FIRST FINANCIAL BANK

FFIN
Delayed Quote. Delayed  - 09/28 04:00:01 pm
42.74USD +1.98%

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

08/02/2022 | 04:15pm

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, including securities with a current unrealized loss;





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 together with increasing
wage costs in our markets;





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;



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changes in our compensation and benefit plans;





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 (i) the accounting estimate required us to make
assumptions about matters that are highly uncertain at the time we make the
accounting estimate; and (ii) different estimates that reasonably could have
been used in the current period, or changes in the accounting estimate that are
reasonably likely to occur from period to period, would have a material impact
on the financial statements.

We deem our most critical accounting policies to be (i) our allowance for credit
losses and our provision for credit losses and (ii) our valuation of financial
instruments. We have other significant accounting policies and continue to
evaluate the materiality of their impact on our consolidated financial
statements, but we believe these other policies either do not generally require
us to make estimates and judgments that are difficult or subjective, or it is
less likely they would have a material impact on our reported results for a
given period. A discussion of (i) our allowance for credit losses and our
provision for credit losses and (ii) our valuation of financial instruments is
included in Note 1 to our Consolidated Financial Statements beginning on page
10.

Stock Repurchase

On July 27, 2021, the Company's Board of Directors authorized the repurchase of
up to 5.00 million common shares through July 31, 2023. The stock repurchase
plan authorizes management to repurchase and retire the stock at such time as
repurchases are considered beneficial to the Company and its stockholders. Any
repurchase of stock will be made through the open market, block trades or in
privately negotiated transactions in accordance with applicable laws and
regulations. Under the repurchase plan, there is no minimum number of shares
that the Company is required to repurchase. Subsequent to July 27, 2021 and
through the date of this report, 244,559 shares were repurchased and retired
totaling $9.45 million under this repurchase plan.


Results of Operations




Performance Summary. Net earnings for the second quarter of 2022 were $60.49
million
compared with earnings of $56.38 million for the second quarter of 2021.
Diluted earnings per share was $0.42 for the second quarter of 2022 compared
with $0.39 in the same quarter a year ago.

The return on average assets was 1.82% for the second quarter of 2022, as
compared to 1.89% for the second quarter of 2021. The return on average equity
was 17.26% for the second quarter of 2022 as compared to 13.38% for the second
quarter of 2021.

Net earnings for the six-month period ended June 30, 2022 were $116.47 million
compared to earnings of $113.30 million for the same period in 2021. Diluted
earnings per share was $0.81 for the first six months of 2022 as compared to
$0.79 for the same period in 2021.

The return on average assets was 1.77% for the first six months of 2022 as
compared to 1.97% for the same period a year ago. The return on average equity
was 15.24% for the first six months of 2022 as compared to 13.61% for the same
period in 2021.

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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 $102.15 million for the second quarter of
2022, as compared to $94.58 million for the same period last year. The increase
in 2022 tax equivalent net interest income compared to 2021 was largely
attributable to the increases in and change in the mix of interest earning
assets primarily derived from an increase in loans and investment securities
held partially offset by the lower amortization of PPP origination fees which
totaled $313 thousand in the second quarter of 2022 compared to $5.24 million in
the second quarter of 2021. PPP loan balances totaled $2.30 million at June 30,
2022
. Average earning assets were $12.49 billion for the second quarter of 2022,
as compared to $11.30 billion during the second quarter of 2021. The increase of
$1.19 billion in average earning assets in 2022 when compared to 2021 was
primarily a result of increases of taxable securities of $1.45 billion offset by
decreases in short-term investments of $509.63 million and tax-exempt securities
of $85.60 million when compared to June 30, 2021 balances. Additionally, average
loans increased $337.02 million from a year ago and the mix shifted from PPP
loans which earned 1.00% excluding origination fees, to other loan categories
with higher yields. Average interest-bearing liabilities were $7.78 billion for
the second quarter of 2022, as compared to $6.76 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 four basis
points while the rate paid on interest-bearing liabilities increased six basis
points for the second quarter of 2022 compared to the second quarter of 2021.

Tax-equivalent net interest income was $201.37 million for the first six months
of 2022 as compared to $186.95 million for the same period last year. The
increase in 2022 tax equivalent net interest income compared to 2021 was largely
attributable to the increases in and change in the mix of interest earning
assets primarily derived from an increase in loans and investment securities
held partially offset by the lower amortization of PPP origination fees which
totaled $1.69 million for the first half of 2022 compared to $11.49 million for
the first half of 2021. Average earning assets were $12.50 billion for the first
six months of 2022, as compared to $10.93 billion during the first six months of
2021. The increase of $1.57 billion in average earning assets in 2022 when
compared to 2021 was primarily a result of increases of taxable securities of
$1.71 billion and tax-exempt securities of $78.00 million offset by decreases in
short-term investments of $487.98 million when compared to June 30, 2021
balances. Additionally, average loans increased $264.61 million when compared to
a year ago and the mix shifted from PPP loans, which earned 1.00%, excluding
origination fees, to other loan categories with higher yields. Average
interest-bearing liabilities were $7.73 billion for the first six months of
2022, as compared to $6.57 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 18 basis points while the rate
paid on interest-bearing liabilities increased one basis point for the first six
months of 2022 compared to the first six months of 2021.


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




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

Three-Months Ended June 30, 2022 Six-Months Ended June 30, 2022
Compared to Three-Months Ended Compared to Six-Months Ended
June 30, 2021 June 30, 2021
Change Attributable to Total Change Attributable to Total
Volume Rate Change Volume Rate Change
Short-term investments $ (137 ) $ 474 $


337 $ (255 ) $ 526 $ 271
Taxable investment securities


6,231 1,471 7,702 15,137 125 15,262
Tax-exempt investment securities (1) (605 ) 361 (244 ) 1,113 (226 ) 887
Loans (1) (2) 4,205 (2,888 ) 1,317 6,632 (7,306 ) (674 )
Interest income 9,694 (582 ) 9,112 22,627 (6,881 ) 15,746
Interest-bearing deposits 205 1,202 1,407 484 597 1,081
Short-term borrowings 30 109 139 99 150 249
Interest expense 235 1,311 1,546 583 747 1,330
Net interest income $ 9,459 $ (1,893 ) $ 7,566 $ 22,044 $ (7,628 ) $ 14,416



(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 3.28% for the second
quarter of 2022, a decrease of eight basis points from the same period in 2021.
The net interest margin, on a tax equivalent basis, was 3.25% for the first six
months of 2022, a decrease of 20 basis points from the same period in 2021. We
experienced downward pressure on our net interest margin during 2021 primarily
due to (i) the extended period of historically low levels of short-term interest
rates, (ii) the shift in the mix of interest-earning assets and (iii) the impact
of the overall level of excess liquidity, which totaled $465.56 million and
$844.59 million at June 30, 2022 and 2021, respectively. We have been able to
somewhat mitigate the impact of these lower short-term interest rates 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. The Federal Reserve increased rates 150 basis points during the
first half of 2022 resulting in a target rate range of 150 to 175 basis points.
Most recently, on July 27, 2022, the Federal Reserve increased rates 75 basis
points resulting in a current target rate range of 225 to 250 basis points.
However, short-term and long-term treasury interest rates have remained flat and
the rate curve has continued to become inverted recently, which may impact our
ongoing net interest income and net interest margin.

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Loan rates on variable loans have increased as the majority of such loans are
indexed to the applicable prime rate (currently 4.75% at June 30, 2022), subject
to underlying floors. With the latest increase in the federal funds rate, the
majority of variable rate loans have increased with approximately $1 billion
subject to floors as shown below on page 50. Subsequent to June 30, 2022, on
July 28, 2022, the applicable prime rate increased to 5.50%.

During June 2022, we increased rates on each of the primary depository products
in response to the increasing federal funds rate and expect those rates will
continue to move upward in the foreseeable future. Additionally, we have
approximately $1.1 billion of municipal and related deposits which are indexed
to short-term treasury rates which have continued to increase with the changes
in the applicable rate index.


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 June 30,
2022 2021
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Assets
Short-term investments (1) $ 290,250 $ 552 0.76 % $ 799,884 $ 215 0.11 %
Taxable investment
securities (2) 4,101,751 19,151 1.87 2,656,211 11,449 1.72
Tax-exempt investment
securities (2)(3) 2,376,324 17,166 2.89 2,461,924 17,410 2.83
Loans (3)(4) 5,720,804 68,478 4.80 5,383,781 67,161 5.00
Total earning assets 12,489,129 $ 105,347 3.38 % 11,301,800 $ 96,235 3.42 %
Cash and due from banks 233,621 197,412
Bank premises and
equipment, net 149,887 144,671
Other assets 193,308 95,575
Goodwill and other
intangible assets, net 316,278 317,721
Allowance for credit losses (67,383 ) (63,097 )
Total assets $ 13,314,840 $ 11,994,082
Liabilities and
Shareholders' Equity
Interest-bearing deposits $ 7,049,041 $ 2,967 0.17 % $ 6,229,991 $ 1,560 0.10 %
Short-term borrowings 730,477 232 0.13 527,669 93 0.07
Total interest-bearing
liabilities 7,779,518 $ 3,199 0.16 % 6,757,660 $ 1,653 0.10 %
Noninterest-bearing
deposits 4,064,207 3,439,683
Other liabilities 65,475 106,994
Total liabilities 11,909,200 10,304,337
Shareholders' equity 1,405,640 1,689,745
Total liabilities and
shareholders' equity $ 13,314,840 $ 11,994,082
Net interest income $ 102,148 $ 94,582
Rate Analysis:
Interest income/earning
assets 3.38 % 3.42 %
Interest expense/earning
assets (0.10 ) (0.06 )
Net interest margin 3.28 % 3.36 %



(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 $3.37 million and
$3.63 million in the second quarters of 2022 and 2021, respectively, using an
effective tax rate of 21% for both periods.
(4)
Nonaccrual loans are included in loans.


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Six-Months Ended June 30,
2022 2021
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Assets
Short-term investments (1) $ 231,941 $ 648 0.56 % $ 719,922 $ 377 0.11 %
Taxable investment
securities (2) 4,166,490 36,974 1.77 2,454,933 21,712 1.77
Tax-exempt investment
securities (2)(3) 2,493,523 35,276 2.83 2,415,527 34,389 2.85
Loans (3)(4) 5,604,815 133,240 4.79 5,340,207 133,914 5.06
Total earning assets 12,496,769 $ 206,138 3.33 % 10,930,589 $ 190,392 3.51 %
Cash and due from banks 232,063 203,392
Bank premises and equipment,
net 149,764 143,293
Other assets 152,715 96,931
Goodwill and other
intangible assets, net 316,432 317,930
Allowance for credit losses (65,488 ) (65,153 )
Total assets $ 13,282,255 $ 11,626,982
Liabilities and
Shareholders' Equity
Interest-bearing deposits $ 6,973,967 $ 4,336 0.13 % $ 6,073,981 $ 3,255 0.11 %
Short-term borrowings 755,755 433 0.12 492,341 184 0.08
Total interest-bearing
liabilities 7,729,722 $ 4,769 0.12 % 6,566,322 $ 3,439 0.11 %
Noninterest-bearing deposits 3,946,483 3,278,067
Other liabilities 65,239 103,307
Total liabilities 11,741,444 9,947,696
Shareholders' equity 1,540,811 1,679,286
Total liabilities and
shareholders' equity $ 13,282,255 $ 11,626,982
Net interest income (tax
equivalent) $ 201,369 $ 186,953
Rate Analysis:
Interest income/earning
assets 3.33 % 3.51 %
Interest expense/earning
assets (0.08 ) (0.06 )
Net interest margin 3.25 % 3.45 %



(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 $7.15 million and
$7.18 million in the first six months of 2022 and 2021, respectively, using an
effective tax rate of 21% for both periods.
(4)
Nonaccrual loans are included in loans.

Noninterest Income. Noninterest income for the second quarter of 2022 was $37.32
million
compared to $34.67 million in the same quarter of 2021. Increases in
certain categories of noninterest income included (i) trust fees of $1.05
million
, (ii) service charges on deposit accounts of $1.11 million and, (iii)
ATM, interchange and credit card fees of $715 thousand, (iv) net gain on sale of
available-for-sale securities of $1.64 million and (v) recoveries of interest on
previously charged-off or nonaccrual loans of $945 thousand when compared to the
second quarter of 2021. Mortgage related income was $5.73 million in the second
quarter of 2022 compared to $8.29 million in the second quarter of 2021 due to
lower overall origination volumes. The increase in trust fees was driven mainly
by the continued increase in oil and gas revenue. 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.

Noninterest income for the six-month period ended June 30, 2022 was $72.20
million
compared to $69.55 million compared to the same period in 2021.
Increases in certain categories of noninterest income included (i) trust fees of
$2.57 million, (ii) service charges on deposit accounts of $2.02 million, (iii)
ATM, interchange and credit card fees of $1.57 million, (iv) net gain on sale of
available-for-sale securities of $866 thousand, (v) net gain on sale of
foreclosed assets of $1.05 million and (vi) recoveries of interest on previously
charged-off or nonaccrual loans of $846 thousand when compared to the same
period of 2021. Mortgage related income was $12.06 million for the six-month
period ended June 30, 2022 compared to $18.19 million in the same period of 2021
due to lower overall origination volumes. The increase in trust fees was driven
mainly by the continued increase in oil and gas revenue.

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 interchange fees to approximate $18 million annually
(pre-tax). Based on the applicable Federal Reserve rules, as amended, the
Company became subject to the limitation effective July 1, 2022 and forward.



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Table 3 - Noninterest Income (dollars in thousands):




Three-Months Ended June 30, Six-Months Ended June 30,
Increase Increase
2022 (Decrease) 2021 2022 (Decrease) 2021
Trust fees $ 9,742 $ 1,050 $ 8,692 $ 19,559 $ 2,568 $ 16,991
Service charges on deposit
accounts 6,038 1,110 4,928 11,744 2,023 9,721
ATM, interchange and credit
card fees 10,568 715 9,853 20,096 1,566 18,530
Gain on sale and fees on
mortgage loans 5,728 (2,563 ) 8,291 12,061 (6,124 ) 18,185
Net gain on sale of
available-for-sale securities 1,648 1,643 5 1,679 866 813
Net gain on sale of foreclosed
assets 18 17 1 1,102 1,046 56
Net gain on sale of assets 6 (68 ) 74 (4 ) (223 ) 219
Interest on loan recoveries 1,649 945 704 1,932 846 1,086


Other:



Check printing fees 31 (2 ) 33 58 (9 ) 67
Safe deposit rental fees 189 (3 ) 192 478 (20 ) 498
Credit life fees 366 2 364 585 6 579
Brokerage commissions 401 44 357 775 73 702
Wire transfer fees 436 82 354 824 154 670
Miscellaneous income 497 (328 ) 825 1,309 (122 ) 1,431
Total other 1,920 (205 ) 2,125 4,029 82 3,947
Total Noninterest Income $ 37,317 $ 2,644 $ 34,673 $ 72,198 $ 2,650 $ 69,548



Noninterest Expense. Total noninterest expense for the second quarter of 2022
was $58.33 million, a decrease of $1.04 million, or 1.75%, 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 41.83% for the second quarter of
2022 compared to 45.94% for the same quarter in 2021.

Salaries, commissions and employee benefits for the second quarter of 2022
totaled $33.15 million, compared to $35.05 million for the same period in 2021.
The net decrease reflected lower mortgage compensation expenses of $1.49 million
and a decrease of $803 thousand in profit sharing expenses offset by annual
merit-based and other market-based pay increases that were effective March 1,
2022
for the second quarter of 2022.

All other categories of noninterest expense for the second quarter of 2022
totaled $25.19 million, up from $24.33 million in the same quarter a year ago.
Noninterest expense, excluding salary related costs, for the three-months ended
June 30, 2022 increased primarily due to increases in FDIC insurance, deposit
account charge-offs and interchange processing costs compared to the
three-months ended June 30, 2021.

Total noninterest expense for the first six months of 2022 was $117.56 million,
an increase of $460 thousand, or 0.39%, as compared to the same period of 2021.
Our efficiency ratio for the first six months of 2022 was 42.97% compared to
45.65% for the same period in 2021.

Salaries, commissions and employee benefits for the first six months of 2022
totaled $67.29 million, compared to $69.98 million for the same period in 2021.
The net decrease reflected lower mortgage compensation expenses of $2.89 million
and a decrease of $1.50 million in profit sharing expenses offset by annual
merit-based and other market-based pay increases that were effective March 1,
2022
for the first six months of 2022.

All other categories of noninterest expense for the first six months of 2022
totaled $50.27 million, up from $47.12 million in the same period a year ago.
Noninterest expense, excluding salary related costs, for the six-months ended
June 30, 2022, increased primarily due to increases in FDIC insurance, deposit
account charge-offs and interchange processing costs compared to the six-months
ended June 30, 2021.




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Table 4 - Noninterest Expense (dollars in thousands):




Three-Months Ended June 30, Six-Months Ended June 30,
Increase Increase
2022 (Decrease) 2021 2022 (Decrease) 2021
Salaries and commissions $ 25,772 $ (1,106 ) $ 26,878 $ 51,530 $ (1,442 ) $ 52,972
Medical 2,496 (259 ) 2,755 5,388 (207 ) 5,595
Profit sharing 1,307 (803 ) 2,110 2,905 (1,500 ) 4,405
401(k) match expense 942 15 927 1,924 34 1,890
Payroll taxes 1,719 6 1,713 3,887 43 3,844
Stock based compensation 911 248 663 1,651 380 1,271
Total salaries and employee
benefits 33,147 (1,899 ) 35,046 67,285 (2,692 ) 69,977
Net occupancy expense 3,292 51 3,241 6,517 129 6,388
Equipment expense 2,346 169 2,177 4,603 262 4,341
FDIC assessment fees 904 138 766 1,773 306 1,467
ATM, interchange and credit
card expense 3,201 162 3,039 6,169 358 5,811
Professional and service fees 2,191 (201 ) 2,392 4,415 (116 ) 4,531
Printing, stationery and
supplies 501 12 489 1,041 227 814
Operational and other losses 782 248 534 1,378 557 821
Software amortization and
expense 2,522 (307 ) 2,829 4,979 (469 ) 5,448
Amortization of intangible
assets 320 (92 ) 412 640 (184 ) 824
Other:
Data processing fees 445 7 438 890 46 844
Postage 332 43 289 640 (26 ) 666
Advertising 739 134 605 1,439 113 1,326
Correspondent bank service
charges 278 18 260 532 42 490
Telephone 754 (68 ) 822 1,519 (579 ) 2,098
Public relations and business
development 815 28 787 1,608 154 1,454
Directors' fees 629 33 596 1,349 137 1,212
Audit and accounting fees 513 32 481 1,025 39 986
Legal fees and other related
costs 260 (649 ) 909 930 (501 ) 1,431
Regulatory exam fees 395 58 337 789 115 674
Travel 461 109 352 774 177 597
Courier expense 314 56 258 579 115 464
Other real estate owned 2 (9 ) 11 2 (37 ) 39
Other 3,190 886 2,304 6,682 2,287 4,395
Total other 9,127 678 8,449 18,758 2,082 16,676
Total Noninterest
Expense $ 58,333 $ (1,041 ) $ 59,374 $ 117,558 $ 460 $ 117,098




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 June 30, 2022, total loans
held-for-investment were $5.88 billion, an increase of $489.61 million, as
compared to December 31, 2021. Total PPP loans outstanding were $2.30 million at
June 30, 2022, which are included in the Company's commercial loan totals. PPP
loan balances accounted for $4.55 million and $19.47 million in average balances
for the three and six-months ended June 30, 2022.

As compared to year-end 2021 balances, total real estate loans increased $390.61
million
, total commercial loans increased $25.53 million, agricultural loans
decreased $7.67 million and total consumer loans increased $81.15 million. Loans
averaged $5.72 billion for the second quarter of 2022, an increase of $337.02
million
over the prior year second quarter average balances. Loans averaged
$5.60 billion for the first six months of 2022, an increase of $264.61 million
from the prior year six-month period average balances.

Our loan portfolio segments include C&I, Municipal, Agricultural, Construction
and Development, Farm, Non-Owner Occupied and Owner Occupied CRE, Residential,
Consumer Auto and Consumer Non-Auto. This segmentation allows for a more precise
pooling of loans with similar credit risk characteristics and credit monitor
procedures for the Company's calculation of its allowance for credit losses.


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 June 30, 2022 and
2021, and December 31, 2021.





47
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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):




June 30, December 31,
2022 2021 2021
Commercial:
C&I * $ 839,928 $ 983,103 $ 837,075
Municipal 200,577 179,356 177,905
Total Commercial 1,040,505 1,162,459 1,014,980
Agricultural 90,420 95,212 98,089
Real Estate:
Construction & Development 928,644 550,928 749,793
Farm 250,028 185,288 217,220
Non-Owner Occupied CRE 636,432 673,608 623,434
Owner Occupied CRE 909,899 820,055 821,653
Residential 1,412,125 1,328,474 1,334,419
Total Real Estate 4,137,128 3,558,353 3,746,519
Consumer:
Auto 468,147 383,764 405,416
Non-Auto 142,382 104,814 123,968
Total Consumer 610,529 488,578 529,384
Total $ 5,878,582 $ 5,304,602 $ 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
$26.45 million, $61.80 million, and $37.81 million at June 30, 2022 and 2021,
and December 31, 2021, respectively. At June 30, 2022 and 2021, and December 31,
2021
, $2.60 million, $5.55 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.


48
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The following tables summarize maturity information of our loan portfolio as of
June 30, 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 June 30, 2022
(dollars in thousands):


After One but After Five but After
Due in One Within Five Within Fifteen Fifteen
Total Loans Held-for-Investment: Year or Less Years Years Years Total
Commercial:
C&I $ 310,414 $ 416,815 $ 88,800 $ 21,598 $ 837,627
PPP - 2,301 - - 2,301
Municipal 4,139 48,569 111,026 36,843 200,577
Total Commercial 314,553 467,685 199,826 58,441 1,040,505
Agricultural 67,765 20,852 1,803 - 90,420
Real Estate:
Construction & Development 462,479 178,723 174,936 112,506 928,644
Farm 23,092 24,805 131,929 70,202 250,028
Non-Owner Occupied CRE 22,048 165,880 316,298 132,206 636,432
Owner Occupied CRE 30,382 203,760 466,544 209,213 909,899
Residential 115,259 100,270 646,545 550,051 1,412,125
Total Real Estate 653,260 673,438 1,736,252 1,074,178 4,137,128
Consumer:
Auto 5,707 439,885 22,555 - 468,147
Non-Auto 25,802 96,053 14,464 6,063 142,382
Total Consumer 31,509 535,938 37,019 6,063 610,529
Total $ 1,067,087 $ 1,697,913 $ 1,974,900 $ 1,138,682 $ 5,878,582
% of Total Loans 18.15 % 28.88 % 33.60 % 19.37 % 100.00 %



Due in One After One but After Five but After
Year or Within Five Within Fifteen Fifteen
Loans with fixed interest rates: Less Years Years Years Total
Commercial:
C&I $ 55,587 $ 244,429 $ 8,168 $ - $ 308,184
PPP - 2,301 - - 2,301
Municipal 3,670 47,112 87,847 7,594 146,223
Total Commercial 59,257 293,842 96,015 7,594 456,708
Agricultural 7,877 13,654 515 - 22,046
Real Estate:
Construction & Development 176,235 82,124 47,485 458 306,302
Farm 5,823 19,740 73,397 949 99,909
Non-Owner Occupied CRE 8,591 111,167 71,950 - 191,708
Owner Occupied CRE 14,916 143,508 52,110 224 210,758
Residential 40,910 83,609 428,792 37,809 591,120
Total Real Estate 246,475 440,148 673,734 39,440 1,399,797
Consumer:
Auto 5,707 439,885 22,555 - 468,147
Non-Auto 20,527 94,191 14,044 5,682 134,444
Total Consumer 26,234 534,076 36,599 5,682 602,591
Total $ 339,843 $ 1,281,720 $ 806,863 $ 52,716 $ 2,481,142
% of Total Loans 5.78 % 21.80 % 13.73 % 0.90 % 42.21 %




49



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Due in One After One After Five but After
Loans with variable interest Year or but Within Within Fifteen Fifteen
rates: Less Five Years Years Years Total
Commercial:
C&I $ 254,827 $ 172,386 $ 80,632 $ 21,598 $ 529,443
PPP - - - - -
Municipal 469 1,457 23,179 29,249 54,354
Total Commercial 255,296 173,843 103,811 50,847 583,797
Agricultural 59,888 7,198 1,288 - 68,374
Real Estate:
Construction & Development 286,244 96,599 127,451 112,048 622,342
Farm 17,269 5,065 58,532 69,253 150,119
Non-Owner Occupied CRE 13,457 54,713 244,348 132,206 444,724
Owner Occupied CRE 15,466 60,252 414,434 208,989 699,141
Residential 74,349 16,661 217,753 512,242 821,005
Total Real Estate 406,785 233,290 1,062,518 1,034,738 2,737,331
Consumer:
Auto - - - - -
Non-Auto 5,275 1,862 420 381 7,938
Total Consumer 5,275 1,862 420 381 7,938
Total $ 727,244 $ 416,193 $ 1,168,037 $ 1,085,966 $ 3,397,440
% of Total Loans 12.37 % 7.08 % 19.87 % 18.47 % 57.79 %


Of the $3.40 billion of variable interest rate loans shown above, loans totaling
$1.34 billion mature or reprice over the next twelve months. Of this amount,
approximately $1 billion will reprice immediately upon changes in the underlying
index rate (primarily U.S. prime rate) with the remaining $300 million being
subject to floors above the current index (however, with the recent 75 basis
point increase in prime rate the majority of these are now at or above their
stated floors).

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 $25.52 million at
June 30, 2022, as compared to $30.11 million at June 30, 2021 and $34.16 million
at December 31, 2021. As a percent of loans held-for-investment and foreclosed
assets, these assets were 0.43% at June 30, 2022, as compared to 0.57% at June
30, 2021
and 0.63% at December 31, 2021. As a percent of total assets, these
assets were 0.19% at June 30, 2022, as compared to 0.24% at June 30, 2021 and
0.26% at December 31, 2021. We believe the level of these assets to be
manageable and are not aware of any material classified credits not properly
disclosed as nonperforming at June 30, 2022.


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




June 30, December 31,
2022 2021 2021
Nonaccrual loans $ 25,475 $ 29,786 $ 31,652
Loans still accruing and past due 90 days or
more 22 - 8
Troubled debt restructured loans* 20 23 21
Nonperforming loans 25,517 29,809 31,681
Foreclosed assets - 305 2,477
Total nonperforming assets $ 25,517 $ 30,114 $ 34,158
As a % of loans held-for-investment and
foreclosed assets 0.43 % 0.57 % 0.63 %
As a % of total assets 0.19 0.24 0.26



* Troubled debt restructured loans of $2.24 million, $7.31 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 June 30, 2022 and 2021, and December 31, 2021,
respectively.

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

Allowance for Credit Losses. The allowance for credit losses is the amount we
determine as of a specific date to be appropriate to absorb current expected
credit losses on existing loans. For a discussion of our methodology, see our
accounting policies in Note 1 to the Consolidated Financial Statements
(unaudited).

50
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The provision for loan losses of $4.10 million for the three-months ended June
30, 2022
is combined with the provision for unfunded commitments of $1.25
million
and reported in the aggregate of $5.35 million under the provision for
credit losses in the consolidated statements of earnings for the three-months
ended June 30, 2022. The provision for loan losses of $7.85 million for the
six-months ended June 30, 2022 is combined with the provision for unfunded
commitments of $2.28 million and reported in the aggregate of $10.13 million
under the provision for credit losses in the consolidated statements of earnings
for the six-months ended June 30, 2022. The increase in the Company's provision
for credit losses during the second quarter of 2022 was primarily driven by
strong organic loan growth and a slight decline in the projected economic
forecast.

The $1.04 million reversal of the provision for loan losses for the three-months
ended June 30, 2021 is combined with the reversal of the provision for unfunded
commitments of $167 thousand and reported in the aggregate of a reversal of
$1.21 million under the provision for credit losses for the three-months ended
June 30, 2021. The $4.47 million reversal of the provision for loan losses for
the six-months ended June 30, 2021 is combined with the provision for unfunded
commitments $1.27 million and reported in the net aggregate reversal of $3.20
million
under the provision for credit losses for the six-months ended June 30,
2021
. The increase in the Company's provision for credit losses during the first
half of 2022 was primarily driven by strong organic loan growth and a slight
decline in the projected economic forecast.

As a percent of average loans, net loan recoveries were 0.06% for the second
quarter of 2022, as compared to 0.02% for the second quarter of 2021. As a
percent of average loans, net loan recoveries were 0.02% for the first half of
2022, as compared to net charge-offs of zero percent for the first half of 2021.
The allowance for credit losses as a percent of loans held-for-investment was
1.22% as of June 30, 2022, as compared to 1.17% and 1.18% as of June 30, 2021
and December 31, 2021, respectively.


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




Three-Months Ended Six-Months Ended
June 30, June 30,
2022 2021 2022 2021
Allowance for credit losses at
period-end $ 71,932 $ 62,138 $ 71,932 $ 62,138
Loans held-for-investment at
period-end 5,878,582 5,304,602 5,878,582 5,304,602
Average loans for period 5,720,804 5,383,781 5,604,815 5,340,207
Net charge-offs
(recoveries)/average
loans (annualized) (0.06 )% (0.02 )% (0.02 )% -
Allowance for loan
losses/period-end
loans held-for-investment 1.22 % 1.17 % 1.22 % 1.17 %
Allowance for loan
losses/nonaccrual loans,
past due 90 days still
accruing and
restructured loans 281.90 % 208.45 % 281.90 % 208.45 %



Interest-Bearing Demand Deposits in Banks. The Company had interest-bearing
deposits in banks of $222.90 million at June 30, 2022 compared to $654.53
million
at June 30, 2021 and $323.54 million at December 31, 2021, respectively.
At June 30, 2022, interest-bearing deposits in banks included $222.46 million
maintained at the Federal Reserve Bank of Dallas and $443 thousand on deposit
with the FHLB.

Available-for-Sale Securities. At June 30, 2022, securities with a fair value of
$6.22 billion were classified as securities available-for-sale. As compared to
December 31, 2021, the available-for-sale portfolio at June 30, 2022 reflected
(i) an increase of $359.52 million in U.S. Treasury securities, (ii) a decrease
of $508.87 million in obligations of states and political subdivisions, (iii) an
increase of $36.05 million and in corporate bonds and other securities, and (iv)
a decrease of $244.84 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 June 30, 2022 and 2021, and December 31,
2021
.



Table 8 - Maturities and Yields of Available-for-Sale Securities Held at June
30, 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 $ - - % $ 486,358 1.86 % $ - - % $ - - % $ 486,358 1.86 %
Obligations of
states and
political
subdivisions 139,895 4.38 504,141 3.76



1,450,796 2.59 149,772 2.76 2,244,604 2.98
Corporate bonds and
other



securities 4,078 1.17 58,235 2.93 42,032 1.96 - - 104,345 2.47


Mortgage-backed



securities 95,667 2.47 1,731,459 1.88 1,137,913 1.79 414,690 2.22 3,379,729 1.91
Total $ 239,640 3.56 % $ 2,780,193 2.24 % $ 2,630,741 2.24 % $ 564,462 2.36 % $ 6,215,036 2.30 %




51



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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 June 30, 2022, the investment portfolio had an overall tax equivalent
yield of 2.30%, a weighted average life of 5.94 years and modified duration of
5.14 years.




Deposits. Deposits held by our subsidiary bank represent our primary source of
funding. Total deposits were $11.12 billion as of June 30, 2022, as compared to
$9.78 billion as of June 30, 2021 and $10.57 billion as of December 31, 2021.


Table 9 provides a breakdown of average deposits and rates paid over the three
and six month periods ended June 30, 2022 and 2021, respectively.




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

Three-Months Ended June 30,
2022 2021
Average Average Average Average
Balance Rate Balance Rate
Noninterest-bearing deposits $ 4,064,207 -% $ 3,439,683 -%
Interest-bearing deposits:
Interest-bearing checking 3,690,920 0.22 3,045,255 0.08
Savings and money market accounts 2,911,318 0.10 2,705,925 0.08
Time deposits under $250,000 303,759 0.19


319,705 0.28
Time deposits of $250,000 or more 143,044 0.28 159,106 0.50



Total interest-bearing deposits 7,049,041 0.17 % 6,229,991 0.10 %
Total average deposits $ 11,113,248 $ 9,669,674
Total cost of deposits 0.11 % 0.06 %



Six-Months Ended June 30,
2022 2021
Average Average Average Average
Balance Rate Balance Rate
Noninterest-bearing deposits $ 3,946,483 -% $ 3,278,067 -%
Interest-bearing deposits:
Interest-bearing checking 3,656,398 0.15 2,973,933 0.08
Savings and money market accounts 2,868,000 0.08 2,621,171 0.09
Time deposits under $250,000 305,926 0.20 322,217 0.31
Time deposits of $250,000 or more 143,643 0.28 156,660 0.55
Total interest-bearing deposits 6,973,967 0.13 % 6,073,981 0.11 %
Total average deposits $ 10,920,450 $ 9,352,048
Total cost of deposits 0.08 % 0.07 %




The estimated amount of uninsured and uncollateralized deposits including
related accrued and unpaid is approximately $4.11 billion as of June 30, 2022.




Borrowings. Included in borrowings were federal funds purchased, securities sold
under repurchase agreements, advances from the FHLB and other borrowings of
$768.36 million, $549.97 million and $671.15 million at June 30, 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 $730.48 million and
$527.67 million in the second quarters of 2022 and 2021, respectively. The
weighted average interest rates paid on these borrowings were 0.13% and 0.07%
for the second quarters of 2022 and 2021, respectively. The average balance of
federal funds purchased, securities sold under repurchase agreements, advances
from the FHLB and other borrowings were $755.76 million and $492.34 million for
the six-months ended June 30, 2022 and June 30, 2021, respectively. The weighted
average interest rates paid on these borrowings were 0.12% and 0.08% for the
six-month periods ended June 30, 2022 and June 30, 2021, respectively.


Interest Rate Risk



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



52
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Our subsidiary bank has an asset liability management committee that monitors
interest rate risk and compliance with investment policies. The subsidiary bank
utilizes an earnings simulation model as the primary quantitative tool in
measuring the amount of interest rate risk associated with changing market
rates. The model quantifies the effects of various interest rate scenarios on
projected net interest income and net income over the next twelve months. The
model measures the impact on net interest income relative to a base case
scenario of hypothetical fluctuations in interest rates over the next twelve
months. These simulations incorporate assumptions regarding balance sheet growth
and mix, pricing and the re-pricing and maturity characteristics of the existing
and projected balance sheet.

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

Percentage change in net interest income:
Change in interest rates: June 30, December 31,
(in basis points) 2022 2021 2021
+400 7.34% 11.19% 10.56%
+300 5.80% 8.94% 8.52%
+200 4.36% 6.41% 6.13%
+100 2.63% 3.57% 3.42%
-100 (2.85)% (4.98)% (5.64)%
-200 (6.67)% (7.85)% (9.06)%



The results for the net interest income simulations as of June 30, 2022 and
2021, and December 31, 2021 resulted in an asset sensitive position. These are
good faith estimates and assume that the composition of our interest sensitive
assets and liabilities existing at each year-end will remain constant over the
relevant twelve-month measurement period and that changes in market interest
rates are instantaneous and sustained across the yield curve regardless of
duration of pricing characteristics on specific assets or liabilities. Also,
this analysis does not contemplate any actions that we might undertake in
response to changes in market interest rates. We believe these estimates are not
necessarily indicative of what actually could occur in the event of immediate
interest rate increases or decreases of this magnitude. As interest-bearing
assets and liabilities reprice in different time frames and proportions to
market interest rate movements, various assumptions must be made based on
historical relationships of these variables in reaching any conclusion. Since
these correlations are based on competitive and market conditions, we anticipate
that our future results will likely be different from the foregoing estimates,
and such differences could be material.

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

The fair value of our investment securities classified as available-for-sale
totaled $6.22 billion at June 30, 2022. During the six months ended June 30,
2022
, the corresponding unrealized gain before taxes on the portfolio of $125.67
million
at December 31, 2021, moved into an unrealized loss before taxes of
$507.30 million at June 30, 2022, which is recorded net of taxes in accumulated
other comprehensive earnings (loss) in shareholders' equity. The unrealized
gains or losses, net of taxes, on the portfolio are excluded from the
calculation of all regulatory capital ratios. The changes in the fair value were
driven by increases in interest rates based on expected actions by the Federal
Reserve Board
and other market conditions. The overall valuation of the
portfolio is most correlated to the 5-year U.S. Treasury rates based on the
composition and duration of the portfolio. At June 30, 2022, the 5-year U.S.
Treasury rate was 3.01% compared to 1.26% at December 31, 2021, representing a
175 basis point increase during the first six months of 2022. As of June 30,
2022
, an additional 100 basis point increase in the 5-year U.S. Treasury rate
would result in an increase to unrealized losses by approximately $300 million
before taxes, while a 100 basis point decrease in the same rate would result in
a decrease to unrealized losses by approximately $270 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 $1.33 billion, or 10.02% of total assets at June
30, 2022
, as compared to $1.72 billion, or 13.95% of total assets at June 30,
2021
, and $1.76 billion, or 13.43% of total assets at December 31, 2021.
Included in shareholders' equity at June 30, 2022 were $400.51 million in
unrealized losses on investment securities available-for-sale, net of related
income taxes. Included in shareholders' equity at June 30, 2021 and December 31,
2021
were $136.49 million and $99.25 million, respectively, in unrealized gains
on investment securities available-for-sale, net of related income taxes,
although such amount is excluded from and does not impact regulatory capital.
For the second quarter of 2022, total shareholders' equity averaged $1.41
billion
, or 10.56% of average assets, as compared to $1.69 billion, or 14.09% of
average assets, during the same period in 2021. For the first six months of
2022, total shareholders' equity averaged $1.54 billion, or 11.60% of average
assets, as compared to $1.68 billion, or 14.44% 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.

53
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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 June 30, 2022 and 2021, and December 31, 2021, we had a total risk-based
capital ratio of 19.54%, 21.12% and 20.34%, a Tier 1 capital to risk-weighted
assets ratio of 18.50%, 20.04% and 19.35%; a common equity Tier 1 to
risk-weighted assets ratio of 18.50%, 20.04% and 19.35% and a Tier 1 leverage
ratio of 10.65%, 11.10% and 11.13%, respectively. The regulatory capital ratios
as of June 30, 2022 and 2021, and December 31, 2021 were calculated under Basel
III rules.


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




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



As of June 30, 2022: Amount Ratio Amount Ratio Amount Ratio
Total Capital to
Risk-Weighted Assets:
Consolidated $ 1,507,098 19.54 % $ 809,783 10.50 % $ 771,222 10.00 %
First Financial Bank, N.A $ 1,379,750 17.93 % $ 808,070 10.50 % $ 769,591 10.00 %
Tier 1 Capital to
Risk-Weighted Assets:
Consolidated $ 1,426,448 18.50 % $ 655,538 8.50 % $ 462,733 6.00 %
First Financial Bank, N.A $ 1,299,100 16.88 % $ 654,152 8.50 % $ 615,672 8.00 %
Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated $ 1,426,448 18.50 % $ 539,855 7.00 % - N/A
First Financial Bank, N.A $ 1,299,100 16.88 % $ 538,713 7.00 % $ 500,234 6.50 %
Leverage Ratio:
Consolidated $ 1,426,448 10.65 % $ 535,975 4.00 % - N/A
First Financial Bank, N.A $ 1,299,100 9.73 % $ 534,178 4.00 % $ 667,723 5.00 %



Required to be
Minimum Capital Considered Well-
Actual Required-Basel III Capitalized
As of June 30, 2021: Amount Ratio Amount Ratio Amount Ratio
Total Capital to
Risk-Weighted Assets:
Consolidated $ 1,347,772 21.12 % $ 669,931 10.50 % $ 638,030 10.00 %
First Financial Bank, N.A $ 1,227,741 19.28 % $ 668,612 10.50 % $ 636,773 10.00 %
Tier 1 Capital to
Risk-Weighted Assets:
Consolidated $ 1,278,883 20.04 % $ 542,325 8.50 % $ 382,818 6.00 %
First Financial Bank, N.A $ 1,158,852 18.20 % $ 541,257 8.50 % $ 509,418 8.00 %
Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated $ 1,278,883 20.04 % $ 446,621 7.00 % - N/A
First Financial Bank, N.A $ 1,158,852 18.20 % $ 445,741 7.00 % $ 413,902 6.50 %
Leverage Ratio:
Consolidated $ 1,278,883 11.10 % $ 460,851 4.00 % - N/A
First Financial Bank, N.A $ 1,158,852 10.09 % $ 459,483 4.00 % $ 574,353 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 %




54



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

Liquidity. Liquidity is our ability to meet cash demands as they arise. Such
needs can develop from loan demand, deposit withdrawals or acquisition
opportunities. Potential obligations resulting from the issuance of standby
letters of credit and commitments to fund future borrowings to our loan
customers are other factors affecting our liquidity needs. Many of these
obligations and commitments are expected to expire without being drawn upon;
therefore the total commitment amounts do not necessarily represent future cash
requirements affecting our liquidity position. The potential need for liquidity
arising from these types of financial instruments is represented by the
contractual notional amount of the instrument. Asset liquidity is provided by
cash and assets which are readily marketable or which will mature in the near
future. Liquid assets include cash, federal funds sold, and short-term
investments in time deposits in banks. Liquidity is also provided by access to
funding sources, which include core depositors and correspondent banks that
maintain accounts with and sell federal funds to our subsidiary bank. Other
sources of funds include our ability to borrow from short-term sources, such as
purchasing federal funds from correspondent banks, sales of securities under
agreements to repurchase and other borrowings (see below) and an unfunded $25.00
million
revolving line of credit established with Frost Bank, a nonaffiliated
bank, which matures in June 2023 (see next paragraph). Our subsidiary bank also
has federal funds purchased lines of credit with two non-affiliated banks
totaling $130.00 million. At June 30, 2022, there were no amounts drawn on these
lines of credit. Our subsidiary bank also has (i) an available line of credit
with the FHLB totaling $2.09 billion at June 30, 2022, secured by portions of
our loan portfolio and certain investment securities and (ii) access to the
Federal Reserve Bank of Dallas lending program secured by portions of certain
investment securities. At June 30, 2022, the Company did not have any balances
under this line of credit.

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

In addition, we anticipate that future acquisitions of financial institutions,
expansion of branch locations or offerings of new products could also place a
demand on our cash resources. Available cash and cash equivalents at our parent
company which totaled $89.10 million at June 30, 2022, investment securities
which totaled $2.26 million at June 30, 2022 and mature over 8 to 9 years,
available dividends from our subsidiaries which totaled $375.31 million at June
30, 2022
, utilization of available lines of credit, and future debt or equity
offerings are expected to be the source of funding for these potential
acquisitions or expansions.

Our liquidity position is continuously monitored and adjustments are made to the
balance between sources and uses of funds as deemed appropriate. Liquidity risk
management is an important element in our asset/liability management process. We
regularly model liquidity stress scenarios to assess potential liquidity
outflows or funding problems resulting from economic disruptions, volatility in
the financial markets, unexpected credit events or other significant occurrences
deemed potentially problematic by management. These scenarios are incorporated
into our contingency funding plan, which provides the basis for the
identification of our liquidity needs. As of June 30, 2022, management is not
aware of any events that are reasonably likely to have a material adverse effect
on our liquidity, capital resources or operations. We are monitoring closely the
economic impact of the coronavirus on our customers and the communities we
serve. Given the strong core deposit base and relatively low loan to deposit
ratios maintained at our subsidiary bank, we consider our current liquidity
position to be adequate to meet our short-term and long-term liquidity needs. In
addition, management is not aware of any regulatory recommendations regarding
liquidity that would have a material adverse effect on us.

Off-Balance Sheet ("OBS")/Reserve for Unfunded Commitments. We are a party to
financial instruments with OBS risk in the normal course of business to meet the
financing needs of our customers. These financial instruments include unfunded
lines of credit, commitments to extend credit and federal funds sold to
correspondent banks and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in our consolidated balance sheets. At June 30, 2022, the
Company's reserve for unfunded commitments totaled $8.72 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.

55
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Standby letters of credit are conditional commitments we issue to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The average collateral value held on letters of credit
usually exceeds the contract amount.


Table 10 - Commitments as of June 30, 2022 (in thousands):




Total Notional
Amounts
Committed
Unfunded lines of credit $ 1,020,918
Unfunded commitments to extend credit 845,774
Standby letters of credit 37,986
Total commercial commitments $ 1,904,678



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 June 30, 2022,
$375.31 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 $7.50 million and $9.00 million for the six-months
ended June 30, 2022 and 2021, respectively.

Dividends. Our long-term dividend policy is to pay cash dividends to our
shareholders of approximately 35% to 40% of annual net earnings while
maintaining adequate capital to support growth. We are also restricted by a loan
covenant within our line of credit agreement with Frost Bank to dividend no
greater than 55% of net income, as defined in such loan agreement. The cash
dividend payout ratios have amounted to 39.23% and 35.18% of net earnings for
the first six 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 second quarter of
2021. The record date for this dividend was June 16, 2022, payable on July 1,
2022
(although such amount was prefunded with our transfer agent prior to June
30, 2022
).

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

To pay dividends, we and our subsidiary bank must maintain adequate capital
above regulatory guidelines. 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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