PROSPERITY BANCSHARES, INC. Special Cautionary Notice Regarding Forward-Looking Statements
Statements and financial discussion and analysis contained in this quarterly report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and involve a number of risks and uncertainties, many of which are beyond the Company's control. Forward-looking statements can be identified by words such as "believes," "intends," "expects," "plans," "will" and similar references to future periods. Many possible events or factors could affect the future financial results and performance of the Company and could cause such results or performance to differ materially from those expressed in the forward-looking statements. These possible events or factors include, but are not limited to:
•
changes in the strength ofthe United States economy in general and the strength of the local economies in which the Company conducts operations resulting in, among other things, a deterioration in credit quality or reduced demand for credit, including the result and effect on the Company's loan portfolio and allowance for credit losses;
•
the effect, impact, potential duration or other implications of the COVID-19 pandemic, including any actions undertaken by federal, state and local governmental authorities in response to the pandemic;
•
volatility in interest rates and market prices, which could reduce the Company's net interest margins, asset valuations and expense expectations;
•
changes in the levels of loan prepayments and the resulting effects on the value of the Company's loan portfolio;
•
changes in local economic and business conditions, including fluctuations in the price of oil, natural gas and other commodities, which adversely affect the Company's customers and their ability to transact profitable business with the company, including the ability of the Company's borrowers to repay their loans according to their terms or a change in the value of the related collateral;
•
the potential impacts of climate change;
•
increased competition for deposits and loans adversely affecting rates and terms;
•
the timing, impact and other uncertainties of any future acquisitions, including
the pending acquisition of
•
the possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on the results of operations;
•
increased credit risk in the Company's assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of the total loan portfolio;
•
the concentration of the Company's loan portfolio in loans collateralized by residential and commercial real estate;
•
the failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses, including such assumptions related to potential, pending or recent acquisitions;
•
changes in the availability of funds resulting in increased costs or reduced liquidity;
•
a deterioration or downgrade in the credit quality and credit agency ratings of the securities in the Company's securities portfolio;
•
increased asset levels and changes in the composition of assets and the resulting impact on the Company's capital levels and regulatory capital ratios;
•
the Company's ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes;
•
the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels;
•
government intervention in the
•
changes in statutes and government regulations or their interpretations
applicable to financial holding companies and the Company's present and future
banking and other subsidiaries, including changes in tax requirements and tax
rates;
31
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the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as thePublic Company Accounting Oversight Board , theFinancial Accounting Standards Board and other accounting standard setters;
•
poor performance by external vendors;
•
the cost and effects of a failure, interruption, or breach of security of the Company's systems;
•
the failure of analytical and forecasting models and tools used by the Company to estimate expected credit losses and to measure the fair value of financial instruments;
•
additional risks from new lines of businesses or new products and services;
•
claims or litigation related to intellectual property or fiduciary responsibilities;
•
the failure of the Company's enterprise risk management framework to identify or address risks adequately;
•
a failure in or breach of operational or security systems of the Company's infrastructure, or those of its third-party vendors and other service providers, including as a result of cyber-attacks;
•
potential risk of environmental liability associated with lending activities;
•
acts of terrorism, an outbreak of hostilities, such as the war betweenRussia andUkraine , or other international or domestic calamities, civil unrest, insurrections, other political, economic or diplomatic developments, including those caused by public health issues, outbreaks of diseases and pandemics, such as the COVID-19 pandemic, weather or other acts of God and other matters beyond the Company's control; and
•
other risks and uncertainties described in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 , or in the Company's other reports and documents filed with theSecurities and Exchange Commission . A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes it has chosen these assumptions or bases in good faith and that they are reasonable. However, the Company cautions that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. Therefore, the Company cautions against placing undue reliance on its forward-looking statements. The forward-looking statements speak only as of the date the statements are made. The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise. Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company's balance sheets and statements of income. This section should be read in conjunction with the Company's consolidated financial statements and accompanying notes included in Part I, Item 1 of this report and with the consolidated financial statements and accompanying notes and other detailed information appearing in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 .
OVERVIEW
Prosperity Bancshares, Inc. , aTexas corporation ("Bancshares"), is a registered financial holding company that derives substantially all of its revenues and income from the operation of its bank subsidiary,Prosperity Bank (the "Bank," and together with Bancshares, the "Company"). The Bank provides a wide array of financial products and services to businesses and consumers throughoutTexas andOklahoma . As ofMarch 31, 2023 , the Bank operated 272 full-service banking locations; with 65 in theHouston area includingThe Woodlands ; 30 in theSouth Texas area includingCorpus Christi andVictoria ; 62 in theDallas/Fort Worth area; 22 in theEast Texas area; 29 in theCentral Texas area includingAustin andSan Antonio ; 34 in theWest Texas area includingLubbock ,Midland -Odessa andAbilene ; 16 in theBryan/College Station area; 6 in theCentral Oklahoma area; and 8 in theTulsa, Oklahoma area. The Company's principal executive office is located atProsperity Bank Plaza , 4295 San Felipe inHouston, Texas , and its telephone number is (281) 269-7199. The Company's website address is www.prosperitybankusa.com. Information contained on the Company's website is not incorporated by reference into this quarterly report on Form 10-Q and is not part of this or any other report. The Company generates the majority of its revenues from interest income on loans, service charges and fees on customer accounts and income from investment in securities. The revenues are partially offset by interest expense paid on deposits and other borrowings and noninterest expenses such as administrative and occupancy expenses. Net interest income is the difference between interest income on earning assets such as loans and securities and interest expense on liabilities such as deposits and borrowings which are used to fund those assets. Net interest income is the Company's largest source of revenue. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and margin. Three principal components of the Company's growth strategy are internal growth, efficient operations and acquisitions, including strategic merger transactions. The Company focuses on continual internal growth. The Company maintains separate data 32 -------------------------------------------------------------------------------- with respect to each banking center's net interest income, efficiency ratio, deposit growth and loan growth for purposes of measuring its overall profitability. The Company also focuses on maintaining efficiency and stringent cost control practices and policies. The Company has centralized many of its critical operations, such as data processing and loan processing. Management believes that this centralized infrastructure can accommodate substantial additional growth and achieve necessary controls while enabling the Company to minimize operational costs through certain economies of scale. The Company also intends to continue to seek expansion opportunities. OnMay 1, 2023 , the Company acquiredFirst Bancshares of Texas, Inc. ("First Bancshares") headquartered inMidland, Texas . OnOctober 11, 2022 , Bancshares announced the signing of a definitive merger agreement withLone Star State Bancshares, Inc. ("Lone Star ") headquartered inLubbock, Texas . Total assets were$37.83 billion atMarch 31, 2023 compared with$37.69 billion atDecember 31, 2022 , an increase of$139.4 million or 0.4%. Total loans were$19.33 billion atMarch 31, 2023 compared with$18.84 billion atDecember 31, 2022 , an increase of$494.5 million or 2.6% . Total deposits were$27.00 billion atMarch 31, 2023 compared with$28.53 billion atDecember 31, 2022 , a decrease of$1.53 billion or 5.4%. Total shareholders' equity was$6.74 billion atMarch 31, 2023 compared with$6.70 billion atDecember 31, 2022 , an increase of$39.7 million or 0.6%. PENDING ACQUISITION Pending Acquisition ofLone Star State Bancshares, Inc. - OnOctober 11, 2022 , the Company andLone Star jointly announced the signing of a definitive merger agreement wherebyLone Star , the parent company ofLone Star State Bank of West Texas ("Lone Star Bank "), will merge with and into the Company.Lone Star Bank operates 5 banking offices in theWest Texas area, including its main office inLubbock , and 1 banking center in each ofBrownfield ,Midland ,Odessa andBig Spring, Texas . As ofMarch 31, 2023 ,Lone Star , on a consolidated basis, reported total assets of$1.38 billion , total loans of$1.03 billion and total deposits of$1.23 billion . Under the terms of the merger agreement, the Company will issue 2,376,182 shares of its common stock plus$64.1 million in cash for all outstanding shares ofLone Star capital stock, subject to certain conditions and potential adjustments. Based on the closing price of the Company's common stock of$69.27 onOctober 7, 2022 , the total consideration was valued at approximately$228.7 million . The transaction is subject to customary closing conditions, including the receipt of regulatory approvals. The shareholders ofLone Star approved the transaction onMarch 28, 2023 . The transaction is expected to close during the second quarter of 2023, although delays could occur.
RECENT DEVELOPMENTS
Merger withFirst Bancshares of Texas, Inc. - EffectiveMay 1, 2023 , the Company completed the merger ofFirst Bancshares of Texas, Inc. ("First Bancshares") into Bancshares and the subsequent merger of its wholly owned subsidiaryFirstCapital Bank of Texas, N.A. ("FirstCapital Bank "), into the Bank. Under the terms of the definitive agreement, the Company issued 3,583,370 shares of Prosperity common stock plus approximately$91.5 million in cash for all outstanding shares of First Bancshares.FirstCapital Bank operated 16 full-service banking offices in six different markets in West, North andCentral Texas areas, including its main office inMidland , and banking offices inMidland ,Lubbock ,Amarillo ,Wichita Falls ,Burkburnett ,Byers ,Henrietta ,Dallas ,Horseshoe Bay ,Marble Falls andFredericksburg, Texas . As ofMarch 31, 2023 , First Bancshares, on a consolidated basis, reported total assets of$2.14 billion , total loans of$1.65 billion and total deposits of$1.71 billion .
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires the Company to establish accounting policies and make estimates that affect amounts reported in the consolidated financial statements. An accounting estimate requires assumptions and judgments about uncertain matters that could have a material effect on the consolidated financial statements. Estimates are made using facts and circumstances known at a point in time. Changes in those facts and circumstances could produce results substantially different from those estimates. The Company's accounting policies are described in detail in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 . The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity: Business Combinations-Generally, acquisitions are accounted for under the acquisition method of accounting in accordance withFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805, Business Combinations. A business combination occurs when the Company acquires net assets that constitute a business and obtains control over that business. Business combinations are effected through the transfer of consideration consisting of cash and/or common stock and are accounted for using the acquisition method. Accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values at the acquisition date. Determining the fair value of assets and liabilities, especially the loan portfolio, is a process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are subject to refinement 33 --------------------------------------------------------------------------------
for up to one year after the closing date of the acquisition as information relative to closing date fair values becomes available. The results of operations of an acquired entity are included in the Company's consolidated results from acquisition date, and prior periods are not restated.
Allowance for Credit Losses- The allowance for credit losses is accounted for in
accordance with FASB ASC 326, Measurement of Credit Losses on Financial
Instruments which replaced the incurred loss methodology with an expected loss
methodology that is referred to as the current expected credit loss ("CECL")
methodology. CECL requires a financial asset (or a group of financial assets)
measured at amortized cost basis to be presented at the net amount expected to
be collected. The allowance for credit losses is an allowance available for
losses on loans and held-to-maturity securities. The allowance for credit losses
is adjusted through charges to earnings in the form of a provision for credit
losses. All losses are charged to the allowance when the loss actually occurs or
when a determination is made that such a loss is likely and can be reasonably
estimated. Recoveries are credited to the allowance at the time of recovery.
The Company's allowance for credit losses consists of two elements: (1) specific
valuation allowances based on expected losses on impaired loans and purchased
credit-deteriorated loans ("PCD") loans; and (2) a general valuation allowance
based on historical lifetime loan loss experience, current economic conditions,
reasonable and supportable forecasted economic conditions and other qualitative
risk factors both internal and external to the Company. Management has
established an allowance for credit losses which it believes is adequate for
estimated losses in the Company's loan portfolio. Based on an evaluation of the
portfolio, management presents a quarterly review of the allowance for credit
losses to the Bank's Board of Directors, indicating any change in the allowance
since the last review and any recommendations as to adjustments in the
allowance. In making its evaluation, management considers factors such as
historical lifetime loan loss experience, the amount of nonperforming assets and
related collateral, the volume, growth and composition of the portfolio, current
economic conditions and reasonable and supportable forecasted economic
conditions that may affect borrower ability to pay and the value of collateral,
the evaluation of the portfolio through its internal loan review process and
other relevant factors. Portions of the allowance may be allocated for specific
credits; however, the entire allowance is available for any credit that, in
management's judgment, should be charged off. Charge-offs occur when loans are
deemed to be uncollectible. Pursuant to the Company's adoption of ASU 2022-02
effective January 1, 2023 , the Company prospectively discontinued troubled debt
restructurings accounting and no longer measures the economic concession for
loan modifications occurring on or after the adoption date. In addition,
modifications to loans previously designated as troubled debt restructurings
that occur on or after January 1, 2023 , are accounted for under the newly
adopted ASU and result in the elimination of any prior economic concession
recorded in the allowance related to such loans. For further discussion of the
methodology used in the determination of the allowance for credit losses on
loans, see "Accounting for Acquired Loans and the Allowance for Acquired Credit
Losses" below and "Financial Condition-Allowance for Credit Losses on Loans"
below.
Accounting for Acquired Loans and the Allowance for Acquired Credit Losses - The
Company accounts for its acquisitions using the acquisition method of
accounting. Accordingly, the assets, including loans, and liabilities of the
acquired entity are recorded at their fair values at the acquisition date. The
fair value estimates associated with acquired loans, and based on a discounted
cash flow model, include estimates related to market interest rates and
undiscounted projections of future cash flows that incorporate expectations of
prepayments and the amount and timing of principal, interest and other cash
flows, as well as any shortfalls thereof. For further discussion of the
methodology used in the determination of the allowance for credit losses for
acquired loans, see "Financial Condition-Allowance for Credit Losses on Loans"
below. For further discussion of the Company's acquisition and loan accounting,
see Note 5 to the consolidated financial statements.
RESULTS OF OPERATIONS
Net income available to common shareholders was$124.7 million for the quarter endedMarch 31, 2023 compared with$122.3 million for the same period in 2022, an increase of$2.4 million or 1.9%. Net income per diluted common share was$1.37 for the quarter endedMarch 31, 2023 compared with$1.33 for the same period in 2022, an increase of 3.0%. The Company posted annualized returns on average common equity of 7.38% and 7.54%, annualized returns on average assets of 1.31% and 1.29% and efficiency ratios of 43.68% and 43.68% for the quarters endedMarch 31, 2023 and 2022, respectively. The efficiency ratio is calculated by dividing total noninterest expense (excluding net gains and losses on the sale or write down of assets and securities) by the sum of net interest income and noninterest income. Because the ratio is a measure of revenues and expenses resulting from the Company's lending activities and fee-based banking services, net gains and losses on the sale or write-down of assets and securities are not included. Additionally, taxes are not part of this calculation. 34 --------------------------------------------------------------------------------
Net Interest Income
The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a "volume change." It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a "rate change."
For the Three Months Ended
Net interest income before the provision for credit losses was$243.5 million for the quarter endedMarch 31, 2023 , an increase of$3.5 million or 1.5%, compared with$239.9 million for the same period in 2022. The change was primarily due to an increase in the average balances and average rates on loans held for investment and investment securities, partially offset by a decrease in Paycheck Protection Program ("PPP") fees and interest income of$3.6 million , a decrease in loan discount accretion of$4.3 million , an increase in average borrowings and an increase in the average rates on interest-bearing deposits.
Interest income on loans was
Interest income on securities was$73.2 million for the quarter endedMarch 31, 2023 , an increase of$18.2 million or 33.0%, compared with$55.0 million for the same period in 2022, primarily due to an increase in the average balances and average rates on investment securities. Average interest-bearing liabilities were$20.82 billion for the quarter endedMarch 31, 2023 , an increase of$82.6 million or 0.4%, compared with$20.74 billion for the same period in 2022, primarily due to an increase in other borrowings, partially offset by a decrease in interest-bearing deposits. The average rate on interest-bearing liabilities was 1.63% for the quarter endedMarch 31, 2023 , an increase of 146 basis points, compared with 0.17% for the same period in 2022.
The net interest margin on a tax-equivalent basis was 2.93% for the quarter
ended
35
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The following table presents, for the periods indicated, the total dollar amount
of average balances, interest income from average interest-earning assets and
the resultant yields, as well as the interest expense on average
interest-bearing liabilities and the resultant rates. Except as indicated in the
footnotes, no tax-equivalent adjustments were made and all average balances are
daily average balances. Any nonaccruing loans have been included in the table as
loans carrying a zero yield.
Three Months Ended March 31,
2023 2022
Average Average
Outstanding Interest Average Outstanding Interest Average
Balance Earned/Paid Yield/Rate (1) Balance Earned/Paid Yield/Rate (1)
(Dollars in thousands)
Assets
Interest-Earning Assets:
Loans held for sale $ 2,343 $ 38 6.58 % $ 4,611 $ 40 3.52 %
Loans held for investment 18,317,712 236,606 5.24 % 16,712,690 183,033 4.44 %
Loans held for investment -
Warehouse Purchase Program 617,822 10,474 6.88 % 1,268,715 9,952 3.18 %
Total loans 18,937,877 247,118 5.29 % 17,986,016 193,025 4.35 %
Investment securities 14,332,509 73,185 2.07 % 13,772,974 55,011 1.62 %
Federal funds sold and other
earning assets 600,048 7,006 4.74 % 2,135,503 847 0.16 %
Total interest-earning
assets 33,870,434 327,309 3.92 % 33,894,493 248,883 2.98 %
Allowance for credit losses
on loans (282,316 ) (285,692 )
Noninterest-earning assets 4,589,735 4,458,669
Total assets $ 38,177,853 $ 38,067,470
Liabilities and
Shareholders' Equity
Interest-Bearing
Liabilities:
Interest-bearing demand
deposits $ 5,877,641 $ 3,792 0.26 % $ 6,775,114 $ 2,452 0.15 %
Savings and money market
deposits 9,579,679 35,521 1.50 % 10,870,461 4,026 0.15 %
Certificates and other time
deposits 2,045,580 8,030 1.59 % 2,637,529 2,276 0.35 %
Other borrowings 2,887,011 34,396 4.83 % - - -
Securities sold under
repurchase agreements 427,887 2,103 1.99 % 452,054 185 0.17 %
Total interest-bearing
liabilities 20,817,798 83,842 1.63 % 20,735,158 8,939 0.17 %
Noninterest-Bearing
Liabilities:
Noninterest-bearing demand
deposits 10,389,980 10,636,624
Allowance for credit losses
on off-balance sheet credit
exposures 29,947 29,947
Other liabilities 180,685 176,360
Total liabilities 31,418,410 31,578,089
Shareholders' equity 6,759,443 6,489,381
Total liabilities and
shareholders' equity $ 38,177,853 $ 38,067,470
Net interest rate spread 2.29 % 2.81 %
Net interest income and
margin (2) (3) $ 243,467 2.92 % $ 239,944 2.87 %
Net interest income and
margin (tax equivalent) (4) $ 244,300 2.93 % $ 240,416 2.88 %
(1)
Annualized and based on average balances on an actual 365-day basis for the
three months ended March 31, 2023 and 2022.
(2)
Yield is based on amortized cost and does not include any component of
unrealized gains or losses.
(3)
The net interest margin is equal to net interest income divided by average
interest-earning assets.
(4)
In order to make pretax income and resultant yields on tax-exempt investments
and loans comparable to those on taxable investments and loans, a tax-equivalent
adjustment has been computed using a federal income tax rate of 21% and other
applicable effective tax rates.
36
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The following table presents information regarding the dollar amount of changes
in interest income and interest expense for the periods indicated for each major
component of interest-earning assets and interest-bearing liabilities and
distinguishes between the changes attributable to changes in volume and changes
in interest rates. For purposes of this table, changes in interest income and
interest expense related to purchase accounting adjustments and changes
attributable to both rate and volume which cannot be segregated have been
allocated to rate.
Three Months Ended March 31,
2023 vs. 2022
Increase
(Decrease)
Due to Change in
Volume Rate Total
(Dollars in thousands)
Interest-Earning Assets:
Loans held for sale $ (20 ) $ 18 $ (2 )
Loans held for investment (1) 17,578 35,995 53,573
Loans held for investment - Warehouse Purchase Program (5,106 ) 5,628 522 Investment securities (1) 2,235 15,939
18,174
Federal funds sold and other earning assets (609 ) 6,768
6,159
Total increase in interest income 14,078 64,348
78,426
Interest-Bearing Liabilities: Interest-bearing demand deposits (325 ) 1,665
1,340
Savings and money market deposits (478 ) 31,973
31,495
Certificates and other time deposits (1) (511 ) 6,265
5,754
Other borrowings 34,396 -
34,396
Securities sold under repurchase agreements (10 ) 1,928
1,918
Total increase in interest expense 33,072 41,831
74,903
(Decrease) increase in net interest income
$ 3,523 (1)
Includes impact of purchase accounting adjustments.
Provision for Credit Losses
Management actively monitors the Company's asset quality and provides specific loss provisions when necessary. Provisions for credit losses are charged to income to bring the total allowance for credit losses on loans and off-balance sheet credit exposures to a level deemed appropriate by management of the Company based on such factors as historical lifetime credit loss experience, the amount of nonperforming loans and related collateral, the volume growth and composition of the loan portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect borrower ability to pay and the value of collateral, the evaluation of the loan portfolio through the internal loan review process and other relevant factors. Loans are charged off against the allowance for credit losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for credit losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations.
The Company had no provision for credit losses for the three months ended
Net recoveries were$615 thousand for the quarter endedMarch 31, 2023 compared with net charge-offs of$1.2 million for the quarter endedMarch 31, 2022 . Net recoveries for the three months endedMarch 31, 2023 did not include any PCD loans and$241 thousand of specific reserves on resolved PCD loans was released to the general reserve. Noninterest Income The Company's primary sources of recurring noninterest income are credit, debit and ATM card income, nonsufficient funds fees and service charges on deposit accounts. Additionally, the Company generates recurring noninterest income from its various additional products and services, including trust services, mortgage lending, brokerage and independent sales organization sponsorship operations. Noninterest income does not include loan origination fees, which are recognized over the life of the related loan as an adjustment to yield using the interest method. Noninterest income totaled$38.3 million for the three months endedMarch 31, 2023 compared with$35.1 million for the same period in 2022. This change was primarily due to an increase in trust income and an increase in other noninterest income. 37 -------------------------------------------------------------------------------- The following table presents, for the periods indicated, the major categories of noninterest income: Three Months Ended March 31, 2023 2022 (Dollars in thousands) Nonsufficient funds fees$ 8,095 $ 8,124 Credit card, debit card and ATM card income 8,666
8,179
Service charges on deposit accounts 5,926 6,211 Trust income 3,225 2,703 Mortgage income 238 455 Brokerage income 1,149 892 Bank owned life insurance income 1,354
1,283
Net gain on sale or write-down of assets 121 689 Other 9,492 6,586 Total noninterest income$ 38,266 $ 35,122 Noninterest Expense Noninterest expense totaled$123.0 million for the quarter endedMarch 31, 2023 compared with$119.9 million for the quarter endedMarch 31, 2022 , an increase of$3.2 million or 2.6%, primarily due to increases in regulatory assessments andFDIC insurance and merger related expenses, partially offset by a decrease in salaries and benefits. The following table presents, for the periods indicated, the major categories of noninterest expense: Three Months Ended March 31, 2023 2022 (Dollars in thousands) Salaries and employee benefits (1)$ 77,798 $ 79,411 Non-staff expenses: Net occupancy and equipment 8,025
7,848
Credit and debit card, data processing and software amortization
9,566 8,849
Regulatory assessments andFDIC insurance 4,973
2,850
Core deposit intangibles amortization 2,374 2,620 Depreciation 4,433 4,547 Communications (2) 3,462 2,919 Net other real estate expense (income) (3) 45 (407 ) Merger related expenses 860 - Other 11,464 11,213 Total noninterest expense$ 123,000 $ 119,850 (1) Includes stock-based compensation expense of$3.2 million and$2.9 million for the three months endedMarch 31, 2023 and 2022, respectively. (2) Communications expense includes telephone, data circuits, postage and courier expenses. (3) Net other real estate income is comprised of rental expense, rental income and gains and losses on sales of real estate.
Income Taxes
The amount of federal and state income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible expenses. Income tax expense totaled$34.0 million for the quarter endedMarch 31, 2023 compared with$32.9 million for the same period in 2022, an increase of$1.1 million or 3.5%. The Company's effective tax rate for the three months endedMarch 31, 2023 and 2022 was 21.4% and 21.2%, respectively. 38 --------------------------------------------------------------------------------
FINANCIAL CONDITION Loan Portfolio The Company separates its loan portfolio into two general categories of loans: (1) "originated loans," which are loans originated byProsperity Bank and made pursuant to the Company's loan policy and procedures in effect at the time the loan was made, and (2) "acquired loans," which are loans acquired in a business combination and recorded at fair value at acquisition date. Those acquired loans that are renewed or substantially modified after the date of the business combination are referred to as "re-underwritten acquired loans." If a renewal or substantial modification of an acquired loan is underwritten by the Company with a new credit analysis, the loan may no longer be categorized as an acquired loan. For example, acquired loans to one borrower may be combined into a new loan with a new loan number and categorized as an originated loan. Acquired loans with a fair value discount or premium at the date of the business combination that remained at the reporting date are referred to as "fair-valued acquired loans." All fair-valued acquired loans are further categorized into PCD loans and "Non-PCD loans." Acquired loans with evidence of credit quality deterioration as of the acquisition date when compared to the origination date are classified as PCD loans.
The following tables summarize the Company's originated and acquired loan portfolios broken out into originated loans, re-underwritten acquired loans, Non-PCD loans and PCD loans, as of the dates indicated.
March 31, 2023
Acquired Loans
Re-Underwritten
Originated Loans Acquired Loans Non-PCD Loans PCD Loans Total Loans
(Dollars in thousands)
Residential mortgage
loans held for sale $ 1,603 $ - $ - $ - $ 1,603
Commercial and
industrial 1,713,157 626,517 125,918 11,628 2,477,220
Warehouse purchase
program 799,115 - - - 799,115
Real estate:
Construction, land
development and other
land loans 2,772,865 121,977 4,988 150 2,899,980
1-4 family residential
(includes home equity) 6,226,211 221,510 565,332 - 7,013,053
Commercial real estate
(includes multi-family
residential) 4,154,390 404,005 531,721 43,577 5,133,693
Farmland 530,124 5,351 12,605 172 548,252
Agriculture 148,917 24,172 54 - 173,143
Consumer and other 249,759 30,939 7,602 - 288,300
Total loans held for
investment 16,594,538 1,434,471 1,248,220 55,527 19,332,756
Total $ 16,596,141 $ 1,434,471 $ 1,248,220 $ 55,527 $ 19,334,359
December 31, 2022
Acquired Loans
Re-Underwritten
Originated Loans Acquired Loans Non-PCD Loans PCD Loans Total Loans
(Dollars in thousands)
Residential mortgage
loans held for sale $ 554 $ - $ - $ - $ 554
Commercial and
industrial 1,711,433 730,969 137,272 15,068 2,594,742
Warehouse purchase
program 740,620 - - - 740,620
Real estate:
Construction, land
development and other
land loans 2,672,903 126,607 5,759 169 2,805,438
1-4 family residential
(includes home equity) 5,918,995 232,975 588,700 - 6,740,670
Commercial real estate
(includes multi-family
residential) 3,967,943 410,834 562,834 44,600 4,986,211
Farmland 498,512 5,740 13,658 185 518,095
Agriculture 140,838 29,041 59 - 169,938
Consumer and other 245,131 29,436 8,992 - 283,559
Total loans held for
investment 15,896,375 1,565,602 1,317,274 60,022 18,839,273
Total $ 15,896,929 $ 1,565,602 $ 1,317,274 $ 60,022 $ 18,839,827
39-------------------------------------------------------------------------------- AtMarch 31, 2023 , total loans were$19.33 billion , an increase of$494.5 million or 2.6%, compared with$18.84 billion atDecember 31, 2022 . Loans atMarch 31, 2023 included$1.6 million of loans held for sale and$799.1 million of Warehouse Purchase Program loans compared with$554 thousand of loans held for sale and$740.6 million of Warehouse Purchase Program loans atDecember 31, 2022 . AtMarch 31, 2023 , loans represented 51.1% of total assets compared with 50.0% of total assets atDecember 31, 2022 .
The loan portfolio consists of various types of loans categorized by major type as follows:
(i) Commercial and Industrial Loans. In nearly all cases, the Company's commercial loans are made in the Company's market areas and are underwritten based on the borrower's ability to service the debt from income. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. As a general practice, term loans are secured by any available real estate, equipment or other assets owned by the borrower. Both working capital and term loans are typically supported by a personal guaranty of a principal. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and, therefore, usually yield a higher return. The increased risk in commercial loans is due to the type of collateral securing these loans as well as the expectation that commercial loans generally will be serviced principally from the operations of the business, and those operations may not be successful. Historical trends have shown these types of loans to have higher delinquencies than mortgage loans. As a result of these additional complexities, variables and risks, commercial loans require more thorough underwriting and servicing than other types of loans. Included in commercial and industrial loans are (1) commitments to oil and gas producers largely secured by proven, developed and producing reserves and (2) commitments to service, equipment and midstream companies secured mainly by accounts receivable, inventory and equipment. Mineral reserve values supporting commitments to producers are normally re-determined semi-annually using reserve studies prepared by a third-party or the Company's oil and gas engineer. Accounts receivable and inventory borrowing bases for service companies are typically re-determined monthly. Funding requests by both producers and service companies are monitored relative to the most recently determined borrowing base. (ii)Commercial Real Estate . The Company makes commercial real estate loans collateralized by owner-occupied and nonowner-occupied real estate to finance the purchase of real estate. The Company's commercial real estate loans are collateralized by first liens on real estate, typically have variable interest rates (or five year or less fixed rates) and amortize over a 15- to 25-year period. Payments on loans secured by nonowner-occupied properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. The Company seeks to minimize these risks in a variety of ways, including giving careful consideration to the property's operating history, future operating projections, current and projected occupancy, location and physical condition, in connection with underwriting these loans. The underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of the financial condition of the borrower and guarantor. Loans to hotels and restaurants are included in commercial real estate loans. (iii) 1-4 Family Residential Loans. The Company's lending activities also include the origination of 1-4 family residential mortgage loans (including home equity loans) collateralized by owner-occupied and nonowner-occupied residential properties located in the Company's market areas. The Company offers a variety of mortgage loan portfolio products which generally are amortized over five to 30 years. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts of no more than 89% of appraised value. The Company requires mortgage title insurance, as well as hazard, wind and/or flood insurance as appropriate. The Company prefers to retain residential mortgage loans for its own account rather than selling them into the secondary market. By doing so, the Company incurs interest rate risk as well as the risks associated with non-payments on such loans. The Company's mortgage department also offers a variety of mortgage loan products which are generally amortized over 30 years, including FHA andVA loans, which are sold to secondary market investors. (iv) Construction,Land Development and Other Land Loans. The Company makes loans to finance the construction of residential and nonresidential properties. Construction loans generally are collateralized by first liens on real estate and have variable interest rates. The Company conducts periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Underwriting guidelines similar to those described above are also used in the Company's construction lending activities, with heightened analysis of construction and/or development costs. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to foreclose on a project prior to completion, the Company may not be able to recover all of the unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete a 40 -------------------------------------------------------------------------------- project and may have to hold the property for an indeterminate period of time. Although the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, these procedures may not prevent losses from the risks described above. (v) Warehouse Purchase Program. The Warehouse Purchase Program allows unaffiliated mortgage originators ("Clients") to close 1-4 family real estate loans in their own name and manage their cash flow needs until the loans are sold to investors. The Company's Clients are strategically targeted for their experienced management teams and analyzed for the expected profitability of each Client's business model over the long term. The Clients are located across theU.S. and originate mortgage loans primarily through traditional retail and/or wholesale business models using underwriting standards as required byUnited States government-sponsored enterprise agencies, "Agencies" such as Fannie Mae, private investors to which the mortgage loans are ultimately sold and/or mortgage insurers. Although not subject to any legally binding commitment, when the Company makes a purchase decision, it acquires a 100% participation interest in the mortgage loans originated by its Clients. Individual mortgage loans are warehoused in the Company's portfolio only for a short duration, averaging less than 30 days. When instructed by a Client that a warehoused loan has been sold to an investor, the Company delivers the note to the investor that pays the Company, which in turn remits the net sales proceeds to the Client. (vi) Agriculture Loans. The Company provides agriculture loans for short-term livestock and crop production, including rice, cotton, milo and corn, farm equipment financing and agriculture real estate financing. The Company evaluates agriculture borrowers primarily based on their historical profitability, level of experience in their particular industry segment, overall financial capacity and the availability of secondary collateral to withstand economic and natural variations common to the industry. Because agriculture loans present a higher level of risk associated with events caused by nature, the Company routinely makes on-site visits and inspections in order to identify and monitor such risks. (vii) Consumer Loans. Consumer loans made by the Company include direct "A"-credit automobile loans, recreational vehicle loans, boat loans, home improvement loans, personal loans (collateralized and uncollateralized) and deposit account collateralized loans. The terms of these loans typically range from 12 to 180 months and vary based upon the nature of collateral and size of loan. Generally, consumer loans entail greater risk than do real estate secured loans, particularly in the case of consumer loans that are unsecured or collateralized by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness, personal bankruptcy or death. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans. The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company's policies and procedures.
Nonperforming Assets
Nonperforming assets include loans on nonaccrual status, accruing loans 90 days or more past due, repossessed assets and real estate which has been acquired through foreclosure and is awaiting disposition. Nonperforming assets do not include PCD loans unless the loan has deteriorated since the acquisition date. PCD loans are reported as nonperforming assets when a deterioration in projected cash flows is identified. The Company generally places a loan on nonaccrual status and ceases accruing interest when the payment of principal or interest is delinquent for 90 days, or earlier in some cases, unless the loan is in the process of collection and the underlying collateral fully supports the carrying value of the loan. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower. Nonperforming assets decreased$3.0 million , or 10.9%, to$24.5 million atMarch 31, 2023 compared with$27.5 million atDecember 31, 2022 , of which$9.0 million and$9.1 million , respectively, were attributable to acquired loans. The decrease in nonperforming assets was primarily due to a$5.9 million decrease in accruing loans 90 or more days past due, partially offset by a$2.9 million increase in nonaccrual loans in the 1-4 family residential and construction loans portfolio. 41 --------------------------------------------------------------------------------
The following tables present information regarding nonperforming assets differentiated among originated loans, re-underwritten acquired loans, Non-PCD loans and PCD loans, as of the dates indicated:
March 31, 2023
Acquired Loans
Re-Underwritten Non-PCD
Originated Loans Acquired Loans Loans PCD Loans Total
(Dollars in thousands)
Nonaccrual loans (1)(3) $ 13,512 $ 1,815 $ 7,001 $ 168 $ 22,496
Accruing loans 90 or more days past
due - - - - -
Total nonperforming loans 13,512 1,815 7,001 168 22,496
Repossessed assets - - - - -
Other real estate 1,989 - - - 1,989
Total nonperforming assets $ 15,501 $ 1,815 $ 7,001 $ 168 $ 24,485
Nonperforming assets to total loans
and other real estate 0.09 % 0.13 % 0.56 % 0.30 % 0.13 %
Nonperforming assets to total
loans, excluding Warehouse Purchase
Program loans, and other real
estate 0.10 % 0.13 % 0.56 % 0.30 % 0.13 %
Nonaccrual loans to total loans 0.08 % 0.13 % 0.56 % 0.30 % 0.12 %
Nonaccrual loans to total loans,
excluding Warehouse Purchase
Program loans 0.09 % 0.13 % 0.56 % 0.30 % 0.12 %
December 31, 2022
Acquired Loans
Re-Underwritten Non-PCD
Originated Loans Acquired Loans Loans PCD Loans Total
(Dollars in thousands)
Nonaccrual loans (2)(3) $ 10,544 $ 2,138 $ 6,764 $ 168 $ 19,614
Accruing loans 90 or more days past
due 5,917 - - - 5,917
Total nonperforming loans 16,461 2,138 6,764 168 25,531
Repossessed assets - - - - -
Other real estate 1,963 - - - 1,963
Total nonperforming assets $ 18,424 $ 2,138 $ 6,764 $ 168 $ 27,494
Nonperforming assets to total loans
and other real estate 0.12 % 0.14 % 0.51 % 0.28 % 0.15 %
Nonperforming assets to total
loans, excluding Warehouse Purchase
Program loans, and other real
estate 0.12 % 0.14 % 0.51 % 0.28 % 0.15 %
Nonaccrual loans to total loans 0.07 % 0.14 % 0.51 % 0.28 % 0.10 %
Nonaccrual loans to total loans,
excluding Warehouse Purchase
Program loans 0.07 % 0.14 % 0.51 % 0.28 % 0.11 %
(1)
ASU 2022-02 became effective for the Company on January 1, 2023 .
(2)
Includes troubled debt restructurings of $4.6 million as of December 31, 2022 .
(3)
There were no nonperforming loans of Warehouse Purchase Program loans or
Warehouse Purchase Program lines of credit for the periods presented.
Nonperforming assets were 0.13% of total loans and other real estate at March
31, 2023 and 0.15% of total loans and other real estate at December 31, 2022 .
The allowance for credit losses as a percentage of total nonperforming loans was
1254.4% at March 31, 2023 and 1102.9% at December 31, 2022 .
42
--------------------------------------------------------------------------------Allowance for Credit Losses on Loans
The allowance for credit losses is adjusted through charges to earnings in the form of a provision for credit losses. Management has established an allowance for credit losses on loans which it believes is adequate as ofMarch 31, 2023 for estimated losses in the Company's loan portfolio. The amount of the allowance for credit losses on loans is affected by the following: (1) charge-offs of loans that occur when loans are deemed uncollectible and decrease the allowance, (2) recoveries on loans previously charged off that increase the allowance, (3) provisions for credit losses charged to earnings that increase the allowance, and (4) provision releases returned to earnings that decrease the allowance. Based on an evaluation of the loan portfolio and consideration of the factors listed below, management presents a quarterly review of the allowance for credit losses to the Bank's Board of Directors, indicating any change in the allowance since the last review and any recommendations as to adjustments in the allowance. Although management believes it uses the best information available to make determinations with respect to the allowance for credit losses, future adjustments may be necessary if economic conditions or borrower performance differ from the assumptions used in making the initial determinations. The Company's allowance for credit losses on loans consists of two components: (1) a specific valuation allowance based on expected lifetime losses on specifically identified loans and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted economic conditions and other qualitative risk factors both internal and external to the Company. In setting the specific valuation allowance, the Company follows a loan review program to evaluate the credit risk in the total loan portfolio and assigns risk grades to each loan. Through this loan review process, the Company maintains an internal list of impaired loans which, along with the delinquency list of loans, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses. All loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific reserve is required. For certain impaired loans, the Company allocates a specific loan loss reserve primarily based on the value of the collateral securing the impaired loan. The specific reserves are determined on an individual loan basis. Loans for which specific reserves are provided are excluded from the general valuation allowance described below. In determining the amount of the general valuation allowance, management considers factors such as historical lifetime loan loss experience, concentration risk of specific loan types, the volume, growth and composition of the Company's loan portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect borrower ability to pay and the value of collateral, the evaluation of the Company's loan portfolio through its internal loan review process, other qualitative risk factors both internal and external to the Company and other relevant factors. Historical lifetime loan loss experience is determined by utilizing an open-pool ("cumulative loss rate") methodology. Adjustments to the historical lifetime loan loss experience are made for differences in current loan pool risk characteristics such as portfolio concentrations, delinquency, non-accrual, and watch list levels, as well as changes in current and forecasted economic conditions such as unemployment rates, property and collateral values, and other indices relating to economic activity. The utilization of reasonable and supportable forecasts includes an immediate reversion to lifetime historical loss rates. Based on a review of these factors for each loan type, the Company applies an estimated percentage to the outstanding balance of each loan type, excluding any loan that has a specific reserve. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
A change in the allowance for credit losses can be attributable to several factors, most notably (1) specific reserves identified for impaired loans, (2) historical lifetime credit loss information, (3) changes in current and forecasted environmental factors and (4) growth in the balance of loans.
Changes in the Company's asset quality are reflected in the allowance in several
ways. Specific reserves that are calculated on a loan-by-loan basis and the
qualitative assessment of all other loans reflect current changes in the credit
quality of the loan portfolio. Historical lifetime credit losses, on the other
hand, are based on an open-pool ("cumulative loss rate") methodology, which is
then applied to estimate lifetime credit losses in the loan portfolio. A
deterioration in the credit quality of the loan portfolio in the current period
would increase the historical lifetime loss rate to be applied in future
periods, just as an improvement in credit quality would decrease the historical
lifetime loss rate.
43
--------------------------------------------------------------------------------
The allowance for credit losses is further determined by the size of the loan
portfolio subject to the allowance methodology and environmental factors that
include Company-specific risk indicators and general economic conditions, both
of which are constantly changing. The Company evaluates the economic and
portfolio-specific factors on a quarterly basis to determine a qualitative
component of the general valuation allowance. The factors include current
economic metrics, reasonable and supportable forecasted economic metrics,
business conditions, delinquency trends, credit concentrations, nature and
volume of the portfolio and other adjustments for items not covered by specific
reserves and historical lifetime loss experience. Management's assessment of
qualitative factors is a statistically based approach to determine the loss rate
adjustment associated with such factors. Based on the Company's actual
historical lifetime loan loss experience relative to economic and loan
portfolio-specific factors at the time the losses occurred, management is able
to identify the expected level of lifetime losses as of the date of measurement.
The correlation of historical loss experience with current and forecasted
economic conditions provides an estimate of lifetime losses that has not been
previously factored into the general valuation allowance by the determination of
specific reserves and lifetime historical losses. Additionally, the Company
considers qualitative factors not easily quantified and the possibility of model
imprecision.
Utilizing the aggregation of specific reserves, historical loss experience and a
qualitative component, management is able to determine the valuation allowance
to reflect the full lifetime loss.
The Company accounts for its acquisitions using the acquisition method of
accounting. Accordingly, the assets, including loans, and liabilities of the
acquired entity are recorded at their fair values at the acquisition date. These
fair value estimates associated with acquired loans, and based on a discounted
cash flow model, include estimates related to market interest rates and
undiscounted projections of future cash flows that incorporate expectations of
prepayments and the amount and timing of principal, interest and other cash
flows, as well as any shortfalls thereof.
Non-PCD loans that were not deemed impaired subsequent to the acquisition date
are considered non-impaired and are evaluated as part of the general valuation
allowance.
Non-PCD loans that have deteriorated to an impaired status subsequent to
acquisition are evaluated for a specific reserve on a quarterly basis which,
when identified, is added to the allowance for credit losses. The Company
reviews impaired Non-PCD loans on a loan-by-loan basis and determines the
specific reserve based on the difference between the recorded investment in the
loan and one of three factors: expected future cash flows, observable market
price or fair value of the collateral. Because essentially all of the Company's
impaired Non-PCD loans have been collateral-dependent, the amount of the
specific reserve historically has been determined by comparing the fair value of
the collateral securing the Non-PCD loan with the recorded investment in such
loan. In the future, the Company will continue to analyze impaired Non-PCD loans
on a loan-by-loan basis and may use an alternative measurement method to
determine the specific reserve, as appropriate and in accordance with applicable
accounting standards.
PCD loans are individually monitored on a quarterly basis to assess for changes
in expected cash flows subsequent to acquisition. If a deterioration in cash
flows is identified, an increase to the specific reserve for that loan is made.
PCD loans were recorded at their acquisition date fair values, which were based
on expected cash flows and considers estimates of expected future credit losses.
The Company's estimates of loan fair values at the acquisition date may be
adjusted for a period of up to one year as the Company continues to evaluate its
estimate of expected future cash flows at the acquisition date. If the Company
determines that losses arose after the acquisition date, the additional losses
will be reflected as a provision for credit losses. See "Critical Accounting
Estimates" above for more information.
As described in the section captioned "Critical Accounting Estimates" above, the
Company's determination of the allowance for credit losses involves a high
degree of judgment and complexity. The Company's analysis of qualitative, or
environmental, factors on pools of loans with common risk characteristics, in
combination with the quantitative historical lifetime loss information and
specific reserves, provides the Company with an estimate of lifetime losses. The
allowance must reflect changes in the balance of loans subject to the allowance
methodology, as well as the estimated lifetime losses associated with those
loans.
44
--------------------------------------------------------------------------------
The following tables present, as of and for the periods indicated, information
regarding the allowance for credit losses on loans differentiated between
originated loans and acquired loans. Reported net charge-offs may include those
from Non-PCD loans and PCD loans, but only if the total charge-off required is
greater than the remaining discount.
As of and for the
Three Months Ended
Originated Loans Acquired Loans Total
(Dollars in thousands)
Average loans outstanding $ 16,097,319 $ 2,840,558 $ 18,937,877
Gross loans outstanding at end of period $ 16,596,141 $ 2,738,218 $ 19,334,359
Allowance for credit losses on loans at
beginning of period $ 209,467 $ 72,109 $ 281,576
Provision for credit losses 6,737 (6,737 ) -
Charge-offs:
Commercial and industrial (394 ) (507 ) (901 )
Real estate and agriculture (65 ) - (65 )
Consumer and other (1,192 ) (33 ) (1,225 )
Recoveries:
Commercial and industrial 1,177 1,196 2,373
Real estate and agriculture 31 194 225
Consumer and other 204 4 208
Net (charge-offs) recoveries(1) (239 ) 854 615
Allowance for credit losses on loans at end of
period $ 215,965 $ 66,226 $ 282,191
Ratio of allowance to end of period loans 1.30 % 2.42 % 1.46 %
Ratio of allowance to end of period loans,
excluding Warehouse Purchase Program 1.37 % 2.42 % 1.52 %
Ratio of net charge-offs (recoveries) to
average loans (annualized) 0.01 % (0.12 %) (0.01 %)
Ratio of allowance to end of period
nonperforming loans 1,598.3 % 737.2 % 1,254.4 %
Ratio of allowance to end of period nonaccrual
loans 1,598.3 % 737.2 % 1,254.4 %
As of and for the
Three Months Ended
Originated Loans Acquired Loans Total
(Dollars in thousands)
Average loans outstanding $ 13,356,719 $ 4,629,297 $ 17,986,016
Gross loans outstanding at end of period $ 14,447,778 $ 3,619,746 $ 18,067,524
Allowance for credit losses on loans at
beginning of period $ 186,736 $ 99,644 $ 286,380
Provision for credit losses 3,984 (3,984 ) -
Charge-offs:
Commercial and industrial (453 ) (19 ) (472 )
Real estate and agriculture (686 ) (43 ) (729 )
Consumer and other (1,337 ) (70 ) (1,407 )
Recoveries:
Commercial and industrial 370 88 458
Real estate and agriculture 278 403 681
Consumer and other 230 22 252
Net (charge-offs) recoveries(1) (1,598 ) 381 (1,217 )
Allowance for credit losses on loans at end of
period $ 189,122 $ 96,041 $ 285,163
Ratio of allowance to end of period loans 1.31 % 2.65 % 1.58 %
Ratio of allowance to end of period loans,
excluding Warehouse Purchase Program 1.44 % 2.65 % 1.71 %
Ratio of net charge-offs (recoveries) to
average loans (annualized) 0.05 % (0.03 %) 0.03 %
Ratio of allowance to end of period
nonperforming loans 1,202.3 % 987.1 % 1,120.0 %
Ratio of allowance to end of period nonaccrual
loans 1,301.1 % 1,328.4 % 1,310.2 %
(1)There was no net charge-off activity on Warehouse Purchase Program loans during the periods presented.
45
--------------------------------------------------------------------------------
The Company had gross charge-offs on originated loans of $1.7 million during the
three months ended March 31, 2023 . Partially offsetting these charge-offs were
recoveries on originated loans of $1.4 million . Gross charge-offs on acquired
loans were $540 thousand during the three months ended March 31, 2023 . Partially
offsetting these charge-offs were recoveries on acquired loans of $1.4 million .
Total charge-offs for the three months ended March 31, 2023 were $2.2 million ,
partially offset by total recoveries of $2.8 million .
The following table shows the allocation of the net charge-offs among various categories of loans as of the dates indicated.
March 31, 2023 March 31, 2022
Ratio of
Ratio of Net Net
Charge-offs Charge-offs
(Recoveries) (Recoveries)
to Average to Average
Loans Loans
Amount (Annualized) Amount (Annualized)
(Dollars in thousands)
Balance of net recoveries (charge-offs)
applicable to:
Commercial and industrial $ 1,472 (0.03 %) $ (14 ) 0.00 %
Real estate:
Construction, land development and other
land loans 13 0.00 % (430 ) 0.01 %
1-4 family residential (including home
equity) 140 0.00 % (87 ) 0.00 %
Commercial real estate (including
multi-family residential) 1 0.00 % 366 (0.01 %)
Agriculture (includes farmland) 6 0.00 % 103 0.00 %
Consumer and other (1,017 ) 0.02 % (1,155 ) 0.03 %
Total net recoveries (charge-offs) $ 615 (0.01 %) $ (1,217 ) 0.03 %
The following tables show the allocation of the allowance for credit losses on
loans among various categories of loans disaggregated between originated loans,
re-underwritten acquired loans, Non-PCD loans and PCD loans at the dates
indicated. The allocation is made for analytical purposes and is not necessarily
indicative of the categories in which future losses may occur. The total
allowance is available to absorb losses from any loan category, regardless of
whether allocated to an originated loan or an acquired loan.
March 31, 2023
Acquired Loans
Percent of
Re-Underwritten Non-PCD Total Loans to Total
Originated Loans Acquired Loans Loans PCD Loans Allowance Loans(1)
(Dollars in thousands)
Balance of allowance for
credit losses on loans
applicable to:
Commercial and industrial $ 30,450 $ 21,738 $ 4,613 $ 495 $ 57,296 13.4 %
Real estate 173,521 9,887 11,298 16,365 211,071 81.2 %
Agriculture and agriculture
real estate 7,339 604 106 12 8,061 3.9 %
Consumer and other 4,655 939 169 - 5,763 1.5 %
Total allowance for credit
losses on loans $ 215,965 $ 33,168 $ 16,186 $ 16,872 $ 282,191 100.0 %
December 31, 2022
Acquired Loans
Percent of
Re-Underwritten Non-PCD Total Loans to Total
Originated Loans Acquired Loans Loans PCD Loans Allowance Loans(1)
(Dollars in thousands)
Balance of allowance for
credit losses on loans
applicable to:
Commercial and industrial $ 30,837 $ 25,736 $ 5,091 $ 655 $ 62,319 14.3 %
Real estate 167,270 10,225 11,978 16,447 205,920 80.3 %
Agriculture and agriculture
real estate 6,845 731 111 12 7,699 3.8 %
Consumer and other 4,515 917 206 - 5,638 1.6 %
Total allowance for credit
losses on loans $ 209,467 $ 37,609 $ 17,386 $ 17,114 $ 281,576 100.0 %
(1)Loans outstanding as of a percentage of total loans, excluding Warehouse Purchase Program loans.
46
--------------------------------------------------------------------------------
The allowance for credit losses totaled $282.2 million at March 31, 2023 and
$281.6 million at December 31, 2022 . The allowance for credit losses totaled
1.46% of total loans at March 31, 2023 and 1.49% of total loans at December 31,
2022 .
At March 31, 2023 , $216.0 million of the allowance for credit losses was
attributable to originated loans, an increase of $6.5 million or 3.1% compared
with $209.5 million of the allowance at December 31, 2022 . At March 31, 2023 ,
$33.2 million of the allowance for credit losses was attributable to
re-underwritten acquired loans compared with $37.6 million of the allowance at
December 31, 2022 , a decrease of $4.4 million or 11.8%. At March 31, 2023 , $16.2
million of the allowance for credit losses was attributable to Non-PCD loans
compared with $17.4 million of the allowance at December 31, 2022 , a decrease of
$1.2 million or 6.9%. At March 31, 2023 , $16.9 million of the allowance for
credit losses was attributable to PCD loans compared with $17.1 million of the
allowance at December 31, 2022 , a decrease of $242 thousand or 1.4%.
At
The Company believes that the allowance for credit losses on loans atMarch 31, 2023 is adequate to absorb expected lifetime losses that may be realized from the loan portfolio as of such date. Nevertheless, the Company could sustain losses in future periods which could be substantial in relation to the size of the allowance atMarch 31, 2023 .
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The allowance for credit losses on off-balance sheet credit exposures estimates expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, except when an obligation is unconditionally cancellable by the Company. The allowance is adjusted by provisions for credit losses charged to earnings that increase the allowance, or by provision releases returned to earnings that decrease the allowance. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is affected by historical analysis of utilization rates. The expected credit loss rates applied to the commitments expected to fund are affected by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. As ofMarch 31, 2023 andDecember 31, 2022 , the Company had$29.9 million in allowance for credit losses on off-balance sheet credit exposures. The allowance for credit losses on off-balance sheet credit exposures is a separate line item on the Company's consolidated balance sheet.
Securities
The carrying cost of securities totaled
The amortized cost and fair value of investment securities were as follows:
March 31, 2023
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
(Dollars in thousands)
Available for Sale
Collateralized mortgage obligations $ 372,869 $ 1,132 $ (3,287 ) $ 370,714
Mortgage-backed securities 100,781 137 (2,382 ) 98,536
Total $ 473,650 $ 1,269 $ (5,669 ) $ 469,250
Held to Maturity
States and political subdivisions $ 115,470 $ 1,458 $ (2,538 ) $ 114,390
Corporate debt securities 12,000 - (3,300 ) 8,700
Collateralized mortgage obligations 264,124 893 (16,511 ) 248,506
Mortgage-backed securities 13,210,701 3,403 (1,370,035 ) 11,844,069
Total $ 13,602,295 $ 5,754 $ (1,392,384 ) $ 12,215,665
47--------------------------------------------------------------------------------
December 31, 2022
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
(Dollars in thousands)
Available for Sale
Collateralized mortgage obligations $ 359,251 $ 1,190 $ (3,039 ) $ 357,402
Mortgage-backed securities 101,647 93 (2,640 ) 99,100
Total $ 460,898 $ 1,283 $ (5,679 ) $ 456,502
Held to Maturity
States and political subdivisions $ 122,361 $ 868 $ (3,255 ) $ 119,974
Corporate debt securities 12,000 - (2,520 ) 9,480
Collateralized mortgage obligations 271,727 377 (22,922 ) 249,182
Mortgage-backed securities 13,613,415 2,575 (1,607,501 ) 12,008,489
Total $ 14,019,503 $ 3,820 $ (1,636,198 ) $ 12,387,125
The investment securities portfolio is measured for expected credit losses by
segregating the portfolio into two general segments and applying the appropriate
expected credit losses methodology. Investment securities classified as
available for sale or held to maturity are evaluated for expected credit losses
under FASB ASC 326, "Financial Instruments - Credit Losses."
Available for sale securities. For available for sale securities in an
unrealized loss position, the amount of the expected credit losses recognized in
earnings depends on whether an entity intends to sell the security or more
likely than not will be required to sell the security before recovery of its
amortized cost basis less any current-period credit loss. If an entity intends
to sell or more likely than not will be required to sell the security before
recovery of its amortized cost basis less any current-period credit loss, the
expected credit losses will be recognized in earnings equal to the entire
difference between the investment's amortized cost basis and its fair value at
the balance sheet date. If an entity does not intend to sell the security and it
is not more likely than not that the entity will be required to sell the
security before recovery of its amortized cost basis less any current-period
loss, the expected credit losses will be separated into the amount representing
the credit-related portion of the impairment loss ("credit loss") and the
noncredit portion of the impairment loss ("noncredit portion"). The amount of
the total expected credit losses related to the credit loss is determined based
on the difference between the present value of cash flows expected to be
collected and the amortized cost basis, and such difference is recognized in
earnings. The amount of the total expected credit losses related to the
noncredit portion is recognized in other comprehensive income, net of applicable
taxes. The previous amortized cost basis less the expected credit losses
recognized in earnings will become the new amortized cost basis of the
investment.
As of March 31, 2023 , management does not have the intent to sell any of the
securities classified as available for sale before a recovery of cost. In
addition, management believes it is more likely than not that the Company will
not be required to sell any of its investment securities before a recovery of
cost. The unrealized losses are largely due to changes in market interest rates
and spread relationships since the time the underlying securities were
purchased. The fair value is expected to recover as the securities approach
their maturity date or repricing date or if market yields for such investments
decline. Management does not believe any of the securities are impaired due to
reasons of credit quality. Accordingly, as of March 31, 2023 , management
believes that there is no potential for credit losses on available for sale
securities.
Held to maturity securities. The Company's held to maturity investments include
mortgage-related bonds issued by either the Government National Mortgage
Corporation ("Ginnie Mae"), Federal National Mortgage Association ("Fannie Mae")
or Federal Home Loan Mortgage Corporation ("Freddie Mac"). Ginnie Mae issued
securities are explicitly guaranteed by the U.S. government, while Fannie Mae
and Freddie Mac issued securities are fully guaranteed by those respective
United States government-sponsored agencies, and conditionally guaranteed by the
full faith and credit of the United States . The Company's held to maturity
securities also include taxable and tax-exempt municipal securities issued
primarily by school districts, utility districts and municipalities located in
Texas . The Company's investment in municipal securities is exposed to credit
risk. The securities are highly rated by major rating agencies and regularly
reviewed by management. A significant portion are guaranteed or insured by
either the Texas Permanent School Fund , Assured Guaranty or Build America
Mutual. As of March 31, 2023 , the Company's municipal securities represent 0.8%
of the securities portfolio. Management has the ability and intent to hold the
securities classified as held to maturity until they mature, at which time the
Company will receive full value for the securities. Accordingly, as of March 31,
2023 , management believes that there is no potential for material credit losses
on held to maturity securities.
48
--------------------------------------------------------------------------------Deposits
Total deposits were$27.00 billion atMarch 31, 2023 compared with$28.53 billion atDecember 31, 2022 , a decrease of$1.53 billion or 5.4%. AtMarch 31, 2023 , noninterest-bearing deposits totaled$10.11 billion , a decrease of$807.1 million or 7.4% compared with$10.92 billion atDecember 31, 2022 . Interest-bearing deposits totaled$16.90 billion atMarch 31, 2023 compared with$17.62 billion atDecember 31, 2022 , a decrease of$722.2 million or 4.1%, primarily due to a decrease in business demand deposits and public fund deposits. Average deposits for the three months endedMarch 31, 2023 were$27.89 billion , a decrease of$3.03 billion or 9.8%, compared with$30.92 billion for the three months endedMarch 31, 2022 . The ratio of average interest-bearing deposits to total average deposits was 62.8% and 65.6% during the first three months of 2023 and 2022, respectively.
The following table summarizes the daily average balances and weighted average rates paid on deposits for the periods indicated below:
Three Months Ended March 31,
2023 2022
Average Rate Average Rate
Average Balance (1) Average Balance (1)
(Dollars in thousands)
Interest-bearing demand deposits $ 5,877,641 0.26 % $ 6,775,114 0.15 %
Regular savings 3,396,252 0.70 % 3,445,108 0.11 %
Money market savings 6,183,427 1.95 % 7,425,353 0.17 %
Certificates, IRAs and other time
deposits 2,045,580 1.59 % 2,637,529 0.35 %
Total interest-bearing deposits 17,502,900 1.10 % 20,283,104 0.18 %
Noninterest-bearing demand deposits 10,389,980 10,636,624
Total deposits $ 27,892,880 0.69 % $ 30,919,728 0.11 %
(1)
Annualized and based on average balances on an actual 365-day basis for the
three months ended
Other Borrowings
The following table presents the Company's borrowings as of the dates indicated:
March 31, 2023 December 31, 2022
(Dollars in thousands)
FHLB advances $ 3,365,000 $ 1,850,000
Securities sold under repurchase agreements 434,261 428,134
Total $ 3,799,261 $ 2,278,134
FHLB advances and long-term notes payable- The Company has an available line of
credit with the FHLB of Dallas , which allows the Company to borrow on a
collateralized basis. The Company's FHLB advances are typically considered
short-term borrowings and are used to manage liquidity as needed. Maturing
advances are replaced by drawing on available cash, making additional borrowings
or through increased customer deposits. At March 31, 2023 , the Company had total
funds of $11.29 billion available under this line. FHLB advances of $3.37
billion were outstanding at March 31, 2023 , at a weighted average interest rate
of 5.01%. At March 31, 2023 , the Company had no FHLB long-term notes payable
balance.
Securities sold under repurchase agreements- At March 31, 2023 , the Company had
$434.3 million in securities sold under repurchase agreements with banking
customers compared with $428.1 million at December 31, 2022 , an increase of $6.1
million or 1.4%. Repurchase agreements are generally settled on the following
business day; however, approximately $4.2 million of the repurchase agreements
outstanding at March 31, 2023 have maturity dates ranging from 1 to 12 months.
All securities sold under repurchase agreements are collateralized by certain
pledged securities.
LIBOR Transition
As of March 31, 2023 , LIBOR was used as an index rate for approximately 88.1% of
the Company's interest-rate swaps and approximately 0.39% of the Company's loan
portfolio. As of December 31, 2022 , LIBOR was used as an index rate for the
Company's interest-rate swaps and approximately 1.5% of the Company's loan
portfolio. On September 30, 2021 , the Company began transitioning away from
LIBOR to Secured Overnight Financing Rate ("SOFR") or other alternative variable
rate indexes for its interest-rate swaps and loans historically using LIBOR as
an index.
49
--------------------------------------------------------------------------------Liquidity
Liquidity involves the Company's ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate the Company on an ongoing basis and manage unexpected events. The Company's largest source of funds is deposits and its largest use of funds is loans. The Company does not expect a change in the source or use of its funds in the future. Although access to purchased funds from correspondent banks is available and has been utilized on occasion to take advantage of investment opportunities, the Company does not generally rely on this external funding source. The cash and federal funds sold position, supplemented by amortizing investment and loan portfolios, has generally created an adequate liquidity position. As ofMarch 31, 2023 , the Company had outstanding$4.97 billion in commitments to extend credit,$60.3 million in commitments associated with outstanding standby letters of credit and$1.32 billion in commitments associated with unused capacity on Warehouse Purchase Program loans. Since commitments associated with letters of credit, unused capacity on Warehouse Purchase Program loans and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.
The Company has no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.
Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. As ofMarch 31, 2023 , the Company had cash and cash equivalents of$405.6 million compared with$424.1 million atDecember 31, 2022 , a decrease of$18.6 million or 4.4%. The decrease was primarily due to the increase in loans held for investment of$434.0 million , payment of cash dividends of$50.1 million , repurchase of common stock of$38.0 million and a decrease in deposits of$1.53 billion , partially offset by proceeds from short-term borrowings of$1.52 billion , net proceeds from investment securities of$397.1 million and net cash provided by operating activities of$179.8 million .
Share Repurchases
OnJanuary 17, 2023 , the Company announced a stock repurchase program under which up to 5%, or approximately 4.6 million shares, of its outstanding common stock may be acquired over a one-year period expiring onJanuary 17, 2024 , at the discretion of management. Under the stock repurchase program, Bancshares may repurchase shares from time to time at prevailing market prices, through open-market purchases or privately negotiated transactions, depending upon market conditions. Repurchases under this program may also be made in transactions outside the safe harbor during a pending merger, acquisition or similar transaction. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. Shares of stock repurchased are held as authorized but unissued shares. Bancshares is not obligated to purchase any particular number of shares, and Bancshares may suspend, modify or terminate the program at any time and for any reason without prior notice. Bancshares repurchased 611,263 shares of its common stock at an average weighted price of$62.20 per share during the three months endedMarch 31, 2023 . Contractual Obligations
The Company's contractual obligations and other commitments to make future
payments (other than deposit obligations and securities sold under repurchase
agreements) as of
Federal Home Loan Bank Borrowings
The Company's future cash payments associated with its contractual obligations pursuant to itsFederal Home Loan Bank ("FHLB") advances as ofMarch 31, 2023 are summarized below. More than 3 years or 1 year but more but less than less than 1 year or less 3 years 5 years 5 years or more Total (Dollars in thousands) Federal Home Loan Bank advances$ 3,365,000 $ - $ - $ -$ 3,365,000 50
--------------------------------------------------------------------------------
Leases
The Company's leases relate primarily to operating leases for office space and banking centers. The Company determines if an arrangement is a lease or contains a lease at inception. The Company's leases have remaining lease terms of 1 to 17 years, which may include the option to extend the lease when it is reasonably certain for the Company to exercise that option. Operating lease right-of-use (ROU) assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses its incremental collateralized borrowing rate to determine the present value of lease payments. Short-term leases and leases with variable lease costs are immaterial, and the Company has one sublease arrangement. Sublease income was$806 thousand and$798 thousand for the three months endedMarch 31, 2023 and 2022, respectively. As ofMarch 31, 2023 , operating lease ROU assets and lease liabilities were approximately$39.9 million . ROU assets and lease liabilities were classified as other assets and other liabilities, respectively. As ofMarch 31, 2023 , the weighted average of remaining lease terms of the Company's operating leases was 5.3 years. The weighted average discount rate used to determine the lease liabilities as ofMarch 31, 2023 for the Company's operating leases was 2.53%. Cash paid for the Company's operating leases was$2.8 million for the three months endedMarch 31, 2023 and 2022. The Company obtained$258 thousand in ROU assets in exchange for lease liabilities for one operating lease during the three months endedMarch 31, 2023 .
The Company's future undiscounted cash payments associated with its operating
leases as of
Remaining 2023$ 7,780 2024 9,599 2025 9,031 2026 7,916 2027 5,028 2028 2,183 Thereafter 4,686
Total undiscounted lease payments
Off-Balance Sheet Items
In the normal course of business, the Company enters into various transactions that, in accordance with GAAP, are not included in its consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company's commitments associated with outstanding standby letters of credit, unused capacity of Warehouse Purchase Program loans and commitments to extend credit expiring by period as ofMarch 31, 2023 are summarized below. Since commitments associated with letters of credit, unused capacity of Warehouse Purchase Program loans and commitments to extend credit may expire unused, the amounts shown may not necessarily reflect the actual future cash funding requirements. More than 1 3 years or year but less more but less 1 year or less than 3 years than 5 years 5 years or more Total (Dollars in thousands)
Standby letters of credit $ 51,669
2,815 $ -$ 60,324 Unused capacity on Warehouse Purchase Program loans 1,321,869 - - - 1,321,869 Commitments to extend credit 1,465,385 1,336,655 278,784 1,893,646 4,974,470 Total$ 2,838,923 $ 1,342,495 $ 281,599 $ 1,893,646 $ 6,356,663 Allowance for Credit Losses on Off-balance Sheet Credit Exposures. The Company records an allowance for credit losses on off-balance sheet credit exposure that is adjusted through a charge to provision for credit losses on the Company's consolidated statement of income. AtMarch 31, 2023 andDecember 31, 2022 , this allowance, reported as a separate line item on the Company's consolidated balance sheet, totaled$29.9 million . 51 --------------------------------------------------------------------------------
Capital Resources
Total shareholders' equity was$6.74 billion atMarch 31, 2023 compared with$6.70 billion atDecember 31, 2022 , an increase of$39.7 million or 0.6%. The increase was primarily the result of net income of$124.7 million partially offset by dividend payments of$50.1 million and common stock repurchases of$38.0 million . The Basel III Capital Rules adopted by the federal regulatory authorities in 2013 substantially revised the risk-based capital requirements applicable to the Company and the Bank. The Basel III Capital Rules became effective for the Company onJanuary 1, 2015 , subject to a phase-in period for certain provisions. The Basel III Capital Rules require a capital conservation buffer with respect to each of the Common Equity Tier 1, Tier 1 risk-based and total risk-based capital ratios, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. The capital conservation buffer of 2.5% was fully phased-in onJanuary 1, 2019 . A financial institution with a conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers. In response to the COVID-19 pandemic, inMarch 2020 the joint federal bank regulatory agencies issued an interim final rule that allowed banking organizations that implemented CECL in 2020 to mitigate the effects of the CECL accounting standard in their regulatory capital for two years. This two-year delay is in addition to the three-year transition period that the agencies had already made available. The Company adopted the option provided by the interim final rule, which delayed the effects of CECL on its regulatory capital through 2021, after which the effects will be phased in over a three-year period fromJanuary 1, 2022 throughDecember 31, 2024 . Under the interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period include both the initial impact of the Company's adoption of CECL onJanuary 1, 2020 and 25% of subsequent changes in the Company's allowance for credit losses during each quarter of the two-year period endingDecember 31, 2021 . The cumulative amount of the transition adjustments is being phased in over the three-year transition period that began onJanuary 1, 2022 , with 75% recognized in 2022, 50% recognized in 2023, and 25% recognized in 2024. Financial institutions are categorized by theFDIC based on minimum Common Equity Tier 1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios. As ofMarch 31, 2023 , the Bank's capital ratios were above the levels required for the Bank to be designated as "well capitalized."
The following table provides a comparison of the Company's and the Bank's
risk-weighted and leverage capital ratios to the minimum and well-capitalized
regulatory standards as of
To Be
Categorized As
Well
Minimum Minimum Capitalized
Required For Required Plus Under Prompt
Capital Capital Corrective
Adequacy Conservation Action Actual Ratio as of
Purposes Buffer Provisions March 31, 2023
The Company
CET1 capital (to risk
weighted assets) 4.50 % 7.00 % N/A 15.59 %
Tier 1 capital (to risk
weighted assets) 6.00 % 8.50 % N/A 15.59 %
Total capital (to risk
weighted assets) 8.00 % 10.50 % N/A 16.41 %
Tier 1 capital (to
average assets) 4.00 % (1) 4.00 % N/A 10.06 %
The Bank
CET1 capital (to risk
weighted assets) 4.50 % 7.00 % 6.50 % 15.53 %
Tier 1 capital (to risk
weighted assets) 6.00 % 8.50 % 8.00 % 15.53 %
Total capital (to risk
weighted assets) 8.00 % 10.50 % 10.00 % 16.35 %
Tier 1 capital (to
average assets) 4.00 % (2) 4.00 % 5.00 % 10.03 %
(1)
The Federal Reserve Board may require the Company to maintain a leverage ratio
above the required minimum.
(2)
The FDIC may require the Bank to maintain a leverage ratio above the required
minimum.
52--------------------------------------------------------------------------------
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