First Financial Bankshares - 10-Q quarterly report FY2023 Q3

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-07674

First Financial Bankshares, Inc.

(Exact name of registrant as specified in its charter)



Texas		75-0944023
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

400 Pine Street, Abilene, Texas		79601
(Address of principal executive offices)		(Zip Code)

(325) 627-7155

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	FFIN	The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2of the Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:



Class		Outstanding at November 6, 2023
Common Stock, $0.01 par value per share		142,709,314

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION


Item		Page
1.	Financial Statements	3
	Consolidated Balance Sheets – Unaudited	4
	Consolidated Statements of Earnings – Unaudited	5
	Consolidated Statements of Comprehensive Earnings (Loss) – Unaudited	6
	Consolidated Statements of Shareholders’ Equity – Unaudited	7
	Consolidated Statements of Cash Flows – Unaudited	9
	Notes to Consolidated Financial Statements – Unaudited	10

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

3.	Quantitative and Qualitative Disclosures About Market Risk	56

4.	Controls and Procedures	57

PART II - OTHER INFORMATION

1.	Legal Proceedings	58

1A.	Risk Factors	58

2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

3.	Defaults Upon Senior Securities	58

4.	Mine Safety Disclosures	58

5.	Other Information	58

6.	Exhibits	59

	Signatures	60

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

The consolidated balance sheets of First Financial Bankshares, Inc. and Subsidiaries (the “Company” or “we”) at September 30, 2023 and 2022 (unaudited), and December 31, 2022, and the consolidated statements of earnings, comprehensive earnings (loss) and shareholders’ equity for the three and nine-months ended September 30, 2023 and 2022 (unaudited), and the consolidated statements of cash flows for the nine-months ended September 30, 2023 and 2022 (unaudited) and notes to consolidated financial statements (unaudited), follow on pages 4 through 40.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)


	September 30,						December 31,
	2023			2022			2022
	(Unaudited)
ASSETS
CASH AND DUE FROM BANKS	$	208,277		$	227,298		$	293,286
INTEREST-BEARING DEMAND DEPOSITS IN BANKS		180,008			138,484			37,392
Total cash and cash equivalents		388,285			365,782			330,678
SECURITIES AVAILABLE-FOR-SALE, at fair value (amortized cost of these securities was $5,463,186, $6,546,471 and $6,152,348 as of September 30, 2023 and 2022, and December 31, 2022, respectively)		4,652,537			5,745,443			5,474,359
LOANS:
Held-for-investment, excluding PPP loans		6,994,574			6,255,286			6,441,699
PPP loans		122			202			169
Total loans held-for-investment		6,994,696			6,255,488			6,441,868
Less—allowance for credit losses		(89,714	)		(74,108	)		(75,834	)
Net loans held-for-investment		6,904,982			6,181,380			6,366,034
Held-for-sale ($11,908, $15,892 and $10,497 at fair value at September 30, 2023 and 2022, and December 31, 2022, respectively)		12,229			18,815			11,965
BANK PREMISES AND EQUIPMENT, net		152,936			152,646			152,973
INTANGIBLE ASSETS, net		314,850			315,833			315,534
OTHER ASSETS		351,599			330,445			322,523
Total assets	$	12,777,418		$	13,110,344		$	12,974,066
LIABILITIES AND SHAREHOLDERS’ EQUITY
NONINTEREST-BEARING DEPOSITS	$	3,477,553		$	4,200,792		$	4,061,788
INTEREST-BEARING DEPOSITS		7,238,970			6,941,326			6,943,719
Total deposits		10,716,523			11,142,118			11,005,507
DIVIDENDS PAYABLE		25,730			—			24,278
BORROWINGS		751,544			774,581			642,507
TRADE DATE PAYABLE		2,500			—			—
OTHER LIABILITIES		41,011			61,030			36,037
Total liabilities		11,537,308			11,977,729			11,708,329
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
COMMON STOCK — ($0.01 par value, authorized 200,000,000 shares; 142,677,069, 142,628,163 and 142,657,871 shares issued at September 30, 2023 and 2022, and December 31, 2022, respectively)		1,427			1,426			1,427
CAPITAL SURPLUS		679,374			676,067			677,593
RETAINED EARNINGS		1,199,243			1,087,543			1,121,945
TREASURY STOCK (shares at cost: 926,723, 933,152 and 929,210 at September 30, 2023 and 2022, and December 31, 2022, respectively)		(11,658	)		(10,907	)		(11,035	)
DEFERRED COMPENSATION		11,658			10,907			11,035
ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSS), net		(639,934	)		(632,421	)		(535,228	)
Total shareholders’ equity		1,240,110			1,132,615			1,265,737
Total liabilities and shareholders’ equity	$	12,777,418		$	13,110,344		$	12,974,066

See notes to consolidated financial statements.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS—(UNAUDITED)

(Dollars in thousands, except per share amounts)


	Three-Months Ended September 30,					Nine-Months Ended September 30,
	2023			2022		2023			2022
INTEREST INCOME:
Interest and fees on loans	$	106,377		$	77,523	$	293,453		$	210,180
Interest on investment securities:
Taxable		19,425			20,799		60,240			57,772
Exempt from federal income tax		8,757			12,974		28,145			41,686
Interest on federal funds sold and interest-bearing demand deposits in banks		792			1,432		4,026			2,080
Total interest income		135,351			112,728		385,864			311,718
INTEREST EXPENSE:
Interest on deposits		36,165			8,788		85,606			13,123
Interest on borrowings		5,037			784		13,957			1,217
Total interest expense		41,202			9,572		99,563			14,340
Net interest income		94,149			103,156		286,301			297,378
PROVISION FOR CREDIT LOSSES		2,276			3,221		10,631			13,353
Net interest income after provision for credit losses		91,873			99,935		275,670			284,025
NONINTEREST INCOME:
Trust fees		10,050			10,314		29,778			29,873
Service charges on deposit accounts		6,509			6,399		18,855			18,143
Debit card fees		5,041			5,587		16,697			24,381
Credit card fees		694			651		2,014			1,953
Gain on sale and fees on mortgage loans		3,442			4,070		9,950			16,131
Net gain (loss) on sale of available-for-sale securities		(972	)		334		(914	)		2,013
Net gain (loss) on sale of foreclosed assets		(10	)		349		23			1,451
Net gain on sale of other assets		696			526		1,626			522
Interest on loan recoveries		698			664		1,519			2,596
Other		1,922			2,049		6,477			6,078
Total noninterest income		28,070			30,943		86,025			103,141
NONINTEREST EXPENSE:
Salaries, commissions and employee benefits		32,935			33,892		96,162			101,177
Net occupancy expense		3,565			3,440		10,418			9,957
Equipment expense		2,200			2,396		6,525			6,999
FDIC insurance premiums		1,573			917		4,644			2,690
Debit card expense		3,284			3,013		9,704			9,177
Professional and service fees		2,425			2,219		7,187			6,635
Printing, stationery and supplies		512			600		1,962			1,641
Operational and other losses		959			869		2,746			2,247
Software amortization and expense		2,441			2,564		7,271			7,543
Amortization of intangible assets		228			306		684			946
Other		9,417			9,226		27,104			27,988
Total noninterest expense		59,539			59,442		174,407			177,000
EARNINGS BEFORE INCOME TAXES		60,404			71,436		187,288			210,166
INCOME TAX EXPENSE		10,848			12,095		34,291			34,359
NET EARNINGS	$	49,556		$	59,341	$	152,997		$	175,807
NET EARNINGS PER SHARE, BASIC	$	0.35		$	0.42	$	1.07		$	1.23
NET EARNINGS PER SHARE, DILUTED	$	0.35		$	0.41	$	1.07		$	1.23
DIVIDENDS PER SHARE	$	0.18		$	0.17	$	0.53		$	0.49

See notes to consolidated financial statements.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS) —(UNAUDITED)

(Dollars in thousands)


	Three-Months Ended September 30,						Nine-Months Ended September 30,
	2023			2022			2023			2022
NET EARNINGS	$	49,556		$	59,341		$	152,997		$	175,807
OTHER ITEMS OF COMPREHENSIVE EARNINGS (LOSS):
Change in unrealized gain (loss) on investment securities available-for- sale, before income taxes		(190,407	)		(293,219	)		(133,453	)		(924,157	)
Reclassification adjustment for realized (gains) losses on investment securities included in net earnings, before income taxes		972			(334	)		914			(2,013	)
Total other items of comprehensive earnings (loss)		(189,435	)		(293,553	)		(132,539	)		(926,170	)
Income tax benefit (expense) related to:
Change in unrealized gain (loss) on investment securities available-for- sale		39,985			61,576			28,025			194,073
Reclassification adjustment for realized gains (losses) on investment securities included in net earnings		(204	)		70			(192	)		423
Total income tax benefit (expense)		39,781			61,646			27,833			194,496
COMPREHENSIVE EARNINGS (LOSS)	$	(100,098	)	$	(172,566	)	$	48,291		$	(555,867	)

See notes to consolidated financial statements.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars in thousands, except per share amounts)


	Common Stock						Capital			Retained			Treasury Stock						Deferred		Accumulated Other Comprehensive Earnings			Total Shareholders’
	Shares			Amount			Surplus			Earnings			Shares			Amounts			Compensation		(Loss)			Equity
Balances at June 30, 2022 (unaudited)		142,586,601		$	1,426		$	675,653		$	1,052,453			(937,924	)	$	(10,656	)	$	10,656	$	(400,514	)	$	1,329,018
Net earnings (unaudited)		—			—			—			59,341			—			—			—		—			59,341
Stock option exercises/ stock unit conversions/ restricted stock activity (unaudited)		94,134			—			1,628			—			—			—			—		—			1,628
Cash dividends declared, $0.17 per share (unaudited)		—			—			—			(24,251	)		—			—			—		—			(24,251	)
Change in unrealized gain (loss) in investment securities available-for-sale, net of related income taxes (unaudited)		—			—			—			—			—			—			—		(231,907	)		(231,907	)
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)		—			—			—			—			4,772			(251	)		251		—			—
Stock-based compensation expense (unaudited)		—			—			830			—			—			—			—		—			359
Shares repurchased under stock repurchase authorization (unaudited)		(52,572	)		—			(2,044	)		—			—			—			—		—			(2,044	)
Balances at September 30, 2022 (unaudited)		142,628,163		$	1,426		$	676,067		$	1,087,543			(933,152	)	$	(10,907	)	$	10,907	$	(632,421	)	$	1,132,615
Balances at June 30, 2023 (unaudited)		142,741,196		$	1,427		$	680,676		$	1,175,410			(927,608	)	$	(11,466	)	$	11,466	$	(490,280	)	$	1,367,233
Net earnings (unaudited)		—			—			—			49,556			—			—			—		—			49,556
Stock option exercises/ stock unit conversions/ restricted stock activity (unaudited)		37,210			1			383			—			—			—			—		—			384
Cash dividends declared, $0.18 per share (unaudited)		—			—			—			(25,723	)		—			—			—		—			(25,723	)
Change in unrealized gain (loss) in investment securities available-for-sale, net of related income taxes (unaudited)		—			—			—			—			—			—			—		(149,654	)		(149,654	)
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)		—			—			—			—			885			(192	)		192		—			—
Stock-based compensation expense (unaudited)		—			—			1,049																	1,049
Shares repurchased under stock repurchase authorization (unaudited)		(101,337	)		(1	)		(2,734	)																(2,735	)
Balances at September 30, 2023 (unaudited)		142,677,069		$	1,427		$	679,374		$	1,199,243			(926,723	)	$	(11,658	)	$	11,658	$	(639,934	)	$	1,240,110

See notes to consolidated financial statements.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars in thousands, except per share amounts)


	Common Stock						Capital			Retained			Treasury Stock						Deferred		Accumulated Other Comprehensive Earnings			Total Shareholders’
	Shares			Amount			Surplus			Earnings			Shares			Amounts			Compensation		(Loss)			Equity
Balances at December 31, 2021		142,532,116		$	1,425		$	676,871		$	981,675			(936,897	)	$	(10,090	)	$	10,090	$	99,253		$	1,759,224
Net earnings (unaudited)		—			—			—			175,807			—			—			—		—			175,807
Stock option exercises/ stock unit conversions/ restricted stock activity (unaudited)		340,606			3			5,971			—			—			—			—		—			5,974
Cash dividends declared, $0.49 per share (unaudited)		—			—			—			(69,939	)		—			—			—		—			(69,939	)
Change in unrealized gain (loss) in investment securities available-for-sale, net of related income taxes (unaudited)		—			—			—			—			—			—			—		(731,674	)		(731,674	)
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)		—			—			—			—			3,745			(817	)		817		—			—
Stock-based compensation expense (unaudited)		—			—			2,672			—			—			—			—		—			2,672
Shares repurchased under stock repurchase authorization (unaudited)		(244,559	)		(2	)		(9,447	)		—			—			—			—		—			(9,449	)
Balances at September 30, 2022 (unaudited)		142,628,163		$	1,426		$	676,067		$	1,087,543			(933,152	)	$	(10,907	)	$	10,907	$	(632,421	)	$	1,132,615
Balances at December 31, 2022		142,657,871		$	1,427		$	677,593		$	1,121,945			(929,210	)	$	(11,035	)	$	11,035	$	(535,228	)	$	1,265,737
Net earnings (unaudited)		—			—			—			152,997			—			—			—		—			152,997
Stock option exercises/ stock unit conversions/ restricted stock activity (unaudited)		120,535			1			1,482			—			—			—			—		—			1,483
Cash dividends declared, $0.53 per share (unaudited)		—			—			—			(75,699	)		—			—			—		—			(75,699	)
Change in unrealized gain (loss) in investment securities available-for-sale, net of related income taxes (unaudited)		—			—			—			—			—			—			—		(104,706	)		(104,706	)
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)		—			—			—			—			2,487			(623	)		623		—			—
Stock-based compensation expense (unaudited)		—			—			3,033			—			—			—			—		—			3,033
Shares repurchased under stock repurchase authorization (unaudited)		(101,337	)		(1	)		(2,734	)		—			—			—			—		—			(2,735	)
Balances at September 30, 2023 (unaudited)		142,677,069		$	1,427		$	679,374		$	1,199,243			(926,723	)	$	(11,658	)	$	11,658	$	(639,934	)	$	1,240,110

See notes to consolidated financial statements.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS—(UNAUDITED)

(Dollars in thousands)


	Nine-Months Ended September 30,
	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	152,997		$	175,807
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		9,290			9,589
Provision for credit losses		10,631			13,353
Securities premium amortization, net		40,376			55,355
Discount accretion on purchased loans		—			(1,119	)
Gain on sale of securities and other assets, net		(735	)		(3,986	)
Stock-based compensation		3,033			2,672
Net tax benefit from stock-based compensation		269			353
Deferred federal income tax benefit		1,789			—
Change in loans held-for-sale		(312	)		17,967
Change in other assets		(371	)		11,827
Change in other liabilities		9,126			(27,412	)
Total adjustments		73,096			78,599
Net cash provided by operating activities		226,093			254,406
CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities:
Sales		320,419			205,444
Maturities		333,273			2,773,665
Purchases		(3,322	)		(3,131,413	)
Net increase in loans held-for-investment		(553,762	)		(862,636	)
Purchases of bank premises, equipment and software		(13,386	)		(11,970	)
Proceeds from sale of bank premises and equipment and other assets		3,740			1,186
Net cash provided by (used in) investing activities		86,962			(1,025,724	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits		(584,235	)		420,562
Net increase in interest-bearing deposits		295,250			155,068
Net change in borrowings		109,036			103,429
Common stock transactions:
Proceeds from stock option exercises/stock unit conversions/restricted stock activity		1,483			5,974
Dividends paid		(74,247	)		(67,072	)
Repurchases of stock		(2,735	)		(9,449	)
Net cash provided by (used in) financing activities		(255,448	)		608,512
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		57,607			(162,806	)
CASH AND CASH EQUIVALENTS, beginning of period		330,678			528,588
CASH AND CASH EQUIVALENTS, end of period	$	388,285		$	365,782
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS:
Interest paid	$	87,127		$	14,067
Federal income taxes paid		35,529			33,050
Investment securities purchased not settled		2,500			—
Transfer of loans to other real estate		190			—

See notes to consolidated financial statements.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Summary of Significant Accounting Policies

Nature of Operations

First Financial Bankshares, Inc., a Texas corporation, (“Bankshares,” “Company,” “we” or “us”) is a financial holding company which owns all of the capital stock of one bank with 80 locations located in Texas as of September 30, 2023. The Company’s subsidiary bank is First Financial Bank, N.A. The Company’s primary source of revenue is providing loans and banking services to consumers and commercial customers in the market area in which First Financial Bank, N.A. is located. In addition, the Company also owns First Financial Trust & Asset Management Company, N.A., First Financial Insurance Agency, Inc. (inactive), First Technology Services, Inc., FB Investment Paris Fund, LLC, and FFB Portfolio Management, Inc.

Basis of Presentation

A summary of significant accounting policies of the Company and its subsidiaries applied in the preparation of the accompanying consolidated financial statements follows. The accounting principles followed by the Company and the methods of applying them are in conformity with both United States generally accepted accounting principles (“GAAP”) and prevailing practices of the banking industry.

The Company evaluated subsequent events for potential recognition through the date the consolidated financial statements were issued.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates include its allowance for credit losses and its valuation of financial instruments.

Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated.

Stock Repurchase

On July 27, 2021, the Company’s Board of Directors authorized the repurchase of up to 5,000,000 common shares through July 31, 2023. On July 25, 2023, the Company's Board of Directors renewed the prior authorization through July 31, 2024. The stock repurchase plan authorizes management to repurchase and retire the stock at such time as repurchases and retirements are considered beneficial to the Company and 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. Under the prior authorization, 244,559 shares were repurchased and retired (all during the months of June and July 2022) at an average price of $38.61 per share. Under the current authorization, the Company has repurchased and retired 101,337 shares (all during September 2023) at an average price of $26.99 per share.

Other Recently Issued and Effective Authoritative Accounting Guidance

ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. ASU 2020-04 was effective upon issuance, and based upon the amendments provided in ASU 2022-06 discussed below, can generally be applied through December 31, 2024. The adoption of ASU 2020-04 did not have a significant impact on our financial statements.

ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” ASU 2021-01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance, and based upon the amendments provided in ASU 2022-06 discussed below, can generally be applied through December 31, 2024. The adoption of ASU 2021-01 did not have a significant impact on our financial statements.

ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in ASC Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. ASU 2022-02 will also require that an entity disclose current-period gross charge-offs by year of origination for financial receivables and net investment leases within the scope of ASC Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. ASU 2022-02 became effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, though early adoption is permitted. The adoption of ASU 2022-02 did not have a significant impact on our financial statements.

ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848." ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance provided by ASU 2020-04 and ASU 2021-01, which are discussed above. ASU 2022-06, which was effective upon issuance, defers the sunset date of this prior guidance from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief guidance in Topic 848. The adoption of ASU 2022-06 did not have a significant impact on our financial statements.

Investment Securities

Management classifies debt securities as held-to-maturity, available-for-sale, or trading based on its intent. Securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using the interest method. Securities not classified as held-to-maturity or trading are classified as available-for-sale and recorded at fair value, with unrealized holding gains and losses (those for which no allowance for credit losses are recorded) reported as a component of other comprehensive income, net of tax. Management determines the appropriate classification of securities at the time of purchase.

Interest income includes amortization of purchase premiums and discounts over the period to maturity using a level-yield method, except for premiums on callable securities, which are amortized to their earliest call date. Realized gains and losses are recorded on the sale of securities in noninterest income.

The Company has made a policy election to exclude accrued interest from the amortized cost basis of securities and report accrued interest separately in other assets on the consolidated balance sheets. A security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a security placed on nonaccrual is reversed against interest income. There was no accrued interest related to securities reversed against interest income for the three and nine-months ended September 30, 2023 and 2022.

The Company records its available-for-sale securities portfolio at fair value. Fair values of these securities are determined based on methodologies in accordance with current authoritative accounting guidance. Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, credit ratings, and yield curves. Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the marketplace as a result of the illiquid market, specific to the type of security.

The Company’s investment portfolio currently consists of obligations of state and political subdivisions, mortgage pass-through securities, corporate bonds and general obligation or revenue based municipal bonds. Pricing for such securities is generally readily available and transparent in the market. The Company utilizes independent third-party pricing services to value its investment securities, which the Company reviews as well as the underlying pricing methodologies for reasonableness and to ensure such prices are aligned with pricing matrices. The Company validates prices supplied by the independent pricing services by comparison to prices obtained from other third-party sources on a quarterly basis.

Allowance for Credit Losses – Available-for-Sale Securities

For available-for-sale securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, any previously recognized allowances are charged-off and the security’s amortized cost basis is written down to fair value through income as a provision for credit losses. For available-for-sale securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit losses. Available-for-sale securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.

At September 30, 2023 and 2022, and December 31, 2022, no allowance for credit losses - available-for-sale securities was recorded.

Allowance for Credit Losses – Held-to-Maturity Securities

The allowance for credit losses on held-to-maturity securities is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of held-to-maturity securities to present management’s best estimate of the net amount expected to be collected. Held-to-maturity securities are charged-off against the allowance when deemed uncollectible by management. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity securities from the estimate of credit losses.

At September 30, 2023 and 2022, and December 31, 2022, the Company held no securities that were classified as held-to-maturity.

Loans Held-for-Investment

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, net of the allowance for credit losses. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, fair value hedge accounting adjustments, deferred loan fees and costs. The Company has made a policy election to exclude accrued interest from the amortized cost basis of loans and report accrued interest separately from the related loan balance in other assets on the condensed consolidated balance sheets.

Interest on loans is calculated by using the simple interest method on daily balances of the principal amounts outstanding. The Company defers and amortizes net loan origination fees and costs as an adjustment to yield.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to our collateral position. Regulatory provisions would typically require the placement of a loan on nonaccrual status if principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or full payment of principal and interest is not expected. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on nonaccrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured.

Further information regarding our accounting policies related to past due loans, nonaccrual loans and loans to borrowers experiencing financial difficulty is presented in Note 3.

Acquired Loans

Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value. The allowance for credit losses related to the acquired loan portfolio is not carried over. Upon the adoption of ASC 326, acquired loans are classified into two categories based on the credit risk characteristics of the underlying borrowers as either purchased credit deteriorated (“PCD”) loans, or loans with no evidence of credit deterioration (“non-PCD”).

PCD loans are defined as a loan or pool of loans that have experienced more-than-insignificant credit deterioration since the origination date. The Company uses a combination of individual and pooled review approaches to determine if acquired loans are PCD. At acquisition, the Company considers a number of factors to determine if an acquired loan or pool of loans has experienced more-than-insignificant credit deterioration.

The initial allowance related to PCD loans that share similar risk characteristics is established using a pooled approach. The Company uses either a discounted cash flow or weighted average remaining life method to determine the required level of the allowance. PCD loans that were classified as nonaccrual as of the acquisition date and are collateral dependent are assessed for allowance on an individual basis. For PCD loans, an initial allowance is established on the acquisition date. Subsequent to the acquisition date, the initial allowance for credit losses on PCD loans will increase or decrease based on future evaluations, with changes recognized in the provision for credit losses.

Non-PCD loans are pooled into segments together with originated loans that share similar risk characteristics and have an allowance established on the acquisition date, which is recognized in the current period provision for credit losses as well as a fair value adjustment to the amortized cost of the loan and accreted into income over the life of the loan.

Determining the fair value of the acquired loans involves estimating the principal and interest payment cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life, interest rate profile, market interest rate environment, payment schedules, risk ratings, probability of default and loss given default, and estimated prepayment rates. For PCD loans, the non-credit discount or premium is allocated to individual loans as determined by the difference between the loan’s unpaid principal balance and amortized cost basis. For non-PCD loans, the fair value discount or premium is allocated to individual loans and recognized into interest income on a level yield basis over the remaining expected life of the loan.

Allowance for Credit Losses - Loans

The allowance for credit losses (“allowance” or “ACL”) is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans. The ACL represents an amount which, in management’s judgement, is adequate to absorb the lifetime expected credit losses that may be experienced on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The allowance for credit losses is measured and recorded upon the initial recognition of a financial asset. Determination of the adequacy of the allowance is inherently complex and requires the use of significant and highly subjective estimates. Loans are charged-off against the allowance when deemed uncollectible by management. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Adjustments to the allowance are reported in our income statement as a component of the provision for credit losses. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses.

The Company’s methodology for estimating the allowance includes: (1) a collective quantified reserve that reflects the Company’s historical default and loss experience adjusted for expected economic conditions throughout a reasonable and supportable period and the Company’s prepayment and curtailment rates; (2) collective qualitative factors that consider concentrations of the loan portfolio, expected changes to the economic forecasts, large relationships, early delinquencies, and factors related to credit administrations, including, among others, loan-to-value ratios, borrowers’ risk rating and credit score migrations; and (3) individual allowances on loans where borrowers are experiencing financial difficulty or when the Company determines that the foreclosure is probable.

In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk profiles. Common characteristics and risk profiles include the type/purpose of loan, underlying collateral, geographical similarity and historical/expected credit loss patterns. In developing these loan pools for the purposes of modeling expected credit losses, we also analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors. For modeling purposes, our loan portfolio segments include Commercial and Industrial (“C&I”), Municipal, Agricultural, Construction and Development, Farm, Non-Owner Occupied and Owner Occupied Commercial Real Estate (“CRE”), Residential, Consumer Auto, and Consumer Non-Auto. We periodically reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary. Refer to Note 3 for more details on the Company’s portfolio segments.

The Company applies two methodologies to estimate the allowance on its pooled portfolio segments; discounted cash flows method and weighted average remaining life method. Allowance estimates on the following portfolio segments are calculated using the discounted cash flows method: C&I, Municipal, Construction and Development, Farm, Non-Owner Occupied and Owner Occupied CRE, and Residential. Allowance estimates on the following portfolio segments are calculated using the remaining life method: Agriculture, Consumer Auto and Consumer Non-Auto. The models related to these methodologies utilize the Company’s historical default and loss experience adjusted for future economic forecasts. The reasonable and supportable forecast period represents a one-year economic outlook for the applicable economic variables. Following the end of the reasonable and supportable forecast period, expected losses revert back to the historical mean over the next two years on a straight-line basis. Economic variables that have the most significant impact on the allowance include: Texas unemployment rate, Texas house price index, and Texas retail sales index. Contractual loan level cash flows within the discounted cash flows methodology are adjusted for the Company’s historical prepayment and curtailment rate experience.

In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk rating of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on an ongoing basis.

Management qualitatively adjusts model results for risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factor (“Q-Factor”) adjustments may increase or decrease management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor adjustments include, among other things, the impact of (i) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (ii) actual and expected changes in national, regional, and local economic and business conditions and developments that affect the collectability of the loan pools, (iii) changes in the nature, volume and size of a loan or the loan pools and in the terms of the underlying loans, (iv) changes in the experience, ability, and depth of our lending management and staff, (v) changes in volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets, (vi) changes in the quality of our credit review function, (vii) changes in the value of the underlying collateral for loans that are non-collateral dependent, (viii) the existence, growth, and effect of any concentrations of credit and (ix) other factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or health pandemics.

Management believes it uses relevant information available to make determinations about the allowance and that it has established the existing allowance in accordance with GAAP. However, the determination of the allowance requires significant judgment, and estimates of expected lifetime losses in the loan portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize expected losses, future additions to the allowance may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.

Allowance for Credit Losses - Off-Balance-Sheet/Reserve for Unfunded Commitments

The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. These obligations include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. No allowance is recognized if we have the unconditional right to cancel the obligation. The allowance is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. Adjustments to the allowance are reported in our income statement as a component of the provision for credit losses. At September 30, 2023 and 2022, and December 31, 2022, the Company’s reserve for unfunded commitments totaled $7,903,000, $10,879,000 and $12,323,000, respectively, which is included in other liabilities in the consolidated balance sheet.

Other Real Estate

Other real estate owned is foreclosed property held pending disposition and is initially recorded at fair value, less estimated costs to sell, and is included in other assets in the consolidated balance sheet. At foreclosure, if the fair value of the real estate, less estimated costs to sell, is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for credit losses. Any subsequent reduction in value is recognized by a charge to income. Operating and holding expenses of such properties, net of related income, and gains/losses on their disposition are included in net gain (loss) on sale of foreclosed assets as incurred.

Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the respective lease or the estimated useful lives of the improvements, whichever is shorter.

Business Combinations, Goodwill and Other Intangible Assets

The Company accounts for all business combinations under the purchase method of accounting. Tangible and intangible assets and liabilities of the acquired entity are recorded at fair value. Intangible assets with finite useful lives represent the future benefit associated with the acquisition of the core deposits and are amortized over seven years, utilizing a method that approximates the expected attrition of the deposits. Goodwill with an indefinite life is not amortized, but rather tested annually for impairment as of June 30 each year. There was no impairment recorded during the nine-months ended September 30, 2023 or 2022, respectively.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase, which are classified as borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of the cash received in connection with the transaction. The Company may be required to provide additional collateral based on the estimated fair value of the underlying securities.

Segment Reporting

The Company has determined that its banking regions meet the aggregation criteria of the current authoritative accounting guidance since each of its banking regions offer similar products and services, operate in a similar manner, have similar customers and report to the same regulatory authority, and therefore operate one line of business (community banking) located in a single geographic area (Texas).

Statements of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks, including interest-bearing deposits in banks with original maturity of 90 days or less, and federal funds sold.

Accumulated Other Comprehensive Earnings (Loss)

Unrealized net losses on the Company’s available-for-sale securities, net of applicable income taxes, totaled $639,934,000, $632,421,000 and $535,228,000 at September 30, 2023, and 2022, and December 31, 2022, respectively, are included in accumulated other comprehensive earnings (loss) as a separate component of shareholders' equity.

Income Taxes

The Company’s provision for income taxes is based on income before income taxes adjusted for permanent differences between financial reporting and taxable income. Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. As of September 30, 2023, and 2022, and December 31, 2022, deferred tax assets totaled $173,032,000, $168,398,000 and $145,511,000, respectively, and were included in other assets on the consolidated balance sheets.

Stock Based Compensation

The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value using the Black-Scholes model of the shares at the grant date. The grant date fair value is amortized over the vesting period which generally is three, five or six years. The Company also grants restricted stock and/or units for a fixed number of shares which generally vests over periods of one to three years, and performance stock units which vest over a 3-year period based on Company performance metrics relative to a defined peer group. For stock option grants, the exercise price is established based on the closing trading price. No adjustments have been necessary to properly value the grant based on the terms or other conditions of the grants. Expense is recognized based on the fair value of the portion of stock-based payment awards that ultimately expected to vest, reduced for forfeitures based on grant-date fair value. See Note 8 for further information.

Advertising Costs

Advertising costs are expensed as incurred.

Per Share Data

Net earnings per share (“EPS”) are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. The Company calculates dilutive EPS assuming all outstanding stock options to purchase common shares and unvested restricted stock shares and units have been exercised and/or vested at the beginning of the year (or the time of issuance, if later.) The dilutive effect of the outstanding options and restricted stock is reflected by application of the treasury stock method, whereby the proceeds from the exercised options and unearned compensation for both restricted stock and stock options are assumed to be used to purchase common shares at the average market price during the respective period. There were 864,000 and 478,000 anti-dilutive shares for the three and nine-months ended September 30, 2023, respectively, that were excluded from the computation of EPS. There were 346,000 and 272,000 anti-dilutive shares for the three and nine-months ended September 30, 2022, respectively, that were excluded from the computation of EPS. The following table reconciles the computation of basic EPS to diluted EPS:


	Net		Weighted
	Earnings		Average		Per Share
	(in thousands)		Shares		Amount
For the three-months ended September 30, 2023:
Net earnings per share, basic	$	49,556		142,707,260	$	0.35
Effect of stock options and stock grants		—		442,113		—
Net earnings per share, diluted	$	49,556		143,149,373	$	0.35


	Net		Weighted
	Earnings		Average		Per Share
	(in thousands)		Shares		Amount
For the three-months ended September 30, 2022:
Net earnings per share, basic	$	59,341		142,524,500	$	0.42
Effect of stock options and stock grants		—		601,588		(0.01	)
Net earnings per share, diluted	$	59,341		143,126,088	$	0.41


	Net		Weighted
	Earnings		Average		Per Share
	(in thousands)		Shares		Amount
For the nine-months ended September 30, 2023:
Net earnings per share, basic	$	152,997		142,691,389	$	1.07
Effect of stock options and stock grants		—		351,469		—
Net earnings per share, diluted	$	152,997		143,042,858	$	1.07


	Net		Weighted
	Earnings		Average		Per Share
	(in thousands)		Shares		Amount
For the nine-months ended September 30, 2022:
Net earnings per share, basic	$	175,807		142,588,373	$	1.23
Effect of stock options and stock grants		—		658,395		—
Net earnings per share, diluted	$	175,807		143,246,768	$	1.23

Note 2 - Securities

Debt securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost, related gross unrealized gains and losses, allowance for credit losses and the fair value of available-for-sale securities are as follows (dollars in thousands):


	September 30, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost Basis		Holding Gains		Holding Losses			Fair Value
Securities available-for-sale:
U.S. Treasury securities	$	507,549	$	—	$	(22,102	)	$	485,447
Obligations of states and political subdivisions		1,726,947		120		(263,313	)		1,463,754
Residential mortgage-backed securities		2,792,813		—		(495,578	)		2,297,235
Commercial mortgage-backed securities		323,539		—		(18,191	)		305,348
Corporate bonds and other		112,338		—		(11,585	)		100,753
Total securities available-for-sale	$	5,463,186	$	120	$	(810,769	)	$	4,652,537


	September 30, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost Basis		Holding Gains		Holding Losses			Fair Value
Securities available-for-sale:
U.S. Treasury securities	$	504,457	$	2	$	(27,283	)	$	477,176
Obligations of states and political subdivisions		2,368,605		514		(285,307	)		2,083,812
Residential mortgage-backed securities		3,153,864		14		(456,997	)		2,696,881
Commercial mortgage-backed securities		406,530		1		(19,185	)		387,346
Corporate bonds and other		113,015		-		(12,787	)		100,228
Total securities available-for-sale	$	6,546,471	$	531	$	(801,559	)	$	5,745,443


	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost Basis		Holding Gains		Holding Losses			Fair Value
Securities available-for-sale:
U.S. Treasury securities	$	508,275	$	11	$	(25,737	)	$	482,549
Obligations of states and political subdivisions		2,104,193		1,217		(206,799	)		1,898,611
Residential mortgage-backed securities		3,034,120		8		(417,562	)		2,616,566
Commercial mortgage-backed securities		392,914		1		(18,046	)		374,869
Corporate bonds and other		112,846		-		(11,082	)		101,764
Total securities available-for-sale	$	6,152,348	$	1,237	$	(679,226	)	$	5,474,359

The Company did not hold any securities classified as held-to-maturity at September 30, 2023, September 30, 2022, or December 31, 2022.

The Company invests in mortgage-backed securities that have expected maturities that differ from their contractual maturities. These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty. These securities include collateralized mortgage obligations (CMOs) and other asset backed securities. The expected maturities of these securities at September 30, 2023 and 2022, and December 31, 2022, were computed by using scheduled amortization of balances and historical prepayment rates.

The amortized cost and estimated fair value of available-for-sale securities at September 30, 2023, by contractual and expected maturity, are shown below (dollars in thousands):


	Amortized		Estimated
	Cost Basis		Fair Value
Due within one year	$	335,508	$	327,912
Due after one year through five years		1,345,049		1,214,288
Due after five years through ten years		2,466,782		2,034,867
Due after ten years		1,315,847		1,075,470
Total	$	5,463,186	$	4,652,537

The following tables disclose as of September 30, 2023 and 2022, and December 31, 2022, the Company’s investment securities that have been in a continuous unrealized-loss position for less than 12 months and for 12 or more months (dollars in thousands):


	Less than 12 Months				12 Months or Longer				Total
September 30, 2023	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Treasury securities	$	4,867	$	49	$	480,580	$	22,053	$	485,447	$	22,102
Obligations of states and political subdivisions		53,029		2,568		1,402,097		260,745	$	1,455,126		263,313
Residential mortgage-backed securities		3,123		106		2,294,112		495,472	$	2,297,235		495,578
Commercial mortgage-backed securities		1,274		87		304,074		18,104	$	305,348		18,191
Corporate bonds and other		—		—		100,753		11,585	$	100,753		11,585
Total	$	62,293	$	2,810	$	4,581,616	$	807,959	$	4,643,909	$	810,769


	Less than 12 Months				12 Months or Longer				Total
September 30, 2022	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Treasury securities	$	476,696	$	27,283	$	—	$	—	$	476,696	$	27,283
Obligations of states and political subdivisions		1,828,105		254,212		139,732		31,095		1,967,837		285,307
Residential mortgage-backed securities		1,507,121		231,915		1,187,815		225,082		2,694,936		456,997
Commercial mortgage-backed securities		386,479		19,185		—		—		386,479		19,185
Corporate bonds and other		59,782		4,544		40,446		8,243		100,228		12,787
Total	$	4,258,183	$	537,139	$	1,367,993	$	264,420	$	5,626,176	$	801,559


	Less than 12 Months				12 Months or Longer				Total
December 31, 2022	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Treasury securities	$	307,012	$	11,650	$	173,105	$	14,087	$	480,117	$	25,737
Obligations of states and political subdivisions		770,469		55,943		946,571		150,856		1,717,040		206,799
Residential mortgage-backed securities		470,970		37,065		2,143,869		380,497		2,614,839		417,562
Commercial mortgage-backed securities		319,303		11,677		54,862		6,369		374,165		18,046
Corporate bonds and other		41,920		1,698		59,844		9,384		101,764		11,082
Total	$	1,909,674	$	118,033	$	3,378,251	$	561,193	$	5,287,925	$	679,226

The number of investments in an unrealized loss position totaled 892 at September 30, 2023. We believe any unrealized losses in the U.S. treasury securities, obligations of state and political subdivisions, residential and commercial mortgage-backed and asset-backed investment securities, and corporate bonds and other at September 30, 2023 and 2022, and December 31, 2022, are due to changes in interest rates and not credit-related events. As such, no allowance for credit losses is required on these securities at September 30, 2023 and 2022, and December 31, 2022. Unrealized losses on investment securities are expected to recover over time as these securities approach maturity. Our mortgage related securities are backed by GNMA, FNMA and FHLMC or are collateralized by securities backed by these agencies. At September 30, 2023, 66.92% of our available-for-sale securities that are obligations of states and political subdivisions were issued within the State of Texas, of which 56.47% are guaranteed by the Texas Permanent School Fund.

Securities, carried at approximately $3,397,495,000 on September 30, 2023, were pledged as collateral for public or trust fund deposits, repurchase agreements, borrowings and for other purposes required or permitted by law.

During the three-months ended September 30, 2023 and 2022, sales of investment securities that were classified as available-for-sale were $113,132,000 and $17,081,000, respectively. Gross realized security gains from sales and calls during the third quarter of 2023 and 2022 totaled $53,000 and $334,000, respectively. Gross realized security losses from sales or calls during the third quarter of 2023 totaled $1,025,000. There were no gross realized security losses from sales or calls during the third quarter of 2022.

During the nine-months ended September 30, 2023 and 2022, sales of investment securities that were classified as available-for-sale were $320,419,000 and $205,444,000, respectively. Gross realized security gains from sales and calls during the nine-months ended September 30, 2023 and 2022 totaled $1,701,000 and $4,357,000, respectively. Gross realized security losses from sales or calls during the nine-months ended September 30, 2023 and 2022 totaled $2,615,000 and $2,344,000, respectively.

The specific identification method was used to determine cost in order to compute the realized gains and losses.

Note 3 – Loans Held-for-Investment and Allowance for Credit Losses

For the periods ended September 30, 2023 and 2022, and December 31, 2022, the following tables outline the Company’s loan portfolio by the ten portfolio segments where applicable.

Loans held-for-investment by portfolio segment are as follows (dollars in thousands):


	September 30,						December 31,
	2023			2022			2022
Commercial:
C&I*	$	1,108,240		$	871,335		$	917,317
Municipal		218,358			214,852			221,090
Total Commercial		1,326,598			1,086,187			1,138,407
Agricultural		81,876			76,937			76,947
Real Estate:
Construction & Development		929,570			938,051			959,426
Farm		341,052			268,139			306,322
Non-Owner Occupied CRE		828,900			717,738			732,089
Owner Occupied CRE		1,002,913			945,665			954,400
Residential		1,788,913			1,536,180			1,575,758
Total Real Estate		4,891,348			4,405,773			4,527,995
Consumer:
Auto		540,382			538,798			550,635
Non-Auto		154,492			147,793			147,884
Total Consumer		694,874			686,591			698,519
Total Loans		6,994,696			6,255,488			6,441,868
Less: Allowance for credit losses		(89,714	)		(74,108	)		(75,834	)
Loans, net	$	6,904,982		$	6,181,380		$	6,366,034

* 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.

Outstanding loan balances at September 30, 2023 and 2022, and December 31, 2022, are net of unearned income, including net deferred loan fees.

At September 30, 2023, $2,600,103,000 in loans held by our bank subsidiary were subject to blanket liens as security for a line of credit with the Federal Home Loan Bank of Dallas ("FHLB"). At September 30, 2023, this available line of credit was $2,538,345,000. At September 30, 2023, there was $45,000,000 used on the line advance for undisbursed commitments (letters of credit) used to secure public funds.

The Company’s nonaccrual loans and loans still accruing and past due 90 days or more are as follows (dollars in thousands):


	September 30,				December 31,
	2023		2022		2022
Nonaccrual loans	$	38,812	$	24,604	$	24,325
Loans still accruing and past due 90 days or more		289		15		—
Total nonperforming loans (1)	$	39,101	$	24,619	$	24,325

(1) With the adoption of ASU 2022-02, effective January 1, 2023, troubled debt restructuring ("TDR") accounting has been eliminated.

The Company had $39,698,000, $24,619,000 and $24,325,000 in nonaccrual, past due 90 days or more and still accruing, and foreclosed assets at September 30, 2023 and 2022, and December 31, 2022, respectively. Nonaccrual loans at September 30, 2023 and 2022, and December 31, 2022, consisted of the following (dollars in thousands):


	September 30,				December 31,
	2023		2022		2022
Commercial:
C&I	$	3,365	$	5,966	$	5,057
Municipal		—		—		—
Total Commercial		3,365		5,966		5,057
Agricultural		838		338		324
Real Estate:
Construction & Development		3,295		1,696		1,567
Farm		5,534		91		85
Non-Owner Occupied CRE		8,407		2,406		2,321
Owner Occupied CRE		7,812		6,703		7,092
Residential		8,990		6,781		7,419
Total Real Estate		34,038		17,677		18,484
Consumer:
Auto		465		596		429
Non-Auto		106		27		31
Total Consumer		571		623		460
Total	$	38,812	$	24,604	$	24,325

No significant additional funds are committed to be advanced in connection with nonaccrual loans as of September 30, 2023.

Summary information on the allowance for credit losses for the three and nine-months ended September 30, 2023 and 2022, are outlined by portfolio segment in the following tables (dollars in thousands):


Three-Months Ended September 30, 2023	C&I			Municipal			Agricultural		Construction & Development			Farm
Beginning balance	$	16,530		$	187		$	1,082	$	28,966		$	2,804
Provision for loan losses		(64	)		(2	)		53		(696	)		131
Recoveries		56			—			21		6			—
Charge-offs		(715	)		—			—		—			—
Ending balance	$	15,807		$	185		$	1,156	$	28,276		$	2,935


Three-Months Ended September 30, 2023 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential			Auto			Non-Auto			Total
Beginning balance	$	13,471	$	12,572	$	9,767		$	829		$	333		$	86,541
Provision for loan losses		2,330		767		1,035			172			95			3,821
Recoveries		16		187		3			96			47			432
Charge-offs		—		—		(7	)		(235	)		(123	)		(1,080	)
Ending balance	$	15,817	$	13,526	$	10,798		$	862		$	352		$	89,714


Three-Months Ended September 30, 2022	C&I			Municipal			Agricultural			Construction & Development		Farm
Beginning balance	$	18,589		$	1,352		$	1,162		$	21,085	$	1,006
Provision for loan losses		(2,378	)		(33	)		(187	)		4,614		149
Recoveries		266			—			18			—		—
Charge-offs		(38	)		—			—			—		—
Ending balance	$	16,439		$	1,319		$	993		$	25,699	$	1,155


Three-Months Ended September 30, 2022 (continued)	Non-Owner Occupied CRE			Owner Occupied CRE			Residential		Auto			Non-Auto			Total
Beginning balance	$	8,410		$	10,740		$	8,304	$	912		$	372		$	71,932
Provision for loan losses		(498	)		(1,303	)		557		72			67			1,060
Recoveries		283			649			93		47			53			1,409
Charge-offs		—			—			—		(119	)		(136	)		(293	)
Ending balance	$	8,195		$	10,086		$	8,954	$	912		$	356		$	74,108


Nine-Months Ended September 30, 2023	C&I			Municipal			Agricultural			Construction & Development		Farm
Beginning balance	$	16,129		$	1,026		$	1,041		$	26,443	$	1,957
Provision for loan losses		860			(841	)		(128	)		1,727		978
Recoveries		221			—			243			106		—
Charge-offs		(1,403	)		—			—			—		—
Ending balance	$	15,807		$	185		$	1,156		$	28,276	$	2,935


Nine-Months Ended September 30, 2023 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential			Auto			Non- Auto			Total
Beginning balance	$	9,075	$	9,928	$	9,075		$	845		$	315		$	75,834
Provision for loan losses		6,679		3,390		1,826			341			218			15,050
Recoveries		63		208		18			329			128			1,316
Charge-offs		—		—		(121	)		(653	)		(309	)		(2,486	)
Ending balance	$	15,817	$	13,526	$	10,798		$	862		$	352		$	89,714


Nine-Months Ended September 30, 2022	C&I			Municipal		Agricultural			Construction & Development			Farm
Beginning balance	$	12,280		$	348	$	1,597		$	17,627		$	663
Provision for loan losses		3,598			971		(730	)		8,172			492
Recoveries		824			—		135			—			—
Charge-offs		(263	)		—		(9	)		(100	)		—
Ending balance	$	16,439		$	1,319	$	993		$	25,699		$	1,155


Nine-Months Ended September 30, 2022 (continued)	Non-Owner Occupied CRE			Owner Occupied CRE			Residential			Auto			Non- Auto			Total
Beginning balance	$	10,722		$	10,828		$	8,133		$	896		$	371		$	63,465
Provision for loan losses		(3,352	)		(1,323	)		860			116			106			8,910
Recoveries		825			669			110			215			182			2,960
Charge-offs		—			(88	)		(149	)		(315	)		(303	)		(1,227	)
Ending balance	$	8,195		$	10,086		$	8,954		$	912		$	356		$	74,108

Additionally, the Company records a reserve for unfunded commitments in other liabilities which totaled $7,903,000, $10,879,000 and $12,323,000 at September 30, 2023 and 2022, and December 31, 2022, respectively. The provision for loan losses of $3,821,000 for the three-months ended September 30, 2023 is combined with the reversal of the provision for unfunded commitments of $1,545,000 and reported in the net aggregate of $2,276,000 under the provision for credit losses in the consolidated statement of earnings for the three-months ended September 30, 2023. The provision for loan losses of $15,050,000 for the nine-months ended September 30, 2023 is combined with the reversal of the provision for unfunded commitments of $4,419,000 and reported in the net aggregate of $10,631,000 under the provision for credit losses in the consolidated statement of earnings for the nine-months ended September 30, 2023.

The $1,060,000 provision for loan losses for the three-months ended September 30, 2022 above is combined with the provision for unfunded commitments of $2,161,000 and reported in the aggregate of $3,221,000 under the provision for credit losses for the three-months ended September 30, 2022. The $8,910,000 provision for loan losses for the nine-months ended September 30, 2022 above is combined with the provision for unfunded commitments of $4,443,000 and reported in the aggregate of $13,353,000 under the provision for credit losses for the nine-months ended September 30, 2022.

The Company’s loans that are individually evaluated for credit losses (both collateral and non-collateral dependent) and their related allowances as of September 30, 2023 and 2022, and December 31, 2022, are summarized in the following tables by loan segment (dollars in thousands):


September 30, 2023	Collateral Dependent Loans Individually Evaluated for Credit Losses Without an Allowance		Collateral Dependent Loans Individually Evaluated for Credit Losses With an Allowance		Non-Collateral Dependent Loans Individually Evaluated for Credit Losses		Total Loans Individually Evaluated for Credit Losses		Related Allowance on Collateral Dependent Loans		Related Allowance on Non-Collateral Dependent Loans		Total Allowance for Credit Losses on Loans Individually Evaluated for Credit Losses
Commercial:
C&I	$	310	$	3,055	$	20,476	$	23,841	$	2,025	$	4,651	$	6,676
Municipal		—		—		1,377		1,377		—		—		—
Total Commercial		310		3,055		21,853		25,218		2,025		4,651		6,676
Agricultural		215		623		1,278		2,116		58		594		652
Real Estate:
Construction & Development		2,678		617		19,912		23,207		139		1,887		2,026
Farm		553		4,981		2,225		7,759		1,070		133		1,203
Non-Owner Occupied CRE		1,991		6,416		28,127		36,534		889		2,665		3,554
Owner Occupied CRE		5,473		2,339		34,988		42,800		400		1,635		2,035
Residential		6,059		2,931		29,453		38,443		281		1,865		2,146
Total Real Estate		16,754		17,284		114,705		148,743		2,779		8,185		10,964
Consumer:
Auto		—		465		1,858		2,323		1		3		4
Non-Auto		—		106		599		705		—		2		2
Total Consumer		—		571		2,457		3,028		1		5		6
Total	$	17,279	$	21,533	$	140,293	$	179,105	$	4,863	$	13,435	$	18,298


September 30, 2022	Collateral Dependent Loans Individually Evaluated for Credit Losses Without an Allowance		Collateral Dependent Loans Individually Evaluated for Credit Losses With an Allowance		Non-Collateral Dependent Loans Individually Evaluated for Credit Losses		Total Loans Individually Evaluated for Credit Losses		Related Allowance on Collateral Dependent Loans		Related Allowance on Non-Collateral Dependent Loans		Total Allowance for Credit Losses on Loans Individually Evaluated for Credit Losses
Commercial:
C&I	$	334	$	5,632	$	20,844	$	26,810	$	4,094	$	4,345	$	8,439
Municipal		—		—		71		71		—		—		—
Total Commercial		334		5,632		20,915		26,881		4,094		4,345		8,439
Agricultural		116		222		412		750		103		247		350
Real Estate:
Construction & Development		919		777		5,461		7,157		207		384		591
Farm		—		91		1,616		1,707		2		39		41
Non-Owner Occupied CRE		2,230		176		32,959		35,365		12		2,317		2,329
Owner Occupied CRE		5,700		1,003		30,136		36,839		103		1,958		2,061
Residential		4,129		2,652		26,057		32,838		293		1,347		1,640
Total Real Estate		12,978		4,699		96,229		113,906		617		6,045		6,662
Consumer:
Auto		—		596		1,096		1,692		1		2		3
Non-Auto		—		27		461		488		—		1		1
Total Consumer		—		623		1,557		2,180		1		3		4
Total	$	13,428	$	11,176	$	119,113	$	143,717	$	4,815	$	10,640	$	15,455


December 31, 2022	Collateral Dependent Loans Individually Evaluated for Credit Losses Without an Allowance		Collateral Dependent Loans Individually Evaluated for Credit Losses With an Allowance		Non-Collateral Dependent Loans Individually Evaluated for Credit Losses		Total Loans Individually Evaluated for Credit Losses		Related Allowance on Collateral Dependent Loans		Related Allowance on Non-Collateral Dependent Loans		Total Allowance for Credit Losses on Loans Individually Evaluated for Credit Losses
Commercial:
C&I	$	—	$	5,057	$	24,325	$	29,382	$	3,513	$	4,885	$	8,398
Municipal		—		—		58		58		—		—		—
Total Commercial		—		5,057		24,383		29,440		3,513		4,885		8,398
Agricultural		116		209		354		679		122		276		398
Real Estate:
Construction & Development		577		990		4,873		6,440		193		112		305
Farm		—		85		1,578		1,663		2		34		36
Non-Owner Occupied CRE		2,062		259		36,037		38,358		16		2,341		2,357
Owner Occupied CRE		4,363		2,728		29,115		36,206		91		1,509		1,600
Residential		5,132		2,287		28,564		35,983		229		1,215		1,444
Total Real Estate		12,134		6,349		100,167		118,650		531		5,211		5,742
Consumer:
Auto		—		429		931		1,360		1		1		2
Non-Auto		—		31		538		569		—		1		1
Total Consumer		—		460		1,469		1,929		1		2		3
Total	$	12,250	$	12,075	$	126,373	$	150,698	$	4,167	$	10,374	$	14,541

The Company’s allowance for loans that are individually evaluated for credit losses and collectively evaluated for credit losses as of September 30, 2023 and 2022, and December 31, 2022, are summarized in the following table by loan segment (dollars in thousands). Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


September 30, 2023	C&I		Municipal		Agricultural		Construction & Development		Farm
Loans individually evaluated for credit losses	$	6,676	$	—	$	652	$	2,026	$	1,203
Loans collectively evaluated for credit losses		9,131		185		504		26,250		1,732
Total	$	15,807	$	185	$	1,156	$	28,276	$	2,935


September 30, 2023 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
Loans individually evaluated for credit losses	$	3,554	$	2,035	$	2,146	$	4	$	2	$	18,298
Loans collectively evaluated for credit losses		12,263		11,491		8,652		858		350		71,416
Total	$	15,817	$	13,526	$	10,798	$	862	$	352	$	89,714


September 30, 2022	C&I		Municipal		Agricultural		Construction & Development		Farm
Loans individually evaluated for credit losses	$	8,439	$	—	$	350	$	591	$	41
Loans collectively evaluated for credit losses		8,000		1,319		643		25,108		1,114
Total	$	16,439	$	1,319	$	993	$	25,699	$	1,155


September 30, 2022 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
Loans individually evaluated for credit losses	$	2,329	$	2,061	$	1,640	$	3	$	1	$	15,455
Loans collectively evaluated for credit losses		5,866		8,025		7,314		909		355		58,653
Total	$	8,195	$	10,086	$	8,954	$	912	$	356	$	74,108


December 31, 2022	C&I		Municipal		Agricultural		Construction & Development		Farm
Loans individually evaluated for credit losses	$	8,398	$	—	$	398	$	305	$	36
Loans collectively evaluated for credit losses		7,731		1,026		643		26,138		1,921
Total	$	16,129	$	1,026	$	1,041	$	26,443	$	1,957


December 31, 2022 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
Loans individually evaluated for credit losses	$	2,357	$	1,600	$	1,444	$	2	$	1	$	14,541
Loans collectively evaluated for credit losses		6,718		8,328		7,631		843		314		61,293
Total	$	9,075	$	9,928	$	9,075	$	845	$	315	$	75,834

The Company’s recorded investment in loans as of September 30, 2023 and 2022, and December 31, 2022, related to the balance in the allowance for credit losses follows below (dollars in thousands):


September 30, 2023	C&I		Municipal		Agricultural		Construction & Development		Farm
Loans individually evaluated for credit losses	$	23,841	$	1,377	$	2,116	$	23,207	$	7,759
Loans collectively evaluated for credit losses		1,084,399		216,981		79,760		906,363		333,293
Total	$	1,108,240	$	218,358	$	81,876	$	929,570	$	341,052


September 30, 2023 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
Loans individually evaluated for credit losses	$	36,534	$	42,800	$	38,443	$	2,323	$	705	$	179,105
Loans collectively evaluated for credit losses		792,366		960,113		1,750,470		538,059		153,787		6,815,591
Total	$	828,900	$	1,002,913	$	1,788,913	$	540,382	$	154,492	$	6,994,696


September 30, 2022	C&I		Municipal		Agricultural		Construction & Development		Farm
Loans individually evaluated for credit losses	$	26,810	$	71	$	750	$	7,157	$	1,707
Loans collectively evaluated for credit losses		844,525		214,781		76,187		930,894		266,432
Total	$	871,335	$	214,852	$	76,937	$	938,051	$	268,139


September 30, 2022 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
Loans individually evaluated for credit losses	$	35,365	$	36,839	$	32,838	$	1,692	$	488	$	143,717
Loans collectively evaluated for credit losses		682,373		908,826		1,503,342		537,106		147,305		6,111,771
Total	$	717,738	$	945,665	$	1,536,180	$	538,798	$	147,793	$	6,255,488


December 31, 2022	C&I		Municipal		Agricultural		Construction & Development		Farm
Loans individually evaluated for credit losses	$	29,382	$	58	$	679	$	6,440	$	1,663
Loans collectively evaluated for credit losses		887,935		221,032		76,268		952,986		304,659
Total	$	917,317	$	221,090	$	76,947	$	959,426	$	306,322


December 31, 2022 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
Loans individually evaluated for credit losses	$	38,358	$	36,206	$	35,983	$	1,360	$	569	$	150,698
Loans collectively evaluated for credit losses		693,731		918,194		1,539,775		549,275		147,315		6,291,170
Total	$	732,089	$	954,400	$	1,575,758	$	550,635	$	147,884	$	6,441,868

From a credit risk standpoint, the Company rates its loans in one of five categories: (i) pass, (ii) special mention, (iii) substandard, (iv) doubtful or (v) loss (which are charged-off).

The ratings of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on our credits as part of our ongoing monitoring of the credit quality of our loan portfolio. Ratings are adjusted to reflect the degree of risk and loss that are felt to be inherent in each credit as of each reporting period. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness, however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on nonaccrual.

The following summarizes the Company’s internal ratings of its loans held-for-investment, including the year of origination, by portfolio segments, at September 30, 2023 (dollars in millions):


September 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
C&I
Risk rating:
Pass	$	524	$	386	$	94	$	40	$	16	$	24	$	—	$	1,084
Special mention		7		1		—		—		1		—		—		9
Substandard		2		5		3		2		1		2		—		15
Doubtful		—		—		—		—		—		—		—		—
Total	$	533	$	392	$	97	$	42	$	18	$	26	$	—	$	1,108
Year-to-Date Gross Charge-Offs	$	—	$	—	$	1	$	—	$	—	$	—	$	—	$	1


September 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Municipal
Risk rating:
Pass	$	20	$	83	$	16	$	14	$	2	$	82	$	—	$	217
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		1		—		—		—		—		1
Doubtful		—		—		—		—		—		—		—		—
Total	$	20	$	83	$	17	$	14	$	2	$	82	$	—	$	218
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


September 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Agricultural
Risk rating:
Pass	$	42	$	30	$	5	$	2	$	1	$	—	$	—	$	80
Special mention		—		—		—		—		—		—		—		—
Substandard		1		1		—		—		—		—		—		2
Doubtful		—		—		—		—		—		—		—		—
Total	$	43	$	31	$	5	$	2	$	1	$	—	$	—	$	82
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


September 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Construction & Development
Risk rating:
Pass	$	373	$	401	$	94	$	22	$	10	$	7	$	—	$	907
Special mention		7		4		—		—		—		—		—		11
Substandard		8		3		1		—		—		—		—		12
Doubtful		—		—		—		—		—		—		—		—
Total	$	388	$	408	$	95	$	22	$	10	$	7	$	—	$	930
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


September 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Farm
Risk rating:
Pass	$	83	$	116	$	75	$	25	$	9	$	25	$	—	$	333
Special mention		—		—		—		—		—		—		—		—
Substandard		—		1		1		5		—		1		—		8
Doubtful		—		—		—		—		—		—		—		—
Total	$	83	$	117	$	76	$	30	$	9	$	26	$	—	$	341
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


September 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Non-Owner Occupied CRE
Risk rating:
Pass	$	134	$	240	$	182	$	116	$	45	$	75	$	—	$	792
Special mention		—		4		1		—		11		2		—		18
Substandard		1		1		1		7		2		7		—		19
Doubtful		—		—		—		—		—		—		—		—
Total	$	135	$	245	$	184	$	123	$	58	$	84	$	—	$	829
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


September 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Owner Occupied CRE
Risk rating:
Pass	$	81	$	320	$	228	$	118	$	64	$	149	$	—	$	960
Special mention		1		—		5		—		3		—		—		9
Substandard		3		6		4		—		5		16		—		34
Doubtful		—		—		—		—		—		—		—		—
Total	$	85	$	326	$	237	$	118	$	72	$	165	$	—	$	1,003
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


September 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Residential
Risk rating:
Pass	$	368	$	443	$	325	$	165	$	70	$	241	$	139	$	1,751
Special mention		—		2		2		2		—		3		1		10
Substandard		4		5		4		3		2		8		2		28
Doubtful		—		—		—		—		—		—		—		—
Total	$	372	$	450	$	331	$	170	$	72	$	252	$	142	$	1,789
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


September 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Auto
Risk rating:
Pass	$	168	$	237	$	86	$	32	$	13	$	2	$	—	$	538
Special mention		—		—		—		—		—		—		—		—
Substandard		—		1		1		—		—		—		—		2
Doubtful		—		—		—		—		—		—		—		—
Total	$	168	$	238	$	87	$	32	$	13	$	2	$	—	$	540
Year-to-Date Gross Charge-Offs	$	—	$	1	$	—	$	—	$	—	$	—	$	—	$	1


September 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Non-Auto
Risk rating:
Pass	$	60	$	54	$	26	$	5	$	1	$	1	$	7	$	154
Special mention		—		—		—		—		—		—		—		—
Substandard		1		—		—		—		—		—		—		1
Doubtful		—		—		—		—		—		—		—		—
Total	$	61	$	54	$	26	$	5	$	1	$	1	$	7	$	155
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


September 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Total Loans
Risk rating:
Pass	$	1,853	$	2,310	$	1,131	$	539	$	231	$	606	$	146	$	6,816
Special mention		15		11		8		2		15		5		1		57
Substandard		20		23		16		17		10		34		2		122
Doubtful		—		—		—		—		—		—		—		—
Total	$	1,888	$	2,344	$	1,155	$	558	$	256	$	645	$	149	$	6,995
Year-to-Date Gross Charge-Offs	$	—	$	1	$	1	$	—	$	—	$	—	$	—	$	2

The following summarizes the Company’s internal ratings of its loans held-for-investment, including the year of origination, by portfolio segments, at September 30, 2022 (dollars in millions):


September 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
C&I
Risk rating:
Pass	$	495	$	226	$	65	$	24	$	18	$	16	$	—	$	844
Special mention		1		—		—		1		—		—		—		2
Substandard		11		7		3		1		3		—		—		25
Doubtful		—		—		—		—		—		—		—		—
Total	$	507	$	233	$	68	$	26	$	21	$	16	$	—	$	871


September 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Municipal
Risk rating:
Pass	$	67	$	21	$	16	$	5	$	20	$	86	$	—	$	215
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total	$	67	$	21	$	16	$	5	$	20	$	86	$	—	$	215


September 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Agricultural
Risk rating:
Pass	$	46	$	21	$	4	$	3	$	1	$	1	$	—	$	76
Special mention		—		—		—		—		—		—		—		—
Substandard		—		1		—		—		—		—		—		1
Doubtful		—		—		—		—		—		—		—		—
Total	$	46	$	22	$	4	$	3	$	1	$	1	$	—	$	77


September 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Construction & Development
Risk rating:
Pass	$	504	$	317	$	78	$	15	$	8	$	9	$	—	$	931
Special mention		—		2		—		—		—		—		—		2
Substandard		4		1		—		—		—		—		—		5
Doubtful		—		—		—		—		—		—		—		—
Total	$	508	$	320	$	78	$	15	$	8	$	9	$	—	$	938


September 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Farm
Risk rating:
Pass	$	101	$	89	$	33	$	12	$	8	$	23	$	—	$	266
Special mention		—		—		—		—		—		—		—		—
Substandard		1		—		—		—		—		1		—		2
Doubtful		—		—		—		—		—		—		—		—
Total	$	102	$	89	$	33	$	12	$	8	$	24	$	—	$	268


September 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Non-Owner Occupied CRE
Risk rating:
Pass	$	223	$	200	$	108	$	51	$	22	$	79	$	—	$	683
Special mention		—		1		—		11		—		7		—		19
Substandard		5		1		1		2		1		6		—		16
Doubtful		—		—		—		—		—		—		—		—
Total	$	228	$	202	$	109	$	64	$	23	$	92	$	—	$	718


September 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Owner Occupied CRE
Risk rating:
Pass	$	280	$	223	$	134	$	81	$	67	$	124	$	—	$	909
Special mention		—		1		2		4		—		1		—		8
Substandard		1		2		1		3		11		11		—		29
Doubtful		—		—		—		—		—		—		—		—
Total	$	281	$	226	$	137	$	88	$	78	$	136	$	—	$	946


September 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Residential
Risk rating:
Pass	$	433	$	382	$	183	$	87	$	68	$	224	$	126	$	1,503
Special mention		—		2		3		—		—		3		—		8
Substandard		4		3		3		2		1		9		3		25
Doubtful		—		—		—		—		—		—		—		—
Total	$	437	$	387	$	189	$	89	$	69	$	236	$	129	$	1,536


September 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Auto
Risk rating:
Pass	$	284	$	149	$	64	$	29	$	8	$	3	$	—	$	537
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		1		1		—		—		—		2
Doubtful		—				—		—		—		—		—		—
Total	$	284	$	149	$	65	$	30	$	8	$	3	$	—	$	539


September 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Non-Auto
Risk rating:
Pass	$	73	$	48	$	13	$	4	$	2	$	1	$	7	$	148
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total	$	73	$	48	$	13	$	4	$	2	$	1	$	7	$	148


September 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Total Loans
Risk rating:
Pass	$	2,506	$	1,676	$	698	$	311	$	222	$	566	$	133	$	6,112
Special mention		1		6		5		16		—		11		—		39
Substandard		26		15		9		9		16		27		3		105
Doubtful		—		—		—		—		—		—		—		—
Total	$	2,533	$	1,697	$	712	$	336	$	238	$	604	$	136	$	6,256

The following summarizes the Company’s internal ratings of its loans held-for-investment, including the year of origination, by portfolio segments, at December 31, 2022 (dollars in millions):


December 31,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
C&I
Risk rating:
Pass	$	627	$	157	$	52	$	22	$	16	$	13	$	—	$	887
Special mention		4		1		2		1		—		—		—		8
Substandard		13		5		2		1		1		—		—		22
Doubtful		—		—		—		—		—		—		—		—
Total	$	644	$	163	$	56	$	24	$	17	$	13	$	—	$	917


December 31,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Municipal
Risk rating:
Pass	$	79	$	19	$	15	$	4	$	20	$	84	$	—	$	221
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total	$	79	$	19	$	15	$	4	$	20	$	84	$	—	$	221


December 31,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Agricultural
Risk rating:
Pass	$	60	$	9	$	3	$	2	$	1	$	1	$	—	$	76
Special mention		—		—		—		—		—		—		—		—
Substandard		—		1		—		—		—		—		—		1
Doubtful		—		—		—		—		—		—		—		—
Total	$	60	$	10	$	3	$	2	$	1	$	1	$	—	$	77


December 31,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Construction & Development
Risk rating:
Pass	$	638	$	218	$	70	$	13	$	8	$	7	$	—	$	954
Special mention		1		—		—		—		—		—		—		1
Substandard		4		1		—		—		—		—		—		5
Doubtful		—		—		—		—		—		—		—		—
Total	$	643	$	219	$	70	$	13	$	8	$	7	$	—	$	960


December 31,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Farm
Risk rating:
Pass	$	147	$	85	$	32	$	11	$	8	$	21	$	—	$	304
Special mention		—		—		—		—		—		—		—		—
Substandard		1		—		—		—		—		1		—		2
Doubtful		—		—		—		—		—		—		—		—
Total	$	148	$	85	$	32	$	11	$	8	$	22	$	—	$	306


December 31,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Non-Owner Occupied CRE
Risk rating:
Pass	$	258	$	191	$	100	$	49	$	21	$	75	$	—	$	694
Special mention		—		1		1		11		—		7		—		20
Substandard		8		1		1		2		1		5		—		18
Doubtful		—		—		—		—		—		—		—		—
Total	$	266	$	193	$	102	$	62	$	22	$	87	$	—	$	732


December 31,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Owner Occupied CRE
Risk rating:
Pass	$	316	$	224	$	128	$	74	$	63	$	113	$	—	$	918
Special mention		1		—		1		8		—		1		—		11
Substandard		1		2		1		2		9		10		—		25
Doubtful		—		—		—		—		—		—		—		—
Total	$	318	$	226	$	130	$	84	$	72	$	124	$	—	$	954


December 31,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Residential
Risk rating:
Pass	$	513	$	355	$	173	$	82	$	64	$	214	$	139	$	1,540
Special mention		1		3		2		—		—		3		1		10
Substandard		6		3		2		2		1		9		3		26
Doubtful		—		—		—		—		—		—		—		—
Total	$	520	$	361	$	177	$	84	$	65	$	226	$	143	$	1,576


December 31,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Auto
Risk rating:
Pass	$	331	$	131	$	55	$	25	$	6	$	2	$	—	$	550
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		1		—		—		—		—		1
Doubtful		—		—		—		—		—		—		—		—
Total	$	331	$	131	$	56	$	25	$	6	$	2	$	—	$	551


December 31,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Non-Auto
Risk rating:
Pass	$	85	$	41	$	9	$	3	$	1	$	1	$	7	$	147
Special mention		—		—		—		—		—		—		—		—
Substandard		—		1		—		—		—		—		—		1
Doubtful		—		—		—		—		—		—		—		—
Total	$	85	$	42	$	9	$	3	$	1	$	1	$	7	$	148


December 31,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Total Loans
Risk rating:
Pass	$	3,054	$	1,430	$	637	$	285	$	208	$	531	$	146	$	6,291
Special mention		7		5		6		20		—		11		1		50
Substandard		33		14		7		7		12		25		3		101
Doubtful		—		—		—		—		—		—		—		—
Total	$	3,094	$	1,449	$	650	$	312	$	220	$	567	$	150	$	6,442

At September 30, 2023 and 2022, and December 31, 2022, the Company’s past due loans are as follows (dollars in thousands):


September 30, 2023	15-59 Days Past Due*		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		90 Days Past Due Still Accruing
Commercial:
C&I	$	5,111	$	390	$	1,388	$	6,889	$	1,101,351	$	1,108,240	$	109
Municipal		481		—		—		481		217,877		218,358		—
Total Commercial		5,592		390		1,388		7,370		1,319,228		1,326,598		109
Agricultural		187		—		550		737		81,139		81,876		32
Real Estate:
Construction & Development		10,037		169		1,986		12,192		917,378		929,570		—
Farm		706		—		205		911		340,141		341,052		—
Non-Owner Occupied CRE		2,748		—		—		2,748		826,152		828,900		—
Owner Occupied CRE		1,867		—		476		2,343		1,000,570		1,002,913		—
Residential		9,049		1,658		2,067		12,774		1,776,139		1,788,913		148
Total Real Estate		24,407		1,827		4,734		30,968		4,860,380		4,891,348		148
Consumer:
Auto		339		176		32		547		539,835		540,382		—
Non-Auto		217		2		9		228		154,264		154,492		—
Total Consumer		556		178		41		775		694,099		694,874		—
Total	$	30,742	$	2,395	$	6,713	$	39,850	$	6,954,846	$	6,994,696	$	289


September 30, 2022	15-59 Days Past Due*		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		90 Days Past Due Still Accruing
Commercial:
C&I	$	5,422	$	73	$	1,515	$	7,010	$	864,325	$	871,335	$	—
Municipal		—		—		—		—		214,852		214,852		—
Total Commercial		5,422		73		1,515		7,010		1,079,177		1,086,187		—
Agricultural		290		93		—		383		76,554		76,937		—
Real Estate:
Construction & Development		2,958		600		—		3,558		934,493		938,051		—
Farm		822		150		—		972		267,167		268,139		—
Non-Owner Occupied CRE		536		—		—		536		717,202		717,738		—
Owner Occupied CRE		1,138		37		—		1,175		944,490		945,665		—
Residential		4,834		252		15		5,101		1,531,079		1,536,180		15
Total Real Estate		10,288		1,039		15		11,342		4,394,431		4,405,773		15
Consumer:
Auto		267		76		33		376		538,422		538,798		—
Non-Auto		66		10		—		76		147,717		147,793		—
Total Consumer		333		86		33		452		686,139		686,591		—
Total	$	16,333	$	1,291	$	1,563	$	19,187	$	6,236,301	$	6,255,488	$	15


December 31, 2022	15-59 Days Past Due*		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		90 Days Past Due Still Accruing
Commercial:
C&I	$	3,924	$	297	$	1,646	$	5,867	$	911,450	$	917,317	$	—
Municipal		76		783		—		859		220,231		221,090		—
Total Commercial		4,000		1,080		1,646		6,726		1,131,681		1,138,407		—
Agricultural		243		—		—		243		76,704		76,947		—
Real Estate:
Construction & Development		3,751		—		175		3,926		955,500		959,426		—
Farm		668		—		—		668		305,654		306,322		—
Non-Owner Occupied CRE		1,444		160		—		1,604		730,485		732,089		—
Owner Occupied CRE		1,151		—		—		1,151		953,249		954,400		—
Residential		8,720		707		266		9,693		1,566,065		1,575,758		—
Total Real Estate		15,734		867		441		17,042		4,510,953		4,527,995		—
Consumer:
Auto		779		30		—		809		549,826		550,635		—
Non-Auto		50		—		—		50		147,834		147,884		—
Total Consumer		829		30		—		859		697,660		698,519		—
Total	$	20,806	$	1,977	$	2,087	$	24,870	$	6,416,998	$	6,441,868	$	—

* The Company monitors commercial, agricultural and real estate loans after such loans are 15 days past due. Consumer loans are monitored after such loans are 30 days past due.

Modifications of receivables to debtors experiencing financial difficulty

On January 1, 2023, the Company adopted the accounting guidance in ASU 2022-02, which eliminates the recognition and measurement of a TDR. Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, term extensions, interest rate reduction, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.

An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses due to the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. During the nine-months ended September 30, 2023, loan modifications made to borrowers experiencing financial difficulty was insignificant.

Note 4 - Loans Held-for-Sale

Loans held-for-sale totaled $12,229,000, $18,815,000 and $11,965,000 at September 30, 2023 and 2022, and December 31, 2022, respectively. At September 30, 2023 and 2022, and December 31, 2022, $321,000, $2,923,000 and $1,468,000, respectively, are valued at the lower of cost or fair value, and the remaining amounts are valued under the fair value option.

These loans, which are sold on a servicing released basis, are valued using a market approach by utilizing either: (i) the fair value of the securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures (see Note 9). Interest income on mortgage loans held-for-sale is recognized based on the contractual rates and reflected in interest income on loans in the consolidated statements of earnings. The Company has no continuing ownership in any residential mortgage loans sold.

The Company originates certain mortgage loans for sale in the secondary market. The mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first three to six months, or if documentation is determined not to be in compliance with regulations. The Company’s historic losses as a result of these indemnities have been insignificant.

Note 5 - Derivative Financial Instruments

The Company enters into interest rate lock commitments (“IRLCs”) with customers to originate residential mortgage loans at a specific interest rate that are ultimately sold in the secondary market. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company.

The Company purchases forward mortgage-backed securities contracts to manage the changes in fair value associated with changes in interest rates related to a portion of the IRLCs. These instruments are typically entered into at the time the IRLC is made in the aggregate.

The fair values of IRLCs are based on current secondary market prices for underlying loans and estimated servicing value with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability (pull-through rate) net of estimated costs to originate the loan. The fair value of IRLCs is subject to change primarily due to changes in interest rates and the estimated pull-through rate. These commitments are classified as Level 2 in the fair value disclosures (see Note 9), as the valuations are based on observable market inputs.

Forward mortgage-backed securities contracts are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract and these instruments are therefore classified as Level 2 in the fair value disclosures (see Note 9). The estimated fair values are subject to change primarily due to changes in interest rates. The impact of these forward contracts is included in gain on sale and fees on mortgage loans in the statement of earnings.

These financial instruments are not designated as hedging instruments for accounting purposes. All derivatives are carried at fair value in either other assets or other liabilities and are reflected in the gain on sale and fees on mortgage loans in the consolidated statement of earnings.

The following tables provide the outstanding notional balances and fair values of outstanding derivative positions (dollars in thousands):


September 30, 2023:	Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
IRLCs	$	35,081	$	409	$	—
Forward mortgage-backed securities trades		45,500		237		—


September 30, 2022:	Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
IRLCs	$	78,653	$	—	$	251
Forward mortgage-backed securities trades		72,500		1,897		—


December 31, 2022:	Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
IRLCs	$	41,664	$	400	$	—
Forward mortgage-backed securities trades		45,000		85		—

Note 6 – Borrowings

Borrowings consisted of the following (dollars in thousands):


	September 30,				December 31,
	2023		2022		2022
Securities sold under agreements with customers to repurchase	$	621,791	$	749,278	$	618,829
Short-term borrowings		108,700		4,250		2,625
Other borrowings		21,053		21,053		21,053
Total	$	751,544	$	774,581	$	642,507

Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which the Company pledges certain securities that have a fair value equal to at least the amount of the borrowings. The agreements mature daily and therefore the risk arising from a decline in the fair value of the collateral pledged is minimal. The securities pledged are mortgage-backed securities. These agreements do not include “right of set-off” provisions and therefore the Company does not offset such agreements for financial reporting purposes.

The Company renewed its loan agreement, effective June 30, 2023, with Frost Bank. Under the loan agreement, as renewed and amended, we are permitted to draw up to $25,000,000 on a revolving line of credit. There was no outstanding balance under the line of credit as of September 30, 2023.

During 2021, the Company began investing in qualifying Community Development Entities ("CDE") under the federal New Market Tax Credits ("NMTC") program. See Note 7 for further discussion of our activity and related balances on the consolidated balance sheets, including the $21,053,000 in other borrowings shown above.

Note 7 - Income Taxes

Income tax expense was $10,848,000 for the third quarter of 2023 as compared to $12,095,000 for the same period in 2022. The Company’s effective tax rates on pretax income were 17.96% and 16.93% for the third quarters of 2023 and 2022, respectively. Income tax expense was $34,291,000 for the nine-months ended September 30, 2023 as compared to $34,359,000 for the same period in 2022. The Company's effective tax rates on pretax income were 18.31% and 16.35% for the nine-months ended September 30, 2023 and 2022, respectively. The effective tax rates differ from the statutory federal tax rate of 21% primarily due to tax exempt interest income earned on certain investment securities and loans, the deductibility of dividends paid to our employee stock ownership plan, excess tax benefits for distributions under our deferred compensation plan and vesting of equity awards, and NMTC benefits.

Low Income Housing Tax Credit Investments - During 2021, the Company began investing in an affordable housing fund that will invest in real estate projects that qualify for the federal low-income housing tax credit ("LIHTC") program designed to promote private development of low income housing. The investments made by the fund will generate a return to the Company primarily through the realization of LIHTCs, and also through federal tax deductions generated from the ongoing operating losses from the investees of the fund. The Company's investment in the fund will be amortized through income tax expense using the proportional amortization method as related tax credits are utilized by the Company. The initial capital contribution commitment to the fund was for up to $5,500,000. Contributions were $539,000 at September 30, 2023, and $131,000 at September 30, 2022, and December 31, 2022, respectively, which is included in other assets on the consolidated balance sheet.

New Market Tax Credit Investments - During 2021, the Company began investing in qualifying CDEs under the federal NMTC program. NMTC investments are made through the third-party CDEs which are qualified through the U.S. Department of Treasury and receive periodic allocation of amounts under the NMTC program. NMTCs are generated from qualified investments by the CDEs utilizing equity investments made by a taxpayer, like the Company. Through these equity investments, the Company will receive the tax benefits from the NMTCs equal to 39% of the qualified investment from the CDE yield method and related tax credits are allocated to the Company. At September 30, 2023, September 30, 2022, and December 31, 2022, the consolidated balance sheet of the Company included a $18,000,000 loan to the investee in loans and the $21,053,000 leveraged loan from the investee in other borrowings (see Note 6). At September 30, 2023 and 2022, and December 31, 2022, the consolidated balance sheet of the Company included CDE investments in other assets of $26,009,000, $29,000,000, and $26,825,000, respectively.

Note 8 - Stock Based Compensation

On April 27, 2021, the Company’s shareholders approved the 2021 Omnibus Stock and Incentive Plan (“2021 Plan”) and reserved 2,500,000 shares of the Company’s common stock for issuance under this plan. At September 30, 2023, the Company had 1,562,362 shares of stock remaining for issuance under the plan. The 2021 Plan superseded all prior stock option and restricted stock plans with shares previously reserved for issuance under such plans cancelled.

Restricted Stock Units

Under the 2021 Plan, the Company grants restricted stock units under compensation arrangements for the benefit of employees, senior and executive officers and directors. Restricted stock unit grants are subject to time-based vesting. The total number of restricted stock units granted represents the maximum number of restricted stock units eligible to vest based upon the service conditions set forth in the grant agreements. The following table summarizes information about the changes in restricted stock units for the nine-months ended September 30, 2023 and 2022.


	For the Nine-Months Ended September 30,
	2023					2022
	Restricted Stock Units Outstanding			Weighted Average Grant Date Fair Value		Restricted Stock Units Outstanding			Weighted Average Grant Date Fair Value
Balance at beginning of period		39,657		$	47.83		22,597		$	48.91
Grants		33,294			29.53		24,833			47.19
Vesting		(14,553	)		48.00		(7,425	)		48.91
Forfeited/expired		(2,888	)		47.87		(348	)		48.91
Balance at end of period		55,510		$	36.81		39,657		$	47.83

Performance Stock Units

Also under the 2021 Plan, the Company awards performance-based restricted stock units (“PSUs”) to employees, senior and executive officers, and directors. Under the terms of the award, the number of units that will vest and convert to shares of common stock will be based on the extent to which the Company achieves specific performance criteria during the fixed three-year performance period. The number of shares issued upon vesting will range from 0% to 200% of the PSUs granted. The PSUs vest at the end of a three-year period based 50% each on average adjusted earnings per share growth and return on average assets as reported, adjusted for unusual gains/losses, merger expenses, and other items as approved by the compensation committee of the Company's board of directors. Performance for each period is measured relative to other U.S. publicly traded banks with $10 billion to $50 billion in assets. Compensation expense for the PSUs will be estimated each period based on the fair value of the stock at the grant date and the most probable outcome of the performance condition, adjusted for the passage of time within the vesting period of the awards.

The following table summarizes information about the changes in PSUs as of and for the nine-months ended September 30, 2023 and 2022.


	For the Nine-Months Ended September 30,
	2023					2022
	Performance-Based Restricted Stock Units Outstanding			Weighted Average Grant Date Fair Value		Performance-Based Restricted Stock Units Outstanding			Weighted Average Grant Date Fair Value
Balance at beginning of period		47,082		$	48.00		22,597		$	48.91
Grants		33,294			29.53		24,833			47.19
Vesting		—			—		—			—
Forfeited/expired		(3,456	)		48.04		(348	)		48.91
Balance at end of period		76,920		$	40.01		47,082		$	48.00

Restricted Stock Awards

Under the 2021 Plan, the Company grants restricted stock awards under compensation arrangements for the benefit of employees, senior and executive officers and directors. Restricted stock awards are subject to time-based vesting. The total number of restricted stock awards granted represents the maximum number of shares of restricted stock eligible to vest based upon the service conditions set forth in the grant agreements.

The following table summarizes information about vested and unvested restricted stock.


	For the Nine-Months Ended September 30,
	2023					2022
	Restricted Stock Outstanding			Weighted Average Grant Date Fair Value		Restricted Stock Outstanding			Weighted Average Grant Date Fair Value
Balance at beginning of period		24,813		$	36.21		46,598		$	35.75
Grants		25,190			27.79		15,425			40.89
Vesting		(17,682	)		38.54		(23,898	)		40.40
Forfeited/expired		(1,105	)		29.70		(200	)		29.70
Balance at end of period		31,216		$	28.25		37,925		$	34.94

The total fair value of restricted stock vested for the nine-months ended September 30, 2023 and 2022, was $940,000 and $1,363,000, respectively.

The Company recorded restricted stock unit, performance-based restricted stock unit and restricted stock award expense for employees of $483,000 and $370,000 for the three-months ended September 30, 2023 and 2022, respectively. The Company recorded restricted stock unit, performance-based restricted stock unit and restricted stock award expense for employees of $1,261,000 and $1,390,000 for the nine-months ended September 30, 2023 and 2022, respectively. The Company recorded director expense related to these restricted stock grants of $175,000 and $150,000, for the three-months ended September 30, 2023 and 2022, respectively. The Company recorded director expense related to these restricted stock grants of $492,000 and $481,000, for the nine-months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023 and 2022, there were $3,998,000 and $4,105,000 respectively, of total unrecognized compensation cost related to unvested restricted stock, restricted stock units and performance-based restricted stock units which is expected to be recognized over a weighted-average period of 1.27 years and 1.23 years, respectively. At September 30, 2023 and 2022, and December 31, 2022, there was $107,000, $72,000 and $74,000, respectively, accrued in other liabilities related to dividends declared to be paid upon vesting.

Stock Option Plans

Prior to the approval of the 2021 Plan, the 2012 Incentive Stock Option Plan (the “2012 Plan”) provided for the granting of options to employees of the Company at prices not less than market value at the date of the grant. The 2012 Plan provided that options granted vest and are exercisable after two years from the date of grant and vest at a rate of 20% each year thereafter and have a 10-year term. The most recent grants from the 2021 Plan provided that 20% of the options granted vest and are exercisable after one year from the date of grant and the remaining options vest and are exercisable at a rate of 20% each year thereafter and have a 10-year term. Shares are issued under the 2012 Plan and the 2021 Plan from available authorized shares. An analysis of stock option activity for the nine-months ended September 30, 2023 is presented in the table and narrative below:


	Shares			Weighted- Average Ex. Price
Outstanding, December 31, 2022		1,490,413		$	29.99
Granted		253,228			29.53
Exercised		(84,000	)		18.36
Cancelled		(50,535	)		42.90
Outstanding, September 30, 2023		1,609,106			30.12
Exercisable, September 30, 2023		938,924		$	24.96

The options outstanding at September 30, 2023 had exercise prices ranging between $15.43 and $48.91. Stock options have been adjusted retroactively for the effects of stock dividends and splits.

The Company grants incentive stock options for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant to employees.

The Company recorded stock option expense totaling $391,000 and $360,000 for the three-months ended September 30, 2023 and 2022, respectively. The Company recorded stock option expense totaling $1,280,000 and $992,000 for the nine-months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, there was $5,746,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of 1.67 years. The total fair value of shares vested during the nine-months ended September 30, 2023 and 2022 was $2,110,000 and $1,747,000, respectively.

Note 9 - Fair Value Disclosures

The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

The authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

•

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

•

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•

Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities classified as available-for-sale and trading are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market spreads, cash flows, the United States Treasury yield curve, live trading levels, trade execution data, dealer quotes, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other items.

See Notes 4 and 5 related to the determination of fair value for loans held-for-sale, IRLCs and forward mortgage-backed securities trades.

There were no transfers between Level 2 and Level 3 during the three and nine-months ended September 30, 2023 and 2022, and the year ended December 31, 2022.

The following table summarizes the Company’s available-for-sale securities, loans held-for-sale, and derivatives which are measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):


September 30, 2023	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S. Treasury securities	$	485,447	$	—	$	—	$	485,447
Obligations of state and political subdivisions		—		1,463,754		—		1,463,754
Corporate bonds		—		96,961		—		96,961
Residential mortgage-backed securities		—		2,297,235		—		2,297,235
Commercial mortgage-backed securities		—		305,348		—		305,348
Other securities		3,792		—		—		3,792
Total	$	489,239	$	4,163,298	$	—	$	4,652,537
Loans held-for-sale	$	—	$	11,908	$	—	$	11,908
IRLCs	$	—	$	409	$	—	$	409
Forward mortgage-backed securities trades	$	—	$	237	$	—	$	237


September 30, 2022	Level 1 Inputs		Level 2 Inputs			Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S. Treasury securities	$	477,176	$	—		$	—	$	477,176
Obligations of states and political subdivisions		—		2,083,812			—		2,083,812
Corporate bonds		—		96,322			—		96,322
Residential mortgage-backed securities		—		2,696,881			—		2,696,881
Commercial mortgage-backed securities		—		387,346			—		387,346
Other securities		3,906		—			—		3,906
Total	$	481,082	$	5,264,361		$	—	$	5,745,443
Loans held-for-sale	$	—	$	15,892		$	—	$	15,892
IRLCs	$	—	$	(251	)	$	—	$	(251	)
Forward mortgage-backed securities trades	$	—	$	1,897		$	—	$	1,897


December 31, 2022	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S. Treasury securities	$	482,549	$	—	$	—	$	482,549
Obligations of state and political subdivisions		—		1,898,611		—		1,898,611
Corporate bonds		—		97,850		—		97,850
Residential mortgage-backed securities		—		2,616,566		—		2,616,566
Commercial mortgage-backed securities		—		374,869		—		374,869
Other securities		3,914		—		—		3,914
Total	$	486,463	$	4,987,896	$	—	$	5,474,359
Loans held-for-sale	$	—	$	10,497	$	—	$	10,497
IRLCs	$	—	$	400	$	—	$	400
Forward mortgage-backed securities trades	$	—	$	85	$	—	$	85

The following table summarizes the Company’s loans held-for-sale at fair value and the net unrealized gains as of the balance sheet dates shown below (dollars in thousands):


	September 30,					December 31,
	2023		2022			2022
Unpaid principal balance on loans held-for-sale	$	11,684	$	15,998		$	10,226
Net unrealized gains on loans held-for-sale		224		(106	)		271
Loans held-for-sale at fair value	$	11,908	$	15,892		$	10,497

The following table summarizes the Company’s gains on sale and fees of mortgage loans for the three and nine-months ended September 30, 2023 and 2022 (dollars in thousand):


	Three-Months Ended September 30,						Nine-Months Ended September 30,
	2023			2022			2023		2022
Realized gain on sale and fees on mortgage loans*	$	3,485		$	4,664		$	9,774	$	16,973
Change in fair value on loans held-for-sale and IRLCs		(121	)		(2,433	)		24		(2,886	)
Change in forward mortgage-backed securities trades		78			1,839			152		2,044
Total gain on sale of mortgage loans	$	3,442		$	4,070		$	9,950	$	16,131

* This includes gains on loans held-for-sale carried under the fair value method and lower of cost or market.

No residential mortgage loans held-for-sale were 90 days or more past due or considered nonaccrual as of September 30, 2023, September 30, 2022, or December 31, 2022. No significant credit losses were recognized on mortgage loans held-for-sale for the three and nine-months ended September 30, 2023 and 2022.

Certain non-financial assets and non-financial liabilities measured at fair value on a nonrecurring basis include other real estate owned, goodwill and other intangible assets, and other non-financial long-lived assets. Non-financial assets measured at fair value on a non-recurring basis during the nine-months ended September 30, 2023 include other real estate owned which, subsequent to their initial transfer to other real estate owned from loans, were re-measured at fair value through a write-down included in gain (loss) on sale of foreclosed assets. During the reported periods, all fair value measurements for foreclosed assets utilized Level 2 inputs based on observable market data, generally third-party appraisals, or Level 3 inputs based on customized discounting criteria. These appraisals are evaluated individually and discounted as necessary due to the age of the appraisal, lack of comparable sales, expected holding periods of property or special use type of the property. Such discounts vary by appraisal based on the above factors but generally range from 5% to 25% of the appraised value. Re-evaluation of other real estate owned is performed at least annually as required by regulatory guidelines or more often if particular circumstances arise. There were no other real estate owned properties that were re-measured subsequent to their initial transfer to other real estate owned during the three and nine-months ended September 30, 2023 and 2022.

At September 30, 2023, other real estate owned totaled $15,000. At September 30, 2022 and December 31, 2022, the Company had no other real estate owned.

The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instrument assets and liabilities including those subject to the requirements discussed above. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

Cash and due from banks, federal funds sold, interest-bearing deposits in banks and accrued interest receivable and payable are liquid in nature and considered Levels 1 or 2 of the fair value hierarchy.

Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities and are considered Levels 2 and 3 of the fair value hierarchy. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the carrying value and are considered Level 1 of the fair value hierarchy.

The carrying value and the estimated fair value of the Company’s contractual off-balance-sheet unfunded lines of credit, loan commitments and letters of credit, which are generally priced at market at the time of funding, are not material.

The estimated fair values and carrying values of all financial instruments under current authoritative guidance were as follows (dollars in thousands).


	September 30,										December 31,
	2023				2022						2022
	Carrying Value		Estimated Fair Value		Carrying Value			Estimated Fair Value			Carrying Value		Estimated Fair Value		Fair Value Hierarchy
Cash and due from banks	$	208,277	$	208,277	$	227,298		$	227,298		$	293,286	$	293,286	Level 1
Interest-bearing demand deposits in banks		180,008		180,008		138,484			138,484			37,392		37,392	Level 1
Available-for-sale securities		4,652,537		4,652,537		5,745,443			5,745,443			5,474,359		5,474,359	Levels 1 and 2
Loans held-for-investment, net of allowance for credit losses		6,904,982		6,890,218		6,181,380			6,215,441			6,366,034		6,372,859	Level 3
Loans held-for-sale		12,229		12,266		18,815			18,815			11,965		11,965	Level 2
Accrued interest receivable		53,518		53,518		49,416			49,416			58,162		58,162	Level 2
Deposits with stated maturities		1,004,227		1,002,893		418,102			416,400			524,666		518,811	Level 2
Deposits with no stated maturities		9,712,296		9,712,296		10,724,016			10,724,016			10,480,841		10,480,841	Level 1
Borrowings		751,544		751,544		774,581			774,581			642,507		642,507	Level 2
Accrued interest payable		13,557		13,557		494			494			1,121		1,121	Level 2
IRLCs		409		409		(251	)		(251	)		400		400	Level 2
Forward mortgage-backed securities trades asset (liability)		237		237		1,897			1,897			85		85	Level 2

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project,” “could,” “may,” or “would” and similar expressions, as they relate to us or our management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited, to those discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, under the heading “Risk Factors,” and the following:

•

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

•

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

•

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

•

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

•

government intervention in the U.S. financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau (“CFPB”), the 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;

•

political or social unrest and economic instability;

•

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

•

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

•

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

•

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

•

government and regulatory responses to the COVID pandemic;

•

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;

•

the costs, effects and results of regulatory examinations, investigations or reviews and the ability to obtain required regulatory approvals;

•

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

•

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

•

the accuracy of our estimates of future credit losses;

•

the accuracy of our estimates and assumptions regarding the performance of our securities portfolio, including securities with a current unrealized loss;

•

inflation, interest rate, market and monetary fluctuations;

•

soundness of other financial institutions with which we have transactions;

•

changes in consumer spending, borrowing and savings habits;

•

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

•

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

•

changes in our liquidity position; including a result of a reduction in the amount of sources of liquidity we currently have;

•

fluctuations in the market value and liquidity of the investment securities we have classified as held-for-sale ("HFS"), including the effects of changes in market interest rates;

•

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

•

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

•

our ability to attract and retain qualified employees;

•

acquisitions and integration of acquired businesses;

•

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

•

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

•

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

•

changes in our compensation and benefit plans;

•

acts of God or of war or terrorism;

•

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

•

potential risk of environmental liability associated with lending activities; and

•

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

In addition, financial markets and global supply chains may continue to be adversely affected by the current or anticipated impact of military conflict, including the current Russian invasion of Ukraine and the conflict in the Middle East, terrorism or other geopolitical events.

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

Introduction

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

The following discussion and analysis of operations and financial condition should be read in conjunction with the financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as those included in the Company’s 2022 Annual Report on Form 10-K.

Critical Accounting Policies

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

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

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

Stock Repurchase

On July 27, 2021, the Company’s Board of Directors authorized the repurchase of up to 5 million common shares through July 31, 2023. On July 25, 2023, the Company's Board of Directors renewed the prior authorization through July 31, 2024.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. Under the prior authorization, 244,559 shares were repurchased and retired (all during the months of June and July 2022) at an average price of $38.61 per share. Under the current authorization, the Company has repurchased and retired 101,337 shares (all during September 2023) at an average price of $26.99 per share.

Results of Operations

Performance Summary. Net earnings for the third quarter of 2023 were $49.56 million compared to earnings of $59.34 million for the third quarter of 2022. Diluted earnings per share was $0.35 for the third quarter of 2023 and $0.41 for the third quarter of 2022.

The return on average assets was 1.53% for the third quarter of 2023, as compared to 1.76% for the third quarter of 2022. The return on average equity was 14.51% for the third quarter of 2023 as compared to 17.31% for the third quarter of 2022.

Net earnings for the nine-months ended September 30, 2023 were $153.00 million compared to earnings of $175.81 million for the same period in 2022. Diluted earnings per share was $1.07 for the nine-months ended September 30, 2023, as compared to $1.23 for the same period in 2022.

The return on average assets was 1.59% for the nine-months ended September 30, 2023, as compared to 1.77% for the same period a year ago. The return on average equity was 15.22% for the nine-months ended September 30, 2023, as compared to 15.88% for the same period in 2022.

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 $96.97 million for the third quarter of 2023, as compared to $106.96 million for the same period last year. The decrease in 2023 tax equivalent net interest income compared to 2022 was largely attributable to the increases in the rates paid on deposits and borrowings and a change in the mix of interest earning assets primarily derived from a decrease in taxable and tax-exempt investment securities offset by an increase in average loans. Average earning assets were $11.96 billion for the third quarter of 2023, as compared to $12.54 billion during the third quarter of 2022. The decrease of $578.99 million in average earning assets in 2023 when compared to 2022 was primarily a result of (i) a decrease in taxable investment securities of $609.82 million, (ii) a decrease in tax-exempt securities of $586.17 million, (iii) a decrease in short-term investments of $194.42 million, offset by (iv) the increase of average loans of $811.42 million, when compared to the three months ended September 30, 2022 average balances. Average interest-bearing liabilities were $7.88 billion for the third quarter of 2023, as compared to $7.77 billion in the same period in 2022. The yield on earning assets increased 89 basis points while the rate paid on interest-bearing liabilities increased 158 basis points for the third quarter of 2023 compared to the third quarter of 2022.

Tax-equivalent net interest income was $295.20 million for the nine-months ended September 30, 2023, as compared to $309.05 million for the same period last year. The decrease in 2023 tax equivalent net interest income compared to 2022 was largely attributable to the increases in the rates paid on deposits and borrowings and a change in the mix of interest earning assets primarily derived from a decrease in taxable and tax-exempt investment securities offset by an increase in average loans. Average earning assets were $12.03 billion for the nine-months ended September 30, 2023, as compared to $12.51 billion during same period last year. The decrease of $485.85 million in average earning assets in 2023 when compared to 2022 was primarily a result of (i) a decrease in tax-exempt securities of $722.51 million, (ii) the decrease of taxable securities of $560.81 million, (iii) a decrease in short-term investments of $130.68 million, offset by (iv) the increase of average loans of $928.16 million, when compared to the nine-months ended September 30, 2022 average balances. Average interest-bearing liabilities were $7.78 billion for the nine-months ended September 30, 2023, as compared to $7.74 billion for the nine-months ended September 30, 2022, respectively. The yield on earning assets increased 93 basis points while the rate paid on interest-bearing liabilities increased 146 basis points for the nine-months ended September 30, 2023 compared to the nine-months ended September 30, 2022.

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

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


	Three-Months Ended September 30, 2023 Compared to Three-Months Ended September 30, 2022									Nine-Months Ended September 30, 2023 Compared to Nine-Months Ended September 30, 2022
	Change Attributable to						Total			Change Attributable to						Total
	Volume			Rate			Change			Volume			Rate			Change
Short-term investments	$	(1,104	)	$	464		$	(640	)	$	(1,131	)	$	3,077		$	1,946
Taxable investment securities		(3,140	)		1,766			(1,374	)		(7,857	)		10,325			2,468
Tax-exempt investment securities (1)		(4,447	)		(891	)		(5,338	)		(15,890	)		(887	)		(16,777	)
Loans (1) (2)		10,389			18,603			28,992			33,987			49,754			83,741
Interest income		1,698			19,942			21,640			9,109			62,269			71,378
Interest-bearing deposits		320			27,058			27,378			267			72,215			72,482
Short-term borrowings		(150	)		4,403			4,253			(170	)		12,911			12,741
Interest expense		170			31,461			31,631			97			85,126			85,223
Net interest income	$	1,528		$	(11,519	)	$	(9,991	)	$	9,012		$	(22,857	)	$	(13,845	)

(1)

Computed on a tax-equivalent basis assuming a marginal tax rate of 21%.

(2)

Nonaccrual loans are included in loans.

The net interest margin, on a tax equivalent basis, was 3.22% for the third quarter of 2023, a decrease of 16 basis point from the same period in 2022. The net interest margin, on a tax equivalent basis, was 3.28% for the first nine-months of 2023, a decrease of two basis points from the same period in 2022. We continued to experience downward pressure on our net interest margin in 2023 compared to 2022 primarily due to (i) the effects of the Federal Reserve's accelerated rate of raising interest rates in 2022 and 2023, which was preceded by the extended period of historically low levels of short-term interest rates leading up to the first quarter of 2022, and (ii) the shift in the mix of interest-earning assets and interest-bearing deposits. The Federal Reserve began increasing interest rates by raising rates 25 basis points in March 2022, 50 basis points in May 2022, and 75 basis points in June, July, September and November 2022, respectively, 50 basis points in December 2022, and 25 basis points in February, March, May, and July 2023, respectively, resulting in a target rate range of 5.25% to 5.50% at September 30, 2023.

Loan rates on variable loans have increased as the majority of such loans are indexed to the applicable prime rate (currently 8.50% at September 30, 2023), 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 49).

During 2022, we increased rates on each of the primary depository products in response to the increasing federal funds rate. Additionally, we have approximately $883 million of municipal and related deposits which are indexed to short-term treasury rates which have continued to increase with the changes in the applicable rate index. Average municipal and related deposits totaled $1.48 billion and $1.45 billion for the nine-months ended September 30, 2023 and 2022, respectively, with an average rate paid of 2.95% and 1.50%, for the respective nine-months 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,
	2023								2022
	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
Assets
Short-term investments (1)	$	57,614		$	792		5.45	%	$	252,036		$	1,432		2.25	%
Taxable investment securities (2)		3,429,290			19,425		2.27			4,039,107			20,799		2.06
Tax-exempt investment securities (2)(3)		1,578,660			11,085		2.81			2,164,829			16,423		3.03
Loans (3)(4)		6,894,064			106,872		6.15			6,082,649			77,880		5.08
Total earning assets		11,959,628		$	138,174		4.58	%		12,538,621		$	116,534		3.69	%
Cash and due from banks		227,156								227,206
Bank premises and equipment, net		151,867								150,455
Other assets		243,386								213,094
Goodwill and other intangible assets, net		314,953								315,962
Allowance for credit losses		(86,507	)							(72,737	)
Total assets	$	12,810,483							$	13,372,601
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	7,259,252		$	36,165		1.98	%	$	7,004,478		$	8,787		0.50	%
Short-term borrowings		621,188			5,037		3.22			768,096			784		0.40
Total interest-bearing liabilities		7,880,440		$	41,202		2.07	%		7,772,574		$	9,571		0.49	%
Noninterest-bearing deposits		3,509,809								4,178,675
Other liabilities		65,094								61,320
Total liabilities		11,455,343								12,012,569
Shareholders’ equity		1,355,140								1,360,032
Total liabilities and shareholders’ equity	$	12,810,483							$	13,372,601
Net interest income (tax equivalent) (5)				$	96,972							$	106,963
Rate Analysis:
Interest income/earning assets							4.58	%							3.69	%
Interest expense/earning assets							(1.36	)							(0.31	)
Net interest margin							3.22	%							3.38	%

(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 $2.82 million and $3.81 million in the third quarters of 2023 and 2022, respectively, using an effective tax rate of 21% for both periods.

(4)

Includes nonaccrual loans.

(5)

Calculations for 2022 have been adjusted to remove the effect of TEFRA disallowance.


	Nine-Months Ended September 30,
	2023								2022
	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
Assets
Short-term investments (1)	$	108,034		$	4,026		4.98	%	$	238,713		$	2,080		1.16	%
Taxable investment securities (2)		3,562,753			60,240		2.25			4,123,562			57,772		1.87
Tax-exempt investment securities (2)(3)		1,660,241			35,626		2.86			2,382,754			52,403		2.93
Loans (3)(4)		6,694,000			294,875		5.89			5,765,844			211,134		4.90
Total earning assets		12,025,028		$	394,767		4.39	%		12,510,873		$	323,389		3.46	%
Cash and due from banks		230,473								230,427
Bank premises and equipment, net		152,630								149,997
Other assets		234,982								173,061
Goodwill and other intangible assets, net		315,183								316,274
Allowance for credit losses		(81,155	)							(67,931	)
Total assets	$	12,877,141							$	13,312,701
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	7,126,471		$	85,606		1.61	%	$	6,984,249		$	13,124		0.25	%
Short-term borrowings		653,784			13,957		2.85			759,913			1,216		0.21
Total interest-bearing liabilities		7,780,255		$	99,563		1.71	%		7,744,162		$	14,340		0.25	%
Noninterest-bearing deposits		3,690,190								4,024,731
Other liabilities		62,468								63,919
Total liabilities		11,532,913								11,832,812
Shareholders’ equity		1,344,228								1,479,889
Total liabilities and shareholders’ equity	$	12,877,141							$	13,312,701
Net interest income (tax equivalent) (5)				$	295,204							$	309,049
Rate Analysis:
Interest income/earning assets							4.39	%							3.46	%
Interest expense/earning assets							(1.11	)							(0.16	)
Net interest margin							3.28	%							3.30	%

(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 $8.90 million and $11.67 million in the first nine months of 2023 and 2022, respectively, using an effective tax rate of 21% for both periods.

(4)

Includes nonaccrual loans.

(5)

Calculations for 2022 have been adjusted to remove the effect of TEFRA disallowance.

Noninterest Income. Noninterest income for the third quarter of 2023 was $28.07 million compared to $30.94 million in the same quarter of 2022. Debit card fees for the third quarter of 2023 decreased by $546 thousand from the third quarter of 2022 due to the recognition of $988 thousand of volume incentive income in the third quarter of 2022 compared to $375 thousand in the third quarter of 2023. Mortgage related income was $3.44 million in the third quarter of 2023 compared to $4.07 million in the third quarter of 2022 due to lower overall origination volumes and margins on loan sales primarily because of the significant increase in mortgage interest rates. Available for sale securities totaling $113.13 million with an average book yield of 3.53% were sold in the third quarter of 2023 resulting in a loss on sales of securities of $972 thousand compared to a gain on sales of securities of $334 thousand in the third quarter of 2022.The proceeds from the sales of these securities are being used to fund organic loan growth that is yielding around 8%, resulting in an anticipated earn back period of less than six months.

Noninterest income for the nine-months ended September 30, 2023 was $86.03 million compared to $103.14 million in the same period in 2022. Debit card fees for the nine-months ended September 30, 2023 were $16.70 million compared to $24.38 million during the nine-months ended September 30, 2022 due to the impact of the Bank becoming subject to regulations imposed by the Federal Reserve that limits debit card interchange revenue (also known as the "Durbin Amendment") which became effective for the Company as of July 1, 2022, and is consistent with our previously disclosed expectations. Mortgage related income was $9.95 million in the nine-months ended September 30, 2023 compared to $16.13 million in the nine-months ended September 30, 2022 due to lower overall origination volumes and margins on loan sales as a result of the increases in mortgage interest rates. During the nine-months ended September 30, 2023, losses on sales of available-for-sale securities was $914 thousand, compared to a gain on sales of available-for-sale securities of $2.01 million during the same period in 2022. Net gain on sale of foreclosed assets was $23 thousand for the nine-months ended September 30, 2023, compared to $1.45 million for the same period in 2022. Recoveries of interest on previously charged-off or nonaccrual loans totaled $1.52 million for the nine-months ended September 30, 2023, compared with $2.60 million for the same period in 2022.

Debit card fees are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Debit card fees consist of income from debit card usage, point of sale income for debit card transactions and ATM service fees. Federal Reserve Board rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is limited to the sum of 21 cents per transaction plus 5 basis points multiplied by the value of the transaction. Based on the applicable Federal Reserve Board rules, the Company became subject to the limitation effective July 1, 2022, which reduced debit card fees in 2023 compared to 2022, as discussed above.

Table 3 - Noninterest Income (dollars in thousands):


	Three-Months Ended September 30,								Nine-Months Ended September 30,
	2023			Increase (Decrease)			2022		2023			Increase (Decrease)			2022
Trust fees	$	10,050		$	(264	)	$	10,314	$	29,778		$	(95	)	$	29,873
Service charges on deposit accounts		6,509			110			6,399		18,855			712			18,143
Debit card fees		5,041			(546	)		5,587		16,697			(7,684	)		24,381
Credit card fees		694			43			651		2,014			61			1,953
Gain on sale and fees on mortgage loans		3,442			(628	)		4,070		9,950			(6,181	)		16,131
Net gain on sale of available-for-sale securities		(972	)		(1,306	)		334		(914	)		(2,927	)		2,013
Net gain (loss) on sale of foreclosed assets		(10	)		(359	)		349		23			(1,428	)		1,451
Net gain (loss) on sale of assets		696			170			526		1,626			1,104			522
Interest on loan recoveries		698			34			664		1,519			(1,077	)		2,596
Other:
Check printing fees		29			—			29		71			(16	)		87
Safe deposit rental fees		176			(16	)		192		643			(28	)		671
Credit life fees		177			(91	)		268		452			(401	)		853
Brokerage commissions		380			25			355		1,114			(16	)		1,130
Wire transfer fees		420			(8	)		428		1,224			(28	)		1,252
Miscellaneous income		740			(37	)		777		2,973			888			2,085
Total other		1,922			(127	)		2,049		6,477			399			6,078
Total Noninterest Income	$	28,070		$	(2,873	)	$	30,943	$	86,025		$	(17,116	)	$	103,141

Noninterest Expense. Total noninterest expense for the third quarter of 2023 was $59.54 million, compared to $59.44 million for the same period of 2022. An important measure in determining whether a financial institution effectively manages noninterest expense is the efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax-equivalent basis and noninterest income. Lower ratios indicate better efficiency since more income is generated with a lower noninterest expense total. Our efficiency ratio was 47.62% for the third quarter of 2023 compared to 43.10% for the same quarter in 2022.

Salaries, commissions and employee benefits for the third quarter of 2023 totaled $32.94 million, compared to $33.89 million for the same period in 2022. The net decrease reflected lower profit sharing expenses of $583 thousand and a $310 thousand decrease in mortgage salaries and incentive compensation expenses.

All other categories of noninterest expense for the third quarter of 2023 totaled $26.60 million, compared to $25.55 million in the same quarter a year ago. Noninterest expense, excluding salary related costs, for the three-months ended September 30, 2023 increased primarily due to increases in FDIC insurance premiums of $656 thousand due to the increased FDIC insurance base assessment rate effective January 1, 2023, compared to the three-months ended September 30, 2022.

Total noninterest expense for the first nine months of 2023 was $174.41 million, a decrease of $2.59 million, or 1.46%, as compared to the same period in 2022. Our efficiency ratio was 45.75% for the first nine months of 2023 compared to 42.94% for the same period in 2022.

Salaries, commissions and employee benefits for the first nine months of 2023 totaled $96.16 million, compared to $101.18 million for the same period in 2022. The net decrease reflected lower profit sharing expenses of $3.49 million, a $2.02 million decrease in mortgage salaries and incentive compensation expenses and a $1.02 million decrease in medical expenses, offset by annual merit-based and other market-based pay increases that were effective March 1, 2023.

All other categories of noninterest expense for the first nine months of 2023 totaled $78.25 million, compared to $75.82 million for the same period in 2022. Noninterest expense, excluding salary related costs, for the nine-months ended September 30, 2023 increased primarily due to increases in FDIC insurance premiums of $1.95 million due to the increased FDIC insurance base assessment rate effective January 1, 2023.

Table 4 - Noninterest Expense (dollars in thousands):


	Three-Months Ended September 30,							Nine-Months Ended September 30,
	2023		Increase (Decrease)			2022		2023		Increase (Decrease)			2022
Salaries, commissions and incentives (excluding mortgage)	$	23,811	$	(432	)	$	24,243	$	71,170	$	1,218		$	69,952
Mortgage salaries and incentives		2,252		(310	)		2,562		6,362		(2,021	)		8,383
Medical		3,148		139			3,009		7,373		(1,023	)		8,396
Profit sharing		180		(583	)		763		180		(3,487	)		3,667
401(k) match expense		938		41			897		2,870		49			2,821
Payroll taxes		1,732		44			1,688		5,666		91			5,575
Stock based compensation		874		144			730		2,541		158			2,383
Total salaries and employee benefits		32,935		(957	)		33,892		96,162		(5,015	)		101,177
Net occupancy expense		3,565		125			3,440		10,418		461			9,957
Equipment expense		2,200		(196	)		2,396		6,525		(474	)		6,999
FDIC insurance premiums		1,573		656			917		4,644		1,954			2,690
Debit card expense		3,284		271			3,013		9,704		527			9,177
Professional and service fees		2,425		206			2,219		7,187		552			6,635
Printing, stationery and supplies		512		(88	)		600		1,962		321			1,641
Operational and other losses		959		90			869		2,746		499			2,247
Software amortization and expense		2,441		(123	)		2,564		7,271		(272	)		7,543
Amortization of intangible assets		228		(78	)		306		684		(262	)		946
Other:
Data processing fees		485		52			433		1,472		149			1,323
Postage		368		16			352		1,086		93			993
Advertising		808		70			738		2,290		115			2,175
Correspondent bank service charges		212		(53	)		265		648		(149	)		797
Telephone		798		39			759		2,422		144			2,278
Public relations and business development		814		(140	)		954		2,595		34			2,561
Directors’ fees		608		19			589		1,900		(38	)		1,938
Audit and accounting fees		631		118			513		1,894		356			1,538
Legal fees and other related costs		502		179			323		1,114		(140	)		1,254
Regulatory exam fees		333		(66	)		399		954		(234	)		1,188
Travel		484		20			464		1,401		163			1,238
Courier expense		313		6			307		907		21			886
Other real estate owned		68		67			1		79		76			3
Other miscellaneous expense		2,993		(136	)		3,129		8,342		(1,474	)		9,816
Total other		9,417		191			9,226		27,104		(884	)		27,988
Total Noninterest Expense	$	59,539	$	97		$	59,442	$	174,407	$	(2,593	)	$	177,000

Balance Sheet Review

Loans. Our portfolio is comprised of loans made to businesses, professionals, individuals, and farm and ranch operations located in the primary trade areas served by our subsidiary bank. As of September 30, 2023, total loans held-for-investment were $6.99 billion, an increase of $552.83 million, as compared to December 31, 2022. Total PPP loans outstanding were $122 thousand at September 30, 2023, which are included in the Company’s commercial loan totals.

As compared to year-end 2022 balances, total real estate loans increased $363.35 million, total commercial loans increased $188.19 million, agricultural loans increased $4.93 million, and total consumer loans decreased $3.65 million. Loans averaged $6.89 billion for the third quarter of 2023, an increase of $811.42 million over the prior year third quarter average balances. Loans averaged $6.69 billion for the first nine months of 2023, an increase of $928.16 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.

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,
	2023		2022		2022
Commercial:
C&I *	$	1,108,240	$	871,335	$	917,317
Municipal		218,358		214,852		221,090
Total Commercial		1,326,598		1,086,187		1,138,407
Agricultural		81,876		76,937		76,947
Real Estate:
Construction & Development		929,570		938,051		959,426
Farm		341,052		268,139		306,322
Non-Owner Occupied CRE		828,900		717,738		732,089
Owner Occupied CRE		1,002,913		945,665		954,400
Residential		1,788,913		1,536,180		1,575,758
Total Real Estate		4,891,348		4,405,773		4,527,995
Consumer:
Auto		540,382		538,798		550,635
Non-Auto		154,492		147,793		147,884
Total Consumer		694,874		686,591		698,519
Total	$	6,994,696	$	6,255,488	$	6,441,868

* All disclosures for the C&I loan segment include PPP loan balances, net of deferred fees and costs, as disclosed on the face of the consolidated balance sheet.

Loans held-for-sale, consisting of secondary market mortgage loans, totaled $12.23 million, $18.82 million, and $11.97 million at September 30, 2023 and 2022, and December 31, 2022, respectively. At September 30, 2023 and 2022, and December 31, 2022, $321 thousand, $2.92 million and $1.47 million, respectively, are valued using the lower of cost or fair value, and the remaining amounts are valued under the fair value option.

The following tables summarize maturity information of our loan portfolio as of September 30, 2023. The tables also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.

Maturity Distribution and Interest Sensitivity of Loans at September 30, 2023 (dollars in thousands):


Total Loans Held-for-Investment:	Due in One Year or Less			After One but Within Five Years			After Five but Within Fifteen Years			After Fifteen Years			Total
Commercial:
C&I	$	446,190		$	533,352		$	107,231		$	21,467		$	1,108,240
Municipal		6,096			47,518			112,840			51,904			218,358
Total Commercial		452,286			580,870			220,071			73,371			1,326,598
Agricultural		62,480			17,929			1,467			—			81,876
Real Estate:
Construction & Development		423,079			170,947			215,135			120,409			929,570
Farm		14,639			71,753			173,030			81,630			341,052
Non-Owner Occupied CRE		85,743			235,726			377,957			129,474			828,900
Owner Occupied CRE		40,373			257,848			476,992			227,700			1,002,913
Residential		111,796			141,964			762,385			772,768			1,788,913
Total Real Estate		675,630			878,238			2,005,499			1,331,981			4,891,348
Consumer:
Auto		6,601			518,833			14,948			—			540,382
Non-Auto		29,083			98,817			20,765			5,827			154,492
Total Consumer		35,684			617,650			35,713			5,827			694,874
Total	$	1,226,080		$	2,094,687		$	2,262,750		$	1,411,179		$	6,994,696
% of Total Loans		17.53	%		29.94	%		32.35	%		20.18	%		100.00	%


Loans with fixed interest rates:	Due in One Year or Less			After One but Within Five Years			After Five but Within Fifteen Years			After Fifteen Years			Total
Commercial:
C&I	$	93,350		$	318,820		$	12,484		$	—		$	424,654
Municipal		4,904			46,618			81,463			7,276			140,261
Total Commercial		98,254			365,438			93,947			7,276			564,915
Agricultural		14,296			13,067			259			—			27,622
Real Estate:
Construction & Development		159,211			142,806			47,389			10,305			359,711
Farm		5,083			24,301			106,616			1,013			137,013
Non-Owner Occupied CRE		18,110			152,103			71,762			247			242,222
Owner Occupied CRE		22,038			155,129			42,992			180			220,339
Residential		51,839			102,587			478,637			85,396			718,459
Total Real Estate		256,281			576,926			747,396			97,141			1,677,744
Consumer:
Auto		6,574			518,833			14,948			—			540,355
Non-Auto		24,807			96,986			20,451			3,021			145,265
Total Consumer		31,381			615,819			35,399			3,021			685,620
Total	$	400,212		$	1,571,250		$	877,001		$	107,438		$	2,955,901
% of Total Loans		5.72	%		22.46	%		12.54	%		1.54	%		42.26	%


Loans with variable interest rates:	Due in One Year or Less			After One but Within Five Years			After Five but Within Fifteen Years			After Fifteen Years			Total
Commercial:
C&I	$	352,840		$	214,532		$	94,747		$	21,467		$	683,586
Municipal		1,192			900			31,377			44,628			78,097
Total Commercial		354,032			215,432			126,124			66,095			761,683
Agricultural		48,184			4,862			1,208			—			54,254
Real Estate:
Construction & Development		263,868			28,141			167,746			110,104			569,859
Farm		9,556			47,452			66,414			80,617			204,039
Non-Owner Occupied CRE		67,633			83,623			306,195			129,227			586,678
Owner Occupied CRE		18,335			102,719			434,000			227,520			782,574
Residential		59,957			39,377			283,748			687,372			1,070,454
Total Real Estate		419,349			301,312			1,258,103			1,234,840			3,213,604
Consumer:
Auto		27			—			—			—			27
Non-Auto		4,276			1,831			314			2,806			9,227
Total Consumer		4,303			1,831			314			2,806			9,254
Total	$	825,868		$	523,437		$	1,385,749		$	1,303,741		$	4,038,795
% of Total Loans		11.81	%		7.48	%		19.81	%		18.64	%		57.74	%

Of the $4.04 billion of variable interest rate loans shown above, loans totaling $1.6 billion mature or reprice over the next twelve months. Of this amount, approximately $1.4 billion will reprice immediately upon changes in the underlying index rate (primarily U.S. prime rate) with the remaining $188 million being subject to floors above or ceilings below 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 foreclosed assets were $39.70 million at September 30, 2023, as compared to $24.62 million at September 30, 2022 and $24.33 million at December 31, 2022. As a percent of loans held-for-investment and foreclosed assets, these assets were 0.57% at September 30, 2023, 0.39% at September 30, 2022, and 0.38% at December 31, 2022. As a percent of total assets, these assets were 0.31% at September 30, 2023, as compared to 0.19% at September 30, 2022 and December 31, 2022, respectively. We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming at September 30, 2023.

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


	September 30,						December 31,
	2023			2022			2022
Nonaccrual loans	$	38,812		$	24,604		$	24,325
Loans still accruing and past due 90 days or more		289			15			—
Total nonperforming loans (1)		39,101			24,619			24,325
Foreclosed assets		597			—			—
Total nonperforming assets	$	39,698		$	24,619		$	24,325
As a % of loans held-for-investment and foreclosed assets		0.57	%		0.39	%		0.38	%
As a % of total assets		0.31			0.19			0.19

(1) With the adoption of ASU 2022-02, effective January 1, 2023, TDR accounting has been eliminated.

We record interest payments received on nonaccrual loans as reductions of principal. Prior to the loans being placed on nonaccrual, we recognized interest income on these loans of approximately $963 thousand for the year ended December 31, 2022. If interest on these loans had been recognized on a full accrual basis during the year ended December 31, 2022, such income would have been approximately $2.32 million. Such amounts for the 2023 and 2022 interim periods were not significant.

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

The provision for loan losses of $3.82 million for the three-months ended September 30, 2023 is combined with the reversal of provision for unfunded commitments of $1.55 million and reported in the net aggregate of $2.28 million under the provision for credit losses in the consolidated statements of earnings for the three-months ended September 30, 2023. The provision for loan losses of $15.05 million for the nine-months ended September 30, 2023 is combined with the reversal of provision for unfunded commitments of $4.42 million and reported in the net aggregate of $10.63 million under the provision for credit losses in the consolidated statements of earnings for the nine-months ended September 30, 2023.

The provision for loan losses of $1.06 million for the three-months ended September 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 ended September 30, 2022. The provision for loan losses of $8.91 million for the nine-months ended September 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 ended September 30, 2022.

As a percent of average loans, net loan charge-offs were 0.04% for the third quarter of 2023, as compared to net loan recoveries of 0.07% for the third quarter of 2022. As a percent of average loans, net loan charge-offs were 0.02% for the first nine months of 2023, as compared to net loan recoveries of 0.04% for the first nine months of 2022. The allowance for credit losses as a percent of loans held-for-investment was 1.28% as of September 30, 2023, as compared to 1.18% as of September 30, 2022 and December 31, 2022, respectively.

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


	Three-Months Ended September 30,						Nine-Months Ended September 30,
	2023			2022			2023			2022
Allowance for credit losses at period-end	$	89,714		$	74,108		$	89,714		$	74,108
Loans held-for-investment at period-end		6,994,696			6,255,488			6,994,696			6,255,488
Average loans for period		6,894,064			6,082,649			6,694,000			5,765,844
Net charge-offs (recoveries)/average loans (annualized)		0.04	%		(0.07	)%		0.02	%		(0.04	)%
Allowance for loan losses/period-end loans held-for-investment		1.28	%		1.18	%		1.28	%		1.18	%
Allowance for loan losses/nonaccrual loans, past due 90 days still accruing and restructured loans		229.44	%		301.02	%		229.44	%		301.02	%

Interest-Bearing Demand Deposits in Banks. The Company had interest-bearing deposits in banks of $180.01 million at September 30, 2023 compared to $138.48 million at September 30, 2022 and $37.39 million at December 31, 2022, respectively. At September 30, 2023, interest-bearing deposits in banks included $179.18 million maintained at the Federal Reserve Bank of Dallas and $832 thousand on deposit with the FHLB.

Available-for-Sale Securities. At September 30, 2023, securities with a fair value of $4.65 billion were classified as securities available-for-sale. As compared to December 31, 2022, the available-for-sale portfolio at September 30, 2023 reflected (i) an increase of $2.90 million in U.S. Treasury securities, (ii) a decrease of $434.86 million in obligations of states and political subdivisions, and (iv) a decrease of $388.85 million in mortgage-backed securities, and (iv) a decrease of $1.01 million in corporate bonds and other securities. Fluctuations in the available-for-sale securities portfolio balances were primarily driven by sales, calls, and maturities, and changes in unrealized losses during the first nine months of 2023. 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 September 30, 2023 and 2022, and December 31, 2022.

Table 8 - Maturities and Yields of Available-for-Sale Securities Held at September 30, 2023 (dollars in thousands, except percentages):


	Maturing by Contractual Maturity
	One Year or Less					After One Year Through Five Years					After Five Years Through Ten Years					After Ten Years					Total
Available-for-Sale:	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
U.S. Treasury securities	$	202,192		2.00	%	$	283,255		1.86	%	$	—		—	%	$	—		—	%	$	485,447		1.91	%
Obligations of states and political subdivisions		24,805		2.64			91,276		2.60			517,283		2.40			830,390		2.70			1,463,754		2.59
Corporate bonds and other securities		3,792		3.95			70,440		2.83			26,521		1.74			—		—			100,753		2.58
Mortgage-backed securities		97,123		2.65			769,317		2.16			1,491,063		1.93			245,080		2.27			2,602,583		2.06
Total	$	327,912		2.26	%	$	1,214,288		2.16	%	$	2,034,867		2.05	%	$	1,075,470		2.60	%	$	4,652,537		2.22	%

All yields are computed on a tax-equivalent basis assuming a marginal tax rate of 21%. Yields on available-for-sale securities are based on amortized cost. Maturities of mortgage-backed securities are based on contractual maturities and could differ due to prepayments of underlying mortgages. Maturities of other securities are reported at the earlier of maturity date or call date.

As of September 30, 2023, the investment portfolio had an overall tax equivalent yield of 2.22%, a weighted average life of 7.94 years and modified duration of 6.42 years.

Deposits. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were $10.72 billion as of September 30, 2023, as compared to $11.14 billion as of September 30, 2022 and $11.01 billion as of December 31, 2022.

Table 9 provides a breakdown of average deposits and rates paid over the three and nine month periods ended September 30, 2023 and 2022, respectively.

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


	Three-Months Ended September 30,
	2023					2022
	Average Balance		Average Rate			Average Balance		Average Rate
Noninterest-bearing deposits	$	3,509,809	—%			$	4,178,675	—%
Interest-bearing deposits:
Interest-bearing checking		3,197,961		1.56			3,641,147		0.61
Savings and money market accounts		3,106,443		1.95			2,935,020		0.38
Time deposits under $250,000		352,294		5.71			299,211		0.31
Time deposits of $250,000 or more		602,554		2.16			129,100		0.40
Total interest-bearing deposits		7,259,252		1.98	%		7,004,478		0.50	%
Total average deposits	$	10,769,061				$	11,183,153
Total cost of deposits				1.33	%				0.31	%


	Nine-Months Ended September 30,
	2023					2022
	Average Balance		Average Rate			Average Balance		Average Rate
Noninterest-bearing deposits	$	3,690,190	—%			$	4,024,731	—%
Interest-bearing deposits:
Interest-bearing checking		3,319,967		1.23			3,651,259		0.31
Savings and money market accounts		3,002,987		1.64			2,890,585		0.18
Time deposits under $250,000		295,717		4.84			303,663		0.24
Time deposits of $250,000 or more		507,800		1.97			138,742		0.32
Total interest-bearing deposits		7,126,471		1.61	%		6,984,249		0.25	%
Total average deposits	$	10,816,661				$	11,008,980
Total cost of deposits				1.06	%				0.16	%

The estimated amount of uninsured and uncollateralized deposits including related accrued and unpaid interest is approximately $5.16 billion as of September 30, 2023.

Borrowings. Included in borrowings were federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings of $751.54 million, $774.58 million and $642.51 million at September 30, 2023 and 2022, and December 31, 2022, respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the short-term borrowings. The average balance of federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings were $621.19 million and $768.10 million in the third quarters of 2023 and 2022, respectively. The weighted average interest rates paid on these borrowings were 3.22% and 0.40% for the third quarters of 2023 and 2022, respectively. The average balance of federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings were $653.78 million and $759.91 million for the nine-months ended September 30, 2023 and 2022, respectively. The weighted average interest rates paid on these borrowings were 2.85% and 0.21% for the nine-months ended September 30, 2023 and 2022, respectively.

Interest Rate Risk

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

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

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


	Percentage change in net interest income:
Change in interest rates:	September 30,		December 31,
(in basis points)	2023	2022	2022
+400	3.03%	6.87%	5.13%
+300	2.23%	5.24%	3.86%
+200	1.82%	3.90%	3.13%
+100	1.14%	2.30%	2.09%
-100	(1.76)%	(2.80)%	(2.66)%
-200	(3.45)%	(5.62)%	(5.47)%
-300	(5.76)%	(8.51)%	(8.54)%
-400	(6.31)%	(9.82)%	(10.31)%

The results for the net interest income simulations as of September 30, 2023 and 2022, and December 31, 2022 resulted in an asset sensitive position. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each year-end will remain constant over the relevant twelve-month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics on specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. We believe these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities reprice in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any 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 $4.65 billion at September 30, 2023. During the nine months ended September 30, 2023, the corresponding unrealized loss before taxes on the portfolio of $677.99 million at December 31, 2022, changed to an unrealized loss before taxes of $810.65 million at September 30, 2023, which is recorded net of taxes in accumulated other comprehensive earnings (loss) in shareholders' equity. The unrealized gains or losses, net of taxes, on the portfolio are excluded from the calculation of all regulatory capital ratios. The changes in the fair value were driven by changes in interest rates based on expected actions by the Federal Reserve Board and other market conditions. The overall valuation of the portfolio is most correlated to the 5-year U.S. Treasury rates based on the composition and duration of the portfolio. At September 30, 2023, the 5-year U.S. Treasury rate was 4.60% compared to 4.01% at December 31, 2022, representing a 59 basis point increase during the first nine months of 2023. As of September 30, 2023, an increase of 100 basis points in the 5-year U.S. Treasury rate would result in an increase to unrealized losses by approximately $258 million before taxes, while a 100 basis point decrease in the same rate would result in a decrease to unrealized losses by approximately $246 million before taxes. We believe that we have the ability to hold these securities based on our overall liquidity and intent to hold the portfolio.

Capital and Liquidity

Capital. We evaluate capital resources by our ability to maintain adequate regulatory capital ratios to do business in the banking industry. Issues related to capital resources arise primarily when we are growing at an accelerated rate but not retaining a significant amount of our profits or when we experience significant asset quality deterioration.

Total shareholders’ equity was $1.24 billion, or 9.71% of total assets at September 30, 2023, as compared to $1.13 billion, or 8.64% of total assets at September 30, 2022, and $1.27 billion, or 9.76% of total assets at December 31, 2022. Included in shareholders' equity at September 30, 2023, and 2022, and December 31, 2022 were $639.93 million, $632.42 million and $535.23 million, respectively, in unrealized losses on investment securities available-for-sale, net of related income taxes, although such amount is excluded from and does not impact regulatory capital. For the third quarter of 2023, total shareholders’ equity averaged $1.36 billion, or 10.58% of average assets, as compared to $1.36 billion, or 10.17% of average assets, during the same period in 2022. For the first nine months of 2023, total shareholders’ equity averaged $1.34 billion, or 10.44% of average assets, as compared to $1.48 billion, or 11.12% of average assets, during the same period in 2022.

Banking regulators measure capital adequacy by means of the risk-based capital ratios and the leverage ratio under the Basel III rules and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and off-balance-sheet commitments and contingencies according to prescribed risk categories. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders’ equity less intangible assets by quarter-to-date average assets less intangible assets.

Beginning in January 2015, under the Basel III rules, the implementation of the capital conservation buffer was effective for the Company starting at the 0.625% level and increasing 0.625% each year thereafter, until it reached 2.50% on January 1, 2019. As of January 1, 2019, the capital conservation buffer Basel III was fully phased in. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers.

As of September 30, 2023 and 2022, and December 31, 2022, we had a total risk-based capital ratio of 19.49%, 19.07% and 19.29%, a Tier 1 capital to risk-weighted assets ratio of 18.35%, 18.03% and 18.22%; a common equity Tier 1 to risk-weighted assets ratio of 18.35%, 18.03% and 18.22% and a Tier 1 leverage ratio of 12.00%, 10.79% and 10.96%, respectively. The regulatory capital ratios as of September 30, 2023 and 2022, and December 31, 2022 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:


	Actual					Minimum Capital Required-Basel III					Required to be Considered Well- Capitalized
As of September 30, 2023:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital to Risk-Weighted Assets:
Consolidated	$	1,676,476		19.49	%	$	903,272		10.50	%	$	860,259		10.00	%
First Financial Bank, N.A	$	1,507,129		17.56	%	$	901,009		10.50	%	$	858,104		10.00	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated	$	1,578,858		18.35	%	$	731,220		8.50	%	$	516,155		6.00	%
First Financial Bank, N.A	$	1,409,511		16.43	%	$	729,388		8.50	%	$	686,483		8.00	%
Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated	$	1,578,858		18.35	%	$	602,181		7.00	%	$	—	N/A
First Financial Bank, N.A	$	1,409,511		16.43	%	$	600,673		7.00	%	$	557,768		6.50	%
Leverage Ratio:
Consolidated	$	1,578,858		12.00	%	$	344,103		4.00	%	$	—	N/A
First Financial Bank, N.A	$	1,409,511		10.76	%	$	343,242		4.00	%	$	429,052		5.00	%


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


	Actual					Minimum Capital Required Basel III					Required to be Considered Well- Capitalized
As of December 31, 2022:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital to Risk-Weighted Assets:
Consolidated	$	1,586,888		19.29	%	$	863,622		10.50	%	$	822,497		10.00	%
First Financial Bank, N.A	$	1,442,902		17.58	%	$	861,860		10.50	%	$	820,819		10.00	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated	$	1,498,731		18.22	%	$	699,122		8.50	%	$	493,498		6.00	%
First Financial Bank, N.A	$	1,354,745		16.50	%	$	697,696		8.50	%	$	656,655		8.00	%
Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated	$	1,498,731		18.22	%	$	575,748		7.00	%		—	N/A
First Financial Bank, N.A	$	1,354,745		16.50	%	$	574,573		7.00	%	$	533,532		6.50	%
Leverage Ratio:
Consolidated	$	1,498,731		10.96	%	$	546,983		4.00	%		—	N/A
First Financial Bank, N.A	$	1,354,745		9.95	%	$	544,886		4.00	%	$	681,107		5.00	%

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

Liquidity. Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon;

therefore, the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. The potential need for liquidity arising from these types of financial instruments is represented by the contractual notional amount of the instrument. Asset liquidity is provided by cash and assets which are readily marketable, or which will mature in the near future. Liquid assets include cash, federal funds sold, and short-term investments in time deposits in banks. Liquidity is also provided by access to funding sources, which include core depositors and correspondent banks that maintain accounts with and sell federal funds to our subsidiary bank. Other sources of funds include our ability to borrow from short-term sources, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and other borrowings (see below) and an unfunded $25.00 million revolving line of credit established with Frost Bank, a nonaffiliated bank, which matures on June 30, 2025 (see next paragraph). Our subsidiary bank also has federal funds purchased lines of credit with two non-affiliated banks totaling $130.00 million. At September 30, 2023, there were no amounts drawn on these lines of credit. Our subsidiary bank also has (i) an available line of credit with the FHLB totaling $2.54 billion at September 30, 2023, secured by portions of our loan portfolio and certain investment securities, and (ii) access to the Federal Reserve Bank of Dallas lending program, including the Bank Term Funding Program, secured by portions of certain investment securities. At September 30, 2023, there was $45 million used on the FHLB line advance for undisbursed commitments (letters of credit) used to secure public funds and $100 million in overnight borrowings at the Federal Reserve Bank discount window.

The Company renewed its loan agreement, effective June 30, 2023, with Frost Bank. Under the loan agreement, as renewed and amended, we are permitted to draw up to $25.00 million on a revolving line of credit. Prior to June 30, 2025, interest is paid quarterly at The Wall Street Journal Prime Rate and the line of credit matures June 30, 2025. If a balance exists at June 30, 2025, the principal balance converts to a term facility payable quarterly over five years and interest is paid quarterly at The Wall Street Journal Prime Rate. The line of credit is unsecured. Among other provisions in the credit agreement, we must satisfy certain financial covenants during the term of the loan agreement, including, without limitation, covenants that require us to maintain certain capital, loan loss reserve, non-performing asset and cash flow coverage ratios. In addition, the credit agreement contains certain operational covenants, which among others, restricts the payment of dividends above 55% of consolidated net income, limits the incurrence of debt (excluding any amounts acquired in an acquisition) and prohibits the disposal of assets except in the ordinary course of business. Since 1995, we have historically declared dividends as a percentage of our consolidated net income in a range of 36% (low) in 2021 and 2020 to 53% (high) in 2003 and 2006. The Company was in compliance with the financial and operational covenants at September 30, 2023. There was no outstanding balance under the line of credit as of September 30, 2023.

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 $133.90 million at September 30, 2023, investment securities which totaled $2.12 million at September 30, 2023 and mature over 6 to 7 years, available dividends from our subsidiaries which totaled $375.18 million at September 30, 2023, utilization of available lines of credit, and future debt or equity offerings are expected to be the source of funding for these potential acquisitions or expansions.

Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed potentially problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As of September 30, 2023, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. We are monitoring closely the impact to the financial system due to the recent failures of several banks. Given the diversified core deposit base and relatively low loan to deposit ratios maintained at our subsidiary bank, we consider our current liquidity position to be adequate to meet our short-term and long-term liquidity needs. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.

Off-Balance Sheet (“OBS”)/Reserve for Unfunded Commitments. We are a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of our customers. These financial instruments include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheets. At September 30, 2023, the Company’s reserve for unfunded commitments totaled $7.90 million which is recorded in other liabilities.

Our exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. We generally use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments.

Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, as we deem necessary upon extension of credit, is based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment and income-producing commercial properties.

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

Table 10 – Commitments as of September 30, 2023 (dollars in thousands):


	Total Notional Amounts Committed
Unfunded lines of credit	$	1,179,616
Unfunded commitments to extend credit		748,354
Standby letters of credit		55,632
Total commercial commitments	$	1,983,602

We believe we have no other OBS arrangements or transactions with unconsolidated, special purpose entities that would expose us to liability that is not reflected on the face of the financial statements. The above table does not include balances related to the Company’s IRLC and forward mortgage-backed security trades. Total commercial commitments were $1.98 billion at September 30, 2023, compared to $2.00 billion at September 30, 2022, and $2.06 billion at December 31, 2022.

Parent Company Funding. Our ability to fund various operating expenses, dividends, and cash acquisitions is generally dependent on our own earnings (without giving effect to our subsidiaries), cash reserves and funds derived from our subsidiaries. These funds historically have been produced by intercompany dividends and management fees that are limited to reimbursement of actual expenses. We anticipate that our recurring cash sources will continue to include dividends and management fees from our subsidiaries. At September 30, 2023, $375.18 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 $97.50 million and $67.50 million for the nine-months ended September 30, 2023 and 2022, respectively.

Dividends. Our long-term dividend policy is to pay cash dividends to our shareholders of approximately 35% to 40% of annual net earnings while maintaining adequate capital to support growth. We are also restricted by a loan covenant within our line of credit agreement with Frost Bank to dividend no greater than 55% of net income, as defined in such loan agreement. The cash dividend payout ratios have amounted to 49.48% and 39.78% of net earnings for the first nine months of 2023 and 2022, respectively. Given our current capital position, projected earnings and asset growth rates, we do not anticipate any significant change in our current dividend policy. In July 2023, the Board of Directors declared an $0.18 per share cash dividend for the third quarter of 2023, a 5.88% increase over the dividend declared in the third quarter of 2022. The record date for this dividend was September 14, 2023, payable on October 2, 2023.

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

To pay dividends, we and our subsidiary bank must maintain adequate capital above regulatory guidelines and comply with the general requirements applicable to a Texas corporation. Generally, a Texas corporation may not pay a dividend to its shareholders if (i) after giving effect to the dividend, the corporation would be insolvent, or (ii) the amount of the dividend would exceed the surplus of the corporation. In addition, if the applicable regulatory authority believes that a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the authority may require, after notice and hearing, that such bank cease and desist from the unsafe practice. The Federal Reserve, the FDIC and the OCC have each indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve, the OCC and the FDIC have issued policy statements that recommend that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Management considers interest rate risk to be a significant market risk for the Company. See “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk” for disclosure regarding this market risk.

Item 4. Controls and Procedures.

As of September 30, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934). Our management, which includes our principal executive officer and our principal financial officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Our principal executive officer and principal financial officer have concluded, based on our evaluation of our disclosure controls and procedures, that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2023.

Subsequent to our evaluation, there were no significant changes in internal controls over financial reporting or other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we and our subsidiaries are parties to lawsuits arising in the ordinary course of our banking business. However, there are no material pending legal proceedings to which we, our subsidiaries, or any of their properties, are currently subject.

Item 1A. Risk Factors.

There has been no material change in the risk factors previously disclosed under Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and Part II, Item 1A of the Company's Quarterly Report on Form 10-Q for the quarter-ended March 31, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Repurchase of Common Stock

The following table provides information with respect to purchases we made or were made on our behalf or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the three months ended September 30, 2023. Dollar amounts in thousands.


Period	(a) Total number of shares purchased		(b) Average price paid per share		(c) Total number of shares purchased as part of publicly announced plans or programs		(d) Maximum number of shares that may yet be purchased under the plans or programs
July 1, 2023 through July 31, 2023		-	$	-		-		5,000,000
August 1, 2023 through August 31, 2023		-	$	-		-		5,000,000
September 1, 2023 through September 30, 2023		101,337	$	26.99		101,337		4,898,663
Total		101,337	$	26.99		101,337		4,898,663

Item 3. Defaults Upon Senior Securities.

Not Applicable

Item 4. Mine Safety Disclosures.

Not Applicable

Item 5. Other Information.

Not Applicable

Item 6. Exhibits.



3.1	—	Amended and Restated Certificate of Formation (incorporated by reference from Exhibit 3.1 of the Registrant’s Form 10-Q filed July 30, 2019).

3.2	—	Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrant’s Form 8-K filed April 3, 2020).

3.3	—	Amendment to the Amended and Restated Bylaws of the Registrant, dated July 27, 2021 (incorporated by reference from Exhibit 3.3 to the Registrant's Form 10-Q filed August 2, 2021).

4.1	—	Specimen certificate of First Financial Common Stock (incorporated by reference from Exhibit 3 of the Registrant’s Amendment No. 1 to Form 8-A filed on Form 8-A/A No. 1 on January 7, 1994).

4.2	—	Description of Registrant’s Securities (incorporated by reference from Exhibit 4.2 of the Registrant’s Form 10-K filed February 22, 2023).

10.1	—	2012 Incentive Stock Option Plan (incorporated by reference from Appendix A of the Registrant’s Definitive Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 filed March 1, 2012).++

10.2	—	2021 Omnibus Stock and Incentive Plan as Amended (incorporated by reference from Exhibit 10 of the Registrant’s Form 8-K filed April 28, 2021).++

10.3	—	Promissory Note, dated June 30, 2023, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant's Form 8-K filed July 7, 2023).

10.4	—	Amended and Restated Loan Agreement, dated June 30, 2023, by and between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.2 of the Registrant's Form 8-K filed July 7, 2023).

10.5	—	2015 Restricted Stock Plan as Amended and Restated April 28, 2020 (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed May 1, 2020).++

10.6	—	Form of Executive Recognition Agreement (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed August 10, 2022).++

10.7	—	First Financial Bankshares, Inc. Supplemental Executive Retirement Plan, as amended and restated effective July 26, 2022 (incorporated by reference from Exhibit 10.1 of the Registrant's Form 8-K filed July 29, 2022.)++

10.8	—	Confidential Separation and Release Agreement , dated January 9, 2023, by and between the Company and James R. Gordon (incorporated by reference from Exhibit 10.1 of the Registrant's Form 8-K filed January 11, 2023).++

31.1	—	Rule 13a-14(a) / 15(d)-14(a) Certification of Chief Executive Officer of First Financial Bankshares, Inc.*

31.2	—	Rule 13a-14(a) / 15(d)-14(a) Certification of Chief Financial Officer of First Financial Bankshares, Inc.*

32.1	—	Section 1350 Certification of Chief Executive Officer of First Financial Bankshares, Inc.+

32.2	—	Section 1350 Certification of Chief Financial Officer of First Financial Bankshares, Inc.+

101.INS	—	Inline XBRL Instance Document.- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*

101.SCH	—	Inline XBRL Taxonomy Extension Schema Document.*

101.CAL	—	Inline XBRL Taxonomy Extension Calculation Linkbase Document.*

101.DEF	—	Inline XBRL Taxonomy Extension Definition Linkbase Document.*

101.LAB	—	Inline XBRL Taxonomy Extension Label Linkbase Document.*

104	—	Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Filed herewith

+ Furnished herewith. This Exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

++ Management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	FIRST FINANCIAL BANKSHARES, INC.
Date: November 6, 2023	By:	/s/ F. Scott Dueser
		F. Scott Dueser
		Chairman of the Board, President and Chief Executive Officer

Date: November 6, 2023	By:	/s/ Michelle S. Hickox
		Michelle S. Hickox
		Executive Vice President and
		Chief Financial Officer, Secretary and Treasurer

First Financial Bankshares - 10-Q quarterly report FY2023 Q3

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