What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-05 compared with 2020-11-04 · 239 added, 321 removed, 374 unchanged (60% of the section changed)

7 unchanged sentences

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 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;

effect of the coronavirus (COVID-19)

on our Company, the communities where we have our branches, the state of Texas and the United States, related to the economy and overall financial stability;

impact of reduction in interchange fees if assets exceed $10 billion;

government and regulatory responses to the COVID-19

for the year ended December 31, 2020 and the following:

general economic conditions, including our local, state and national real estate markets and employment trends;

effect of the coronavirus (“COVID”) on our Company, the communities where we have our branches, the state of Texas and the United States, related to the economy and overall financial stability;

government and regulatory responses to the COVID pandemic;

effect of severe weather conditions, including hurricanes, tornadoes, flooding and droughts;

volatility and disruption in national and international financial and commodity markets and oil and gas prices;

volatility and disruption in national and international financial and commodity markets;

government intervention in the U.S.

financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by the federal banking authorities and the Tax Cuts and Jobs Act;

political instability;

financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau (“CFPB”), the capital ratios of Basel III as adopted by the federal banking authorities and the Tax Cuts and Jobs Act;

political and racial instability;

the ability of the Federal government to address the national economy;

1 unchanged sentence

the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”);

the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;

the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board (“PCAOB”), the Financial Accounting Standards Board (“FASB”) and other accounting standard setters;

the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we and our subsidiaries must comply;

changes in the demand for loans;

fluctuations in the value of collateral securing our loan portfolio and in the level of the allowance for loan losses;

potential risk of environmental liability associated with lending activities;

the accuracy of our estimates of future loan losses;

changes in the demand for loans, including loans originated for sale in the secondary market;

fluctuations in the value of collateral securing our loan portfolio and in the level of the allowance for credit losses;

the accuracy of our estimates of future credit losses;

the accuracy of our estimates and assumptions regarding the performance of our securities portfolio;

13 unchanged sentences

changes in our compensation and benefit plans;

acts of God, pandemic, war or terrorism;

acts of God or of war or terrorism;

potential risk of environmental liability associated with lending activities;

our success at managing the risk involved in the foregoing items.

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 strategy 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).

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

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.

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, 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.

Our largest expense are salaries and related employee benefits.

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

The following discussion and analysis of 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

as well as those included in the Company’s 2020 Annual Report on Form 10-K.

Coronavirus Update/Status

The coronavirus (COVID-19)

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

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;

Provided extensions and deferrals to loan customers effected by COVID-19

provided such customers were not 30 days past due at December 31, 2019;

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

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.

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.

Recent Coronavirus Developments

During March 2020, the outbreak of the novel Coronavirus Disease 2019 was recognized as a pandemic by the World Health Organization and a national emergency by the President of the United States.

The spread of COVID has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve across the State of Texas.

National, state and local governmental responses to the pandemic have included orders to close or limit businesses activity not deemed essential and directing individuals to limit their movements and travel, observe social distancing, and shelter in place.

These actions, together with responses to the pandemic by businesses and individuals, have resulted in decreases in commercial and consumer activity.

These responses and restrictions have led to a loss of revenues for certain industries and a sudden increase in unemployment, volatility in oil and gas prices and in business valuations, market downturns and volatility, changes in consumer behaviors, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.

The following is an update on our response through the date of filing:

Currently, the Company is assisting borrowers in the second round of the PPP under the December 2020 Bipartisan-Bicameral Omnibus COVID Relief Deal.

Through March 31, 2021, we had funded approximately 8,500 PPP loans in total from both the first and second rounds of PPP loans totaling $920.13 million.

At March 31, 2021, the Company’s total PPP loans have an outstanding balance of $531.81 million following repayments and forgiveness by the SBA.

We did not participate in the PPP Facility program.

We are continuing to encourage our employees to take the COVID vaccinations when available and allowing employees and customers to wear a mask on an optional basis based on their preferences.

Recent actions taken by the U.S.

government to further mitigate the economic effects of COVID will also have an impact on our financial position and results of operations.

These actions are further discussed below.

During the first quarter of 2021, President Biden signed a number of executive orders relating to stimulus and relief measures.

These orders include, among other things, (i) an extension, through March 31, 2021, of the moratorium on evictions and foreclosures, (ii) an extension, through September 30, 2021, of the deferral of federal student loan payments and interest and (iii) an extension, through June 30, 2021, of certain mortgage forbearance programs and guidelines.

On March 11, 2021, the American Rescue Plan Act of 2021 (the “ARP Act”) was enacted, implementing a $1.9 trillion package of stimulus and relief proposals.

Among other things, the ARP Act provides (i) additional funding for the PPP program and an expansion of the program for the benefit of certain nonprofits, (ii) funding for the Small Business Administration (“SBA”) to make targeted grants for restaurants and similar establishments, (iii) direct cash payments of up to $1,400 to individuals, subject to income provisions, (iv) an increase in the maximum annual Child Tax Credit, subject to income limitation provisions, (v) $300 a week in expanded unemployment insurance lasting through September 6, 2021 and makes $10,200 in unemployment benefits tax free for households, subject to income limitation provisions, (vi) tax relief making any student loan forgiveness incurred between December 31, 2020, and January 1, 2026 non-taxable

income, and (vii) funding to support state and local governments;

schools and higher education;

the Centers for Disease Control;

public transit;

rental assistance;

and airline industry workers.

On March 27, 2021, the COVID-19

Bankruptcy Relief Extension Act of 2021 was enacted, extending the bankruptcy relief provisions enacted in the CARES Act of 2020 bill until March 27, 2022.

These provisions provide financially distressed small businesses and individuals greater access to bankruptcy relief.

On March 30, 2021, the PPP Extension Act of 2021 was enacted, extending the Paycheck Protection Program (“PPP”) from its previous expiration date of March 31, 2021 to June 30, 2021.

Beginning June 1, 2021, the SBA may only process applications submitted prior to that date, and it may not accept any new loan applications.

We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S.

Notwithstanding the foregoing actions, the COVID outbreak could still, among other things, greatly affect our routine and essential operations due to staff absenteeism, particularly among key personnel, further limit access to or result in further closures of our branch facilities and other physical offices, exacerbate operational, technical or security-related risks arising from a remote workforce, and result in adverse government or regulatory agency orders.

The business and operations of our third-party service providers, many of whom perform critical services for our business, could also be significantly impacted, which in turn could impact us.

As a result, we are currently unable to fully assess or predict the extent of the effects of COVID on our operations as the ultimate impact will depend on factors that are currently unknown and/or beyond our control.

Critical Accounting Policies

We prepare consolidated financial statements based on U.S.

GAAP and customary practices in the banking industry.

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.

1 unchanged sentence

and (2) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements.

We deem our most critical accounting policies to be (1) our allowance for loan losses and our provision for loan loss expense and (2) our valuation of securities.

We deem our most critical accounting policies to be (1) our allowance for credit losses and our provision for credit losses and (2) our valuation of financial instruments.

We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period.

Our policy for (1) our allowance for loan losses and our provision for loan loss expense and (2) our valuation of securities is included in note 1 to our notes to consolidated financial statements (unaudited) which begins on page 10.

A discussion of (1) our allowance for credit losses and our provision for credit losses and (2) our valuation of financial instruments is included in Note 1 to our Consolidated Financial Statements beginning on page 10.

Additional detailed information is included in Notes 4 and 5 to our notes to the consolidated financial statements (unaudited) and should be read in conjunction with this analysis.

On April 23, 2019, the Company’s Board of Directors declared a two-for-one

stock split in the form of a 100% stock dividend effective June 3, 2019.

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 nine-months ended September 30, 2019.

Stock Repurchase

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.

Previously, the Board of Directors had authorized the repurchase of up to 2.00 million common shares through September 30, 2020.

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

Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations.

Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase.

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.

Through March 31, 2021, the Company repurchased and retired 324,802 shares (all during the months of March and April of 2020) totaling $8.01 million under this repurchase plan.

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

8 unchanged sentences

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.

The total purchase price of $220.27 million exceeded the estimated fair value of the net assets acquired by $141.92 million and the Company recorded such excess as goodwill.

The balance sheet and results of operations of TB&T Bancshares, Inc.

1 unchanged sentence

See Note 10 to the consolidated financial statements for additional information and disclosure.

Participation in PPP Loans

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.

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

On January 1, 2020, ASU 2016-13

Participation in PPP Loan Program

The Company elected to participate in the first and second rounds of PPP loan program processing a total of 8,546 loans and funded $920.13 million from March 31, 2020 through March 31, 2021.

The Company received fees totaling approximately $26.26 million and incurred incremental direct origination costs of $3.62 million related to the first round of PPP loans from March 31, 2020 through December 31, 2020, 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.

During the first quarter of 2021, the Company recognized $6.25 million in interest income related to PPP loan fees.

The remainder of the PPP loan deferred fees totaled approximately $16 million at March 31, 2021, including approximately $11 million for 2021 originations for the second round of PPP loans.

These remaining deferred fees related to the second round of PPP loans will be amortized over the shorter of the repayment period or the contractual life of 60 months.

Additional information related to the Company’s PPP loan balances are included in the following table (dollars in thousands):

PPP Loans Originated

PPP Loans Outstanding at March 31, 2021

Implementation of New Accounting Standard for Allowance for Credit Losses

On January 1, 2020, Accounting Standards Update (“ASU”) 2016-13,

Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments

, became effective for the Company which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables.

It also applies to off-balance

sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments).

In addition, ASU 2016-13

made changes to the accounting for available-for-sale

Measurement of Credit Losses on Financial Instruments, became effective for the Company.

Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) replaced the previous “incurred loss” model for measuring credit losses with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity

debt securities.

It also applies to off-balance-sheet

(“OBS”, “reserve for unfunded commitments”) credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments).

In addition, ASC 326 made changes to the accounting for available-for-sale

debt securities.

One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale

1 unchanged sentence

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 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.

Under this option, the Company elected to delay implementation of CECL and calculated and recorded the provision for credit losses through the nine-months ended September 30, 2020 under the incurred loss model.

At December 31, 2020, the Company elected to adopt ASC 326, effective as of January 1, 2020, through a transition charge to retained earnings of $589 thousand ($466 thousand net of applicable income taxes), which was reflected in the consolidated financial statements as of and for the year ended December 31, 2020.

This transition adjustment was comprised of a decrease of $619 thousand in allowance for credit losses and an increase of $1.21 million in the reserve for unfunded commitments.

The Company completed its CECL implementation plan by forming a 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;

and system configuration, among other things.

We contracted with a third-party vendor to assist us in the implementation of CECL.

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 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.

Additionally, the adoption and implementation of ASU 2016-13

is not expected to have a significant impact on our regulatory capital ratios.

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

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;

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;

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 September 30, 2020 and the provision for loan losses for the three and nine- months then ended.

The implementation plan included assessment and documentation of processes, internal controls and data sources, model development, documentation and validation, and system configuration, among other things.

The Company contracted with a third-party vendor to assist in the implementation of CECL.

Results of Operations

Performance Summary

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 earnings for the first quarter of 2021 were $56.92 million, up $19.69 million or 52.87%, when compared with earnings of $37.23 million for the first quarter of 2020.

Diluted earnings per share was $0.40 for the first quarter of 2021 compared with $0.26 in the same quarter a year ago.

The increase in earnings for the first quarter of 2021 over the first quarter of 2020 was primarily attributable to the overall growth in net interest income and noninterest income.

The return on average assets was 2.05% for the first quarter of 2021, as compared to 1.63% for the first quarter of 2020.

The return on average equity was 13.83% for the first quarter of 2021 as compared to 10.11% for the first quarter of 2020.

Net Interest Income

3 unchanged sentences

Tax-equivalent

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 $267.25 million for the first nine months of 2020, as compared to $218.83 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 program (see above).

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 $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.

net interest income was $92.37 million for the first quarter of 2021, as compared to $82.74 million for the same period last year.

The increase in 2021 compared to 2020 was largely attributable to the increase in interest-earning assets primarily derived from an increase in investment securities held and the impact of the Company’s participation in the PPP loan program (see above).

Average earning assets were $10.56 billion for the first quarter of 2021, as compared to $8.50 billion during the first quarter of 2020.

The increase of $2.06 billion in average earning assets in 2021 when compared to 2020 was primarily a result of increases of loans of $628.71 million and tax-exempt

securities of $1.02 billion when compared to March 31, 2020 balances.

Average interest-bearing liabilities were $6.37 billion for the first quarter of 2021, as compared to $5.36 billion in the same period in 2020.

The increase in average interest-bearing liabilities primarily resulted from our customers depositing their PPP loan amounts into our Bank and organic growth.

The yield on earning assets decreased 63 basis points while the rate paid on interest-bearing liabilities decreased 43 basis points for the first quarter of 2021 compared to the first quarter of 2020.

Table 1 allocates the change in tax-equivalent

1 unchanged sentence

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

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

Three-Months Ended March 31, 2021

Compared to Three-Months Ended March 31, 2020

Change Attributable to

10 unchanged sentences

basis assuming a marginal tax rate of 21%.

(2) Non-accrual

loans are included in loans.

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.

The net interest margin, on a tax equivalent basis, was 3.55% for the first quarter of 2021, a decrease of 36 basis points from the same period in 2020.

We have continued to experience downward pressures on our net interest margin in 2021 and 2020 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.

Additionally, the net interest margin was particularly impacted in the first quarter of 2021 as a result of the overall level of excess liquidity, which totaled $1.08 billion at March 31, 2021, pending investment.

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.

2 unchanged sentences

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 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

1 unchanged sentence

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

Three-Months Ended September 30,

Short-term investments (1)

Taxable investment securities (2)

investment securities (2)(3)

Total earning assets

Cash and due from banks

Bank premises and equipment, net

Goodwill and other intangible assets, net

Allowance for loan losses

Liabilities and Shareholders’ Equity

Interest-bearing deposits

Short-term borrowings

Total interest-bearing liabilities

Noninterest-bearing deposits

Other liabilities

Total liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest income

Rate Analysis:

Interest income/earning assets

Interest expense/earning assets

Net interest margin

Nine-Months Ended September 30,

Three-Months Ended March 31,

Short-term investments (1)

5 unchanged sentences

Goodwill and other intangible assets, net

Allowance for loan losses

Allowance for credit losses

Liabilities and Shareholders’ Equity

18 unchanged sentences

Noninterest Income

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 $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.

Noninterest income for the first quarter of 2021 was $34.88 million, an increase of $6.14 million, or 21.38%, as compared to the same quarter of 2020.

Increases in certain categories of noninterest income included (1) real estate mortgage operations income of $6.04 million, (2) ATM, interchange and credit card fees of $1.28 million and (3) trust fees of $862 thousand when compared to the first quarter of 2020.

The mortgage related income increase was mainly 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 increase in ATM, interchange and credit card fees was driven by continued growth in the number of net new accounts and debit cards issued and overall customer utilization.

The increase in trust fees resulted from an increase in assets under management over the prior year.

The fair value of trust assets managed, which are not reflected in our consolidated balance sheets, totaled $7.54 billion at March 31, 2021, up 22.55% when compared to $6.15 billion at March 31, 2020.

Offsetting these increases was a decline in service charge revenue of $1.12 million in the first quarter of 2021 when compared to the first quarter of 2020.

The decrease in service charge revenue was primarily driven by lower overdraft fees in the current quarter as a result of the effects of the pandemic and related stimulus programs.

Additionally, there was also a decline in net gain on sale of available for sale securities of $1.25 million in the first quarter of 2021 when compared to the first quarter of 2020.

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

2 unchanged sentences

Management has estimated the impact of this reduction in ATM and interchange fees to approximate $14.00 million annually (pre-tax)

once the Company reaches $10 billion.

once the Federal Reserve rules apply to the Company.

Federal Reserve requirements stipulate that these rules would go into effect on July 1 st

1 unchanged sentence

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

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.

At March 31, 2021, 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.

However, on November 20, 2020, the federal bank regulatory agencies announced an interim final rule that provides temporary relief for certain community banking organizations that have crossed this threshold as of December 31, 2020 if they had less than $10 billion in assets as of December 31, 2019.

Under the interim final rule, these banks, which includes us, will generally have until 2022 to either reduce their size, or to prepare for the regulatory and reporting standards under the Dodd-Frank Act.

Management will continue to monitor the Company’s balance sheet levels and prepare for the effects of this future loss of debit card income.

Table 3 - Noninterest Income (in thousands):

Three-Months Ended

September 30,

Nine-Months Ended

September 30,

Service charges on deposit accounts

3 unchanged sentences

Net gain on sale of foreclosed assets

Net gain (loss) on sale of assets

Net gain on sale of assets

Interest on loan recoveries

3 unchanged sentences

Brokerage commissions

Wire transfer fees

Miscellaneous income

1 unchanged sentence

Noninterest Expense

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

Total noninterest expense for the first quarter of 2021 was $57.72 million, an increase of $2.41 million, or 4.35%, as compared to the same period of 2020.

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

1 unchanged sentence

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

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.

Our efficiency ratio for the first quarter of 2021 was 45.36% compared to 49.63% for the same quarter in 2020.

The reduction in the Company’s efficiency ratio during the first quarter of 2021 primarily resulted from the growth in the Company’s revenues from higher levels of interest-earning assets while controlling expenses.

Salaries, commissions and employee benefits for the first quarter of 2021 totaled $34.93 million, compared to $29.64 million for the same period in 2020.

The increase over the prior year was primarily driven by (i) annual merit-based pay increases that were effective March 1, 2021, (ii) higher mortgage related commission expenses and (iii) increases in incentive compensation and profit sharing expenses.

All other categories of noninterest expense for the first quarter of 2021 totaled $22.79 million, down from $25.68 million in the same quarter a year ago.

Included in other noninterest expense in the first quarter of 2020 were technology contract termination and conversion related costs totaling $3.81 million related to the TB&T Bancshares, Inc.

Table 4 - Noninterest Expense (in thousands):

Three-Months Ended September 30,

Nine-Months Ended September 30,

Three-Months Ended March 31,

Salaries and commissions

4 unchanged sentences

Total salaries and employee benefits

Loss from partial settlement of pension plan

Net occupancy expense

12 unchanged sentences

Audit and accounting fees

Legal fees and other related costs

Regulatory exam fees

4 unchanged sentences

Our portfolio is comprised of loans made to businesses, professionals, individuals, and farm and ranch operations located in the primary trade areas served by our subsidiary bank.

Real estate loans represent loans primarily for 1-4

family residences and commercial real estate.

The structure of loans in the real estate mortgage area generally provides re-pricing

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

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 $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.

As of March 31, 2021, total loans held-for-investment

were $5.32 billion, an increase of $151.53 million, as compared to December 31, 2020.

During the first quarter of 2021, $167.54 million of PPP loans originated in 2020 were forgiven and $216.68 million of new PPP loans were originated.

Total PPP loans outstanding were $531.81 million at March 31, 2021, which are included in the Company’s commercial loan totals.

PPP loan balances accounted for $499.35 million in average balances for the quarter ended March 31, 2021.

At March 31, 2021, approximately $16 million of deferred loan fees related to PPP loans, including approximately $11 million for 2021 originations, continues to be amortized over the shorter of the repayment period or the contractual life of 24 to 60 months.

As compared to year-end

2020 balances, total real estate loans increased $95.49 million, total commercial loans increased $42.37 million, agricultural loans decreased $4.50 million and total consumer loans increased $18.17 million.

Loans averaged $5.30 billion for the first quarter of 2021, an increase of $628.71 million from the prior year first quarter average balances.

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

For modeling purposes, our loan portfolio segments include C&I, Municipal, Agricultural, Construction and Development, Farm, Non-Owner

Occupied and Owner Occupied CRE, Residential, Consumer Auto and Consumer Non-Auto.

This additional segmentation allows for a more precise pooling of loans with similar credit risk characteristics and credit monitor procedures for the Company’s calculation of its allowance for credit losses.

The loans originated as a result of the Company’s participation in the PPP program, discussed in further detail on page 50, are included in the C&I loan portfolio segment as of March 31, 2021 and December 31, 2020.

Table 5 outlines the composition of the Company’s held-for-investment

loans by portfolio segment.

For all periods prior to December 31, 2020, management has elected to maintain its previously disclosed loan portfolio segments.

Table 5 - Composition of Loans (in thousands):

September 30,

Total loans held-for-investment

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%.

Total Commercial

Construction & Development

Owner Occupied CRE

Total Real Estate

Total Consumer

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.

consisting of secondary market mortgage loans, totaled $65.41 million, $42.03 million, and $83.97 million at March 31, 2021 and 2020, and December 31, 2020, respectively.

At March 31, 2021 and 2020 and December 31, 2020, $3.89 million, $2.38 million and $4.38 million, respectively, are valued using the lower of cost or fair value, and the remaining amounts are valued under the fair value option.

Asset Quality

Our loan portfolio is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by the Office of the Comptroller of the Currency (“OCC”).

Our loan portfolio is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by bank regulatory agencies.

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

Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were $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.

Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were $39.66 million at March 31, 2021, as compared to $40.44 million at March 31, 2020 and $42.90 million at December 31, 2020.

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.

and foreclosed assets, these assets were 0.75% at March 31, 2021, as compared to 0.87% at March 31, 2020 and 0.83% at December 31, 2020.

As a percent of total assets, these assets were 0.33% at March 31, 2021, as compared to 0.42% at March 31, 2020 and 0.39% at December 31, 2020.

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, 2021.

Supplemental Oil and Gas Information

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 September 30, 2020 and 2019, and December 31, 2019 (in thousands, except percentages):

September 30,

As of March 31, 2021, the Company’s exposure to the oil and gas industry totaled 2.20% of total loans held-for-investment,

excluding PPP loans, or $105.26 million, down $976 thousand from December 31, 2020 year-end

These oil and gas loans consisted (based on collateral supporting the loan) of (i) development and production loans of 11.02%, (ii) oil and gas field servicing loans of 5.76%, (iii) real estate loans of 56.71%, (iv) accounts receivable and inventory of 2.47%, (v) automobile of 8.17% and (vi) other of 15.87%.

These have warranted additional scrutiny because of fluctuating oil and gas prices and the COVID pandemic.

The Company instituted additional monitoring procedures for these loans and has classified and downgraded loans as appropriate.

The following oil and gas information is as of and for the quarters ended March 31, 2021 and 2020, and the year ended December 31, 2020 (in thousands, except percentages):

Oil and gas related loans, excluding PPP loans

2 unchanged sentences

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

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

Nonaccrual oil and gas related loans

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

Supplemental COVID-19

Industry Exposure.

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,

In addition, at March 31, 2021, loan balances in the retail/restaurant/hospitality industries totaled $430.20 million or 8.98% 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.

These loans comprised $45.21 million of classified loans, including $6.58 million in nonaccrual loans.

There were no net charge-offs related to this portfolio for the quarter ended March 31, 2021.

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

September 30,

Restaurant loans

1 unchanged sentence

Total Retail/Restaurant/Hospitality loans, excluding PPP loans

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

held-for-investment

Retail/Restaurant/Hospitality loans as a % of total loans held-for-investment,

excluding PPP loans

1 unchanged sentence

Nonaccrual Retail/Restaurant/Hospitality loans

Net Charge-Offs for Retail/Restaurant/Hospitality loans

Table 6 – Non-accrual,

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

September 30,

Net Charge-Offs for Retail/Restaurant/Hospitality loans quarter/year then ended

Table 6 – Nonaccrual, Past Due 90 Days or More and Still Accruing, Restructured Loans and Foreclosed Assets (in thousands, except percentages):

Nonaccrual loans

Loans still accruing and past due 90 days or more

6 unchanged sentences

As a % of total assets

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

We record interest payments received on non-accrual

loans as reductions of principal.

Prior to the loans being placed on non-accrual,

we recognized interest income on impaired loans of approximately $151 thousand for the year ended December 31, 2019.

If interest on these impaired loans had been recognized on a full accrual basis during the year ended December 31, 2019, such income would have approximated $2.39 million.

Troubled debt restructured loans of $6.62 million, $7.77 million and $7.41 million, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in nonaccrual loans at March 31, 2021 and 2020, and December 31, 2020, respectively.

We record interest payments received on nonaccrual loans as reductions of principal.

Prior to the loans being placed on nonaccrual, we recognized interest income on these loans of approximately $255 thousand for the year ended December 31, 2020.

If interest on these loans had been recognized on a full accrual basis during the year ended December 31, 2020, such income would have approximated $4.46 million.

Such amounts for the 2021 and 2020 interim periods were not significant.

Provision and Allowance for Loan Losses

The allowance for loan losses is the amount we determine as of a specific date to be appropriate to absorb probable losses on existing loans in which full collectability is unlikely based on our review and evaluation of the loan portfolio.

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

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 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 $5.04 million at September 30, 2020.

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

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 in which full collectability is unlikely based on our review and evaluation of the loan portfolio.

For a discussion of our methodology, see our accounting policies in Note 1 to the consolidated financial statements (unaudited).

The provision for credit losses was a reversal of $2.00 million, which was made up of a reversal of provision for loan losses of $3.43 million offset by a $1.43 million provision for unfunded commitments for the first quarter of 2021, as compared to $9.85 million for the first quarter of 2020.

The net reversal provision for credit losses in 2021 reflects the continued improvement in the economic outlook for our markets across Texas and overall improvements in asset quality.

As a percent of average loans, net loan charge-offs were 0.01% for the first quarter of 2021, as compared to 0.16% for the first quarter of 2020.

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

was 1.18% as of March 31, 2021, as compared to 1.30% as of March 31, 2020 and 1.29% as of December 31, 2020.

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

excluding PPP loans, was 1.31% as of March 31, 2021, as compared to 1.30% as of March 31, 2020 and 1.42% as of December 31, 2020.

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

Three-Months Ended

September 30,

Nine-Months Ended

September 30,

Allowance for loan losses at period-end

Allowance for credit losses at period-end

Loans held-for-investment

7 unchanged sentences

Interest-Bearing Demand Deposits in Banks.

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.

At March 31, 2021, our interest-bearing deposits in banks were $893.22 million compared to $76.38 million at March 31, 2020 and $517.97 million at December 31, 2020, respectively.

At March 31, 2021, interest-bearing deposits in banks included $892.82 million maintained at the Federal Reserve Bank of Dallas and $403 thousand on deposit with the FHLB.

Available-for-Sale

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

At March 31, 2021, securities with a fair value of $5.11 billion were classified as securities available-for-sale.

As compared to December 31, 2020, the available-for-sale

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.

portfolio at March 31, 2021

reflected (i) an increase of $90.14 million in obligations of states and political subdivisions, (ii) an increase of $32.41 million in corporate bonds and other, and (iii) an increase of $594.05 million in mortgage-backed securities.

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 September 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 March 31, 2021 and 2020, and December 31, 2020.

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

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

by Contractual Maturity

Securities Held at March 31, 2021 (in thousands, except percentages):

Maturing by Contractual Maturity

After One Year

2 unchanged sentences

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 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.

As of March 31, 2021, the investment portfolio had an overall tax equivalent yield of 2.53%, a weighted average life of 5.13 years and modified duration of 4.55 years.

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

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.

Total deposits were $9.41 billion as of March 31, 2021, as compared to $7.21 billion as of March 31, 2020 and $8.68 billion as of December 31, 2020.

Table 9 provides a breakdown of average deposits and rates paid for the three-month periods ended March 31, 2021 and 2020, respectively.

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

Three-Months Ended September 30,

Noninterest-bearing deposits

Interest-bearing deposits:

Interest-bearing checking

Savings and money market accounts

Time deposits under $100,000

Time deposits of $100,000 or more

Total interest-bearing deposits

Total average deposits

Total cost of deposits

Nine-Months Ended September 30,

Three-Months Ended March 31,

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 $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 $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.

Included in borrowings were federal funds purchased, securities sold under repurchase agreements and advances from the FHLB of $548.60 million, $857.87 million and $430.09 million at March 31, 2021 and 2020 and December 31, 2020, respectively.

The average balance of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were $456.62 million and $460.61 million in the first quarters of 2021 and 2020, respectively.

The weighted average interest rates paid on these borrowings were 0.08% and 0.45% for the first quarters of 2021 and 2020, respectively.

Capital Resources

1 unchanged sentence

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 $1.62 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,

Total shareholders’ equity was $1.67 billion, or 13.76% of total assets at March 31, 2021, as compared to $1.53 billion, or 15.73% of total assets at March 31, 2020, and $1.68 billion, or 15.39% of total assets at December 31, 2020.

Included in shareholders’ equity at March 31, 2021 and 2020 and December 31, 2020 were $117.01 million, $123.58 million and $170.40 million, respectively, in unrealized gains on investment securities available-for-sale,

net of related income taxes.

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.

For the first quarter of 2021, total shareholders’ equity averaged $1.67 billion, or 14.83% of average assets, as compared to $1.48 billion, or 16.10% of average assets, during the same period in 2020.

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.

7 unchanged sentences

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 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%;

As of March 31, 2021 and 2020, and December 31, 2020, we had a total capital to risk-weighted assets ratio of 21.47%, 20.65% and 22.03%, a Tier 1 capital to risk-weighted assets ratio of 20.32%, 19.55% and 20.79%;

a common equity Tier 1 to risk-weighted assets ratio of 20.32%, 19.55% and 20.79% and a leverage ratio of 11.55%, 12.49% and 11.86%, respectively.

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 as of March 31, 2021 and 2020, and December 31, 2020 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 September 30, 2020:

As of March 31, 2021:

Total Capital to Risk-Weighted Assets:

6 unchanged sentences

First Financial Bank, N.A

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

At March 31, 2021, the capital conservation buffer under Basel III has been fully phased-in.

Minimum Capital

3 unchanged sentences

Considered Well-

As of September 30, 2019:

As of March 31, 2020:

Total Capital to Risk-Weighted Assets:

25 unchanged sentences

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.

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.

4 unchanged sentences

and maturity characteristics of the existing and projected balance sheet.

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.

The following analysis depicts the estimated impact on net interest income of immediate changes in interest rates at the specified levels for period presented.

Percentage change in net interest income:

Change in interest rates:

(in basis points)

The results for the net interest income simulations as of March 31, 2021 and December 31, 2020 resulted in an asset sensitive position.

Our model simulation as of March 31, 2020, indicated that our balance sheet is relatively asset sensitive.

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

19 unchanged sentences

banks totaling $130.00 million.

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.

At March 31, 2021, there were no amounts drawn on these lines of credit.

Our subsidiary bank also has (i) an available line of credit with the FHLB totaling $1.53 billion at March 31, 2021, secured by portions of our loan portfolio and certain investment securities and (ii) access to the Federal Reserve Bank of Dallas lending program.

At March 31, 2021, the Company had no outstanding advances from the FHLB.

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

7 unchanged sentences

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 September 30, 2020.

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

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 March 31, 2021.

There was no outstanding balance under the line of credit as of March 31, 2021 and 2020, or December 31, 2020.

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 $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.

Available cash and cash equivalents at our parent company which totaled $121.79 million at March 31, 2021, investment securities which totaled $2.54 million at March 31, 2021 and mature over 9 to 10 years, available dividends from our subsidiaries which totaled $260.95 million at March 31, 2021, 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 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.

As of March 31, 2021, 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.

1 unchanged sentence

In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.

Sheet Arrangements.

We are a party to financial instruments with off-balance

sheet risk in the normal course of business to meet the financing needs of our customers.

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 September 30, 2020, the Company’s reserve for unfunded commitments totaled $2.30 million which is recorded in other liabilities.

At March 31, 2021, the Company’s reserve for unfunded commitments totaled $6.92 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.

We generally use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet

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.

7 unchanged sentences

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

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

Table 10 – Commitments as of March 31, 2021 (in thousands):

Total Notional

3 unchanged sentences

Total commercial commitments

We believe we have no other off-balance

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.

We believe we have no other OBS arrangements or transactions with unconsolidated, special purpose entities that would expose us to liability that is not reflected on the face of the financial statements.

The above table does not include balances related to the Company’s IRLC and forward mortgage-backed security trades.

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 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.

At March 31, 2021, $260.95 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 $6.00 million and $2.50 million for the three-month periods ended March 31, 2021 and 2020, 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 37.62% and 37.94% of net earnings for the first nine months of 2020 and 2019, respectively.

The cash dividend payout ratios have amounted to 32.50% and 45.82% of net earnings for the first three months of 2021 and 2020, 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.

8 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