FIRST FINANCIAL BANK

FFIN
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FIRST FINANCIAL BANKSHARES INC Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

05/06/2022 | 11:23am

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:




general economic conditions, including our local, state and national real estate
markets and employment trends;





effect of the coronavirus ("COVID") on our Company, the communities where we
have our branches, the state of Texas and the United States, related to the
economy and overall financial stability, including disruptions to supply
channels and labor availability;





government and regulatory responses to the COVID pandemic;





effect of severe weather conditions, including hurricanes, tornadoes, flooding
and droughts;





volatility and disruption in national and international financial and commodity
markets;





government intervention in the U.S. financial system including the effects of
recent legislative, tax, accounting and regulatory actions and reforms,
including the Coronavirus Aid, Relief, and Economic Security Act (the "CARES
Act"), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
"Dodd-Frank Act"), the Jumpstart Our Business Startups Act, the Consumer
Financial Protection Bureau
("CFPB"), the capital ratios of Basel III as adopted
by the federal banking authorities and the Tax Cuts and Jobs Act;




political or social unrest and economic instability;





the ability of the Federal government to address the national economy;





changes in our competitive environment from other financial institutions and
financial service providers;





the effects of and changes in trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal
Reserve System
(the "Federal Reserve Board");





the effect of changes in accounting policies and practices, as may be adopted by
the regulatory agencies, as well as the Public Company Accounting Oversight
Board
("PCAOB"), the Financial Accounting Standards Board ("FASB") and other
accounting standard setters;




the effect of changes in laws and regulations (including laws and regulations
concerning taxes, banking, securities and insurance) with which we and our
subsidiaries must comply;





changes in the demand for loans, including loans originated for sale in the
secondary market;





fluctuations in the value of collateral securing our loan portfolio and in the
level of the allowance for credit losses;





the accuracy of our estimates of future credit losses;





the accuracy of our estimates and assumptions regarding the performance of our
securities portfolio;





soundness of other financial institutions with which we have transactions;





inflation, interest rate, market and monetary fluctuations;





changes in consumer spending, borrowing and savings habits;





changes in commodity prices (e.g., oil and gas, cattle, and wind energy);





our ability to attract deposits and maintain and/or increase market share;





changes in our liquidity position;





changes in the reliability of our vendors, internal control system or
information systems;





cyber attacks on our technology information systems, including fraud from our
customers and external third-party vendors;





our ability to attract and retain qualified employees;





acquisitions and integration of acquired businesses;





the possible impairment of goodwill and other intangibles associated with our
acquisitions;





consequences of continued bank mergers and acquisitions in our market area,
resulting in fewer but much larger and stronger competitors;





expansion of operations, including branch openings, new product offerings and
expansion into new markets;





changes in our compensation and benefit plans;



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acts of God or of war or terrorism;





the impact of changes to the global climate and its effects on our operations
and customers;





potential risk of environmental liability associated with lending activities;
and





our success at managing the risk involved in the foregoing items.




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

Introduction

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

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


Critical Accounting Policies




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

We deem a policy critical if (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



(1)



Computed on a tax-equivalent basis assuming a marginal tax rate of 21%.
(2)
Nonaccrual loans are included in loans.




The net interest margin, on a tax equivalent basis, was 3.22% 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 Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense 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 %



(1)
Short-term investments are comprised of federal funds sold, interest-bearing
deposits in banks and interest-bearing time deposits in banks.
(2)
Average balances include unrealized gains and losses on available-for-sale
securities.
(3)
Includes tax equivalent yield adjustment of approximately $3.78 million and
$3.55 million in the first quarters of 2022 and 2021, respectively, using an
effective tax rate of 21% for both periods.
(4)
Nonaccrual loans are included in loans.

Noninterest Income. Noninterest income for the 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,
Increase
2022 (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,
Increase
2022 (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):


After One but After Five but After
Due in One Within Five Within Fifteen Fifteen
Year or Less Years Years 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 %



Due in One After One but After Five After
Year or Within Five but Within Fifteen
Loans with fixed interest rates: Less Years Fifteen Years 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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Due in One After One After Five but After
Loans with variable Year or but Within Within Fifteen Fifteen
interest rates: Less Five Years Years 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

47
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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



After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
Available-for-Sale: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasury
securities $ - - % $ 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.


48
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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 Average Average Average
Balance Rate Balance 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

49
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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.


50



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The regulatory capital ratios of the Company and Bank under the Basel III
regulatory capital framework are as follows:




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



As of 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 %



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



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



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,

51
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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.


52
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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.

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