# FIRST FINANCIAL BANKSHARES INC (FFIN) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FIRST FINANCIAL BANKSHARES INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/36029/000095017024019528/ffin-20231231.htm
Accession: 0000950170-24-019528
Filing date: 2024-02-26
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FFIN/
All MD&A years: /company/FFIN/mda/
Previous year: /company/FFIN/mda/fy2022/ (FY 2022)
Next year: /company/FFIN/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited to those listed in “Item 1A – Risk Factors” and in the “Cautionary Statement Regarding Forward-Looking Statements” notice on page 1.

Introduction

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

The following discussion and analysis of the major elements of our consolidated balance sheets as of December 31, 2023 and 2022, and consolidated statements of earnings for the years 2021 through 2023 should be read in conjunction with our consolidated financial statements, accompanying notes, and selected financial data presented elsewhere in this 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 (1) the accounting estimate required us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (2) 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 (1) our allowance for credit losses and our provision for credit losses and (2) 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 (1) our allowance for credit losses and our provision for credit losses and (2) our valuation of financial instruments is included in Notes 1 and 10, respectively, to our Consolidated Financial Statements.

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 are considered beneficial to the Company and its stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Under the prior authorization, 244,559 shares were repurchased and retired (all during the months of June and July 2022) at an average price of $38.61 per share. Under the current authorization, the Company has repurchased and retired 101,337 shares (all during September 2023) at an average price of $26.99 per share.

Other Recently Issued and Effective Authoritative Accounting Guidance

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

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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 generally can be applied through December 31, 2022. 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 refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. ASU 2022-02 will also require that an entity disclosure current-period gross charge-offs by year of origination for financial receivables and net investment leases within scope of ASC Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. ASU 2022-02 will become effected 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 is not expected to 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.

ASU 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method." ASU 2023-02 is intended to improve the accounting and disclosures for investments in tax credit structures. ASU 2023-02 allows entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. Previously, this method was only available for qualifying tax equity investments in low-income housing tax credit structures. ASU 2023-02 has been early adopted by the Company as it relates to the qualifying investments that are generating New Market Tax Credits. The adoption of ASU 2023-02 did not have a significant impact on our financial statements.

ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” ASU 2023-09 requires entities to disclose more detailed information in their reconciliation of their statutory tax rate to their effective tax rate. Public business entities (PBEs) are required to provide this incremental detail in a numerical, tabular format. The ASU also requires entities to disclose more detailed information about income taxes paid, including by jurisdiction; pretax income (or loss) from continuing operations; and income tax expense (or benefit). PBEs will be required to adopt the new requirements in annual reporting periods beginning after December 15, 2024, and interim periods beginning after December 15, 2025.The adoption of ASU 2023-09 is not expected to have a significant impact on our financial statements.

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Selected Financial Data

The selected financial data presented below as of and for the years ended December 31, 2023, 2022, 2021, 2020, and 2019, have been derived from our audited consolidated financial statements. The data set forth below may not be fully comparable from period to period due to an acquisition in 2020 and changes in accounting, including the allowance for credit losses in 2020 (see Notes 1 and 3 to the Notes to Consolidated Financial Statements for further information). The results of operations presented below are not necessarily indicative of the results of operations that may be achieved in the future.

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[[/GREPCENT_TABLE]]

(1)
Calculated by dividing at period-end, shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets by fourth quarter average assets less intangible assets.

(2)
Calculated by dividing at period-end, shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets by risk-adjusted assets.

(3)
Calculated by dividing at period-end, shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets by risk-adjusted assets.

(4)
Calculated by dividing at period-end, shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets plus allowance for loan losses to the extent allowed under regulatory guidelines by risk-adjusted assets.

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Results of Operations

Performance Summary. Net earnings for 2023 were $198.98 million compared to net earnings of $234.48 million for 2022. Included in earnings for the year ended December 31, 2023, when compared to the year ended December 31, 2022, were (i) a decrease of $17.61 million in net interest income, (ii) a decrease in debit card revenues of $8.56 million, (iii) a decrease in mortgage revenues of $7.15 million, (iv) a $9.26 million decline in gains on sales of securities, and (v) an increase of $4.04 million in FDIC insurance premiums, which includes a $1.75 million special assessment. Offsetting these reductions to earnings were (i) a decline of $6.80 million in the provision for credit losses and (ii) a decline of $5.30 million in incentive and profit sharing expenses.

Net earnings for 2022 were $234.48 million compared to $227.56 million for 2021. The increase in net earnings for 2022 over 2021 was primarily attributable to the overall growth in net interest income from the growth in earning assets. Net earnings in 2022 also include a provision for credit losses of $17.43 million compared to a net reversal of provision for credit losses of $1.14 million in 2021. The increased provision for credit losses in 2022 over 2021 was driven by strong organic loan growth, increases in unfunded commitments and a slight decline in the projected economic forecast metrics post pandemic highs.

On a diluted net earnings per share basis, net earnings were $1.39 for 2023, as compared to $1.64 for 2022 and $1.59 for 2021. The return on average assets was 1.55% for 2023, as compared to 1.76% for 2022 and 1.89% for 2021. The return on average equity was 14.99% for 2023, as compared to 16.72% for 2022 and to 13.31% for 2021.

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 $395.36 million in 2023, as compared to $416.84 million in 2022, and $385.05 million in 2021. Average earning assets were $12.00 billion in 2023, as compared to $12.46 billion in 2022 and $11.34 billion in 2021. The decrease in tax-equivalent net interest income in 2023 compared to 2022 was largely attributable to the increases in the rates paid on deposits and borrowings and a change in the mix of interest earning assets. The decrease of $461.72 million in average earning assets in 2023 when compared to 2022 was primarily a result of a decrease in taxable securities of $531.39 million and tax-exempt securities of $689.37 million offset by an increase in loans of $860.76 million when compared to 2022. The increase in tax-equivalent net interest income in 2022 compared to 2021 was largely attributable to increases in interest earning assets. The increase of $1.13 billion in average earning assets in 2022 when compared to 2021 was primarily a result of increases in taxable securities of $1.13 billion and loans of $582.26 million offset by a decrease in short-term investments of $372.77 million and tax-exempt securities of $216.64 million when compared to 2021. Average interest-bearing liabilities were $7.84 billion in 2023, as compared to $7.76 billion in 2022 and $6.78 billion in 2021. The yield on earning assets increased 90 basis points in 2023 when compared to 2022 while the rate paid on interest-bearing liabilities increased 143 basis points. The yield on earning assets increased 15 basis points in 2022 when compared to 2021 while the rate paid on interest-bearing liabilities increased 32 basis points.

The table below allocates the change in tax-equivalent net interest income between the amount of change attributable to volume and to rate.

Changes in Interest Income and Interest Expense (in thousands):

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[[/GREPCENT_TABLE]]

(1)
Computed on a tax-equivalent basis assuming a marginal tax rate of 21%.

(2)
Nonaccrual loans are included in loans.

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The net interest margin for 2023 was 3.29% which was a decrease of five basis points from 2022. The net interest margin in 2022 was 3.34%, a decrease of six basis points from 2021. We experienced downward pressure on our net interest margin the majority of 2023 compared to 2022 primarily due to (i) the effects of the Federal Reserve Board's accelerated rate of raising interest rates in 2022 and 2023, which was preceded by the extended period of historically low levels of short-term interest rates leading up to the first quarter of 2022, and (ii) the shift in the mix of interest-earning assets and interest-bearing deposits. The Federal Reserve Board began increasing interest rates by raising rates 25 basis points in March 2022, 50 basis points in May 2022, and 75 basis points in June, July, September and November 2022, respectively, 50 basis points in December 2022, and 25 basis points in February, March, May, and July 2023, respectively, resulting in a target rate range of 5.25% to 5.50% at December 31, 2023.

Loan rates on variable loans have increased as the majority of such loans are indexed to the applicable prime rate (8.50% at December 31, 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 43).

During 2022, we increased rates on each of the primary depository products in response to the increasing federal funds rate. Additionally, we have approximately $985 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 $1.46 billion and $1.48 billion for the years ended December 31, 2023 and 2022, respectively, with an average rate paid of 3.13% and 1.01%, for the respective years then ended.

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The net interest margin, which measures tax-equivalent net interest income as a percentage of average earning assets, is illustrated in the table below for the years 2021 through 2023.

Average Balances and Average Yields and Rates (in thousands, except percentages):

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[[/GREPCENT_TABLE]]

(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 AFS securities.

(3)
Includes tax-equivalent yield adjustment of approximately $11.55 million, $15.42 million and $14.69 million for the years ended December 31, 2023, 2022 and 2021, respectively, using an effective tax rate of 21%.

(4)
Includes nonaccrual loans.

(5)
Calculations for 2023 and 2022 have been adjusted to remove the effect of TEFRA allowance

Noninterest Income. Noninterest income for 2023 was $108.00 million compared to $131.67 million in 2022. Changes in certain categories of noninterest income included (1) a decline in gains on sales of AFS securities of $9.26 million, (2) a decrease in debit card fees of $8.56 million, and (3) a decrease in gain on sale and fees of mortgage loans of $7.15 million when compared to 2022. Available for sale securities totaling $411.13 million with an average book yield of 2.91% were sold during 2023. The proceeds from the sales of these securities are being used to fund organic loan growth that is yielding approximately 8%, resulting in an anticipated earn back period of less than 18 months. The decrease in debit card fees was due to the impact of becoming subject to regulations imposed by the Federal Reserve Board that limits debit card interchange revenue which became effective for the Company as of July 1, 2022, and is consistent with our previously disclosed expectations. Mortgage income declined due to lower overall origination volumes and declining margins on loan sales as a result of the increases in mortgage interest rates during the year.

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Noninterest income for 2022 was $131.67 million, a decrease of $10.51 million, or 7.39%, as compared to 2021. Changes in certain categories of noninterest income included (1) an increase in trust fees of $3.85 million, (2) an increase in service charges on deposit accounts of $3.38 million, (3) an increase in the net gain on sale of AFS securities of $1.33 million, offset by (4) a decrease in gain on sale and fees of mortgage loans of $14.21 million, and (5) a decrease in debit card fees of $5.63 million. The increase in trust fees resulted from an increase in assets under management over the prior year and an increase in oil and gas production fees driven by increasing oil and gas prices. The fair value of our trust assets managed, which are not reflected in our consolidated balance sheets, totaled $8.75 billion at December 31, 2022. Oil and gas production fees increased related trust fees by $2.77 million in 2022 over 2021. The increase in service charges on deposits was driven by more than 10,500 net new accounts opened in 2022 and growth in treasury management services. Mortgage income declined due to lower overall origination volumes and declining margins on loan sales as a result of the increase in interest rates. The decrease in debit card fees was due to the impact of becoming subject to regulations imposed by the Federal Reserve Board that limits debit card interchange revenue which became effective for the Company as of July 1, 2022, and is consistent with our previously disclosed expectation.

Debit card fees are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Debit card fees consist of income from debit card usage, point of sale income for debit card transactions and ATM service fees.

Federal Reserve Board rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is limited to the sum of 21 cents per transaction plus 5 basis points multiplied by the value of the transaction. Based on the applicable Federal Reserve Board rules, as amended, the Company became subject to the limitation effective July 1, 2022, which reduced debit card fees during 2023 compared to 2022, as discussed above.

Noninterest Income (in thousands):

[[GREPCENT_TABLE]]
[["","","2023","","","Increase (Decrease)","","","2022","","","Increase (Decrease)","","","2021"],["Trust fees","","$","40,456","","","$","461","","","$","39,995","","","$","3,850","","","$","36,145"],["Service charges on deposit accounts","","","25,378","","","","838","","","","24,540","","","","3,384","","","","21,156"],["Debit card fees","","","21,721","","","","(8,559",")","","","30,280","","","","(5,625",")","","","35,905"],["Credit card fees","","","2,645","","","","60","","","","2,585","","","","212","","","","2,373"],["Gain on sale and fees of mortgage loans","","","11,890","","","","(7,145",")","","","19,035","","","","(14,210",")","","","33,245"],["Net gain on sale of available-for-sale securities","","","(7,119",")","","","(9,263",")","","","2,144","","","","1,329","","","","815"],["Net gain on sale of foreclosed assets","","","46","","","","(1,405",")","","","1,451","","","","1,261","","","","190"],["Net gain on sale of assets","","","1,525","","","","1,005","","","","520","","","","310","","","","210"],["Interest on loan recoveries","","","2,055","","","","(785",")","","","2,840","","","","(1,199",")","","","4,039"],["Other:"],["Check printing fees","","","110","","","","(21",")","","","131","","","","(81",")","","","212"],["Safe deposit rental fees","","","803","","","","(32",")","","","835","","","","(32",")","","","867"],["Credit life and debt protection fees","","","605","","","","(414",")","","","1,019","","","","(74",")","","","1,093"],["Brokerage commissions","","","1,511","","","","73","","","","1,438","","","","46","","","","1,392"],["Wire transfer fees","","","1,646","","","","(8",")","","","1,654","","","","230","","","","1,424"],["Miscellaneous income","","","4,731","","","","1,533","","","","3,198","","","","88","","","","3,110"],["Total other","","","9,406","","","","1,131","","","","8,275","","","","177","","","","8,098"],["Total Noninterest Income","","$","108,003","","","$","(23,662",")","","$","131,665","","","$","(10,511",")","","$","142,176"]]
[[/GREPCENT_TABLE]]

Noninterest Expense. Total noninterest expense for 2023 amounted to $237.88 million, an increase of $3.10 million, or 1.32%, as compared to 2022. Total noninterest expense for 2022 was $234.78 million, a decrease of $6.93 million, or 2.87%, as compared to 2021. An important measure in determining whether a financial institution effectively manages noninterest expenses 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 for 2023 was 47.26%, as compared to 42.80% for 2022 and 45.84% for 2021.

Salaries and employee benefits for 2023 totaled $131.92 million, a decrease of $2.22 million, or 1.65%, as compared to 2022. The net decrease reflected a decrease of $2.86 million in profit sharing expenses and lower mortgage compensation expenses of $2.40 million offset by annual merit-based and other market-based pay increases that were effective March 1, 2023.

All other categories of noninterest expense for 2023 totaled $105.97 million, an increase of $5.32 million, or 5.29%, as compared to 2022. Included in noninterest expense during 2023, excluding salary and employee benefit related costs, were increases in FDIC insurance premiums of $4.04 million primarily due to the recognition of $1.75 million related to the special assessment in the fourth quarter of 2023.

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Salaries and employee benefits for 2022 totaled $134.13 million, a decrease of $7.91 million, or 5.57%, as compared to 2021. The change reflected a decrease of $5.90 million in profit sharing expenses and lower mortgage compensation expenses of $4.94 million offset by annual merit-based and other market-based pay increases that were effective March 1, 2022.

All other categories of noninterest expense for 2022 totaled $100.65 million, an increase of $979 thousand, or 0.98%, as compared to 2021. Included in noninterest expense during 2022, excluding salary and employee benefit related costs, during 2022 were decreases of $1.16 million in software amortization and expense offset by increases in FDIC insurance premiums of $851 thousand due to the increase in the average assets with tangible equity and loan related fees within other miscellaneous expense of $745 thousand due to the increase in the loan portfolio during 2022.

Noninterest Expense (in thousands):

[[GREPCENT_TABLE]]
[["","","2023","","","Increase (Decrease)","","","2022","","","Increase (Decrease)","","","2021"],["Salaries, commissions and incentives (excluding mortgage)","","$","97,155","","","$","3,264","","","$","93,891","","","$","1,867","","","$","92,024"],["Mortgage salaries and incentives","","","8,295","","","","(2,395",")","","","10,690","","","","(4,942",")","","","15,632"],["Medical","","","10,475","","","","(710",")","","","11,185","","","","142","","","","11,043"],["Profit sharing","","","1,373","","","","(2,860",")","","","4,233","","","","(5,901",")","","","10,134"],["401(k) match expense","","","3,750","","","","75","","","","3,675","","","","85","","","","3,590"],["Payroll taxes","","","7,278","","","","146","","","","7,132","","","","158","","","","6,974"],["Stock based compensation","","","3,589","","","","262","","","","3,327","","","","682","","","","2,645"],["Total salaries and employee benefits","","","131,915","","","","(2,218",")","","","134,133","","","","(7,909",")","","","142,042"],["Net occupancy expense","","","13,766","","","","459","","","","13,307","","","","298","","","","13,009"],["Equipment expense","","","8,545","","","","(507",")","","","9,052","","","","(121",")","","","9,173"],["FDIC assessment fees","","","7,749","","","","4,038","","","","3,711","","","","581","","","","3,130"],["Debit card expense","","","12,933","","","","702","","","","12,231","","","","274","","","","11,957"],["Professional and service fees","","","9,810","","","","1,040","","","","8,770","","","","(564",")","","","9,334"],["Printing, stationery and supplies","","","2,454","","","","340","","","","2,114","","","","204","","","","1,910"],["Operational and other losses","","","3,842","","","","613","","","","3,229","","","","(64",")","","","3,293"],["Software amortization and expense","","","10,288","","","","325","","","","9,963","","","","(1,157",")","","","11,120"],["Amortization of intangible assets","","","912","","","","(333",")","","","1,245","","","","(368",")","","","1,613"],["Other:"],["Data processing fees","","","2,051","","","","284","","","","1,767","","","","(15",")","","","1,782"],["Postage","","","1,449","","","","115","","","","1,334","","","","(205",")","","","1,539"],["Advertising","","","2,779","","","","(48",")","","","2,827","","","","(198",")","","","3,025"],["Correspondent bank service charges","","","830","","","","(191",")","","","1,021","","","","20","","","","1,001"],["Telephone","","","3,340","","","","273","","","","3,067","","","","(560",")","","","3,627"],["Public relations and business development","","","3,252","","","","(303",")","","","3,555","","","","212","","","","3,343"],["Directors\u2019 fees","","","2,546","","","","10","","","","2,536","","","","162","","","","2,374"],["Audit and accounting fees","","","2,241","","","","441","","","","1,800","","","","41","","","","1,759"],["Legal fees and other related costs","","","1,535","","","","(335",")","","","1,870","","","","(381",")","","","2,251"],["Regulatory exam fees","","","1,272","","","","(314",")","","","1,586","","","","163","","","","1,423"],["Travel","","","1,858","","","","218","","","","1,640","","","","222","","","","1,418"],["Courier expense","","","1,218","","","","22","","","","1,196","","","","248","","","","948"],["Other real estate owned","","","90","","","","87","","","","3","","","","(46",")","","","49"],["Other miscellaneous expense","","","11,207","","","","(1,614",")","","","12,821","","","","2,233","","","","10,588"],["Total other","","","35,668","","","","(1,355",")","","","37,023","","","","1,896","","","","35,127"],["Total Noninterest Expense","","$","237,882","","","$","3,104","","","$","234,778","","","$","(6,930",")","","$","241,708"]]
[[/GREPCENT_TABLE]]

Income Taxes. Income tax expense was $44.32 million for 2023, as compared to $46.40 million for 2022 and $44.41 million for 2021. Our effective tax rates on pretax income were 18.22%, 16.52% and 16.33%, respectively, for the years 2023, 2022 and 2021. The effective tax rates differ from the statutory federal tax rate of 21.0% largely 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 distribution under our deferred compensation plan and vesting of equity awards, and New Market Tax Credit ("NMTC") benefits.

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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 December 31, 2023, total loans HFI were $7.15 billion, an increase of $706.92 million as compared to December 31, 2022.

As compared to year-end 2022 balances, total commercial loans increased $241.25 million, agricultural loans increased $7.94 million, total real estate loans increased $479.96 million, and total consumer loans decreased $22.23 million. Loans averaged $6.78 billion during 2023, an increase of $860 million over 2022 average balances.

In conjunction with the adoption of ASC 326, the Company expanded its four loan portfolio segments used under the legacy disclosure requirements into the following ten portfolio segments. 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. This additional 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.

The table below outlines the composition of the Company’s HFI loans by portfolio segment. For all periods prior to December 31, 2020, management has elected to maintain its previously disclosed loan portfolio segments.

Composition of Loans Held-For-Investment (in thousands):

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","","2022","","","2021","","","2020","","","2019"],["Commercial:"],["C&I","","$","1,164,811","","","$","917,317","","","$","837,075","","","$","1,131,382","","","$ N/A"],["Municipal","","","214,850","","","","221,090","","","","177,905","","","","181,325","","","N/A"],["Total Commercial","","","1,379,661","","","","1,138,407","","","","1,014,980","","","","1,312,707","","","","856,326"],["Agricultural","","","84,890","","","","76,947","","","","98,089","","","","94,864","","","","103,640"],["Real Estate:"],["Construction & Development","","","963,158","","","","959,426","","","","749,793","","","","553,959","","","N/A"],["Farm","","","344,954","","","","306,322","","","","217,220","","","","152,237","","","N/A"],["Non-Owner Occupied CRE","","","827,969","","","","732,089","","","","623,434","","","","617,686","","","N/A"],["Owner Occupied CRE","","","1,037,281","","","","954,400","","","","821,653","","","","746,974","","","N/A"],["Residential","","","1,834,593","","","","1,575,758","","","","1,334,419","","","","1,248,409","","","N/A"],["Total Real Estate","","","5,007,955","","","","4,527,995","","","","3,746,519","","","","3,319,265","","","","2,823,372"],["Consumer:"],["Auto","","","521,859","","","","550,635","","","","405,416","","","","353,595","","","N/A"],["Non-Auto","","","154,426","","","","147,884","","","","123,968","","","","90,602","","","N/A"],["Total Consumer","","","676,285","","","","698,519","","","","529,384","","","","444,197","","","","411,631"],["Total","","$","7,148,791","","","$","6,441,868","","","$","5,388,972","","","$","5,171,033","","","$","4,194,969"]]
[[/GREPCENT_TABLE]]

Loans HFS, consisting of secondary market mortgage loans, totaled $14.25 million and $11.97 million at December 31, 2023 and 2022, respectively. At December 31, 2023 and 2022, $3.18 million and $1.47 million are valued at the lower of cost or fair value, and the remaining amount is valued under the fair value option.

The Company has certain lending policies and procedures in place that are designed to maximize loan growth with an acceptable level of risk. Management reviews and approves these policies and procedures on an annual basis and makes changes as appropriate with input from our Board of Directors. Management receives and reviews monthly reports related to loan originations, quality, concentrations, delinquencies, nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geographic location.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and include personal guarantees.

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Agricultural loans are subject to underwriting standards and processes similar to commercial loans. These agricultural loans are based primarily on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most agricultural loans are secured by the agriculture related assets being financed, such as farm land, cattle or equipment, and include personal guarantees.

Real estate loans are also subject to underwriting standards and processes similar to commercial and agricultural loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s real estate portfolio are generally diverse in terms of type and geographic location within Texas. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry.

Consumer loan underwriting utilizes methodical credit standards and analysis to supplement the Company’s underwriting policies and procedures. The Company’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimize the Company’s risk.

Maturity Distribution and Interest Sensitivity of Loans at December 31, 2023 (in thousands):

The following tables summarize maturity information of our loan portfolio as of December 31, 2023. The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.

[[GREPCENT_TABLE]]
[["Total Loans Held-for-Investment","","Due in One Year or Less","","","After One but Within Five Years","","","After Five but Within Fifteen Years","","","After Fifteen Years","","","Total"],["Commercial:"],["C&I","","$","486,266","","","$","550,273","","","$","103,625","","","$","24,647","","","$","1,164,811"],["Municipal","","","5,637","","","","44,443","","","","110,999","","","","53,771","","","","214,850"],["Total Commercial","","","491,903","","","","594,716","","","","214,624","","","","78,418","","","","1,379,661"],["Agricultural","","","64,993","","","","18,280","","","","1,617","","","","\u2014","","","","84,890"],["Real Estate:"],["Construction & Development","","","397,118","","","","199,262","","","","230,838","","","","135,940","","","","963,158"],["Farm","","","19,651","","","","68,288","","","","173,533","","","","83,482","","","","344,954"],["Non-Owner Occupied CRE","","","100,973","","","","233,174","","","","362,955","","","","130,867","","","","827,969"],["Owner Occupied CRE","","","50,058","","","","273,714","","","","479,315","","","","234,194","","","","1,037,281"],["Residential","","","134,536","","","","117,832","","","","770,377","","","","811,848","","","","1,834,593"],["Total Real Estate","","","702,336","","","","892,270","","","","2,017,018","","","","1,396,331","","","","5,007,955"],["Consumer:"],["Auto","","","6,735","","","","504,045","","","","11,079","","","","\u2014","","","","521,859"],["Non-Auto","","","32,014","","","","94,186","","","","22,123","","","","6,103","","","","154,426"],["Total Consumer","","","38,749","","","","598,231","","","","33,202","","","","6,103","","","","676,285"],["Total","","$","1,297,981","","","$","2,103,497","","","$","2,266,461","","","$","1,480,852","","","$","7,148,791"],["% of Total Loans","","","18.16","%","","","29.42","%","","","31.70","%","","","20.72","%","","","100.00","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["Loans with fixed interest rates:","","Due in One Year or Less","","","After One but Within Five Years","","","After Five but Within Fifteen Years","","","After Fifteen Years","","","Total"],["Commercial:"],["C&I","","$","79,004","","","$","324,154","","","$","11,946","","","$","\u2014","","","$","415,104"],["Municipal","","","3,963","","","","43,559","","","","80,079","","","","8,392","","","","135,993"],["Total Commercial","","","82,967","","","","367,713","","","","92,025","","","","8,392","","","","551,097"],["Agricultural","","","9,103","","","","12,859","","","","333","","","","\u2014","","","","22,295"],["Real Estate:"],["Construction & Development","","","154,911","","","","162,150","","","","49,815","","","","10,336","","","","377,212"],["Farm","","","8,602","","","","24,316","","","","105,438","","","","1,008","","","","139,364"],["Non-Owner Occupied CRE","","","34,751","","","","148,624","","","","69,235","","","","246","","","","252,856"],["Owner Occupied CRE","","","27,602","","","","160,146","","","","40,152","","","","170","","","","228,070"],["Residential","","","57,001","","","","96,629","","","","484,586","","","","102,155","","","","740,371"],["Total Real Estate","","","282,867","","","","591,865","","","","749,226","","","","113,915","","","","1,737,873"],["Consumer:"],["Auto","","","6,708","","","","504,045","","","","11,079","","","","\u2014","","","","521,832"],["Non-Auto","","","27,835","","","","92,441","","","","21,813","","","","3,272","","","","145,361"],["Total Consumer","","","34,543","","","","596,486","","","","32,892","","","","3,272","","","","667,193"],["Total","","$","409,480","","","$","1,568,923","","","$","874,476","","","$","125,579","","","$","2,978,458"],["% of Total Loans","","","5.73","%","","","21.94","%","","","12.23","%","","","1.76","%","","","41.66","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Loans with variable interest rates:","","Due in One Year or Less","","","After One but Within Five Years","","","After Five but Within Fifteen Years","","","After Fifteen Years","","","Total"],["Commercial:"],["C&I","","$","407,262","","","$","226,119","","","$","91,679","","","$","24,647","","","$","749,707"],["Municipal","","","1,674","","","","884","","","","30,920","","","","45,379","","","","78,857"],["Total Commercial","","","408,936","","","","227,003","","","","122,599","","","","70,026","","","","828,564"],["Agricultural","","","55,890","","","","5,421","","","","1,284","","","","\u2014","","","","62,595"],["Real Estate:"],["Construction & Development","","","242,207","","","","37,112","","","","181,023","","","","125,604","","","","585,946"],["Farm","","","11,049","","","","43,972","","","","68,095","","","","82,474","","","","205,590"],["Non-Owner Occupied CRE","","","66,222","","","","84,550","","","","293,720","","","","130,621","","","","575,113"],["Owner Occupied CRE","","","22,456","","","","113,568","","","","439,163","","","","234,024","","","","809,211"],["Residential","","","77,535","","","","21,203","","","","285,791","","","","709,693","","","","1,094,222"],["Total Real Estate","","","419,469","","","","300,405","","","","1,267,792","","","","1,282,416","","","","3,270,082"],["Consumer:"],["Auto","","","27","","","","\u2014","","","","\u2014","","","","\u2014","","","","27"],["Non-Auto","","","4,179","","","","1,745","","","","310","","","","2,831","","","","9,065"],["Total Consumer","","","4,206","","","","1,745","","","","310","","","","2,831","","","","9,092"],["Total","","$","888,501","","","$","534,574","","","$","1,391,985","","","$","1,355,273","","","$","4,170,333"],["% of Total Loans","","","12.43","%","","","7.48","%","","","19.47","%","","","18.96","%","","","58.34","%"]]
[[/GREPCENT_TABLE]]

Of the $4.17 billion of the variable interest rate loans shown above, loans totaling $1.66 billion mature or reprice over the next twelve months. Of this amount, approximately $1.37 billion will reprice immediately upon changes in the underlying index rate (primarily U.S. prime rate) with the remaining $287 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 $35.10 million at December 31, 2023, as compared to $24.33 million at December 31, 2022 and $34.16 million at December 31, 2021. As a percent of loans HFI and foreclosed assets, these assets were 0.49% at December 31, 2023, as compared to 0.38% at December 31, 2022 and 0.63% at December 31, 2021. As a percent of total assets, these assets were 0.27% at December 31, 2023, as compared to 0.19% at December 31, 2022 and 0.26% at December 31, 2021. We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming at December 31, 2023.

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

[[GREPCENT_TABLE]]
[["","","At December 31,"],["","","2023","","","2022","","","2021","","","2020","","","2019"],["Nonaccrual loans","","$","33,609","","","$","24,325","","","$","31,673","","","$","42,643","","","$","24,608"],["Loans still accruing and past due 90 days or more","","","1,004","","","","\u2014","","","","8","","","","113","","","","153"],["Nonperforming loans (1)","","","34,613","","","","24,325","","","","31,681","","","","42,756","","","","24,761"],["Foreclosed assets","","","483","","","","\u2014","","","","2,477","","","","142","","","","1,009"],["Total nonperforming assets","","$","35,096","","","$","24,325","","","$","34,158","","","$","42,898","","","$","25,770"],["As a % of loans held-for-investment and foreclosed assets","","","0.49","%","","","0.38","%","","","0.63","%","","","0.83","%","","","0.61","%"],["As a % of total assets","","","0.27","","","","0.19","","","","0.26","","","","0.39","","","","0.31"]]
[[/GREPCENT_TABLE]]

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

We record interest payments received on nonaccrual loans as reductions of principal. Prior to the loans being placed on nonaccrual, we recognized interest income on these loans as of December 31, 2023 of approximately $913 thousand during the year ended December 31, 2023. If interest on these loans had been recognized on a full accrual basis during the year ended December 31, 2023, such income would have approximated $3.22 million.

Included in our loan portfolio are certain other loans not included in the table above that are deemed to be potential problem loans. Potential problem loans are those loans that are currently performing, but for which known information about trends, uncertainties or possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present repayment terms, possibly resulting in the transfer of such loans to nonperforming status. These potential problem loans totaled $5.46 million as of December 31, 2023.

See Note 3 to the Consolidated Financial Statements for more information on these assets.

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. The provision for credit losses was $10.63 million in 2023, a provision of $17.43 million in 2022, as compared to a reversal of provision of $1.14 million in 2021. The Company's provision for credit losses during 2023 was driven by strong organic loan growth offset by a decrease in construction and development unfunded commitments. The increase in the Company's provision for credit losses during 2022 was driven by strong organic loan growth, increases in unfunded commitments and a slight decline in the projected economic forecast metrics. The net reversal of the Company's provision for credit losses in 2021 reflected improvement in the economic outlook for our markets across Texas and overall improvements in asset quality offset by loan growth.

As a percent of average loans, net loan charge-offs were 0.03% during 2023, net recoveries of 0.01% during 2022, and net loan charge-offs of 0.02% during 2021. The allowance for credit losses as a percent of loans HFI was 1.24% as of December 31, 2023, as compared to 1.18% as of December 31, 2022, and 1.18% as of December 31, 2021. Included in the following tables are further analysis of our allowance for credit losses.

Although we believe we use the best information available to make credit loss allowance determinations, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making our initial determinations. A downturn in the economy or lower employment could result in increased levels of nonaccrual, past due 90 days or more and still accruing, foreclosed assets, charge-offs, increased provision for credit losses and reductions in income. Additionally, as an integral part of their examination process, bank regulatory agencies periodically review the adequacy of our allowance for credit losses. The banking agencies could require additions to our allowance for credit losses based on their judgment of information available to them at the time of their examinations of our bank subsidiary.

45

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

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","2021","","","2020","","","2019"],["Balance at January 1,","","$","75,834","","","$","63,465","","","$","66,534","","","$","52,499","","","$","51,202"],["Impact of adopting ASC 326","","","\u2014","","","","\u2014","","","","\u2014","","","","(619",")","","","\u2014"],["Initial allowance on acquired TB&T PCD loans","","","\u2014","","","","\u2014","","","","\u2014","","","","1,678","","","","\u2014"],["Charge-offs:"],["Commercial:"],["C&I","","","(1,816",")","","","(589",")","","","(1,600",")","","","(2,516",")","","N/A"],["Municipal","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","N/A"],["Total Commercial","","","(1,816",")","","","(589",")","","","(1,600",")","","","(2,516",")","","","(1,545",")"],["Agricultural","","","(9",")","","","(9",")","","","(2,683",")","","","(372",")","","","(319",")"],["Real estate:"],["Construction & Development","","","\u2014","","","","(100",")","","","\u2014","","","","\u2014","","","N/A"],["Farm","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","N/A"],["Non-Owner Occupied CRE","","","\u2014","","","","\u2014","","","","(6",")","","","(563",")","","N/A"],["Owner Occupied CRE","","","(10",")","","","(537",")","","","(231",")","","","(567",")","","N/A"],["Residential real estate","","","(258",")","","","(186",")","","","(93",")","","","(373",")","","N/A"],["Total real estate","","","(268",")","","","(823",")","","","(330",")","","","(1,503",")","","","(1,335",")"],["Consumer:"],["Auto","","","(1,006",")","","","(596",")","","","(610",")","","","(548",")","","N/A"],["Non-Auto","","","(600",")","","","(435",")","","","(285",")","","","(375",")","","N/A"],["Total Consumer","","","(1,606",")","","","(1,031",")","","","(895",")","","","(923",")","","","(927",")"],["Total charge-offs","","","(3,699",")","","","(2,452",")","","","(5,508",")","","","(5,314",")","","","(4,126",")"],["Recoveries:"],["Commercial:"],["C&I","","","267","","","","953","","","","2,150","","","","1,315","","","N/A"],["Municipal","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","N/A"],["Total Commercial","","","267","","","","953","","","","2,150","","","","1,315","","","","1,364"],["Agricultural","","","286","","","","155","","","","36","","","","31","","","","158"],["Real estate:"],["Construction & Development","","","106","","","","\u2014","","","","1","","","","\u2014","","","N/A"],["Farm","","","\u2014","","","","\u2014","","","","110","","","157","","","N/A"],["Non-Owner Occupied CRE","","","71","","","","852","","","","702","","","131","","","N/A"],["Owner Occupied CRE","","","227","","","","699","","","","821","","","17","","","N/A"],["Residential real estate","","","24","","","","114","","","","96","","","151","","","N/A"],["Total Real Estate","","","428","","","","1,665","","","","1,730","","","","456","","","","404"],["Consumer:"],["Auto","","","398","","","","293","","","","401","","","269","","","N/A"],["Non-Auto","","","170","","","","215","","","","211","","","171","","","N/A"],["Total Consumer","","","568","","","","508","","","","612","","","","440","","","","532"],["Total recoveries","","","1,549","","","","3,281","","","","4,528","","","","2,242","","","","2,458"],["Net recoveries (charge-offs)","","","(2,150",")","","","829","","","","(980",")","","","(3,072",")","","","(1,668",")"],["Provision for credit losses (excluding provision for unfunded commitment)","","","15,050","","","","11,540","","","","(2,089",")","","","16,048","","","","2,965"],["Balance at December 31,","","$","88,734","","","$","75,834","","","$","63,465","","","$","66,534","","","$","52,499"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Loans, held-for-investment at year-end","","$","7,148,791","","","$","6,441,868","","","$","5,388,972","","","$","5,171,033","","","$","4,194,969"],["Average loans","","","6,784,352","","","","5,923,594","","","","5,341,332","","","","5,152,531","","","","4,074,667"],["Net (recoveries) charge-offs/average loans","","","0.03","%","","","(0.01",")%","","","0.02","%","","","0.06","%","","","0.04","%"],["Allowance for credit losses/year-end loans held-for-investment","","","1.24","%","","","1.18","%","","","1.18","%","","","1.29","%","","","1.25","%"],["Allowance for credit losses/nonaccrual, past due 90 days still accruing and restructured loans","","","256.36","","","","311.75","","","","200.33","","","","155.61","","","","212.02"]]
[[/GREPCENT_TABLE]]

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Allocation of Allowance for Credit Losses (in thousands):

[[GREPCENT_TABLE]]
[["","","At December 31,"],["","","2023","","","2022","","","2021","","","2020","","","2019"],["","","Allocation Amount","","","Allocation Amount","","","Allocation Amount","","","Allocation Amount","","","Allocation Amount"],["Commercial:"],["C&I","","$","15,698","","","$","16,129","","","$","12,280","","","$","13,609","","","$ N/A"],["Municipal","","","195","","","","1,026","","","","348","","","","1,552","","","N/A"],["Total Commercial","","","15,893","","","","17,155","","","","12,628","","","","15,161","","","","12,122"],["Agricultural","","","1,281","","","","1,041","","","","1,597","","","","1,255","","","","1,206"],["Real estate:"],["Construction & Development","","","28,553","","","","26,443","","","","17,627","","","","13,512","","","N/A"],["Farm","","","2,914","","","","1,957","","","","663","","","","1,876","","","N/A"],["Non-Owner Occupied CRE","","","13,425","","","","9,075","","","","10,722","","","","8,391","","","N/A"],["Owner Occupied CRE","","","13,813","","","","9,928","","","","10,828","","","","12,347","","","N/A"],["Residential real estate","","","11,654","","","","9,075","","","","8,133","","","","12,601","","","N/A"],["Total Real Estate","","","70,359","","","","56,478","","","","47,973","","","","48,727","","","","33,974"],["Consumer:"],["Auto","","","810","","","","845","","","","896","","","","1,020","","","N/A"],["Non-Auto","","","391","","","","315","","","","371","","","","371","","","N/A"],["Total Consumer","","","1,201","","","","1,160","","","","1,267","","","","1,391","","","","5,197"],["Total","","$","88,734","","","$","75,834","","","$","63,465","","","$","66,534","","","$","52,499"]]
[[/GREPCENT_TABLE]]

Percent of Loans in Each Category of Total Loans:

[[GREPCENT_TABLE]]
[["","","At December 31,"],["","","2023","","","2022","","","2021","","","2020","","","2019"],["Commercial:"],["C&I","","","16.29","%","","","14.24","%","","","15.53","%","","","21.88","%","","N/A%"],["Municipal","","","3.01","","","","3.43","","","","3.30","","","","3.51","","","N/A"],["Total Commercial","","","19.30","%","","","17.67","","","","18.83","","","","25.39","","","","20.41"],["Agricultural","","","1.19","","","","1.19","","","","1.83","","","","1.83","","","","2.47"],["Real estate:"],["Construction & Development","","","13.47","","","","14.89","","","","13.91","","","","10.71","","","N/A"],["Farm","","","4.83","","","","4.76","","","","4.03","","","","2.94","","","N/A"],["Non-Owner Occupied CRE","","","11.58","","","","11.36","","","","11.57","","","","11.95","","","N/A"],["Owner Occupied CRE","","","14.51","","","","14.82","","","","15.25","","","","14.45","","","N/A"],["Residential real estate","","","25.66","","","","24.46","","","","24.76","","","","24.14","","","N/A"],["Total Real Estate","","","70.05","","","","70.29","","","","69.52","","","","64.19","","","","67.31"],["Consumer:"],["Auto","","","7.30","","","","8.55","","","","7.52","","","","6.84","","","N/A"],["Non-Auto","","","2.16","","","","2.30","","","","2.30","","","","1.75","","","N/A"],["Total Consumer","","","9.46","","","","10.85","","","","9.82","","","","8.59","","","","9.81"],["Total","","","100.00","%","","","100.00","%","","","100.00","%","","","100.00","%","","","100.00","%"]]
[[/GREPCENT_TABLE]]

Interest-Bearing Demand Deposits in Banks. The Company had interest-bearing demand deposits in banks of $255.24 million at December 31, 2023 and $37.39 million at December 31, 2022, respectively. At December 31, 2023, our interest-bearing deposits in banks included $248.24 million maintained at the Federal Reserve Bank of Dallas and $7.00 million on deposit with the Federal Home Loan Bank of Dallas (FHLB). The average balance of interest-bearing deposits in banks was $115.79 million, $217.53 million and $590.84 million in 2023, 2022 and 2021, respectively. The average yield on interest-bearing deposits in banks was 5.09%, 1.67% and 0.12% in 2023, 2022 and 2021, respectively.

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Available-for-Sale Securities. At December 31, 2023, securities with a fair value of $4.73 billion were classified as securities AFS. There were no securities classified as held-to-maturity at December 31, 2023 and 2022. As compared to December 31, 2022, the AFS portfolio at December 31, 2023, reflected (1) a decrease of $315 thousand in U.S. Treasury securities; (2) a decrease of $401.45 million in obligations of states and political subdivisions; (3) an increase of $3.19 million in corporate bonds and other securities; and (4) a decrease of $343.02 million in mortgage-backed securities. As compared to December 31, 2021, the AFS portfolio at December 31, 2022, reflected (1) an increase of $355.71 million in U.S. Treasury securities; (2) a decrease of $854.86 million in obligations of states and political subdivisions; (3) an increase of $33.47 million in corporate bonds and other securities; and (4) a decrease of $633.13 million in mortgage-backed securities. Securities-AFS included an unrealized loss fair value adjustment of $510.92 million and $677.99 million at December 31, 2023 and 2022, respectively, and an unrealized gain fair value adjustments of $125.67 million at December 31, 2021. 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 for additional disclosures relating to the maturities and fair values of the investment portfolio at December 31, 2023 and 2022.

Maturities and Yields of Available-for-Sale Held at December 31, 2023 (in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","","Maturing"],["","","One Year or Less","","","After One Year Through Five Years","","","After Five Years Through Ten Years","","","After Ten Years","","","Total"],["Available-for-Sale:","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield"],["U.S. Treasury securities","","$","213,660","","","","2.03","%","","$","268,574","","","","1.78","%","","$","\u2014","","","","\u2014","%","","$","\u2014","","","","\u2014","%","","$","482,234","","","","1.90","%"],["Obligations of states and political subdivisions","","","51,697","","","","3.46","","","","204,966","","","","3.06","","","","1,181,109","","","","2.46","","","","59,385","","","","3.20","","","","1,497,157","","","","2.60"],["Corporate bonds and other securities","","","4,483","","","","3.89","","","","77,448","","","","2.75","","","","23,024","","","","1.76","","","","\u2014","","","","\u2014","","","","104,955","","","","2.58"],["Mortgage-backed securities","","","85,962","","","","2.69","","","","757,418","","","","2.16","","","","1,251,749","","","","1.90","","","","553,287","","","","2.24","","","","2,648,416","","","","2.07"],["Total","","$","355,802","","","","2.42","%","","$","1,308,406","","","","2.26","%","","$","2,455,882","","","","2.17","%","","$","612,672","","","","2.33","%","","$","4,732,762","","","","2.23","%"]]
[[/GREPCENT_TABLE]]

All yields are computed on a tax-equivalent basis assuming a marginal tax rate of 21%. Yields on AFS 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 December 31, 2023, the investment portfolio had an overall tax equivalent yield of 2.23%, a weighted average life of 6.07 years and modified duration of 5.30 years. At December 31, 2022, the investment portfolio had an overall tax equivalent yield of 2.31%, a weighted average life of 7.76 years and modified duration of 6.33 years.

Deposits. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were $11.14 billion as of December 31, 2023, as compared to $11.01 billion as of December 31, 2022 and $10.57 billion as of December 31, 2021. The table below provides a breakdown of average deposits and rates paid over the past three years and the remaining maturity of time deposits of $250,000 or more:

Composition of Average Deposits and Remaining Maturity of Time Deposits of $250,000 or More (in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","2021"],["","","Average Balance","","","Average Rate","","","Average Balance","","","Average Rate","","","Average Balance","","","Average Rate"],["Noninterest-bearing deposits","","$","3,632,559","","","\u2014%","","","$","4,063,740","","","\u2014%","","","$","3,449,313","","","\u2014%"],["Interest-bearing deposits"],["Interest-bearing checking","","","3,321,139","","","","1.36","","","","3,623,301","","","","0.42","","","","3,068,952","","","","0.07"],["Savings and money market accounts","","","3,018,102","","","","1.74","","","","2,893,012","","","","0.32","","","","2,682,266","","","","0.07"],["Time deposits under $250,000","","","312,046","","","","5.26","","","","303,531","","","","0.34","","","","318,886","","","","0.28"],["Time deposits of $250,000 or more","","","536,884","","","","2.00","","","","135,939","","","","0.47","","","","154,517","","","","0.47"],["Total interest-bearing deposits","","","7,188,171","","","","1.74","%","","","6,955,783","","","","0.38","%","","","6,224,621","","","","0.09","%"],["Total average deposits","","$","10,820,730","","","","","","$","11,019,523","","","","","","$","9,673,934"],["Total cost of deposits","","","","","","1.15","%","","","","","","0.24","%","","","","","","0.06","%"]]
[[/GREPCENT_TABLE]]

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The table below outlines the maturity of time deposits of $250,000 or more (in thousands):

[[GREPCENT_TABLE]]
[["","","As of December 31, 2023"],["Three months or less","","$","164,746"],["Over three through six months","","","52,165"],["Over six through twelve months","","","127,718"],["Over twelve months","","","25,876"],["Total time deposits of $250,000 or more","","$","370,505"]]
[[/GREPCENT_TABLE]]

The estimated amount of uninsured and uncollateralized deposits including related interest accrued and unpaid is approximately $5.38 billion as of December 31, 2023.

Borrowings. Included in borrowings were federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings of $404.08 million, $642.51 million and $671.15 million at December 31, 2023, 2022 and 2021, respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the short-term borrowing. The average balances of securities sold under repurchase agreements were $568.21 million, $674.23 million and $535.07 million in 2023, 2022 and 2021, respectively. The average rates paid on securities sold under repurchase agreements were 2.84%, 0.31% and 0.06% for the years ended December 31, 2023, 2022 and 2021, respectively. The average balances of federal funds purchased and advances from the FHLB were $81.26 million, $127.87 million, and $21.54 million in 2023, 2022 and 2021, respectively. The average rates paid on federal funds purchased and advances from the FHLB were 4.05%, 2.45% and 0.05% for the years ended December 31, 2023, 2022 and 2021, respectively. The weighted average interest rate on federal funds purchased, securities sold under repurchase agreements and advances from the FHLB was 3.27%, 1.96% and 0.06% at December 31, 2023, 2022 and 2021, respectively. The highest amount of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB at any month-end during 2023, 2022 and 2021 was $822.98 million, $1.04 billion and $674.88 million, 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.

[[GREPCENT_TABLE]]
[["","","Percentage change in net interest income:"],["Change in interest rates:","","December 31,"],["(in basis points)","","2023","","","2022"],["+400","","","7.17","%","","","5.13","%"],["+300","","","5.36","%","","","3.86","%"],["+200","","","3.87","%","","","3.13","%"],["+100","","","2.11","%","","","2.09","%"],["-100","","","(2.72",")%","","","(2.66",")%"],["-200","","","(5.54",")%","","","(5.47",")%"],["-300","","","(8.70",")%","","","(8.54",")%"],["-400","","","(9.65",")%","","","(10.31",")%"]]
[[/GREPCENT_TABLE]]

49

Table of Contents

The results for the net interest income simulations as of December 31, 2023 and December 31, 2022 resulted in an asset sensitive position. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each year-end will remain constant over the relevant twelve-month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics on specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. We believe these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities reprice in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material.

Should we be unable to maintain a reasonable balance of maturities and repricing of our interest-earning assets and our interest-bearing liabilities, we could be required to dispose of our assets in an unfavorable manner or pay a higher than market rate to fund our activities. Our asset liability committee oversees and monitors this risk.

The fair value of our investment securities classified as available-for-sale totaled $4.73 billion at December 31, 2023. During the year ended December 31, 2023, the corresponding unrealized loss before taxes on the portfolio of $677.99 million at December 31, 2022, changed to an unrealized loss before taxes of $510.92 million at December 31, 2023, which is recorded net of taxes in accumulated other comprehensive earnings (loss) in shareholders' equity. The unrealized gains or losses, net of taxes, on the portfolio are excluded from the calculation of all regulatory capital ratios. The changes in the fair value were driven by sales of securities and 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 December 31, 2023, the 5-year U.S. Treasury rate was 3.84% compared to 4.01% at December 31, 2022, representing a 17 basis point decrease during the year. As of December 31, 2023, an increase of 100 basis points in the 5-year U.S. Treasury rate would result in an increase to unrealized losses by approximately $225 million before taxes, while a 100 basis point decrease in the same rate would result in a decrease to unrealized losses by approximately $198 million before taxes. We believe that we have the ability to hold these securities based on our overall liquidity and intent to hold the portfolio.

Capital and Liquidity

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

Total shareholders’ equity was $1.50 billion, or 11.44% of total assets at December 31, 2023, as compared to $1.27 billion, or 9.76% of total assets at December 31, 2022. Included in shareholders’ equity were $403.30 million and $535.23 million at December 31, 2023 and 2022, respectively, in unrealized losses on investment securities AFS, net of related income taxes. Unrealized gains and losses on investment securities AFS are excluded from and do not impact regulatory capital. During 2023, total shareholders’ equity averaged $1.33 billion, or 10.32% of average assets, as compared to $1.40 billion, or 10.55% of average assets during 2022.

Banking regulators measure capital adequacy by means of the risk-based capital ratios and 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 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including divided payments and stock repurchase, and to pay discretionary bonuses to executive officers.

As of December 31, 2023 and 2022, we had a total risk-based capital ratio of 19.62% and 19.29%, a Tier 1 capital to risk-weighted assets ratio of 18.50% and 18.22%, a common equity Tier 1 capital to risk-weighted ratio of 18.50% and 18.22% and a Tier 1 leverage ratio of 12.06% and 10.96%, respectively. The regulatory capital ratios as of December 31, 2023 and 2022 were calculated under Basel III Rules.

Our subsidiary bank made the election to continue to exclude accumulated other comprehensive income from capital in connection with its March 31, 2015 quarterly financial filing and, in effect, to retain the accumulated other comprehensive income treatment under the prior capital rules.

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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, which amounted to $404.08 million at December 31, 2023, and an unfunded $25.00 million revolving line of credit established with Frost Bank, a nonaffiliated bank, which matures on June 30, 2025 (see next paragraph). Our subsidiary bank also has federal funds purchased lines of credit with two non-affiliated banks totaling $130.00 million. At December 31, 2023, there were no amounts drawn on these lines of credit. Our subsidiary bank also has (i) an available line of credit with the FHLB totaling $1.86 billion at December 31, 2023, secured by portions of our loan portfolio and certain investment securities; and (ii) access to the Federal Reserve Bank of Dallas lending program, including the Bank Term Funding Program, secured by portions of certain investment securities. At December 31, 2023, there was $813 million used on the FHLB line advance for undisbursed commitments (letters of credit) used to secure public funds.

The Company renewed its loan agreement, effective June 30, 2023, with Frost Bank. Under the loan agreement, as renewed and amended, we are permitted to draw up to $25.00 million on a revolving line of credit. See Note 8 - Line of Credit in the accompanying notes to consolidated financial statements regarding further information on this line of credit.

In addition, we anticipate that any future acquisition of financial institutions, expansion of branch locations or offering of new products could also place a demand on our cash resources. Available cash and cash equivalents at the Company, which totaled $143.32 million at December 31, 2023, investment securities which totaled $2.20 million at December 31, 2023 with maturities over 6 to 7 years, available dividends from our subsidiaries which totaled $387.33 million at December 31, 2023, utilization of available lines of credit, and future debt or equity offerings are expected to be the source of funding for these potential acquisitions or expansions.

The Company continuously monitors the Company's liquidity position to ensure that assets and liabilities are managed in a manner that will meet all of the Company's short-term and long-term cash requirements. The Company manages the Company's liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of the Company's shareholders. The Company also monitors its liquidity requirements in light of interest rate trends, changes in the economy, and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits.

In the ordinary course of business we have entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to consolidated financial statements for the expected timing of such payments as of December 31, 2023. These payments related to time deposits with stated maturity dates (Note 7 - Deposits and Borrowings) and operating leases (Note 11 - Commitments and Contingencies). In addition, we have construction contracts with remaining future minimum contractual obligations of approximately $624 thousand in 2024.

Off-Balance Sheet/Reserve for Unfunded Commitments. We are a party to financial instruments with off-balance sheet (“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 the consolidated balance sheets. At December 31, 2023, the Company’s reserve for unfunded commitments totaled $7.90 million which is recorded in other liabilities.

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

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

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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.

See further disclosure of the unfunded lines of credit, unfunded commitments to extend credit and standby letters of credit (Note 12 - Financial Instruments with Off-Balance-Sheet Risk). Future notional amounts committed are $466.25 million in less than one year, $868.47 million in more than one year but less than three years and $588.37 million thereafter.

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.

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 December 31, 2023, $387.33 million was available for the payment of intercompany dividends by our subsidiaries without the prior approval of regulatory agencies. Our subsidiaries paid aggregate dividends to us of $133.50 million in 2023 and $67.50 million in 2022.

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 50.96%, 40.18% and 36.30% of net earnings, respectively, in 2023, 2022 and 2021. Given our current capital position, projected earnings and asset growth rates, we do not anticipate any significant change in our current dividend policy.

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 (1) such bank’s net profits (as defined and interpreted by regulation) for that year plus (2) 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. 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 Board, 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 Board, 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.