First Financial Bankshares(FFIN) - 2022 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This part encompasses the Company's unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited consolidated financial statements of First Financial Bankshares, Inc. and its subsidiaries for the periods ended June 30, 2022 and 2021, and December 31, 2021, including balance sheets, statements of earnings, comprehensive earnings, shareholders' equity, and cash flows, along with detailed notes explaining significant accounting policies and financial instrument specifics Consolidated Balance Sheets – Unaudited This section presents the Company's financial position, detailing assets, liabilities, and equity at specific reporting dates | Metric (in thousands) | June 30, 2022 | December 31, 2021 | June 30, 2021 | |:----------------------|:--------------|:------------------|:--------------| | Total Assets | $13,260,212 | $13,102,461 | $12,329,083 | | Total Liabilities | $11,931,194 | $11,343,237 | $10,608,714 | | Total Shareholders' Equity | $1,329,018 | $1,759,224 | $1,720,369 | - Total Assets increased by $157.75 million from December 31, 2021, to June 30, 2022, primarily driven by an increase in loans held-for-investment[15] - Total Shareholders' Equity decreased significantly by $430.206 million from December 31, 2021, to June 30, 2022, largely due to accumulated other comprehensive loss[15] Consolidated Statements of Earnings – Unaudited This section outlines the Company's revenues, expenses, and net income over specific reporting periods | Metric (in thousands, except per share) | Three-Months Ended June 30, 2022 | Three-Months Ended June 30, 2021 | Six-Months Ended June 30, 2022 | Six-Months Ended June 30, 2021 | |:----------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Total Interest Income | $101,981 | $92,602 | $198,990 | $183,212 | | Total Interest Expense | $3,199 | $1,653 | $4,769 | $3,439 | | Net Interest Income | $98,782 | $90,949 | $194,221 | $179,773 | | Provision for Credit Losses | $5,350 | $(1,206) | $10,132 | $(3,203) | | Total Noninterest Income | $37,317 | $34,673 | $72,198 | $69,548 | | Total Noninterest Expense | $58,333 | $59,374 | $117,558 | $117,098 | | Net Earnings | $60,494 | $56,379 | $116,466 | $113,297 | | Net Earnings Per Share, Basic | $0.42 | $0.40 | $0.82 | $0.80 | | Net Earnings Per Share, Diluted | $0.42 | $0.39 | $0.81 | $0.79 | | Dividends Per Share | $0.17 | $0.15 | $0.32 | $0.28 | - Net Earnings for Q2 2022 increased by $4.115 million (7.3%) YoY, while diluted EPS increased by $0.03 (7.7%) YoY[19] - Provision for Credit Losses shifted from a reversal of $1.206 million in Q2 2021 to a provision of $5.350 million in Q2 2022, indicating a less favorable credit outlook[19] Consolidated Statements of Comprehensive Earnings (Loss) – Unaudited This section reports net earnings and other comprehensive income (loss) components, reflecting changes in equity from non-owner sources | Metric (in thousands) | Three-Months Ended June 30, 2022 | Three-Months Ended June 30, 2021 | Six-Months Ended June 30, 2022 | Six-Months Ended June 30, 2021 | |:----------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Net Earnings | $60,494 | $56,379 | $116,466 | $113,297 | | Change in unrealized gain (loss) on investment securities available-for-sale, before income taxes | $(240,038) | $24,659 | $(630,937) | $(42,111) | | Total other items of comprehensive earnings (loss) | $(241,686) | $24,654 | $(632,616) | $(42,924) | | Total income tax benefit (expense) | $50,754 | $(5,177) | $132,849 | $9,015 | | Comprehensive Earnings (Loss) | $(130,438) | $75,856 | $(383,301) | $79,388 | - The company reported a significant comprehensive loss of $(130.438) million for Q2 2022, a sharp decline from comprehensive earnings of $75.856 million in Q2 2021, primarily due to a large unrealized loss on available-for-sale investment securities[21] Consolidated Statements of Shareholders' Equity – Unaudited This section details changes in the Company's equity accounts, including common stock, retained earnings, and accumulated other comprehensive income | Metric (in thousands) | Balance at Dec 31, 2021 | Net Earnings (6M 2022) | Cash Dividends Declared (6M 2022) | Change in Unrealized Gain (Loss) (6M 2022) | Balance at June 30, 2022 | |:----------------------|:------------------------|:-----------------------|:----------------------------------|:-------------------------------------------|:-------------------------| | Common Stock | $1,425 | — | — | — | $1,426 | | Capital Surplus | $676,871 | — | — | — | $675,653 | | Retained Earnings | $981,675 | $116,466 | $(45,688) | — | $1,052,453 | | Treasury Stock | $(10,090) | — | — | — | $(10,656) | | Accumulated Other Comprehensive Earnings (Loss) | $99,253 | — | — | $(499,767) | $(400,514) | | Total Shareholders' Equity | $1,759,224 | $116,466 | $(45,688) | $(499,767) | $1,329,018 | - Shareholders' equity decreased by $430.206 million from December 31, 2021, to June 30, 2022, primarily due to a significant decline in accumulated other comprehensive earnings (loss) from $99.253 million gain to a $(400.514) million loss[27] - Cash dividends declared for the six months ended June 30, 2022, totaled $45.688 million, representing $0.32 per share[19][27] Consolidated Statements of Cash Flows – Unaudited This section summarizes cash inflows and outflows from operating, investing, and financing activities over specific periods | Metric (in thousands) | Six-Months Ended June 30, 2022 | Six-Months Ended June 30, 2021 | |:----------------------|:-------------------------------|:-------------------------------| | Net Cash Provided by Operating Activities | $158,346 | $148,316 | | Net Cash Used in Investing Activities | $(804,964) | $(1,224,197) | | Net Cash Provided by Financing Activities | $583,594 | $1,191,389 | | Net Increase (Decrease) in Cash and Cash Equivalents | $(63,024) | $115,508 | | Cash and Cash Equivalents, End of Period | $465,564 | $844,592 | - Net cash provided by operating activities increased by $10.03 million YoY for the six months ended June 30, 2022[31] - Net cash used in investing activities decreased by $419.233 million YoY, primarily due to lower purchases of available-for-sale securities[31] - Net cash provided by financing activities decreased significantly by $607.795 million YoY, mainly due to lower net increases in deposits and new stock repurchases[31] Notes to Consolidated Financial Statements – Unaudited This section provides detailed explanations and additional information regarding the Company's financial statements and accounting policies Note 1 – Summary of Significant Accounting Policies This note outlines the Company's nature of operations, basis of presentation, use of estimates, consolidation principles, stock repurchase program, and recently issued accounting guidance. Key policies include classification and valuation of investment securities, accounting for credit losses on various asset types (available-for-sale, held-to-maturity, loans, and off-balance-sheet commitments), and the treatment of other real estate, bank premises, business combinations, and stock-based compensation - First Financial Bankshares, Inc. operates as a financial holding company with one bank subsidiary (First Financial Bank, N.A.) and other financial service entities, primarily generating revenue from loans and banking services in Texas[34] - The Company's Board authorized a stock repurchase plan on July 27, 2021, to repurchase up to 5,000,000 common shares through July 31, 2023. As of the report date, 244,559 shares totaling $9.45 million have been repurchased and retired under this plan[39][219] - The Company's significant accounting estimates include its allowance for credit losses and the valuation of financial instruments[37][218] - No allowance for credit losses was recorded for available-for-sale or held-to-maturity securities at June 30, 2022, June 30, 2021, or December 31, 2021[51][55] Note 2 - Securities This note details the Company's investment securities portfolio, primarily available-for-sale, including amortized cost, unrealized gains and losses, and fair values by security type and maturity. It highlights a significant increase in unrealized losses on available-for-sale securities at June 30, 2022, primarily due to rising interest rates, but management believes these are not credit-related | Security Type (in thousands) | Amortized Cost Basis (June 30, 2022) | Gross Unrealized Holding Gains (June 30, 2022) | Gross Unrealized Holding Losses (June 30, 2022) | Estimated Fair Value (June 30, 2022) | |:-----------------------------|:-------------------------------------|:-----------------------------------------------|:------------------------------------------------|:-------------------------------------| | U.S. Treasury securities | $501,098 | $12 | $(14,752) | $486,358 | | Obligations of states and political subdivisions | $2,419,232 | $7,737 | $(182,365) | $2,244,604 | | Residential mortgage-backed securities | $3,265,654 | $399 | $(301,149) | $2,964,904 | | Commercial mortgage-backed securities | $423,168 | $476 | $(8,819) | $414,825 | | Corporate bonds and other | $113,184 | $88 | $(8,927) | $104,345 | | Total | $6,722,336 | $8,712 | $(516,012) | $6,215,036 | - At June 30, 2022, the Company's available-for-sale securities had total gross unrealized losses of $516.012 million, a significant increase from $23.711 million at December 31, 2021, primarily due to changes in interest rates[88][90][94] - During the six months ended June 30, 2022, sales of available-for-sale securities totaled $188.363 million, generating gross realized gains of $4.023 million and losses of $2.344 million[97] Note 3 – Loans Held-for-Investment and Allowance for Credit Losses This note provides a detailed breakdown of the Company's loan portfolio by segment, including loans held-for-investment, nonaccrual loans, and troubled debt restructurings. It also outlines the methodology for the allowance for credit losses (ACL), which increased due to strong organic loan growth and a slight decline in economic forecasts. The note also presents internal risk ratings and past due loan information | Loan Segment (in thousands) | June 30, 2022 | December 31, 2021 | June 30, 2021 | |:----------------------------|:--------------|:------------------|:--------------| | Total Commercial | $1,040,505 | $1,014,980 | $1,162,459 | | Agricultural | $90,420 | $98,089 | $95,212 | | Total Real Estate | $4,137,128 | $3,746,519 | $3,558,353 | | Total Consumer | $610,529 | $529,384 | $488,578 | | Total Loans Held-for-Investment | $5,878,582 | $5,388,972 | $5,304,602 | | Less: Allowance for Credit Losses | $(71,932) | $(63,465) | $(62,138) | | Loans, net | $5,806,650 | $5,325,507 | $5,242,464 | | Nonperforming Asset (in thousands) | June 30, 2022 | December 31, 2021 | June 30, 2021 | |:-----------------------------------|:--------------|:------------------|:--------------| | Nonaccrual loans | $25,475 | $31,652 | $29,786 | | Loans still accruing and past due 90 days or more | $22 | $8 | — | | Troubled debt restructured loans | $20 | $21 | $23 | | Total Nonperforming Loans | $25,517 | $31,681 | $29,809 | | Foreclosed assets | — | $2,477 | $305 | | Total Nonperforming Assets | $25,517 | $34,158 | $30,114 | - The allowance for credit losses increased to $71.932 million at June 30, 2022, from $63.465 million at December 31, 2021, driven by strong organic loan growth and a slight decline in the projected economic forecast[100][108][265] - Total loans held-for-investment increased by $489.61 million from December 31, 2021, to June 30, 2022, with real estate loans showing the largest increase[248][249] Note 4 - Loans Held-for-Sale This note details the Company's loans held-for-sale, primarily secondary market mortgage loans. It specifies their valuation methods (lower of cost or fair value, or fair value option) and the inputs used for fair value determination, which are classified as Level 2 | Metric (in thousands) | June 30, 2022 | December 31, 2021 | June 30, 2021 | |:----------------------|:--------------|:------------------|:--------------| | Loans held-for-sale | $26,445 | $37,810 | $61,802 | - Loans held-for-sale decreased by $11.365 million from December 31, 2021, to June 30, 2022[159] - The majority of loans held-for-sale are valued under the fair value option, with valuations classified as Level 2 in the fair value hierarchy[159][160] Note 5 - Derivative Financial Instruments This note describes the Company's use of derivative financial instruments, specifically interest rate lock commitments (IRLCs) and forward mortgage-backed securities contracts, to manage interest rate risk related to residential mortgage loans intended for sale. All derivatives are carried at fair value and are not designated as hedging instruments for accounting purposes | Derivative Type (in thousands) | Outstanding Notional Balance (June 30, 2022) | Asset Derivative Fair Value (June 30, 2022) | Liability Derivative Fair Value (June 30, 2022) | |:-------------------------------|:---------------------------------------------|:--------------------------------------------|:------------------------------------------------| | IRLCs | $99,429 | $1,414 | — | | Forward mortgage-backed securities trades | $101,500 | $58 | — | - IRLCs and forward mortgage-backed securities contracts are classified as Level 2 in fair value disclosures, as their valuations are based on observable market inputs[164][165] - The fair value of IRLCs is subject to changes in interest rates and estimated loan funding probability[164] Note 6 – Borrowings This note details the Company's borrowings, which include securities sold under repurchase agreements, federal funds purchased, and other borrowings. It also mentions a revolving line of credit with Frost Bank and investments in Community Development Entities (CDE) under the New Market Tax Credits (NMTC) program | Borrowing Type (in thousands) | June 30, 2022 | December 31, 2021 | June 30, 2021 | |:------------------------------|:--------------|:------------------|:--------------| | Securities sold under agreements with customers to repurchase | $738,986 | $625,499 | $531,469 | | Federal funds purchased | $8,325 | $24,600 | $18,500 | | Other borrowings | $21,053 | $21,053 | — | | Total | $768,364 | $671,152 | $549,969 | - Total borrowings increased by $97.212 million from December 31, 2021, to June 30, 2022, primarily due to an increase in securities sold under repurchase agreements[169] - The Company has a $25 million revolving line of credit with Frost Bank, with no outstanding balance as of June 30, 2022[170] - Other borrowings include a $21.053 million leveraged loan from an investee related to New Market Tax Credit (NMTC) investments[171][172] Note 7 - Income Taxes This note details the Company's income tax expense and effective tax rates, explaining the differences from the statutory federal tax rate due to tax-exempt income and tax credit investments. It also describes investments in Low Income Housing Tax Credit (LIHTC) and New Market Tax Credit (NMTC) programs | Metric (in thousands) | Three-Months Ended June 30, 2022 | Three-Months Ended June 30, 2021 | Six-Months Ended June 30, 2022 | Six-Months Ended June 30, 2021 | |:----------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Income Tax Expense | $11,922 | $11,075 | $22,263 | $22,129 | | Effective Tax Rate | 16.46% | 16.42% | 16.05% | 16.34% | - The effective tax rates are lower than the statutory federal rate of 21% primarily due to tax-exempt interest income, deductibility of ESOP dividends, and benefits from deferred compensation and equity awards, as well as NMTC benefits[172] - The Company began investing in federal Low Income Housing Tax Credit (LIHTC) and New Market Tax Credit (NMTC) programs in 2021, which generate tax benefits[172] Note 8 - Stock Based Compensation This note details the Company's stock-based compensation plans, including the 2021 Omnibus Stock and Incentive Plan, which grants restricted stock units and performance-based restricted stock units (PSUs) to officers and directors. It also covers stock option activity and related compensation expenses | Metric (in thousands) | Six-Months Ended June 30, 2022 | Six-Months Ended June 30, 2021 | |:----------------------|:-------------------------------|:-------------------------------| | Restricted Stock, RSU, PSU Expense (Employees) | $1,020 | $579 | | Restricted Stock Grants (Directors) | $331 | $300 | | Stock Option Expense | $632 | $691 | - As of June 30, 2022, there was $2.281 million of unrecognized compensation cost related to unvested restricted stock, RSUs, and PSUs, expected to be recognized over a weighted-average period of 1.10 years[182] - As of June 30, 2022, there was $3.709 million of total unrecognized compensation cost related to unvested share-based compensation arrangements under stock option plans, expected to be recognized over a weighted-average period of 1.71 years[185] Note 9 - Fair Value Disclosures This note outlines the Company's fair value measurement methodologies and hierarchy (Level 1, 2, and 3 inputs) for financial instruments. It provides a summary of available-for-sale securities, loans held-for-sale, and derivatives measured at fair value on a recurring basis, emphasizing the use of observable market data for most valuations | Asset Type (in thousands) | Level 1 Inputs (June 30, 2022) | Level 2 Inputs (June 30, 2022) | Level 3 Inputs (June 30, 2022) | Total Fair Value (June 30, 2022) | |:--------------------------|:-------------------------------|:-------------------------------|:-------------------------------|:-------------------------------| | Available-for-sale investment securities | $490,436 | $5,724,600 | — | $6,215,036 | | Loans held-for-sale | — | $23,848 | — | $23,848 | | IRLCs | — | $1,414 | — | $1,414 | | Forward mortgage-backed securities trades | — | $58 | — | $58 | - The majority of available-for-sale investment securities are valued using Level 2 inputs, reflecting observable market data[194] | Metric (in thousands) | Three-Months Ended June 30, 2022 | Three-Months Ended June 30, 2021 | Six-Months Ended June 30, 2022 | Six-Months Ended June 30, 2021 | |:----------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Total gain on sale of mortgage loans | $5,728 | $8,291 | $12,061 | $18,185 | - No significant credit losses were recognized on mortgage loans held-for-sale for the three and six-months ended June 30, 2022 and 2021[197] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, including forward-looking statements, critical accounting policies, and a detailed review of performance, net interest income, noninterest income and expense, balance sheet items, asset quality, interest rate risk, capital, and liquidity. It highlights the impact of rising interest rates and loan growth on financial performance Forward-Looking Statements This section highlights inherent uncertainties and risks associated with future-oriented information presented in the report - The report contains forward-looking statements based on current management information, subject to various risks including economic conditions, COVID-19 impact, regulatory changes, interest rate fluctuations, and cybersecurity threats[210][212] Introduction This section provides an overview of the Company's business model, primary revenue sources, and key performance measurement metrics - The Company's primary revenue sources are interest on loans and investments, trust fees, mortgage loan sales, and service charges, funded mainly by deposits[214] - Performance is measured by metrics such as return on average assets, return on average equity, regulatory capital ratios, net interest margin, and efficiency ratio[214] Critical Accounting Policies This section identifies the accounting policies requiring significant judgment and estimation, which are crucial to understanding the financial statements - The most critical accounting policies are the allowance for credit losses and the valuation of financial instruments, which involve significant estimates and assumptions[218] Stock Repurchase This section details the Company's common stock repurchase program, including authorization and shares repurchased to date - The Board authorized a repurchase of up to 5.00 million common shares through July 31, 2023. As of the report date, 244,559 shares totaling $9.45 million have been repurchased[219] Results of Operations This section analyzes the Company's financial performance, including net interest income, noninterest income, and noninterest expense Performance Summary The Company reported increased net earnings and diluted EPS for both the second quarter and the first six months of 2022 compared to the prior year, despite a decrease in return on average assets | Metric | Q2 2022 | Q2 2021 | 6M 2022 | 6M 2021 | |:-------|:--------|:--------|:--------|:--------| | Net Earnings (in millions) | $60.49 | $56.38 | $116.47 | $113.30 | | Diluted EPS | $0.42 | $0.39 | $0.81 | $0.79 | | Return on Average Assets | 1.82% | 1.89% | 1.77% | 1.97% | | Return on Average Equity | 17.26% | 13.38% | 15.24% | 13.61% | - Net earnings for Q2 2022 increased by $4.11 million (7.3%) YoY, and for the first six months, increased by $3.17 million (2.8%) YoY[220][221] - Return on average equity significantly improved for both periods, reaching 17.26% in Q2 2022 and 15.24% for 6M 2022[221][222] Net Interest Income Net interest income increased for both the quarter and six-month periods, driven by growth in interest-earning assets, particularly loans and investment securities. However, the net interest margin experienced downward pressure due to low short-term interest rates and a shift in asset mix, partially mitigated by rising prime rates and adjustments to deposit rates | Metric (in millions) | Q2 2022 | Q2 2021 | 6M 2022 | 6M 2021 | |:---------------------|:--------|:--------|:--------|:--------| | Tax-equivalent Net Interest Income | $102.15 | $94.58 | $201.37 | $186.95 | | Net Interest Margin (tax equivalent) | 3.28% | 3.36% | 3.25% | 3.45% | | Average Earning Assets (in billions) | $12.49 | $11.30 | $12.50 | $10.93 | | Average Interest-Bearing Liabilities (in billions) | $7.78 | $6.76 | $7.73 | $6.57 | - Tax-equivalent net interest income increased by $7.57 million (8.0%) in Q2 2022 YoY and $14.42 million (7.7%) in 6M 2022 YoY[225][226] - The net interest margin decreased by 8 basis points in Q2 2022 YoY and 20 basis points in 6M 2022 YoY, primarily due to lower short-term interest rates and changes in asset mix[229] - Average earning assets increased by $1.19 billion in Q2 2022 YoY and $1.57 billion in 6M 2022 YoY[225][226] Noninterest Income Noninterest income saw an increase for both the quarter and six-month periods, driven by higher trust fees, service charges on deposit accounts, ATM/interchange/credit card fees, and net gains on sale of available-for-sale securities. Mortgage-related income, however, declined due to lower origination volumes | Metric (in thousands) | Q2 2022 | Q2 2021 | 6M 2022 | 6M 2021 | |:----------------------|:--------|:--------|:--------|:--------| | Total Noninterest Income | $37,317 | $34,673 | $72,198 | $69,548 | | Trust fees | $9,742 | $8,692 | $19,559 | $16,991 | | Service charges on deposit accounts | $6,038 | $4,928 | $11,744 | $9,721 | | ATM, interchange and credit card fees | $10,568 | $9,853 | $20,096 | $18,530 | | Gain on sale and fees on mortgage loans | $5,728 | $8,291 | $12,061 | $18,185 | | Net gain on sale of available-for-sale securities | $1,648 | $5 | $1,679 | $813 | - Total noninterest income increased by $2.644 million (7.6%) in Q2 2022 YoY and $2.650 million (3.8%) in 6M 2022 YoY[240] - Mortgage-related income decreased by $2.563 million in Q2 2022 YoY and $6.124 million in 6M 2022 YoY due to lower origination volumes[236][237] - Effective July 1, 2022, the Company became subject to Federal Reserve rules limiting interchange fees, with an estimated annual impact of $18 million (pre-tax)[238] Noninterest Expense Total noninterest expense decreased for the second quarter but slightly increased for the six-month period. The efficiency ratio improved, reflecting better expense management. Salaries and employee benefits decreased due to lower mortgage compensation and profit-sharing expenses, while other noninterest expenses saw increases in areas like FDIC insurance and interchange processing costs | Metric (in thousands) | Q2 2022 | Q2 2021 | 6M 2022 | 6M 2021 | |:----------------------|:--------|:--------|:--------|:--------| | Total Noninterest Expense | $58,333 | $59,374 | $117,558 | $117,098 | | Salaries, commissions and employee benefits | $33,147 | $35,046 | $67,285 | $69,977 | | Efficiency Ratio | 41.83% | 45.94% | 42.97% | 45.65% | - Total noninterest expense decreased by $1.04 million (1.75%) in Q2 2022 YoY but increased by $460 thousand (0.39%) in 6M 2022 YoY[240][243] - The efficiency ratio improved to 41.83% in Q2 2022 and 42.97% in 6M 2022, indicating better operational efficiency[240][243] - Salaries, commissions, and employee benefits decreased due to lower mortgage compensation and profit-sharing expenses, partially offset by merit-based pay increases[241][244] Balance Sheet Review This section provides an overview of key balance sheet components, including loans, asset quality, deposits, and borrowings Loans The Company's loan portfolio, held-for-investment, experienced significant growth, primarily in real estate and consumer loans. The portfolio is segmented for credit risk assessment, and maturity distribution shows a substantial portion of variable-rate loans, many of which are indexed to the prime rate | Loan Segment (in thousands) | June 30, 2022 | December 31, 2021 | June 30, 2021 | |:----------------------------|:--------------|:------------------|:--------------| | Total Loans Held-for-Investment | $5,878,582 | $5,388,972 | $5,304,602 | | Real Estate Loans | $4,137,128 | $3,746,519 | $3,558,353 | | Consumer Loans | $610,529 | $529,384 | $488,578 | - Total loans held-for-investment increased by $489.61 million (9.1%) from December 31, 2021, to June 30, 2022[248] - Real estate loans increased by $390.61 million, and consumer loans increased by $81.15 million from year-end 2021[249] - Approximately $3.40 billion (57.79%) of total loans held-for-investment have variable interest rates, with $1.34 billion maturing or repricing within the next twelve months[257][259] Asset Quality The Company's asset quality improved, with a decrease in nonaccrual, past due 90 days or more, and restructured loans, as well as foreclosed assets. These nonperforming assets represent a smaller percentage of total loans and assets compared to previous periods | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | |:-------|:--------------|:------------------|:--------------| | Total Nonperforming Assets (in millions) | $25.52 | $34.16 | $30.11 | | As a % of loans held-for-investment and foreclosed assets | 0.43% | 0.63% | 0.57% | | As a % of total assets | 0.19% | 0.26% | 0.24% | - Total nonperforming assets decreased by $8.64 million (25.3%) from December 31, 2021, to June 30, 2022[260][261] Allowance for Credit Losses The allowance for credit losses (ACL) increased for the three and six-month periods ended June 30, 2022, primarily due to strong organic loan growth and a slight decline in the projected economic forecast. Net loan recoveries also improved | Metric | Q2 2022 | Q2 2021 | 6M 2022 | 6M 2021 | |:-------|:--------|:--------|:--------|:--------| | Provision for Credit Losses (in millions) | $5.35 | $(1.21) | $10.13 | $(3.20) | | Net loan recoveries/average loans (annualized) | 0.06% | 0.02% | 0.02% | 0.00% | | Allowance for loan losses/period-end loans held-for-investment | 1.22% | 1.17% | 1.22% | 1.17% | - The provision for credit losses for Q2 2022 was $5.35 million, a significant increase from a reversal of $1.21 million in Q2 2021[265] - The allowance for credit losses as a percent of loans held-for-investment increased to 1.22% at June 30, 2022, from 1.18% at December 31, 2021[267] Interest-Bearing Demand Deposits in Banks Interest-bearing demand deposits in banks decreased significantly at June 30, 2022, compared to prior periods, with the majority maintained at the Federal Reserve Bank of Dallas | Metric (in millions) | June 30, 2022 | December 31, 2021 | June 30, 2021 | |:---------------------|:--------------|:------------------|:--------------| | Interest-Bearing Demand Deposits in Banks | $222.90 | $323.54 | $654.53 | - Interest-bearing demand deposits in banks decreased by $100.64 million from December 31, 2021, to June 30, 2022[268] Available-for-Sale Securities The available-for-sale securities portfolio experienced a shift in composition and a significant increase in unrealized losses due to rising interest rates. The overall tax equivalent yield and weighted average life are also provided | Metric (in billions) | June 30, 2022 | December 31, 2021 | |:---------------------|:--------------|:------------------| | Fair Value of Available-for-Sale Securities | $6.22 | $6.57 | - The portfolio saw an increase in U.S. Treasury securities and corporate bonds, offset by decreases in obligations of states and political subdivisions and mortgage-backed securities[269] - The investment portfolio had an overall tax equivalent yield of 2.30%, a weighted average life of 5.94 years, and a modified duration of 5.14 years at June 30, 2022[273] Deposits Deposits, the primary funding source, increased significantly, with a breakdown of average deposits and rates paid. A substantial portion of deposits are uninsured and uncollateralized | Metric (in billions) | June 30, 2022 | December 31, 2021 | June 30, 2021 | |:---------------------|:--------------|:------------------|:--------------| | Total Deposits | $11.12 | $10.57 | $9.78 | - Total deposits increased by $550 million (5.2%) from December 31, 2021, to June 30, 2022[274] - The estimated amount of uninsured and uncollateralized deposits was approximately $4.11 billion as of June 30, 2022[276] Borrowings Borrowings increased, primarily driven by securities sold under repurchase agreements. The weighted average interest rates paid on these borrowings also increased | Metric (in millions) | June 30, 2022 | December 31, 2021 | June 30, 2021 | |:---------------------|:--------------|:------------------|:--------------| | Total Borrowings | $768.36 | $671.15 | $549.97 | | Weighted Average Interest Rate (6M) | 0.12% | N/A | 0.08% | - Total borrowings increased by $97.21 million from December 31, 2021, to June 30, 2022[277] Interest Rate Risk The Company manages interest rate risk through its asset-liability management committee, using an earnings simulation model to assess the impact of interest rate changes on net interest income. The portfolio is asset-sensitive, meaning rising rates generally benefit net interest income, but significant unrealized losses on available-for-sale securities have occurred due to recent rate increases | Change in Interest Rates (basis points) | Percentage change in net interest income (June 30, 2022) | |:----------------------------------------|:---------------------------------------------------------| | +400 | 7.34% | | +300 | 5.80% | | +200 | 4.36% | | +100 | 2.63% | | -100 | (2.85)% | | -200 | (6.67)% | - The Company's position is asset-sensitive, with a 100 basis point increase in interest rates projected to increase net interest income by 2.63% at June 30, 2022[284] - Unrealized gains on the available-for-sale portfolio shifted to an unrealized loss of $507.30 million before taxes at June 30, 2022, from a $125.67 million gain at December 31, 2021, due to a 175 basis point increase in the 5-year U.S. Treasury rate[286] Capital and Liquidity This section assesses the Company's capital adequacy and liquidity position, including regulatory ratios and funding sources Capital The Company's capital ratios remain strong and well above regulatory minimums, despite a decrease in total shareholders' equity primarily due to unrealized losses on available-for-sale securities. These unrealized losses are excluded from regulatory capital calculations | Capital Ratio | Consolidated (June 30, 2022) | Minimum Capital Required-Basel III | Required to be Considered Well-Capitalized | |:--------------|:-------------------------------|:-----------------------------------|:-------------------------------------------| | Total Capital to Risk-Weighted Assets | 19.54% | 10.50% | 10.00% | | Tier 1 Capital to Risk-Weighted Assets | 18.50% | 8.50% | 6.00% | | Common Equity Tier 1 Capital to Risk-Weighted Assets | 18.50% | 7.00% | N/A | | Leverage Ratio | 10.65% | 4.00% | N/A | - Total shareholders' equity decreased to $1.33 billion at June 30, 2022, from $1.76 billion at December 31, 2021, largely due to $400.51 million in unrealized losses on investment securities available-for-sale, net of taxes[288] - All regulatory capital ratios (Total, Tier 1, Common Equity Tier 1, and Leverage) for both the consolidated entity and the bank subsidiary exceed the 'well-capitalized' thresholds[292][293] Liquidity The Company maintains adequate liquidity through cash, marketable assets, core deposits, and access to various funding sources, including lines of credit with the FHLB and Federal Reserve. Management continuously monitors liquidity risk and has a contingency funding plan in place, with no material adverse effects anticipated - Liquid assets include cash, federal funds sold, and short-term investments in time deposits in banks[297] - The subsidiary bank has an available line of credit with the FHLB totaling $2.09 billion and access to the Federal Reserve Bank of Dallas lending program[297] - The Company's current liquidity position is considered adequate to meet short-term and long-term needs, supported by a strong core deposit base and low loan-to-deposit ratios[300] Off-Balance Sheet ("OBS")/Reserve for Unfunded Commitments The Company engages in off-balance sheet activities, including unfunded lines of credit, commitments to extend credit, and standby letters of credit, which expose it to credit and interest rate risk. A reserve for unfunded commitments is maintained to cover potential credit losses | Commitment Type (in thousands) | Total Notional Amounts Committed (June 30, 2022) | |:-------------------------------|:-------------------------------------------------| | 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 | - The reserve for unfunded commitments totaled $8.72 million at June 30, 2022, recorded in other liabilities[301] Parent Company Funding The parent company's funding for operations, dividends, and acquisitions primarily comes from its own earnings, cash reserves, and intercompany dividends and management fees from subsidiaries. A significant amount was available for intercompany dividends at June 30, 2022 - Available cash and cash equivalents at the parent company totaled $89.10 million at June 30, 2022[299] - $375.31 million was available for intercompany dividends from subsidiaries at June 30, 2022, without prior regulatory approval[308] Dividends The Company's dividend policy aims to pay 35% to 40% of annual net earnings while maintaining adequate capital. Dividends are subject to regulatory restrictions and loan covenants - The long-term dividend policy is to pay cash dividends of approximately 35% to 40% of annual net earnings[309] - Cash dividend payout ratios were 39.23% and 35.18% of net earnings for the first six months of 2022 and 2021, respectively[309] - A $0.17 per share cash dividend was declared for Q2 2022, a 13.33% increase over Q2 2021[309] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section provides information on the Company's exposure to market risks, particularly interest rate risk, and its management strategies - Management considers interest rate risk to be a significant market risk for the Company, with further details provided in the 'Interest Rate Risk' section of the MD&A[312] Item 4. Controls and Procedures This section reports on the effectiveness of the Company's disclosure controls and procedures and internal control over financial reporting - Management, including the principal executive and financial officers, concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2022[315] - No significant changes in internal controls over financial reporting occurred that materially affected or are reasonably likely to materially affect internal control over financial reporting[316] PART II - OTHER INFORMATION This section covers other required disclosures, including legal proceedings, risk factors, unregistered sales of equity securities, and a list of exhibits Item 1. Legal Proceedings This section discloses any material legal proceedings involving the Company or its subsidiaries - The Company and its subsidiaries are not currently subject to any material pending legal proceedings[319] Item 1A. Risk Factors This section outlines the significant risks and uncertainties that could materially affect the Company's business, financial condition, or results of operations - There have been no material changes in the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021[320] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on any unregistered sales of equity securities and the use of proceeds from such sales Repurchase of Common Stock The Company's Board of Directors authorized a stock repurchase plan for up to 5,000,000 common shares through July 31, 2023. During June 2022, 191,987 shares were repurchased under this plan | Period | Total number of shares purchased | Average price paid per share | |:-------|:-------------------------------|:-----------------------------| | June 1, 2022 through June 30, 2022 | 191,987 | $38.5314 | - As of June 30, 2022, 4,808,013 shares remained available for repurchase under the plan[322] Item 3. Defaults Upon Senior Securities This section reports on any defaults on senior securities, if applicable - Not Applicable[323] Item 4. Mine Safety Disclosures This section provides disclosures related to mine safety, if applicable - Not Applicable[323] Item 5. Other Information This section includes any other information required to be disclosed that is not covered elsewhere - Not Applicable[323] Item 6. Exhibits This section lists all exhibits filed as part of the report - This section lists all exhibits filed with the Form 10-Q, including organizational documents, stock plans, loan agreements, and certifications[325] Signatures This section contains the official signatures of the Company's principal executive and financial officers, certifying the report's accuracy