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~~June 30, ~~2022~~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 ☐☒ ~~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~~August 2, ~~2022~~2023
Common Stock, $0.01 par value per share		~~142,641,666~~142,741,196

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION


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

2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	42		Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

3.		Quantitative and Qualitative Disclosures About Market Risk	57		Quantitative and Qualitative Disclosures About Market Risk	56

4.		Controls and Procedures	58		Controls and Procedures	57

PART II - OTHER INFORMATION	PART II - OTHER INFORMATION			PART II - OTHER INFORMATION

1.		Legal Proceedings	59		Legal Proceedings	58

1A.		Risk Factors	59		Risk Factors	58

2.		Unregistered Sales of Equity Securities and Use of Proceeds	59		Unregistered Sales of Equity Securities and Use of Proceeds	58

3.		Defaults Upon Senior Securities	59		Defaults Upon Senior Securities	58

4.		Mine Safety Disclosures	59		Mine Safety Disclosures	58

5.		Other Information	59		Other Information	58

6.		Exhibits	60		Exhibits	59

		Signatures	61		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~~June 30, ~~2022~~2023 and ~~2021~~2022 (unaudited), and December 31, ~~2021,~~2022, and the consolidated statements of earnings, comprehensive earnings (loss) and shareholders’ equity for the three and ~~nine-months~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 (unaudited), and the consolidated statements of cash flows for the ~~nine-months~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 (unaudited) and notes to consolidated financial statements (unaudited), follow on pages 4 through ~~41.~~40.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)


	September 30,						December 31,			June 30,						December 31,
	2022			2021			2021			2023			2022			2022
	(Unaudited)									(Unaudited)
ASSETS
CASH AND DUE FROM BANKS	$	227,298		$	201,901		$	205,053		$	255,018		$	242,665		$	293,286
INTEREST-BEARING DEMAND DEPOSITS IN BANKS		138,484			359,241			323,535			23,839			222,899			37,392
Total cash and cash equivalents		365,782			561,142			528,588			278,857			465,564			330,678
SECURITIES AVAILABLE-FOR-SALE, at fair value (amortized cost of these securities was $6,546,471, $5,981,374 and $6,447,510 as of September 30, 2022 and 2021, and December 31, 2021, respectively)		5,745,443			6,119,984			6,573,179
SECURITIES AVAILABLE-FOR-SALE, at fair value (amortized cost of these securities was $5,687,352, $6,722,336 and $6,152,348 as of June 30, 2023 and 2022, and December 31, 2022, respectively)											5,066,262			6,215,036			5,474,359
LOANS:
Held-for-investment, excluding PPP loans		6,255,286			5,147,160			5,336,179			6,777,429			5,876,281			6,441,699
PPP loans		202			139,334			52,793			141			2,301			169
Total loans held-for-investment		6,255,488			5,286,494			5,388,972			6,777,570			5,878,582			6,441,868
Less—allowance for credit losses		(74,108	)		(63,370	)		(63,465	)		(86,541	)		(71,932	)		(75,834	)
Net loans held-for-investment		6,181,380			5,223,124			5,325,507			6,691,029			5,806,650			6,366,034
Held-for-sale ($15,892, $46,081 and $34,122 at fair value at September 30, 2022 and 2021, and December 31, 2021, respectively)		18,815			47,721			37,810
Held-for-sale ($18,089, $23,848 and $10,497 at fair value at June 30, 2023 and 2022, and December 31, 2022, respectively)											19,220			26,445			11,965
BANK PREMISES AND EQUIPMENT, net		152,646			147,516			149,764			152,876			149,280			152,973
INTANGIBLE ASSETS, net		315,833			317,170			316,779			315,078			316,139			315,534
OTHER ASSETS		330,445			126,601			170,834			302,115			281,098			322,523
Total assets	$	13,110,344		$	12,543,258		$	13,102,461		$	12,825,437		$	13,260,212		$	12,974,066
LIABILITIES AND SHAREHOLDERS’ EQUITY
NONINTEREST-BEARING DEPOSITS	$	4,200,792		$	3,574,405		$	3,780,230		$	3,578,483		$	4,104,034		$	4,061,788
INTEREST-BEARING DEPOSITS		6,941,326			6,318,712			6,786,258			7,229,077			7,018,949			6,943,719
Total deposits		11,142,118			9,893,117			10,566,488			10,807,560			11,122,983			11,005,507
DIVIDENDS PAYABLE											25,714			—			24,278
BORROWINGS		774,581			648,679			671,152			587,656			768,364			642,507
TRADE DATE PAYABLE		—			174,236			—
OTHER LIABILITIES		61,030			93,491			105,597			37,274			39,847			36,037
Total liabilities		11,977,729			10,809,523			11,343,237			11,458,204			11,931,194			11,708,329
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
COMMON STOCK — ($0.01 par value, authorized 200,000,000 shares; 142,628,163, 142,467,687 and 142,532,116 shares issued at September 30, 2022 and 2021, and December 31, 2021, respectively)		1,426			1,425			1,425
COMMON STOCK — ($0.01 par value, authorized 200,000,000 shares; 142,741,196, 142,586,601 and 142,657,871 shares issued at June 30, 2023 and 2022, and December 31, 2022, respectively)											1,427			1,426			1,427
CAPITAL SURPLUS		676,067			675,139			676,871			680,676			675,653			677,593
RETAINED EARNINGS		1,087,543			947,724			981,675			1,175,410			1,052,453			1,121,945
TREASURY STOCK (shares at cost: 933,152, 937,803 and 936,897 at September 30, 2022 and 2021, and December 31, 2021, respectively)		(10,907	)		(9,876	)		(10,090	)
TREASURY STOCK (shares at cost: 927,608, 937,924 and 929,210 at June 30, 2023 and 2022, and December 31, 2022, respectively)											(11,466	)		(10,656	)		(11,035	)
DEFERRED COMPENSATION		10,907			9,876			10,090			11,466			10,656			11,035
ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSS), net		(632,421	)		109,447			99,253			(490,280	)		(400,514	)		(535,228	)
Total shareholders’ equity		1,132,615			1,733,735			1,759,224			1,367,233		$	1,329,018			1,265,737
Total liabilities and shareholders’ equity	$	13,110,344		$	12,543,258		$	13,102,461		$	12,825,437		$	13,260,212		$	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,					Three-Months Ended June 30,					Six-Months Ended June 30,
	2022		2021			2022		2021			2023			2022		2023		2022
INTEREST INCOME:
Interest and fees on loans	$	77,523	$	70,588		$	210,180	$	203,902		$	98,067		$	68,158	$	187,076	$	132,656
Interest on investment securities:
Taxable		20,799		12,122			57,772		33,834			20,033			19,151		40,815		36,974
Exempt from federal income tax		12,974		14,249			41,686		42,058			9,321			14,120		19,388		28,712
Interest on federal funds sold and interest-bearing demand deposits in banks		1,432		239			2,080		616			1,584			552		3,234		648
Total interest income		112,728		97,198			311,718		280,410			129,005			101,981		250,513		198,990
INTEREST EXPENSE:
Interest on deposits		8,788		1,340			13,123		4,595			27,629			2,966		49,441		4,336
Interest on borrowings		784		76			1,217		260			5,510			233		8,920		433
Total interest expense		9,572		1,416			14,340		4,855			33,139			3,199		58,361		4,769
Net interest income		103,156		95,782			297,378		275,555			95,866			98,782		192,152		194,221
PROVISION FOR CREDIT LOSSES		3,221		—			13,353		(3,203	)		5,573			5,350		8,354		10,132
Net interest income after provision for credit losses		99,935		95,782			284,025		278,758			90,293			93,432		183,798		184,089
NONINTEREST INCOME:
Trust fees		10,314		9,484			29,873		26,475			9,883			9,742		19,728		19,559
Service charges on deposit accounts		6,399		5,673			18,143		15,394			6,310			6,038		12,346		11,744
Debit card fees		5,587		9,198			24,381		26,552			6,720			9,868		11,656		18,795
Credit card fees		651		595			1,953		1,771			711			700		1,320		1,301
Gain on sale and fees on mortgage loans		4,070		8,788			16,131		26,973			3,534			5,728		6,508		12,061
Net gain on sale of available-for-sale securities		334		1			2,013		814			46			1,648		58		1,679
Net gain on sale of foreclosed assets		349		27			1,451		83
Net gain (loss) on sale of foreclosed assets												(1	)		18		33		1,102
Net gain (loss) on sale of other assets		526		(6	)		522		213			—			6		930		(4	)
Interest on loan recoveries		664		1,746			2,596		2,832			475			1,649		821		1,932
Other		2,049		2,220			6,078		6,166			2,269			1,920		4,554		4,029
Total noninterest income		30,943		37,726			103,141		107,273			29,947			37,317		57,954		72,198
NONINTEREST EXPENSE:
Salaries, commissions and employee benefits		33,892		37,090			101,177		107,067			31,766			33,147		63,227		67,285
Net occupancy expense		3,440		3,288			9,957		9,676			3,423			3,292		6,853		6,517
Equipment expense		2,396		2,450			6,999		6,791			2,198			2,346		4,325		4,603
FDIC insurance premiums		917		815			2,690		2,282			1,417			904		3,071		1,773
Debit card expense		3,013		2,929			9,177		8,736			3,221			3,200		6,420		6,164
Professional and service fees		2,219		2,406			6,635		6,936			2,397			2,191		4,762		4,415
Printing, stationery and supplies		600		432			1,641		1,246			740			501		1,450		1,041
Operational and other losses		869		1,087			2,247		1,908			856			782		1,787		1,378
Software amortization and expense		2,564		2,855			7,543		8,303			2,519			2,522		4,830		4,979
Amortization of intangible assets		306		398			946		1,222			228			320		456		640
Other		9,226		9,189			27,988		25,869			8,848			9,128		17,688		18,763
Total noninterest expense		59,442		62,939			177,000		180,036			57,613			58,333		114,869		117,558
EARNINGS BEFORE INCOME TAXES		71,436		70,569			210,166		205,995			62,627			72,416		126,883		138,729
INCOME TAX EXPENSE		12,095		11,641			34,359		33,770			11,754			11,922		23,442		22,263
NET EARNINGS	$	59,341	$	58,928		$	175,807	$	172,225		$	50,873		$	60,494	$	103,441	$	116,466
NET EARNINGS PER SHARE, BASIC	$	0.42	$	0.41		$	1.23	$	1.21		$	0.36		$	0.42	$	0.72	$	0.82
NET EARNINGS PER SHARE, DILUTED	$	0.41	$	0.41		$	1.23	$	1.20		$	0.36		$	0.42	$	0.72	$	0.81
DIVIDENDS PER SHARE	$	0.17	$	0.15		$	0.49	$	0.43		$	0.18		$	0.17	$	0.35	$	0.32

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,						Three-Months Ended June 30,						Six-Months Ended June 30,
	2022			2021			2022			2021			2023			2022			2023			2022
NET EARNINGS	$	59,341		$	58,928		$	175,807		$	172,225		$	50,873		$	60,494		$	103,441		$	116,466
OTHER ITEMS OF COMPREHENSIVE EARNINGS (LOSS):
Change in unrealized gain (loss) on investment securities available-for- sale, before income taxes		(293,219	)		(34,224	)		(924,157	)		(76,335	)		(40,500	)		(240,038	)		56,954			(630,937	)
Reclassification adjustment for realized gains (loss) on investment securities included in net earnings, before income taxes		(334	)		(1	)		(2,013	)		(814	)
Reclassification adjustment for realized gains on investment securities included in net earnings, before income taxes														(46	)		(1,648	)		(58	)		(1,679	)
Total other items of comprehensive earnings (loss)		(293,553	)		(34,225	)		(926,170	)		(77,149	)		(40,546	)		(241,686	)		56,896			(632,616	)
Income tax benefit (expense) related to:
Change in unrealized gain (loss) on investment securities available-for- sale		61,576			7,186			194,073			16,029			8,506			50,409			(11,960	)		132,497
Reclassification adjustment for realized gains (loss) on investment securities included in net earnings		70			—			423			172
Reclassification adjustment for realized gains on investment securities included in net earnings														9			346			12			353
Total income tax benefit (expense)		61,646			7,186			194,496			16,201			8,515			50,754			(11,948	)		132,849
COMPREHENSIVE EARNINGS (LOSS)	$	(172,566	)	$	31,889		$	(555,867	)	$	111,277		$	18,842		$	(130,438	)	$	148,389		$	(383,301	)

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											Treasury Stock								Accumulated Other			Total			Common Stock						Capital			Retained			Treasury Stock						Deferred		Accumulated Other Comprehensive Earnings			Total Shareholders’
	Shares			Amount		Capital Surplus			Retained Earnings			Shares			Amounts			Deferred Compensation		Comprehensive Earnings (Loss)			Shareholders’ Equity			Shares			Amount			Surplus			Earnings			Shares			Amounts			Compensation		(Loss)			Equity
Balances at June 30, 2021 (unaudited)		142,359,774		$	1,424	$	672,288		$	910,171			(938,629	)	$	(9,641	)	$	9,641	$	136,486		$	1,720,369
Net earnings (unaudited)		—			—		—			58,928			—			—			—		—			58,928
Stock option exercises (unaudited)		107,796			1		2,057			—			—			—			—		—			2,058
Restricted stock grant/forfeiture, net (unaudited)		117			—		498			—			—			—			—		—			498
Cash dividends declared, $0.15 per share (unaudited)		—			—		—			(21,375	)		—			—			—		—			(21,375	)
Change in unrealized gain (loss) in investment securities available-for-sale, net of related income taxes (unaudited)		—			—		—			—			—			—			—		(27,039	)		(27,039	)
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)		—			—		—			—			826			(235	)		235		—			—
Stock option expense (unaudited)		—			—		296			—			—			—			—		—			296
Balances at September 30, 2021 (unaudited)		142,467,687			1,425		675,139			947,724			(937,803	)		(9,876	)		9,876		109,447			1,733,735
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
Balances at March 31, 2022 (unaudited)																											142,704,495		$	1,427		$	680,665		$	1,016,239			(936,847	)	$	(10,404	)	$	10,404	$	(209,582	)	$	1,488,749
Net earnings (unaudited)		—			—		—			59,341			—			—			—		—			59,341			—			—			—			60,494			—			—			—		—			60,494
Stock option exercises (unaudited)		87,739			—		1,628			—			—			—			—		—			1,628			61,834			1			1,424			—			—			—			—		—			1,425
Restricted stock grant/forfeiture, net (unaudited)		6,395			—		471			—			—			—			—		—			471			12,259			—			651			—			—			—			—		—			651
Cash dividends declared, $0.17 per share (unaudited)		—			—		—			(24,251	)		—			—			—		—			(24,251	)		—			—			—			(24,280	)		—			—			—		—			(24,280	)
Change in unrealized gain (loss) in investment securities available-for-sale, net of related income taxes (unaudited)		—			—		—			—			—			—			—		(231,907	)		(231,907	)		—			—			—			—			—			—			—		(190,932	)		(190,932	)
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)		—			—		—			—			4,772			(251	)		251		—			—			—			—			—			—			(1,077	)		(252	)		252		—			—
Stock option expense (unaudited)		—			—		359			—			—			—			—		—			359			—			—			316			—			—			—			—		—			316
Shares repurchased under stock repurchase authorization (unaudited)		(52,572	)		—		(2,044	)		—			—			—			—		—			(2,044	)		(191,987	)		(2	)		(7,403	)		—			—			—			—		—			(7,405	)
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, 2022 (unaudited)																											142,586,601		$	1,426		$	675,653		$	1,052,453			(937,924	)	$	(10,656	)	$	10,656	$	(400,514	)	$	1,329,018
Balances at March 31, 2023 (unaudited)																											142,703,531		$	1,427		$	679,429		$	1,150,246			(927,789	)	$	(11,271	)	$	11,271	$	(458,249	)	$	1,372,853
Net earnings (unaudited)																											—			—			—			50,873			—			—			—		—			50,873
Stock option exercises (unaudited)																											12,475			—			215			—			—			—			—		—			215
Restricted stock grant/forfeiture, net (unaudited)																											25,190			—			587			—			—			—			—		—			587
Cash dividends declared, $0.18 per share (unaudited)																											—			—			—			(25,709	)		—			—			—		—			(25,709	)
Change in unrealized gain (loss) in investment securities available-for-sale, net of related income taxes (unaudited)																											—			—			—						—			—			—		(32,031	)		(32,031	)
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)																											—			—			—			—			181			(195	)		195		—			—
Stock option expense (unaudited)																											—			—			445			—			—			—			—		—			445
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

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												Treasury Stock								Accumulated Other			Total			Common Stock						Capital			Retained			Treasury Stock								Deferred		Accumulated Other Comprehensive Earnings			Total Shareholders’
	Shares			Amount			Capital Surplus			Retained Earnings			Shares			Amounts			Deferred Compensation		Comprehensive Earnings (Loss)			Shareholders’ Equity			Shares			Amount			Surplus			Earnings			Shares				Amounts				Compensation		(Loss)			Equity
Balances at December 31, 2020		142,161,834		$	1,422		$	669,644		$	836,729			(938,591	)	$	(9,126	)	$	9,126	$	170,395		$	1,678,190
Net earnings (unaudited)		—			—			—			172,225			—			—			—		—			172,225
Stock option exercises (unaudited)		273,167			3			4,673			—			—			—			—		—			4,676
Restricted stock grant/forfeiture, net (unaudited)		32,686			—			(165	)		—			—			—			—		—			(165	)
Cash dividends declared, $0.43 per share (unaudited)		—			—			—			(61,230	)		—			—			—		—			(61,230	)
Change in unrealized gain (loss) in investment securities available-for-sale, net of related income taxes (unaudited)		—			—			—			—			—			—			—		(60,948	)		(60,948	)
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)		—			—			—			—			788			(750	)		750		—			—
Stock option expense (unaudited)		—			—			987			—			—			—			—		—			987
Balances at September 30, 2021 (unaudited)		142,467,687			1,425			675,139			947,724			(937,803	)		(9,876	)		9,876		109,447			1,733,735
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			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			—			—			—			116,466			—				—				—		—			116,466
Stock option exercises (unaudited)		322,324			3			5,971			—			—			—			—		—			5,974			234,585			3			4,343			—			—				—				—		—			4,346
Restricted stock grant/forfeiture, net (unaudited)		18,282			—			1,681			—			—			—			—		—			1,681			11,887			—			1,210			—			—				—				—		—			1,210
Cash dividends declared, $0.49 per share (unaudited)		—			—			—			(69,939	)		—			—			—		—			(69,939	)
Cash dividends declared, $0.32 per share (unaudited)																												—			—			—			(45,688	)		—				—				—		—			(45,688	)
Change in unrealized gain (loss) in investment securities available-for-sale, net of related income taxes (unaudited)		—			—			—			—			—			—			—		(731,674	)		(731,674	)		—			—			—			—			—				—				—		(499,767	)		(499,767	)
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)		—			—			—			—			3,745			(817	)		817		—			—			—			—			—			—			(1,027	)			(566	)			566		—			—
Stock option expense (unaudited)		—			—			991			—			—			—			—		—			991			—			—			632			—			—		—		—		—		—		—			632
Shares repurchased under stock repurchase authorization (unaudited)		(244,559	)		(2	)		(9,447	)		—			—			—			—		—			(9,449	)		(191,987	)		(2	)		(7,403	)		—			—				—				—		—			(7,405	)
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, 2022 (unaudited)																												142,586,601		$	1,426		$	675,653		$	1,052,453			(937,924	)		$	(10,656	)		$	10,656	$	(400,514	)	$	1,329,018
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)																												—			—			—			103,441			—				—				—		—			103,441
Stock option exercises (unaudited)																												60,095			—			1,128			—			—				—				—		—			1,128
Restricted stock grant/forfeiture, net (unaudited)																												23,230			—			1,066			—			—				—				—		—			1,066
Cash dividends declared, $0.35 per share (unaudited)																												—			—			—			(49,976	)		—				—				—		—			(49,976	)
Change in unrealized gain (loss) in investment securities available-for-sale, net of related income taxes (unaudited)																												—			—			—			—			—				—				—		44,948			44,948
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)																												—			—			—			—			1,602				(431	)			431		—			—
Stock option expense (unaudited)																												—			—			889			—			—				—				—		—			889
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

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,						Six-Months Ended June 30,
	2022			2021			2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	175,807		$	172,225		$	103,441		$	116,466
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		9,589			9,746			6,268			6,436
Provision for credit losses		13,353			(3,203	)		8,354			10,132
Securities premium amortization, net		55,355			48,333			27,151			38,727
Discount accretion on purchased loans		(1,119	)		(1,771	)		—			(746	)
Gain on sale of securities and other assets, net		(3,986	)		(1,110	)		(1,021	)		(2,777	)
Deferred federal income tax benefit								1,555			1,421
Change in loans held-for-sale		17,967			34,562			(7,167	)		10,980
Change in other assets		13,508			6,308			9,397			(1,077	)
Change in other liabilities		(26,068	)		780			5,001			(21,216	)
Total adjustments		78,599			93,645			49,538			41,880
Net cash provided by operating activities		254,406			265,870			152,979			158,346
CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities:
Sales		205,444			10,631			207,287			188,363
Maturities		2,773,665			8,270,218			233,935			2,615,256
Purchases		(3,131,413	)		(9,972,985	)		(3,322	)		(3,115,482	)
Net increase in loans held-for-investment		(862,636	)		(110,404	)		(336,122	)		(487,862	)
Purchases of bank premises and equipment		(11,970	)		(14,282	)		(8,966	)		(5,245	)
Proceeds from sale of bank premises and equipment and other assets		1,186			785			2,598			6
Net cash used in investing activities		(1,025,724	)		(1,816,037	)
Net cash provided by (used in) investing activities								95,410			(804,964	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits		420,562			591,708
Net increase (decrease) in noninterest-bearing deposits								(483,305	)		323,804
Net increase in interest-bearing deposits		155,068			625,592			285,358			232,691
Net increase in borrowings		103,429			218,586
Net change in borrowings								(54,851	)		97,212
Common stock transactions:
Proceeds from stock option exercises		5,974			4,673			1,128			4,346
Dividends paid		(67,072	)		(58,334	)		(48,540	)		(67,054	)
Repurchases of stock		(9,449	)		—			—			(7,405	)
Net cash provided by financing activities		608,512			1,382,225
Net cash provided by (used in) financing activities								(300,210	)		583,594
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(162,806	)		(167,942	)		(51,821	)		(63,024	)
CASH AND CASH EQUIVALENTS, beginning of period		528,588			729,084			330,678			528,588
CASH AND CASH EQUIVALENTS, end of period	$	365,782		$	561,142		$	278,857		$	465,564
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS:
Interest paid	$	14,067		$	4,938		$	51,327		$	4,567
Federal income taxes paid		33,050			31,073			25,032			20,981
Transfer of loans to other real estate		—			296			190			—
Investment securities purchased but not settled		—			174,236
Restricted stock grant (forfeiture)		1,681			(165	)
Restricted stock grant								1,066			1,210

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 7879 locations located in Texas as of ~~September~~June 30, ~~2022.~~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., First Technology Services, Inc. ~~and~~, FB Investment Paris Fund, ~~LLC.~~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 ~~in Preparation of Financial Statements~~

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. ~~Subsequent to July 27, 2021 and through September~~Through June 30, ~~2022,~~2023, 244,559 shares were repurchased and retired (all during the months of June and July 2022) at an average price of $38.61. The Company did not repurchase any shares during the first half of 2023.

Other Recently Issued and Effective Authoritative Accounting Guidance

ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12, simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intra-period tax aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 was effective for the Company for annual reporting periods after December 15, 2020, and interim periods within. Adoption of ASU 2019-12 did not have a significant impact on the Company’s financial statements and related disclosures.

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 ~~can~~ be applied through December 31, ~~2022.~~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 ~~can~~ be applied through December 31, ~~2022.~~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 will become 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 isdid not ~~expected~~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~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~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~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~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~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~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 ~~troubled-debt restructurings~~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~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, the Company’s reserve for unfunded commitments totaled $~~10,879,000~~9,449,000, $~~6,751,000~~8,718,000 and $~~6,436,000~~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.~~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 ~~for~~during the ~~three~~six-months ended June 30, 2023 or ~~nine-months ended September 30,~~ 2022, ~~or 2021,~~ 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 ~~gains or~~ losses on the Company’s available-for-sale securities, net of applicable income taxes, ~~totaling~~totaled $~~632,421,000~~490,280,000 ~~of losses at September 30, 2022 and~~, $~~109,447,000~~400,514,000 and $~~99,253,000~~535,228,000 ~~of gains~~ at ~~September~~June 30, ~~2021~~2023, and 2022, and December 31, ~~2021,~~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~~June 30, 2023, and 2022, and December 31, 2022, deferred tax assets totaled $~~168,398,000~~133,016,000, $109,450,000 and $145,511,000, respectively, and were included in other assets on the consolidated balance sheets. ~~As of September 30, 2021, and December 31, 2021, deferred tax liabilities totaled $27,524,000~~ ~~and $24,817,000, respectively, and were included in other liabilities 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 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/or~~and performance stock units which vest over a 3-year period based on Company performance metrics ~~over a three-year period related~~relative to a defined ~~group of peers.~~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 ~~346,000~~778,000 and ~~272,000~~485,000 anti-dilutive shares for the three and ~~nine-months~~six-months ended ~~September~~June 30, ~~2022,~~2023, respectively, that were excluded from the computation of EPS. There were ~~127,000~~207,000 and ~~46,000~~209,000 anti-dilutive shares for the three and ~~nine-months~~six-months ended ~~September~~June 30, ~~2021, respectively.~~2022, respectively, that were excluded from the computation of EPS. The following table reconciles the computation of basic EPS to diluted EPS:


	Net		Weighted					Net		Weighted
	Earnings		Average		Per Share			Earnings		Average		Per Share
	(in thousands)		Shares		Amount			(in thousands)		Shares		Amount
For the three-months ended September 30, 2022:
For the three-months ended June 30, 2023:
Net earnings per share, basic	$	59,341		142,524,500	$	0.42		$	50,873		142,700,905	$	0.36
Effect of stock options and stock grants		—		601,588		(0.01	)		—		386,650		—
Net earnings per share, diluted	$	59,341		143,126,088	$	0.41		$	50,873		143,087,555	$	0.36


	Net		Weighted				Net		Weighted
	Earnings		Average		Per Share		Earnings		Average		Per Share
	(in thousands)		Shares		Amount		(in thousands)		Shares		Amount
For the nine-months ended September 30, 2022:
For the three-months ended June 30, 2022:
Net earnings per share, basic	$	175,807		142,588,373	$	1.23	$	60,494		142,682,251	$	0.42
Effect of stock options and stock grants		—		658,395		—		—		556,418		—
Net earnings per share, diluted	$	175,807		143,246,768	$	1.23	$	60,494		143,238,669	$	0.42


	Net		Weighted				Net		Weighted
	Earnings		Average		Per Share		Earnings		Average		Per Share
	(in thousands)		Shares		Amount		(in thousands)		Shares		Amount
For the three-months ended September 30, 2021:
For the six-months ended June 30, 2023:
Net earnings per share, basic	$	58,928		142,334,449	$	0.41	$	103,441		142,683,322	$	0.72
Effect of stock options and stock grants		—		884,471		—		—		344,181		—
Net earnings per share, diluted	$	58,928		143,218,920	$	0.41	$	103,441		143,027,503	$	0.72


	Net		Weighted					Net		Weighted
	Earnings		Average		Per Share			Earnings		Average		Per Share
	(in thousands)		Shares		Amount			(in thousands)		Shares		Amount
For the nine-months ended September 30, 2021:
For the six-months ended June 30, 2022:
Net earnings per share, basic	$	172,225		142,242,783	$	1.21		$	116,466		142,620,838	$	0.82
Effect of stock options and stock grants		—		941,009		(0.01	)		—		652,553		(0.01	)
Net earnings per share, diluted	$	172,225		143,183,792	$	1.20		$	116,466		143,273,391	$	0.81

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, 2022									June 30, 2023
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated		Amortized		Unrealized		Unrealized			Estimated
	Cost Basis		Holding Gains		Holding Losses			Fair Value		Cost Basis		Holding Gains		Holding Losses			Fair Value
Securities available-for-sale:
U.S. Treasury securities	$	504,457	$	2	$	(27,283	)	$	477,176	$	508,124	$	—	$	(24,348	)	$	483,776
Obligations of states and political subdivisions		2,368,605		514		(285,307	)		2,083,812		1,859,193		405		(166,634	)		1,692,964
Residential mortgage-backed securities		3,153,864		14		(456,997	)		2,696,881		2,875,699		2		(402,760	)		2,472,941
Commercial mortgage-backed securities		406,530		1		(19,185	)		387,346		331,829		—		(17,442	)		314,387
Corporate bonds and other		113,015		—		(12,787	)		100,228		112,507		—		(10,313	)		102,194
Total securities available-for-sale	$	6,546,471	$	531	$	(801,559	)	$	5,745,443	$	5,687,352	$	407	$	(621,497	)	$	5,066,262


	June 30, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost Basis		Holding Gains		Holding Losses			Fair Value
Securities available-for-sale:
U.S. Treasury securities	$	501,098	$	12	$	(14,752	)	$	486,358
Obligations of states and political subdivisions		2,419,232		7,737		(182,365	)		2,244,604
Residential mortgage-backed securities		3,265,654		399		(301,149	)		2,964,904
Commercial mortgage-backed securities		423,168		476		(8,819	)		414,825
Corporate bonds and other		113,184		88		(8,927	)		104,345
Total securities available-for-sale	$	6,722,336	$	8,712	$	(516,012	)	$	6,215,036

September 30, 2021

Gross

Gross

Amortized

Unrealized

Unrealized

Estimated

Cost Basis

Holding Gains

Holding Losses

Fair Value

Securities available-for-sale:

Obligations of states and political subdivisions

$
2,568,224

$
103,646

$
(6,503
)

$
2,665,367

Residential mortgage-backed securities

2,999,369

35,950

(7,170
)

3,028,149

Commercial mortgage-backed securities

375,614

13,402

—

389,016

Corporate bonds and other

38,167

70

(785
)

37,452

Total securities available-for-sale

$
5,981,374

$
153,068

$
(14,458
)

$
6,119,984


	December 31, 2021									December 31, 2022
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated		Amortized		Unrealized		Unrealized			Estimated
	Cost Basis		Holding Gains		Holding Losses			Fair Value		Cost Basis		Holding Gains		Holding Losses			Fair Value
Securities available-for-sale:
U.S. Treasury securities	$	126,716	$	125	$	—		$	126,841	$	508,275	$	11	$	(25,737	)	$	482,549
Obligations of states and political subdivisions		2,638,369		116,319		(1,217	)		2,753,471		2,104,193		1,217		(206,799	)		1,898,611
Residential mortgage-backed securities		3,256,746		23,990		(21,287	)		3,259,449		3,034,120		8		(417,562	)		2,616,566
Commercial mortgage-backed securities		356,207		8,914		(1	)		365,120		392,914		1		(18,046	)		374,869
Corporate bonds and other		69,472		32		(1,206	)		68,298		112,846		-		(11,082	)		101,764
Total securities available-for-sale	$	6,447,510	$	149,380	$	(23,711	)	$	6,573,179	$	6,152,348	$	1,237	$	(679,226	)	$	5,474,359

The Company did not hold any securities classified as held-to-maturity at ~~September~~June 30, ~~2022, September~~2023, June 30, ~~2021,~~2022, or December 31, ~~2021.~~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~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~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~~June 30, ~~2022,~~2023, by contractual and expected maturity, are shown below (dollars in thousands):


	Amortized		Estimated		Amortized		Estimated
	Cost Basis		Fair Value		Cost Basis		Fair Value
Due within one year	$	239,974	$	238,511	$	326,804	$	320,734
Due after one year through five years		2,213,010		2,056,408		1,487,053		1,379,040
Due after five years through ten years		2,394,729		2,051,847		2,817,340		2,473,140
Due after ten years		1,698,758		1,398,677		1,056,155		893,348
Total	$	6,546,471	$	5,745,443	$	5,687,352	$	5,066,262

The following tables disclose as of ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, the Company’s investment securities that have been in a continuous unrealized-loss position for less than 12 months ~~months~~ and for 12 or more months (dollars in thousands):


	Less than 12 Months				12 Months or Longer				Total				Less than 12 Months				12 Months or Longer				Total
September 30, 2022	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
June 30, 2023													Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Treasury securities	$	476,696	$	27,283	$	—	$	—	$	476,696	$	27,283	$	47,498	$	1,614	$	436,278	$	22,734	$	483,776	$	24,348
Obligations of states and political subdivisions		1,828,105		254,212		139,732		31,095		1,967,837		285,307		137,728		1,838		1,457,431		164,796		1,595,159		166,634
Residential mortgage-backed securities		1,507,121		231,915		1,187,815		225,082		2,694,936		456,997		68,439		3,609		2,403,837		399,151		2,472,276		402,760
Commercial mortgage-backed securities		386,479		19,185		—		—		386,479		19,185		99,347		4,771		215,040		12,671		314,387		17,442
Corporate bonds and other		59,782		4,544		40,446		8,243		100,228		12,787		38,042		1,282		64,152		9,031		102,194		10,313
Total	$	4,258,183	$	537,139	$	1,367,993	$	264,420	$	5,626,176	$	801,559	$	391,054	$	13,114	$	4,576,738	$	608,383	$	4,967,792	$	621,497


	Less than 12 Months				12 Months or Longer				Total				Less than 12 Months				12 Months or Longer				Total
September 30, 2021	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
June 30, 2022													Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Treasury securities													$	466,438	$	14,752	$	—	$	—	$	466,438	$	14,752
Obligations of states and political subdivisions	$	570,916	$	6,036	$	18,711	$	467	$	589,627	$	6,503		1,623,146		178,446		24,038		3,919		1,647,184		182,365
Residential mortgage-backed securities		1,208,129		7,166		2,051		4		1,210,180		7,170		2,631,511		266,352		277,404		34,797		2,908,915		301,149
Commercial mortgage-backed securities														341,997		8,819		—		—		341,997		8,819
Corporate bonds and other		32,985		785		—		—		32,985		785		73,358		4,287		26,397		4,640		99,755		8,927
Total	$	1,812,030	$	13,987	$	20,762	$	471	$	1,832,792	$	14,458	$	5,136,450	$	472,656	$	327,839	$	43,356	$	5,464,289	$	516,012


	Less than 12 Months				12 Months or Longer				Total				Less than 12 Months				12 Months or Longer				Total
December 31, 2021	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
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	$	163,698	$	1,096	$	18,943	$	122	$	182,641	$	1,218		770,469		55,943		946,571		150,856		1,717,040		206,799
Residential mortgage-backed securities		2,263,010		19,742		54,392		1,544		2,317,402		21,286		470,970		37,065		2,143,869		380,497		2,614,839		417,562
Commercial mortgage-backed securities		820		1		—		—		820		1		319,303		11,677		54,862		6,369		374,165		18,046
Corporate bonds and other		47,436		635		16,432		571		63,868		1,206		41,920		1,698		59,844		9,384		101,764		11,082
Total	$	2,474,964	$	21,474	$	89,767	$	2,237	$	2,564,731	$	23,711	$	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 ~~1,115~~934 at ~~September~~June 30, ~~2022.~~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~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~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~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021.~~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~~June 30, ~~2022,~~2023, ~~72.44~~69.19% of our available-for-sale securities that are obligations of states and political subdivisions were issued within the State of Texas, of which ~~55.16~~52.59% are guaranteed by the Texas Permanent School Fund.

~~At September~~Securities, carried at approximately $3,447,659,000 on June 30, ~~2022, $3,447,317,000~~ ~~of the Company’s securities~~2023, were pledged ~~at fair value,~~ 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~~June 30, ~~2022, there were $17,081,000~~ of sales of investment securities that were classified as available-for-sale. During the three-months ended September 30, 2021, there were calls of investment securities that were classified as available-for-sale. Gross realized security gains from sales2023 and ~~calls during the third quarters of~~ 2022, ~~and 2021 totaled $334,000~~ ~~and $1,000, respectively. There were no gross realized security losses from sales or calls during the third quarter of 2022 or 2021, respectively.~~

~~During the nine-months ended September 30, 2022 and 2021,~~ sales of investment securities that were classified as available-for-sale ~~totaled~~were $~~205,444,000~~61,339,000 and $~~10,631,000~~188,363,000, respectively. Gross realized security gains from sales and calls during the ~~nine-months ended September 30,~~second quarter of 2023 and 2022 ~~and 2021~~ totaled $~~4,357,000~~596,000 and $~~814,000~~3,990,000, respectively. Gross ~~realized security losses from sales and calls during the nine-months ended September 30, 2022 totaled $2,344,000~~ ~~with~~ no ~~gross~~ realized security losses from sales or calls during the ~~nine-months~~second quarter of 2023 or 2022 totaled $550,000 and $2,342,000, respectively.

During the six-months ended ~~September~~June 30, ~~2021.~~2023 and 2022, sales of investment securities that were classified as available-for-sale were $207,287,000 and $188,363,000, respectively. Gross realized security gains from sales and calls during the six-months ended June 30, 2023 and 2022 totaled $1,648,000 and $4,023,000, respectively. Gross realized security losses from sales or calls during the six-months ended June 30, 2023 and 2022 totaled $1,590,000 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~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~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,			June 30,						December 31,
	2022			2021			2021			2023			2022			2022
Commercial:
C&I*	$	871,335		$	819,597		$	837,075		$	1,021,863		$	839,928		$	917,317
Municipal		214,852			165,847			177,905			215,977			200,577			221,090
Total Commercial		1,086,187			985,444			1,014,980			1,237,840			1,040,505			1,138,407
Agricultural		76,937			98,947			98,089			82,032			90,420			76,947
Real Estate:
Construction & Development		938,051			656,530			749,793			915,221			928,644			959,426
Farm		268,139			203,064			217,220			335,644			250,028			306,322
Non-Owner Occupied CRE		717,738			674,958			623,434			811,347			636,432			732,089
Owner Occupied CRE		945,665			824,231			821,653			1,011,511			909,899			954,400
Residential		1,536,180			1,328,798			1,334,419			1,698,679			1,412,125			1,575,758
Total Real Estate		4,405,773			3,687,581			3,746,519			4,772,402			4,137,128			4,527,995
Consumer:
Auto		538,798			394,072			405,416			534,603			468,147			550,635
Non-Auto		147,793			120,450			123,968			150,693			142,382			147,884
Total Consumer		686,591			514,522			529,384			685,296			610,529			698,519
Total Loans		6,255,488			5,286,494			5,388,972			6,777,570			5,878,582			6,441,868
Less: Allowance for credit losses		(74,108	)		(63,370	)		(63,465	)		(86,541	)		(71,932	)		(75,834	)
Loans, net	$	6,181,380		$	5,223,124		$	5,325,507		$	6,691,029		$	5,806,650		$	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~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, are net of unearned income, including net deferred loan fees.

Our subsidiary bank has established a line of credit with the Federal Home Loan Bank of Dallas (“FHLB”) to provide liquidity and meet pledging requirements for those customers eligible to have securities pledged to secure certain uninsured deposits. At ~~September~~June 30, ~~2022, this available line of credit was~~2023, $~~2,258,125,000. At September 30, 2022, $3,901,376,000~~4,717,880,000 in loans held by our bank subsidiary were subject to blanket liens as security for ~~this~~a line of ~~credit.~~credit with the Federal Home Loan Bank of Dallas ("FHLB"). At ~~September~~June 30, ~~2022,~~2023, this available line of credit was $2,516,497,000. At June 30, 2023, there was no balance outstanding under this line of credit.

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


	September 30,				December 31,		June 30,				December 31,
	2022		2021		2021		2023		2022		2022
Nonaccrual loans	$	24,585	$	25,210	$	31,652	$	28,672	$	25,495	$	24,325
Loans still accruing and past due 90 days or more		15		23		8		552		22		—
Troubled debt restructured loans still accruing*		19		22		21
Total	$	24,619	$	25,255	$	31,681
Total nonperforming loans (1)							$	29,224	$	25,517	$	24,325

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

* Troubled debt restructured loans of $18~~1,951,000, $4,732,000~~

~~and $6,721,000, for which interest collection is doubtful are included in nonaccrual loans as of September 30, 2022 and 2021, and December 31, 2021, respectively.~~

The Company had $~~24,619,000~~29,249,000, $~~25,283,000~~25,517,000 and $~~34,158,000~~24,325,000 in nonaccrual, past due 90 days or more and still accruing, ~~restructured loans,~~ and foreclosed assets at ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, respectively. Nonaccrual loans at ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, consisted of the following (dollars in thousands):


	September 30,				December 31,		June 30,				December 31,
	2022		2021		2021		2023		2022		2022
Commercial:
C&I	$	5,966	$	3,430	$	5,370	$	4,818	$	6,695	$	5,057
Municipal		—		—		—		—		—		—
Total Commercial		5,966		3,430		5,370		4,818		6,695		5,057
Agricultural		338		949		4,920		133		482		324
Real Estate:
Construction & Development		1,696		1,455		708		2,835		990		1,567
Farm		91		965		1,173		701		97		85
Non-Owner Occupied CRE		2,406		2,776		2,671		5,329		2,477		2,321
Owner Occupied CRE		6,703		6,551		7,897		7,308		6,823		7,092
Residential		6,762		8,399		8,360		6,769		7,512		7,419
Total Real Estate		17,658		20,146		20,809		22,942		17,899		18,484
Consumer:
Auto		596		589		514		649		389		429
Non-Auto		27		96		39		130		30		31
Total Consumer		623		685		553		779		419		460
Total	$	24,585	$	25,210	$	31,652	$	28,672	$	25,495	$	24,325

No significant additional funds are committed to be advanced in connection with nonaccrual loans as of ~~September~~June 30, ~~2022.~~2023.

Summary information on the allowance for credit losses for the three and ~~nine-months~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, are outlined by portfolio segment in the following tables (dollars in thousands):


Three-Months Ended September 30, 2022	C&I			Municipal			Agricultural			Construction & Development		Farm
Three-Months Ended June 30, 2023														C&I			Municipal			Agricultural			Construction & Development		Farm
Beginning balance	$	18,589		$	1,352		$	1,162		$	21,085	$	1,006	$	16,083		$	1,067		$	1,214		$	28,627	$	1,937
Provision for loan losses		(2,378	)		(33	)		(187	)		4,614		149		988			(880	)		(153	)		339		867
Recoveries		266			—			18			—		—		113			—			21			—		—
Charge-offs		(38	)		—			—			—		—		(654	)		—			—			—		—
Ending balance	$	16,439		$	1,319		$	993		$	25,699	$	1,155	$	16,530		$	187		$	1,082		$	28,966	$	2,804


Three-Months Ended June 30, 2023 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential			Auto			Non-Auto			Total
Beginning balance	$	9,051	$	11,948	$	9,702		$	857		$	332		$	80,818
Provision for loan losses		4,398		610		167			99			87			6,522
Recoveries		22		14		12			101			36			319
Charge-offs		—		—		(114	)		(228	)		(122	)		(1,118	)
Ending balance	$	13,471	$	12,572	$	9,767		$	829		$	333		$	86,541


Three-Months Ended June 30, 2022	C&I			Municipal			Agricultural			Construction & Development		Farm
Beginning balance	$	15,737		$	1,418		$	1,911		$	17,887	$	873
Provision for loan losses		2,521			(66	)		(832	)		3,198		133
Recoveries		402			—			92			—		—
Charge-offs		(71	)		—			(9	)		—		—
Ending balance	$	18,589		$	1,352		$	1,162		$	21,085	$	1,006


Three-Months Ended June 30, 2022 (continued)	Non-Owner Occupied CRE			Owner Occupied CRE			Residential			Auto			Non-Auto			Total
Beginning balance	$	8,499		$	11,536		$	7,829		$	869		$	354		$	66,913
Provision for loan losses		(576	)		(809	)		466			64			4			4,103
Recoveries		487			13			12			102			83			1,191
Charge-offs		—			—			(3	)		(123	)		(69	)		(275	)
Ending balance	$	8,410		$	10,740		$	8,304		$	912		$	372		$	71,932

1819

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, 2022	C&I			Municipal		Agricultural			Construction & Development			Farm
Six-Months Ended June 30, 2023														C&I			Municipal			Agricultural			Construction & Development		Farm
Beginning balance	$	12,280		$	348	$	1,597		$	17,627		$	663	$	16,129		$	1,026		$	1,041		$	26,443	$	1,957
Provision for loan losses		3,598			971		(730	)		8,172			492		924			(839	)		(181	)		2,423		847
Recoveries		824			—		135			—			—		165			—			222			100		—
Charge-offs		(263	)		—		(9	)		(100	)		—		(688	)		—			—			—		—
Ending balance	$	16,439		$	1,319	$	993		$	25,699		$	1,155	$	16,530		$	187		$	1,082		$	28,966	$	2,804


Nine-Months Ended September 30, 2022 (continued)	Non-Owner Occupied CRE			Owner Occupied CRE			Residential			Auto			Non-Auto			Total
Six-Months Ended June 30, 2023 (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		$	9,075	$	9,928	$	9,075		$	845		$	315		$	75,834
Provision for loan losses		(3,352	)		(1,323	)		860			116			106			8,910			4,349		2,623		791			169			123			11,229
Recoveries		825			669			110			215			182			2,960			47		21		15			233			81			884
Charge-offs		—			(88	)		(149	)		(315	)		(303	)		(1,227	)		—		—		(114	)		(418	)		(186	)		(1,406	)
Ending balance	$	8,195		$	10,086		$	8,954		$	912		$	356		$	74,108		$	13,471	$	12,572	$	9,767		$	829		$	333		$	86,541


Three-Months Ended September 30, 2021	C&I			Municipal			Agricultural			Construction & Development		Farm
Six-Months Ended June 30, 2022															C&I			Municipal		Agricultural			Construction & Development			Farm
Beginning balance	$	10,186		$	588		$	1,312		$	15,632	$	607		$	12,280		$	348	$	1,597		$	17,627		$	663
Provision for loan losses		(31	)		(273	)		1,022			1,230		(21	)		5,976			1,004		(543	)		3,558			343
Recoveries		1,140			—			5			—		—			558			—		117			—			—
Charge-offs		(902	)		—			(50	)		—		—			(225	)		—		(9	)		(100	)		—
Ending balance	$	10,393		$	315		$	2,289		$	16,862	$	586		$	18,589		$	1,352	$	1,162		$	21,085		$	1,006


Three-Months Ended September 30, 2021 (continued)	Non-Owner Occupied CRE			Owner Occupied CRE			Residential			Auto			Non- Auto			Total
Six-Months Ended June 30, 2022 (continued)																			Non-Owner Occupied CRE			Owner Occupied CRE			Residential			Auto			Non- Auto			Total
Beginning balance	$	10,432		$	10,399		$	11,234		$	1,266		$	482		$	62,138		$	10,722		$	10,828		$	8,133		$	896		$	371		$	63,465
Provision for loan losses		(344	)		(94	)		(1,184	)		(259	)		(46	)		—			(2,854	)		(20	)		303			44			39			7,850
Recoveries		556			806			7			129			64			2,707			542			20			17			168			129			1,551
Charge-offs		—			(222	)		—			(176	)		(125	)		(1,475	)		—			(88	)		(149	)		(196	)		(167	)		(934	)
Ending balance	$	10,644		$	10,889		$	10,057		$	960		$	375		$	63,370		$	8,410		$	10,740		$	8,304		$	912		$	372		$	71,932

Nine-Months Ended September 30, 2021

C&I

Municipal

Agricultural

Construction
&
Development

Farm

Beginning balance

$
13,609

$
1,552

$
1,255

$
13,512

$
1,876

Provision for loan losses

(3,597
)

(1,237
)

1,076

3,348

(1,300
)
Recoveries

1,671

—

29

2

10

Charge-offs

(1,290
)

—

(71
)

—

—

Ending balance

$
10,393

$
315

$
2,289

$
16,862

$
586

Nine-Months Ended September 30, 2021 (continued)

Non-Owner
Occupied
CRE

Owner
Occupied
CRE

Residential

Auto

Non-
Auto

Total

Beginning balance

$
8,391

$
12,347

$
12,601

$
1,020

$
371

$
66,534

Provision for loan losses

1,609

(2,044
)

(2,542
)

139

80

(4,468
)
Recoveries

650

816

90

305

172

3,745

Charge-offs

(6
)

(230
)

(92
)

(504
)

(248
)

(2,441
)
Ending balance

$
10,644

$
10,889

$
10,057

$
960

$
375

$
63,370

Additionally, the Company records a reserve for unfunded commitments in other liabilities which totaled $~~10,879,000~~9,449,000, $~~6,751,000~~8,718,000 and $~~6,436,000~~12,323,000 at ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, respectively. The provision for loan losses of $~~1,060,000~~6,522,000 for the three-months ended

~~September~~ June 30, ~~2022~~2023 is combined with the reversal of the provision for unfunded commitments of $~~2,161,000~~949,000 and reported in the net aggregate of $~~3,221,000~~5,573,000 under the provision for credit losses in the consolidated statement of earnings for the three-months ended ~~September~~June 30, ~~2022.~~2023. The provision for loan losses of $~~8,910,000~~11,229,000 for the ~~nine-months~~six-months ended ~~September~~June 30, ~~2022 above~~2023 is combined with the reversal of the provision for unfunded commitments of $~~4,443,000~~2,875,000 and reported in the net aggregate of $~~13,353,000~~8,354,000 under the provision for credit losses in the consolidated statement of earnings for the ~~nine-months~~six-months ended ~~September~~June 30, ~~2022.~~2023.

~~There was no provision for loan losses or unfunded commitments for the three-months ended September 30, 2021.~~

The $~~4,468,000~~4,103,000 ~~reversal of the~~ provision for loan losses for the ~~nine-months~~three-months ended ~~September~~June 30, ~~2021~~2022 above is combined with the provision for unfunded commitments of $~~1,265,000~~1,247,000 and reported in the ~~net~~ aggregate ~~reversal~~ of $~~3,203,000~~5,350,000 under the provision for credit losses for the ~~nine-months~~three-months ended ~~September~~June 30, ~~2021.~~2022. The $7,850,000 provision for loan losses for the six-months ended June 30, 2022 above is combined with the provision for unfunded commitments of $2,282,000 and reported in the aggregate of $10,132,000 under the provision for credit losses for the six-months ended June 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~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, are summarized in the following tables by loan segment (dollars in thousands):


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
June 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	$	334	$	5,632	$	20,844	$	26,810	$	4,094	$	4,345	$	8,439	$	610	$	4,208	$	23,282	$	28,100	$	2,780	$	5,671	$	8,451
Municipal		—		—		71		71		—		—		—		—		—		1,507		1,507		—		—		—
Total Commercial		334		5,632		20,915		26,881		4,094		4,345		8,439		610		4,208		24,789		29,607		2,780		5,671		8,451
Agricultural		116		222		412		750		103		247		350		—		133		1,855		1,988		37		517		554
Real Estate:
Construction & Development		919		777		5,461		7,157		207		384		591		2,672		163		21,787		24,622		15		2,194		2,209
Farm		—		91		1,616		1,707		2		39		41		578		123		7,038		7,739		18		1,117		1,135
Non-Owner Occupied CRE		2,230		176		32,959		35,365		12		2,317		2,329		2,062		3,267		27,112		32,441		421		2,502		2,923
Owner Occupied CRE		5,700		1,003		30,136		36,839		103		1,958		2,061		5,643		1,665		31,870		39,178		299		1,769		2,068
Residential		4,129		2,633		26,076		32,838		293		1,347		1,640		4,283		2,486		29,923		36,692		261		1,611		1,872
Total Real Estate		12,978		4,680		96,248		113,906		617		6,045		6,662		15,238		7,704		117,730		140,672		1,014		9,193		10,207
Consumer:
Auto		—		596		1,096		1,692		1		2		3		29		620		1,571		2,220		1		2		3
Non-Auto		—		27		461		488		—		1		1		—		130		522		652		—		1		1
Total Consumer		—		623		1,557		2,180		1		3		4		29		750		2,093		2,872		1		3		4
Total	$	13,428	$	11,157	$	119,132	$	143,717	$	4,815	$	10,640	$	15,455	$	15,877	$	12,795	$	146,467	$	175,139	$	3,832	$	15,384	$	19,216


September 30, 2021	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
June 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	$	1,311	$	2,119	$	18,713	$	22,143	$	610	$	3,296	$	3,906	$	1,224	$	5,471	$	25,674	$	32,369	$	2,794	$	6,797	$	9,591
Municipal		—		—		121		121		—		—		—		—		—		84		84		—		—		—
Total Commercial		1,311		2,119		18,834		22,264		610		3,296		3,906		1,224		5,471		25,758		32,453		2,794		6,797		9,591
Agricultural		328		621		6,944		7,893		184		1,965		2,149		178		304		270		752		146		214		360
Real Estate:
Construction & Development		1,225		230		4,872		6,327		6		158		164		441		549		9,622		10,612		34		352		386
Farm		878		87		2,140		3,105		—		6		6		—		97		1,565		1,662		3		43		46
Non-Owner Occupied CRE		2,629		147		33,382		36,158		16		3,959		3,975		2,391		86		32,225		34,702		7		2,836		2,843
Owner Occupied CRE		5,886		665		42,781		49,332		99		3,382		3,481		5,727		1,096		30,616		37,439		58		2,527		2,585
Residential		3,634		4,765		30,090		38,489		641		2,022		2,663		4,307		3,205		25,642		33,154		355		1,297		1,652
Total Real Estate		14,252		5,894		113,265		133,411		762		9,527		10,289		12,866		5,033		99,670		117,569		457		7,055		7,512
Consumer:
Auto		—		589		1,181		1,770		2		2		4		—		389		1,002		1,391		1		2		3
Non-Auto		—		96		337		433		—		2		2		—		30		473		503		—		1		1
Total Consumer		—		685		1,518		2,203		2		4		6		—		419		1,475		1,894		1		3		4
Total	$	15,891	$	9,319	$	140,561	$	165,771	$	1,558	$	14,792	$	16,350	$	14,268	$	11,227	$	127,173	$	152,668	$	3,398	$	14,069	$	17,467

2021


December 31, 2021	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
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	$	749	$	4,621	$	19,021	$	24,391	$	2,533	$	4,094	$	6,627	$	—	$	5,057	$	24,325	$	29,382	$	3,513	$	4,885	$	8,398
Municipal		—		—		109		109		—		—		—		—		—		58		58		—		—		—
Total Commercial		749		4,621		19,130		24,500		2,533		4,094		6,627		—		5,057		24,383		29,440		3,513		4,885		8,398
Agricultural		3,026		1,894		478		5,398		1,086		359		1,445		116		209		354		679		122		276		398
Real Estate:
Construction & Development		102		606		4,765		5,473		90		135		225		577		990		4,873		6,440		193		112		305
Farm		997		176		1,969		3,142		—		2		2		—		85		1,578		1,663		2		34		36
Non-Owner Occupied CRE		2,543		128		31,797		34,468		15		4,044		4,059		2,062		259		36,037		38,358		16		2,341		2,357
Owner Occupied CRE		6,548		1,349		40,607		48,504		152		3,329		3,481		4,363		2,728		29,115		36,206		91		1,509		1,600
Residential		5,990		2,370		29,210		37,570		307		1,719		2,026		5,132		2,287		28,564		35,983		229		1,215		1,444
Total Real Estate		16,180		4,629		108,348		129,157		564		9,229		9,793		12,134		6,349		100,167		118,650		531		5,211		5,742
Consumer:
Auto		—		514		1,161		1,675		1		3		4		—		429		931		1,360		1		1		2
Non-Auto		—		39		416		455		—		1		1		—		31		538		569		—		1		1
Total Consumer		—		553		1,577		2,130		1		4		5		—		460		1,469		1,929		1		2		3
Total	$	19,955	$	11,697	$	129,533	$	161,185	$	4,184	$	13,686	$	17,870	$	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~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~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, 2022	C&I		Municipal		Agricultural		Construction & Development		Farm
June 30, 2023											C&I		Municipal		Agricultural		Construction & Development		Farm
Loans individually evaluated for credit losses	$	8,439	$	—	$	350	$	591	$	41	$	8,451	$	—	$	554	$	2,209	$	1,135
Loans collectively evaluated for credit losses		8,000		1,319		643		25,108		1,114		8,079		187		528		26,757		1,669
Total	$	16,439	$	1,319	$	993	$	25,699	$	1,155	$	16,530	$	187	$	1,082	$	28,966	$	2,804


September 30, 2022 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
June 30, 2023 (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	$	2,923	$	2,068	$	1,872	$	3	$	1	$	19,216
Loans collectively evaluated for credit losses		5,866		8,025		7,314		909		355		58,653		10,548		10,504		7,895		826		332		67,325
Total	$	8,195	$	10,086	$	8,954	$	912	$	356	$	74,108	$	13,471	$	12,572	$	9,767	$	829	$	333	$	86,541


September 30, 2021	C&I		Municipal		Agricultural		Construction & Development		Farm
June 30, 2022											C&I		Municipal		Agricultural		Construction & Development		Farm
Loans individually evaluated for credit losses	$	3,906	$	—	$	2,149	$	164	$	6	$	9,591	$	—	$	360	$	386	$	46
Loans collectively evaluated for credit losses		6,487		315		140		16,698		580		8,998		1,352		802		20,699		960
Total	$	10,393	$	315	$	2,289	$	16,862	$	586	$	18,589	$	1,352	$	1,162	$	21,085	$	1,006


September 30, 2021 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
June 30, 2022 (continued)													Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
Loans individually evaluated for credit losses	$	3,975	$	3,481	$	2,663	$	4	$	2	$	16,350	$	2,843	$	2,585	$	1,652	$	3	$	1	$	17,467
Loans collectively evaluated for credit losses		6,669		7,408		7,394		956		373		47,020		5,567		8,155		6,652		909		371		54,465
Total	$	10,644	$	10,889	$	10,057	$	960	$	375	$	63,370	$	8,410	$	10,740	$	8,304	$	912	$	372	$	71,932

2122


December 31, 2021	C&I		Municipal		Agricultural		Construction & Development		Farm
December 31, 2022											C&I		Municipal		Agricultural		Construction & Development		Farm
Loans individually evaluated for credit losses	$	6,627	$	—	$	1,445	$	225	$	2	$	8,398	$	—	$	398	$	305	$	36
Loans collectively evaluated for credit losses		5,653		348		152		17,402		661		7,731		1,026		643		26,138		1,921
Total	$	12,280	$	348	$	1,597	$	17,627	$	663	$	16,129	$	1,026	$	1,041	$	26,443	$	1,957


December 31, 2021 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
December 31, 2022 (continued)													Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
Loans individually evaluated for credit losses	$	4,059	$	3,481	$	2,026	$	4	$	1	$	17,870	$	2,357	$	1,600	$	1,444	$	2	$	1	$	14,541
Loans collectively evaluated for credit losses		6,663		7,347		6,107		892		370		45,595		6,718		8,328		7,631		843		314		61,293
Total	$	10,722	$	10,828	$	8,133	$	896	$	371	$	63,465	$	9,075	$	9,928	$	9,075	$	845	$	315	$	75,834

The Company’s recorded investment in loans as of ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, related to the balance in the allowance for credit losses follows below (dollars in thousands):


September 30, 2022	C&I		Municipal		Agricultural		Construction & Development		Farm
June 30, 2023											C&I		Municipal		Agricultural		Construction & Development		Farm
Loans individually evaluated for credit losses	$	26,810	$	71	$	750	$	7,157	$	1,707	$	28,100	$	1,507	$	1,988	$	24,622	$	7,739
Loans collectively evaluated for credit losses		844,525		214,781		76,187		930,894		266,432		993,763		214,470		80,044		890,599		327,905
Total	$	871,335	$	214,852	$	76,937	$	938,051	$	268,139	$	1,021,863	$	215,977	$	82,032	$	915,221	$	335,644


September 30, 2022 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
June 30, 2023 (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	$	32,441	$	39,178	$	36,692	$	2,220	$	652	$	175,139
Loans collectively evaluated for credit losses		682,373		908,826		1,503,342		537,106		147,305		6,111,771		778,906		972,333		1,661,987		532,383		150,041		6,602,431
Total	$	717,738	$	945,665	$	1,536,180	$	538,798	$	147,793	$	6,255,488	$	811,347	$	1,011,511	$	1,698,679	$	534,603	$	150,693	$	6,777,570


September 30, 2021	C&I		Municipal		Agricultural		Construction & Development		Farm
June 30, 2022											C&I		Municipal		Agricultural		Construction & Development		Farm
Loans individually evaluated for credit losses	$	22,143	$	121	$	7,893	$	6,327	$	3,105	$	32,369	$	84	$	752	$	10,612	$	1,662
Loans collectively evaluated for credit losses		797,454		165,726		91,054		650,203		199,959		807,559		200,493		89,668		918,032		248,366
Total	$	819,597	$	165,847	$	98,947	$	656,530	$	203,064	$	839,928	$	200,577	$	90,420	$	928,644	$	250,028


September 30, 2021 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
June 30, 2022 (continued)													Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
Loans individually evaluated for credit losses	$	36,158	$	49,332	$	38,489	$	1,770	$	433	$	165,771	$	34,702	$	37,439	$	33,154	$	1,391	$	503	$	152,668
Loans collectively evaluated for credit losses		638,800		774,899		1,290,309		392,302		120,017		5,120,723		601,730		872,460		1,378,971		466,756		141,879		5,725,914
Total	$	674,958	$	824,231	$	1,328,798	$	394,072	$	120,450	$	5,286,494	$	636,432	$	909,899	$	1,412,125	$	468,147	$	142,382	$	5,878,582


December 31, 2021	C&I		Municipal		Agricultural		Construction & Development		Farm
December 31, 2022											C&I		Municipal		Agricultural		Construction & Development		Farm
Loans individually evaluated for credit losses	$	24,391	$	109	$	5,398	$	5,473	$	3,142	$	29,382	$	58	$	679	$	6,440	$	1,663
Loans collectively evaluated for credit losses		812,684		177,796		92,691		744,320		214,078		887,935		221,032		76,268		952,986		304,659
Total	$	837,075	$	177,905	$	98,089	$	749,793	$	217,220	$	917,317	$	221,090	$	76,947	$	959,426	$	306,322


December 31, 2021 (continued)	Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
December 31, 2022 (continued)													Non-Owner Occupied CRE		Owner Occupied CRE		Residential		Auto		Non-Auto		Total
Loans individually evaluated for credit losses	$	34,468	$	48,504	$	37,570	$	1,675	$	455	$	161,185	$	38,358	$	36,206	$	35,983	$	1,360	$	569	$	150,698
Loans collectively evaluated for credit losses		588,966		773,149		1,296,849		403,741		123,513		5,227,787		693,731		918,194		1,539,775		549,275		147,315		6,291,170
Total	$	623,434	$	821,653	$	1,334,419	$	405,416	$	123,968	$	5,388,972	$	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~~June 30, ~~2022~~2023 (dollars in millions):


September 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
June 30,																	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
C&I
Risk rating:
Pass	$	495	$	226	$	65	$	24	$	18	$	16	$	—	$	844	$	333	$	468	$	105	$	44	$	18	$	26	$	—	$	994
Special mention		1		—		—		1		—		—		—		2		8		1		—		—		1		—		—		10
Substandard		11		7		3		1		3		—		—		25		3		7		4		2		—		2		—		18
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	507	$	233	$	68	$	26	$	21	$	16	$	—	$	871	$	344	$	476	$	109	$	46	$	19	$	28	$	—	$	1,022
Year-to-Date Gross Charge-Offs																	$	—	$	—	$	1	$	—	$	—	$	—	$	—	$	1


June 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Municipal
Risk rating:
Pass	$	11	$	84	$	17	$	14	$	1	$	87	$	—	$	214
Special mention		—		—		—		—		1		—		—		1
Substandard		—		—		1		—		—		—		—		1
Doubtful		—		—		—		—		—		—		—		—
Total	$	11	$	84	$	18	$	14	$	2	$	87	$	—	$	216
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


September 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Municipal
June 30,																	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Agricultural
Risk rating:
Pass	$	67	$	21	$	16	$	5	$	20	$	86	$	—	$	215	$	30	$	42	$	5	$	2	$	1	$	—	$	—	$	80
Special mention		—		—		—		—		—		—		—		—		—		1		—		—		—		—		—		1
Substandard		—		—		—		—		—		—		—		—		—		1		—		—		—		—		—		1
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	67	$	21	$	16	$	5	$	20	$	86	$	—	$	215	$	30	$	44	$	5	$	2	$	1	$	—	$	—	$	82
Year-to-Date Gross Charge-Offs																	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

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


June 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Construction & Development
Risk rating:
Pass	$	242	$	498	$	103	$	24	$	11	$	12	$	—	$	890
Special mention		8		4		—		—		—		—		—		12
Substandard		4		8		1		—		—		—		—		13
Doubtful		—		—		—		—		—		—		—		—
Total	$	254	$	510	$	104	$	24	$	11	$	12	$	—	$	915
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


June 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Farm
Risk rating:
Pass	$	63	$	126	$	78	$	26	$	9	$	26	$	—	$	328
Special mention		—		—		—		5		—		—		—		5
Substandard		—		1		1		—		—		1		—		3
Doubtful		—		—		—		—		—		—		—		—
Total	$	63	$	127	$	79	$	31	$	9	$	27	$	—	$	336
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


June 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Non-Owner Occupied CRE
Risk rating:
Pass	$	101	$	234	$	185	$	125	$	46	$	88	$	—	$	779
Special mention		—		5		1		—		11		2		—		19
Substandard		—		1		4		1		2		5		—		13
Doubtful		—		—		—		—		—		—		—		—
Total	$	101	$	240	$	190	$	126	$	59	$	95	$	—	$	811
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


June 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Owner Occupied CRE
Risk rating:
Pass	$	67	$	321	$	240	$	121	$	68	$	156	$	—	$	973
Special mention		—		—		—		—		6		1		—		7
Substandard		2		5		1		1		6		17		—		32
Doubtful		—		—		—		—		—		—		—		—
Total	$	69	$	326	$	241	$	122	$	80	$	174	$	—	$	1,012
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


June 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Residential
Risk rating:
Pass	$	228	$	461	$	335	$	172	$	73	$	255	$	138	$	1,662
Special mention		—		2		3		2		—		3		1		11
Substandard		1		6		4		3		2		8		2		26
Doubtful		—		—		—		—		—		—		—		—
Total	$	229	$	469	$	342	$	177	$	75	$	266	$	141	$	1,699
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


June 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Auto
Risk rating:
Pass	$	110	$	265	$	99	$	39	$	16	$	4	$	—	$	533
Special mention		—		—		—		—		—		—		—		—
Substandard		—		1		1		—		—		—		—		2
Doubtful		—		—		—		—		—		—		—		—
Total	$	110	$	266	$	100	$	39	$	16	$	4	$	—	$	535
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


June 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Non-Auto
Risk rating:
Pass	$	41	$	63	$	29	$	6	$	2	$	1	$	8	$	150
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total	$	41	$	63	$	29	$	6	$	2	$	1	$	8	$	150
Year-to-Date Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


June 30,	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Total Loans
Risk rating:
Pass	$	1,226	$	2,562	$	1,196	$	573	$	245	$	655	$	146	$	6,603
Special mention		16		13		4		7		19		6		1		66
Substandard		10		30		17		7		10		33		2		109
Doubtful		—		—		—		—		—		—		—		—
Total	$	1,252	$	2,605	$	1,217	$	587	$	274	$	694	$	149	$	6,778
Year-to-Date Gross Charge-Offs	$	—	$	—	$	1	$	—	$	—	$	—	$	—	$	1


September 30,	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
June 30,																	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
C&I
Risk rating:
Pass	$	485	$	185	$	62	$	35	$	19	$	12	$	—	$	798	$	342	$	317	$	79	$	28	$	20	$	22	$	—	$	808
Special mention		2		1		1		1		1		—		—		6		4		1		—		2		—		—		—		7
Substandard		5		6		2		2		1		—		—		16		11		5		3		3		3		—		—		25
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	492	$	192	$	65	$	38	$	21	$	12	$	—	$	820	$	357	$	323	$	82	$	33	$	23	$	22	$	—	$	840


September 30,	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
June 30,																	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Municipal
Risk rating:
Pass	$	22	$	17	$	6	$	22	$	17	$	82	$	—	$	166	$	49	$	21	$	14	$	5	$	21	$	91	$	—	$	201
Special mention		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	22	$	17	$	6	$	22	$	17	$	82	$	—	$	166	$	49	$	21	$	14	$	5	$	21	$	91	$	—	$	201


September 30,	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
June 30,																	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Agricultural
Risk rating:
Pass	$	51	$	19	$	11	$	6	$	3	$	1	$	—	$	91	$	39	$	41	$	4	$	3	$	1	$	1	$	—	$	89
Special mention		—		1		—		—		—		—		—		1		—		—		—		—		—		—		—		—
Substandard		6		1		—		—		—		—		—		7		1		—		—		—		—		—		—		1
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	57	$	21	$	11	$	6	$	3	$	1	$	—	$	99	$	40	$	41	$	4	$	3	$	1	$	1	$	—	$	90


September 30,	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
June 30,																	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Construction & Development
Risk rating:
Pass	$	383	$	195	$	37	$	18	$	8	$	8	$	—	$	649	$	330	$	440	$	104	$	22	$	11	$	11	$	—	$	918
Special mention		3		—		—		—		—		—		—		3		—		4		—		—		—		—		—		4
Substandard		2		1		1		—		—		—		—		4		2		5		—		—		—		—		—		7
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	388	$	196	$	38	$	18	$	8	$	8	$	—	$	656	$	332	$	449	$	104	$	22	$	11	$	11	$	—	$	929


September 30,	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
June 30,																	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Farm
Risk rating:
Pass	$	94	$	46	$	16	$	11	$	8	$	25	$	—	$	200	$	63	$	104	$	35	$	13	$	8	$	26	$	—	$	249
Special mention		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Substandard		—		1		—		1		—		1		—		3		—		—		—		—		—		1		—		1
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	94	$	47	$	16	$	12	$	8	$	26	$	—	$	203	$	63	$	104	$	35	$	13	$	8	$	27	$	—	$	250

September 30,

2021

2020

2019

2018

2017

Prior

Revolving
Loans
Amortized
Cost Basis

Total

Non-Owner Occupied CRE

Risk rating:

Pass

$
158

$
156

$
98

$
75

$
35

$
117

$
—

$
639

Special mention

—

1

13

—

7

3

—

24

Substandard

1

—

3

1

3

4

—

12

Doubtful

—

—

—

—

—

—

—

—

Total

$
159

$
157

$
114

$
76

$
45

$
124

$
—

$
675

September 30,

2021

2020

2019

2018

2017

Prior

Revolving
Loans
Amortized
Cost Basis

Total

Owner Occupied CRE

Risk rating:

Pass

$
193

$
166

$
125

$
99

$
59

$
133

$
—

$
775

Special mention

3

—

1

—

1

1

—

6

Substandard

9

3

4

14

3

10

—

43

Doubtful

—

—

—

—

—

—

—

—

Total

$
205

$
169

$
130

$
113

$
63

$
144

$
—

$
824

September 30,

2021

2020

2019

2018

2017

Prior

Revolving
Loans
Amortized
Cost Basis

Total

Residential

Risk rating:

Pass

$
374

$
279

$
126

$
94

$
76

$
245

$
96

$
1,290

Special mention

4

4

—

1

1

3

—

13

Substandard

4

3

3

2

2

10

2

26

Doubtful

—

—

—

—

—

—

—

—

Total

$
382

$
286

$
129

$
97

$
79

$
258

$
98

$
1,329

September 30,

2021

2020

2019

2018

2017

Prior

Revolving
Loans
Amortized
Cost Basis

Total

Auto

Risk rating:

Pass

$
174

$
121

$
64

$
21

$
9

$
3

$
—

$
392

Special mention

—

—

—

—

—

—

—

—

Substandard

—

1

1

—

—

—

—

2

Doubtful

—

—

—

—

—

—

—

—

Total

$
174

$
122

$
65

$
21

$
9

$
3

$
—

$
394

September 30,

2021

2020

2019

2018

2017

Prior

Revolving
Loans
Amortized
Cost Basis

Total

Non-Auto

Risk rating:

Pass

$
65

$
27

$
11

$
4

$
2

$
5

$
6

$
120

Special mention

—

—

—

—

—

—

—

—

Substandard

—

—

—

—

—

—

—

—

Doubtful

—

—

—

—

—

—

—

—

Total

$
65

$
27

$
11

$
4

$
2

$
5

$
6

$
120


September 30,	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
Total Loans
June 30,																	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Non-Owner Occupied CRE
Risk rating:
Pass	$	1,999	$	1,211	$	556	$	385	$	236	$	631	$	102	$	5,120	$	130	$	203	$	109	$	52	$	24	$	83	$	—	$	601
Special mention		12		7		15		2		10		7		—		53		—		—		1		11		—		7		—		19
Substandard		27		16		14		20		9		25		2		113		6		—		1		2		1		6		—		16
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	2,038	$	1,234	$	585	$	407	$	255	$	663	$	104	$	5,286	$	136	$	203	$	111	$	65	$	25	$	96	$	—	$	636


June 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Owner Occupied CRE
Risk rating:
Pass	$	240	$	218	$	122	$	88	$	71	$	133	$	—	$	872
Special mention		—		2		2		1		—		1		—		6
Substandard		1		4		2		3		11		11		—		32
Doubtful		—		—		—		—		—		—		—		—
Total	$	241	$	224	$	126	$	92	$	82	$	145	$	—	$	910


June 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Residential
Risk rating:
Pass	$	277	$	399	$	188	$	94	$	70	$	239	$	112	$	1,379
Special mention		1		2		2		1		—		4		—		10
Substandard		2		3		2		2		2		8		4		23
Doubtful		—		—		—		—		—		—		—		—
Total	$	280	$	404	$	192	$	97	$	72	$	251	$	116	$	1,412


June 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Auto
Risk rating:
Pass	$	168	$	171	$	77	$	36	$	11	$	4	$	—	$	467
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		1		—		—		—		1
Doubtful		—		—		—		—		—		—		—		—
Total	$	168	$	171	$	77	$	37	$	11	$	4	$	—	$	468


June 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Non-Auto
Risk rating:
Pass	$	54	$	56	$	15	$	5	$	2	$	2	$	7	$	141
Special mention		1		—		—		—		—		—		—		1
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total	$	55	$	56	$	15	$	5	$	2	$	2	$	7	$	142


June 30,	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Total Loans
Risk rating:
Pass	$	1,692	$	1,970	$	747	$	346	$	239	$	612	$	119	$	5,725
Special mention		6		9		5		15		—		12		—		47
Substandard		23		17		8		11		17		26		4		106
Doubtful		—		—		—		—		—		—		—		—
Total	$	1,721	$	1,996	$	760	$	372	$	256	$	650	$	123	$	5,878

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, ~~2021~~2022 (dollars in millions):


December 31,	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total		2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
C&I
Risk rating:
Pass	$	526	$	178	$	52	$	29	$	17	$	11	$	—	$	813	$	627	$	157	$	52	$	22	$	16	$	13	$	—	$	887
Special mention		4		1		4		—		—		—		—		9		4		1		2		1		—		—		—		8
Substandard		7		4		1		3		—		—		—		15		13		5		2		1		1		—		—		22
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	537	$	183	$	57	$	32	$	17	$	11	$	—	$	837	$	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,	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total		2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Municipal
Agricultural
Risk rating:
Pass	$	39	$	15	$	6	$	22	$	17	$	79	$	—	$	178	$	60	$	9	$	3	$	2	$	1	$	1	$	—	$	76
Special mention		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—		1		—		—		—		—		—		1
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	39	$	15	$	6	$	22	$	17	$	79	$	—	$	178	$	60	$	10	$	3	$	2	$	1	$	1	$	—	$	77


December 31,	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total		2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Agricultural
Construction & Development
Risk rating:
Pass	$	69	$	8	$	6	$	6	$	3	$	1	$	—	$	93	$	638	$	218	$	70	$	13	$	8	$	7	$	—	$	954
Special mention		—		—		—		—		—		—		—		—		1		—		—		—		—		—		—		1
Substandard		4		1		—		—		—		—		—		5		4		1		—		—		—		—		—		5
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	73	$	9	$	6	$	6	$	3	$	1	$	—	$	98	$	643	$	219	$	70	$	13	$	8	$	7	$	—	$	960

December 31,

2021

2020

2019

2018

2017

Prior

Revolving
Loans
Amortized
Cost Basis

Total

Construction & Development

Risk rating:

Pass

$
557

$
134

$
24

$
14

$
7

$
8

$
—

$
744

Special mention

2

—

—

—

—

—

—

2

Substandard

2

2

—

—

—

—

—

4

Doubtful

—

—

—

—

—

—

—

—

Total

$
561

$
136

$
24

$
14

$
7

$
8

$
—

$
750

December 31,

2021

2020

2019

2018

2017

Prior

Revolving
Loans
Amortized
Cost Basis

Total

Farm

Risk rating:

Pass

$
117

$
42

$
15

$
10

$
7

$
23

$
—

$
214

Special mention

—

—

—

—

—

—

—

—

Substandard

1

1

—

1

—

—

—

3

Doubtful

—

—

—

—

—

—

—

—

Total

$
118

$
43

$
15

$
11

$
7

$
23

$
—

$
217

December 31,

2021

2020

2019

2018

2017

Prior

Revolving
Loans
Amortized
Cost Basis

Total

Non-Owner Occupied CRE

Risk rating:

Pass

$
214

$
128

$
77

$
56

$
31

$
84

$
—

$
590

Special mention

—

1

12

—

7

3

—

23

Substandard

—

1

3

1

3

3

—

11

Doubtful

—

—

—

—

—

—

—

—

Total

$
214

$
130

$
92

$
57

$
41

$
90

$
—

$
624

December 31,

2021

2020

2019

2018

2017

Prior

Revolving
Loans
Amortized
Cost Basis

Total

Owner Occupied CRE

Risk rating:

Pass

$
250

$
143

$
114

$
90

$
59

$
117

$
—

$
773

Special mention

2

2

1

—

1

1

—

7

Substandard

8

2

3

13

5

11

—

42

Doubtful

—

—

—

—

—

—

—

—

Total

$
260

$
147

$
118

$
103

$
65

$
129

$
—

$
822

December 31,

2021

2020

2019

2018

2017

Prior

Revolving
Loans
Amortized
Cost Basis

Total

Residential

Risk rating:

Pass

$
477

$
230

$
115

$
84

$
68

$
222

$
100

$
1,296

Special mention

3

4

—

1

1

3

1

13

Substandard

3

3

3

2

2

10

2

25

Doubtful

—

—

—

—

—

—

—

—

Total

$
483

$
237

$
118

$
87

$
71

$
235

$
103

$
1,334

December 31,

2021

2020

2019

2018

2017

Prior

Revolving
Loans
Amortized
Cost Basis

Total

Auto

Risk rating:

Pass

$
218

$
105

$
54

$
17

$
7

$
2

$
—

$
403

Special mention

1

—

—

—

—

—

—

1

Substandard

—

—

1

—

—

—

—

1

Doubtful

—

—

—

—

—

—

—

—

Total

$
219

$
105

$
55

$
17

$
7

$
2

$
—

$
405


December 31,	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total		2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Non-Auto
Farm
Risk rating:
Pass	$	81	$	22	$	8	$	4	$	1	$	1	$	7	$	124	$	147	$	85	$	32	$	11	$	8	$	21	$	—	$	304
Special mention		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		1		—		—		—		—		1		—		2
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	81	$	22	$	8	$	4	$	1	$	1	$	7	$	124	$	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,	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total		2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Total Loans
Residential
Risk rating:
Pass	$	2,548	$	1,005	$	471	$	332	$	217	$	548	$	107	$	5,228	$	513	$	355	$	173	$	82	$	64	$	214	$	139	$	1,540
Special mention		12		8		17		1		9		7		1		55		1		3		2		—		—		3		1		10
Substandard		25		14		11		20		10		24		2		106		6		3		2		2		1		9		3		26
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	2,585	$	1,027	$	499	$	353	$	236	$	579	$	110	$	5,389	$	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~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, the Company’s past due loans are as follows (dollars in thousands):


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
June 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	$	5,422	$	73	$	1,515	$	7,010	$	864,325	$	871,335	$	—	$	3,734	$	722	$	1,651	$	6,107	$	1,015,756	$	1,021,863	$	3
Municipal		—		—		—		—		214,852		214,852		—		215		—		—		215		215,762		215,977		—
Total Commercial		5,422		73		1,515		7,010		1,079,177		1,086,187		—		3,949		722		1,651		6,322		1,231,518		1,237,840		3
Agricultural		290		93		—		383		76,554		76,937		—		580		1,024		15		1,619		80,413		82,032		—
Real Estate:
Construction & Development		2,958		600		—		3,558		934,493		938,051		—		14,390		2,062		—		16,452		898,769		915,221		—
Farm		822		150		—		972		267,167		268,139		—		776		205		372		1,353		334,291		335,644		—
Non-Owner Occupied CRE		536		—		—		536		717,202		717,738		—		1,395		—		2,988		4,383		806,964		811,347		—
Owner Occupied CRE		1,138		37		—		1,175		944,490		945,665		—		3,356		3,818		—		7,174		1,004,337		1,011,511		—
Residential		4,834		252		15		5,101		1,531,079		1,536,180		15		7,265		2,210		1,301		10,776		1,687,903		1,698,679		520
Total Real Estate		10,288		1,039		15		11,342		4,394,431		4,405,773		15		27,182		8,295		4,661		40,138		4,732,264		4,772,402		520
Consumer:
Auto		267		76		33		376		538,422		538,798		—		574		118		14		706		533,897		534,603		—
Non-Auto		66		10		—		76		147,717		147,793		—		135		18		65		218		150,475		150,693		29
Total Consumer		333		86		33		452		686,139		686,591		—		709		136		79		924		684,372		685,296		29
Total	$	16,333	$	1,291	$	1,563	$	19,187	$	6,236,301	$	6,255,488	$	15	$	32,420	$	10,177	$	6,406	$	49,003	$	6,728,567	$	6,777,570	$	552

3031


September 30, 2021	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
June 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	$	4,136	$	516	$	666	$	5,318	$	814,279	$	819,597	$	23	$	3,240	$	2,704	$	1,470	$	7,414	$	832,514	$	839,928	$	—
Municipal		—		—		—		—		165,847		165,847		—		—		—		—		—		200,577		200,577		—
Total Commercial		4,136		516		666		5,318		980,126		985,444		23		3,240		2,704		1,470		7,414		1,033,091		1,040,505		—
Agricultural		115		1,074		100		1,289		97,658		98,947		—		432		30		27		489		89,931		90,420		—
Real Estate:
Construction & Development		4,676		—		114		4,790		651,740		656,530		—		2,841		734		—		3,575		925,069		928,644		—
Farm		1,182		13		—		1,195		201,869		203,064		—		1,005		—		—		1,005		249,023		250,028		—
Non-Owner Occupied CRE		800		—		—		800		674,158		674,958		—		569		—		107		676		635,756		636,432		—
Owner Occupied CRE		260		315		1,537		2,112		822,119		824,231		—		4,061		495		1,292		5,848		904,051		909,899		—
Residential		7,807		475		415		8,697		1,320,101		1,328,798		—		5,387		92		596		6,075		1,406,050		1,412,125		2
Total Real Estate		14,725		803		2,066		17,594		3,669,987		3,687,581		—		13,863		1,321		1,995		17,179		4,119,949		4,137,128		2
Consumer:
Auto		323		43		7		373		393,699		394,072		—		292		104		30		426		467,721		468,147		14
Non-Auto		59		3		—		62		120,388		120,450		—		161		—		7		168		142,214		142,382		6
Total Consumer		382		46		7		435		514,087		514,522		—		453		104		37		594		609,935		610,529		20
Total	$	19,358	$	2,439	$	2,839	$	24,636	$	5,261,858	$	5,286,494	$	23	$	17,988	$	4,159	$	3,529	$	25,676	$	5,852,906	$	5,878,582	$	22


December 31, 2021	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
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	$	3,638	$	34	$	222	$	3,894	$	833,181	$	837,075	$	5	$	3,924	$	297	$	1,646	$	5,867	$	911,450	$	917,317	$	—
Municipal		63		—		—		63		177,842		177,905		—		76		783		—		859		220,231		221,090		—
Total Commercial		3,701		34		222		3,957		1,011,023		1,014,980		5		4,000		1,080		1,646		6,726		1,131,681		1,138,407		—
Agricultural		181		—		—		181		97,908		98,089		—		243		—		—		243		76,704		76,947		—
Real Estate:
Construction & Development		2,953		39		—		2,992		746,801		749,793		—		3,751		—		175		3,926		955,500		959,426		—
Farm		600		215		—		815		216,405		217,220		—		668		—		—		668		305,654		306,322		—
Non-Owner Occupied CRE		235		—		—		235		623,199		623,434		—		1,444		160		—		1,604		730,485		732,089		—
Owner Occupied CRE		813		—		280		1,093		820,560		821,653		—		1,151		—		—		1,151		953,249		954,400		—
Residential		4,984		327		410		5,721		1,328,698		1,334,419		—		8,720		707		266		9,693		1,566,065		1,575,758		—
Total Real Estate		9,585		581		690		10,856		3,735,663		3,746,519		—		15,734		867		441		17,042		4,510,953		4,527,995		—
Consumer:
Auto		393		26		—		419		404,997		405,416		—		779		30		—		809		549,826		550,635		—
Non-Auto		145		24		3		172		123,796		123,968		3		50		—		—		50		147,834		147,884		—
Total Consumer		538		50		3		591		528,793		529,384		3		829		30		—		859		697,660		698,519		—
Total	$	14,005	$	665	$	915	$	15,585	$	5,373,387	$	5,388,972	$	8	$	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.

~~The restructuring~~

An assessment of whether a ~~loan is considered a “troubled debt restructuring” if both the~~ borrower is experiencing financial ~~difficulties and~~difficulty is made on the ~~creditor has granted~~date of a ~~concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules, reductions~~modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in ~~collateral and other actions intended~~the allowance for credit losses due to ~~minimize potential losses.~~the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. During the six-months ended June 30, 2023, loan modifications made to borrowers experiencing financial difficulty was insignificant.

~~The Company's loans that were modified and considered troubled debt restructurings~~ ~~are as follows (dollars in thousands):~~

Three-Months Ended September 30, 2022

Nine-Months Ended September 30, 2022

Pre-
Modification

Post-
Modification

Pre-
Modification

Post-
Modification

Recorded

Recorded

Recorded

Recorded

Number

Investment

Investment

Number

Investment

Investment

Commercial:

C&I

1

$
205

$
205

1

$
205

$
205

Municipal

—

—

—

—

—

—

Total Commercial

1

205

205

1

205

205

Agricultural

—

—

—

—

—

—

Real Estate:

Construction & Development

—

—

—

—

—

—

Farm

—

—

—

—

—

—

Non-Owner Occupied CRE

—

—

—

—

—

—

Owner Occupied CRE

—

—

—

—

—

—

Residential

1

130

130

1

130

130

Total Real Estate

1

130

130

1

130

130

Consumer:

��

Auto

—

—

—

Non-Auto

—

—

—

Total Consumer

—

—

—

—

—

—

Total

2

$
335

$
335

2

$
335

$
335

Three-Months Ended September 30, 2021

Nine-Months Ended September 30, 2021

Pre-
Modification

Post-
Modification

Pre-
Modification

Post-
Modification

Recorded

Recorded

Recorded

Recorded

Number

Investment

Investment

Number

Investment

Investment

Commercial:

C&I

—

$
—

$
—

4

$
361

$
361

Municipal

—

—

—

—

—

—

Total Commercial

—

—

—

4

361

361

Agricultural

—

—

—

1

68

68

Real Estate:

Construction & Development

—

—

—

1

200

200

Farm

—

—

—

—

—

—

Non-Owner Occupied CRE

—

—

—

—

—

—

Owner Occupied CRE

—

—

—

3

1,047

1,047

Residential

2

77

77

5

519

519

Total Real Estate

2

77

77

9

1,766

1,766

Consumer:

Auto

1

19

19

2

51

51

Non-Auto

1

9

9

1

9

9

Total Consumer

2

28

28

3

60

60

Total

4

$
105

$
105

17

$
2,255

$
2,255

~~The balances below provide information as to how the loans were modified as troubled debt restructured loans (dollars in thousands):~~

Three-Months Ended September 30, 2022

Nine-Months Ended September 30, 2022

Adjusted

Combined

Adjusted

Combined

Interest

Maturity

Rate and

Interest

Maturity

Rate and

Rate

Extended

Maturity

Rate

Extended

Maturity

Commercial:

C&I

$
—

$
—

$
205

$
—

$
—

$
205

Municipal

—

—

—

—

—

—

Total Commercial

—

—

205

—

—

205

Agricultural

—

—

—

—

—

—

Real Estate:

Construction & Development

—

—

—

—

—

—

Farm

—

—

—

—

—

—

Non-Owner Occupied CRE

—

—

—

—

—

—

Owner Occupied CRE

—

—

—

—

—

—

Residential

—

—

130

—

—

130

Total Real Estate

—

—

130

—

—

130

Consumer:

Auto

—

—

—

—

—

—

Non-Auto

—

—

—

—

—

—

Total Consumer

—

—

—

—

—

—

Total

$
—

$
—

$
335

$
—

$
—

$
335

Three-Months Ended September 30, 2021

Nine-Months Ended September 30, 2021

Adjusted

Combined

Adjusted

Combined

Interest

Maturity

Rate and

Interest

Maturity

Rate and

Rate

Extended

Maturity

Rate

Extended

Maturity

Commercial:

C&I

$
—

$
—

$
—

$
—

$
212

$
149

Municipal

—

—

—

—

—

—

Total Commercial

—

—

—

—

212

149

Agricultural

—

—

—

—

68

—

Real Estate:

Construction & Development

—

—

—

—

200

—

Farm

—

—

—

—

—

—

Non-Owner Occupied CRE

—

—

—

—

—

—

Owner Occupied CRE

—

—

—

—

—

1,047

Residential

—

18

59

—

263

256

Total Real Estate

—

18

59

—

463

1,303

Consumer:

Auto

—

—

19

—

—

51

Non-Auto

—

—

9

—

—

9

Total Consumer

—

—

28

—

—

60

Total

$
—

$
18

$
87

$
—

$
743

$
1,512

~~During the three and nine-months ended September 30, 2022,~~ no loans were modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default and still outstanding, respectively. During the three and nine-months ended September 30, 2021, ~~one~~ loan was modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 ~~days past due or more or results in the foreclosure and repossession of the applicable collateral.~~

Note 4 - Loans Held-for-Sale

Loans held-for-sale totaled $~~18,815,000~~19,220,000, $~~47,721,000~~26,445,000 and $~~37,810,000~~11,965,000 at ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, respectively. At ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, $~~2,923,000~~1,131,000, $~~1,640,000~~2,597,000 and $~~3,688,000~~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 ~~time frame~~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, 2022:	Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
June 30, 2023:							Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
IRLCs	$	78,653	$	—	$	251	$	47,824	$	455	$	—
Forward mortgage-backed securities trades		72,500		1,897		—		66,000		160		—


September 30, 2021:	Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
June 30, 2022:							Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
IRLCs	$	141,121	$	1,701	$	—	$	99,429	$	1,414	$	—
Forward mortgage-backed securities trades		145,000		828		—		101,500		58		—


December 31, 2021:	Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
December 31, 2022:							Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
IRLCs	$	85,973	$	1,279	$	—	$	41,664	$	400	$	—
Forward mortgage-backed securities trades		116,000		—		147		45,000		85		—

3433

Note 6 – Borrowings

Borrowings consisted of the following (dollars in thousands):


	September 30,				December 31,		June 30,				December 31,
	2022		2021		2021		2023		2022		2022
Securities sold under agreements with customers to repurchase	$	749,278	$	612,239	$	625,499	$	559,478	$	738,986	$	618,829
Federal funds purchased		4,250		36,440		24,600		7,125		8,325		2,625
Other borrowings		21,053		—		21,053		21,053		21,053		21,053
Total	$	774,581	$	648,679	$	671,152	$	587,656	$	768,364	$	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, ~~2021~~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~~June 30, ~~2022 and 2021, or December 31, 2021.~~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 $~~12,095,000~~11,754,000 for the ~~third~~second quarter of ~~2022~~2023 as compared to $~~11,641,000~~11,922,000 for the same period in ~~2021.~~2022. The Company’s effective tax rates on pretax income were ~~16.93~~18.77% and ~~16.50~~16.46% for the ~~third~~second quarters of ~~2022~~2023 and ~~2021,~~2022, respectively. Income tax expense was $~~34,359,000~~23,442,000 for the first ~~nine~~six months of ~~2022~~2023 as compared to $~~33,770,000~~22,263,000 for the same period ~~in 2021.~~is 2022. The ~~Company’s~~Company's effective tax rates on pretax income were ~~16.35~~18.48% and ~~16.39~~16.05% for ~~the~~ first ~~nine~~six months of ~~2022~~2023 and ~~2021,~~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 $~~131,000~~218,000 ~~and~~at June 30, 2023, $55,000 at ~~September~~June 30, 2022, and $131,000 at December 31, ~~2021, respectively,~~2022, which is included in other ~~assets. There were~~ no ~~balances related to this investment~~assets on the consolidated balance ~~sheet as of September 30, 2021.~~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~~June 30, 2023, June 30, 2022, and December 31, ~~2021,~~2022, the consolidated balance sheet of the Company included a $18,000,000 loan to the investee in loans ~~the $29,000,000~~ ~~CDE investments in other assets~~ and the $21,053,000 leveraged loan from the investee in other borrowings (see Note 6). ~~There were~~ no ~~balances related to this investment on~~At June 30, 2023 and 2022, and December 31, 2022, the consolidated balance sheet as of ~~September 30, 2021.~~the Company included CDE investments in other assets of $26,281,000, $29,000,000, and $26,825,000, respectively.

3534

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~~June 30, ~~2022,~~2023, the Company had ~~1,877,004~~1,911,022 shares of stock remaining for issuance under the plan. The 2021 Plan ~~supersedes~~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 ~~officers,~~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~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022.


	For the Nine-Months Ended September 30,									For the Six-Months Ended June 30,
	2022					2021				2023					2022
	Restricted Stock Units Outstanding			Weighted Average Grant Date Fair Value		Restricted Stock Units Outstanding		Weighted Average Grant Date Fair Value		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		22,597		$	48.91		—	$	—		39,657		$	47.83		22,597	$	48.91
Grants		24,833			47.19		22,597		48.91		—			—		—		—
Vesting		(7,425	)		48.91		—		—		—			—		—		—
Forfeited/expired		(348	)		48.91		—		—		(2,888	)		47.87		—		—
Balance at end of period		39,657		$	47.83		22,597	$	48.91		36,769		$	47.83		22,597	$	48.91

Performance Stock Units

Also under the 2021 Plan, the Company awards performance-based restricted stock units ("PSUs") to employees, senior and executive officers and ~~other officers and employees.~~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~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022.


	For the Nine-Months Ended September 30,									For the Six-Months Ended June 30,
	2022					2021				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		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		22,597		$	48.91		—	$	—		47,082		$	48.00		22,597	$	48.91
Grants		24,833			47.19		22,597		48.91		—			—		—		—
Vesting		—			—		—		—		—			—		—		—
Forfeited/expired		(348	)		48.91		—		—		(3,456	)		48.04		—		—
Balance at end of period		47,082		$	48.00		22,597	$	48.91		43,626		$	48.00		22,597	$	48.91

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,

2022

2021

Restricted
Stock
Outstanding

Weighted
Average
Grant Date
Fair Value

Restricted
Stock
Outstanding

Weighted
Average
Grant Date
Fair Value

Balance at beginning of period

46,598

$
35.75

95,888

$
29.89

Grants

15,425

40.89

12,110

49.58

Vesting

(23,898
)

40.40

(31,081
)

28.42

Forfeited/expired

(200
)

29.70

(1,389
)

32.76

Balance at end of period

37,925

$
34.94

75,528

$
33.60


	For the Six-Months Ended June 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~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, was $~~1,363,000~~510,000 and $~~1,534,000~~980,000, respectively.

The Company recorded restricted stock unit, performance-based restricted stock unit and ~~performance-based~~ restricted stock ~~unit~~award expense for employees of $~~370,000~~420,000 and $~~347,000~~594,000 for the three-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The Company recorded restricted stock unit, performance-based restricted stock unit and ~~performance-based~~ restricted stock ~~unit~~award expense for employees of $~~1,390,000~~779,000 and $~~926,000~~1,020,000 for the ~~nine-months~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The Company recorded director expense related to these restricted stock grants of $~~150,000~~167,000 and $~~150,000~~160,000, for the three-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The Company recorded director expense related to these restricted stock grants of $~~481,000~~317,000 and $~~450,000~~331,000, for the ~~nine-months~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

As of ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, there were $~~4,105,000~~2,689,000 and $~~3,556,000~~2,281,000 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 ~~1.23~~1.08 years and ~~1.49~~1.10 years, respectively. At ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, there was $~~72,000~~92,000, $~~72,000~~57,000 and $~~52,000~~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 ~~grant~~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~~six-months ended ~~September~~June 30, ~~2022~~2023 is presented in the table and narrative below:


	Shares			Weighted- Average Ex. Price		Shares			Weighted- Average Ex. Price
Outstanding, December 31, 2021		1,669,976		$	25.11
Outstanding, December 31, 2022							1,490,413		$	29.99
Granted		240,583			47.19		—			—
Exercised		(322,324	)		18.53		(60,095	)		18.65
Cancelled		(54,854	)		30.26		(44,355	)		42.96
Outstanding, September 30, 2022		1,533,381			29.77
Exercisable, September 30, 2022		804,219		$	21.93
Outstanding, June 30, 2023							1,385,963			30.07
Exercisable, June 30, 2023							883,853		$	22.68

The options outstanding at ~~September~~June 30, ~~2022~~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 $~~360,000~~445,000 and $~~296,000~~316,000 for the three-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The Company recorded stock option expense totaling $~~992,000~~889,000 and $~~987,000~~632,000 for the ~~nine-months~~six-months ended ~~September~~June 30, 2023 and 2022, ~~and 2021,~~ respectively.

As of ~~September~~June 30, ~~2022,~~2023, there was $~~5,915,000~~4,398,000 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 ~~2.04~~1.82 years. The total fair value of shares vested during the ~~nine-months~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 was $~~1,747,000~~1,048,000 and $~~1,246,000~~1,221,000, respectively.

3736

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~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and the year ended December 31, ~~2021.~~2022.

3837

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, 2022	Level 1 Inputs		Level 2 Inputs			Level 3 Inputs		Total Fair Value
June 30, 2023											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		$	483,776	$	—	$	—	$	483,776
Obligations of state and political subdivisions		—		2,083,812			—		2,083,812			—		1,692,964		—		1,692,964
Corporate bonds		—		96,322			—		96,322			—		98,280		—		98,280
Residential mortgage-backed securities		—		2,696,881			—		2,696,881			—		2,472,941		—		2,472,941
Commercial mortgage-backed securities		—		387,346			—		387,346			—		314,387		—		314,387
Other securities		3,906		—			—		3,906			3,914		—		—		3,914
Total	$	481,082	$	5,264,361		$	—	$	5,745,443		$	487,690	$	4,578,572	$	—	$	5,066,262
Loans held-for-sale	$	—	$	15,892		$	—	$	15,892		$	—	$	18,089	$	—	$	18,089
IRLCs	$	—	$	(251	)	$	—	$	(251	)	$	—	$	455	$	—	$	455
Forward mortgage-backed securities trades	$	—	$	1,897		$	—	$	1,897		$	—	$	160	$	—	$	160


September 30, 2021	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
June 30, 2022									Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S. Treasury securities									$	486,358	$	—	$	—	$	486,358
Obligations of states and political subdivisions	$	—	$	2,665,367	$	—	$	2,665,367		—		2,244,604		—		2,244,604
Corporate bonds		—		32,984		—		32,984		—		100,267		—		100,267
Residential mortgage-backed securities		—		3,028,149		—		3,028,149		—		2,964,904		—		2,964,904
Commercial mortgage-backed securities		—		389,016		—		389,016		—		414,825		—		414,825
Other securities		4,468		—		—		4,468		4,078		—		—		4,078
Total	$	4,468	$	6,115,516	$	—	$	6,119,984	$	490,436	$	5,724,600	$	—	$	6,215,036
Loans held-for-sale	$	—	$	46,081	$	—	$	46,081	$	—	$	23,848	$	—	$	23,848
IRLCs	$	—	$	1,701	$	—	$	1,701	$	—	$	1,414	$	—	$	1,414
Forward mortgage-backed securities trades	$	—	$	828	$	—	$	828	$	—	$	58	$	—	$	58


December 31, 2021	Level 1 Inputs		Level 2 Inputs			Level 3 Inputs		Total Fair Value
December 31, 2022											Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S. Treasury securities	$	126,841	$	—		$	—	$	126,841		$	482,549	$	—	$	—	$	482,549
Obligations of state and political subdivisions		—		2,753,471			—		2,753,471			—		1,898,611		—		1,898,611
Corporate bonds		—		63,868			—		63,868			—		97,850		—		97,850
Residential mortgage-backed securities		—		3,259,449			—		3,259,449			—		2,616,566		—		2,616,566
Commercial mortgage-backed securities		—		365,120			—		365,120			—		374,869		—		374,869
Other securities		4,430		—			—		4,430			3,914		—		—		3,914
Total	$	131,271	$	6,441,908		$	—	$	6,573,179		$	486,463	$	4,987,896	$	—	$	5,474,359
Loans held-for-sale	$	—	$	34,122		$	—	$	34,122		$	—	$	10,497	$	—	$	10,497
IRLCs	$	—	$	1,279		$	—	$	1,279		$	—	$	400	$	—	$	400
Forward mortgage-backed securities trades	$	—	$	(147	)	$	—	$	(147	)	$	—	$	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,		June 30,				December 31,
	2022			2021		2021		2023		2022		2022
Unpaid principal balance on loans held-for-sale	$	15,998		$	44,784	$	33,200	$	17,730	$	23,312	$	10,226
Net unrealized gains (losses) on loans held-for-sale		(106	)		1,297		922
Net unrealized gains on loans held-for-sale									359		536		271
Loans held-for-sale at fair value	$	15,892		$	46,081	$	34,122	$	18,089	$	23,848	$	10,497

3938

The following table summarizes the Company’s gains on sale and fees of mortgage loans for the three and ~~nine-months~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 (dollars in thousand):


	Three-Months Ended September 30,						Nine-Months Ended September 30,						Three-Months Ended June 30,						Six-Months Ended June 30,
	2022			2021			2022			2021			2023			2022			2023		2022
Realized gain on sale and fees on mortgage loans*	$	4,664		$	9,050		$	16,973		$	29,245		$	3,429		$	6,311		$	6,288	$	12,309
Change in fair value on loans held-for-sale and IRLCs		(2,433	)		(1,466	)		(2,886	)		(4,659	)		(389	)		1,462			145		(453	)
Change in forward mortgage-backed securities trades		1,839			1,204			2,044			2,387			494			(2,045	)		75		205
Total gain on sale of mortgage loans	$	4,070		$	8,788		$	16,131		$	26,973		$	3,534		$	5,728		$	6,508	$	12,061

* 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~~June 30, ~~2022, September~~2023, June 30, ~~2021,~~2022, or December 31, ~~2021.~~2022. No significant credit losses were recognized on mortgage loans held-for-sale for the three and ~~nine-months~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~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 ~~three and nine-months~~six-months ended ~~September~~June 30, ~~2021~~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. ~~The Company had~~ no ~~other real estate owned during the three and nine-months ended September 30, 2022.~~ 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~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022.

At ~~September~~June 30, 2023, other real estate owned totaled $15,000. At June 30, 2022 and December 31, ~~2021,~~2022, the Company had no other real estate owned. ~~At September 30, 2021, other real estate owned totaled $28,000~~.

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.

4039

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,							June 30,								December 31,
	2022						2021				2021							2023				2022				2022
	Carrying Value			Estimated Fair Value			Carrying Value		Estimated Fair Value		Carrying Value			Estimated Fair Value			Fair Value Hierarchy	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Fair Value Hierarchy
Cash and due from banks	$	227,298		$	227,298		$	201,901	$	201,901	$	205,053		$	205,053		Level 1	$	255,018	$	255,018	$	242,665	$	242,665	$	293,286	$	293,286	Level 1
Interest-bearing demand deposits in banks		138,484			138,484			359,241		359,241		323,535			323,535		Level 1		23,839		23,839		222,899		222,899		37,392		37,392	Level 1
Available-for-sale securities		5,745,443			5,745,443			6,119,984		6,119,984		6,573,179			6,573,179		Levels 1 and 2		5,066,262		5,066,262		6,215,036		6,215,036		5,474,359		5,474,359	Levels 1 and 2
Loans held-for-investment, net of allowance for credit losses		6,181,380			6,215,441			5,223,124		5,236,471		5,325,507			5,335,791		Level 3		6,691,029		6,672,348		5,806,650		5,852,415		6,366,034		6,372,859	Level 3
Loans held-for-sale		18,815			18,815			47,721		47,748		37,810			37,844		Level 2		19,220		19,264		26,445		26,445		11,965		11,965	Level 2
Accrued interest receivable		49,416			49,416			43,516		43,516		57,169			57,169		Level 2		56,236		56,236		58,047		58,047		58,162		58,162	Level 2
Deposits with stated maturities		418,102			416,400			469,867		470,985		461,415			462,312		Level 2		893,429		891,181		441,387		439,546		524,666		518,811	Level 2
Deposits with no stated maturities		10,724,016			10,724,016			9,423,250		9,423,250		10,105,073			10,105,073		Level 1		9,914,131		9,914,131		10,681,596		10,681,596		10,480,841		10,480,841	Level 1
Borrowings		774,581			774,581			648,679		648,679		671,152			671,152		Level 2		587,656		587,656		768,364		768,364		642,507		642,507	Level 2
Accrued interest payable		494			494			294		294		221			221		Level 2		8,155		8,155		423		423		1,121		1,121	Level 2
IRLCs		(251	)		(251	)		1,701		1,701		1,279			1,279		Level 2		455		455		1,414		1,414		400		400	Level 2
Forward mortgage-backed securities trades asset (liability)		1,897			1,897			828		828		(147	)		(147	)	Level 2		160		160		58		58		85		85	Level 2

4140

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, ~~2021,~~2022, under the heading “Risk Factors,” and the following:

•

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

•

~~effect~~the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the ~~coronavirus (“COVID”) on our Company,~~Board of Governors of 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;~~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~~federal government to address the national economy;

•

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

•

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

•

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

•

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;

•

~~inflation, interest rate, market and monetary fluctuations;~~

•

changes in consumer spending, borrowing and savings habits;

•

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

•

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

•

changes in our liquidity position; 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 together with increasing wage costs in our markets;~~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 ~~effects~~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, 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.~~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 ~~expense is~~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 ~~2021~~2022 Annual Report on Form 10-K.

Critical Accounting Policies

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

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

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

Stock Repurchase

On July 27, 2021, the Company’s Board of Directors authorized the repurchase of up to 5.00 million common shares through July 31, 2023. ~~The~~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. ~~Subsequent to July 27, 2021 and through September~~Through June 30, ~~2022,~~2023, 244,559 shares were repurchased and retired (all during the months of June and July 2022) at an average price of $38.61. The Company did not repurchase any shares during the first half of 2023.

Results of Operations

Performance Summary. Net earnings for the ~~third~~second quarter of ~~2022~~2023 were ~~$59.34~~$50.87 million compared to earnings of ~~$58.93~~$60.49 million for the ~~third~~second quarter of ~~2021.~~2022. Diluted earnings per share was ~~$0.41~~$0.36 for ~~both~~ the ~~third~~second quarter of ~~2022~~2023 and ~~2021.~~$0.42 for the second quarter of 2022.

The return on average assets was ~~1.76%~~1.58% for the ~~third~~second quarter of ~~2022,~~2023, as compared to ~~1.90%~~1.82% for the ~~third~~second quarter of ~~2021.~~2022. The return on average equity was ~~17.31%~~14.89% for the ~~third~~second quarter of ~~2022~~2023 as compared to ~~13.43%~~17.26% for the ~~third~~second quarter of ~~2021.~~2022.

Net earnings for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2022~~2023 were ~~$175.81~~$103.44 million compared to earnings of ~~$172.23~~$116.47 million for the same period in ~~2021.~~2022. Diluted earnings per share was ~~$1.23~~$0.72 for the first ~~nine~~six months of ~~2022~~2023, as compared to ~~$1.20~~$0.81 for the same period in ~~2021.~~2022.

The return on average assets was ~~1.77%~~1.62% for the first ~~nine~~six months of ~~2022~~2023, as compared to ~~1.94%~~1.77% for the same period a year ago. The return on average equity was ~~15.88%~~15.58% for the first ~~nine~~six months of ~~2022~~2023, as compared to ~~13.55%~~15.24% for the same period in ~~2021.~~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 ~~$104.89~~$98.82 million for the ~~third~~second quarter of ~~2022,~~2023, as compared to ~~$99.45~~$102.87 million for the same period last year. The ~~increase~~change in ~~2022~~2023 tax equivalent net interest income compared to ~~2021~~2022 was largely attributable to the increases in the rates paid on deposits and borrowings offset by a change in the mix of interest earning assets primarily derived from a decrease in tax-exempt investment securities and an increase in average loans and investment securities held with lower cash and cash equivalents partially offset by increases in the rates paid on deposits and borrowings and lower PPP origination fees and interest which totaled $62 thousand in the third quarter of 2022 compared to $8.25 million in the third quarter of 2021. PPP loan balances totaled $202 thousand at September 30, 2022.loans. Average earning assets were ~~$12.54~~$12.05 billion for the ~~third~~second quarter of ~~2022,~~2023, as compared to ~~$11.58~~$12.49 billion during the ~~third~~second quarter of ~~2021.~~2022. The ~~increase~~decrease of ~~$962.89~~$441.64 million in average earning assets in ~~2022~~2023 when compared to ~~2021~~2022 was primarily a result of (i) a decrease in tax-exempt securities of $722.91 million, (ii) the ~~increase~~decrease of taxable securities of ~~$957.89~~$512.37 million, ~~(ii) the increase of average loans of $744.84 million~~ and ~~offset by~~ (iii) a decrease in short-term investments of ~~$362.07~~$168.84 million, ~~and~~offset by (iv) ~~a decrease in tax-exempt securities~~the increase of ~~$377.78~~average loans of $962.47 million, when compared to ~~September~~June 30, ~~2021~~2022 balances. ~~Additionally, the mix of loans shifted from PPP loans, which earned 1.00% excluding origination fees, to other loan categories with higher yields.~~ Average interest-bearing liabilities were ~~$7.77~~$7.75 billion for the ~~third~~second quarter of ~~2022,~~2023, as compared to ~~$6.95~~$7.78 billion in the same period in ~~2021. The increase in average interest-bearing liabilities primarily resulted from continued organic growth.~~2022. The yield on earning assets increased 1698 basis points while the rate paid on interest-bearing liabilities increased 41155 basis points for the ~~third~~second quarter of ~~2022~~2023 compared to the ~~third~~second quarter of ~~2021.~~2022.

Tax-equivalent net interest income was ~~$306.26~~$198.23 million for the ~~first nine months of 2022~~six-months ended June 30, 2023, as compared to ~~$286.41~~$202.09 million for the same period last year. The ~~increase~~change in ~~2022~~2023 tax equivalent net interest income compared to ~~2021~~2022 was largely attributable to the increases in the rates paid on deposits and borrowings offset by a change in the mix of interest earning assets primarily derived from a decrease in tax-exempt investment securities and an increase in average loans and investment securities held partially offset by increases in the rates paid on deposits and borrowings and lower PPP origination fees and interest which totaled $1.83 million for the first nine months of 2022 compared to $22.18 million for the first nine months of 2021.loans. Average earning assets were ~~$12.51~~$12.06 billion for the ~~first nine months of 2022,~~six-months ended June 30, 2023, as compared to ~~$11.15~~$12.50 billion during ~~the first nine months~~same period last year. The decrease of ~~2021. The increase of $1.36 billion~~$438.50 million in average earning assets in ~~2022~~2023 when compared to ~~2021~~2022 was primarily a result of (i) a decrease in tax-exempt securities of $791.82 million, (ii) the ~~increase~~decrease of taxable securities of ~~$1.46 billion, (ii) the increase of average loans of $426.45~~$535.90 million, and ~~offset by~~ (iii) a decrease in short-term investments of ~~$445.55~~$98.28 million, ~~and~~offset by (iv) ~~a decrease in tax-exempt securities~~the increase of ~~$75.60~~average loans of $987.50 million, when compared to ~~September~~June 30, ~~2021 average~~2022 balances. ~~Additionally, the mix of loans shifted from PPP loans, which earned 1.00%, excluding origination fees, to other loan categories with higher yields.~~ Average interest-bearing liabilities were ~~$7.74~~$7.73 billion for the ~~first nine months of~~six-months ended June 30, 2023, and June 30, 2022, ~~as compared~~respectively. Interest-bearing deposits continued to ~~$6.69 billion~~grow organically offset by the decrease in ~~the same period in 2021. The increase in average interest-bearing liabilities primarily resulted from continued organic growth.~~short-term borrowings. The yield on earning assets ~~decreased six~~increased 95 basis points while the rate paid on interest-bearing liabilities increased 15140 basis points for the ~~first nine months of 2022~~six-months ended June 30, 2023 compared to the ~~first nine months of 2021.~~six-months ended June 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, 2022 Compared to Three-Months Ended September 30, 2021									Nine-Months Ended September 30, 2022 Compared to Nine-Months Ended September 30, 2021									Three-Months Ended June 30, 2023 Compared to Three-Months Ended June 30, 2022									Six-Months Ended June 30, 2023 Compared to Six-Months Ended June 30, 2022
	Change Attributable to						Total			Change Attributable to						Total			Change Attributable to						Total			Change Attributable to						Total
	Volume			Rate			Change			Volume			Rate			Change			Volume			Rate			Change			Volume			Rate			Change
Short-term investments	$	(138	)	$	1,332		$	1,194		$	(397	)	$	1,862		$	1,465		$	(319	)	$	1,350		$	1,031		$	(270	)	$	2,856		$	2,586
Taxable investment securities		3,769			4,908			8,677			18,498			5,440			23,938			(2,392	)		3,273			881			(4,756	)		8,597			3,841
Tax-exempt investment securities (1)		(2,630	)		(689	)		(3,319	)		(1,602	)		(833	)		(2,435	)		(5,437	)		(637	)		(6,074	)		(11,425	)		(13	)		(11,438	)
Loans (1) (2)		9,880			(2,836	)		7,044			16,350			(9,976	)		6,374			11,522			18,531			30,053			23,478			31,270			54,748
Interest income		10,881			2,715			13,596			32,849			(3,507	)		29,342			3,374			22,517			25,891			7,027			42,710			49,737
Interest-bearing deposits		139			7,308			7,447			610			7,919			8,529			(5	)		24,667			24,662			53			45,052			45,105
Short-term borrowings		21			687			708			114			842			956			(5	)		5,283			5,278			(49	)		8,536			8,487
Interest expense		160			7,995			8,155			724			8,761			9,485			(10	)		29,950			29,940			4			53,588			53,592
Net interest income	$	10,721		$	(5,280	)	$	5,441		$	32,125		$	(12,268	)	$	19,857		$	3,384		$	(7,433	)	$	(4,049	)	$	7,023		$	(10,878	)	$	(3,855	)

(1)

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

(2)

Nonaccrual loans are included in loans.

The net interest margin, on a tax equivalent basis, was ~~3.32%~~3.29% for the ~~third~~second quarter of ~~2022,~~2023, a decrease of ~~nine~~1 basis ~~points~~point from the same period in ~~2021.~~2022. The net interest margin, on a tax equivalent basis, was ~~3.27%~~3.32% for the first ~~nine months~~six-months of ~~2022, a decrease~~2023, an increase of 166 basis points from the same period in ~~2021.~~2022. We continued to experience downward pressure on our net interest margin into the early part of 2023 compared to the early part of 2022 primarily

due to (i) the effects of 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 during the first quarter of 2022, and (ii) the shift in the mix of interest-earning ~~assets. However, the~~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 ~~September~~November 2022, respectively, 50 basis points in December 2022, and 25 basis points in February, March and May 2023, respectively, resulting in a target rate range of ~~300~~5.00% to ~~325~~5.25% at ~~September~~June 30, ~~2022.~~2023. Most recently, on July 26, 2023, the Federal Reserve increased rates 25 basis points resulting in a current target range of 5.25% to 5.50%.

Loan rates on variable loans have increased as the majority of such loans are indexed to the applicable prime rate (currently ~~6.25%~~8.25% at ~~September~~June 30, ~~2022)~~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 ~~51)~~50).

During 2022, we increased rates on each of the primary depository products in response to the increasing federal funds ~~rate and expect those rates will continue to move upward in the foreseeable future.~~rate. Additionally, we have approximately ~~$1.1 billion~~$984 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 ~~$1.45~~$1.48 billion and ~~$1.42~~$1.56 billion for the ~~three-months~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, with an average rate paid of ~~1.50%~~2.62% and ~~0.14%~~0.35%, for the respective ~~quarters~~six-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,																Three-Months Ended June 30,
	2022								2021								2023								2022
	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
Assets
Short-term investments (1)	$	252,036		$	1,432		2.25	%	$	614,105		$	238		0.15	%	$	121,410		$	1,583		5.23	%	$	290,250		$	552		0.76	%
Taxable investment securities (2)		4,039,107			20,799		2.06			3,081,215			12,122		1.57			3,589,381			20,032		2.23			4,101,751			19,151		1.87
Tax-exempt investment securities (2)(3)		2,164,829			14,382		2.66			2,542,606			17,701		2.78			1,653,418			11,799		2.85			2,376,324			17,873		3.01
Loans (3)(4)		6,082,649			77,851		5.08			5,337,807			70,807		5.26			6,683,276			98,541		5.91			5,720,804			68,488		4.80
Total earning assets		12,538,621		$	114,464		3.62	%		11,575,733		$	100,868		3.46	%		12,047,485		$	131,955		4.39	%		12,489,129		$	106,064		3.41	%
Cash and due from banks		227,206								205,929								222,220								233,621
Bank premises and equipment, net		150,455								147,071								152,712								149,887
Other assets		213,094								97,827								232,881								193,308
Goodwill and other intangible assets, net		315,962								317,327								315,192								316,278
Allowance for credit losses		(72,737	)							(63,055	)							(80,721	)							(67,383	)
Total assets	$	13,372,601							$	12,280,832							$	12,889,769							$	13,314,840
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	7,004,478		$	8,787		0.50	%	$	6,346,267		$	1,340		0.08	%	$	7,037,677		$	27,629		1.57	%	$	7,049,041		$	2,967		0.17	%
Short-term borrowings		768,096			784		0.40			599,934			76		0.05			715,071			5,510		3.09			730,477			232		0.13
Total interest-bearing liabilities		7,772,574		$	9,571		0.49	%		6,946,201		$	1,416		0.08	%		7,752,748		$	33,139		1.71	%		7,779,518		$	3,199		0.16	%
Noninterest-bearing deposits		4,178,675								3,490,685								3,704,143								4,064,207
Other liabilities		61,320								103,446								62,227								65,475
Total liabilities		12,012,569								10,540,332								11,519,118								11,909,200
Shareholders’ equity		1,360,032								1,740,500								1,370,651								1,405,640
Total liabilities and shareholders’ equity	$	13,372,601							$	12,280,832							$	12,889,769							$	13,314,840
Net interest income				$	104,893							$	99,452							$	98,816							$	102,865
Rate Analysis:
Interest income/earning assets							3.62	%							3.46	%							4.39	%							3.41	%
Interest expense/earning assets							(0.30	)							(0.05	)							(1.10	)							(0.11	)
Net interest margin							3.32	%							3.41	%							3.29	%							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 ~~$1.74~~$2.95 million and ~~$3.67~~$4.08 million in the ~~third~~second quarters of ~~2022~~2023 and ~~2021,~~2022, respectively, using an effective tax rate of 21% for both periods.

(4)

~~Nonaccrual loans are included in~~Includes nonaccrual loans.

4544


	Nine-Months Ended September 30,																Six-Months Ended June 30,
	2022								2021								2023								2022
	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
Assets
Short-term investments (1)	$	238,713		$	2,080		1.16	%	$	684,263		$	615		0.12	%	$	133,662		$	3,234		4.87	%	$	231,941		$	648		0.56	%
Taxable investment securities (2)		4,123,562			57,772		2.80			2,665,988			33,834		1.69			3,630,591			40,815		2.25			4,166,490			36,974		1.77
Tax-exempt investment securities (2)(3)		2,382,754			49,655		2.78			2,458,352			52,090		2.83			1,701,707			24,542		2.88			2,493,523			35,980		2.89
Loans (3)(4)		5,765,844			211,095		4.89			5,339,398			204,721		5.13			6,592,310			188,002		5.75			5,604,815			133,254		4.79
Total earning assets		12,510,873		$	320,602		3.43	%		11,148,001		$	291,260		3.49	%		12,058,270		$	256,593		4.29	%		12,496,769		$	206,856		3.34	%
Cash and due from banks		230,427								204,246								232,160								232,063
Bank premises and equipment, net		149,997								144,566								153,017								149,764
Other assets		173,061								97,234								230,712								152,715
Goodwill and other intangible assets, net		316,274								317,726								315,300								316,432
Allowance for credit losses		(67,931	)							(64,446	)							(78,436	)							(65,488	)
Total assets	$	13,312,701							$	11,847,327							$	12,911,023							$	13,282,255
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	6,984,249		$	13,124		0.25	%	$	6,165,740		$	4,595		0.10	%	$	7,058,979		$	49,441		1.41	%	$	6,973,967		$	4,336		0.13	%
Short-term borrowings		759,913			1,216		0.21			528,599			260		0.07			670,352			8,920		2.68			755,755			433		0.12
Total interest-bearing liabilities		7,744,162		$	14,340		0.25	%		6,694,339		$	4,855		0.10	%		7,729,331		$	58,361		1.52	%		7,729,722		$	4,769		0.12	%
Noninterest-bearing deposits		4,024,731								3,349,719								3,781,876								3,946,483
Other liabilities		63,919								103,354								61,134								65,239
Total liabilities		11,832,812								10,147,412								11,572,341								11,741,444
Shareholders’ equity		1,479,889								1,699,915								1,338,682								1,540,811
Total liabilities and shareholders’ equity	$	13,312,701							$	11,847,327							$	12,911,023							$	13,282,255
Net interest income (tax equivalent)				$	306,262							$	286,405							$	198,232							$	202,087
Rate Analysis:
Interest income/earning assets							3.43	%							3.49	%							4.29	%							3.34	%
Interest expense/earning assets							(0.16	)							(0.06	)							(0.97	)							(0.08	)
Net interest margin							3.27	%							3.43	%							3.32	%							3.26	%

(1)

Short-term investments are comprised of federal funds sold, interest-bearing deposits in banks and interest-bearing time deposits in banks.

(2)

Average balances include unrealized gains and losses on available-for-sale securities.

(3)

Includes tax equivalent yield adjustment of approximately ~~$8.88~~$6.08 million and ~~$10.85~~$7.87 million in the first ~~nine~~six months of ~~2022~~2023 and ~~2021,~~2022, respectively, using an effective tax rate of 21% for both periods.

(4)

~~Nonaccrual loans are included in~~Includes nonaccrual loans.

Noninterest Income. Noninterest income for the ~~third~~second quarter of ~~2022~~2023 was ~~$30.94~~$29.95 million compared to ~~$37.73~~$37.32 million in the same quarter of 2021. Increases in certain categories of noninterest income included (i) trust fees of $830 thousand, (ii) service charges on deposit accounts of $726 thousand, (iii) net gain on sale of assets of $532 thousand, (iv) net gain on sale of available-for-sale securities of $333 thousand and (v) net gain on sale of foreclosed assets of $322 thousand when compared to the third quarter of 2021.The increase in trust fees was driven mainly by the continued increase in oil and gas revenue. Mortgage related income was $4.07 million in the third quarter of 2022 compared to $8.79 million in the third quarter of 2021 due to lower overall origination volumes and margins as a result of the changes in interest rates during the quarter.2022. Debit card fees for the ~~third~~second quarter of ~~2022~~2023 decreased by ~~$3.61~~$3.15 million from the ~~third~~second quarter of ~~2021~~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, ~~which~~and is consistent with our previously disclosed expectations. Accordingly, the second quarter of 2023 is the last quarter that will be impacted for comparability purposes to the prior ~~disclosures.~~year. Mortgage related income was $3.53 million in the second quarter of 2023 compared to $5.73 million in the second quarter of 2022 due to lower overall origination volumes and margins on loan sales as a result of the increases in interest rates. Available for sale securities were sold in the second quarter last year for gain on sales of $1.65 million. Securities sales activity in subsequent quarters in 2022 and the second quarter in 2023 did not generate similar gains. Recoveries of interest on previously charged-off or nonaccrual loans ~~was $664~~totaled $475 thousand for the ~~third~~second quarter of 2023 compared to $1.65 million for the second quarter of 2022, which was larger than normal. Service charges on deposits increased to $6.31 million for the second quarter of 2023 compared ~~to $1.75~~with $6.04 million ~~during~~for the ~~same period~~second quarter of ~~2021.~~2022, driven by the growth in net new accounts.

Noninterest income for the ~~nine-month period~~six-months ended ~~September~~June 30, ~~2022~~2023 was ~~$103.14~~$57.95 million compared to $107.27 million compared to the same period in 2021. Increases in certain categories of noninterest income included (i) trust fees of $3.40 million, (ii) service charges on deposit accounts of $2.75 million, (iii) net gain on sale of foreclosed assets of $1.37 million, and (iv) net gain on sale of available-for-sale securities of $1.20 million when compared to the same period of 2021. The increase in trust fees was driven mainly by the continued increase in oil and gas revenue. Mortgage related income was $16.13 million for the nine-month period ended September 30, 2022 compared to $26.97$72.20 million in the same period ~~of 2021 due to lower overall origination volumes and margins as a result of the changes~~ in ~~interest rates during the year.~~2022. Debit card fees ~~were $24.38~~ for the ~~first nine months of 2022 compared to $26.55~~six-months ended June 30, 2023 were $11.66 million compared to $18.80 million during the ~~first nine months of 2021~~six-months ended June 30, 2022 due to the impact of the Bank becoming subject to regulations imposed by the Federal Reserve that limits debit card interchange revenue ~~under~~(also known as the ~~Durbin Amendment~~"Durbin Amendment") which became effective for the Company as of July 1, 2022, ~~which~~and is consistent with our ~~prior disclosures~~previously disclosed expectations. Mortgage related income was $6.51 million in the six-months ended June 30, 2023 compared to $12.06 million in the six-months ended June 30, 2022 due to lower overall origination volumes and margins on loan sales as a result of ~~$18~~the increases in interest rates. Total net gain on the sale of other assets and interest on loan recoveries was $1.84 million ~~annually.~~for the first six months of 2023 compared to $4.71 million during the same period of 2022. Service charges on deposits increased to $12.35 million for the first six months of 2023 compared with $11.74 million for the same period of 2022, driven by the growth in net new accounts.

4645

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. ~~Management has estimated the impact of this reduction in interchange fees to approximate $18 million annually (pre-tax).~~ Based on the applicable Federal Reserve Board rules, ~~as amended,~~ the Company became subject to the limitation effective July 1, 2022, which reduced debit card fees during the ~~third quarter~~first six months of ~~2022,~~2023, as discussed above.

Table 3 - Noninterest Income (dollars in thousands):


	Three-Months Ended September 30,								Nine-Months Ended September 30,							Three-Months Ended June 30,								Six-Months Ended June 30,
	2022		Increase (Decrease)			2021			2022		Increase (Decrease)			2021		2023			Increase (Decrease)			2022		2023		Increase (Decrease)			2022
Trust fees	$	10,314	$	830		$	9,484		$	29,873	$	3,398		$	26,475	$	9,883		$	141		$	9,742	$	19,728	$	169		$	19,559
Service charges on deposit accounts		6,399		726			5,673			18,143		2,749			15,394		6,310			272			6,038		12,346		602			11,744
Debit card fees		5,587		(3,611	)		9,198			24,381		(2,171	)		26,552		6,720			(3,148	)		9,868		11,656		(7,139	)		18,795
Credit card fees		651		56			595			1,953		182			1,771		711			11			700		1,320		19			1,301
Gain on sale and fees on mortgage loans		4,070		(4,718	)		8,788			16,131		(10,842	)		26,973		3,534			(2,194	)		5,728		6,508		(5,553	)		12,061
Net gain on sale of available-for-sale securities		334		333			1			2,013		1,199			814		46			(1,602	)		1,648		58		(1,621	)		1,679
Net gain on sale of foreclosed assets		349		322			27			1,451		1,368			83
Net gain (loss) on sale of foreclosed assets																	(1	)		(19	)		18		33		(1,069	)		1,102
Net gain (loss) on sale of assets		526		532			(6	)		522		309			213		—			(6	)		6		930		934			(4	)
Interest on loan recoveries		664		(1,082	)		1,746			2,596		(236	)		2,832		475			(1,174	)		1,649		821		(1,111	)		1,932
Other:
Check printing fees		29		(59	)		88			87		(68	)		155		22			(9	)		31		42		(16	)		58
Safe deposit rental fees		192		—			192			671		(19	)		690		187			(2	)		189		467		(11	)		478
Credit life fees		268		12			256			853		18			835		134			(232	)		366		275		(310	)		585
Brokerage commissions		355		18			337			1,130		91			1,039		376			(25	)		401		734		(41	)		775
Wire transfer fees		428		61			367			1,252		215			1,037		417			(19	)		436		804		(20	)		824
Miscellaneous income		777		(203	)		980			2,085		(325	)		2,410		1,133			636			497		2,232		923			1,309
Total other		2,049		(171	)		2,220			6,078		(88	)		6,166		2,269			349			1,920		4,554		525			4,029
Total Noninterest Income	$	30,943	$	(6,783	)	$	37,726		$	103,141	$	(4,132	)	$	107,273	$	29,947		$	(7,370	)	$	37,317	$	57,954	$	(14,244	)	$	72,198

Noninterest Expense. Total noninterest expense for the ~~third~~second quarter of ~~2022~~2023 was ~~$59.44~~$57.61 million, ~~a decrease of $3.50~~compared to $58.33 million ~~or 5.56%, as compared to~~for the same period of ~~2021.~~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 ~~improved to 43.76%~~was 44.74% for the ~~third~~second quarter of ~~2022~~2023 compared to ~~45.88%~~41.61% for the same quarter in ~~2021.~~2022.

Salaries, commissions and employee benefits for the ~~third~~second quarter of ~~2022~~2023 totaled ~~$33.89~~$31.77 million, compared to ~~$37.09~~$33.15 million for the same period in ~~2021.~~2022. The net decrease reflected lower profit sharing expenses of $1.34 million, a $645 thousand decrease in mortgage incentive compensation expenses ~~of $1.25 million~~ and a $591 thousand decrease ~~of $1.87 million~~ in ~~profit sharing~~medical expenses, offset by annual merit-based and other market-based pay increases that were effective March 1, ~~2022 for the third quarter of 2022.~~2023.

All other categories of noninterest expense for the ~~third~~second quarter of ~~2022~~2023 totaled ~~$25.55~~$25.85 million, ~~down from $25.85~~compared to $25.19 million in the same quarter a year ago. Noninterest expense, excluding salary related costs, for the three-months ended ~~September~~June 30, ~~2022 decreased~~2023 increased primarily due to ~~decreases~~increases in ~~software amortization and expense and operational other losses~~FDIC insurance premiums of $513 thousand due to the increased FDIC insurance base assessment rate effective January 1, 2023, compared to the three-months ended ~~September~~June 30, ~~2021.~~2022.

Total noninterest expense for the first ~~nine~~six months of ~~2022~~2023 was ~~$177.00~~$114.87 million, a decrease of ~~$3.04~~$2.69 million, or ~~1.69%~~2.29%, as compared to the same period ~~of 2021.~~in 2022. Our efficiency ratio was 44.84% for the first ~~nine~~six months of ~~2022 improved to 43.23%~~2023 compared to ~~45.73%~~42.86% for the same period in ~~2021.~~2022.

Salaries, commissions and employee benefits for the first ~~nine~~six months of ~~2022~~2023 totaled ~~$101.18~~$63.23 million, compared to ~~$107.07~~$67.29 million for the same period in ~~2021.~~2022. The net decrease reflected lower profit sharing expenses of $2.91 million, a $1.71 million decrease in mortgage incentive compensation expenses ~~of $4.14 million~~ and a $1.16 million decrease ~~of $3.37 million~~ in ~~profit sharing~~medical expenses, offset by annual merit-based and other market-based pay increases that were effective March 1, ~~2022 for the first nine months of 2022.~~2023.

All other categories of noninterest expense for the first ~~nine~~six months of ~~2022~~2023 totaled ~~$75.82~~$51.64 million, ~~up from $72.97~~compared to $50.27 million infor the same period ~~a year ago.~~in 2022. Noninterest expense, excluding salary related costs, for the ~~nine-months~~six-months ended ~~September~~June 30, ~~2022,~~2023 increased ~~compared to the nine-months ended September 30, 2021,~~ primarily due to ~~$743 thousand of foreclosed asset expenses together with~~ increases in ~~debit card expense,~~ FDIC insurance premiums of $1.30 million due to the increased FDIC insurance base assessment ~~fees and printing, stationary and supplies and loan processing costs.~~rate effective January 1, 2023.

4746

Table 4 - Noninterest Expense (dollars in thousands):


	Three-Months Ended September 30,							Nine-Months Ended September 30,							Three-Months Ended June 30,								Six-Months Ended June 30,
	2022		Increase (Decrease)			2021		2022		Increase (Decrease)			2021		2023			Increase (Decrease)			2022		2023		Increase (Decrease)			2022
Salaries and commissions	$	26,805	$	(1,302	)	$	28,107	$	78,335	$	(2,744	)	$	81,079
Salaries, commissions and incentives (excluding mortgage)															$	24,030		$	1,115		$	22,915	$	47,360	$	1,651		$	45,709
Mortgage salaries and incentives																2,212			(645	)		2,857		4,109		(1,712	)		5,821
Medical		3,009		(191	)		3,200		8,396		(399	)		8,795		1,905			(591	)		2,496		4,224		(1,164	)		5,388
Profit sharing		763		(1,867	)		2,630		3,667		(3,368	)		7,035		(30	)		(1,337	)		1,307		—		(2,905	)		2,905
401(k) match expense		897		16			881		2,821		50			2,771		964			22			942		1,933		9			1,924
Payroll taxes		1,688		61			1,627		5,575		104			5,471		1,820			101			1,719		3,934		47			3,887
Stock based compensation		730		85			645		2,383		467			1,916		865			(46	)		911		1,667		16			1,651
Total salaries and employee benefits		33,892		(3,198	)		37,090		101,177		(5,890	)		107,067		31,766			(1,381	)		33,147		63,227		(4,058	)		67,285
Net occupancy expense		3,440		152			3,288		9,957		281			9,676		3,423			131			3,292		6,853		336			6,517
Equipment expense		2,396		(54	)		2,450		6,999		208			6,791		2,198			(148	)		2,346		4,325		(278	)		4,603
FDIC assessment fees		917		102			815		2,690		408			2,282
FDIC insurance premiums																1,417			513			904		3,071		1,298			1,773
Debit card expense		3,013		84			2,929		9,177		441			8,736		3,221			21			3,200		6,420		256			6,164
Professional and service fees		2,219		(187	)		2,406		6,635		(301	)		6,936		2,397			206			2,191		4,762		347			4,415
Printing, stationery and supplies		600		168			432		1,641		395			1,246		740			239			501		1,450		409			1,041
Operational and other losses		869		(218	)		1,087		2,247		339			1,908		856			74			782		1,787		409			1,378
Software amortization and expense		2,564		(291	)		2,855		7,543		(760	)		8,303		2,519			(3	)		2,522		4,830		(149	)		4,979
Amortization of intangible assets		306		(92	)		398		946		(276	)		1,222		228			(92	)		320		456		(184	)		640
Other:
Data processing fees		433		(68	)		501		1,323		(22	)		1,345		491			46			445		986		96			890
Postage		352		(68	)		420		993		(93	)		1,086		345			13			332		718		78			640
Advertising		738		(118	)		856		2,175		(7	)		2,182		889			150			739		1,482		43			1,439
Correspondent bank service charges		265		(2	)		267		797		40			757		221			(57	)		278		436		(96	)		532
Telephone		759		80			679		2,278		(499	)		2,777		794			40			754		1,624		105			1,519
Public relations and business development		954		64			890		2,561		217			2,344		900			85			815		1,782		174			1,608
Directors’ fees		589		1			588		1,938		138			1,800		626			(3	)		629		1,292		(57	)		1,349
Audit and accounting fees		513		(2	)		515		1,538		37			1,501		642			129			513		1,264		239			1,025
Legal fees and other related costs		323		(115	)		438		1,254		(615	)		1,869		369			109			260		611		(319	)		930
Regulatory exam fees		399		25			374		1,188		140			1,048		310			(85	)		395		621		(168	)		789
Travel		464		116			348		1,238		293			945		472			11			461		917		143			774
Courier expense		307		73			234		886		188			698		315			1			314		593		14			579
Other real estate owned		1		(9	)		10		3		(46	)		49		11			9			2		11		9			2
Other		3,129		60			3,069		9,816		2,348			7,468
Other miscellaneous expense																2,463			(728	)		3,191		5,351		(1,336	)		6,687
Total other		9,226		37			9,189		27,988		2,119			25,869		8,848			(280	)		9,128		17,688		(1,075	)		18,763
Total Noninterest Expense	$	59,442	$	(3,497	)	$	62,939	$	177,000	$	(3,036	)	$	180,036	$	57,613		$	(720	)	$	58,333	$	114,869	$	(2,689	)	$	117,558

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~~June 30, ~~2022,~~2023, total loans held-for-investment were ~~$6.26~~$6.78 billion, an increase of ~~$866.52~~$335.70 million, as compared to December 31, ~~2021.~~2022. Total PPP loans outstanding were ~~$202~~$141 thousand at ~~September~~June 30, ~~2022,~~2023, which are included in the Company’s commercial loan totals.

As compared to year-end ~~2021~~2022 balances, total real estate loans increased ~~$659.25 million, total consumer loans increased $157.21~~$244.41 million, total commercial loans increased ~~$71.21~~$99.43 million, agricultural loans increased $5.09 million, and ~~agricultural~~total consumer loans decreased ~~$21.15~~$13.22 million. Loans averaged ~~$6.08~~$6.68 billion for the ~~third~~second quarter of ~~2022,~~2023, an increase of ~~$744.84~~$962.47 million over the prior year ~~third~~second quarter average balances. Loans averaged ~~$5.77~~$6.59 billion for the first ~~nine~~six months of ~~2022,~~2023, an increase of ~~$426.45~~$987.50 million from the prior year ~~nine-month~~six-month period average balances.

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

4847

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,		June 30,				December 31,
	2022		2021		2021		2023		2022		2022
Commercial:
C&I *	$	871,335	$	819,597	$	837,075	$	1,021,863	$	839,928	$	917,317
Municipal		214,852		165,847		177,905		215,977		200,577		221,090
Total Commercial		1,086,187		985,444		1,014,980		1,237,840		1,040,505		1,138,407
Agricultural		76,937		98,947		98,089		82,032		90,420		76,947
Real Estate:
Construction & Development		938,051		656,530		749,793		915,221		928,644		959,426
Farm		268,139		203,064		217,220		335,644		250,028		306,322
Non-Owner Occupied CRE		717,738		674,958		623,434		811,347		636,432		732,089
Owner Occupied CRE		945,665		824,231		821,653		1,011,511		909,899		954,400
Residential		1,536,180		1,328,798		1,334,419		1,698,679		1,412,125		1,575,758
Total Real Estate		4,405,773		3,687,581		3,746,519		4,772,402		4,137,128		4,527,995
Consumer:
Auto		538,798		394,072		405,416		534,603		468,147		550,635
Non-Auto		147,793		120,450		123,968		150,693		142,382		147,884
Total Consumer		686,591		514,522		529,384		685,296		610,529		698,519
Total	$	6,255,488	$	5,286,494	$	5,388,972	$	6,777,570	$	5,878,582	$	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 ~~$18.82~~$19.22 million, ~~$47.72~~$26.45 million, and ~~$37.81~~$11.97 million at ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, respectively. At ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021, $2.92~~2022, $1.13 million, ~~$1.64~~$2.60 million and ~~$3.69~~$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.

4948

The following tables summarize maturity information of our loan portfolio as of ~~September~~June 30, ~~2022.~~2023. The tables also presents the ~~portions~~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~~June 30, ~~2022~~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			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	$	336,198		$	422,103		$	95,439		$	17,393		$	871,133		$	441,274		$	459,379		$	102,774		$	18,436		$	1,021,863
PPP		—			202			—			—			202
Municipal		3,599			50,008			124,815			36,430			214,852			4,201			49,734			113,736			48,306			215,977
Total Commercial		339,797			472,313			220,254			53,823			1,086,187			445,475			509,113			216,510			66,742			1,237,840
Agricultural		56,040			19,155			1,742			—			76,937			62,348			17,963			1,721			—			82,032
Real Estate:
Construction & Development		491,989			189,822			165,097			91,143			938,051			422,923			171,809			199,424			121,065			915,221
Farm		18,005			27,830			136,376			85,928			268,139			17,486			66,479			170,799			80,880			335,644
Non-Owner Occupied CRE		27,597			197,675			358,562			133,904			717,738			69,770			242,469			375,592			123,516			811,347
Owner Occupied CRE		45,283			209,925			458,600			231,857			945,665			35,593			258,705			472,892			244,321			1,011,511
Residential		120,532			118,750			682,916			613,982			1,536,180			115,636			146,352			744,750			691,941			1,698,679
Total Real Estate		703,406			744,002			1,801,551			1,156,814			4,405,773			661,408			885,814			1,963,457			1,261,723			4,772,402
Consumer:
Auto		5,860			495,483			37,455			—			538,798			6,274			510,863			17,466			—			534,603
Non-Auto		28,989			96,328			16,484			5,992			147,793			29,572			96,508			18,843			5,770			150,693
Total Consumer		34,849			591,811			53,939			5,992			686,591			35,846			607,371			36,309			5,770			685,296
Total	$	1,134,092		$	1,827,281		$	2,077,486		$	1,216,629		$	6,255,488		$	1,205,077		$	2,020,261		$	2,217,997		$	1,334,235		$	6,777,570
% of Total Loans		18.13	%		29.21	%		33.21	%		19.45	%		100.00	%		17.77	%		29.81	%		32.73	%		19.69	%		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			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	$	55,976		$	272,468		$	12,669		$	—		$	341,113		$	86,664		$	306,175		$	13,219		$	—		$	406,058
PPP		—			202			—			—			202
Municipal		3,104			48,690			94,149			14,553			160,496			3,523			48,698			81,872			7,276			141,369
Total Commercial		59,080			321,360			106,818			14,553			501,811			90,187			354,873			95,091			7,276			547,427
Agricultural		8,110			13,071			477			—			21,658			14,440			13,019			389			—			27,848
Real Estate:
Construction & Development		180,442			81,221			39,992			562			302,217			166,822			126,991			48,651			6,040			348,504
Farm		5,238			18,307			79,343			945			103,833			3,942			22,254			104,369			1,018			131,583
Non-Owner Occupied CRE		10,959			142,347			70,904			—			224,210			18,906			154,388			70,855			248			244,397
Owner Occupied CRE		30,365			143,375			48,599			218			222,557			18,182			157,970			43,932			187			220,271
Residential		47,287			99,737			451,276			39,583			637,883			46,091			108,353			468,935			58,240			681,619
Total Real Estate		274,291			484,987			690,114			41,308			1,490,700			253,943			569,956			736,742			65,733			1,626,374
Consumer:
Auto		5,860			495,483			37,455			—			538,798			6,274			510,863			17,466			—			534,603
Non-Auto		23,978			94,078			16,070			5,627			139,753			24,490			94,248			18,524			5,508			142,770
Total Consumer		29,838			589,561			53,525			5,627			678,551			30,764			605,111			35,990			5,508			677,373
Total	$	371,319		$	1,408,979		$	850,934		$	61,488		$	2,692,720		$	389,334		$	1,542,959		$	868,212		$	78,517		$	2,879,022
% of Total Loans		5.94	%		22.52	%		13.60	%		0.98	%		43.04	%		5.73	%		22.77	%		12.81	%		1.16	%		42.47	%

5049


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			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	$	280,222		$	149,635		$	82,770		$	17,393		$	530,020		$	354,610		$	153,204		$	89,555		$	18,436		$	615,805
PPP		—			—			—			—			—
Municipal		495			1,318			30,666			21,877			54,356			678			1,036			31,864			41,030			74,608
Total Commercial		280,717			150,953			113,436			39,270			584,376			355,288			154,240			121,419			59,466			690,413
Agricultural		47,930			6,084			1,265			—			55,279			47,908			4,944			1,332			—			54,184
Real Estate:
Construction & Development		311,547			108,601			125,105			90,581			635,834			256,101			44,818			150,773			115,025			566,717
Farm		12,767			9,523			57,033			84,983			164,306			13,544			44,225			66,430			79,862			204,061
Non-Owner Occupied CRE		16,638			55,328			287,658			133,904			493,528			50,864			88,081			304,737			123,268			566,950
Owner Occupied CRE		14,918			66,550			410,001			231,639			723,108			17,411			100,735			428,960			244,134			791,240
Residential		73,245			19,013			231,640			574,399			898,297			69,545			37,999			275,815			633,701			1,017,060
Total Real Estate		429,115			259,015			1,111,437			1,115,506			2,915,073			407,465			315,858			1,226,715			1,195,990			3,146,028
Consumer:
Auto		—			—			—			—			—			—			—			—			—			—
Non-Auto		5,011			2,250			414			365			8,040			5,082			2,260			319			262			7,923
Total Consumer		5,011			2,250			414			365			8,040			5,082			2,260			319			262			7,923
Total	$	762,773		$	418,302		$	1,226,552		$	1,155,141		$	3,562,768		$	815,743		$	477,302		$	1,349,785		$	1,255,718		$	3,898,548
% of Total Loans		12.19	%		6.69	%		19.61	%		18.47	%		56.96	%		12.04	%		7.04	%		19.92	%		18.53	%		57.53	%

Of the ~~$3.56~~$3.90 billion of variable interest rate loans shown above, loans totaling ~~$1.4~~$1.5 billion mature or reprice over the next twelve ~~months with floating rates subject to floors in many cases.~~months. Of this amount, approximately ~~$1.37~~$1.4 billion will reprice immediately upon changes in the underlying index rate (primarily U.S. prime rate) with the remaining ~~$30~~$134 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 ~~restructured loans plus~~ foreclosed assets were ~~$24.62~~$29.25 million at ~~September~~June 30, ~~2022,~~2023, as compared to ~~$25.28~~$25.52 million at ~~September~~June 30, ~~2021~~2022 and ~~$34.16~~$24.33 million at December 31, ~~2021.~~2022. As a percent of loans held-for-investment and foreclosed assets, these assets were ~~0.39%~~0.43% at ~~September~~June 30, 2023, and June 30, 2022, ~~as compared to 0.48% at September 30, 2021~~respectively, and ~~0.63%~~0.38% at December 31, ~~2021.~~2022. As a percent of total assets, these assets were ~~0.19%~~0.23% at ~~September~~June 30, ~~2022,~~2023, as compared to ~~0.20%~~0.19% at ~~September~~June 30, ~~2021~~2022 and ~~0.26% at~~ December 31, ~~2021.~~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~~June 30, ~~2022.~~2023.

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


	September 30,						December 31,			June 30,						December 31,
	2022			2021			2021			2023			2022			2022
Nonaccrual loans	$	24,585		$	25,210		$	31,652		$	28,672		$	25,495		$	24,325
Loans still accruing and past due 90 days or more		15			23			8			552			22			—
Troubled debt restructured loans*		19			22			21
Nonperforming loans		24,619			25,255			31,681
Total nonperforming loans (1)											29,224			25,517			24,325
Foreclosed assets		—			28			2,477			25			—			—
Total nonperforming assets	$	24,619		$	25,283		$	34,158		$	29,249		$	25,517		$	24,325
As a % of loans held-for-investment and foreclosed assets		0.39	%		0.48	%		0.63	%		0.43	%		0.43	%		0.38	%
As a % of total assets		0.19	%		0.20	%		0.26	%		0.23			0.19			0.19

* Troubled debt restructured loans(1) With the adoption of $1.95 million, $4.73 million and $6.72 million, respectively, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in nonaccrual loans as of September 30, 2022 and 2021, and December 31, 2021, respectively.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 ~~$1.35 million~~$963 thousand for the year ended December 31, ~~2021.~~2022. If interest on these loans had been recognized on a full accrual basis during the year ended December 31, ~~2021,~~2022, such income would have ~~approximated $2.61~~been approximately $2.32 million. Such amounts for the ~~2022~~2023 and ~~2021~~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 ~~$1.06~~$6.52 million for the three-months ended ~~September~~June 30, ~~2022~~2023 is combined with the reversal of provision for unfunded commitments of ~~$2.16 million~~$949 thousand and reported in the net aggregate of ~~$3.22~~$5.57 million under the provision for credit losses in the consolidated statements of earnings for the three-months ended ~~September~~June 30, ~~2022.~~2023. The provision for loan losses of ~~$8.91~~$11.23 million for the ~~nine-months~~six-months ended ~~September~~June 30, ~~2022~~2023 is combined with the reversal of provision for unfunded commitments of ~~$4.44~~$2.88 million and reported in the net aggregate of ~~$13.35~~$8.35 million under the provision for credit losses in the consolidated statements of earnings for the ~~nine-months~~six-months ended ~~September~~June 30, ~~2022.~~2023.

~~There was no~~50

The provision for loan losses ~~or unfunded commitments~~of $4.10 million for the three-months ended ~~September~~June 30, ~~2021. The $4.47 million reversal of the provision for loan losses for the nine-months ended September 30, 2021~~2022 is combined with the provision for unfunded commitments ~~$1.27~~of $1.25 million and reported in the ~~net~~ aggregate ~~reversal~~ of ~~$3.20~~$5.35 million under the provision for credit losses in the consolidated statements of earnings for the ~~nine-months~~three-months ended ~~September~~June 30, ~~2021.~~2022. The ~~increase~~provision for loan losses of $7.85 million for the six-months ended June 30, 2022 is combined with the provision for unfunded commitments of $2.28 million and reported in the ~~Company's~~aggregate of $10.13 million under the provision for credit losses ~~during 2022 was primarily driven by strong organic loan growth, increases in unfunded commitments and a slight decline~~ in the ~~projected economic forecast metrics offset by loan recoveries and lower classified loan specific reserves.~~consolidated statements of earnings for the six-months ended June 30, 2022.

As a percent of average loans, net loan ~~recoveries~~charge-offs were ~~0.07%~~0.05% for the ~~third~~second quarter of ~~2022,~~2023, as compared to ~~0.09%~~net loan recoveries of 0.06% for the ~~third~~second quarter of ~~2021.~~2022. As a percent of average loans, net loan ~~recoveries~~charge-offs were ~~0.04%~~0.02% for the first ~~nine-months~~six months of ~~2022,~~2023, as compared to ~~0.03%~~net loan recoveries of 0.02% for the first ~~nine-months~~six months of ~~2021.~~2022. The allowance for credit losses as a percent of loans held-for-investment was ~~1.18%~~1.28% as of ~~September~~June 30, ~~2022,~~2023, as compared to ~~1.20%~~1.22% and 1.18% as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2021,~~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,						Three-Months Ended June 30,						Six-Months Ended June 30,
	2022			2021			2022			2021			2023			2022			2023			2022
Allowance for credit losses at period-end	$	74,108		$	63,370		$	74,108		$	63,370		$	86,541		$	71,932		$	86,541		$	71,932
Loans held-for-investment at period-end		6,255,488			5,286,494			6,255,488			5,286,494			6,777,570			5,878,582			6,777,570			5,878,582
Average loans for period		6,082,649			5,337,807			5,765,844			5,339,398			6,683,276			5,720,804			6,592,310			5,604,815
Net charge-offs (recoveries)/average loans (annualized)		(0.07	)%		(0.09	)%		(0.04	)%		(0.03	)%		0.05	%		(0.06	)%		0.02	%		(0.02	)%
Allowance for loan losses/period-end loans held-for-investment		1.18	%		1.20	%		1.18	%		1.20	%		1.28	%		1.22	%		1.28	%		1.22	%
Allowance for loan losses/nonaccrual loans, past due 90 days still accruing and restructured loans		301.02	%		250.92	%		301.02	%		250.92	%		296.13	%		281.90	%		296.13	%		281.90	%

Interest-Bearing Demand Deposits in Banks. The Company had interest-bearing deposits in banks of ~~$138.48~~$23.84 million at ~~September~~June 30, 2023 compared to $222.90 million at June 30, 2022 ~~compared to $359.24 million at September 30, 2021~~ and ~~$323.54~~$37.39 million at December 31, ~~2021,~~2022, respectively. At ~~September~~June 30, ~~2022,~~2023, interest-bearing deposits in banks included ~~$137.02~~$23.10 million maintained at the Federal Reserve Bank of Dallas and ~~$1.46 million~~$743 thousand on deposit with the FHLB.

Available-for-Sale Securities. At ~~September~~June 30, ~~2022,~~2023, securities with a fair value of ~~$5.75~~$5.07 billion were classified as securities available-for-sale. As compared to December 31, ~~2021,~~2022, the available-for-sale portfolio at ~~September~~June 30, ~~2022~~2023 reflected (i) an increase of ~~$350.34~~$1.23 million in U.S. Treasury securities, (ii) an increase of $430 thousand in corporate bonds and other securities, (iii) a decrease of ~~$669.66~~$205.65 million in obligations of states and political subdivisions, ~~(iii) an increase of $31.93 million in corporate bonds and other securities,~~ and (iv) a decrease of ~~$540.34~~$204.11 million in mortgage-backed securities. Fluctuations in the available-for-sale securities portfolio balances were primarily driven by sales during the first half of 2023, somewhat offset by improvements in the gross unrealized holding losses due to rate changes. Our mortgage related securities are backed by GNMA, FNMA or FHLMC or are collateralized by securities backed by these agencies.

See the below table and Note 2 to the Consolidated Financial Statements (unaudited) for additional disclosures relating to the maturities and fair values of the investment portfolio at ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021.~~2022.

Table 8 - Maturities and Yields of Available-for-Sale Securities Held at ~~September~~June 30, ~~2022~~2023 (dollars in thousands, except percentages):


	Maturing by Contractual Maturity																									Maturing by Contractual Maturity
	One Year or Less					After One Year Through Five Years					After Five Years Through Ten Years					After Ten Years					Total					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			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
U.S. Treasury securities	$	—		—	%	$	477,176		1.88	%	$	—		—	%	$	—		—	%	$	477,176		1.88	%	$	149,231		1.98	%	$	334,545		1.87	%	$	—		—	%	$	—		—	%	$	483,776		1.91	%
Obligations of states and political subdivisions		141,345		4.43			427,680		3.71			692,341		2.55			822,446		2.69			2,083,812		2.97			120,942		4.25			210,731		3.12			1,037,972		2.46			323,319		2.65			1,692,964		2.71
Corporate bonds and other securities		3,906		1.31			60,720		2.84			35,602		1.98			—		—			100,228		2.48			3,914		3.56			70,980		2.83			27,300		1.74			—		—			102,194		2.56
Mortgage-backed securities		93,260		2.71			1,090,832		2.14			1,323,904		1.76			576,231		2.23			3,084,227		2.01			46,647		2.91			762,784		2.21			1,407,868		1.87			570,029		2.24			2,787,328		2.06
Total	$	238,511		3.70	%	$	2,056,408		2.43	%	$	2,051,847		2.03	%	$	1,398,677		2.50	%	$	5,745,443		2.36	%	$	320,734		2.99	%	$	1,379,040		2.30	%	$	2,473,140		2.12	%	$	893,348		2.39	%	$	5,066,262		2.27	%

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~~June 30, ~~2022,~~2023, the investment portfolio had an overall tax equivalent yield of ~~2.36%~~2.27%, a weighted average life of ~~7.96~~6.97 years and modified duration of ~~6.44~~5.85 years.

Deposits. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were ~~$11.14~~$10.81 billion as of ~~September~~June 30, ~~2022,~~2023, as compared to ~~$9.89~~$11.12 billion as of ~~September~~June 30, ~~2021~~2022 and ~~$10.57~~$11.01 billion as of December 31, ~~2021.~~2022.

Table 9 provides a breakdown of average deposits and rates paid over the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

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


	Three-Months Ended September 30,										Three-Months Ended June 30,
	2022					2021					2023					2022
	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
Noninterest-bearing deposits	$	4,178,675	—%			$	3,490,685	—%			$	3,704,143	—%			$	4,064,207	—%
Interest-bearing deposits:
Interest-bearing checking		3,641,147		0.61			3,142,769		0.07			3,277,300		1.16			3,690,920		0.22
Savings and money market accounts		2,935,020		0.38			2,732,149		0.06			2,955,374		1.63			2,911,318		0.10
Time deposits under $250,000		299,211		0.31			317,843		0.26			293,988		4.94			303,759		0.19
Time deposits of $250,000 or more		129,100		0.40			153,506		0.43			511,015		1.96			143,044		0.28
Total interest-bearing deposits		7,004,478		0.50	%		6,346,267		0.08	%		7,037,677		1.57	%		7,049,041		0.17	%
Total average deposits	$	11,183,153				$	9,836,952				$	10,741,820				$	11,113,248
Total cost of deposits				0.31	%				0.05	%				1.03	%				0.11	%


	Nine-Months Ended September 30,										Six-Months Ended June 30,
	2022					2021					2023					2022
	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
Noninterest-bearing deposits	$	4,024,731	—%			$	3,349,719	—%			$	3,781,876	—%			$	3,946,483	—%
Interest-bearing deposits:
Interest-bearing checking		3,651,259		0.31			3,030,830		0.08			3,381,983		1.07			3,656,398		0.15
Savings and money market accounts		2,890,585		0.18			2,658,570		0.08			2,950,400		1.48			2,868,000		0.08
Time deposits under $250,000		303,663		0.24			320,743		0.29			266,960		4.27			305,926		0.20
Time deposits of $250,000 or more		138,742		0.32			155,597		0.51			459,636		1.84			143,643		0.28
Total interest-bearing deposits		6,984,249		0.25	%		6,165,740		0.10	%		7,058,979		1.41	%		6,973,967		0.13	%
Total average deposits	$	11,008,980				$	9,515,459				$	10,840,855				$	10,920,450
Total cost of deposits				0.16	%				0.06	%				0.92	%				0.08	%

The estimated amount of uninsured and uncollateralized deposits including related accrued and unpaid interest is approximately ~~$4.2~~$3.81 billion as of ~~September~~June 30, ~~2022.~~2023.

Borrowings. Included in borrowings were federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings of ~~$774.58~~$587.66 million, ~~$648.68~~$768.36 million and ~~$671.15~~$642.51 million at ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~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 ~~$768.10~~$715.07 million and ~~$599.93~~$730.48 million in the ~~third~~second quarters of ~~2022~~2023 and ~~2021,~~2022, respectively. The weighted average interest rates paid on these borrowings were ~~0.40%~~3.09% and ~~0.05%~~0.13% for the ~~third~~second quarters of ~~2022~~2023 and ~~2021,~~2022, respectively. The average balance of federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings were ~~$759.91~~$670.35 million and ~~$528.60~~$755.76 million for the ~~nine-months~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~September 30, 2021,~~2022, respectively. The weighted average interest rates paid on these borrowings were ~~0.21%~~2.68% and ~~0.07%~~0.12% for the ~~nine-month periods~~six-months ended ~~September~~June 30, 2023 and 2022, ~~and September 30, 2021,~~ respectively.

Interest Rate Risk

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

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

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

Percentage change in net interest income:
Change in interest rates:

September 30,

December 31,
(in basis points)

2022

2021

2021
+400

6.87%

8.60%

10.56%
+300

5.24%

7.13%

8.52%
+200

3.90%

5.23%

6.13%
+100

2.30%

3.04%

3.42%
-100

(2.80)%

(5.57)%

(5.64)%
-200

(5.62)%

(8.24)%

(9.06)%


	Percentage change in net interest income:
Change in interest rates:	June 30,		December 31,
(in basis points)	2023	2022	2022
+400	0.51%	7.34%	5.13%
+300	0.28%	5.80%	3.86%
+200	0.59%	4.36%	3.13%
+100	0.84%	2.63%	2.09%
-100	(1.84)%	(2.85)%	(2.66)%
-200	(3.88)%	(6.67)%	(5.47)%
-300	(4.27)%	(11.77)%	(8.54)%
-400	(4.00)%	(13.03)%	(10.31)%

The results for the net interest income simulations as of ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021~~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 ~~$5.75~~$5.07 billion at ~~September~~June 30, ~~2022.~~2023. During the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, the corresponding unrealized ~~gain~~loss before taxes on the portfolio of ~~$125.67~~$677.99 million at December 31, ~~2021, moved into~~2022, decreased to an unrealized loss before taxes of ~~$801.03~~$621.09 million at ~~September~~June 30, ~~2022,~~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 ~~increases~~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~~June 30, ~~2022,~~2023, the 5-year U.S. Treasury rate was ~~4.06%~~4.13% compared to ~~1.26%~~4.01% at December 31, ~~2021,~~2022, representing a ~~280~~12 basis point increase during the first ~~nine~~six months of ~~2022.~~2023. As of ~~September~~June 30, ~~2022,~~2023, an ~~additional~~increase of 100 basis ~~point increase~~points in the 5-year U.S. Treasury rate would result in an increase to unrealized losses by approximately ~~$300~~$256 million before taxes, while a 100 basis point decrease in the same rate would result in a decrease to unrealized losses by approximately ~~$280~~$218 million before taxes. We ~~currently~~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 ~~$1.13~~$1.37 billion, or ~~8.64%~~10.66% of total assets at ~~September~~June 30, ~~2022,~~2023, as compared to ~~$1.73~~$1.33 billion, or ~~13.82%~~10.02% of total assets at ~~September~~June 30, ~~2021,~~2022, and ~~$1.76~~$1.27 billion, or ~~13.43%~~9.76% of total assets at December 31, ~~2021. Included in shareholders’ equity at September 30, 2022 were $632.42 million in unrealized losses on investment securities available-for-sale, net of related income taxes.~~2022. Included in shareholders' equity at ~~September~~June 30, ~~2021~~2023, and 2022, and December 31, ~~2021~~2022 were ~~$109.45~~$490.28 million, $400.51 million and ~~$99.25~~$535.23 million, respectively, in unrealized ~~gains~~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~~second quarter of ~~2022,~~2023, total shareholders’ equity averaged ~~$1.36~~$1.37 billion, or ~~10.17%~~10.63% of average assets, as compared to ~~$1.74~~$1.41 billion, or ~~14.17%~~10.56% of average assets, during the same period in ~~2021.~~2022. For the first ~~nine~~six months of ~~2022,~~2023, total shareholders’ equity averaged ~~$1.48~~$1.34 billion, or ~~11.12%~~10.37% of average assets, as compared to ~~$1.70~~$1.54 billion, or ~~14.35%~~11.60% of average assets, during the same period in ~~2021.~~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~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021,~~2022, we had a total risk-based capital ratio of ~~19.07%~~19.62%, ~~20.76%~~19.54% and ~~20.34%~~19.29%, a Tier 1 capital to risk-weighted assets ratio of ~~18.03%~~18.48%, ~~19.71%~~18.50% and ~~19.35%~~18.22%; a common equity Tier 1 to risk-weighted assets ratio of ~~18.03%~~18.48%, ~~19.71%~~18.50% and ~~19.35%~~18.22% and a Tier

1 leverage ratio of ~~10.79%~~11.81%, ~~11.19%~~10.65% and ~~11.13%~~10.96%, respectively. The regulatory capital ratios as of ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021~~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						Actual					Minimum Capital Required-Basel III					Required to be Considered Well- Capitalized
As of September 30, 2022:		Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2023:																		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	%		$	1,651,966		19.62	%	$	884,219		10.50	%	$	842,114		10.00	%
First Financial Bank, N.A		$	1,383,653		17.09	%	$	850,038		10.50	%	$	809,560		10.00	%		$	1,489,982		17.73	%	$	882,320		10.50	%	$	840,304		10.00	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,462,382		18.03	%	$	689,549		8.50	%	$	486,740		6.00	%		$	1,555,976		18.48	%	$	715,797		8.50	%	$	505,268		6.00	%
First Financial Bank, N.A		$	1,298,666		16.04	%	$	688,126		8.50	%	$	647,648		8.00	%		$	1,393,992		16.59	%	$	714,259		8.50	%	$	672,243		8.00	%
Common Equity Tier 1 Capital to Risk-Weighted Assets:	Common Equity Tier 1 Capital to Risk-Weighted Assets:																Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,462,382		18.03	%	$	567,864		7.00	%		—	N/A				$	1,555,976		18.48	%	$	589,480		7.00	%	$	—	N/A
First Financial Bank, N.A		$	1,298,666		16.04	%	$	566,692		7.00	%	$	526,214		6.50	%		$	1,393,992		16.59	%	$	588,213		7.00	%	$	546,198		6.50	%
Leverage Ratio:
Consolidated		$	1,462,382		10.79	%	$	542,094		4.00	%		—	N/A				$	1,555,976		11.81	%	$	336,845		4.00	%	$	—	N/A
First Financial Bank, N.A		$	1,298,666		9.62	%	$	540,211		4.00	%	$	675,263		5.00	%		$	1,393,992		10.62	%	$	336,122		4.00	%	$	420,152		5.00	%


		Actual					Minimum Capital Required-Basel III					Required to be Considered Well- Capitalized						Actual					Minimum Capital Required-Basel III					Required to be Considered Well- Capitalized
As of September 30, 2021:		Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2022:																		Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital to Risk-Weighted Assets:
Consolidated		$	1,389,929		20.76	%	$	702,959		10.50	%	$	669,485		10.00	%		$	1,507,098		19.54	%	$	809,783		10.50	%	$	771,222		10.00	%
First Financial Bank, N.A		$	1,246,266		18.65	%	$	701,572		10.50	%	$	668,164		10.00	%		$	1,379,750		17.93	%	$	808,070		10.50	%	$	769,591		10.00	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,319,809		19.71	%	$	569,062		8.50	%	$	401,691		6.00	%		$	1,426,448		18.50	%	$	655,538		8.50	%	$	462,733		6.00	%
First Financial Bank, N.A		$	1,176,146		17.60	%	$	567,939		8.50	%	$	534,531		8.00	%		$	1,299,100		16.88	%	$	654,152		8.50	%	$	615,672		8.00	%
Common Equity Tier 1 Capital to Risk-Weighted Assets:	Common Equity Tier 1 Capital to Risk-Weighted Assets:																Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,319,809		19.71	%	$	468,639		7.00	%	$	—	N/A				$	1,426,448		18.50	%	$	539,855		7.00	%	$	—	N/A
First Financial Bank, N.A		$	1,176,146		17.60	%	$	467,715		7.00	%	$	434,306		6.50	%		$	1,299,100		16.88	%	$	538,713		7.00	%	$	500,234		6.50	%
Leverage Ratio:
Consolidated		$	1,319,809		11.19	%	$	471,745		4.00	%	$	—	N/A				$	1,426,448		10.65	%	$	535,975		4.00	%	$	—	N/A
First Financial Bank, N.A		$	1,176,146		10.00	%	$	470,355		4.00	%	$	587,944		5.00	%		$	1,299,100		9.73	%	$	534,178		4.00	%	$	667,723		5.00	%


		Actual					Minimum Capital Required Basel III					Required to be Considered Well- Capitalized						Actual					Minimum Capital Required Basel III					Required to be Considered Well- Capitalized
As of December 31, 2021:		Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2022:																		Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital to Risk-Weighted Assets:
Consolidated		$	1,425,907		20.34	%	$	736,003		10.50	%	$	700,955		10.00	%		$	1,586,888		19.29	%	$	863,622		10.50	%	$	822,497		10.00	%
First Financial Bank, N.A		$	1,258,965		17.99	%	$	734,604		10.50	%	$	699,623		10.00	%		$	1,442,902		17.58	%	$	861,860		10.50	%	$	820,819		10.00	%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,356,006		19.35	%	$	595,812		8.50	%	$	420,573		6.00	%		$	1,498,731		18.22	%	$	699,122		8.50	%	$	493,498		6.00	%
First Financial Bank, N.A		$	1,189,064		17.00	%	$	594,679		8.50	%	$	559,698		8.00	%		$	1,354,745		16.50	%	$	697,696		8.50	%	$	656,655		8.00	%
Common Equity Tier 1 Capital to Risk-Weighted Assets:	Common Equity Tier 1 Capital to Risk-Weighted Assets:																Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated		$	1,356,006		19.35	%	$	490,669		7.00	%		—	N/A				$	1,498,731		18.22	%	$	575,748		7.00	%		—	N/A
First Financial Bank, N.A		$	1,189,064		17.00	%	$	489,736		7.00	%	$	454,755		6.50	%		$	1,354,745		16.50	%	$	574,573		7.00	%	$	533,532		6.50	%
Leverage Ratio:
Consolidated		$	1,356,006		11.13	%	$	487,459		4.00	%		—	N/A				$	1,498,731		10.96	%	$	546,983		4.00	%		—	N/A
First Financial Bank, N.A		$	1,189,064		9.79	%	$	485,926		4.00	%	$	607,407		5.00	%		$	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 inon June ~~2023~~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~~June 30, ~~2022,~~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 ~~$2.26~~$2.52 billion at ~~September~~June 30, ~~2022,~~2023, secured by portions of our loan portfolio and certain investment securities, ~~subject to certain requirements including maintaining positive tangible equity as defined by the FHLB,~~ and (ii) access to the Federal Reserve Bank of Dallas lending program, including the new Bank Term Funding Program, secured by portions of certain investment securities. At ~~September~~June 30, ~~2022,~~2023, the Company did not have any balances under ~~this line of credit.~~these lines.

The Company renewed its loan agreement, effective June 30, ~~2021,~~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, ~~2023,~~2025, interest is paid quarterly at The Wall Street Journal Prime Rate and the line of credit matures June 30, ~~2023.~~2025. If a balance exists at June 30, ~~2023,~~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, ~~tangible net worth,~~ loan loss reserve, non-performing asset and cash flow coverage ratios. In addition, the credit agreement contains certain operational covenants, which among others, restricts the payment of dividends above 55% of consolidated net income, limits the incurrence of debt (excluding any amounts acquired in an acquisition) and prohibits the disposal of assets except in the ordinary course of business. Since 1995, we have historically declared dividends as a percentage of our consolidated net income in a range of 36% (low) in 2021 and 2020 to 53% (high) in 2003 and 2006. The Company was in compliance with the financial and operational covenants at ~~September~~June 30, ~~2022.~~2023. There was no outstanding balance under the line of credit as of ~~September~~June 30, ~~2022 and 2021, or December 31, 2021.~~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 ~~$143.32~~$129.89 million at ~~September~~June 30, ~~2022,~~2023, investment securities which totaled ~~$2.17~~$2.20 million at ~~September~~June 30, ~~2022~~2023 and mature over 7 to 8 years, available dividends from our subsidiaries which totaled ~~$376.67~~$357.72 million at ~~September~~June 30, ~~2022,~~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~~June 30, ~~2022,~~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 ~~economic~~ impact to the financial system due to the recent failures of ~~the coronavirus on our customers and the communities we serve.~~several banks. Given the ~~strong~~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~~June 30, ~~2022,~~2023, the Company’s reserve for unfunded commitments totaled ~~$10.88~~$9.45 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~~June 30, ~~2022~~2023 (dollars in thousands):


	Total Notional Amounts Committed		Total Notional Amounts Committed
Unfunded lines of credit	$	1,077,595	$	1,173,293
Unfunded commitments to extend credit		868,816		810,717
Standby letters of credit		51,474		35,093
Total commercial commitments	$	1,997,885	$	2,019,103

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. ~~At December 31, 20221, total~~Total commercial commitments were ~~$1.70~~$2.02 billion at June 30, 2023, compared to ~~the $2.00~~$1.90 billion ~~above~~ at ~~September~~June 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~~June 30, ~~2022, $376.67~~2023, $357.72 million was available for the payment of intercompany dividends by our subsidiaries without the prior approval of regulatory agencies. Our subsidiaries paid aggregate dividends of ~~$67.50~~$64.00 million and ~~$53.50~~$7.50 million for the ~~nine-months~~six-months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~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 ~~39.78%~~48.31% and ~~35.55%~~39.23% of net earnings for the first ~~nine~~six months of ~~2022~~2023 and ~~2021,~~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 2022,~~On April 25, 2023, the Board of Directors declared a ~~$0.17~~$0.18 per share cash dividend for the ~~third~~second quarter of ~~2022,~~2023, a ~~13.33%~~5.88% increase over the dividend declared in the ~~third~~first quarter of ~~2021.~~2023. The record date for this dividend ~~was September~~will be June 15, ~~2022,~~2023, payable on ~~October~~July 3, ~~2022.~~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.

5756

Item 4. Controls and Procedures.

As of ~~September~~June 30, ~~2022,~~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~~June 30, ~~2022.~~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.

5857

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. Other than regular, routine examinations by state and federal banking authorities, there are no proceedings pending or known to be contemplated by any governmental authorities.

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, ~~2021.~~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~~Not Applicable

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. 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. Subsequent to July 27, 2021 and through September 30, 2022, 244,559 shares were repurchased and retired at an average price of $38.61.

~~The following table presents shares that have been repurchased under the Company's repurchase program for the three month period ended September 30, 2022:~~

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, 2022 through July 31, 2022

52,572

$
38.8967

244,559

4,755,441

August 1, 2022 through August 31, 2022

-

$
-

244,559

4,755,441

September 1, 2022 through September 30, 2022

-

$
-

244,559

4,755,441

Total

244,559

$
38.6099

244,559

4,755,441

Item 3. Defaults Upon Senior Securities.

Not Applicable

Item 4. Mine Safety Disclosures.

Not Applicable

Item 5. Other Information.

Not Applicable

5958

Item 6. Exhibits.



~~2.1~~3.1	—	Agreement and Plan of Reorganization, dated September 19, 2019, by and among First Financial Bankshares, Inc., Brazos Merger Sub, Inc., and TB&T Bancshares, Inc. (schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K) (incorporated by reference from Exhibit 2.1 to Registrant’s Form 8-K filed September 20, 2019).

~~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, ~~2022)~~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	—	~~Loan agreement~~Promissory Note, dated June 30, ~~2013,~~2023, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the ~~Registrant’s~~Registrant's Form 8-K filed July ~~1, 2013)~~7, 2023).

10.4	—	~~First Amendment to~~Amended and Restated Loan Agreement, dated June 30, ~~2015,~~2023, by and between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit ~~10.1~~10.2 of the ~~Registrant’s~~Registrant's Form 8-K filed ~~June 30, 2015)~~July 7, 2023).

10.5	—	Second Amendment to Loan Agreement, dated June 30, 2017, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed June 30, 2017).

~~10.6~~	—	Third Amendment to Loan Agreement, dated June 30, 2019, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed July 1, 2019).

~~10.7~~	—	Fourth Amendment to Loan Agreement, dated June 30, 2021, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrants Form 8-K filed July 7, 2021).

~~10.8~~	—	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).++

~~10.9~~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).++

~~10.10~~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~~August 2, ~~2022~~2023	By:	/s/ F. Scott Dueser
			F. Scott Dueser
			Chairman of the Board, President and Chief Executive Officer

Date: ~~November~~August 2, ~~2022~~2023	By:	/s/ ~~James R. Gordon~~Michelle S. Hickox
			~~James R. Gordon~~Michelle S. Hickox
			Executive Vice President and
			Chief Financial Officer, Secretary and Treasurer

6160


Nine-Months Ended September 30, 2021	C&I			Municipal			Agricultural			Construction & Development		Farm
Beginning balance	$	13,609		$	1,552		$	1,255		$	13,512	$	1,876
Provision for loan losses		(3,597	)		(1,237	)		1,076			3,348		(1,300	)
Recoveries		1,671			—			29			2		10
Charge-offs		(1,290	)		—			(71	)		—		—
Ending balance	$	10,393		$	315		$	2,289		$	16,862	$	586


	Three-Months Ended September 30, 2022						Nine-Months Ended September 30, 2022
			Pre- Modification		Post- Modification				Pre- Modification			Post- Modification
			Recorded		Recorded				Recorded			Recorded
	Number		Investment		Investment		Number		Investment			Investment
Commercial:
C&I		1	$	205	$	205		1	$	205		$	205
Municipal		—		—		—		—		—			—
Total Commercial		1		205		205		1		205			205
Agricultural		—		—		—		—		—			—
Real Estate:
Construction & Development		—		—		—		—		—			—
Farm		—		—		—		—		—			—
Non-Owner Occupied CRE		—		—		—		—		—			—
Owner Occupied CRE		—		—		—		—		—			—
Residential		1		130		130		1		130			130
Total Real Estate		1		130		130		1		130			130
Consumer:											��
Auto		—		—		—
Non-Auto		—		—		—
Total Consumer		—		—		—		—		—			—
Total		2	$	335	$	335		2	$	335		$	335


	Three-Months Ended September 30, 2022						Nine-Months Ended September 30, 2022
	Adjusted				Combined		Adjusted				Combined
	Interest		Maturity		Rate and		Interest		Maturity		Rate and
	Rate		Extended		Maturity		Rate		Extended		Maturity
Commercial:
C&I	$	—	$	—	$	205	$	—	$	—	$	205
Municipal		—		—		—		—		—		—
Total Commercial		—		—		205		—		—		205
Agricultural		—		—		—		—		—		—
Real Estate:
Construction & Development		—		—		—		—		—		—
Farm		—		—		—		—		—		—
Non-Owner Occupied CRE		—		—		—		—		—		—
Owner Occupied CRE		—		—		—		—		—		—
Residential		—		—		130		—		—		130
Total Real Estate		—		—		130		—		—		130
Consumer:
Auto		—		—		—		—		—		—
Non-Auto		—		—		—		—		—		—
Total Consumer		—		—		—		—		—		—
Total	$	—	$	—	$	335	$	—	$	—	$	335


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, 2022 through July 31, 2022		52,572	$	38.8967		244,559		4,755,441
August 1, 2022 through August 31, 2022		-	$	-		244,559		4,755,441
September 1, 2022 through September 30, 2022		-	$	-		244,559		4,755,441
Total		244,559	$	38.6099		244,559		4,755,441