What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-04 compared with 2020-07-28 · 216 added, 200 removed, 479 unchanged (46% of the section changed)

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When used in this Form 10-Q,

words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project,” and similar expressions, as they relate to us or our management, identify forward-looking statements.

words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “indicate,” “predict,” “project,” 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, 2019 and Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q

for the quarter ended March 31, 2020, in each case under the heading “Risk Factors,” and the following:

for the year ended December 31, 2019 and Part II, Item 1A of the Company’s Quarterly Reports on Form 10-Q

for the quarter ended March 31, 2020 and the quarter ended June 30, 2020, in each case under the heading “Risk Factors,” and the following:

general economic conditions, including local, state, national and international, and the impact they may have on us and our customers;

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As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, and service charges.

Our primary source of funding for our loans and investments are deposits held by our subsidiary, First Financial Bank, National Association, Abilene, Texas.

Our primary source of funding for our loans and investments are deposits held by our subsidiary, First Financial Bank, N.A.

Our largest expense is salaries and related employee benefits.

We usually measure our performance by calculating our return on average assets, return on average equity, our regulatory leverage and risk-based capital ratios and our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income, on a tax equivalent basis and noninterest income.

We usually measure our performance by calculating our return on average assets, return on average equity, return on average tangible equity, our regulatory leverage and risk-based capital ratios and our efficiency ratio, which is calculated net interest margin by dividing noninterest expense by the sum of net interest income, on a tax equivalent basis, and noninterest income.

The following discussion and analysis of operations and financial condition should be read in conjunction with the financial statements and accompanying footnotes included in Item 1 of this Form 10-Q

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The coronavirus (COVID-19)

pandemic has placed significant health, economic and other major pressure throughout the communities we serve, the state of Texas, the United States and the entire world.

pandemic has placed significant health, economic and other major pressures throughout the communities we serve, the state of Texas, the United States and the entire world.

We have implemented a number of procedures in response to the pandemic to support the safety and well being of our employees, customers and shareholders that continue through the date of this report:

We have addressed the safety of our 78 branches and other locations, following the guidelines of the Center for Disease Control, and while the branches generally remain open to customers, we have taken steps, and continue to evaluate, to push as much traffic and transactions as possible to our motor banks;

We hold executive meetings weekly or more as needed to address issues that are changing rapidly;

We have addressed the safety of our 78 branches and other locations, following the guidelines of the Center for Disease Control, and while the branches

have remained

open to customers, we have taken steps, and continue to evaluate, to push as much traffic and transactions as possible to our motor banks and our online services;

executive meetings weekly or as needed to address issues that are changing rapidly;

We moved our Annual Shareholders’ Meeting from a physical meeting to a virtual meeting;

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We chose to participate in the CARES Act Paycheck Protection Program (PPP) that provided government guaranteed and forgivable loans to our customers.

Through June 30, 2020, we completed approximately 6,500 applications and funded $703.12 million of such loans (see below).

Through September 30, 2020, we completed approximately 6,500 loans and funded $703.73 million of such loans.

We believe these loans and our participation in the program was good for our customers and the communities we serve;

We chose to participate in the Federal Reserve’s Main Street Lending Program to provide ongoing loans for our customers.

No loans have yet been funded as of June 30, 2020.

We continue to closely monitor this pandemic and expect to make future changes to respond to the pandemic as this situation continues to evolve.

One loan has been funded as of September 30, 2020 under this program.

We continue to closely monitor this pandemic and continue to make changes to protect our employees and customers as we respond to the pandemic as this situation continues to evolve.

Critical Accounting Policies

We prepare consolidated financial statements based on GAAP and customary practices in the banking industry.

We prepare consolidated financial statements based on U.S.

GAAP and customary practices in the banking industry.

These policies, in certain areas, require us to make significant estimates and assumptions.

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All per share amounts in this report have been restated to reflect this stock split.

An amount equal to the par value of the additional common shares to be issued pursuant to the stock split was reflected as a transfer from retained earnings to common shares in the consolidated financial statements as of and for the six-months ended June 30, 2019.

Stock Repurchase

On March 12, 2020, the Company’s Board of Directors authorized the repurchase of up to 4,000,000 common shares through September 30, 2021.

The stock buyback plan authorizes management to repurchase the stock at such time as repurchases are considered beneficial to the Company and stockholders.

On March 12, 2020, the Company’s Board of Directors authorized the repurchase of up to 4.00 million common shares through September 30, 2021.

The stock buyback plan authorizes management to repurchase and retire the stock at such time as repurchases

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.

Through June 30, 2020, the Company repurchased 324,802 shares totaling $8.0 million under this repurchase plan.

Subsequent to June 30, 2020 and through July 28, 2020, no additional shares were repurchased.

Through September 30, 2020, the Company repurchased 324,802 shares totaling $8.01 million under this repurchase plan.

Subsequent to September 30, 2020 and through November 4, 2020, no additional shares were repurchased.

On September 19, 2019, we entered into an agreement and plan of reorganization to acquire TB&T Bancshares, Inc.

and its wholly-owned bank subsidiary, The Bank & Trust of Bryan/College Station, Texas.

On January 1, 2020, the transaction closed.

On January 1, 2020, the transaction was completed.

Pursuant to the agreement, we issued 6.28 million shares of the Company’s common shares in exchange for all of the outstanding shares of TB&T Bancshares, Inc.

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Immediately following such merger, TB&T Bancshares, Inc.

was merged into the Company and The Bank & Trust of Bryan/College Station, Texas was merged into First Financial Bank, National Association, Abilene, Texas, a wholly owned subsidiary of the Company.

was merged into the Company and The Bank & Trust of Bryan/College Station, Texas was merged into First Financial Bank, N.A., a wholly-owned subsidiary of the Company.

The total purchase price exceeded the estimated fair value of the net assets acquired by approximately $141.92 million and the Company recorded such excess as goodwill.

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Participation in PPP Loans

The Company elected to participate in the PPP loan program, subject to prepayment, processing approximately 6,500 loans and funded $703.12 million.

The Company elected to participate in the PPP loan program processing approximately 6,500 loans and funded $703.73 million.

The Company received fees totaling approximately $26.26 million and incurred incremental direct origination costs of $3.62 million, both of which have been deferred and are being amortized over the shorter of the repayment period or 24 months, the contractual life of these loans.

The Company recognized $2.83 million of this net amount into interest income in the second quarter of 2020.

During the second and third quarters of 2020, the Company recognized $2.83 million each quarter of this net amount into interest income.

At September 30, 2020, the Company had approximately $15.97 million in unrecognized deferred loan fees on PPP loans.

Status of New Accounting Standard for Allowance for Credit Losses

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debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States that included an option for entities to delay the implementation of ASC 326 until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020.

On March 27, 2020, the CARES Act was signed by the President of the United States that included an option for entities to delay the implementation of ASC 326 until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020.

The Company elected to delay its implementation of ASU 2016-13

and has calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASU 2016-13.

Prior to the CARES Act being signed and our decision to delay the implementation of CECL, we were continuing our CECL implementation plan with our cross-functional working group, under the direction of our Chief Credit Officer along with our Chief Accounting Officer, Chief Lending Officer and Chief Financial Officer.

The working group includes individuals from various functional areas including credit, risk management, accounting and information technology, among others.

Our implementation plan

included assessment and documentation of processes, internal controls and data sources;

Prior to the CARES Act being signed and our decision to delay the implementation of CECL, we were completing our CECL implementation plan with our cross-functional working group, under the direction of our Chief Credit Officer along with our Chief Accounting Officer, Chief Lending Officer and Chief Financial Officer.

The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others.

Our implementation plan included assessment and documentation of processes, internal controls and data sources;

model development, documentation and validation;

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Had we completed the adoption and implementation of CECL, we believe our allowance for loan losses amount at January 1, 2020 would have been approximately $52.0 million.

At December 31, 2019, our allowance for loan losses totaled $52.5 million.

At December 31, 2019, our allowance for loan losses totaled $52.5 million under the incurred model.

In addition, we have evaluated our expected credit losses for certain debt securities and other financial assets and do not expect these allowances to be significant.

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As we continue to evaluate the provisions of ASU 2016-13

as of and for the three- and six-

months ended June 30, 2020, we have considered the following in developing our forecast and its effect on our CECL calculations:

as of and for the three and nine-months ended September 30, 2020, we have considered the following in developing our forecast and its effect on our future CECL calculations:

duration, extent and severity of COVID-19;

effect of government assistance;

unemployment and effect on economies and markets;

price of oil and gas and effect on economy;

utilization of unfunded commitments;

effects of government assistance;

unemployment and the corresponding effects on the economy;

volatility of oil and gas prices;

value of real estate;

effect of our TB&T Bancshares, Inc.

the effect of our TB&T Bancshares, Inc.

acquisition on our combined loan portfolio.

We are unable as of the date of this report to provide an estimate of our allowance for loan losses under the CECL model as of June 30, 2020 and the provision for loan losses for the three- and six-

months then ended.

We are unable as of the date of this report to provide an estimate of our allowance for loan losses under the CECL model as of September 30, 2020 and the provision for loan losses for the three and nine- months then ended.

Results of Operations

Performance Summary

Net earnings for the second quarter of 2020 were $53.47 million, up $11.38 million when compared with earnings of $42.09 million in the same quarter last year.

Basic earnings per share were $0.38 for the second quarter of 2020 compared with $0.31 in the same quarter a year ago.

The return on average assets was 2.06% for the second quarter of 2020, as compared to 2.14% for the second quarter of 2019.

The return on average equity was 14.00% for the second quarter of 2020 as compared to 15.04% for the second quarter of 2019.

The return on average tangible equity was 17.67% for the second quarter of 2020 compared to 17.81% for the second quarter of 2019.

Net earnings for the six-month

period ended June 30, 2020 were $90.70 million compared to $80.35 million for the same period in 2019.

Basic earnings per share for the first six months of 2020 were $0.64 compared to $0.59 for the same period in 2019.

The return on average assets was 1.86% for the first six months of 2020, as compared to 2.08% for the same period a year ago.

The return on average equity was 12.09% for the first six months of 2020 as compared to 14.78% for the first six months of 2019.

The return on average tangible equity was 15.33% for the first six months of 2020 as compared to 17.58% for the first six months of 2019.

Net earnings for the third quarter of 2020 were $52.86 million compared with $43.08 million for the third quarter of 2019, represented in 22.69% increase.

Basic and diluted earnings per share were $0.37 for the third quarter of 2020 compared with $0.32 in the same quarter a year ago.

The return on average assets was 2.01% for the third quarter of 2020, as compared to 2.15% for the third quarter of 2019.

The return on average equity was 13.14% for the third quarter of 2020 as compared to 14.46% for the third quarter of 2019.

The return on average tangible equity was 16.41% for the third quarter of 2020 compared to 16.96% for the third quarter of 2019.

Net earnings for the nine month period ended September 30, 2020 were $143.56 million compared to $123.42 million for the same period in 2019, representing a 16.31% increase.

Basic and diluted earnings per share for the first nine months of 2020 were $1.01 compared to $0.91 for the same period in 2019.

The return on average assets was 1.91% for the first nine months of 2020, as compared to 2.10% for the same period a year ago.

The return on average equity was 12.46% for the first nine months of 2020 as compared to 14.67% for the same period in 2019.

The return on average tangible equity was 15.71% for the first nine months of 2020 as compared to 17.36% a year ago.

Net Interest Income

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Tax-equivalent

net interest income was $92.14 million for the second quarter of 2020, as compared to $73.28 million for the same period last year.

The increase in 2020 compared to 2019 was largely attributable to the increase in interest earning assets primarily from our TB&T acquisition, an increase in investment securities held and the impact of the Company’s participation in the PPP loan programax-exempt

securities increased $1.20 billion and $630.45 million, respectively, for the second quarter of 2020 over the same quarter of 2019.

Average interest-bearing liabilities increased $1.44 billion for the second quarter of 2020, as compared to the same period in 2019 primarily from our customers depositing their PPP loan amounts into our Bank, the TB&T acquisition and internal organic growth.

The yield on earning assets decreased 51 basis points while the rate paid on interest-bearing liabilities decreased 50 basis points for the second quarter of 2020 compared to the second quarter of 2019.

net interest income was $92.38 million for the third quarter of 2020, as compared to $74.21 million for the same period last year.

The increase in 2020 compared to 2019 was largely attributable to the increase in interest-earning assets primarily derived from our TB&T acquisition, an increase in investment securities held and the impact of the Company’s participation in the PPP loan program (see above).

Average earning assets increased $2.33 billion for the third quarter of 2020 over the same period in 2019.

Average loans and tax-exempt

securities increased $1.24 billion and $925.75 million, respectively, for the third quarter of 2020 over the same quarter of 2019.

Average interest-bearing liabilities increased $1.21 billion for the third quarter of 2020, as compared to the same period in 2019 primarily from our customers depositing their PPP loan amounts into our Bank, the TB&T acquisition and organic growth.

The yield on earning assets decreased 52 basis points while the rate paid on interest-bearing liabilities decreased 54 basis points for the third quarter of 2020 compared to the third quarter of 2019.

Tax-equivalent

net interest income was $174.87 million for the first six months of 2020, as compared to $144.61 million for the same period last year.

Average earning assets increased $1.85 billion for the first six months of 2020 over the same period in 2019.

net interest income was $267.25 million for the first nine months of 2020, as compared to $218.83 million for the same period last year.

Average earning assets increased $2.01 billion for the first nine months of 2020 over the same period in 2019.

Average loans and tax-exempt

securities increased $949.47 million and $375.58 million, respectively, for the first six months of 2020 over the first six months of 2019.

Average interest-bearing liabilities increased $1.13 billion for the first six months of 2020, as compared to the same period in 2019 primarily from our customers depositing their PPP loan amounts into our Bank, the TB&T acquisition and internal organic growth.

The yield on earning assets decreased 35 basis points while the rate paid on interest-bearing liabilities decreased 32 basis points for the first six months of 2020 compared to the first six months of 2019.

securities increased $1.05 billion and $560.39 million, respectively, for the first nine months of 2020 over the first nine months of 2019.

Average interest-bearing liabilities increased $1.15 billion for the first nine months of 2020, as compared to the same period in 2019 primarily from our customers depositing their PPP loan amounts into our Bank, the TB&T acquisition and organic growth.

The yield on earning assets decreased 42 basis points while the rate paid on interest-bearing liabilities decreased 39 basis points for the first nine months of 2020 compared to the first nine months of 2019.

Table 1 allocates the change in tax-equivalent

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Table 1 - Changes in Interest Income and Interest Expense (in thousands):

Three Months Ended June 30, 2020

Compared to Three Months Ended

June 30, 2019

Six Months Ended June 30, 2020

Compared to Six Months Ended

June 30, 2019

Three-Months Ended September 30,

2020 Compared to Three-Months

Ended September 30, 2019

Nine-Months Ended September 30, 2020

Compared to Nine-Months Ended

September 30, 2019

Change Attributable to

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basis assuming a marginal tax rate of 21%.

(2) Non-accrual

loans are included in loans.

The net interest margin for the second quarter of 2020 was

3.78%, a decrease of 20 basis points from the same period in 2019.

The net interest margin for the first six months of 2020 was 3.84%, a decrease of 15 basis points from the same period in 2019.

We continue to experience downward pressures on our net interest margin in 2020 and 2019 primarily due to the extended period of fluctuating historically low levels of short-term interest rates and a flat to inverted yield curve currently being experienced in the bond market.

We have been able to somewhat mitigate the impact of these lower short-term interest rates and the flat/inverted yield curve by establishing minimum interest rates on certain of our loans, improving the pricing for loan risk, and minimizing rates paid on interest bearing liabilities.

In March 2020, as the market experienced volatility, we took advantage of that volatility to purchase high quality municipal bonds at favorable tax equivalent interest yields.

The net interest margin for the third quarter of 2020 was 3.75%, a decrease of 19 basis points from the same period in 2019.

The net interest margin for the first nine months of 2020 was 3.81%, a decrease of 16 basis points from the same period in 2019.

We continue to experience downward pressures on our net interest margin in 2020 and 2019 primarily due to (i) the extended period of fluctuating historically low levels of short-term interest rates and (ii) the flat to inverted yield curve currently being experienced in the bond market.

We have been able to somewhat mitigate the impact of these lower short-term interest rates and the flat/inverted yield curve by establishing minimum interest rates on certain of our loans, improving the pricing for loan risk and reducing the rates paid on our interest-bearing liabilities.

In March 2020, as the market experienced volatility, we took advantage of that volatility to purchase high quality municipal bonds at favorable tax-equivalent

interest yields.

The Federal Reserve increased rates 100 basis points in 2018 but then decreased rates 75 basis points during the third and fourth quarters of 2019 and then an additional 150 basis points in the first quarter of 2020, resulting in a current target rate range of zero to 25 basis points.

The Company’s participation in the PPP loan program impacted the net interest margin from (i) the amortization of loan fees (positive) and (ii) the 1% loan rate (negative).

The Company’s participation in the PPP loan program negatively

impacted the net interest margin from (i) the amortization of net deferred loan fees and (ii) the 1% loan rate.

The net interest margin, which measures tax-equivalent

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Table 2 - Average Balances and Average Yields and Rates (in thousands, except percentages):

Three Months Ended June 30,

Three-Months Ended September 30,

Short-term investments (1)

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Net interest margin

Six Months Ended June 30,

Nine-Months Ended September 30,

Short-term investments (1)

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Noninterest Income

Noninterest income for the second quarter of 2020 increased to $36.92 million compared to $27.98 million in same period in 2019.

Mortgage related income increased 189.68% to $13.68 million compared with $4.72 million in the same quarter a year ago due to a significant increase in the volume of loans originated.

The Company’s mortgage loan pipeline increased to $182.14 million as of June 30, 2020 when compared to $65.90 million at June 30, 2019.

ATM, interchange and credit card fees increased 9.48% to $8.05 million compared with $7.35 million in the same quarter last year due to continued growth in the number of debit cards issued and our TB&T acquisition.

Also included in noninterest income during the second quarter of 2020 was a gain on sale of securities of $1.51 million compared to $676 thousand from the same quarter a year ago.

Trust fees decreased $66 thousand to $6.96 million in the second quarter of 2020 compared with $7.03 million in the same quarter last year due primarily to reduced mineral and lease bonus fees.

The fair value of Trust assets managed increased to $6.78 billion from $6.19 billion a year ago.

Service charges on deposits decreased to $4.32 million compared with $5.37 million in the same quarter a year ago due largely to the lack of economic activity caused by the pandemic during the second quarter of 2020.

Noninterest income for the six-month

period ended June 30, 2020 was $65.65 million, an increase of $13.24 million compared to the same period in 2019.

Mortgage related income increased in the first six months of 2020 to $17.53 million when compared to $8.20 million in the same period a year ago due to a significant increase in the volume of loans originated and additional income from the change to mandatory delivery related to sales in the secondary mortgage market (see notes 4 and 5 to the consolidated financial statements (unaudited)).

ATM, interchange and credit card fees increased 8.86% to $15.45 million compared with $14.19 million in the same period last year due to continued growth in

debit cards and our TB&T acquisition.

Also included in noninterest income during the first six months of 2020 was a gain on sale of securities of $3.57 million compared to $676 thousand from the same quarter a year ago.

Trust fees increased slightly to $14.40 million in the first six months of 2020 compared with $14.01 million in the same period in 2019.

Noninterest income for the third quarter of 2020 increased to $38.58 million compared to $28.67 million in same period in 2019.

Mortgage related income increased to $15.23 million compared with $5.73 million in the same quarter a year ago due to a significant increase in the volume of loans originated driven by the lower rate environment and a strong housing market in Texas.

The Company’s mortgage loan pipeline increased to $235.63 million as of September 30, 2020 when compared to $62.79 million at September 30, 2019.

ATM, interchange and credit card fees increased to $8.64 million compared with $7.73 million in the same quarter last year, driven by continued growth in the number of debit cards issued as well as our TB&T acquisition.

Trust fees increased to $7.46 million in the third quarter of 2020 compared with $7.05 million in the same quarter last year.

The fair value of Trust assets managed increased to $6.95 billion, up 9.36% at September 30, 2020, from $6.36 billion a year ago.

Service charges on deposits were $5.01 million compared with $5.63 million in the same quarter a year ago.

The decline in service charge revenue in 2020 when compared with 2019 has primarily been driven by lower overdraft fees in the current year as a result of the effects of the pandemic and related stimulus programs.

Noninterest income for the nine month period ended September 30, 2020 was $104.23 million, compared to $81.08 million in the same period in 2019.

Mortgage related income increased in the first nine months of 2020 to $32.76 million when compared to $13.93 million in the same period a year ago due to a significant increase in the volume of loans originated driven by the lower rate environment and a strong housing market in Texas.

The Company’s mortgage loan pipeline increased to $235.63 million as of September 30, 2020 when compared to $62.79 million at September 30, 2019.

ATM, interchange and credit card fees increased to $24.09 million compared with $21.92 million in the same period last year driven by continued growth in the number of debit cards issued as well as our TB&T acquisition.

Also included in noninterest income during the first nine months of 2020 was a gain on sale of securities of $3.61 million compared to $728 thousand from the first nine months of 2019.

Trust fees increased slightly to $21.86 million in the first nine months of 2020 compared with $21.06 million in the same period in 2019.

The fair value of Trust assets managed increased to $6.95 billion from $6.36 billion a year ago, but our revenue from oil and gas management decreased by $715 thousand due to decreased volumes in oil and gas production.

Offsetting these increases was a $822 thousand decrease in interest on loan recoveries to $419 thousand for the first six months of 2020 compared to $1.24 million in the same period in 2019 due to the collection of a larger loan during the first six months of 2019 that had previously been on nonaccrual.

In addition, service charges on deposits decreased to $10.23 million compared with $10.55 million in the same period last year ago due largely to the lack of economic activity caused by the pandemic during the second quarter of 2020.

Offsetting these increases was a $1.19 million decrease in interest on loan recoveries to $621 thousand for the first nine months of 2020 compared to $1.82 million in the same period in 2019 due to the collection of a larger loan during the first nine months of 2019 that had previously been on nonaccrual.

In addition, service charges on deposits decreased to $15.24 million compared with $16.18 million in the same period a year ago as a result of the effects of the pandemic and related stimulus programs.

ATM and interchange fees are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions.

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in which a financial institution’s total assets exceeded $10 billion at December 31 st

At June 30, 2020, the Company’s total assets exceeded the $10 billion threshold, due primarily to the effect of the Company’s participation in the PPP loan program.

At September 30, 2020, the Company’s total assets exceeded the $10 billion threshold, due primarily to the effect of the Company’s participation in the PPP loan program and growth in deposits from related activities.

Management continues to monitor the Company’s balance sheet levels and may utilize strategies to reduce the Company’s asset levels below $10 billion to mitigate the loss of debit card income.

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Three-Months Ended

Six Months Ended

September 30,

Nine-Months Ended

September 30,

Service charges on deposit accounts

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Noninterest Expense

Total noninterest expense for the second quarter of 2020 was $53.32 million, an increase of $5.02 million compared to $48.30 million in the same period of 2019.

Total noninterest expense for the third quarter of 2020 was $55.59 million, compared to $48.91 million in the same period of 2019.

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

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Lower ratios indicate better efficiency since more income is generated with a lower noninterest expense total.

Our efficiency ratio for the second quarter of 2020 was 41.32% compared to 47.71% for the same quarter in 2019.

The reduction in the Company’s efficiency ratio during the second quarter of 2020 primarily resulted from the deferral of $3.62 million in noninterest expenses related to PPP loan origination costs.

Salaries, commissions and employee benefits for the second quarter of 2020 totaled $30.81 million, an increase of $3.42 million compared to the same period in 2019.

The increase was primarily driven by (i) the TB&T acquisition, (ii) annual merit-based pay increases that were effective March 1, 2020 and (iii) higher mortgage related commission, offset by the deferral of $3.62 million PPP origination costs.

All other categories of noninterest expense for the second quarter of 2020 totaled $22.51 million, up from $20.91 million in the same quarter a year ago.

Included in noninterest expense in the second quarter of 2020 were technology contract termination and conversion related costs totaling $583 thousand related to the TB&T acquisition.

Total noninterest expense for the first six months of 2020 was $108.64 million, an increase of $12.97 million when compared to $95.67 million in the same period in 2019.

Our efficiency ratio for the first six months of 2020 was 45.17%, compared to 48.56% from the same period in 2019.

Management notes the reduction in the Company’s efficiency ratio for the first six months of 2020 primarily resulted from the deferral of $3.62 million in noninterest expenses related to PPP loan origination costs.

Salaries, commissions and employee benefits for the first six months of 2020 totaled $60.46 million, an increase of $6.54 million when compared to the same period in 2019.

The increase was primarily driven by (i) the TB&T acquisition, (ii) annual pay increases that were effective March 1, 2020 and (iii) higher mortgage related commission, offset by the deferral of $3.62 million PPP origination costs.

All other categories of noninterest expense for the first six months of 2020 totaled $48.18 million, an increase of $6.43 million when compared to the same period in 2019.

Included in noninterest expense in the first six months period of 2020 were technology contract termination and conversion related costs totaling $4.39 million related to the TB&T acquisition.

Our efficiency ratio for the third quarter of 2020 was 42.45% compared to 47.54% for the same quarter in 2019.

Salaries, commissions and employee benefits for the third quarter of 2020 totaled $33.65 million, compared to $28.55 million the same period in 2019.

The increase over the prior year was primarily driven by (i) the TB&T acquisition, (ii) annual merit-based pay increases that were effective March 1, 2020 and (iii) higher mortgage related commission.

All other categories of noninterest expense for the third quarter of 2020 totaled $21.94 million, up from $20.36 million in the same quarter a year ago.

Total noninterest expense for the first nine months of 2020 was $164.23 million, compared to $144.58 million in the same period in 2019.

Our efficiency ratio for the first nine months of 2020 was 44.21%, compared to 48.21% from the same period in 2019.

Management notes the reduction in the Company’s efficiency ratio during 2020 primarily resulted from the growth in the Company’s balance sheet and interest-earning assets as a result of the Company’s participation in the PPP loan program and the deferral of $3.62 million in noninterest expenses related to PPP loan origination costs during the second quarter of 2020.

Salaries, commissions and employee benefits for the first nine months of 2020 totaled $94.11 million, compared to $83.37 million the same period in 2019.

The increase was primarily driven by (i) the TB&T acquisition, (ii) annual pay increases that were effective March 1, 2020 and (iii) higher mortgage related commission and incentives offset by the deferral of $3.62 million in PPP loan origination costs.

All other categories of noninterest expense for the first nine months of 2020 totaled $70.13 million, compared to $61.22 million for the same period in 2019.

Included in other noninterest expenses in the first nine months of 2020 were technology contract termination and conversion related costs totaling $4.40 million related to the TB&T acquisition.

Table 4 - Noninterest Expense (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Three-Months Ended September 30,

Nine-Months Ended September 30,

Salaries and commissions

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Other real estate owned

Other miscellaneous expense

Total Noninterest Expense

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intervals to minimize the interest rate risk inherent in long-term fixed rate loans.

As of June 30, 2020, total loans held for investment were $5.25 billion, an increase of $1.06 billion, as compared to December 31, 2019 balances.

As of September 30, 2020, total loans held-for-investment

were $5.29 billion, an increase of $1.10 billion, as compared to December 31, 2019 balances.

This increase is due primarily from our participation in the PPP loan program and our TB&T acquisition.

As compared to December 31, 2019, commercial loans increased $653.13 million, agricultural loans decreased $6.19 million, real estate loans increased $411.84 million and consumer loans decreased $674 thousand.

Loans averaged $5.25 billion during the second quarter of 2020, an increase of $1.20 billion from the prior year second quarter average balances.

Loans averaged $4.96 billion during the first six months of 2020, an increase of $949.47 million from the prior year six-month

period average balances.

As compared to December 31, 2019, commercial loans increased $632.02 million, agricultural loans decreased $9.67 million, real estate loans increased $464.23 million and consumer loans increased $12.13 million.

Loans averaged $5.33 billion during the third quarter of 2020, an increase of $1.24 billion from the prior year third quarter average balances.

Loans averaged $5.08 billion during the first nine months of 2020, an increase of $1.05 billion from the prior year nine month period average balances.

Table 5 - Composition of Loans (in thousands):

September 30,

Total loans held-for-investment

At June 30, 2020, our real estate loans represented approximately 61.59% of our loan portfolio and were comprised of (i) 1-4

family residence loans of 39.45%, (ii) commercial real estate loans of 29.58%, generally owner occupied, (iii) other loans, which includes ranches, hospitals and universities, of 14.51%, (iv) residential development and construction loans of 9.29%, which includes our custom and speculative home construction loans and (v) commercial development and construction loans of 7.17%.

Loans held for sale, consisting of secondary market mortgage loans, totaled $66.37 million, $22.31 million, and $28.23 million at June 30, 2020 and 2019, and December 31, 2019, respectively.

At June 30, 2020 and 2019 and December 31, 2019, $3.08 million, $3.32 million and $5.15 million, respectively, are valued using the lower of cost or fair value method and the remaining amounts are valued under the fair value option method.

See notes 4 and 5 to the consolidated financial statements (unaudited) related to the change to mandatory delivery for sales in the secondary mortgage market.

At September 30, 2020, our real estate loans represented approximately 62.10% of our loan portfolio and were comprised of (i) 1-4

family residence loans of 38.94%, (ii) commercial real estate loans of 29.54%, (iii) other loans, which includes ranches, hospitals and universities, of 14.76%, (iv) residential development and construction loans of 9.21%, which includes our custom and speculative home construction loans and (v) commercial development and construction loans of 7.55%.

Loans held-for-sale,

consisting of secondary market mortgage loans, totaled $101.06 million, $40.50 million, and $28.23 million at September 30, 2020 and 2019, and December 31, 2019, respectively.

At September 30, 2020 and 2019 and December 31, 2019, $6.39 million, $764 thousand and $5.15 million, respectively, are valued using the lower of cost or fair value method and the remaining amounts are valued under the fair value option method.

Asset Quality

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Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful.

Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were $39.72 million at June 30, 2020, as compared to $27.86 million at June 30, 2019 and $25.77 million at December 31, 2019.

As a percent of loans and foreclosed assets, these assets were 0.75% at June 30, 2020, as compared to 0.69% at June 30, 2019 and 0.61% at December 31, 2019.

As a percent of total assets, these assets were 0.38% at June 30, 2020, as compared to 0.35% at June 30, 2019 and 0.31% at December 31, 2019.

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 June 30, 2020.

Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were $43.05 million at September 30, 2020, as compared to $27.21 million at September 30, 2019 and $25.77 million at December 31, 2019.

As a percent of loans held-for-investment

and foreclosed assets, these assets were 0.81% at September 30, 2020, as compared to 0.66% at September 30, 2019 and 0.61% at December 31, 2019.

As a percent of total assets, these assets were 0.41% at September 30, 2020, as compared to 0.34% at September 30, 2019 and 0.31% at December 31, 2019.

We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming at September 30, 2020.

Supplemental Oil and Gas Information

As of June 30, 2020, the Company’s exposure to the oil and gas industry totaled 2.78% of total loans, excluding PPP loans, or $128.14 million, up $8.35 million from December 31, 2019

As of September 30, 2020, the Company’s exposure to the oil and gas industry totaled 2.58% of total loans held-for-investment,

excluding PPP loans, or $118.57 million, down $1.22 million from December 31, 2019 year-end

levels, and consisted (based on collateral supporting the loan) of (i) development and production loans of 10.36%, (ii) oil and gas field servicing loans of 7.82%, (iii) real estate loans of 43.10%, (iv) accounts receivable and inventory of 1.48%, (v) automobile of 7.80% and (vi) other of 29.44%.

The following oil and gas information is as of and for the quarters ended June 30, 2020 and 2019, and December 31, 2019:

The following oil and gas information is as of and for the quarters ended September 30, 2020 and 2019, and December 31, 2019 (in thousands, except percentages):

September 30,

Oil and gas related loans, excluding PPP loans

Oil and gas related loans as a % of total loans, excluding PPP loans

Oil and gas related loans as a % of total loans held-for-investment,

excluding PPP loans

Classified oil and gas related loans

oil and gas related loans

Net charge-offs for oil and gas related loans for quarter/year then ended

Net charge-offs for oil and gas related

loans for quarter/year then ended

Allowance for oil and gas related loans as a % of oil and gas loans

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Industry Exposure.

In addition, at June 30, 2020, loan balances in the retail/restaurant/hospitality industries totaled $338.76 million or 7.34% of the Company’s total loans, excluding PPP loans.

Classified and nonperforming loans for these industries combined at June 30, 2020, totaled $15.84 million and $5.75 million, respectively.

Net charge-offs related to this portfolio totaled $178 thousand and $308 thousand for the three and six-months

ended June 30, 2020, respectively.

Additional information related to the Company’s retail/restaurant/hospitality industries follows below:

In addition, at September 30, 2020, loan balances in the retail/restaurant/hospitality industries totaled $359.02 million or 7.82% of the Company’s total loans held-for-investment,

excluding PPP loans.

Classified and nonperforming loans for these industries combined at September 30, 2020, totaled $28.17 million and $5.69 million, respectively.

Net charge-offs related to this portfolio totaled

$26 thousand and $334 thousand for the three and nine-months ended September 30, 2020, respectively.

Additional information related to the Company’s retail/restaurant/hospitality industries follows below (in thousands, except percentages):

September 30,

Restaurant loans

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Total Retail/Restaurant/Hospitality loans, excluding PPP loans

Retail/Restaurant/Hospitality as a % of total loans, excluding PPP loans

Retail/Restaurant/Hospitality loans as a % of total loans

held-for-investment

, excluding PPP loans

Classified Retail/Restaurant/Hospitality loans

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

September 30,

Loans still accruing and past due 90 days or more

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Total nonperforming assets

As a % of loans and foreclosed assets

As a % of loans held-for-investment

and foreclosed assets

As a % of total assets

Includes $7.28 million, $464 thousand and $251 thousand of purchased credit impaired loans as of June 30, 2020 and 2019, and December 31, 2019, respectively.

Includes $5.98 million, $342 thousand and $251 thousand of purchased credit impaired loans as of September 30, 2020 and 2019, and December 31, 2019, respectively.

Other troubled debt restructured loans of $4.48 million, $3.98 million and $4.79 million, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in non-accrual

loans at June 30, 2020 and 2019, and December 31, 2019, respectively.

loans at September 30, 2020 and 2019, and December 31, 2019, respectively.

We record interest payments received on non-accrual

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For a discussion of our methodology, see note 1 to our notes to the consolidated financial statements (unaudited).

The provision for loan losses was $8.70 million for the second quarter of 2020, as compared to $600 thousand for the second quarter of 2019.

The provision for loan losses was $18.55 million for the six-month

period ended June 30, 2020 as compared to $1.57 million for the same period in 2019.

The provision for credit losses was $9.00 million, including $1.50 million in provision for unfunded commitments for the third quarter of 2020, as compared to $450 thousand for the third quarter of 2019.

The provision for credit losses was $27.55 million for the nine month period ended September 30, 2020 as compared to $2.02 million for the same period in 2019.

The provision for loan losses in 2020 reflects primarily the stress on our loan portfolio from the increase in unemployment and economic effects of the COVID-19

pandemic and the decrease in oil and gas prices.

As a percent of average loans, net loan charge-offs were 0.01% for the second quarter of 2020, as compared to 0.04% for the second quarter of 2019.

As a percentage of average loans, net loan charge-offs were 0.09% for the first six months of 2020, as compared to 0.05% for the first six months of 2019.

The allowance for loan losses as a percent of total loans was 1.30% as of June 30, 2020, as compared to 1.28% as of June 30, 2019 and 1.24% as of December 31, 2019.

While we note that our allowance for loan losses as a percentage of total loans has remained relatively flat, we acquired $455.18 million in loans in the TB&T Bancshares, Inc.

pandemic and the volatility of oil and gas prices.

As a percent of average loans, net loan charge-offs were 0.03% for the third quarter of 2020, as compared to 0.04% for the third quarter of 2019.

As a percentage of average loans, net loan charge-offs were 0.07% for the first nine months of 2020, as compared to 0.04% for the first nine months of 2019.

The allowance for loan losses as a percent of loans held-for-investment

was 1.44% as of September 30, 2020, as compared to 1.27% as of September 30, 2019 and 1.25% as of December 31, 2019.

In addition, management notes the acquisition of $455.18 million in loans in the TB&T Bancshares, Inc.

acquisition that were recorded at fair value, including credit considerations, with no corresponding allowance for loan losses being recorded.

The Company recorded a $7.65 million discount on the acquired loan portfolio at acquisition date and such amounts totaled $6.69 million at June 30, 2020.

The Company recorded a $7.65 million discount on the acquired loan portfolio at acquisition date and such amounts totaled $5.04 million at September 30, 2020.

Table 7 - Loan Loss Experience and Allowance for Loan Losses (in thousands, except percentages):

Three-Months Ended

Six Months Ended

September 30,

Nine-Months Ended

September 30,

Allowance for loan losses at period-end

Loans held for investment at period-end

Average total loans for period

Loans held-for-investment

at period-end

Average loans for period

Net charge-offs/average loans (annualized)

Allowance for loan losses/period-end

loans held-for-investment

Allowance for loan losses/non-accrual

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Interest-Bearing Demand Deposits in Banks.

At June 30, 2020, our interest-bearing deposits in banks were $196.43 million compared to $129.61 million at June 30, 2019 and $47.92 million at December 31, 2019, respectively.

At June 30, 2020, interest-bearing deposits in banks included $196.12 million maintained at the Federal Reserve Bank of Dallas and $302 thousand on deposit with the Federal Home Loan Bank of Dallas (“FHLB”).

At September 30, 2020, our interest-bearing deposits in banks were $58.93 million compared to $31.41 million at September 30, 2019 and $47.92 million at December 31, 2019, respectively.

At September 30, 2020, interest-bearing deposits in banks included $58.56 million maintained at the Federal Reserve Bank of Dallas and $369 thousand on deposit with the FHLB.

Available-for-Sale

At June 30, 2020, securities with a fair value of $4.12 billion were classified as securities available-for-sale.

At September 30, 2020, securities with a fair value of $4.43 billion were classified as securities available-for-sale.

As compared to December 31, 2019, the available-for-sale

portfolio at June 30, 2020

reflected (i) an increase in U.S.

Treasury securities of $103 thousand, (ii) an increase of $661.30 million in obligations of states and political subdivisions, (iii) a decrease of $139 thousand in corporate bonds and other, and (iv) an increase of $44.29 million in mortgage-backed securities.

We have seen an increase in our purchases of state and political subdivisions bonds in the first half of 2020 due to favorable shifts in tax equivalent yields.

portfolio at September 30, 2020

reflected (i) a decrease in U.S.

Treasury securities of $10.02 million, (ii) an increase of $1.08 billion in obligations of states and political subdivisions, (iii) a decrease of $139 thousand in corporate bonds and other, and (iv) a decrease of $50.39 million in mortgage-backed securities.

The shift to mortgage-backed securities from obligations of state and political subdivisions was due to the change in the federal income tax rate of 21% from 35% effective January 1, 2018, although we have seen an increase in our purchases of state and political subdivisions bonds in the first nine months of 2020 due to favorable shifts in tax equivalent yields.

Our mortgage related securities are backed by GNMA, FNMA or FHLMC or are collateralized by securities backed by these agencies.

See note 2 to the consolidated financial statements (unaudited) for additional disclosures relating to the investment portfolio at June 30, 2020 and 2019, and December 31, 2019.

See note 2 to the consolidated financial statements (unaudited) for additional disclosures relating to the investment portfolio at September 30, 2020 and 2019, and December 31, 2019.

Table 8 - Maturities and Yields of Available-for-Sale

Securities Held at June 30, 2020 (in thousands, except percentages):

Securities Held at September 30, 2020 (in thousands, except percentages):

by Contractual Maturity

After One Year

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Available-for-Sale:

Treasury securities

Obligations of states and political subdivisions

Corporate bonds and other securities

Mortgage-backed securities

Other securities

All yields are computed on a tax-equivalent

4 unchanged sentences

Maturities of other securities are reported at the earlier of maturity date or call date.

As of June 30, 2020, the investment portfolio had an overall tax equivalent yield of 3.04%, a weighted average life of 4.42 years and modified duration of 3.94 years.

As of September 30, 2020, the investment portfolio had an overall tax equivalent yield of 2.84%, a weighted average life of 4.62 years and modified duration of 4.10 years.

Deposits held by our subsidiary bank represent our primary source of funding.

Total deposits were $8.16 billion as of June 30, 2020, as compared to $6.37 billion as of June 30, 2019 and $6.60 billion as of December 31, 2019.

Table 9 provides a breakdown of average deposits and rates paid for the three and six-month

periods ended June 30, 2020 and 2019, respectively.

Total deposits were $8.29 billion as of September 30, 2020, as compared to $6.40 billion as of September 30, 2019 and $6.60 billion as of December 31, 2019.

Table 9 provides a breakdown of average deposits and rates paid for the three and nine-month periods ended September 30, 2020 and 2019, respectively.

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

Three Months Ended June 30,

Three-Months Ended September 30,

Noninterest-bearing deposits

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Total cost of deposits

Six Months Ended June 30,

Nine-Months Ended September 30,

Noninterest-bearing deposits

7 unchanged sentences

Total cost of deposits

Included in borrowings were federal funds purchased, securities sold under repurchase agreements and advances from the FHLB of $449.22 million, $362.01 million and $381.36 million at June 30, 2020 and 2019 and December 31, 2019, respectively.

Included in borrowings were federal funds purchased, securities sold under repurchase agreements and advances from the FHLB of $503.16 million, $400.16 million and $381.36 million at September 30, 2020 and 2019 and December 31, 2019, 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 borrowings.

The average balance of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were $877.08 million and $378.39 million in the second quarters of 2020 and 2019, respectively.

The weighted average interest rates paid on these borrowings were 0.19% and 0.72% for the second quarters of 2020 and 2019, respectively.

The average balances of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB was $668.84 million and $393.43 million for the six-month

periods ended June 30, 2020 and 2019, respectively.

The weighted average interest rate on these short-term borrowings was 0.28% and 0.72% for the first six months of 2020 and 2019, respectively.

The average balance of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were $482.56 million and $388.24 million in the third quarters of 2020 and 2019, respectively.

The weighted average interest rates paid on these borrowings were 0.08% and 0.85% for the third quarters of 2020 and 2019, respectively.

The average balances of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB was $606.29 million and $391.68 million for the nine-month periods ended September 30, 2020 and 2019, respectively.

The weighted average interest rate on these short-term borrowings was 0.23% and 0.76% for the first nine months of 2020 and 2019, respectively.

Capital Resources

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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 $1.58 billion, or 15.30% of total assets at June 30, 2020, as compared to $1.16 billion or 14.60% of total assets at June 30, 2019 and $1.23 billion, or 14.85% of total assets at December 31, 2019.

Included in shareholders’ equity at June 30, 2020 and 2019 and December 31, 2019, were $151.24 million, $60.57 million and $67.51 million, respectively, in unrealized gains (losses) on investment securities available-for-sale,

Total shareholders’ equity was $1.62 billion, or 15.33% of total assets at September 30, 2020, as compared to $1.21 billion, or 14.85% of total assets at September 30, 2019, and $1.23 billion, or 14.85% of total assets at December 31, 2019.

Included in shareholders’ equity at September 30, 2020 and 2019 and December 31, 2019 were $152.06 million, $73.52 million and $67.51 million, respectively, in unrealized gains on investment securities available-for-sale,

net of related income taxes.

For the second quarter of 2020, total shareholders’ equity averaged $1.54 billion, or 14.68% of average assets, as compared to $1.12 billion, or 14.25% of average assets, during the same period in 2019.

For the six months ended June 30, 2020, total shareholders’ equity averaged $1.51 billion or 15.35%, as compared to $1.10 billion or 14.04% of total assets during the same period in 2019.

For the third quarter of 2020, total shareholders’ equity averaged $1.60 billion, or 15.27% of average assets, as compared to $1.18 billion, or 14.84% of average assets, during the same period in 2019.

For the nine-months ended September 30, 2020, total shareholders’ equity averaged $1.54 billion, or 15.32%, as compared to $1.12 billion, or 14.31% of total assets during the same period in 2019.

Banking regulators measure capital adequacy by means of the risk-based capital ratios and the leverage ratio under the Basel III regulatory capital framework 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.

commitments and contingencies according to prescribed risk categories.

Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios.

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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 June 30, 2020 and 2019, and December 31, 2019, we had a total capital to risk-weighted assets ratio of 22.03%, 21.16% and 21.13%, a Tier 1 capital to risk-weighted assets ratio of 20.78%, 20.04% and 20.06%;

As of September 30, 2020 and 2019, and December 31, 2019, we had a total capital to risk-weighted assets ratio of 21.82%, 21.14% and 21.13%, a Tier 1 capital to risk-weighted assets ratio of 20.56%, 20.05% and 20.06%;

a common equity Tier 1 to risk-weighted assets ratio of 20.56%, 20.05% and 20.06% and a leverage ratio of 11.65%, 12.58% and 12.60%, respectively.

The regulatory capital ratios as of June 30, 2020 and 2019, and December 31, 2019 were calculated under Basel III rules.

The regulatory capital ratios as of September 30, 2020 and 2019, and December 31, 2019 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:

4 unchanged sentences

Considered Well-

As of June 30, 2020:

As of September 30, 2020:

Total Capital to Risk-Weighted Assets:

6 unchanged sentences

First Financial Bank, N.A

At June 30, 2020, the capital conservation buffer under Basel III has been fully phased-in.

At September 30, 2020, the capital conservation buffer under Basel III has been fully phased-in.

Minimum Capital

3 unchanged sentences

Considered Well-

As of June 30, 2019:

As of September 30, 2019:

Total Capital to Risk-Weighted Assets:

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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 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.

2 unchanged sentences

and maturity characteristics of the existing and projected balance sheet.

As of June 30, 2020, the model simulations projected that 100 and 200 basis point increases in interest rates would result in positive variances in net interest income of 4.43% and 8.86%, respectively, relative to the current financial statement structure over the next twelve months, while a decrease in interest rates of 100 and 200 basis points would result in a negative variance in net interest income of 3.05% and 5.03%, respectively, relative to the current financial statement structure over the next twelve months.

As of September 30, 2020, the model simulations projected that 100 and 200 basis point increases in interest rates would result in positive variances in net interest income of 3.93% and 7.81%, respectively, relative to the current financial statement structure over the next twelve months, while a decrease in interest rates of 100 and 200 basis points would result in a negative variance in net interest income of 4.23% and 6.21%, respectively, relative to the current financial statement structure over the next twelve months.

Our model simulation as of September 30, 2020 indicates that our balance sheet is relatively asset/liability neutral.

These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each year-end

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banks totaling $130.00 million.

At June 30, 2020, no amounts were drawn on these lines of credit.

Our subsidiary bank also has (i) an available a line of credit with the FHLB totaling $1.79 billion at June 30, 2020, secured by portions of our loan portfolio and certain investment securities and (ii) access to the Federal Reserve Bank of Dallas lending program.

At June 30, 2020, the Company had no outstanding advances under these lines of credit.

At September 30, 2020, no amounts were drawn on these federal funds lines of credit.

Our subsidiary bank also has (i) an available line of credit with the FHLB totaling $1.77 billion at September 30, 2020, secured by portions of our loan portfolio and certain investment securities and (ii) access to the Federal Reserve Bank of Dallas lending program.

At September 30, 2020, the Company had $30.00 million in outstanding advances from the FHLB.

The Company renewed its loan agreement, effective June 30, 2019, with Frost Bank.

Under the loan agreement, as renewed and amended, we are permitted to draw up to $25.00 million on a revolving line of

Under the loan agreement, as renewed and amended, we are permitted to draw up to $25.00 million on a revolving line of credit.

Prior to June 30, 2021, interest is paid quarterly at The Wall Street Journal

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The line of credit is unsecured.

Among other provisions in the credit agreement, we must satisfy certain financial covenants during the term of the loan agreement, including, without limitation, covenants that require us to maintain certain capital, tangible net worth, loan loss reserve, non-performing asset and cash flow coverage ratios.

asset and cash flow coverage ratios.

In addition, the credit agreement contains certain operational covenants, which among others, restricts the payment of dividends above 55% of consolidated net income, limits the incurrence of debt (excluding any amounts acquired in an acquisition) and prohibits the disposal of assets except in the ordinary course of business.

Since 1995, we have historically declared dividends as a percentage of our consolidated net income in a range of 37% (low) in 1995 to 53% (high) in 2003 and 2006.

The Company was in compliance with the financial and operational covenants at June 30, 2020.

There was no outstanding balance under the line of credit as of June 30, 2020 or December 31, 2019.

The Company was in compliance with the financial and operational covenants at September 30, 2020.

There was no outstanding balance under the line of credit as of September 30, 2020 and 2019, or December 31, 2019.

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 $89.85 million at June 30, 2020, investment securities which totaled $3.62 million at June 30, 2020 and mature over 9 to 10 years, available dividends from our subsidiaries which totaled $257.09 million at June 30, 2020, 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.

Available cash and cash equivalents at our parent company which totaled $113.72 million at September 30, 2020, investment securities which totaled $3.60 million at September 30, 2020 and mature over 9 to 10 years, available dividends from our subsidiaries which totaled $270.17 million at September 30, 2020, 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.

2 unchanged sentences

These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs.

As of June 30, 2020, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

As of September 30, 2020, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

We are monitoring closely the economic impact of the coronavirus on our customers and the communities we serve.

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Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheets.

At September 30, 2020, the Company’s reserve for unfunded commitments totaled $2.30 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.

10 unchanged sentences

The average collateral value held on letters of credit usually exceeds the contract amount.

Table 10 – Commitments as of June 30, 2020 (in thousands):

Table 10 – Commitments as of September 30, 2020 (in thousands):

Total Notional

5 unchanged sentences

sheet arrangements or transactions with unconsolidated, special purpose entities that would expose us to liability that is not reflected on the face of the financial statements.

Amounts related to interest rate lock commitments are not included in this table.

Parent Company Funding

2 unchanged sentences

We anticipate that our recurring cash sources will continue to include dividends and management fees from our subsidiaries.

At June 30, 2020, approximately $257.09 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 $5.00 million and $4.00 million for the six-month

periods ended June 30, 2020 and 2019, respectively.

At September 30, 2020, $270.17 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 $46.00 million and $44.50 million for the nine-month periods ended September 30, 2020 and 2019, respectively.

Our long-term dividend policy is to pay cash dividends to our shareholders of approximately 40% of annual net earnings while maintaining adequate capital to support growth.

We are also restricted by a loan covenant within our line of credit agreement with Frost Bank to dividend no greater than 55% of net income, as defined in such loan agreement.

The cash dividend payout ratios have amounted to 39.17% and 38.00% of net earnings for the first six months of 2020 and 2019, respectively.

The cash dividend payout ratios have amounted to 37.62% and 37.94% of net earnings for the first nine months of 2020 and 2019, respectively.

Given our current capital position and projected earnings and asset growth rates, we do not anticipate any significant change in our current dividend policy.

On April 28, 2020 the Board of Directors declared a $0.13 per share cash dividend for the second quarter of 2020, an 8.33% increase over 2019.

Our bank subsidiary, which is a national banking association and a member of the Federal Reserve System, is required by federal law to obtain the prior approval of the OCC to declare and pay dividends if the total of all dividends declared in any calendar year would exceed the total of (1) such bank’s net profits (as defined and interpreted by regulation) for that year plus (2) its retained net profits (as defined and interpreted by regulation) for the preceding two calendar years, less any required transfers to surplus.

7 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis