value, and the remaining amounts are valued under the fair value option.

 

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The following tables summarize maturity information of our loan portfolio as of March 31, 2022. The table also presents the portions of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.

Maturity Distribution and Interest Sensitivity of Loans at March 31, 2022 (dollars in thousands):

 

		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		$	345,663			$	373,489			$	94,015			$	9,143			$	822,310
PPP			416				15,323				—				—				15,739
Municipal			14,046				42,668				110,364				24,721				191,799
Total Commercial			360,125				431,480				204,379				33,864				1,029,848
Agricultural			60,651				20,769				1,463				—				82,883
Real Estate:
Construction & Development			410,245				151,891				143,487				100,588				806,211
Farm			21,253				25,537				124,216				54,936				225,942
Non-Owner Occupied CRE			25,866				183,206				294,293				132,795				636,160
Owner Occupied CRE			42,324				179,855				445,645				213,357				881,181
Residential			100,605				99,846				633,400				518,311				1,352,162
Total Real Estate			600,293				640,335				1,641,041				1,019,987				3,901,656
Consumer:
Auto			5,892				403,034				10,892				—				419,818
Non-Auto			26,105				85,730				14,007				6,122				131,964
Total Consumer			31,997				488,764				24,899				6,122				551,782
Total		$	1,053,066			$	1,581,348			$	1,871,782			$	1,059,973			$	5,566,169
% of Total Loans			18.92	%			28.41	%			33.63	%			19.04	%			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		$	57,319			$	224,040			$	5,144			$	896			$	287,399
PPP			416				15,323				—				—				15,739
Municipal			3,675				40,977				86,979				—				131,631
Total Commercial			61,410				280,340				92,123				896				434,769
Agricultural			6,194				13,438				528				—				20,160
Real Estate:
Construction & Development			145,185				77,150				40,377				948				263,660
Farm			6,332				19,262				65,813				1,609				93,016
Non-Owner Occupied CRE			8,208				117,602				60,972				—				186,782
Owner Occupied CRE			19,813				110,875				46,164				1,309				178,161
Residential			27,648				84,008				417,360				36,709				565,725
Total Real Estate			207,186				408,897				630,686				40,575				1,287,344
Consumer:
Auto			5,892				403,034				10,892				—				419,818
Non-Auto			20,942				83,441				13,581				5,718				123,682
Total Consumer			26,834				486,475				24,473				5,718				543,500
Total		$	301,624			$	1,189,150			$	747,810			$	47,189			$	2,285,773
% of Total Loans			5.42	%			21.36	%			13.43	%			0.85	%			41.07	%

 

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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		$	288,344			$	149,449			$	88,871			$	8,247			$	534,911
PPP			—				—				—				—				—
Municipal			10,371				1,691				23,385				24,721				60,168
Total Commercial			298,715				151,140				112,256				32,968				595,079
Agricultural			54,457				7,331				935				—				62,723
Real Estate:
Construction & Development			265,060				74,741				103,110				99,640				542,551
Farm			14,921				6,275				58,403				53,327				132,926
Non-Owner Occupied CRE			17,658				65,604				233,321				132,795				449,378
Owner Occupied CRE			22,511				68,980				399,481				212,048				703,020
Residential			72,957				15,838				216,040				481,602				786,437
Total Real Estate			393,107				231,438				1,010,355				979,412				2,614,312
Consumer:
Auto			—				—				—				—				—
Non-Auto			5,163				2,289				426				404				8,282
Total Consumer			5,163				2,289				426				404				8,282
Total		$	751,442			$	392,198			$	1,123,972			$	1,012,784			$	3,280,396
% of Total Loans			13.50	%			7.05	%			20.19	%			18.20	%			58.93	%

Of the $3.28 billion of variable interest rate loans shown above, loans totaling $1.36 billion mature or reprice over the next twelve months. Of this amount, approximately $335 million will reprice immediately upon changes in the underlying index rate (primarily U.S. prime rate) with the remaining $1.02 billion being subject to floors above the current index.

Asset Quality. Our loan portfolio is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by bank regulatory agencies. Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were $28.75 million at March 31, 2022, as compared to $39.66 million at March 31, 2021 and $34.16 million at December 31, 2021. As a percent of loans held-for-investment and foreclosed assets, these assets were 0.52% at March 31, 2022, as compared to 0.75% at March 31, 2021 and 0.63% at December 31, 2021. As a percent of total assets, these assets were 0.22% at March 31, 2022, as compared to 0.33% at March 31, 2021 and 0.26% at December 31, 2021. We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming at March 31, 2022.

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

 

		March 31,								December 31,
		2022				2021				2021
Nonaccrual loans		$	28,723			$	39,333			$	31,652
Loans still accruing and past due 90 days or more			11				2				8
Troubled debt restructured loans*			20				23				21
Nonperforming loans			28,754				39,358				31,681
Foreclosed assets			—				300				2,477
Total nonperforming assets		$	28,754			$	39,658			$	34,158
As a % of loans held-for-investment and foreclosed assets			0.52	%			0.75	%			0.63	%
As a % of total assets			0.22				0.33				0.26

 

* Troubled debt restructured loans of $6.14 million, $6.62 million and $6.72 million, respectively, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in nonaccrual loans as of March 31, 2022 and 2021, and December 31, 2021, respectively.

We record interest payments received on nonaccrual loans as reductions of principal. Prior to the loans being placed on nonaccrual, we recognized interest income on these loans of approximately $1.35 million for the year ended December 31, 2021. If interest on these loans had been recognized on a full accrual basis during the year ended December 31, 2021, such income would have approximated $2.61 million. Such amounts for the 2022 and 2021 interim periods were not significant.

Allowance for Credit Losses. The allowance for credit losses is the amount we determine as of a specific date to be appropriate to absorb current expected credit losses on existing loans. For a discussion of our methodology, see our accounting policies in Note 1 to the Consolidated Financial Statements (unaudited). The provision for loan losses of $3.75 million for the three-months ended March 31, 2022 is combined with the provision for unfunded commitments of $1.04 million and reported in the aggregate of $4.78 million under the provision for credit losses in the Consolidated Statement of Earnings for the three-months ended March 31, 2022. The $3.43 million reversal of the provision for loan losses for the three-months

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ended March 31, 2021 is combined with the provision for unfunded commitments $1.43 million and reported in the aggregate of $2.00 million under the provision for credit losses for the three-months ended March 31, 2021. The increase in the Company's provision for credit losses during the first quarter of 2022 was primarily driven by strong organic loan growth. As a percent of average loans, net loan charge-offs were 0.02% for the first quarter of 2022, as compared to 0.01% for the first quarter of 2021. The allowance for credit losses as a percent of loans held-for-investment was 1.20% as of March 31, 2022, as compared to 1.18% as of both March 31, 2021 and December 31, 2021, respectively.

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

 

		Three-Months Ended March 31,
		2022				2021
Allowance for credit losses at period-end		$	66,913			$	62,974
Loans held-for-investment at period-end			5,566,169				5,322,562
Average loans for period			5,487,538				5,296,149
Net charge-offs (recoveries)/average    loans (annualized)			0.02	%			0.01	%
Allowance for loan losses/period-end    loans held-for-investment			1.20	%			1.18	%
Allowance for loan losses/nonaccrual loans,    past due 90 days still accruing and    restructured loans			232.71	%			160.00	%

 

Interest-Bearing Demand Deposits in Banks. The Company had interest-bearing deposits in banks of $394.57 million at March 31, 2022 compared to $893.22 million at March 31, 2021 and $323.54 million at December 31, 2021, respectively. At March 31, 2022, interest-bearing deposits in banks included $393.63 million maintained at the Federal Reserve Bank of Dallas and $939 thousand on deposit with the FHLB.

Available-for-Sale Securities. At March 31, 2022, securities with a fair value of $6.50 billion were classified as securities available-for-sale. As compared to December 31, 2021, the available-for-sale portfolio at March 31, 2022 reflected (i) an increase of $175 million in U.S. Treasury securities, (ii) a decrease of $223.99 million in obligations of states and political subdivisions, (iii) an increase of $503 thousand in corporate bonds and other securities, and (iv) a decrease of $21.70 million in mortgage-backed securities. Our mortgage related securities are backed by GNMA, FNMA or FHLMC or are collateralized by securities backed by these agencies.

See the below table and Note 2 to the Consolidated Financial Statements (unaudited) for additional disclosures relating to the maturities and fair values of the investment portfolio at March 31, 2022 and 2021, and December 31, 2021.

Table 8 - Maturities and Yields of Available-for-Sale Securities Held at March 31, 2022 (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		$	—				—	%		$	301,344				1.29	%		$	—				—	%		$	—				—	%		$	301,344				1.29	%
Obligations of states and    political subdivisions			167,213				4.42				660,838				3.78				1,699,561				2.59				1,869				4.47				2,529,481				3.02
Corporate bonds and other    securities			4,221				1.06				24,973				1.61				39,607				1.71				—				—				68,801				1.64
Mortgage-backed securities			116,016				2.43				1,909,788				1.78				1,075,581				1.67				501,484				2.24				3,602,869				1.83
Total		$	287,450				3.41	%		$	2,896,943				2.18	%		$	2,814,749				2.27	%		$	503,353				2.18	%		$	6,502,495				2.27	%

 

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 March 31, 2022, the investment portfolio had an overall tax equivalent yield of 2.27%, a weighted average life of 5.81 years and modified duration of 5.13 years.

Deposits. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were $11.00 billion as of March 31, 2022, as compared to $9.41 billion as of March 31, 2021 and $10.57 billion as of December 31, 2021.

 

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Table 9 provides a breakdown of average deposits and rates paid over the three-month periods ended March 31, 2022 and 2021, respectively.

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

 

		Three-Months Ended March 31,
		2022								2021
		Average Balance				Average Rate				Average Balance				Average Rate
Noninterest-bearing deposits		$	3,827,451			—%				$	3,114,656			—%
Interest-bearing deposits:
Interest-bearing checking			3,621,493				0.08				2,901,819				0.09
Savings and money market accounts			2,824,201				0.06				2,535,474				0.09
Time deposits under $250,000			308,116				0.22				324,758				0.34
Time deposits of $250,000 or more			144,249				0.28				154,186				0.60
Total interest-bearing deposits			6,898,059				0.08	%			5,916,237				0.12	%
Total average deposits		$	10,725,510							$	9,030,893
Total cost of deposits							0.05	%							0.08	%

 

The estimated amount of uninsured and uncollateralized deposits including related accrued and unpaid is approximately $3.99 billion as of March 31, 2022

 

Borrowings. Included in borrowings were federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings of $758.60 million, $548.60 million and $671.15 million at March 31, 2022 and 2021 and December 31, 2021, respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the short-term borrowings. The average balance of federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings were $781.31 million and $456.62 million in the first quarters of 2022 and 2021, respectively. The weighted average interest rates paid on these borrowings were 0.10% and 0.08% for the first quarters of 2022 and 2021, respectively.

Interest Rate Risk

Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. Our exposure to interest rate risk is managed primarily through our strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities that generate favorable earnings while limiting the potential negative effects of changes in market interest rates. We use no off-balance-sheet financial instruments to manage interest rate risk.

Our subsidiary bank has an asset liability management committee that monitors interest rate risk and compliance with investment policies. The subsidiary bank utilizes an earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next twelve months. The model measures the impact on net interest income relative to a base case scenario of hypothetical fluctuations in interest rates over the next twelve months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the re-pricing and maturity characteristics of the existing and projected balance sheet.

The following analysis depicts the estimated impact on net interest income of immediate changes in interest rates at the specified levels for the periods presented.

 

		Percentage change in net interest income:
Change in interest rates:		March 31,				December 31,
(in basis points)		2022		2021		2021
+400		9.17%		17.54%		10.56%
+300		7.26%		13.39%		8.52%
+200		5.36%		9.05%		6.13%
+100		3.15%		4.51%		3.42%
-100		(3.66)%		(4.72)%		(5.64)%
-200		(8.22)%		(7.21)%		(9.06)%

 

The results for the net interest income simulations as of March 31, 2022, March 31, 2021 and December 31, 2021 resulted in an asset sensitive position. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each year-end will remain constant over the relevant twelve-month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics on specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. We believe these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities reprice in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any

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conclusion. Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material.

Should we be unable to maintain a reasonable balance of maturities and repricing of our interest-earning assets and our interest-bearing liabilities, we could be required to dispose of our assets in an unfavorable manner or pay a higher than market rate to fund our activities. Our asset liability committee oversees and monitors this risk.

The fair value of our investment securities classified as available-for-sale totaled $6.50 billion at March 31, 2022. During the quarter-ended March 31, 2022, the corresponding unrealized gain before taxes on the portfolio of $125.67 million at December 31, 2021, and moved into an unrealized loss before taxes of $265.47 million at March 31, 2022, which is recorded net of taxes in accumulated other comprehensive earnings (loss) in shareholders' equity. The unrealized gains or losses, net of taxes, on the portfolio are excluded from the calculation of all regulatory capital ratios. The changes in the fair value were driven by increases in interest rates based on expected actions by the Federal Reserve Board and other market conditions. The overall valuation of the portfolio is most correlated to the 5-year U.S. Treasury rates based on the composition and duration of the portfolio. At March 31, 2022, the 5-year U.S. Treasury rate was 2.42% compared to 1.26% at December 31, 2021, representing a 116 basis point increase during the quarter. As of March 31, 2022, an additional 50 basis point increase in the 5-year U.S. Treasury rate would result in an increase to unrealized losses by approximately $138 million before taxes. We currently have the ability to hold these securities based on our overall liquidity and intent to hold the portfolio.

Capital and Liquidity

Capital. We evaluate capital resources by our ability to maintain adequate regulatory capital ratios to do business in the banking industry. Issues related to capital resources arise primarily when we are growing at an accelerated rate but not retaining a significant amount of our profits or when we experience significant asset quality deterioration.

Total shareholders’ equity was $1.49 billion, or 11.18% of total assets at March 31, 2022, as compared to $1.67 billion, or 13.76% of total assets at March 31, 2021, and $1.76 billion, or 13.43% of total assets at December 31, 2021. Included in shareholders’ equity at March 31, 2022 were $209.58 million in unrealized losses on investment securities available-for-sale, net of related income taxes. Included in shareholders' equity at March 31, 2021 and December 31, 2021 were $117.01 million and $99.25 million, respectively, in unrealized gains on investment securities available-for-sale, net of related income taxes. For the first quarter of 2022, total shareholders’ equity averaged $1.68 billion, or 12.66% of average assets, as compared to $1.67 billion, or 14.83% of average assets, during the same period in 2021.

Banking regulators measure capital adequacy by means of the risk-based capital ratios and the leverage ratio under the Basel III rules and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and off-balance-sheet commitments and contingencies according to prescribed risk categories. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders’ equity less intangible assets by quarter-to-date average assets less intangible assets.

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. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers.

As of March 31, 2022 and 2021, and December 31, 2021, we had a total risk-based capital ratio of 20.01%, 21.47% and 20.34%, a Tier 1 capital to risk-weighted assets ratio of 19.00%, 20.32% and 19.35%; a common equity Tier 1 to risk-weighted assets ratio of 19.00%, 20.32% and 19.35% and a Tier 1 leverage ratio of 10.78%, 11.55% and 11.13%, respectively. The regulatory capital ratios as of March 31, 2022 and 2021, and December 31, 2021 were calculated under Basel III rules.

 

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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 March 31, 2022:		Amount				Ratio				Amount				Ratio				Amount				Ratio
Total Capital to Risk-Weighted Assets:
Consolidated		$	1,469,193				20.01	%		$	770,926				10.50	%		$	734,216				10.00	%
First Financial Bank, N.A		$	1,315,543				17.96	%		$	769,254				10.50	%		$	732,623				10.00	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,394,808				19.00	%		$	624,083				8.50	%		$	440,529				6.00	%
First Financial Bank, N.A		$	1,241,158				16.94	%		$	622,729				8.50	%		$	586,098				8.00	%
Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,394,808				19.00	%		$	513,951				7.00	%			—			N/A
First Financial Bank, N.A		$	1,241,158				16.94	%		$	512,836				7.00	%		$	476,205				6.50	%
Leverage Ratio:
Consolidated		$	1,394,808				10.78	%		$	517,596				4.00	%			—			N/A
First Financial Bank, N.A		$	1,241,158				9.62	%		$	515,926				4.00	%		$	644,908				5.00	%

 

		Actual								Minimum Capital Required-Basel III								Required to be Considered Well- Capitalized
As of March 31, 2021:		Amount				Ratio				Amount				Ratio				Amount				Ratio
Total Capital to Risk-Weighted Assets:
Consolidated		$	1,312,779				21.47	%		$	642,092				10.50	%		$	611,516				10.00	%
First Financial Bank, N.A		$	1,174,022				19.24	%		$	640,757				10.50	%		$	610,245				10.00	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,242,887				20.32	%		$	519,788				8.50	%		$	366,909				6.00	%
First Financial Bank, N.A		$	1,104,130				18.09	%		$	518,708				8.50	%		$	488,196				8.00	%
Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,242,887				20.32	%		$	428,061				7.00	%			—			N/A
First Financial Bank, N.A		$	1,104,130				18.09	%		$	427,172				7.00	%		$	396,659				6.50	%
Leverage Ratio:
Consolidated		$	1,242,887				11.55	%		$	430,308				4.00	%			—			N/A
First Financial Bank, N.A		$	1,104,130				10.30	%		$	428,971				4.00	%		$	536,214				5.00	%

 

		Actual								Minimum Capital Required Basel III								Required to be Considered Well- Capitalized
As of December 31, 2021:		Amount				Ratio				Amount				Ratio				Amount				Ratio
Total Capital to Risk-Weighted Assets:
Consolidated		$	1,425,907				20.34	%		$	736,003				10.50	%		$	700,955				10.00	%
First Financial Bank, N.A		$	1,258,965				17.99	%		$	734,604				10.50	%		$	699,623				10.00	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,356,006				19.35	%		$	595,812				8.50	%		$	420,573				6.00	%
First Financial Bank, N.A		$	1,189,064				17.00	%		$	594,679				8.50	%		$	559,698				8.00	%
Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,356,006				19.35	%		$	490,669				7.00	%			—			N/A
First Financial Bank, N.A		$	1,189,064				17.00	%		$	489,736				7.00	%		$	454,755				6.50	%
Leverage Ratio:
Consolidated		$	1,356,006				11.13	%		$	487,459				4.00	%			—			N/A
First Financial Bank, N.A		$	1,189,064				9.79	%		$	485,926				4.00	%		$	607,407				5.00	%

 

In connection with the adoption of the Basel III regulatory capital framework, our subsidiary bank made the election to continue to exclude accumulated other comprehensive income from available-for-sale securities (“AOCI”) from capital in connection with its quarterly financial filing and, in effect, to retain the AOCI treatment under the prior capital rules.

Liquidity. Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. The potential need for liquidity arising from these types of financial instruments is represented by the contractual notional amount of the instrument. Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. Liquid assets include cash, federal funds sold, and short-term investments in time deposits in banks. Liquidity is also provided by access to funding sources, which include core depositors and correspondent banks that maintain accounts with and sell federal funds to our subsidiary bank. Other sources of funds include our ability to borrow from short-term sources,

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such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and other borrowings (see below) and an unfunded $25.00 million revolving line of credit established with Frost Bank, a nonaffiliated bank, which matures in June 2023 (see next paragraph). Our subsidiary bank also has federal funds purchased lines of credit with two non-affiliated banks totaling $130.00 million. At March 31, 2022, there were no amounts drawn on these lines of credit. Our subsidiary bank also has (i) an available line of credit with the FHLB totaling $2.06 billion at March 31, 2022, secured by portions of our loan portfolio and certain investment securities and (ii) access to the Federal Reserve Bank of Dallas lending program. At March 31, 2022, the Company did not have any balances under this line of credit.

The Company renewed its loan agreement, effective June 30, 2021, with Frost Bank. Under the loan agreement, as renewed and amended, we are permitted to draw up to $25.00 million on a revolving line of credit. Prior to June 30, 2023, interest is paid quarterly at The Wall Street Journal Prime Rate and the line of credit matures June 30, 2023. If a balance exists at June 30, 2023, the principal balance converts to a term facility payable quarterly over five years and interest is paid quarterly at The Wall Street Journal Prime Rate. The line of credit is unsecured. Among other provisions in the credit agreement, we must satisfy certain financial covenants during the term of the loan agreement, including, without limitation, covenants that require us to maintain certain capital, tangible net worth, loan loss reserve, non-performing asset and cash flow coverage ratios. In addition, the credit agreement contains certain operational covenants, which among others, restricts the payment of dividends above 55% of consolidated net income, limits the incurrence of debt (excluding any amounts acquired in an acquisition) and prohibits the disposal of assets except in the ordinary course of business. Since 1995, we have historically declared dividends as a percentage of our consolidated net income in a range of 36% (low) in 2021 and 2020 to 53% (high) in 2003 and 2006. The Company was in compliance with the financial and operational covenants at March 31, 2022. There was no outstanding balance under the line of credit as of March 31, 2022 and 2021, or December 31, 2021.

In addition, we anticipate that future acquisitions of financial institutions, expansion of branch locations or offerings of new products could also place a demand on our cash resources. Available cash and cash equivalents at our parent company which totaled $134.26 million at March 31, 2022, investment securities which totaled $2.31 million at March 31, 2022 and mature over 8 to 9 years, available dividends from our subsidiaries which totaled $317.31 million at March 31, 2022, utilization of available lines of credit, and future debt or equity offerings are expected to be the source of funding for these potential acquisitions or expansions.

Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed potentially problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As of March 31, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. We are monitoring closely the economic impact of the coronavirus on our customers and the communities we serve. Given the strong core deposit base and relatively low loan to deposit ratios maintained at our subsidiary bank, we consider our current liquidity position to be adequate to meet our short-term and long-term liquidity needs. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.

Off-Balance Sheet (“OBS”)/Reserve for Unfunded Commitments. We are a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of our customers. These financial instruments include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheets. At March 31, 2022, the Company’s reserve for unfunded commitments totaled $7.47 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 March 31, 2022 (in thousands):

 

		Total Notional Amounts Committed
Unfunded lines of credit		$	929,712
Unfunded commitments to extend credit			875,991
Standby letters of credit			35,093
Total commercial commitments		$	1,840,796

 

We believe we have no other OBS arrangements or transactions with unconsolidated, special purpose entities that would expose us to liability that is not reflected on the face of the financial statements. The above table does not include balances related to the Company’s IRLC and forward mortgage-backed security trades.

Parent Company Funding. Our ability to fund various operating expenses, dividends, and cash acquisitions is generally dependent on our own earnings (without giving effect to our subsidiaries), cash reserves and funds derived from our subsidiaries. These funds historically have been produced by intercompany dividends and management fees that are limited to reimbursement of actual expenses. We anticipate that our recurring cash sources will continue to include dividends and management fees from our subsidiaries. At March 31, 2022, $317.31 million was available for the payment of intercompany dividends by our subsidiaries without the prior approval of regulatory agencies. Our subsidiaries paid aggregate dividends of $3.00 million and $6.00 million for the three-months ended March 31, 2022 and 2021, respectively.

Dividends. Our long-term dividend policy is to pay cash dividends to our shareholders of approximately 35% to 40% of annual net earnings while maintaining adequate capital to support growth. We are also restricted by a loan covenant within our line of credit agreement with Frost Bank to dividend no greater than 55% of net income, as defined in such loan agreement. The cash dividend payout ratios have amounted to 38.25% and 32.50% of net earnings for the first three months of 2022 and 2021, respectively. Given our current capital position, projected earnings and asset growth rates, we do not anticipate any significant change in our current dividend policy. On April 26, 2022, the Board of Directors declared a $0.17 per share cash dividend for the second quarter of 2022, a 13.33% increase over the dividend declared in the first quarter of 2022. The record date for this dividend will be June 16, 2022, payable on July 1, 2022.

Our bank subsidiary, which is a national banking association and a member of the Federal Reserve System, is required by federal law to obtain the prior approval of the OCC to declare and pay dividends if the total of all dividends declared in any calendar year would exceed the total of (1) such bank’s net profits (as defined and interpreted by regulation) for that year plus (2) its retained net profits (as defined and interpreted by regulation) for the preceding two calendar years, less any required transfers to surplus.

To pay dividends, we and our subsidiary bank must maintain adequate capital above regulatory guidelines. In addition, if the applicable regulatory authority believes that a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the authority may require, after notice and hearing, that such bank cease and desist from the unsafe practice. 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 – Capital Resources—Interest Rate Risk” for disclosure regarding this market risk.

 

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Item 4. Controls and Procedures.

As of March 31, 2022, 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 March 31, 2022.

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. Other than regular, routine examinations by state and federal banking authorities, there are no proceedings pending or known to be contemplated by any governmental authorities.

 

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, 2021.

 

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

 

Not Applicable

 

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.

 

	2.1			—		Agreement and Plan of Reorganization, dated September 19, 2019, by and among First Financial Bankshares, Inc., Brazos Merger Sub, Inc., and TB&T Bancshares, Inc. (schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K) (incorporated by reference from Exhibit 2.1 to Registrant’s Form 8-K filed September 20, 2019).
	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, 2022).
	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			—		Loan agreement dated June 30, 2013, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed July 1, 2013).
	10.4			—		First Amendment to Loan Agreement, dated June 30, 2015, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed June 30, 2015).
	10.5			—		Second Amendment to Loan Agreement, dated June 30, 2017, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed June 30, 2017).
	10.6			—		Third Amendment to Loan Agreement, dated June 30, 2019, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed July 1, 2019).
	10.7			—		Fourth Amendment to Loan Agreement, dated June 30, 2021, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrants Form 8-K filed July 7, 2021).
	10.8			—		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).++
	10.9			—		Form of Executive Recognition Agreement (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed June 30, 2020).++
	10.10			—		First Financial Bankshares, Inc. Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2022 (incorporated by reference from Exhibit 10.1 of the Registrant's Form 8-K filed November 1, 2021.)++
	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.*

 

* 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: May 6, 2022				By:		/s/ F. Scott Dueser
						F. Scott Dueser
						Chairman of the Board, President and Chief Executive Officer
Date: May 6, 2022				By:		/s/ James R. Gordon
						James R. Gordon
						Executive Vice President and
						Chief Financial Officer, Secretary and Treasurer

 

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