FIRST FINANCIAL BANKSHARES INC

Previous wording

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.

Current wording

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. 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.

Previous wording

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.

Current wording

On July 23, 2024, the Company’s Board of Directors extended the authorization to repurchase up to 5,000,000 common shares through July 31, 2025. The prior authorization had been in place since July 27, 2021. The stock repurchase plan authorizes management to repurchase and retire the stock at such time as repurchases and retirements are considered beneficial to the Company and stockholders. Any repurchase of stock will be made through the open market, block trades, or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Under the previous authorization effective through July 31, 2024, 244,559 shares were repurchased and retired (during the months of June and July 2022) at an average price of $38.61 per share. Additionally, 101,337 shares (all during September 2023) were repurchased and retired at an average price of $26.99 per share.

Previous wording

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.

Current wording

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. The adoption of ASU 2023-02 is not expected to have a significant impact on the financial statements and was not early adopted.

Previous wording

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.

Current wording

The selected financial data presented below as of and for the years ended December 31, 2024, 2023, 2022, 2021, and 2020, have been derived from our audited consolidated financial statements. The data set forth below may not be fully comparable from period to period (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.

Previous wording

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.

Current wording

Net earnings for 2023 were $198.98 million compared to $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.

Previous wording

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.

Current wording

On a diluted net earnings per share basis, net earnings were $1.56 for 2024, as compared to $1.39 for 2023 and $1.64 for 2022. The return on average assets was 1.68% for 2024, as compared to 1.55% for 2023 and 1.76% for 2022. The return on average equity was 14.51% for 2024, as compared to 14.99% for 2023 and to 16.72% for 2022.

Previous wording

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.

Current wording

Tax-equivalent net interest income was $437.19 million in 2024, as compared to $395.36 million in 2023, and $416.84 million in 2022. Average earning assets were $12.48 billion in 2024, as compared to $12.00 billion in 2023 and $12.46 billion in 2022. The increase in tax-equivalent net interest income in 2024 compared to 2023 was largely attributable to the change in the mix of interest earning assets primarily derived from an increase in average loans offset by a decrease in taxable and tax-exempt securities. Additionally, the rates received on loans continued to increase along with the rates paid on deposits. The increase of $483.34 million in average earning assets in 2024 when compared to 2023 was primarily a result of an increase in loans of $732.00 million, offset by a decrease in taxable securities of $211.16 million, and a decrease in tax-exempt securities of $176.36 million. 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. Average interest-bearing liabilities were $8.39 billion in 2024, as compared to $7.84 billion in 2023 and $7.76 billion in 2022. The yield on earning assets increased 62 basis points in 2024 when compared to 2023 while the rate paid on interest-bearing liabilities increased 57 basis points. 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.

Previous wording

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.

Current wording

The net interest margin for 2024 was 3.50% which was a increase of 21 basis points from 2023. The net interest margin in 2023 was 3.29%, a decrease of five basis points from 2022. The net interest margin has expanded during the past year primarily due to (i) a shift in asset mix from investment securities to higher yielding loans, and (ii) increased loan yields due to new and renewing loans and variable rate loans repricing higher. The Federal Reserve began aggressively increasing interest rates in March 2022 and continuing into 2023 with increases of 25 basis points in February, March, May, and July 2023. Most recently, the Federal Reserve decreased interest rates 50 basis points in September 2024, and 25 basis points in November and December 2024, respectively, resulting in a target range of 4.25% to 4.50% at December 31, 2024.

Previous wording

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.

Current wording

There are $1.09 billion of municipal and related deposits which are indexed to short-term treasury rates which have continued to increase with the changes in the applicable rate index. Average municipal and related deposits totaled $1.46 billion for both years ended December 31, 2024 and 2023, respectively, with an average rate paid of 3.94% and 3.13%, for the respective years then ended.

Previous wording

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%.

Current wording

Includes tax-equivalent yield adjustment of approximately $10.45 million, $11.55 million and $15.42 million for the years ended December 31, 2024, 2023 and 2022, respectively, using an effective tax rate of 21%.

Previous wording

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.

Current wording

Noninterest income for 2023 was $108.00 million compared to $131.67 million in 2022. Changes in certain categories of noninterest income included (i) a decline in gains on sales of AFS securities of $9.26 million, (ii) a decrease in debit card fees of $8.56 million, and (iii) a decrease in gain on sale and fees of mortgage loans of $7.15 million when compared to 2022. AFS 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 has been yielding approximately 8%. 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 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 2023.

Previous wording

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.

Current wording

Noninterest Expense. Total noninterest expense for 2024 amounted to $265.06 million, an increase of $27.18 million, or 11.43%, as compared to 2023. Total noninterest expense for 2023 was $237.88 million, an increase of $3.10 million, or 1.32%, as compared to 2022. 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 2024 was 47.23%, as compared to 47.26% for 2023 and 42.80% for 2022.

Previous wording

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.

Current wording

All other categories of noninterest expense for 2024 totaled $111.77 million, an increase of $5.80 million, or 5.47%, as compared to 2023. Included in noninterest expense during 2024, excluding salary and employee benefit related costs, were increases in software amortization and expense, occupancy expense, and legal and professional fees offset by a decrease in FDIC insurance premiums of $1.25 million due to the special assessment in the prior year.

Previous wording

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.

Current wording

Income Taxes. Income tax expense was $48.34 million for 2024, as compared to $44.32 million for 2023 and $46.40 million for 2022. Our effective tax rates on pretax income were 17.78%, 18.22% and 16.52%, respectively, for the years 2024, 2023 and 2022. 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.

Previous wording

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.

Current wording

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, 2024, total loans HFI were $7.91 billion, an increase of $764.31 million as compared to December 31, 2023.

Previous wording

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.

Current wording

As compared to year-end 2023 balances, total commercial loans increased $166.58 million, agricultural loans increased $10.65 million, total real estate loans increased $471.75 million, and total consumer loans increased $115.33 million. Loans averaged $7.52 billion during 2024, an increase of $732.00 million over 2023 average balances.

Previous wording

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.

Current wording

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

Previous wording

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.

Current wording

The table below outlines the composition of the Company’s HFI loans by portfolio segment.

Previous wording

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.

Current wording

Loans HFS, consisting of secondary market mortgage loans, totaled $8.24 million and $14.25 million at December 31, 2024 and 2023, respectively. At December 31, 2024 and 2023, $442 thousand and $3.18 million are valued at the lower of cost or fair value, and the remaining amount is valued under the fair value option.

Previous wording

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.

Current wording

Of the $4.67 billion of the variable interest rate loans shown above, loans totaling $2.07 billion mature or reprice over the next twelve months. Of this amount, approximately $1.90 billion will reprice immediately upon changes in the underlying index rate (primarily U.S. prime rate) with the remaining $173.43 million being subject to floors above or ceilings below the current index.

Previous wording

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.

Current wording

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 $63.10 million at December 31, 2024, as compared to $35.10 million at December 31, 2023 and $24.33 million at December 31, 2022. As a percent of loans HFI and foreclosed assets, these assets were 0.80% at December 31, 2024, as compared to 0.49% at December 31, 2023 and 0.38% at December 31, 2022. As a percent of total assets, these assets were 0.45% at December 31, 2024, as compared to 0.27% at December 31, 2023 and 0.19% at December 31, 2022. 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, 2024.

Previous wording

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.

Current wording

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, 2024 of approximately $1.11 million during the year ended December 31, 2024. If interest on these loans had been recognized on a full accrual basis during the year ended December 31, 2024, such income would have approximated $5.35 million.

Previous wording

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.

Current wording

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 $11.25 million as of December 31, 2024.

Previous wording

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.

Current wording

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 $13.82 million in 2024, $10.63 million in 2023, and $17.43 million in 2022. The Company's provision for credit losses during 2024 was driven by strong organic loan growth and an increase in classified loans. The increase in 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.

Previous wording

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.

Current wording

As a percent of average loans, net loan charge-offs were 0.05% during 2024 and 0.03% during 2023, and net loan recoveries of 0.01% during 2022. The allowance for credit losses as a percent of loans HFI was 1.24% as of December 31, 2024, as compared to 1.24% as of December 31, 2023, and 1.18% as of December 31, 2022. Included in the following tables are further analysis of our allowance for credit losses.

Previous wording

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.

Current wording

Interest-Bearing Demand Deposits in Banks. The Company had interest-bearing demand deposits in banks of $503.42 million at December 31, 2024 and $255.24 million at December 31, 2023, respectively. At December 31, 2024, our interest-bearing deposits in banks included $483.70 million maintained at the Federal Reserve Bank of Dallas and $19.72 million on deposit with the Federal Home Loan Bank of Dallas (FHLB). The average balance of interest-bearing deposits in banks was $253.39 million, $115.79 million and $217.53 million in 2024, 2023 and 2022, respectively. The average yield on interest-bearing deposits in banks was 5.23%, 5.09% and 1.67% in 2024, 2023 and 2022, respectively.

Previous wording

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.

Current wording

Available-for-Sale Securities. At December 31, 2024, securities with a fair value of $4.62 billion were classified as securities AFS. There were no securities classified as held-to-maturity at December 31, 2024 and 2023. As compared to December 31, 2023, the AFS portfolio at December 31, 2024, reflected (i) a decrease of $208.67 million in U.S. Treasury securities; (ii) a decrease of $56.91 million in obligations of states and political subdivisions; (iii) an increase of $149.87 million in mortgage-backed securities, and (iv) an increase of $711 thousand in corporate bonds and other securities. As compared to December 31, 2022, the AFS portfolio at December 31, 2023, reflected (i) a decrease of $401.45 million in obligations of states and political subdivisions; (ii) a decrease of $343.02 million in mortgage-backed securities; (iii) a decrease of $315 thousand in U.S. Treasury securities; and (iv) an increase of $3.19 million in corporate bonds and other securities. Securities AFS included an unrealized loss fair value adjustment of $537.55 million, $510.92 million and $677.99 million at December 31, 2024, 2023, and 2022, respectively. Our mortgage related securities are backed by GNMA, FNMA or FHLMC or are collateralized by securities backed by these agencies.

Previous wording

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.

Current wording

As of December 31, 2024, the investment portfolio had an overall tax equivalent yield of 2.55%, a weighted average life of 7.03 years and modified duration of 5.82 years. At 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.

Previous wording

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:

Current wording

Deposits. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were $12.10 billion as of December 31, 2024, as compared to $11.14 billion as of December 31, 2023 and $11.01 billion as of December 31, 2022. 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:

Previous wording

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

Current wording

The estimated amount of uninsured and uncollateralized deposits including related interest accrued and unpaid is approximately $4.01 billion as of December 31, 2024.

Previous wording

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.

Current wording

Repurchase Agreements. 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 $173.07 million, $568.21 million and $674.23 million in 2024, 2023 and 2022, respectively. The average balances of securities sold under repurchase agreements has decreased from the prior year as customers have moved funds to IntraFi deposit accounts. The average rates paid on securities sold under repurchase agreements were 3.16%, 2.84% and 0.31% for the years ended December 31, 2024, 2023 and 2022, respectively. The weighted average interest rate on federal funds purchased, securities sold under repurchase agreements and advances from the FHLB was 2.01%, 3.27% and 1.96% at December 31, 2024, 2023 and 2022, respectively. The highest amount of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB at any month-end during 2024, 2023 and 2022 was $563.28 million, $822.98 million and $1.04 billion, respectively.

Previous wording

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.

Current wording

The fair value of our investment securities classified as available-for-sale totaled $4.62 billion at December 31, 2024. During the year ended December 31, 2024, the corresponding unrealized loss before taxes on the portfolio of $510.92 million at December 31, 2023, changed to an unrealized loss before taxes of $537.55 million at December 31, 2024, which is recorded net of taxes in accumulated other comprehensive earnings (loss) in shareholders' equity. The unrealized gains or losses, net of taxes, on the portfolio are excluded from the calculation of all regulatory capital ratios. The changes in the fair value were driven by changes in interest rates based on expected actions by the Federal Reserve Board and other market conditions. The overall valuation of the portfolio is most correlated to the 5-year U.S. Treasury rates based on the composition and duration of the portfolio. At December 31, 2024, the 5-year U.S. Treasury rate was 4.39% compared to 3.84% at December 31, 2023, representing a 55 basis point increase during the year. As of December 31, 2024, an increase of 100 basis points in the 5-year U.S. Treasury rate would result in an increase to unrealized losses by approximately $231.38 million before taxes, while a 100 basis point decrease in the same rate would result in a decrease to unrealized losses by approximately $193.96 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.

Previous wording

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.

Current wording

Total shareholders’ equity was $1.61 billion, or 11.49% of total assets at December 31, 2024, as compared to $1.50 billion, or 11.44% of total assets at December 31, 2023. Included in shareholders’ equity were $424.29 million and $403.30 million at December 31, 2024 and 2023, 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 2024, total shareholders’ equity averaged $1.54 billion, or 11.56% of average assets, as compared to $1.33 billion, or 10.32% of average assets during 2023.

Previous wording

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.

Current wording

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 repurchases, and to pay discretionary bonuses to executive officers.

Previous wording

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.

Current wording

As of December 31, 2024 and 2023, we had a total risk-based capital ratio of 20.00% and 19.62%, a Tier 1 capital to risk-weighted assets ratio of 18.83% and 18.50%, a common equity Tier 1 capital to risk-weighted ratio of 18.83% and 18.50% and a Tier 1 leverage ratio of 12.49% and 12.06%, respectively. The regulatory capital ratios as of December 31, 2024 and 2023 were calculated under Basel III Rules.

Previous wording

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.

Current wording

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 $197.02 at December 31, 2024, 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, 2024, 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, 2024, 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, 2024, there was $1.05 billion used on the FHLB line advance for undisbursed commitments (letters of credit) used to secure public funds.

Previous wording

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.

Current wording

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 $94.59 million at December 31, 2024, investment securities which totaled $2.12 million at December 31, 2024 with maturities over 5 to 6 years, available dividends from our subsidiaries which totaled $428.66 million at December 31, 2024, 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.

Previous wording

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.

Current wording

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, 2024. 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 $358 thousand in 2025.

Previous wording

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.

Current wording

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, 2024, the Company’s reserve for unfunded commitments totaled $8.68 million which is recorded in other liabilities.

Previous wording

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.

Current wording

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 $1.04 billion in less than one year, $601.28 million in more than one year but less than three years and $525.41 million thereafter.