Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project," and similar expressions, as they relate to us or our management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited, to those discussed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , 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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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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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 effects of and changes in trade, monetary and fiscal policies and laws,
including interest rate policies of the
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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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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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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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soundness of other financial institutions with which we have transactions;
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inflation, interest rate, market and monetary fluctuations;
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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 and maintain and/or increase market share;
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changes in our liquidity position;
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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 together with increasing wage costs in our markets;
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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 effects 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.
Such forward-looking statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategies and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise (except as required by law). Introduction As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, gain on sale of mortgage loans and service charges. Our primary source of funding for our loans and investments are deposits held by our subsidiary,First Financial Bank, N.A . Our largest expense is salaries and related employee benefits. We measure our performance by calculating our return on average assets, return on average equity, regulatory capital ratios, net interest margin and efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income. The following discussion and analysis of operations and financial condition should be read in conjunction with the financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as those included in the Company's 2021 Annual Report on Form 10-K.
Critical Accounting Policies
We prepare consolidated financial statements based on generally accepted accounting principles ("GAAP") and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions. We deem a policy critical if (i) the accounting estimate required us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (ii) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements. We deem our most critical accounting policies to be (i) our allowance for credit losses and our provision for credit losses and (ii) our valuation of financial instruments. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period. A discussion of (i) our allowance for credit losses and our provision for credit losses and (ii) our valuation of financial instruments is included in Note 1 to our Consolidated Financial Statements beginning on page 10. Stock Repurchase 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. Subsequent toJuly 27, 2021 and throughSeptember 30, 2022 , 244,559 shares were repurchased and retired at an average price of$38.61 . Results of Operations
Performance Summary. Net earnings for the third quarter of 2022 were
The return on average assets was 1.76% for the third quarter of 2022, as compared to 1.90% for the third quarter of 2021. The return on average equity was 17.31% for the third quarter of 2022 as compared to 13.43% for the third quarter of 2021. Net earnings for the nine-month period endedSeptember 30, 2022 were$175.81 million compared to earnings of$172.23 million for the same period in 2021. Diluted earnings per share was$1.23 for the first nine months of 2022 as compared to$1.20 for the same period in 2021. The return on average assets was 1.77% for the first nine months of 2022 as compared to 1.94% for the same period a year ago. The return on average equity was 15.88% for the first nine months of 2022 as compared to 13.55% for the same period in 2021. 43 --------------------------------------------------------------------------------
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$104.89 million for the third quarter of 2022, as compared to$99.45 million for the same period last year. The increase in 2022 tax equivalent net interest income compared to 2021 was largely attributable to the increases in and change in the mix of interest earning assets primarily derived from an increase in average loans and investment securities held with lower cash and cash equivalents partially offset by increases in the rates paid on deposits and borrowings and lower PPP origination fees and interest which totaled$62 thousand in the third quarter of 2022 compared to$8.25 million in the third quarter of 2021. PPP loan balances totaled$202 thousand atSeptember 30, 2022 . Average earning assets were$12.54 billion for the third quarter of 2022, as compared to$11.58 billion during the third quarter of 2021. The increase of$962.89 million in average earning assets in 2022 when compared to 2021 was primarily a result of (i) the increase of taxable securities of$957.89 million , (ii) the increase of average loans of$744.84 million and offset by (iii) a decrease in short-term investments of$362.07 million and (iv) a decrease in tax-exempt securities of$377.78 million when compared toSeptember 30, 2021 balances. Additionally, the mix of loans shifted from PPP loans, which earned 1.00% excluding origination fees, to other loan categories with higher yields. Average interest-bearing liabilities were$7.77 billion for the third quarter of 2022, as compared to$6.95 billion in the same period in 2021. The increase in average interest-bearing liabilities primarily resulted from continued organic growth. The yield on earning assets increased 16 basis points while the rate paid on interest-bearing liabilities increased 41 basis points for the third quarter of 2022 compared to the third quarter of 2021. Tax-equivalent net interest income was$306.26 million for the first nine months of 2022 as compared to$286.41 million for the same period last year. The increase in 2022 tax equivalent net interest income compared to 2021 was largely attributable to the increases in and change in the mix of interest earning assets primarily derived from an increase in average loans and investment securities held partially offset by increases in the rates paid on deposits and borrowings and lower PPP origination fees and interest which totaled$1.83 million for the first nine months of 2022 compared to$22.18 million for the first nine months of 2021. Average earning assets were$12.51 billion for the first nine months of 2022, as compared to$11.15 billion during the first nine months of 2021. The increase of$1.36 billion in average earning assets in 2022 when compared to 2021 was primarily a result of (i) the increase of taxable securities of$1.46 billion , (ii) the increase of average loans of$426.45 million and offset by (iii) a decrease in short-term investments of$445.55 million and (iv) a decrease in tax-exempt securities of$75.60 million when compared toSeptember 30, 2021 average balances. Additionally, the mix of loans shifted from PPP loans, which earned 1.00%, excluding origination fees, to other loan categories with higher yields. Average interest-bearing liabilities were$7.74 billion for the first nine months of 2022, as compared to$6.69 billion in the same period in 2021. The increase in average interest-bearing liabilities primarily resulted from continued organic growth. The yield on earning assets decreased six basis points while the rate paid on interest-bearing liabilities increased 15 basis points for the first nine months of 2022 compared to the first nine months of 2021.
Table 1 allocates the change in tax-equivalent net interest income between the amount of change attributable to volume and to rate.
Table 1 - Changes in Interest Income and Interest Expense (dollars in thousands): Three-Months Ended September 30, 2022 Nine-Months Ended September 30, 2022 Compared to Three-Months Ended Compared to Nine-Months Ended September 30, 2021 September 30, 2021 Change Attributable to Total Change Attributable to Total Volume Rate Change Volume Rate Change Short-term investments$ (138 ) $ 1,332 $ 1,194 $ (397 ) $ 1,862 $ 1,465 Taxable investment securities 3,769 4,908 8,677 18,498 5,440 23,938 Tax-exempt investment securities (1) (2,630 ) (689 ) (3,319 ) (1,602 ) (833 ) (2,435 ) Loans (1) (2) 9,880 (2,836 ) 7,044 16,350 (9,976 ) 6,374 Interest income 10,881 2,715 13,596 32,849 (3,507 ) 29,342 Interest-bearing deposits 139 7,308 7,447 610 7,919 8,529 Short-term borrowings 21 687 708 114 842 956 Interest expense 160 7,995 8,155 724 8,761 9,485 Net interest income$ 10,721 $ (5,280 ) $ 5,441 $ 32,125 $ (12,268 ) $ 19,857 (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 3.32% for the third quarter of 2022, a decrease of nine basis points from the same period in 2021. The net interest margin, on a tax equivalent basis, was 3.27% for the first nine months of 2022, a decrease of 16 basis points from the same period in 2021. We continued to experience downward pressure on our net interest margin into the early part of 2022 primarily due to (i) the extended period of historically low levels of short-term interest rates and (ii) the shift in the mix of interest-earning assets. However, 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 andSeptember 2022 , respectively, resulting in a target rate range of 300 to 325 atSeptember 30, 2022 . Loan rates on variable loans have increased as the majority of such loans are indexed to the applicable prime rate (currently 6.25% atSeptember 30, 2022 ), subject to underlying floors. With the latest increase in the federal funds rate, the majority of variable rate loans have increased (see additional discussion beginning on page 51). 44 -------------------------------------------------------------------------------- During 2022, we increased rates on each of the primary depository products in response to the increasing federal funds rate and expect those rates will continue to move upward in the foreseeable future. Additionally, we have approximately$1.1 billion of municipal and related deposits which are indexed to short-term treasury rates which have continued to increase with the changes in the applicable rate index. Average municipal and related deposits totaled$1.45 billion and$1.42 billion for the three-months endedSeptember 30, 2022 and 2021, respectively, with an average rate paid of 1.50% and 0.14%, for the respective quarters then ended.
The net interest margin, which measures tax-equivalent net interest income as a percentage of average earning assets, is illustrated in Table 2.
Table 2 - Average Balances and Average Yields and Rates (dollars in thousands, except percentages): Three-Months Ended September 30, 2022 2021 Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets Short-term investments (1)$ 252,036 $ 1,432 2.25 %$ 614,105 $ 238 0.15 % Taxable investment securities (2) 4,039,107 20,799 2.06 3,081,215 12,122 1.57 Tax-exempt investment securities (2)(3) 2,164,829 14,382 2.66 2,542,606 17,701 2.78 Loans (3)(4) 6,082,649 77,851 5.08 5,337,807 70,807 5.26 Total earning assets 12,538,621$ 114,464 3.62 % 11,575,733$ 100,868 3.46 % Cash and due from banks 227,206 205,929 Bank premises and equipment, net 150,455 147,071 Other assets 213,094 97,827 Goodwill and other intangible assets, net 315,962 317,327 Allowance for credit losses (72,737 ) (63,055 ) Total assets$ 13,372,601 $ 12,280,832 Liabilities and Shareholders' Equity Interest-bearing deposits$ 7,004,478 $ 8,787 0.50 %$ 6,346,267 $ 1,340 0.08 % Short-term borrowings 768,096 784 0.40 599,934 76 0.05 Total interest-bearing liabilities 7,772,574$ 9,571 0.49 % 6,946,201$ 1,416 0.08 % Noninterest-bearing deposits 4,178,675 3,490,685 Other liabilities 61,320 103,446 Total liabilities 12,012,569 10,540,332 Shareholders' equity 1,360,032 1,740,500 Total liabilities and shareholders' equity$ 13,372,601 $ 12,280,832 Net interest income$ 104,893 $ 99,452 Rate Analysis: Interest income/earning assets 3.62 % 3.46 % Interest expense/earning assets (0.30 ) (0.05 ) Net interest margin 3.32 % 3.41 % (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$1.74 million and$3.67 million in the third quarters of 2022 and 2021, respectively, using an effective tax rate of 21% for both periods. (4) Nonaccrual loans are included in loans. 45 --------------------------------------------------------------------------------
Nine-Months Ended September 30, 2022 2021 Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets Short-term investments (1)$ 238,713 $ 2,080 1.16 %$ 684,263 $ 615 0.12 % Taxable investment securities (2) 4,123,562 57,772 2.80 2,665,988 33,834 1.69 Tax-exempt investment securities (2)(3) 2,382,754 49,655 2.78 2,458,352 52,090 2.83 Loans (3)(4) 5,765,844 211,095 4.89 5,339,398 204,721 5.13 Total earning assets 12,510,873$ 320,602 3.43 % 11,148,001$ 291,260 3.49 % Cash and due from banks 230,427 204,246 Bank premises and equipment, net 149,997 144,566 Other assets 173,061 97,234 Goodwill and other intangible assets, net 316,274 317,726 Allowance for credit losses (67,931 ) (64,446 ) Total assets$ 13,312,701 $ 11,847,327 Liabilities and Shareholders' Equity Interest-bearing deposits$ 6,984,249 $ 13,124 0.25 %$ 6,165,740 $ 4,595 0.10 % Short-term borrowings 759,913 1,216 0.21 528,599 260 0.07 Total interest-bearing liabilities 7,744,162$ 14,340 0.25 % 6,694,339$ 4,855 0.10 % Noninterest-bearing deposits 4,024,731 3,349,719 Other liabilities 63,919 103,354 Total liabilities 11,832,812 10,147,412 Shareholders' equity 1,479,889 1,699,915 Total liabilities and shareholders' equity$ 13,312,701 $ 11,847,327 Net interest income (tax equivalent)$ 306,262 $ 286,405 Rate Analysis: Interest income/earning assets 3.43 % 3.49 % Interest expense/earning assets (0.16 ) (0.06 ) Net interest margin 3.27 % 3.43 % (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$8.88 million and$10.85 million in the first nine months of 2022 and 2021, respectively, using an effective tax rate of 21% for both periods. (4) Nonaccrual loans are included in loans. Noninterest Income. Noninterest income for the third quarter of 2022 was$30.94 million compared to$37.73 million in the same quarter of 2021. Increases in certain categories of noninterest income included (i) trust fees of$830 thousand , (ii) service charges on deposit accounts of$726 thousand , (iii) net gain on sale of assets of$532 thousand , (iv) net gain on sale of available-for-sale securities of$333 thousand and (v) net gain on sale of foreclosed assets of$322 thousand when compared to the third quarter of 2021.The increase in trust fees was driven mainly by the continued increase in oil and gas revenue. Mortgage related income was$4.07 million in the third quarter of 2022 compared to$8.79 million in the third quarter of 2021 due to lower overall origination volumes and margins as a result of the changes in interest rates during the quarter. Debit card fees for the third quarter of 2022 decreased by$3.61 million from the third quarter of 2021 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") effectiveJuly 1, 2022 , which is consistent with our prior disclosures. Recoveries of interest on previously charged-off or nonaccrual loans was$664 thousand for the third quarter of 2022 compared to$1.75 million during the same period of 2021. Noninterest income for the nine-month period endedSeptember 30, 2022 was$103.14 million compared to$107.27 million compared to the same period in 2021. Increases in certain categories of noninterest income included (i) trust fees of$3.40 million , (ii) service charges on deposit accounts of$2.75 million , (iii) net gain on sale of foreclosed assets of$1.37 million , and (iv) net gain on sale of available-for-sale securities of$1.20 million when compared to the same period of 2021. The increase in trust fees was driven mainly by the continued increase in oil and gas revenue. Mortgage related income was$16.13 million for the nine-month period endedSeptember 30, 2022 compared to$26.97 million in the same period of 2021 due to lower overall origination volumes and margins as a result of the changes in interest rates during the year. Debit card fees were$24.38 for the first nine months of 2022 compared to$26.55 million compared to the first nine months of 2021 due to the impact of the Bank becoming subject to regulations imposed by theFederal Reserve that limits debit card interchange revenue under the Durbin Amendment effectiveJuly 1, 2022 , which is consistent with our prior disclosures of$18 million annually. 46 -------------------------------------------------------------------------------- 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 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. Management has estimated the impact of this reduction in interchange fees to approximate$18 million annually (pre-tax). Based on the applicableFederal Reserve rules, as amended, the Company became subject to the limitation effectiveJuly 1, 2022 , which reduced debit card fees during the third quarter of 2022, as discussed above.
Table 3 - Noninterest Income (dollars in thousands):
Three-Months Ended September 30, Nine-Months Ended September 30, Increase Increase 2022 (Decrease) 2021 2022 (Decrease) 2021 Trust fees$ 10,314 $ 830 $ 9,484 $ 29,873 $ 3,398 $ 26,475 Service charges on deposit accounts 6,399 726 5,673 18,143 2,749 15,394 Debit card fees 5,587 (3,611 ) 9,198 24,381 (2,171 ) 26,552 Credit card fees 651 56 595 1,953 182 1,771 Gain on sale and fees on mortgage loans 4,070 (4,718 ) 8,788 16,131 (10,842 ) 26,973 Net gain on sale of available-for-sale securities 334 333 1 2,013 1,199 814 Net gain on sale of foreclosed assets 349 322 27 1,451 1,368 83 Net gain (loss) on sale of assets 526 532 (6 ) 522 309 213 Interest on loan recoveries 664 (1,082 ) 1,746 2,596 (236 ) 2,832 Other: Check printing fees 29 (59 ) 88 87 (68 ) 155 Safe deposit rental fees 192 - 192 671 (19 ) 690 Credit life fees 268 12 256 853 18 835 Brokerage commissions 355 18 337 1,130 91 1,039 Wire transfer fees 428 61 367 1,252 215 1,037 Miscellaneous income 777 (203 ) 980 2,085 (325 ) 2,410 Total other 2,049 (171 ) 2,220 6,078 (88 ) 6,166 Total Noninterest Income$ 30,943 $ (6,783 ) $ 37,726 $ 103,141 $ (4,132 ) $ 107,273 Noninterest Expense. Total noninterest expense for the third quarter of 2022 was$59.44 million , a decrease of$3.50 million , or 5.56%, as compared to the same period of 2021. An important measure in determining whether a financial institution effectively manages noninterest expense is the efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax-equivalent basis and noninterest income. Lower ratios indicate better efficiency since more income is generated with a lower noninterest expense total. Our efficiency ratio improved to 43.76% for the third quarter of 2022 compared to 45.88% for the same quarter in 2021. Salaries, commissions and employee benefits for the third quarter of 2022 totaled$33.89 million , compared to$37.09 million for the same period in 2021. The net decrease reflected lower mortgage compensation expenses of$1.25 million and a decrease of$1.87 million in profit sharing expenses offset by annual merit-based and other market-based pay increases that were effectiveMarch 1, 2022 for the third quarter of 2022. All other categories of noninterest expense for the third quarter of 2022 totaled$25.55 million , down from$25.85 million in the same quarter a year ago. Noninterest expense, excluding salary related costs, for the three-months endedSeptember 30, 2022 decreased primarily due to decreases in software amortization and expense and operational other losses compared to the three-months endedSeptember 30, 2021 . Total noninterest expense for the first nine months of 2022 was$177.00 million , a decrease of$3.04 million , or 1.69%, as compared to the same period of 2021. Our efficiency ratio for the first nine months of 2022 improved to 43.23% compared to 45.73% for the same period in 2021. Salaries, commissions and employee benefits for the first nine months of 2022 totaled$101.18 million , compared to$107.07 million for the same period in 2021. The net decrease reflected lower mortgage compensation expenses of$4.14 million and a decrease of$3.37 million in profit sharing expenses offset by annual merit-based and other market-based pay increases that were effectiveMarch 1, 2022 for the first nine months of 2022. All other categories of noninterest expense for the first nine months of 2022 totaled$75.82 million , up from$72.97 million in the same period a year ago. Noninterest expense, excluding salary related costs, for the nine-months endedSeptember 30, 2022 , increased compared to the nine-months endedSeptember 30, 2021 , primarily due to$743 thousand of foreclosed asset expenses together with increases in debit card expense,FDIC assessment fees and printing, stationary and supplies and loan processing costs. 47 --------------------------------------------------------------------------------
Table 4 - Noninterest Expense (dollars in thousands):
Three-Months Ended September 30, Nine-Months Ended September 30, Increase Increase 2022 (Decrease) 2021 2022 (Decrease) 2021 Salaries and commissions$ 26,805 $ (1,302 ) $ 28,107 $ 78,335 $ (2,744 ) $ 81,079 Medical 3,009 (191 ) 3,200 8,396 (399 ) 8,795 Profit sharing 763 (1,867 ) 2,630 3,667 (3,368 ) 7,035 401(k) match expense 897 16 881 2,821 50 2,771 Payroll taxes 1,688 61 1,627 5,575 104 5,471 Stock based compensation 730 85 645 2,383 467 1,916 Total salaries and employee benefits 33,892 (3,198 ) 37,090 101,177 (5,890 ) 107,067 Net occupancy expense 3,440 152 3,288 9,957 281 9,676 Equipment expense 2,396 (54 ) 2,450 6,999 208 6,791 FDIC assessment fees 917 102 815 2,690 408 2,282 Debit card expense 3,013 84 2,929 9,177 441 8,736 Professional and service fees 2,219 (187 ) 2,406 6,635 (301 ) 6,936 Printing, stationery and supplies 600 168 432 1,641 395 1,246 Operational and other losses 869 (218 ) 1,087 2,247 339 1,908 Software amortization and expense 2,564 (291 ) 2,855 7,543 (760 ) 8,303 Amortization of intangible assets 306 (92 ) 398 946 (276 ) 1,222 Other: Data processing fees 433 (68 ) 501 1,323 (22 ) 1,345 Postage 352 (68 ) 420 993 (93 ) 1,086 Advertising 738 (118 ) 856 2,175 (7 ) 2,182 Correspondent bank service charges 265 (2 ) 267 797 40 757 Telephone 759 80 679 2,278 (499 ) 2,777 Public relations and business development 954 64 890 2,561 217 2,344 Directors' fees 589 1 588 1,938 138 1,800 Audit and accounting fees 513 (2 ) 515 1,538 37 1,501 Legal fees and other related costs 323 (115 ) 438 1,254 (615 ) 1,869 Regulatory exam fees 399 25 374 1,188 140 1,048 Travel 464 116 348 1,238 293 945 Courier expense 307 73 234 886 188 698 Other real estate owned 1 (9 ) 10 3 (46 ) 49 Other 3,129 60 3,069 9,816 2,348 7,468 Total other 9,226 37 9,189 27,988 2,119 25,869 Total Noninterest Expense$ 59,442 $ (3,497 ) $ 62,939 $ 177,000 $ (3,036 ) $ 180,036 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 ofSeptember 30, 2022 , total loans held-for-investment were$6.26 billion , an increase of$866.52 million , as compared toDecember 31, 2021 . Total PPP loans outstanding were$202 thousand atSeptember 30, 2022 , which are included in the Company's commercial loan totals. As compared to year-end 2021 balances, total real estate loans increased$659.25 million , total consumer loans increased$157.21 million , total commercial loans increased$71.21 million and agricultural loans decreased$21.15 million . Loans averaged$6.08 billion for the third quarter of 2022, an increase of$744.84 million over the prior year third quarter average balances. Loans averaged$5.77 billion for the first nine months of 2022, an increase of$426.45 million from the prior year nine-month period average balances. Our loan portfolio segments include C&I, Municipal, Agricultural, Construction and Development, Farm, Non-Owner Occupied and Owner Occupied CRE, Residential, Consumer Auto and Consumer Non-Auto. This segmentation allows for a more precise pooling of loans with similar credit risk characteristics and credit monitor procedures for the Company's calculation of its allowance for credit losses. 48 --------------------------------------------------------------------------------
Table 5 outlines the composition of the Company's held-for-investment loans by portfolio segment.
Table 5 - Composition of Loans Held-for-Investment (dollars in thousands):
September 30, December 31, 2022 2021 2021 Commercial: C&I *$ 871,335 $ 819,597 $ 837,075 Municipal 214,852 165,847 177,905 Total Commercial 1,086,187 985,444 1,014,980 Agricultural 76,937 98,947 98,089 Real Estate: Construction & Development 938,051 656,530 749,793 Farm 268,139 203,064 217,220 Non-Owner Occupied CRE 717,738 674,958 623,434 Owner Occupied CRE 945,665 824,231 821,653 Residential 1,536,180 1,328,798 1,334,419Total Real Estate 4,405,773 3,687,581 3,746,519 Consumer: Auto 538,798 394,072 405,416 Non-Auto 147,793 120,450 123,968 Total Consumer 686,591 514,522 529,384 Total$ 6,255,488 $ 5,286,494 $ 5,388,972 * All disclosures for the C&I loan segment include PPP loan balances, net of deferred fees and costs, as disclosed on the face of the consolidated balance sheet. Loans held-for-sale, consisting of secondary market mortgage loans, totaled$18.82 million ,$47.72 million , and$37.81 million atSeptember 30, 2022 and 2021, andDecember 31, 2021 , respectively. AtSeptember 30, 2022 and 2021, andDecember 31, 2021 ,$2.92 million ,$1.64 million and$3.69 million , respectively, are valued using the lower of cost or fair value, and the remaining amounts are valued under the fair value option. 49 -------------------------------------------------------------------------------- The following tables summarize maturity information of our loan portfolio as ofSeptember 30, 2022 . The tables also presents the portions of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index. Maturity Distribution and Interest Sensitivity of Loans atSeptember 30, 2022 (dollars in thousands): After One but After Five but After Due in One Within Five Within Fifteen Fifteen Total Loans Held-for-Investment: Year or Less Years Years Years Total Commercial: C&I$ 336,198 $ 422,103 $ 95,439 $ 17,393 $ 871,133 PPP - 202 - - 202 Municipal 3,599 50,008 124,815 36,430 214,852 Total Commercial 339,797 472,313 220,254 53,823 1,086,187 Agricultural 56,040 19,155 1,742 - 76,937 Real Estate: Construction & Development 491,989 189,822 165,097 91,143 938,051 Farm 18,005 27,830 136,376 85,928 268,139 Non-Owner Occupied CRE 27,597 197,675 358,562 133,904 717,738 Owner Occupied CRE 45,283 209,925 458,600 231,857 945,665 Residential 120,532 118,750 682,916 613,982 1,536,180Total Real Estate 703,406 744,002 1,801,551 1,156,814 4,405,773 Consumer: Auto 5,860 495,483 37,455 - 538,798 Non-Auto 28,989 96,328 16,484 5,992 147,793 Total Consumer 34,849 591,811 53,939 5,992 686,591 Total$ 1,134,092 $ 1,827,281 $ 2,077,486 $ 1,216,629 $ 6,255,488 % of Total Loans 18.13 % 29.21 % 33.21 % 19.45 % 100.00 % Due in One After One but After Five but After Year or Within Five Within Fifteen Fifteen Loans with fixed interest rates: Less Years Years Years Total Commercial: C&I$ 55,976 $ 272,468 $ 12,669 $ -$ 341,113 PPP - 202 - - 202 Municipal 3,104 48,690 94,149 14,553 160,496 Total Commercial 59,080 321,360 106,818 14,553 501,811 Agricultural 8,110 13,071 477 - 21,658 Real Estate: Construction & Development 180,442 81,221 39,992 562 302,217 Farm 5,238 18,307 79,343 945 103,833 Non-Owner Occupied CRE 10,959 142,347 70,904 - 224,210 Owner Occupied CRE 30,365 143,375 48,599 218 222,557 Residential 47,287 99,737 451,276 39,583 637,883Total Real Estate 274,291 484,987 690,114 41,308 1,490,700 Consumer: Auto 5,860 495,483 37,455 - 538,798 Non-Auto 23,978 94,078 16,070 5,627 139,753 Total Consumer 29,838 589,561 53,525 5,627 678,551 Total$ 371,319 $ 1,408,979 $ 850,934 $ 61,488 $ 2,692,720 % of Total Loans 5.94 % 22.52 % 13.60 % 0.98 % 43.04 % 50
-------------------------------------------------------------------------------- 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$ 280,222 $ 149,635 $ 82,770 $ 17,393 $ 530,020 PPP - - - - - Municipal 495 1,318 30,666 21,877 54,356 Total Commercial 280,717 150,953 113,436 39,270 584,376 Agricultural 47,930 6,084 1,265 - 55,279 Real Estate: Construction & Development 311,547 108,601 125,105 90,581 635,834 Farm 12,767 9,523 57,033 84,983 164,306 Non-Owner Occupied CRE 16,638 55,328 287,658 133,904 493,528 Owner Occupied CRE 14,918 66,550 410,001 231,639 723,108 Residential 73,245 19,013 231,640 574,399 898,297Total Real Estate 429,115 259,015 1,111,437 1,115,506 2,915,073 Consumer: Auto - - - - - Non-Auto 5,011 2,250 414 365 8,040 Total Consumer 5,011 2,250 414 365 8,040 Total$ 762,773 $ 418,302 $ 1,226,552 $ 1,155,141 $ 3,562,768 % of Total Loans 12.19 % 6.69 % 19.61 % 18.47 % 56.96 % Of the$3.56 billion of variable interest rate loans shown above, loans totaling$1.4 billion mature or reprice over the next twelve months with floating rates subject to floors in many cases. Of this amount, approximately$1.37 billion will reprice immediately upon changes in the underlying index rate (primarilyU.S. prime rate) with the remaining$30 million being subject to floors above the current index. Asset Quality. Our loan portfolio is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by bank regulatory agencies. Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were$24.62 million atSeptember 30, 2022 , as compared to$25.28 million atSeptember 30, 2021 and$34.16 million atDecember 31, 2021 . As a percent of loans held-for-investment and foreclosed assets, these assets were 0.39% atSeptember 30, 2022 , as compared to 0.48% atSeptember 30, 2021 and 0.63% atDecember 31, 2021 . As a percent of total assets, these assets were 0.19% atSeptember 30, 2022 , as compared to 0.20% atSeptember 30, 2021 and 0.26% atDecember 31, 2021 . We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming atSeptember 30, 2022 .
Table 6 - Nonaccrual, Past Due 90 Days or More and Still Accruing, Restructured Loans and Foreclosed Assets (dollars in thousands, except percentages):
September 30, December 31, 2022 2021 2021 Nonaccrual loans$ 24,585 $ 25,210 $ 31,652 Loans still accruing and past due 90 days or more 15 23 8 Troubled debt restructured loans* 19 22 21 Nonperforming loans 24,619 25,255 31,681 Foreclosed assets - 28 2,477 Total nonperforming assets$ 24,619 $ 25,283 $ 34,158 As a % of loans held-for-investment and foreclosed assets 0.39 % 0.48 % 0.63 % As a % of total assets 0.19 % 0.20 % 0.26 % * Troubled debt restructured loans of$1.95 million ,$4.73 million and$6.72 million , respectively, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in nonaccrual loans as ofSeptember 30, 2022 and 2021, andDecember 31, 2021 , respectively. We record interest payments received on nonaccrual loans as reductions of principal. Prior to the loans being placed on nonaccrual, we recognized interest income on these loans of approximately$1.35 million for the year endedDecember 31, 2021 . If interest on these loans had been recognized on a full accrual basis during the year endedDecember 31, 2021 , such income would have approximated$2.61 million . Such amounts for the 2022 and 2021 interim periods were not significant. Allowance for Credit Losses. The allowance for credit losses is the amount we determine as of a specific date to be appropriate to absorb current expected credit losses on existing loans. For a discussion of our methodology, see our accounting policies in Note 1 to the Consolidated Financial Statements (unaudited). 51 -------------------------------------------------------------------------------- The provision for loan losses of$1.06 million for the three-months endedSeptember 30, 2022 is combined with the provision for unfunded commitments of$2.16 million and reported in the aggregate of$3.22 million under the provision for credit losses in the consolidated statements of earnings for the three-months endedSeptember 30, 2022 . The provision for loan losses of$8.91 million for the nine-months endedSeptember 30, 2022 is combined with the provision for unfunded commitments of$4.44 million and reported in the aggregate of$13.35 million under the provision for credit losses in the consolidated statements of earnings for the nine-months endedSeptember 30, 2022 . There was no provision for loan losses or unfunded commitments for the three-months endedSeptember 30, 2021 . The$4.47 million reversal of the provision for loan losses for the nine-months endedSeptember 30, 2021 is combined with the provision for unfunded commitments$1.27 million and reported in the net aggregate reversal of$3.20 million under the provision for credit losses for the nine-months endedSeptember 30, 2021 . The increase in the Company's provision for credit losses during 2022 was primarily driven by strong organic loan growth, increases in unfunded commitments and a slight decline in the projected economic forecast metrics offset by loan recoveries and lower classified loan specific reserves. As a percent of average loans, net loan recoveries were 0.07% for the third quarter of 2022, as compared to 0.09% for the third quarter of 2021. As a percent of average loans, net loan recoveries were 0.04% for the first nine-months of 2022, as compared to 0.03% for the first nine-months of 2021. The allowance for credit losses as a percent of loans held-for-investment was 1.18% as ofSeptember 30, 2022 , as compared to 1.20% and 1.18% as ofSeptember 30, 2021 andDecember 31, 2021 , respectively.
Table 7 - Loan Loss Experience and Allowance for Credit Losses (dollars in thousands, except percentages):
Three-Months Ended Nine-Months Ended September 30, September 30, 2022 2021 2022 2021 Allowance for credit losses at period-end$ 74,108 $ 63,370 $ 74,108 $ 63,370 Loans held-for-investment at period-end 6,255,488 5,286,494 6,255,488 5,286,494 Average loans for period 6,082,649 5,337,807 5,765,844 5,339,398 Net charge-offs (recoveries)/average loans (annualized) (0.07 )% (0.09 )% (0.04 )% (0.03 )% Allowance for loan losses/period-end loans held-for-investment 1.18 % 1.20 % 1.18 % 1.20 % Allowance for loan losses/nonaccrual loans, past due 90 days still accruing and restructured loans 301.02 % 250.92 % 301.02 % 250.92 % Interest-Bearing Demand Deposits in Banks. The Company had interest-bearing deposits in banks of$138.48 million atSeptember 30, 2022 compared to$359.24 million atSeptember 30, 2021 and$323.54 million atDecember 31, 2021 , respectively. AtSeptember 30, 2022 , interest-bearing deposits in banks included$137.02 million maintained at theFederal Reserve Bank of Dallas and$1.46 million on deposit with the FHLB.Available-for-Sale Securities . AtSeptember 30, 2022 , securities with a fair value of$5.75 billion were classified as securities available-for-sale. As compared toDecember 31, 2021 , the available-for-sale portfolio atSeptember 30, 2022 reflected (i) an increase of$350.34 million inU.S. Treasury securities, (ii) a decrease of$669.66 million in obligations of states and political subdivisions, (iii) an increase of$31.93 million in corporate bonds and other securities, and (iv) a decrease of$540.34 million in mortgage-backed securities. Our mortgage related securities are backed by GNMA,FNMA or FHLMC or are collateralized by securities backed by these agencies.
See the below table and Note 2 to the Consolidated Financial Statements
(unaudited) for additional disclosures relating to the maturities and fair
values of the investment portfolio at
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 Total Available-for-Sale: Amount Yield Amount
Yield Amount Yield Amount Yield Amount
Yield
U.S. Treasury securities $ - - %$ 477,176 1.88 % $ - - % $ - - %$ 477,176 1.88 % Obligations of states and
political subdivisions 141,345 4.43 427,680 3.71 692,341 2.55 822,446 2.69 2,083,812 2.97 Corporate bonds and other
securities 3,906 1.31 60,720 2.84 35,602 1.98 - - 100,228 2.48 Mortgage-backed securities 93,260 2.71 1,090,832 2.14 1,323,904 1.76 576,231 2.23 3,084,227 2.01 Total$ 238,511 3.70 %$ 2,056,408 2.43 %$ 2,051,847 2.03 %$ 1,398,677 2.50 %$ 5,745,443 2.36 % 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. 52 -------------------------------------------------------------------------------- As ofSeptember 30, 2022 , the investment portfolio had an overall tax equivalent yield of 2.36%, a weighted average life of 7.96 years and modified duration of 6.44 years.
Deposits. Deposits held by our subsidiary bank represent our primary source of
funding. Total deposits were
Table 9 provides a breakdown of average deposits and rates paid over the three
and nine month periods ended
Table 9 - Composition of Average Deposits (dollars in thousands, except percentages): Three-Months Ended September 30, 2022 2021 Average Average Average Average Balance Rate Balance Rate Noninterest-bearing deposits$ 4,178,675 -%$ 3,490,685 -% Interest-bearing deposits: Interest-bearing checking 3,641,147 0.61 3,142,769 0.07 Savings and money market accounts 2,935,020 0.38 2,732,149 0.06 Time deposits under$250,000 299,211 0.31
317,843 0.26
Time deposits of
Total interest-bearing deposits 7,004,478 0.50 % 6,346,267 0.08 % Total average deposits$ 11,183,153 $ 9,836,952 Total cost of deposits 0.31 % 0.05 % Nine-Months Ended September 30, 2022 2021 Average Average Average Average Balance Rate Balance Rate Noninterest-bearing deposits$ 4,024,731 -%$ 3,349,719 -% Interest-bearing deposits: Interest-bearing checking 3,651,259 0.31 3,030,830 0.08 Savings and money market accounts 2,890,585 0.18 2,658,570 0.08 Time deposits under$250,000 303,663 0.24 320,743 0.29 Time deposits of$250,000 or more 138,742 0.32 155,597 0.51 Total interest-bearing deposits 6,984,249 0.25 % 6,165,740 0.10 % Total average deposits$ 11,008,980 $ 9,515,459 Total cost of deposits 0.16 % 0.06 %
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$774.58 million ,$648.68 million and$671.15 million atSeptember 30, 2022 and 2021, andDecember 31, 2021 , respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the short-term borrowings. The average balance of federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings were$768.10 million and$599.93 million in the third quarters of 2022 and 2021, respectively. The weighted average interest rates paid on these borrowings were 0.40% and 0.05% for the third quarters of 2022 and 2021, respectively. The average balance of federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings were$759.91 million and$528.60 million for the nine-months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The weighted average interest rates paid on these borrowings were 0.21% and 0.07% for the nine-month periods endedSeptember 30, 2022 andSeptember 30, 2021 , respectively.
Interest Rate Risk
Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. Our exposure to interest rate risk is managed primarily through our strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities that generate favorable earnings while limiting the potential negative effects of changes in market interest rates. We use no off-balance-sheet financial instruments to manage interest rate risk.
53 -------------------------------------------------------------------------------- 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: September 30, December 31, (in basis points) 2022 2021 2021 +400 6.87% 8.60% 10.56% +300 5.24% 7.13% 8.52% +200 3.90% 5.23% 6.13% +100 2.30% 3.04% 3.42% -100 (2.80)% (5.57)% (5.64)% -200 (5.62)% (8.24)% (9.06)% The results for the net interest income simulations as ofSeptember 30, 2022 and 2021, andDecember 31, 2021 resulted in an asset sensitive position. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each year-end will remain constant over the relevant twelve-month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics on specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. We believe these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities reprice in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material. Should we be unable to maintain a reasonable balance of maturities and repricing of our interest-earning assets and our interest-bearing liabilities, we could be required to dispose of our assets in an unfavorable manner or pay a higher than market rate to fund our activities. Our asset liability management committee oversees and monitors this risk. The fair value of our investment securities classified as available-for-sale totaled$5.75 billion atSeptember 30, 2022 . During the nine months endedSeptember 30, 2022 , the corresponding unrealized gain before taxes on the portfolio of$125.67 million atDecember 31, 2021 , moved into an unrealized loss before taxes of$801.03 million atSeptember 30, 2022 , which is recorded net of taxes in accumulated other comprehensive earnings (loss) in shareholders' equity. The unrealized gains or losses, net of taxes, on the portfolio are excluded from the calculation of all regulatory capital ratios. The changes in the fair value were driven by increases in interest rates based on expected actions by 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. AtSeptember 30, 2022 , the 5-yearU.S. Treasury rate was 4.06% compared to 1.26% atDecember 31, 2021 , representing a 280 basis point increase during the first nine months of 2022. As ofSeptember 30, 2022 , an additional 100 basis point increase in the 5-yearU.S. Treasury rate would result in an increase to unrealized losses by approximately$300 million before taxes, while a 100 basis point decrease in the same rate would result in a decrease to unrealized losses by approximately$280 million before taxes. We currently have the ability to hold these securities based on our overall liquidity and intent to hold the portfolio.
Capital and Liquidity
Capital. We evaluate capital resources by our ability to maintain adequate regulatory capital ratios to do business in the banking industry. Issues related to capital resources arise primarily when we are growing at an accelerated rate but not retaining a significant amount of our profits or when we experience significant asset quality deterioration. Total shareholders' equity was$1.13 billion , or 8.64% of total assets atSeptember 30, 2022 , as compared to$1.73 billion , or 13.82% of total assets atSeptember 30, 2021 , and$1.76 billion , or 13.43% of total assets atDecember 31, 2021 . Included in shareholders' equity atSeptember 30, 2022 were$632.42 million in unrealized losses on investment securities available-for-sale, net of related income taxes. Included in shareholders' equity atSeptember 30, 2021 andDecember 31, 2021 were$109.45 million and$99.25 million , respectively, in unrealized gains on investment securities available-for-sale, net of related income taxes, although such amount is excluded from and does not impact regulatory capital. For the third quarter of 2022, total shareholders' equity averaged$1.36 billion , or 10.17% of average assets, as compared to$1.74 billion , or 14.17% of average assets, during the same period in 2021. For the first nine months of 2022, total shareholders' equity averaged$1.48 billion , or 11.12% of average assets, as compared to$1.70 billion , or 14.35% of average assets, during the same period in 2021. Banking regulators measure capital adequacy by means of the risk-based capital ratios and the leverage ratio under the Basel III rules and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and off-balance-sheet commitments and contingencies according to prescribed risk categories. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders' equity less intangible assets by quarter-to-date average assets less intangible assets. 54 -------------------------------------------------------------------------------- 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 . 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 ofSeptember 30, 2022 and 2021, andDecember 31, 2021 , we had a total risk-based capital ratio of 19.07%, 20.76% and 20.34%, a Tier 1 capital to risk-weighted assets ratio of 18.03%, 19.71% and 19.35%; a common equity Tier 1 to risk-weighted assets ratio of 18.03%, 19.71% and 19.35% and a Tier 1 leverage ratio of 10.79%, 11.19% and 11.13%, respectively. The regulatory capital ratios as ofSeptember 30, 2022 and 2021, andDecember 31, 2021 were calculated under Basel III rules.
The regulatory capital ratios of the Company and Bank under the Basel III regulatory capital framework are as follows:
Required to be Minimum Capital Considered Well- Actual Required-Basel III Capitalized As of September 30, 2022: Amount Ratio Amount Ratio Amount Ratio Total Capital to Risk-Weighted Assets: Consolidated$ 1,547,369 19.07 %$ 851,796 10.50 %$ 811,234 10.00 % First Financial Bank, N.A$ 1,383,653 17.09 %$ 850,038 10.50 %$ 809,560 10.00 % Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,462,382 18.03 %$ 689,549 8.50 %$ 486,740 6.00 % First Financial Bank, N.A$ 1,298,666 16.04 %$ 688,126 8.50 %$ 647,648 8.00 % Common Equity Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,462,382 18.03 %$ 567,864 7.00 % - N/A First Financial Bank, N.A$ 1,298,666 16.04 %$ 566,692 7.00 %$ 526,214 6.50 % Leverage Ratio: Consolidated$ 1,462,382 10.79 %$ 542,094 4.00 % - N/A First Financial Bank, N.A$ 1,298,666 9.62 %$ 540,211 4.00 %$ 675,263 5.00 % Required to be Minimum Capital Considered Well- Actual Required-Basel III Capitalized As of September 30, 2021: Amount Ratio Amount Ratio Amount Ratio Total Capital to Risk-Weighted Assets: Consolidated$ 1,389,929 20.76 %$ 702,959 10.50 %$ 669,485 10.00 % First Financial Bank, N.A$ 1,246,266 18.65 %$ 701,572 10.50 %$ 668,164 10.00 % Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,319,809 19.71 %$ 569,062 8.50 %$ 401,691 6.00 % First Financial Bank, N.A$ 1,176,146 17.60 %$ 567,939 8.50 %$ 534,531 8.00 % Common Equity Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,319,809 19.71 %$ 468,639 7.00 % $ - N/A First Financial Bank, N.A$ 1,176,146 17.60 %$ 467,715 7.00 %$ 434,306 6.50 % Leverage Ratio: Consolidated$ 1,319,809 11.19 %$ 471,745 4.00 % $ - N/A First Financial Bank, N.A$ 1,176,146 10.00 %$ 470,355 4.00 %$ 587,944 5.00 % Required to be Minimum Capital Considered Well- Actual Required Basel III Capitalized As of December 31, 2021: Amount Ratio Amount Ratio Amount Ratio Total Capital to Risk-Weighted Assets: Consolidated$ 1,425,907 20.34 %$ 736,003 10.50 %$ 700,955 10.00 % First Financial Bank, N.A$ 1,258,965 17.99 %$ 734,604 10.50 %$ 699,623 10.00 % Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,356,006 19.35 %$ 595,812 8.50 %$ 420,573 6.00 % First Financial Bank, N.A$ 1,189,064 17.00 %$ 594,679 8.50 %$ 559,698 8.00 % Common Equity Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,356,006 19.35 %$ 490,669 7.00 % - N/A First Financial Bank, N.A$ 1,189,064 17.00 %$ 489,736 7.00 %$ 454,755 6.50 % Leverage Ratio: Consolidated$ 1,356,006 11.13 %$ 487,459 4.00 % - N/A First Financial Bank, N.A$ 1,189,064 9.79 %$ 485,926 4.00 %$ 607,407 5.00 % 55
-------------------------------------------------------------------------------- In connection with the adoption of the Basel III regulatory capital framework, our subsidiary bank made the election to continue to exclude accumulated other comprehensive income from available-for-sale securities ("AOCI") from capital in connection with its quarterly financial filing and, in effect, to retain the AOCI treatment under the prior capital rules. Liquidity. Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. The potential need for liquidity arising from these types of financial instruments is represented by the contractual notional amount of the instrument. Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. Liquid assets include cash, federal funds sold, and short-term investments in time deposits in banks. Liquidity is also provided by access to funding sources, which include core depositors and correspondent banks that maintain accounts with and sell federal funds to our subsidiary bank. Other sources of funds include our ability to borrow from short-term sources, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and other borrowings (see below) and an unfunded$25.00 million revolving line of credit established withFrost Bank , a nonaffiliated bank, which matures inJune 2023 (see next paragraph). Our subsidiary bank also has federal funds purchased lines of credit with two non-affiliated banks totaling$130.00 million . AtSeptember 30, 2022 , there were no amounts drawn on these lines of credit. Our subsidiary bank also has (i) an available line of credit with the FHLB totaling$2.26 billion atSeptember 30, 2022 , secured by portions of our loan portfolio and certain investment securities, subject to certain requirements including maintaining positive tangible equity as defined by the FHLB, and (ii) access to theFederal Reserve Bank of Dallas lending program secured by portions of certain investment securities. AtSeptember 30, 2022 , the Company did not have any balances under this line of credit. 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, tangible net worth, loan loss reserve, non-performing asset and cash flow coverage ratios. In addition, the credit agreement contains certain operational covenants, which among others, restricts the payment of dividends above 55% of consolidated net income, limits the incurrence of debt (excluding any amounts acquired in an acquisition) and prohibits the disposal of assets except in the ordinary course of business. Since 1995, we have historically declared dividends as a percentage of our consolidated net income in a range of 36% (low) in 2021 and 2020 to 53% (high) in 2003 and 2006. The Company was in compliance with the financial and operational covenants atSeptember 30, 2022 . There was no outstanding balance under the line of credit as ofSeptember 30, 2022 and 2021, orDecember 31, 2021 . In addition, we anticipate that future acquisitions of financial institutions, expansion of branch locations or offerings of new products could also place a demand on our cash resources. Available cash and cash equivalents at our parent company which totaled$143.32 million atSeptember 30, 2022 , investment securities which totaled$2.17 million atSeptember 30, 2022 and mature over 7 to 8 years, available dividends from our subsidiaries which totaled$376.67 million atSeptember 30, 2022 , utilization of available lines of credit, and future debt or equity offerings are expected to be the source of funding for these potential acquisitions or expansions. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed potentially problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As ofSeptember 30, 2022 , management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. We are monitoring closely the economic impact of the coronavirus on our customers and the communities we serve. Given the strong core deposit base and relatively low loan to deposit ratios maintained at our subsidiary bank, we consider our current liquidity position to be adequate to meet our short-term and long-term liquidity needs. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us. Off-Balance Sheet ("OBS")/Reserve for Unfunded Commitments. We are a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of our customers. These financial instruments include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheets. AtSeptember 30, 2022 , the Company's reserve for unfunded commitments totaled$10.88 million which is recorded in other liabilities. Our exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. We generally use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, as we deem necessary upon extension of credit, is based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment and income-producing commercial properties. 56 -------------------------------------------------------------------------------- Standby letters of credit are conditional commitments we issue to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The average collateral value held on letters of credit usually exceeds the contract amount.
Table 10 - Commitments as of
Total Notional Amounts Committed Unfunded lines of credit$ 1,077,595 Unfunded commitments to extend credit 868,816 Standby letters of credit 51,474 Total commercial commitments$ 1,997,885 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. AtDecember 31 , 20221, total commercial commitments were$1.70 billion compared to the$2.00 billion above atSeptember 30, 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. AtSeptember 30, 2022 ,$376.67 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$67.50 million and$53.50 million for the nine-months endedSeptember 30, 2022 and 2021, respectively. Dividends. Our long-term dividend policy is to pay cash dividends to our shareholders of approximately 35% to 40% of annual net earnings while maintaining adequate capital to support growth. We are also restricted by a loan covenant within our line of credit agreement withFrost Bank to dividend no greater than 55% of net income, as defined in such loan agreement. The cash dividend payout ratios have amounted to 39.78% and 35.55% of net earnings for the first nine months of 2022 and 2021, respectively. Given our current capital position, projected earnings and asset growth rates, we do not anticipate any significant change in our current dividend policy. InJuly 2022 , the Board of Directors declared a$0.17 per share cash dividend for the third quarter of 2022, a 13.33% increase over the dividend declared in the third quarter of 2021. The record date for this dividend wasSeptember 15, 2022 , payable onOctober 3, 2022 . Our bank subsidiary, which is a national banking association and a member of theFederal 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 aTexas corporation. Generally, aTexas 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. TheFederal Reserve , theFDIC 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. TheFederal Reserve , the OCC and theFDIC 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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