FIRST FINANCIAL BANKSHARES, INC. Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project," "could," "may," or "would" and similar expressions, as they relate to us or our management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited, to those discussed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 , under the heading "Risk Factors," and the following:
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general economic conditions, including our local, state and national real estate markets and employment trends;
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the effects of and changes in trade, monetary and fiscal policies and laws,
including interest rate policies of the
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effect of severe weather conditions, including hurricanes, tornadoes, flooding and droughts;
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volatility and disruption in national and international financial and commodity markets;
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government intervention in theU.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, theConsumer Financial Protection Bureau ("CFPB"), the Inflation Reduction Act of 2022, the capital ratios of Basel III as adopted by the federal banking authorities and the Tax Cuts and Jobs Act;
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political or social unrest and economic instability;
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the ability of the federal government to address the national economy;
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changes in our competitive environment from other financial institutions and financial service providers;
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the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as thePublic Company Accounting Oversight Board ("PCAOB"), theFinancial Accounting Standards Board ("FASB") and other accounting standard setters;
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effect of the coronavirus ("COVID") on our Company, the communities where we
have our branches, the state of
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government and regulatory responses to the COVID pandemic;
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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;
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the costs, effects and results of regulatory examinations, investigations or reviews and the ability to obtain required regulatory approvals;
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changes in the demand for loans, including loans originated for sale in the secondary market;
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fluctuations in the value of collateral securing our loan portfolio and in the level of the allowance for credit losses;
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the accuracy of our estimates of future credit losses;
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the accuracy of our estimates and assumptions regarding the performance of our securities portfolio, including securities with a current unrealized loss;
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inflation, interest rate, market and monetary fluctuations;
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soundness of other financial institutions with which we have transactions;
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changes in consumer spending, borrowing and savings habits;
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changes in commodity prices (e.g., oil and gas, cattle, and wind energy);
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our ability to attract deposits, maintain and/or increase market share;
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changes in our liquidity position; including a result of a reduction in the amount of sources of liquidity we currently have;
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fluctuations in the market value and liquidity of the investment securities we
have classified as held-for-sale ("HFS"), including the effects of changes in
market interest rates;
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changes in the reliability of our vendors, internal control system or information systems;
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cyber-attacks on our technology information systems, including fraud from our customers and external third-party vendors;
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our ability to attract and retain qualified employees;
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acquisitions and integration of acquired businesses;
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the possible impairment of goodwill and other intangibles associated with our acquisitions;
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consequences of continued bank mergers and acquisitions in our market area, resulting in fewer but much larger and stronger competitors;
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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;
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acts of God or of war or terrorism;
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the impact of changes to the global climate and its effect on our operations and customers;
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potential risk of environmental liability associated with lending activities; and
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our success at managing the risk involved in the foregoing items.
In addition, financial markets and global supply chains may continue to be
adversely affected by the current or anticipated impact of military conflict,
including the current Russian invasion of
Such forward-looking statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategies and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise (except as required by law). Introduction As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, gain on sale of mortgage loans and service charges and fees on deposit accounts. Our primary source of funding for our loans and investments are deposits held by our bank subsidiary,First Financial Bank, N.A . Our largest expenses are salaries and related employee benefits. We measure our performance by calculating our return on average assets, return on average equity, regulatory capital ratios, net interest margin and efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income. The following discussion and analysis of operations and financial condition should be read in conjunction with the financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as those included in the Company's 2022 Annual Report on Form 10-K.
Critical Accounting Policies
We prepare consolidated financial statements based on generally accepted
accounting principles ("GAAP") and customary practices in the banking industry.
These policies, in certain areas, require us to make significant estimates and
assumptions.
We deem a policy critical if (i) the accounting estimate 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 9.
Stock Repurchase
OnJuly 27, 2021 , the Company's Board of Directors authorized the repurchase of up to 5.00 million common shares throughJuly 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. ThroughMarch 31, 2023 , 244,559 shares were repurchased and retired (all during the months of June andJuly 2022 ) at an average price of$38.61 . The Company did not repurchase any shares during the first quarter of 2023.
Results of Operations
Performance Summary. Net earnings for the first quarter of 2023 were$52.57 million compared to earnings of$55.97 million for the first quarter of 2022. Diluted earnings per share was$0.37 for the first quarter of 2023 and$0.39 for the first quarter of 2022. The return on average assets was 1.65% for the first quarter of 2023, as compared to 1.71% for the first quarter of 2022. The return on average equity was 16.32% for the first quarter of 2023 as compared to 13.53% for the first quarter of 2022. 40 --------------------------------------------------------------------------------
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$99.42 million for the first quarter of 2023, as compared to$99.22 million for the same period last year. The change in 2023 tax equivalent net interest income compared to 2022 was largely attributable to the increases in the rates paid on deposits and borrowings offset by a change in the mix of interest earning assets primarily derived from a decrease in tax-exempt investment securities and an increase in average loans. Average earning assets were$12.07 billion for the first quarter of 2023, as compared to$12.50 billion during the first quarter of 2022. The decrease of$435.33 million in average earning assets in 2023 when compared to 2022 was primarily a result of (i) the increase of average loans of$1.01 billion , offset by (ii) a decrease in tax-exempt securities of$861.49 million , (iii) the decrease of taxable securities of$559.69 million , and (iv) a decrease in short-term investments of$26.94 million when compared toMarch 31, 2022 balances. Average interest-bearing liabilities were$7.71 billion for the first quarter of 2023, as compared to$7.68 billion in the same period in 2022. The increase in average interest-bearing liabilities primarily resulted from continued organic growth in interests-bearing deposits offset by the decrease in short-term borrowings. The yield on earning assets increased 92 basis points while the rate paid on interest-bearing liabilities increased 125 basis points for the first quarter of 2023 compared to the first quarter of 2022.
Table 1 allocates the change in tax-equivalent net interest income between the amount of change attributable to volume and to rate.
Table 1 - Changes in Interest Income and Interest Expense (dollars in
thousands):
Three-Months Ended March 31, 2023
Compared to Three-Months Ended
March 31, 2022
Change Attributable to Total
Volume Rate Change
Short-term investments $ (15 ) $ 1,570 $ 1,555
Taxable investment securities (2,357 ) 5,316 2,959
Tax-exempt investment securities (1) (5,972 ) 608 (5,364 ) Loans (1) (2) 11,953 12,745 24,698 Interest income 3,609 20,239 23,848 Interest-bearing deposits 36 20,407 20,443 Short-term borrowings (40 ) 3,249 3,209 Interest expense (4 ) 23,656 23,652 Net interest income$ 3,613 $ (3,417 ) $ 196 (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 3.34% for the first quarter of 2023, an increase of twelve basis points from the same period in 2022. We continued to experience downward pressure on our net interest margin into the early part of 2023 compared to the early part of 2022 primarily due to (i) the effects of theFederal Reserve's accelerated rate of raising interest rates in 2022 and 2023, which was preceded by the extended period of historically low levels of short-term interest rates during the first quarter of 2022, and (ii) the shift in the mix of interest-earning assets and interest-bearing deposits. TheFederal Reserve began increasing interest rates by raising rates 25 basis points inMarch 2022 , 50 basis points inMay 2022 , and 75 basis points in June, July, September andNovember 2022 , respectively, 50 basis points inDecember 2022 , and 25 basis points in February andMarch 2023 , respectively, resulting in a target rate range of 4.75% to 5.00% atMarch 31, 2023 .
Loan rates on variable loans have increased as the majority of such loans are
indexed to the applicable prime rate (currently 8.00% at
During 2022, we increased rates on each of the primary depository products in response to the increasing federal funds rate. Additionally, we have approximately$915 million of municipal and related deposits which are indexed to short-term treasury rates which have continued to increase with the changes in the applicable rate index. Average municipal and related deposits totaled$1.48 billion and$1.55 billion for the three-months endedMarch 31, 2023 and 2022, respectively, with an average rate paid of 2.39% and 0.17%, for the respective quarters then ended. 41 --------------------------------------------------------------------------------
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,
2023 2022
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Assets
Short-term investments (1) $ 146,049 $ 1,650 4.58 % $ 172,985 $ 95 0.22 %
Taxable investment securities
(2) 3,672,257 20,782 2.26 4,231,949 17,823 1.68
Tax-exempt investment
securities (2)(3) 1,750,533 12,743 2.91 2,612,025 18,107 2.77
Loans (3)(4) 6,500,332 89,464 5.58 5,487,538 64,766 4.79
Total earning assets 12,069,171 $ 124,639 4.19 % 12,504,497 $ 100,791 3.27 %
Cash and due from banks 242,210 230,490
Bank premises and equipment,
net 153,326 149,639
Other assets 228,518
111,669
Goodwill and other intangible assets, net 315,410 316,589 Allowance for credit losses (76,122 ) (63,577 ) Total assets$ 12,932,513 $ 13,249,307 Liabilities and Shareholders' Equity Interest-bearing deposits$ 7,080,518 $ 21,812 1.25 %$ 6,898,059 $ 1,369 0.08 % Short-term borrowings 625,137 3,410 2.21 781,314 201 0.10 Total interest-bearing liabilities 7,705,655$ 25,222 1.33 % 7,679,373$ 1,570 0.08 % Noninterest-bearing deposits 3,860,472 3,827,451 Other liabilities 60,028 64,999 Total liabilities 11,626,155 11,571,823 Shareholders' equity 1,306,358 1,677,484 Total liabilities and shareholders' equity$ 12,932,513 $ 13,249,307 Net interest income$ 99,417 $ 99,221 Rate Analysis: Interest income/earning assets 4.19 % 3.27 % Interest expense/earning assets (0.85 ) (0.05 ) Net interest margin 3.34 % 3.22 % (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$3.13 million and$3.78 million in the first quarters of 2023 and 2022, respectively, using an effective tax rate of 21% for both periods. (4) Includes nonaccrual loans. Noninterest Income. Noninterest income for the first quarter of 2023 was$28.01 million compared to$34.88 million in the same quarter of 2022. Increases in certain categories of noninterest income included (i) net gain on sale of assets of$940 thousand , and (ii) service charges on deposit accounts of$330 thousand , when compared to the first quarter of 2022. Debit card fees for the first quarter of 2023 decreased by$3.99 million from the first quarter of 2022 due to the impact of the Bank becoming subject to regulations imposed by theFederal Reserve that limits debit card interchange revenue (also known as the "Durbin Amendment") which became effective for the Company as ofJuly 1, 2022 , and is consistent with our previously disclosed expectations. Mortgage related income was$2.97 million in the first quarter of 2023 compared to$6.33 million in the first quarter of 2022 due to lower overall origination volumes and margins on loan sales as a result of the increases in interest rates. Net gain on sale of foreclosed assets was$34 thousand for the first quarter of 2023 compared to$1.08 million during the same period of 2022. 42 -------------------------------------------------------------------------------- Debit card fees are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Debit card fees consist of income from debit card usage, point of sale income for debit card transactions and ATM service fees.Federal Reserve Board rules applicable to financial institutions that have assets of$10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is limited to the sum of21 cents per transaction plus 5 basis points multiplied by the value of the transaction. Based on the applicableFederal Reserve Board rules, the Company became subject to the limitation effectiveJuly 1, 2022 , which reduced debit card fees during the first quarter of 2023, as discussed above.
Table 3 - Noninterest Income (dollars in thousands):
Three-Months Ended March 31,
Increase
2023 (Decrease) 2022
Trust fees $ 9,845 $ 28 $ 9,817
Service charges on deposit accounts 6,036 330 5,706
Debit card fees 4,936 (3,990 ) 8,926
Credit card fees 609 7 602
Gain on sale and fees on mortgage loans 2,974 (3,359 ) 6,333
Net gain on sale of available-for-sale securities 12 (19 ) 31
Net gain on sale of foreclosed assets 34 (1,050 ) 1,084
Net gain (loss) on sale of assets 930 940 (10 )
Interest on loan recoveries 346 63 283
Other:
Check printing fees 20 (7 ) 27
Safe deposit rental fees 280 (10 ) 290
Credit life fees 141 (78 ) 219
Brokerage commissions 358 (16 ) 374
Wire transfer fees 387 (1 ) 388
Miscellaneous income 1,099 288 811
Total other 2,285 176 2,109
Total Noninterest Income $ 28,007 $ (6,874 ) $ 34,881
Noninterest Expense. Total noninterest expense for the first quarter of 2023 was
$57.26 million , a decrease of $1.97 million , or 3.32%, as compared to the same
period of 2022. An important measure in determining whether a financial
institution effectively manages noninterest expense is the efficiency ratio,
which is calculated by dividing noninterest expense by the sum of net interest
income on a tax-equivalent basis and noninterest income. Lower ratios indicate
better efficiency since more income is generated with a lower noninterest
expense total. Our efficiency ratio was 44.93% for the first quarter of 2023
compared to 44.16% for the same quarter in 2022.
Salaries, commissions and employee benefits for the first quarter of 2023
totaled $31.46 million , compared to $34.14 million for the same period in 2022.
The net decrease reflected lower profit sharing expenses of $1.57 million , a
$1.07 million decrease in mortgage incentive compensation expenses and a $572
thousand dollar decrease in medical expenses, offset by annual merit-based and
other market-based pay increases that were effective March 1, 2023 .
All other categories of noninterest expense for the first quarter of 2023
totaled $25.80 million , compared to $25.09 million in the same quarter a year
ago. Noninterest expense, excluding salary related costs, for the three-months
ended March 31, 2023 increased primarily due to increases in FDIC insurance
premiums of $785 thousand due to the increased FDIC insurance base assessment
rate effective January 1, 2023 , offset by decreases in legal fees and other
related costs of $428 thousand compared to the three-months ended March 31,
2022 .
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--------------------------------------------------------------------------------Table 4 - Noninterest Expense (dollars in thousands):
Three-Months Ended March 31,
Increase
2023 (Decrease) 2022
Salaries, commissions and incentives
(excluding mortgage) $ 23,330 $ 538 $ 22,792
Mortgage salaries and incentives 1,897 (1,067 ) 2,964
Medical 2,319 (572 ) 2,891
Profit sharing 30 (1,568 ) 1,598
401(k) match expense 969 (13 ) 982
Payroll taxes 2,114 (55 ) 2,169
Stock based compensation 802 60 742
Total salaries and employee benefits 31,461 (2,677 ) 34,138
Net occupancy expense 3,430 205 3,225
Equipment expense 2,127 (130 ) 2,257
FDIC assessment fees 1,654 785 869
Debit card expense 3,199 231 2,968
Professional and service fees 2,365 140 2,225
Printing, stationery and supplies 710 170 540
Operational and other losses 931 335 596
Software amortization and expense 2,311 (146 ) 2,457
Amortization of intangible assets 228 (92 ) 320
Other:
Data processing fees 495 50 445
Postage 373 65 308
Advertising 593 (106 ) 699
Correspondent bank service charges 215 (39 ) 254
Telephone 830 65 765
Public relations and business development 882 88 794
Directors' fees 666 (54 ) 720
Audit and accounting fees 620 107 513
Legal fees and other related costs 242 (428 ) 670
Regulatory exam fees 311 (84 ) 395
Travel 445 132 313
Courier expense 278 13 265
Other real estate owned - - -
Other miscellaneous expense 2,890 (599 ) 3,489
Total other 8,840 (790 ) 9,630
Total Noninterest Expense $ 57,256 $ (1,969 ) $ 59,225
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, 2023 , total loans
held-for-investment were $6.58 billion , an increase of $134.35 million , as
compared to December 31, 2022 . Total PPP loans outstanding were $155 thousand at
March 31, 2023 , which are included in the Company's commercial loan totals.
As compared to year-end 2022 balances, total real estate loans increased $109.88
million , total commercial loans increased $37.66 million , agricultural loans
increased $70 thousand , and total consumer loans decreased $13.26 million . Loans
averaged $6.50 billion for the first quarter of 2023, an increase of $1.01
billion 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 segmentation allows for a more precise
pooling of loans with similar credit risk characteristics and credit monitor
procedures for the Company's calculation of its allowance for credit losses.
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--------------------------------------------------------------------------------Table 5 outlines the composition of the Company's held-for-investment loans by portfolio segment.
Table 5 - Composition of Loans Held-for-Investment (dollars in thousands):
March 31, December 31,
2023 2022 2022
Commercial:
C&I * $ 954,686 $ 838,049 $ 917,317
Municipal 221,379 191,799 221,090
Total Commercial 1,176,065 1,029,848 1,138,407
Agricultural 77,017 82,883 76,947
Real Estate:
Construction & Development 921,190 806,211 959,426
Farm 307,706 225,942 306,322
Non-Owner Occupied CRE 737,117 636,160 732,089
Owner Occupied CRE 1,043,018 881,181 954,400
Residential 1,628,841 1,352,162 1,575,758
Total Real Estate 4,637,872 3,901,656 4,527,995
Consumer:
Auto 537,410 419,818 550,635
Non-Auto 147,851 131,964 147,884
Total Consumer 685,261 551,782 698,519
Total $ 6,576,215 $ 5,566,169 $ 6,441,868
* All disclosures for the C&I loan segment include PPP loan balances, net of
deferred fees and costs, as disclosed on the face of the consolidated balance
sheet.
Loans held-for-sale, consisting of secondary market mortgage loans, totaled
$12.00 million , $27.67 million , and $11.97 million at March 31, 2023 and 2022,
and December 31, 2022 , respectively. At March 31, 2023 and 2022, and December
31, 2022 , $230 thousand , $5.29 million and $1.47 million , respectively, are
valued using the lower of cost or fair value, and the remaining amounts are
valued under the fair value option.
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The following tables summarize maturity information of our loan portfolio as of
March 31, 2023 . The tables also presents the portion of loans that have fixed
interest rates or variable interest rates that fluctuate over the life of the
loans in accordance with changes in an interest rate index.
Maturity Distribution and Interest Sensitivity of Loans at March 31, 2023
(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 $ 378,863 $ 460,747 $ 97,100 $ 17,976 $ 954,686
Municipal 3,816 48,924 123,685 44,954 221,379
Total Commercial 382,679 509,671 220,785 62,930 1,176,065
Agricultural 56,659 18,673 1,685 - 77,017
Real Estate:
Construction & Development 455,622 171,832 186,093 107,643 921,190
Farm 16,835 29,326 181,871 79,674 307,706
Non-Owner Occupied CRE 27,052 208,578 377,470 124,017 737,117
Owner Occupied CRE 71,098 256,081 480,054 235,785 1,043,018
Residential 97,242 141,373 741,687 648,539 1,628,841
Total Real Estate 667,849 807,190 1,967,175 1,195,658 4,637,872
Consumer:
Auto 5,767 509,816 21,827 - 537,410
Non-Auto 27,546 95,944 18,497 5,864 147,851
Total Consumer 33,313 605,760 40,324 5,864 685,261
Total $ 1,140,500 $ 1,941,294 $ 2,229,969 $ 1,264,452 $ 6,576,215
% of Total Loans 17.34 % 29.52 % 33.91 % 19.23 % 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 $ 68,286 $ 304,439 $ 12,905 $ - $ 385,630
Municipal 3,321 47,724 89,976 7,276 148,297
Total Commercial 71,607 352,163 102,881 7,276 533,927
Agricultural 12,160 12,695 308 - 25,163
Real Estate:
Construction & Development 176,818 97,765 43,319 4,138 322,040
Farm 4,673 21,403 111,788 1,022 138,886
Non-Owner Occupied CRE 14,879 153,057 68,894 249 237,079
Owner Occupied CRE 27,631 151,400 45,953 199 225,183
Residential 42,166 103,429 466,638 44,055 656,288
Total Real Estate 266,167 527,054 736,592 49,663 1,579,476
Consumer:
Auto 5,767 509,816 21,827 - 537,410
Non-Auto 22,823 93,378 18,174 5,546 139,921
Total Consumer 28,590 603,194 40,001 5,546 677,331
Total $ 378,524 $ 1,495,106 $ 879,782 $ 62,485 $ 2,815,897
% of Total Loans 5.75 % 22.74 % 13.38 % 0.95 % 42.81 %
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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 $ 310,577 $ 156,308 $ 84,195 $ 17,976 $ 569,056
Municipal 495 1,200 33,709 37,678 73,082
Total Commercial 311,072 157,508 117,904 55,654 642,138
Agricultural 44,499 5,978 1,377 - 51,854
Real Estate:
Construction & Development 278,804 74,067 142,774 103,505 599,150
Farm 12,162 7,923 70,083 78,652 168,820
Non-Owner Occupied CRE 12,173 55,521 308,576 123,768 500,038
Owner Occupied CRE 43,467 104,681 434,101 235,586 817,835
Residential 55,076 37,944 275,049 604,484 972,553
Total Real Estate 401,682 280,136 1,230,583 1,145,995 3,058,396
Consumer:
Auto - - - - -
Non-Auto 4,723 2,566 323 318 7,930
Total Consumer 4,723 2,566 323 318 7,930
Total $ 761,976 $ 446,188 $ 1,350,187 $ 1,201,967 $ 3,760,318
% of Total Loans 11.59 % 6.78 % 20.53 % 18.28 % 57.19 %
Of the
Asset Quality. Our loan portfolio is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by bank regulatory agencies. Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Nonaccrual, past due 90 days or more and still accruing, and foreclosed assets were$24.39 million atMarch 31, 2023 , as compared to$28.75 million atMarch 31, 2022 and$24.33 million atDecember 31, 2022 . As a percent of loans held-for-investment and foreclosed assets, these assets were 0.37% atMarch 31, 2023 , as compared to 0.52% atMarch 31, 2022 and 0.38% atDecember 31, 2022 . As a percent of total assets, these assets were 0.19% atMarch 31, 2023 , as compared to 0.22% atMarch 31, 2022 and 0.19% atDecember 31, 2022 . We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming atMarch 31, 2023 .
Table 6 - Nonaccrual, Past Due 90 Days or More and Still Accruing, and Foreclosed Assets (dollars in thousands, except percentages):
March 31, December 31,
2023 2022 2022
Nonaccrual loans $ 24,171 $ 28,743 $ 24,325
Loans still accruing and past due 90 days or
more 22 11 -
Total nonperforming loans (1) 24,193 28,754 24,325
Foreclosed assets 196 - -
Total nonperforming assets $ 24,389 $ 28,754 $ 24,325
As a % of loans held-for-investment and
foreclosed assets 0.37 % 0.52 % 0.38 %
As a % of total assets 0.19 0.22 0.19
(1) With the adoption of ASU 2022-02, effective
We record interest payments received on nonaccrual loans as reductions of principal. Prior to the loans being placed on nonaccrual, we recognized interest income on these loans of approximately$963 thousand for the year endedDecember 31, 2022 . If interest on these loans had been recognized on a full accrual basis during the year endedDecember 31, 2022 , such income would have been approximately$2.32 million . Such amounts for the 2023 and 2022 interim periods were not significant. Allowance for Credit Losses. The allowance for credit losses is the amount we determine as of a specific date to be appropriate to absorb current expected credit losses on existing loans. For a discussion of our methodology, see our accounting policies in Note 1 to the Consolidated Financial Statements (unaudited). The provision for loan losses of$4.71 million for the three-months endedMarch 31, 2023 is combined with the reversal of provision for unfunded commitments of$1.93 million and reported in the net aggregate of$2.78 million under the provision for credit losses in the consolidated statements of earnings for the three-months endedMarch 31, 2023 . The provision for loan losses of$3.75 million for the three-months endedMarch 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 statements of earnings for the three-months endedMarch 31, 2022 . 47 -------------------------------------------------------------------------------- As a percent of average loans, net loan recoveries were 0.02% for the first quarter of 2023, as compared to charge-offs of 0.02% for the first quarter of 2022. The allowance for credit losses as a percent of loans held-for-investment was 1.23% as ofMarch 31, 2023 , as compared to 1.20% and 1.18% as ofMarch 31, 2022 andDecember 31, 2022 , respectively.
Table 7 - Loan Loss Experience and Allowance for Credit Losses (dollars in thousands, except percentages):
Three-Months Ended
March 31,
2023 2022
Allowance for credit losses at period-end
6,500,332 5,487,538
Net charge-offs (recoveries)/average
loans (annualized) (0.02 )% 0.02 %
Allowance for loan losses/period-end
loans held-for-investment 1.23 % 1.20 %
Allowance for loan losses/nonaccrual
loans, past due 90 days still accruing and restructured loans 334.06 % 232.71 % Interest-Bearing Demand Deposits in Banks. The Company had interest-bearing deposits in banks of$221.34 million atMarch 31, 2023 compared to$394.57 million atMarch 31, 2022 and$37.39 million atDecember 31, 2022 , respectively. AtMarch 31, 2023 , interest-bearing deposits in banks included$214.13 million maintained at theFederal Reserve Bank of Dallas and$7.21 million on deposit with the FHLB.Available-for-Sale Securities . AtMarch 31, 2023 , securities with a fair value of$5.30 billion were classified as securities available-for-sale. As compared toDecember 31, 2022 , the available-for-sale portfolio atMarch 31, 2023 reflected (i) an increase of$5.69 million inU.S. Treasury securities, (ii) an increase of$1.83 million in corporate bonds and other securities, (iii) a decrease of$125.00 million in obligations of states and political subdivisions, and (iv) a decrease of$58.33 million in mortgage-backed securities. Fluctuations in the available-for-sale securities portfolio balances were primarily driven by sales during the first quarter endedMarch 31, 2023 , somewhat offset by improvements in the gross unrealized holding losses due to rate changes. Our mortgage related securities are backed by GNMA,FNMA or FHLMC or are collateralized by securities backed by these agencies.
See the below table and Note 2 to the Consolidated Financial Statements
(unaudited) for additional disclosures relating to the maturities and fair
values of the investment portfolio at
Table 8 - Maturities and Yields of Available-for-Sale Securities Held at
Maturing by Contractual Maturity
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years TotalAvailable-for-Sale: Amount Yield Amount Yield
Amount Yield Amount Yield Amount YieldU.S. Treasury securities$ 59,730 2.20 %$ 428,512 1.85 % $ - - % $ - - %$ 488,242 1.90 % Obligations of states and political subdivisions 132,130 4.34 230,322 3.21
1,109,536 2.51 301,624 2.67 1,773,612 2.77 Corporate bonds and other
securities 3,977 2.77 71,850 2.83 27,770 1.74 - - 103,597 2.53
Mortgage-backed
securities 68,501 2.75 689,385 2.40 1,633,735 1.86 541,485 2.24 2,933,106 2.08 Total$ 264,338 3.42 %$ 1,420,069 2.39 %$ 2,771,041 2.12 %$ 843,109 2.39 %$ 5,298,557 2.30 % 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 ofMarch 31, 2023 , the investment portfolio had an overall tax equivalent yield of 2.30%, a weighted average life of 7.07 years and modified duration of 5.95 years. Deposits. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were$10.94 billion as ofMarch 31, 2023 , as compared to$11.00 billion as ofMarch 31, 2022 and$11.01 billion as ofDecember 31, 2022 .
Table 9 provides a breakdown of average deposits and rates paid over the three
month periods ended
48
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Table 9 - Composition of Average Deposits (dollars in thousands, except
percentages):
Three-Months Ended March 31,
2023 2022
Average Average Average Average
Balance Rate Balance Rate
Noninterest-bearing deposits $ 3,860,472 -% $ 3,827,451 -%
Interest-bearing deposits:
Interest-bearing checking 3,487,828 0.99 3,621,493 0.08
Savings and money market accounts 2,945,372 1.32 2,824,201 0.06
Time deposits under $250,000 407,687 2.01
308,116 0.22
Time deposits of
Total interest-bearing deposits 7,080,518 1.25 % 6,898,059 0.08 % Total average deposits$ 10,940,990 $ 10,725,510 Total cost of deposits 0.81 % 0.05 %
The estimated amount of uninsured and uncollateralized deposits including
related accrued and unpaid interest is approximately
Borrowings. Included in borrowings were federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings of$632.93 million ,$758.60 million and$642.51 million atMarch 31, 2023 and 2022, andDecember 31, 2022 , respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the short-term borrowings. The average balance of federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings were$625.14 million and$781.31 million in the first quarters of 2023 and 2022, respectively. The weighted average interest rates paid on these borrowings were 2.21% and 0.10% for the first quarters of 2023 and 2022, respectively.
Interest Rate Risk
Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. Our exposure to interest rate risk is managed primarily through our strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities that generate favorable earnings while limiting the potential negative effects of changes in market interest rates. We use no off-balance-sheet financial instruments to manage interest rate risk.
Our subsidiary bank has an asset liability management committee that monitors
interest rate risk and compliance with investment policies. The subsidiary bank
utilizes an earnings simulation model as the primary quantitative tool in
measuring the amount of interest rate risk associated with changing market
rates. The model quantifies the effects of various interest rate scenarios on
projected net interest income and net income over the next twelve months. The
model measures the impact on net interest income relative to a base case
scenario of hypothetical fluctuations in interest rates over the next twelve
months. These simulations incorporate assumptions regarding balance sheet growth
and mix, pricing and the re-pricing and maturity characteristics of the existing
and projected balance sheet.
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) 2023 2022 2022
+400 3.63% 9.17% 5.13%
+300 2.64% 7.26% 3.86%
+200 2.33% 5.36% 3.13%
+100 1.79% 3.15% 2.09%
-100 (2.12)% (3.66)% (2.66)%
-200 (4.60)% (8.22)% (5.47)%
-300 (7.53)% (11.98)% (8.54)%
-400 (7.79)% (12.27)% (10.31)%
The results for the net interest income simulations as of March 31, 2023 and
2022, and December 31, 2022 resulted in an asset sensitive position. These are
good faith estimates and assume that the composition of our interest sensitive
assets and liabilities existing at each year-end will remain constant over the
relevant twelve-month measurement period and that changes in market interest
rates are instantaneous and sustained across the yield curve regardless of
duration of pricing characteristics on specific assets or liabilities. Also,
this analysis does not contemplate any actions that we might undertake in
response to changes in market interest rates. We believe these estimates are not
necessarily indicative of what actually could occur in the event of immediate
interest rate increases or decreases of this magnitude. As interest-bearing
assets and liabilities reprice in different time frames and proportions to
market interest rate movements, various assumptions must be made based on
historical relationships of these variables in reaching any
49
--------------------------------------------------------------------------------conclusion. Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material.
Should we be unable to maintain a reasonable balance of maturities and repricing of our interest-earning assets and our interest-bearing liabilities, we could be required to dispose of our assets in an unfavorable manner or pay a higher than market rate to fund our activities. Our asset liability management committee oversees and monitors this risk. The fair value of our investment securities classified as available-for-sale totaled$5.30 billion atMarch 31, 2023 . During the three months endedMarch 31, 2023 , the corresponding unrealized loss before taxes on the portfolio of$677.99 million atDecember 31, 2022 , decreased to unrealized loss before taxes of$580.48 million atMarch 31, 2023 , which is recorded net of taxes in accumulated other comprehensive earnings (loss) in shareholders' equity. The unrealized gains or losses, net of taxes, on the portfolio are excluded from the calculation of all regulatory capital ratios. The changes in the fair value were driven by changes in interest rates based on expected actions by theFederal Reserve Board and other market conditions. The overall valuation of the portfolio is most correlated to the 5-yearU.S. Treasury rates based on the composition and duration of the portfolio. AtMarch 31, 2023 , the 5-yearU.S. Treasury rate was 3.58% compared to 4.01% atDecember 31, 2022 , representing a 43 basis point decrease during the first three months of 2023. As ofMarch 31, 2023 , an increase of 100 basis points in the 5-yearU.S. Treasury rate would result in an increase to unrealized losses by approximately$270 million before taxes, while a 100 basis point decrease in the same rate would result in a decrease to unrealized losses by approximately$230 million before taxes. We believe that we have the ability to hold these securities based on our overall liquidity and intent to hold the portfolio.
Capital and Liquidity
Capital. We evaluate capital resources by our ability to maintain adequate regulatory capital ratios to do business in the banking industry. Issues related to capital resources arise primarily when we are growing at an accelerated rate but not retaining a significant amount of our profits or when we experience significant asset quality deterioration. Total shareholders' equity was$1.37 billion , or 10.55% of total assets atMarch 31, 2023 , as compared to$1.49 billion , or 11.18% of total assets atMarch 31, 2022 , and$1.27 billion , or 9.76% of total assets atDecember 31, 2022 . Included in shareholders' equity atMarch 31, 2023 , 2022, andDecember 31, 2022 were$458.25 million ,$209.58 million and$535.23 million , respectively, in unrealized losses on investment securities available-for-sale, net of related income taxes, although such amount is excluded from and does not impact regulatory capital. For the first quarter of 2023, total shareholders' equity averaged$1.31 billion , or 10.10% of average assets, as compared to$1.68 billion , or 12.66% of average assets, during the same period in 2022. Banking regulators measure capital adequacy by means of the risk-based capital ratios and the leverage ratio under the Basel III rules and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and off-balance-sheet commitments and contingencies according to prescribed risk categories. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders' equity less intangible assets by quarter-to-date average assets less intangible assets. Beginning inJanuary 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% onJanuary 1, 2019 . As ofJanuary 1, 2019 , the capital conservation bufferBasel III was fully phased in. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the amount of the buffer will result in restrictions on the Company's ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers. As ofMarch 31, 2023 and 2022, andDecember 31, 2022 , we had a total risk-based capital ratio of 19.79%, 20.01% and 19.29%, a Tier 1 capital to risk-weighted assets ratio of 18.68%, 19.00% and 18.22%; a common equity Tier 1 to risk-weighted assets ratio of 18.68%, 19.00% and 18.22% and a Tier 1 leverage ratio of 11.53%, 10.78% and 10.96%, respectively. The regulatory capital ratios as ofMarch 31, 2023 and 2022, andDecember 31, 2022 were calculated underBasel III rules. 50 --------------------------------------------------------------------------------
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, 2023: Amount Ratio Amount Ratio Amount Ratio
Total Capital to
Risk-Weighted Assets:
Consolidated $ 1,620,432 19.79 % $ 859,545 10.50 % $ 818,615 10.00 %
First Financial Bank, N.A $ 1,495,532 18.31 % $ 857,688 10.50 % $ 816,846 10.00 %
Tier 1 Capital to
Risk-Weighted Assets:
Consolidated $ 1,529,217 18.68 % $ 695,822 8.50 % $ 491,169 6.00 %
First Financial Bank, N.A $ 1,404,316 17.19 % $ 694,319 8.50 %
$ 1,529,217 18.68 %$ 573,030 7.00 % $ - N/A First Financial Bank, N.A$ 1,404,316 17.19 %$ 571,792 7.00 %$ 530,950 6.50 % Leverage Ratio: Consolidated$ 1,529,217 11.53 %$ 327,446 4.00 % $ - N/A First Financial Bank, N.A$ 1,404,316 10.63 %$ 326,738 4.00 %$ 408,423 5.00 % 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 %
$ 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 December 31, 2022: Amount Ratio Amount Ratio Amount Ratio Total Capital to Risk-Weighted Assets: Consolidated$ 1,586,888 19.29 %$ 863,622 10.50 %$ 822,497 10.00 % First Financial Bank, N.A$ 1,442,902 17.58 %$ 861,860 10.50 %$ 820,819 10.00 % Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,498,731 18.22 %$ 699,122 8.50 %$ 493,498 6.00 % First Financial Bank, N.A$ 1,354,745 16.50 %$ 697,696 8.50 %$ 656,655 8.00 % Common Equity Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,498,731 18.22 %$ 575,748 7.00 % - N/A First Financial Bank, N.A$ 1,354,745 16.50 %$ 574,573 7.00 %$ 533,532 6.50 % Leverage Ratio: Consolidated$ 1,498,731 10.96 %$ 546,983 4.00 % - N/A First Financial Bank, N.A$ 1,354,745 9.95 %$ 544,886 4.00 %$ 681,107 5.00 % In connection with the adoption of the Basel III regulatory capital framework, our subsidiary bank made the election to continue to exclude accumulated other comprehensive income from available-for-sale securities ("AOCI") from capital in connection with its quarterly financial filing and, in effect, to retain the AOCI treatment under the prior capital rules. Liquidity. Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; 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 -------------------------------------------------------------------------------- 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 withFrost Bank , a nonaffiliated bank, which matures onJune 30, 2023 (see next paragraph). Our subsidiary bank also has federal funds purchased lines of credit with two non-affiliated banks totaling$130.00 million . AtMarch 31, 2023 , there were no amounts drawn on these lines of credit. Our subsidiary bank also has (i) an available line of credit with the FHLB totaling$2.40 billion atMarch 31, 2023 , secured by portions of our loan portfolio and certain investment securities, and (ii) access to theFederal Reserve Bank of Dallas lending program, including the new Bank Term Funding Program, secured by portions of certain investment securities. AtMarch 31, 2023 , the Company did not have any balances under these lines. The Company renewed its loan agreement, effectiveJune 30, 2021 , withFrost 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 toJune 30, 2023 , interest is paid quarterly at The Wall Street Journal Prime Rate and the line of credit maturesJune 30, 2023 . If a balance exists atJune 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, 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 atMarch 31, 2023 . There was no outstanding balance under the line of credit as ofMarch 31, 2023 and 2022, orDecember 31, 2022 . 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$94.58 million atMarch 31, 2023 , investment securities which totaled$2.25 million atMarch 31, 2023 and mature over 7 to 8 years, available dividends from our subsidiaries which totaled$371.21 million atMarch 31, 2023 , utilization of available lines of credit, and future debt or equity offerings are expected to be the source of funding for these potential acquisitions or expansions. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed potentially problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As ofMarch 31, 2023 , management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. We are monitoring closely the impact to the financial system due to the recent failures of three mid-size banks. Given the diversified core deposit base and relatively low loan to deposit ratios maintained at our subsidiary bank, we consider our current liquidity position to be adequate to meet our short-term and long-term liquidity needs. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us. Off-Balance Sheet ("OBS")/Reserve for Unfunded Commitments. We are a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of our customers. These financial instruments include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheets. AtMarch 31, 2023 , the Company's reserve for unfunded commitments totaled$10.40 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 --------------------------------------------------------------------------------
Table 10 - Commitments as of
Total Notional
Amounts
Committed
Unfunded lines of credit $ 1,057,640
Unfunded commitments to extend credit 819,679
Standby letters of credit 49,006
Total commercial commitments $ 1,926,325
We believe we have no other OBS arrangements or transactions with
unconsolidated, special purpose entities that would expose us to liability that
is not reflected on the face of the financial statements. The above table does
not include balances related to the Company's IRLC and forward mortgage-backed
security trades. Total commercial commitments were $1.93 billion at March 31,
2023 , compared to $1.84 billion at March 31, 2022 , and $2.07 billion at December
31, 2022 .
Parent Company Funding. Our ability to fund various operating expenses,
dividends, and cash acquisitions is generally dependent on our own earnings
(without giving effect to our subsidiaries), cash reserves and funds derived
from our subsidiaries. These funds historically have been produced by
intercompany dividends and management fees that are limited to reimbursement of
actual expenses. We anticipate that our recurring cash sources will continue to
include dividends and management fees from our subsidiaries. At March 31, 2023 ,
$371.21 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 $2.50 million and $4.50 million for the three-months
ended March 31, 2023 and 2022, respectively.
Dividends. Our long-term dividend policy is to pay cash dividends to our
shareholders of approximately 35% to 40% of annual net earnings while
maintaining adequate capital to support growth. We are also restricted by a loan
covenant within our line of credit agreement with Frost Bank to dividend no
greater than 55% of net income, as defined in such loan agreement. The cash
dividend payout ratios have amounted to 46.16% and 38.25% of net earnings for
the first three months of 2023 and 2022, respectively. Given our current capital
position, projected earnings and asset growth rates, we do not anticipate any
significant change in our current dividend policy. On April 25, 2023 , the Board
of Directors declared a $0.18 per share cash dividend for the second quarter of
2023, a 5.88% increase over the dividend declared in the first quarter of 2023.
The record date for this dividend will be June 15, 2023 , payable on July 3,
2023 .
Our bank subsidiary, which is a national banking association and a member of the
Federal Reserve System , is required by federal law to obtain the prior approval
of the OCC to declare and pay dividends if the total of all dividends declared
in any calendar year would exceed the total of (i) such bank's net profits (as
defined and interpreted by regulation) for that year plus (ii) its retained net
profits (as defined and interpreted by regulation) for the preceding two
calendar years, less any required transfers to surplus.
To pay dividends, we and our subsidiary bank must maintain adequate capital
above regulatory guidelines and comply with the general requirements applicable
to a Texas corporation. Generally, a Texas corporation may not pay a dividend to
its shareholders if (i) after giving effect to the dividend, the corporation
would be insolvent, or (ii) the amount of the dividend would exceed the surplus
of the corporation. In addition, if the applicable regulatory authority believes
that a bank under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
bank, could include the payment of dividends), the authority may require, after
notice and hearing, that such bank cease and desist from the unsafe practice.
The Federal Reserve , the FDIC and the OCC have each indicated that paying
dividends that deplete a bank's capital base to an inadequate level would be an
unsafe and unsound banking practice. The Federal Reserve , the OCC and the FDIC
have issued policy statements that recommend that bank holding companies and
insured banks should generally only pay dividends out of current operating
earnings.
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