Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project," "could," "may," or "would" and similar expressions, as they relate to us or our management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited, to those discussed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2025, under the heading "Risk Factors," and the following:
In addition, financial markets and global supply chains may continue to be adversely affected by the current or anticipated impact of military conflict, including the current Ukraine and Middle East conflicts and other world events, terrorism or other geopolitical events.
Such forward-looking statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategies and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise (except as required by law).
Introduction
As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, gain on sale of mortgage loans and service charges and fees on deposit accounts. Our primary source of funding for our loans and investments are deposits held by our bank subsidiary, First Financial Bank. Our largest expenses are interest on deposits and salaries and related employee benefits. We measure our performance by calculating our return on average assets, return on average equity, regulatory capital ratios, net interest margin and efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income.
The following discussion and analysis of operations and financial condition should be read in conjunction with the consolidated financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as those included in the Company's 2025 Annual Report on Form 10-K.
Critical Accounting Policies
We prepare consolidated financial statements based on generally accepted accounting principles ("GAAP") and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions.
We deem a policy critical if (i) the accounting estimate requires us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (ii) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements.
We deem our most critical accounting policies to be (i) our allowance for credit losses and our provision for credit losses and (ii) our valuation of financial instruments. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period. A discussion of (i) our allowance for credit losses and our provision for credit losses and (ii) our valuation of financial instruments is included in Notes 1, 3, and 9 to our Consolidated Financial Statements.
It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the ACL and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. A large driver to the ACL is the overall credit quality of the underlying credits. Deterioration or improvement in credit quality could have a significant impact on the overall level of ACL.
Stock Repurchase
On July 22, 2025, the Company's Board of Directors extended the authorization to repurchase up to 5 million common shares through July 31, 2026.
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. There have been no repurchases during 2025 or through March 31, 2026.
Results of Operations
Performance Summary. Net earnings for the first quarter of 2026 were $71.54 million, an increase of 16.62% when compared to earnings of $61.35 million for the first quarter of 2025. Diluted earnings per share was $0.50 for the first quarter of 2026 and $0.43 for the first quarter of 2025.
The return on average assets was 1.89% for the first quarter of 2026, as compared to 1.78% for the first quarter of 2025. The return on average equity was 14.83% for the first quarter of 2026, as compared to 15.12% for the first quarter of 2025.
Net Interest Income. Net interest income is the difference between interest income on earning assets and interest expense on liabilities incurred to fund those assets. Our earning assets consist primarily of loans and investment securities. Our liabilities to fund those assets consist primarily of noninterest-bearing and interest-bearing deposits.
Tax-equivalent net interest income was $138.58 million for the first quarter of 2026, as compared to $121.49 million for the same period last year. The increase in tax equivalent net interest income for the first quarter of 2026 compared to the same quarter in 2025 was largely attributable to the increases in average loans, the increase in average balance and the rate of return on taxable and tax-exempt investment securities, and a $1.26 million reversal of interest expense. Average earning assets were $14.54 billion for the first quarter of 2026, as compared to $13.16 billion during the first quarter of 2025. The increase of $1.38 billion in average earning assets for the first quarter of 2026 when compared to the same period in 2025 was primarily a result of (i) an increase in loans of $321.05 million, (ii) an increase in taxable investment securities of $570.66 million and (iii) an increase in tax-exempt investment securities of $319.33 million. Average interest-bearing liabilities were $9.91 billion for the first quarter of 2026, as compared to $9.01 billion in the same period in 2025. The yield on earning assets decreased 2 basis points while the rate paid on interest-bearing liabilities decreased 20 basis points for the first quarter of 2026 when compared to the first quarter of 2025.
Table 1 allocates the change in tax-equivalent net interest income between the amount of change attributable to volume and to rate.
Table 1 - Changes in Interest Income and Interest Expense (dollars in thousands):
Three-Months Ended March 31, 2026 | ||||||||||||
Change Attributable to | Total | |||||||||||
Volume | Rate | Change | ||||||||||
Short-term investments | $ | 1,912 | $ | (927 | ) | $ | 985 | |||||
Taxable investment securities | 4,075 | 3,174 | 7,249 | |||||||||
Tax-exempt investment securities (1) | 2,249 | 2,023 | 4,272 | |||||||||
Loans (1) (2) | 5,313 | (893 | ) | 4,420 | ||||||||
Interest income | 13,549 | 3,377 | 16,926 | |||||||||
Interest-bearing deposits | 5,045 | (4,743 | ) | 302 | ||||||||
Repurchase agreements | 35 | (15 | ) | 20 | ||||||||
Borrowings | (396 | ) | (93 | ) | (489 | ) | ||||||
Interest expense | 4,684 | (4,851 | ) | (167 | ) | |||||||
Net interest income | $ | 8,865 | $ | 8,228 | $ | 17,093 | ||||||
The net interest margin, on a tax equivalent basis, was 3.86% for the first quarter of 2026, an increase of 12 basis points from the same period in 2025. The net interest margin has expanded during the past year primarily due to (i) strong growth in deposits that has enabled the Company to deploy those funds into the higher yielding loans and securities portfolios, (ii) a reduction in cost of deposits, and (iii) investment of lower yielding securities cash flows into higher yielding bonds. The Federal Reserve began increasing interest rates in March 2022 and continuing into 2023 to a peak of 5.25% to 5.50%. Most recently, the Federal Reserve decreased interest rates by 100 basis points in 2024 and 25 basis points in September, October, and December 2025, respectively, resulting in a target rate of 3.50% to 3.75% at March 31, 2026.
There are $1.44 billion of municipal and related deposits which are indexed to short-term treasury rates which have continued to fluctuate with the changes in the applicable rate index. Average municipal and related deposits totaled $1.89 billion and $1.60 billion for the three-months ended March 31, 2026 and 2025, respectively, with an average rate paid of 3.02% and 3.39%, for the respective three-months then ended.
The net interest margin, which measures tax-equivalent net interest income as a percentage of average earning assets, is illustrated in Table 2.
Table 2 - Average Balances and Average Yields and Rates (dollars in thousands, except percentages):
Three-Months Ended March 31, | ||||||||||||||||||||||||
2026 | 2025 | |||||||||||||||||||||||
Average |
Income/ |
Yield/ |
Average |
Income/ |
Yield/ | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Short-term investments (1) | $ | 466,144 | $ | 4,249 | 3.70 | % | $ | 293,636 | $ | 3,264 | 4.51 | % | ||||||||||||
Taxable investment securities (2) | 4,076,690 | 32,283 | 3.17 | 3,506,035 | 25,034 | 2.86 | ||||||||||||||||||
Tax-exempt investment securities (2)(3) | 1,726,765 | 14,184 | 3.29 | 1,407,440 | 9,912 | 2.82 | ||||||||||||||||||
Loans (3)(4) | 8,273,995 | 136,020 | 6.67 | 7,952,946 | 131,600 | 6.71 | ||||||||||||||||||
Total earning assets | 14,543,594 | $ | 186,736 | 5.21 | % | 13,160,057 | $ | 169,810 | 5.23 | % | ||||||||||||||
Cash and due from banks | 259,895 | 226,480 | ||||||||||||||||||||||
Bank premises and equipment, net | 149,894 | 150,885 | ||||||||||||||||||||||
Other assets | 203,945 | 237,103 | ||||||||||||||||||||||
Goodwill and other intangible assets, net | 313,629 | 313,951 | ||||||||||||||||||||||
Allowance for credit losses | (105,728 | ) | (98,364 | ) | ||||||||||||||||||||
Total assets | $ | 15,365,229 | $ | 13,990,112 | ||||||||||||||||||||
Liabilities and Shareholders' Equity | ||||||||||||||||||||||||
Interest-bearing deposits | $ | 9,824,362 | $ | 47,851 | 1.98 | % | $ | 8,882,040 | $ | 47,549 | 2.17 | % | ||||||||||||
Repurchase agreements | 62,849 | 229 | 1.48 | 53,920 | 209 | 1.57 | ||||||||||||||||||
Borrowings | 22,155 | 74 | 1.35 | 74,561 | 563 | 3.06 | ||||||||||||||||||
Total interest-bearing liabilities | 9,909,366 | $ | 48,154 | 1.97 | % | 9,010,521 | $ | 48,321 | 2.17 | % | ||||||||||||||
Noninterest-bearing deposits | 3,401,092 | 3,265,838 | ||||||||||||||||||||||
Other liabilities | 97,986 | 68,218 | ||||||||||||||||||||||
Total liabilities | 13,408,444 | 12,344,577 | ||||||||||||||||||||||
Shareholders' equity | 1,956,785 | 1,645,535 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 15,365,229 | $ | 13,990,112 | ||||||||||||||||||||
Net interest income (tax equivalent) | $ | 138,582 | $ | 121,489 | ||||||||||||||||||||
Rate Analysis: | ||||||||||||||||||||||||
Interest income/earning assets | 5.21 | % | 5.23 | % | ||||||||||||||||||||
Interest expense/earning assets | (1.35 | ) | (1.49 | ) | ||||||||||||||||||||
Net interest margin | 3.86 | % | 3.74 | % | ||||||||||||||||||||
Noninterest Income. Noninterest income for the first quarter of 2026 was $32.10 million, an increase of $1.87 million, when compared to $30.23 million in the same quarter of 2025. Trust fee income increased to $13.36 million for the first quarter of 2026 compared to $12.65 million for the first quarter of 2025, driven by the increase in market value of trust assets managed to $11.91 billion at March 31, 2026, compared to $10.86 billion at March 31, 2025. Service charges on deposits decreased to $6.08 million for the first quarter of 2026 compared with $6.18 million for the first quarter of 2025, driven by a decrease in overdraft fees. Mortgage related income increased to $4.28 million for the first quarter of 2026 compared to $2.83 million in the first quarter of 2025, due to increased volume in mortgage loans originated and better margins.
Table 3 - Noninterest Income (dollars in thousands):
Three-Months Ended March 31, | ||||||||||||
2026 |
Increase | 2025 | ||||||||||
Trust fees | $ | 13,363 | $ | 710 | $ | 12,653 | ||||||
Service charges on deposit accounts | 6,077 | (100 | ) | 6,177 | ||||||||
Debit card fees | 5,245 | 278 | 4,967 | |||||||||
Credit card fees | 651 | 74 | 577 | |||||||||
Gain on sale and fees on mortgage loans | 4,277 | 1,445 | 2,832 | |||||||||
Net gain (loss) on sale of foreclosed assets | (56 | ) | (21 | ) | (35 | ) | ||||||
Other: | ||||||||||||
Check printing fees | 4 | (20 | ) | 24 | ||||||||
Safe deposit rental fees | 242 | (10 | ) | 252 | ||||||||
Credit life fees | 217 | (13 | ) | 230 | ||||||||
Brokerage commissions | 449 | 59 | 390 | |||||||||
Wire transfer fees | 468 | 53 | 415 | |||||||||
Miscellaneous income | 1,159 | (589 | ) | 1,748 | ||||||||
Total other | 2,539 | (520 | ) | 3,059 | ||||||||
Total Noninterest Income | $ | 32,096 | $ | 1,866 | $ | 30,230 | ||||||
Noninterest Expense. Total noninterest expense for the first quarter of 2026 was $76.77 million, compared to $70.34 million for the same period of 2025. An important measure in determining whether a financial institution effectively manages noninterest expense is the efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax-equivalent basis and noninterest income. Lower ratios indicate better efficiency since more income is generated with a lower noninterest expense total. Our efficiency ratio was 44.98% for the first quarter of 2026 compared to 46.36% for the same quarter in 2025.
Salaries, commissions and employee benefits for the first quarter of 2026 totaled $45.98 million, compared to $42.14 million for the same period in 2025. The increase from prior year is primarily resulting from additions to staff and merit-based and market driven pay increases to officers and employees over the past year.
All other categories of noninterest expense for the first quarter of 2026 totaled $30.79 million, compared to $28.19 million in the same quarter a year ago. Noninterest expense, excluding salary related costs, for the three-months ended March 31, 2026 increased when compared to the same period in 2025 largely due to increases in software amortization, professional fees and operational and other losses.
Table 4 - Noninterest Expense (dollars in thousands):
Three-Months Ended March 31, | ||||||||||||
2026 |
Increase | 2025 | ||||||||||
Salaries, commissions and incentives (excluding mortgage) | $ | 30,978 | $ | 2,315 | $ | 28,663 | ||||||
Mortgage salaries and incentives | 2,576 | 716 | 1,860 | |||||||||
Medical | 3,523 | 345 | 3,178 | |||||||||
Profit sharing | 3,023 | 38 | 2,985 | |||||||||
401(k) match expense | 1,292 | 150 | 1,142 | |||||||||
Payroll taxes | 2,898 | 318 | 2,580 | |||||||||
Stock based compensation | 1,692 | (42 | ) | 1,734 | ||||||||
Total salaries and employee benefits | 45,982 | 3,840 | 42,142 | |||||||||
Net occupancy expense | 3,630 | (90 | ) | 3,720 | ||||||||
Equipment expense | 2,158 | (163 | ) | 2,321 | ||||||||
FDIC insurance premiums | 1,560 | (15 | ) | 1,575 | ||||||||
Debit card expense | 3,108 | (265 | ) | 3,373 | ||||||||
Professional and service fees | 3,403 | 753 | 2,650 | |||||||||
Printing, stationery and supplies | 623 | 141 | 482 | |||||||||
Operational and other losses | 1,000 | 460 | 540 | |||||||||
Software amortization and expense | 4,594 | 862 | 3,732 | |||||||||
Amortization of intangible assets | 43 | (52 | ) | 95 | ||||||||
Other: | ||||||||||||
Data processing fees | 715 | 35 | 680 | |||||||||
Postage | 445 | (68 | ) | 513 | ||||||||
Advertising | 753 | (22 | ) | 775 | ||||||||
Correspondent bank service charges | 259 | (34 | ) | 293 | ||||||||
Telephone | 723 | 88 | 635 | |||||||||
Public relations and business development | 948 | 46 | 902 | |||||||||
Directors' fees | 925 | 51 | 874 | |||||||||
Audit and accounting fees | 552 | 12 | 540 | |||||||||
Legal fees and other related costs | 334 | 5 | 329 | |||||||||
Regulatory exam fees | 268 | 32 | 236 | |||||||||
Travel | 497 | 82 | 415 | |||||||||
Courier expense | 399 | 67 | 332 | |||||||||
Other real estate owned | (38 | ) | (36 | ) | (2 | ) | ||||||
Other miscellaneous expense | 3,887 | 704 | 3,183 | |||||||||
Total other | 10,667 | 962 | 9,705 | |||||||||
Total Noninterest Expense | $ | 76,768 | $ | 6,433 | $ | 70,335 | ||||||
Balance Sheet Review
Loans. The 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 March 31, 2026, total loans held-for-investment were $8.29 billion, an increase of $126.84 million, as compared to December 31, 2025 balances.
As compared to year-end 2025 balances, total commercial loans increased $75.44 million, total real estate loans increased $53.43 million, total consumer loans increased $16.17 million, and agricultural loans decreased $18.19 million. Loans averaged $8.27 billion for the first quarter of 2026, an increase of $321.05 million over the prior year first quarter average balances.
Loan portfolio segments include Commercial & Industrial, Municipal, Agricultural, Construction and Development, Farm, Non-Owner Occupied and Owner Occupied CRE, Residential, Consumer Auto and Consumer Non-Auto. This segmentation allows for a more precise pooling of loans with similar credit risk characteristics and credit monitor procedures for the Company's calculation of its allowance for credit losses.
Table 5 outlines the composition of the Company's held-for-investment loans by portfolio segment.
Table 5 - Composition of Loans Held-for-Investment (dollars in thousands):
March 31, | December 31, | |||||||||||
2026 | 2025 | 2025 | ||||||||||
Commercial: | ||||||||||||
Commercial & Industrial | $ | 1,149,931 | $ | 1,144,429 | $ | 1,116,461 | ||||||
Municipal | 384,473 | 338,303 | 342,501 | |||||||||
Total Commercial | 1,534,404 | 1,482,732 | 1,458,962 | |||||||||
Agricultural | 77,583 | 90,186 | 95,776 | |||||||||
Real Estate: | ||||||||||||
Construction & Development | 1,169,037 | 1,098,069 | 1,157,865 | |||||||||
Farm | 329,151 | 331,464 | 327,625 | |||||||||
Non-Owner Occupied CRE | 825,771 | 753,898 | 832,816 | |||||||||
Owner Occupied CRE | 1,132,114 | 1,142,618 | 1,120,608 | |||||||||
Residential | 2,322,097 | 2,217,740 | 2,285,830 | |||||||||
Total Real Estate | 5,778,170 | 5,543,789 | 5,724,744 | |||||||||
Consumer: | ||||||||||||
Auto | 751,283 | 679,189 | 732,351 | |||||||||
Non-Auto | 143,680 | 149,715 | 146,443 | |||||||||
Total Consumer | 894,963 | 828,904 | 878,794 | |||||||||
Total | $ | 8,285,120 | $ | 7,945,611 | $ | 8,158,276 | ||||||
Loans held-for-sale, consisting of secondary market mortgage loans, totaled $22.98 million, $14.35 million, and $29.99 million at March 31, 2026 and 2025, and December 31, 2025, respectively. At March 31, 2026 and 2025, and December 31, 2025, $4.85 million, $351 thousand and $4.56 million, respectively, are valued using the lower of cost or fair value, and the remaining amounts are valued under the fair value option.
Commercial real estate loans (owner and non-owner occupied CRE) represent 23.63% of the Company's total loan portfolio as of March 31, 2026. Non-owner occupied CRE represents $825.77 million, or 9.97%, of the Company's total loan portfolio as of March 31, 2026. The properties securing this portfolio are diverse as to geographic location in Texas as well as industry type. Collateral for CRE loans is located throughout the Company's markets in central west Texas, the Dallas-Fort Worth metroplex and southeast Texas with less than 1% of properties located outside of the state. The largest concentrations in the CRE portfolio as to type are industrial/manufacturing at approximately 19.91% and multifamily at approximately 6.11% as of March 31, 2026. All additional property CRE portfolio property type categories are below the identified concentration levels. Credit underwriting standards are periodically reviewed and adjusted based upon observations from our ongoing monitoring of economic conditions in our lending areas. In response to the current interest rate environment and increases in benchmark rates, the Company has enhanced stress testing and loan review activities to mitigate interest rate reset risk with a specific emphasis on borrowers' abilities to absorb the impact of higher interest rates as loans that were made in a much lower rate environment renew.
The following tables summarize maturity information of our loan portfolio as of March 31, 2026. The tables also present the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.
Maturity Distribution and Interest Sensitivity of Loans at March 31, 2026 (dollars in thousands):
Total Loans Held-for-Investment: | Due in One Year or Less | After One but Within Five Years | After Five but Within Fifteen Years | After Fifteen Years | Total | |||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial & Industrial | $ | 442,944 | $ | 599,850 | $ | 98,692 | $ | 8,445 | $ | 1,149,931 | ||||||||||
Municipal | 95,106 | 74,910 | 147,269 | 67,188 | 384,473 | |||||||||||||||
Total Commercial | 538,050 | 674,760 | 245,961 | 75,633 | 1,534,404 | |||||||||||||||
Agricultural | 61,709 | 15,000 | 874 | - | 77,583 | |||||||||||||||
Real Estate: | ||||||||||||||||||||
Construction & Development | 588,010 | 214,869 | 242,710 | 123,448 | 1,169,037 | |||||||||||||||
Farm | 16,170 | 47,969 | 156,984 | 108,028 | 329,151 | |||||||||||||||
Non-Owner Occupied CRE | 68,925 | 337,611 | 332,566 | 86,669 | 825,771 | |||||||||||||||
Owner Occupied CRE | 77,710 | 328,317 | 537,550 | 188,537 | 1,132,114 | |||||||||||||||
Residential | 159,670 | 152,659 | 841,521 | 1,168,247 | 2,322,097 | |||||||||||||||
Total Real Estate | 910,485 | 1,081,425 | 2,111,331 | 1,674,929 | 5,778,170 | |||||||||||||||
Consumer: | ||||||||||||||||||||
Auto | 6,871 | 719,848 | 24,564 | - | 751,283 | |||||||||||||||
Non-Auto | 31,412 | 82,046 | 27,163 | 3,059 | 143,680 | |||||||||||||||
Total Consumer | 38,283 | 801,894 | 51,727 | 3,059 | 894,963 | |||||||||||||||
Total | $ | 1,548,527 | $ | 2,573,079 | $ | 2,409,893 | $ | 1,753,621 | $ | 8,285,120 | ||||||||||
% of Total Loans | 18.69 | % | 31.06 | % | 29.09 | % | 21.16 | % | 100.00 | % | ||||||||||
Loans with fixed interest rates: | Due in One Year or Less | After One but Within Five Years | After Five but Within Fifteen Years | After Fifteen Years | Total | |||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial & Industrial | $ | 84,769 | $ | 322,038 | $ | 7,785 | $ | - | $ | 414,592 | ||||||||||
Municipal | 38,018 | 74,586 | 88,007 | 25,079 | 225,690 | |||||||||||||||
Total Commercial | 122,787 | 396,624 | 95,792 | 25,079 | 640,282 | |||||||||||||||
Agricultural | 5,496 | 8,963 | 143 | - | 14,602 | |||||||||||||||
Real Estate: | ||||||||||||||||||||
Construction & Development | 269,114 | 65,540 | 41,104 | 13,877 | 389,635 | |||||||||||||||
Farm | 9,888 | 41,113 | 70,529 | 14,064 | 135,594 | |||||||||||||||
Non-Owner Occupied CRE | 52,262 | 193,797 | 27,553 | 3,830 | 277,442 | |||||||||||||||
Owner Occupied CRE | 50,801 | 158,058 | 10,527 | 3,591 | 222,977 | |||||||||||||||
Residential | 120,035 | 122,660 | 477,236 | 221,687 | 941,618 | |||||||||||||||
Total Real Estate | 502,100 | 581,168 | 626,949 | 257,049 | 1,967,266 | |||||||||||||||
Consumer: | ||||||||||||||||||||
Auto | 6,871 | 719,848 | 24,564 | - | 751,283 | |||||||||||||||
Non-Auto | 30,873 | 81,736 | 26,750 | 473 | 139,832 | |||||||||||||||
Total Consumer | 37,744 | 801,584 | 51,314 | 473 | 891,115 | |||||||||||||||
Total | $ | 668,127 | $ | 1,788,339 | $ | 774,198 | $ | 282,601 | $ | 3,513,265 | ||||||||||
% of Total Loans | 8.06 | % | 21.59 | % | 9.34 | % | 3.41 | % | 42.40 | % | ||||||||||
Loans with variable interest rates: | Due in One Year or Less | After One but Within Five Years | After Five but Within Fifteen Years | After Fifteen Years | Total | |||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial & Industrial | $ | 358,175 | $ | 277,812 | $ | 90,907 | $ | 8,445 | $ | 735,339 | ||||||||||
Municipal | 57,088 | 324 | 59,262 | 42,109 | 158,783 | |||||||||||||||
Total Commercial | 415,263 | 278,136 | 150,169 | 50,554 | 894,122 | |||||||||||||||
Agricultural | 56,213 | 6,037 | 731 | - | 62,981 | |||||||||||||||
Real Estate: | ||||||||||||||||||||
Construction & Development | 318,896 | 149,329 | 201,606 | 109,571 | 779,402 | |||||||||||||||
Farm | 6,282 | 6,856 | 86,455 | 93,964 | 193,557 | |||||||||||||||
Non-Owner Occupied CRE | 16,663 | 143,814 | 305,013 | 82,839 | 548,329 | |||||||||||||||
Owner Occupied CRE | 26,909 | 170,259 | 527,023 | 184,946 | 909,137 | |||||||||||||||
Residential | 39,635 | 29,999 | 364,285 | 946,560 | 1,380,479 | |||||||||||||||
Total Real Estate | 408,385 | 500,257 | 1,484,382 | 1,417,880 | 3,810,904 | |||||||||||||||
Consumer: | ||||||||||||||||||||
Auto | - | - | - | - | - | |||||||||||||||
Non-Auto | 539 | 310 | 413 | 2,586 | 3,848 | |||||||||||||||
Total Consumer | 539 | 310 | 413 | 2,586 | 3,848 | |||||||||||||||
Total | $ | 880,400 | $ | 784,740 | $ | 1,635,695 | $ | 1,471,020 | $ | 4,771,855 | ||||||||||
% of Total Loans | 10.63 | % | 9.47 | % | 19.75 | % | 17.75 | % | 57.60 | % | ||||||||||
Of the $4.77 billion of variable interest rate loans shown above, loans totaling $2.29 billion mature or reprice over the next twelve months. Of this amount, approximately $1.97 billion will reprice immediately upon changes in the underlying index rate (primarily U.S. prime rate) with the remaining $320.35 million being subject to floors above or ceilings below the current index.
Asset Quality. Our loan portfolio is subject to periodic reviews by our centralized independent loan review group, engaged third-parties, as well as periodic examinations by bank regulatory agencies. Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Nonaccrual, past due 90 days or more and still accruing, and foreclosed assets were $54.31 million at March 31, 2026, as compared to $61.69 million at March 31, 2025 and $56.49 million at December 31, 2025. As a percent of loans held-for-investment and foreclosed assets, these assets were 0.66% at March 31, 2026, 0.78% at March 31, 2025, and 0.69% at December 31, 2025. As a percent of total assets, these assets were 0.35% at March 31, 2026, as compared to 0.43% at March 31, 2025 and 0.37% at December 31, 2025, respectively. We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming at March 31, 2026.
Table 6 - Nonaccrual, Past Due 90 Days or More and Still Accruing, and Foreclosed Assets (dollars in thousands, except percentages):
March 31, | December 31, | |||||||||||
2026 | 2025 | 2025 | ||||||||||
Nonaccrual loans | $ | 52,129 | $ | 60,430 | $ | 55,121 | ||||||
Loans still accruing and past due 90 days or more | 218 | 1,143 | 892 | |||||||||
Total nonperforming loans | 52,347 | 61,573 | 56,013 | |||||||||
Foreclosed assets | 1,962 | 115 | 479 | |||||||||
Total nonperforming assets | $ | 54,309 | $ | 61,688 | $ | 56,492 | ||||||
As a % of loans held-for-investment and foreclosed assets | 0.66 | % | 0.78 | % | 0.69 | % | ||||||
As a % of total assets | 0.35 | 0.43 | 0.37 | |||||||||
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 loans of approximately $795 thousand for the year ended December 31, 2025. If interest on all nonaccrual loans had been recognized on a full accrual basis during the year ended December 31, 2025, such income would have been approximately $5.69 million. Such amounts for the 2026 and 2025 interim periods were not significant.
Allowance for Credit Losses. The allowance for credit losses is the amount we determine as of a specific date to be appropriate to absorb current expected credit losses on existing loans. For a discussion of our methodology, see Note 3 to the Consolidated Financial Statements (unaudited).
The provision for loan losses of $2.74 million for the three-months ended March 31, 2026 is combined with the reversal of provision for unfunded commitments of $447 thousand and reported in the net aggregate of $2.29 million under the provision for credit losses in the consolidated statements of earnings for the three-months ended March 31, 2026. The provision for loan losses of $2.99 million for the three-months ended March 31, 2025 is combined with the provision for unfunded commitments of $537 thousand and reported in the net aggregate of $3.53 million under the provision for credit losses in the consolidated statements of earnings for the three-months ended March 31, 2025.
As a percent of average loans, annualized net loan charge-offs were 0.02% for the three-months ended March 31, 2026, as compared to 0.01% for the three-months ended March 31, 2025. The allowance for credit losses as a percent of loans held-for-investment was 1.30% as of March 31, 2026, as compared to 1.27% for March 31, 2025 and 1.29% for December 31, 2025, respectively.
Table 7 - Loan Loss Experience and Allowance for Credit Losses (dollars in thousands, except percentages):
Three-Months Ended | ||||||||
2026 | 2025 | |||||||
Allowance for credit losses at period-end | $ | 107,918 | $ | 101,080 | ||||
Loans held-for-investment at period-end | 8,285,120 | 7,945,611 | ||||||
Average loans for period | 8,273,995 | 7,952,946 | ||||||
Net charge-offs (recoveries)/average | 0.02 | % | 0.01 | % | ||||
Allowance for loan losses/period-end | 1.30 | % | 1.27 | % | ||||
Allowance for loan losses/nonaccrual | 206.16 | % | 164.16 | % | ||||
Interest-Bearing Demand Deposits in Banks. The Company had interest-bearing deposits in banks of $458.20 million at March 31, 2026 compared to $682.36 million at March 31, 2025 and $826.95 million at December 31, 2025, respectively. At March 31, 2026, interest-bearing deposits in banks included $402.62 million maintained at the Federal Reserve Bank of Dallas and $55.58 million on deposit with the FHLB.
Available-for-Sale Securities. At March 31, 2026, securities with a fair value of $5.67 billion were classified as securities available-for-sale. As compared to December 31, 2025, the available-for-sale portfolio at March 31, 2026 reflected (i) an increase of $221.49 million in mortgage-backed securities, (ii) a decrease of $40.85 million in U.S. Treasury securities, (iii) a decrease of $21.65 million in obligations of states and political subdivisions, and (iv) a decrease of $4.31 million in corporate bonds and other securities. Fluctuations in the available-for-sale securities portfolio balances were primarily driven by purchases and calls or maturities, and changes in unrealized losses during the first quarter of 2026. Our mortgage related securities are backed by GNMA, FNMA or FHLMC, or are collateralized by securities backed by these agencies.
See the below table and Note 2 to the Consolidated Financial Statements (unaudited) for additional disclosures relating to the maturities and fair values of the investment portfolio at March 31, 2026 and December 31, 2025.
Table 8 - Maturities and Yields of Available-for-Sale Securities Held at March 31, 2026 (dollars in thousands, except percentages):
Maturing by Contractual Maturity | ||||||||||||||||||||||||||||||||||||||||
One Year |
After One Year |
After Five Years |
After | Total | ||||||||||||||||||||||||||||||||||||
Available-for-Sale: | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 19,962 | 1.26 | % | $ | - | - | % | $ | - | - | % | $ | - | - | % | $ | 19,962 | 1.26 | % | ||||||||||||||||||||
Obligations of states and | 78,509 | 3.81 | 636,590 | 2.56 | 517,948 | 4.57 | 496,675 | 2.80 | 1,729,722 | 3.29 | ||||||||||||||||||||||||||||||
Corporate bonds and | 43,425 | 3.26 | 53,545 | 2.32 | - | - | - | - | 96,970 | 2.74 | ||||||||||||||||||||||||||||||
Mortgage-backed | 55,996 | 2.97 | 1,853,701 | 3.23 | 1,522,610 | 3.22 | 389,831 | 2.68 | 3,822,138 | 3.17 | ||||||||||||||||||||||||||||||
Total | $ | 197,892 | 3.19 | % | $ | 2,543,836 | 3.05 | % | $ | 2,040,558 | 3.56 | % | $ | 886,506 | 2.75 | % | $ | 5,668,792 | 3.19 | % | ||||||||||||||||||||
All yields are computed on a tax-equivalent basis assuming a marginal tax rate of 21%. Yields on available-for-sale securities are based on amortized cost. Maturities of mortgage-backed securities are based on contractual maturities and could differ due to prepayments of underlying mortgages. Maturities of other securities are reported at the earlier of maturity date or call date.
As of March 31, 2026, the investment portfolio had an overall tax equivalent yield of 3.19%, a weighted average life of 6.71 and modified duration of 5.55 years.
Deposits. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were $13.25 billion as of March 31, 2026, as compared to $12.47 billion as of March 31, 2025 and $13.35 billion as of December 31, 2025.
Table 9 provides a breakdown of average deposits and rates paid over the three month periods ended March 31, 2026 and 2025, respectively.
Table 9 - Composition of Average Deposits (dollars in thousands, except percentages):
For the Three-Months Ended March 31, | ||||||||||||||||
2026 | 2025 | |||||||||||||||
Average |
Average |
Average |
Average | |||||||||||||
Noninterest-bearing deposits | $ | 3,401,092 | -% | $ | 3,265,838 | -% | ||||||||||
Interest-bearing deposits: | ||||||||||||||||
Interest-bearing checking | 4,980,279 | 1.80 | 4,621,703 | 2.11 | ||||||||||||
Savings and money market accounts | 3,942,114 | 1.99 | 3,347,451 | 1.96 | ||||||||||||
Time deposits under $250,000 | 559,283 | 2.79 | 565,657 | 3.18 | ||||||||||||
Time deposits of $250,000 or more | 342,686 | 2.95 | 347,229 | 3.39 | ||||||||||||
Total interest-bearing deposits | 9,824,362 | 1.98 | % | 8,882,040 | 2.17 | % | ||||||||||
Total average deposits | $ | 13,225,454 | $ | 12,147,878 | ||||||||||||
Total cost of deposits | 1.47 | % | 1.59 | % | ||||||||||||
The estimated amount of uninsured and uncollateralized deposits including related accrued and unpaid interest is approximately $4.00 billion, or 30.17% of total deposits, as of March 31, 2026.
Borrowings. Included in borrowings were federal funds purchased, advances from the FHLB and other borrowings of $22.31 million, $26.98 million and $21.68 million at March 31, 2026 and 2025, and December 31, 2025, respectively. The average balance of federal funds purchased, advances from the FHLB and other borrowings were $22.16 million and $74.56 million in the first quarters of 2026 and 2025, respectively. The weighted average interest rates paid on these borrowings were 1.35% and 3.06% for the first quarters of 2026 and 2025, respectively.
Repurchase Agreements. Securities sold under repurchase agreements of $67.95 million, $56.61 million and $62.96 million at March 31, 2026 and 2025, and December 31, 2025, respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the short-term borrowings. The average balances of securities sold under repurchase agreements were $62.85 million and $53.92 million for the first quarters of 2026 and 2025, respectively. The average rates paid on securities sold under repurchase agreements were 1.48% and 1.57% for the first quarters of 2026 and 2025, respectively.
Interest Rate Risk
Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. Our exposure to interest rate risk is managed primarily through our strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities that generate favorable earnings while limiting the potential negative effects of changes in market interest rates. We use no off-balance-sheet financial instruments to manage interest rate risk.
Our subsidiary bank has an asset liability management committee that monitors interest rate risk and compliance with investment policies. The subsidiary bank utilizes an earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next twelve months. The model measures the impact on net interest income relative to a base case scenario of hypothetical fluctuations in interest rates over the next twelve months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the re-pricing and maturity characteristics of the existing and projected balance sheet.
The following analysis depicts the estimated impact on net interest income of immediate changes in interest rates at the specified levels for the periods presented.
Percentage change in net interest income: | ||||
Change in interest rates: | March 31, | December 31, | ||
(in basis points) | 2026 | 2025 | ||
+200 | 1.60% | 3.45% | ||
+100 | 1.27% | 1.83% | ||
-100 | (1.62)% | (1.44)% | ||
-200 | (3.39)% | (2.86)% | ||
The results for the net interest income simulations as of March 31, 2026 and December 31, 2025 resulted in an asset sensitive position. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each year-end will remain constant over the relevant twelve-month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics on specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. We believe these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities reprice in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion.
Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material.
Should we be unable to maintain a reasonable balance of maturities and repricing of our interest-earning assets and our interest-bearing liabilities, we could be required to dispose of our assets in an unfavorable manner or pay a higher than market rate to fund our activities. Our asset liability management committee oversees and monitors this risk.
The fair value of our investment securities classified as available-for-sale totaled $5.67 billion at March 31, 2026. During the three months ended March 31, 2026, the corresponding unrealized loss before taxes on the portfolio of $342.03 million at December 31, 2025, changed to an unrealized loss before taxes of $367.52 million at March 31, 2026, 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 March 31, 2026, the 5-year U.S. Treasury rate was 3.95% compared to 3.72% at December 31, 2025, representing a 23 basis point increase during the first three months of 2026. As of March 31, 2026, an increase of 100 basis points in the 5-year U.S. Treasury rate would result in an increase to unrealized losses by approximately $270.95 million before taxes, while a 100 basis point decrease in the same rate would result in a decrease to unrealized losses by approximately $236.65 million before taxes. The Company does not intend to sell any impaired available-for-sale securities before fair value recovers to the current amortized cost, and it is more-likely-than-not that the Company will not be required to sell impaired securities before the fair value recovers, which may be maturity.
Capital and Liquidity
Capital. We evaluate capital resources by our ability to maintain adequate regulatory capital ratios to do business in the banking industry. Issues related to capital resources arise primarily when we are growing at an accelerated rate but not retaining a significant amount of our profits or when we experience significant asset quality deterioration.
Total shareholders' equity was $1.94 billion, or 12.63% of total assets at March 31, 2026, as compared to $1.68 billion, or 11.74% of total assets at March 31, 2025, and $1.92 billion, or 12.41% of total assets at December 31, 2025. Included in shareholders' equity at March 31, 2026, and 2025, and December 31, 2025 were $290.06 million, $388.89 million and $269.94 million, respectively, in unrealized losses on investment securities available-for-sale, net of related income taxes, although such amount is excluded from and does not impact regulatory capital. For the first quarter of 2026, total shareholders' equity averaged $1.96 billion, or 12.74% of average assets, as compared to $1.65 billion, or 11.76% of average assets, during the same period in 2025.
Banking regulators measure capital adequacy by means of the risk-based capital ratios and the leverage ratio under the Basel III rules and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and off-balance-sheet commitments and contingencies according to prescribed risk categories. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders' equity less intangible assets by quarter-to-date average assets less intangible assets.
Beginning in January 2015, under the Basel III rules, the implementation of the capital conservation buffer was effective for the Company starting at the 0.625% level and increasing 0.625% each year thereafter, until it reached 2.50% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the amount of the buffer will result in restrictions on the Company's ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers.
As of March 31, 2026 and 2025, and December 31, 2025, we had a total risk-based capital ratio of 21.42%, 20.31% and 21.17%, a Tier 1 capital to risk-weighted assets ratio of 20.23%, 19.12% and 19.99%, a common equity Tier 1 to risk-weighted assets ratio of 20.23%, 19.12% and 19.99% and a Tier 1 leverage ratio of 12.58%, 12.46% and 12.55%, respectively. The regulatory capital ratios as of March 31, 2026 and 2025, and December 31, 2025 were calculated under Basel III rules.
The regulatory capital ratios of the Company and Bank under the Basel III regulatory capital framework are as follows:
Actual |
Minimum Capital |
Required to be | ||||||||||||||||||||||
As of March 31, 2026: | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
First Financial Bankshares, Inc. (Consolidated) | ||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets: | $ | 2,048,977 | 21.42 | % | $ | 1,004,568 | 10.50 | % | $ | 956,732 | 10.00 | % | ||||||||||||
Tier 1 Capital to Risk-Weighted Assets: | $ | 1,935,118 | 20.23 | % | $ | 813,222 | 8.50 | % | $ | 574,039 | 6.00 | % | ||||||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets: | $ | 1,935,118 | 20.23 | % | $ | 669,712 | 7.00 | % | $ | - | N/A | |||||||||||||
Leverage Ratio: | $ | 1,935,118 | 12.58 | % | $ | 382,693 | 4.00 | % | $ | - | N/A | |||||||||||||
First Financial Bank | ||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets: | $ | 1,855,142 | 19.46 | % | $ | 1,001,227 | 10.50 | % | $ | 953,550 | 10.00 | % | ||||||||||||
Tier 1 Capital to Risk-Weighted Assets: | $ | 1,741,283 | 18.26 | % | $ | 810,517 | 8.50 | % | $ | 762,840 | 8.00 | % | ||||||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets: | $ | 1,741,283 | 18.26 | % | $ | 667,485 | 7.00 | % | $ | 619,807 | 6.50 | % | ||||||||||||
Leverage Ratio: | $ | 1,741,283 | 11.37 | % | $ | 381,420 | 4.00 | % | $ | 476,775 | 5.00 | % | ||||||||||||
Actual |
Minimum Capital |
Required to be | ||||||||||||||||||||||
As of March 31, 2025: | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
First Financial Bankshares, Inc. (Consolidated) | ||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets: | $ | 1,879,928 | 20.31 | % | $ | 972,018 | 10.50 | % | $ | 925,731 | 10.00 | % | ||||||||||||
Tier 1 Capital to Risk-Weighted Assets: | $ | 1,769,634 | 19.12 | % | $ | 786,872 | 8.50 | % | $ | 555,439 | 6.00 | % | ||||||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets: | $ | 1,769,634 | 19.12 | % | $ | 648,012 | 7.00 | % | $ | - | N/A | |||||||||||||
Leverage Ratio: | $ | 1,769,634 | 12.46 | % | $ | 370,293 | 4.00 | % | $ | - | N/A | |||||||||||||
First Financial Bank | ||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets: | $ | 1,752,768 | 18.99 | % | $ | 969,370 | 10.50 | % | $ | 923,210 | 10.00 | % | ||||||||||||
Tier 1 Capital to Risk-Weighted Assets: | $ | 1,642,474 | 17.79 | % | $ | 784,728 | 8.50 | % | $ | 738,568 | 8.00 | % | ||||||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets: | $ | 1,642,474 | 17.79 | % | $ | 646,247 | 7.00 | % | $ | 600,086 | 6.50 | % | ||||||||||||
Leverage Ratio: | $ | 1,642,474 | 11.61 | % | $ | 369,284 | 4.00 | % | $ | 461,505 | 5.00 | % | ||||||||||||
Actual |
Minimum Capital |
Required to be | ||||||||||||||||||||||
As of December 31, 2025: | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
First Financial Bankshares, Inc. (Consolidated) | ||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets: | $ | 2,000,262 | 21.17 | % | $ | 991,973 | 10.50 | % | $ | 944,736 | 10.00 | % | ||||||||||||
Tier 1 Capital to Risk-Weighted Assets: | $ | 1,888,339 | 19.99 | % | $ | 803,026 | 8.50 | % | $ | 566,842 | 6.00 | % | ||||||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets: | $ | 1,888,339 | 19.99 | % | $ | 661,315 | 7.00 | % | - | N/A | ||||||||||||||
Leverage Ratio: | $ | 1,888,339 | 12.55 | % | $ | 377,894 | 4.00 | % | - | N/A | ||||||||||||||
First Financial Bank | ||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets: | $ | 1,823,770 | 19.36 | % | $ | 989,005 | 10.50 | % | $ | 941,909 | 10.00 | % | ||||||||||||
Tier 1 Capital to Risk-Weighted Assets: | $ | 1,711,847 | 18.17 | % | $ | 800,623 | 8.50 | % | $ | 753,527 | 8.00 | % | ||||||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets: | $ | 1,711,847 | 18.17 | % | $ | 659,336 | 7.00 | % | $ | 612,241 | 6.50 | % | ||||||||||||
Leverage Ratio: | $ | 1,711,847 | 11.43 | % | $ | 376,764 | 4.00 | % | $ | 470,955 | 5.00 | % | ||||||||||||
In connection with the adoption of the Basel III regulatory capital framework, our subsidiary bank made the election to continue to exclude accumulated other comprehensive income from available-for-sale securities ("AOCI") from capital in connection with its quarterly financial filing and, in effect, to retain the AOCI treatment under the prior capital rules.
Liquidity. Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. The potential need for liquidity arising from these types of financial instruments is represented by the contractual notional amount of the instrument. Asset liquidity is provided by cash and assets which are readily marketable, or which will mature in the near future. Liquid assets include cash, federal funds sold, and short-term investments in time deposits in banks. Liquidity is also provided by access to funding sources, which include core depositors and correspondent banks that maintain accounts with and sell federal funds to our subsidiary bank. Other sources of funds include our ability to borrow from short-term sources, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and other borrowings (see below) and an unfunded $50.00 million revolving line of credit established with Frost Bank, a nonaffiliated bank, which matures on June 30, 2027 (see next paragraph). Our subsidiary bank also has federal funds purchased lines of credit with two non-affiliated banks totaling $175.00 million. At March 31, 2026, there were no amounts drawn on these lines of credit. Our subsidiary bank also has (i) an available line of credit with the FHLB totaling $2.31 billion at March 31, 2026, secured by portions of our loan portfolio and certain investment securities, and (ii) access to approximately $1.87 billion at the Federal Reserve Bank of Dallas discount window lending program secured by portions of certain investment securities and portions of our loan portfolio. At March 31, 2026, there was $633.00 million used on the FHLB line advance for undisbursed commitments (letters of credit) used to secure public funds.
The Company renewed and amended its loan agreement, effective June 30, 2025, with Frost Bank. Under the loan agreement, as renewed and amended, we are permitted to draw up to $50.00 million on a revolving line of credit. Prior to June 30, 2027, interest is
paid quarterly at the U.S. prime rate as quoted in the Money Rates section of The Wall Street Journal, and the line of credit matures
June 30, 2027. If a balance exists at July 1, 2027, the principal balance converts to a term facility payable quarterly over five years and
interest is paid quarterly at the U.S. prime rate as quoted in the Money Rates section of The Wall Street Journal. The line of credit is
unsecured. Among other provisions in the Loan Agreement, the Company must satisfy certain financial covenants during the term of
the Loan Agreement, including without limitation, covenants that require the Company to maintain certain capital, profitability, loan
loss reserve, non-performing asset and debt service coverage ratios. In addition, the credit agreement contains certain operational covenants, which among others, restricts the payment of dividends above 55% of consolidated net income, limits the incurrence of debt (excluding any amounts acquired in an acquisition) and prohibits the disposal of assets except in the ordinary course of business. Since 1995, we have historically declared dividends as a percentage of our consolidated net income in a range of 36% (low) in 2021 and 2020 to 53% (high) in 2003 and 2006. The Company was in compliance with the financial and operational covenants at March 31, 2026. There was no outstanding balance under the line of credit as of March 31, 2026.
In addition, we anticipate that future acquisitions of financial institutions, expansion of branch locations or offerings of new products could also place a demand on our cash resources. Available cash and cash equivalents at our parent company which totaled $147.46 million at March 31, 2026,
investment securities which totaled $1.10 million at March 31, 2026 and mature over 4 to 5 years, available dividends from our subsidiaries which totaled $326.70 million at March 31, 2026, utilization of available lines of credit, and future debt or equity offerings are expected to be the source of funding for these potential acquisitions or expansions.
Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed potentially problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As of March 31, 2026, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. We are monitoring closely the impact to the financial system due to the past failures of several banks. Given the diversified core deposit base and relatively low loan to deposit ratios maintained at our subsidiary bank, we consider our current liquidity position to be adequate to meet our short-term and long-term liquidity needs. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.
Off-Balance Sheet ("OBS")/Reserve for Unfunded Commitments. We are a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of our customers. These financial instruments include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheets. At March 31, 2026, the Company's reserve for unfunded commitments totaled $5.94 million which is recorded in other liabilities.
Our exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. We generally use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments.
Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, as we deem necessary upon extension of credit, is based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments we issue to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The average collateral value held on letters of credit usually exceeds the contract amount.
Table 10 - Commitments as of March 31, 2026 (dollars in thousands):
Total Notional | ||||
Unfunded lines of credit | $ | 1,065,317 | ||
Unfunded commitments to extend credit | 675,986 | |||
Standby letters of credit | 53,383 | |||
Total commercial commitments | $ | 1,794,686 | ||
We believe we have no other OBS arrangements or transactions with unconsolidated, special purpose entities that would expose us to liability that is not reflected in the financial statements. The above table does not include balances related to the Company's forward mortgage-backed security trades. At March 31, 2026 and December 31, 2025, these credit exposures for mortgage loans sold with recourse approximated $27.04 million and $25.54 million, respectively. Total commercial commitments were $1.79 billion at March 31, 2026, compared to $2.30 billion at March 31, 2025, and $1.79 billion at December 31, 2025.
Parent Company Funding. Our ability to fund various operating expenses, dividends, and cash acquisitions is generally dependent on our own earnings (without giving effect to our subsidiaries), cash reserves and funds derived from our subsidiaries. These funds historically have been produced by intercompany dividends and management fees that are limited to reimbursement of actual expenses. We anticipate that our recurring cash sources will continue to include dividends and management fees from our subsidiaries. At March 31, 2026, $326.70 million was available for the payment of intercompany dividends by our subsidiaries without the prior approval of regulatory agencies. Our subsidiaries paid aggregate dividends of $42.50 million and $17.00 million for the three-months ended March 31, 2026 and 2025, respectively.
Dividends. Our long-term dividend policy is to pay cash dividends to our shareholders of approximately 40% to 50% of annual net earnings while maintaining adequate capital to support growth. We are also restricted by a loan covenant within our line of credit agreement with Frost Bank to dividend no greater than 55% of net income, as defined in such loan agreement. The cash dividend payout ratios have amounted to 38.09% and 42.02% of net earnings for the first three months of 2026 and 2025, respectively. Given our current capital position, projected earnings and asset growth rates, we do not anticipate any significant change in our current dividend policy.
To pay dividends, we and our subsidiary bank must maintain adequate capital above regulatory guidelines and comply with the general requirements applicable to a Texas corporation. Generally, a Texas corporation may not pay a dividend to its shareholders if (i) after giving effect to the dividend, the corporation would be insolvent, or (ii) the amount of the dividend would exceed the surplus of the corporation. In addition, if the applicable regulatory authority believes that a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the authority may require, after notice and hearing, that such bank cease and desist from the unsafe practice. As a member bank, First Financial Bank may not declare or pay a dividend if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the bank's net income (as reportable in its Reports of Condition and Income) during the current calendar year and the retained net income of the prior two calendar years, unless the dividend has been approved by the Federal Reserve Board.
The Federal Reserve Board, the FDIC, and the Texas Department of Banking have each indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve Board, the Texas Department of Banking, and the FDIC expect that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.