What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-02 compared with 2021-05-05 · 200 added, 139 removed, 474 unchanged (42% of the section changed)

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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, 2020 and the following:

for the year ended December 31, 2020, under the heading “Risk Factors,” and the following:

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

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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.

The Company assisted borrowers in the second round of the Paycheck Protection Program (“PPP”) under the December 2020 Bipartisan-Bicameral Omnibus COVID Relief Deal through the expiration of the program on May 31, 2021.

Through June 30, 2021, we had funded approximately 9,700 PPP loans in total from both the first and second rounds of PPP loans totaling $970.87 million.

At June 30, 2021, the Company’s total PPP loans had outstanding net balance of $320.39 million following repayments and forgiveness by the SBA.

We did not participate in the PPP Facility program.

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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.

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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.

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

On July 27, 2021, the Company’s Board of Directors renewed the prior authorization and authorized the repurchase of up to 5.00 million common shares through July 31, 2023.

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.

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

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.

Through June 30, 2021, the Company repurchased and retired 324.80 thousand 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.

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paid a special dividend totaling $1.92 million to its shareholders prior to the closing of this transaction.

At the closing, Brazos Merger Sub., Inc., a wholly-owned subsidiary of the Company, merged into TB&T Bancshares Inc., with TB&T Bancshares, Inc.

At the closing, Brazos Merger Sub., Inc., a wholly-owned subsidiary of the Company, merged into TB&T

Bancshares Inc., with TB&T Bancshares, Inc.

surviving as a wholly-owned subsidiary of the Company.

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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.

The Company elected to participate in the first and second rounds of PPP loan program processing a total of 9,709 loans and funded $970.87 million from March 31, 2020 through June 30, 2021.

The Company has received fees totaling approximately $40.16 million and incurred incremental direct origination costs of $3.62 million related to its participation in the PPP loan program from March 31, 2020 through June 30, 2021, both of which have been deferred and are being amortized over the shorter of the repayment period or the contractual life of these loans.

During the first six months of 2021, the Company recognized $11.49 million in interest income related to PPP loan fees.

The remainder of the PPP loan deferred fees totaled approximately $13.72 million at June 30, 2021, including approximately $12.62 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

PPP Amounts as of June 30, 2021

June 30, 2021

the Six-Months

June 30, 2021

Implementation of New Accounting Standard for Allowance for Credit Losses

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Performance Summary

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 earnings for the second quarter of 2021 were $56.38 million, up $2.91 million or 5.44%, when compared with earnings of $53.47 million for the second quarter of 2020.

Diluted earnings per share was $0.39 for the second quarter of 2021 compared with $0.38 in the same quarter a year ago.

The increase in earnings for the second quarter of 2021 over the second quarter of 2020 was primarily attributable to the negative provision for credit losses.

The return on average assets was 1.89% for the second quarter of 2021, as compared to 2.06% for the second quarter of 2020.

The return on average equity was 13.38% for the second quarter of 2021 as compared to 14.00% for the second quarter of 2020.

Net earnings for the six-month

period ended June 30, 2021 were $113.30 million compared to $90.70 million for the same period in 2020.

Diluted earnings per share for the first six months of 2021 were $0.79 compared to $0.64 for the same period in 2020.

The return on average assets was 1.97% for the first six months of 2021 as compared to 1.86% for the same period a year ago.

The return on average equity was 13.61% for the first six months of 2021 as compared to 12.09% for the first six months of 2020.

Net Interest Income

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Tax-equivalent

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.

net interest income was $94.58 million for the second quarter of 2021, as compared to $92.14 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.

Average earning assets were $11.30 billion for the second quarter of 2021, as compared to $9.80 billion during the second quarter of 2020.

The increase of $1.50 billion in average earning assets in 2021 when compared to 2020 was primarily a result of increases of tax-exempt

securities of $661.59 million, interest-bearing deposits in nonaffiliated banks of $444.21 million and taxable securities of $256.85 million when compared to June 30, 2020 balances.

Average interest-bearing liabilities were $6.76 billion for the second quarter of 2021, as compared to $6.01 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.

The yield on earning assets decreased 48 basis points while the rate paid on interest-bearing liabilities decreased ten basis points for the second quarter of 2021 compared to the second quarter of 2020.

Tax-equivalent

net interest income was $186.95 million for the first six months of 2021 as compared to $174.87 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.

Average earning assets increased $1.78 billion for the first six months of 2021 over the same period in 2020.

Average tax exempt securities increased $841.94 million, interest-bearing deposits in nonaffiliated banks increased $426.95 million and loans increased $382.46 million, respectively, for the first six months of 2021 over the first six months of 2020.

Average interest-bearing liabilities increased $877.55 million for the first six months of 2021, as compared to the same period in 2020 primarily resulting from our customers depositing their PPP loan amounts into our Bank and internal organic growth.

The yield on earning assets decreased 55 basis points while the rate paid on interest-bearing liabilities decreased 25 basis points for the first six months of 2021 compared to the first six months of 2020.

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 March 31, 2021

Compared to Three-Months Ended March 31, 2020

Three-Months Ended June 30, 2021

Compared to Three-Months Ended June

Ended June 30, 2021

Compared to Six-Months Ended June 30,

Change Attributable to

Short-term investments

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loans are included in loans.

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.

The net interest margin, on a tax equivalent basis, was 3.36% for the second quarter of 2021, a decrease of 42 basis points from the same period in 2020.

The net interest margin for the first six months of 2021 was 3.45%, a decrease of 39 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.

Additionally, the net interest margin was particularly impacted in the second quarter of 2021 as a result of the overall level of excess liquidity, which totaled $844.59 million at June 30, 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.

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

Three-Months Ended March 31,

Three-Months Ended June 30,

Short-term investments (1)

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loans are included in loans.

Ended June 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 credit 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

Short-term investments are comprised of federal funds sold, interest-bearing deposits in banks and interest-bearing time deposits in banks.

Average balances include unrealized gains and losses on available-for-sale

Computed on a tax-equivalent

basis assuming a marginal tax rate of 21%.

loans are included in loans.

Noninterest Income

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.

Noninterest income for the second quarter of 2021 was $34.67 million, a decrease of $2.25 million, or 6.08%, as compared to the same quarter of 2020.

Increases in certain categories of noninterest income included (1) trust fees of $1.73 million and (2) ATM, interchange and credit card fees of $1.80 million when compared to the first quarter of 2020.

Mortgage related income decreased by $5.39 million when compared to the second quarter of 2020 due to a decline in the overall pipeline volumes to $139.63 million at June 30, 2021 from $194.09 million at June 30, 2020.

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.

The fair value of trust assets managed, which are not reflected in our consolidated balance sheets, totaled $8.06 billion at June 30, 2021, up 18.88% when compared to $6.78 billion at June 30, 2020.

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.

Noninterest income for the six-month

period ended June 30, 2021 was $69.55 million, an increase of $3.90 million compared to the same period in 2020.

ATM, interchange and credit card fees increased $3.08 million, or 19.94%, to $18.53 million compared with $15.45 million in the same period last year due to continued growth in debit cards.

Trust fees increased $2.59 million to $16.99 million for the six-months

ended 2021 compared to the same period of 2020.

The fair value of Trust assets managed increased to $8.06 billion at June 30, 2021 when compared with $6.78 billion at June 30, 2020.

Offsetting these increases was a decline in gain on the sale of available-for-sale

securities of $2.76 million in the for the first six-months

of 2021 when compared to the same period of 2020.

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 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.

At June 30, 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.

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Noninterest Expense

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.

Total noninterest expense for the second quarter of 2021 was $59.37 million, an increase of $6.05 million, or 11.35%, 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

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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 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.

Our efficiency ratio for the second quarter of 2021 was 45.94% compared to 41.32% for the same quarter in 2020.

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

Salaries, commissions and employee benefits for the second quarter of 2021 totaled $35.05 million, compared to $30.81 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) increases in incentive compensation and profit sharing expenses and (iii) the impact of the deferral of $3.62 million compensation expenses related to PPP loan origination costs in the second quarter of 2020.

All other categories of noninterest expense for the second quarter of 2021 totaled $24.33 million, up from $22.51 million in the same quarter a year ago.

Total noninterest expense for the first six months of 2021 was $117.10 million, an increase of $8.46 million when compared to $108.64 million in the same period in 2020.

Our efficiency ratio for the first six months of 2021 was 45.65%, compared to 45.17% for the same period in 2020.

Salaries, commissions and employee benefits for the first six months of 2021 totaled $69.98 million, an increase of $9.52 million when compared to the same period in 2020.

The increase was primarily driven by (i) annual pay increases that were effective March 1, 2021, (ii) higher mortgage related commission for the first six months of 2021 and (iii) the deferral of $3.62 million PPP origination costs in the first six months of 2020.

All other categories of noninterest expense for the first six months of 2021 totaled $47.12 million, a decrease of $1.06 million when compared to the same period of 2020.

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

Table 4 - Noninterest Expense (in thousands):

Three-Months Ended March 31,

Three-Months Ended June 30,

Ended June 30,

Salaries and commissions

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

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

As of June 30, 2021, total loans held-for-investment

were $5.30 billion, an increase of $133.57 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.

During the second quarter of 2021, $243.28 million of PPP loans originated in 2020 were forgiven and $50.74 million of new PPP loans were originated.

Total PPP loans outstanding were $320.39 million at June 30, 2021, which are included in the Company’s commercial loan totals.

PPP loan balances accounted for $482.00 million in average balances for the quarter ended June 30, 2021.

At June 30, 2021, approximately $13.72 million of deferred loan fees related to PPP loans, including approximately $12.62 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.

2020 balances, total real estate loans increased $239.09 million, total commercial loans decreased $150.25 million, agricultural loans increased $348 thousand and total consumer loans increased $44.38 million.

Loans averaged $5.38 billion for the second quarter of 2021, an increase of $135.73 million from the prior year second quarter average balances.

Loans averaged $5.34 billion for the first six months of 2021, an increase of $382.46 million from the prior year six-month

period 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.

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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.

The loans originated as a result of the Company’s participation in the PPP program, discussed in further detail on page 52, are included in the C&I loan portfolio segment as of June 30, 2021 and December 31, 2020.

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

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Loans held-for-sale,

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.

consisting of secondary market mortgage loans, totaled $61.80 million, $66.37 million, and $83.97 million at June 30, 2021 and 2020, and December 31, 2020, respectively.

At June 30, 2021 and 2020 and December 31, 2020, $5.55 million, $3.08 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 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 $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.

Loans are placed on non-accrual

status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful.

past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were $30.11 million at June 30, 2021, as compared to $39.72 million at June 30, 2020 and $42.90 million at December 31, 2020.

As a percent of loans held-for-investment

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.

and foreclosed assets, these assets were 0.57% at June 30, 2021, as compared to 0.76% at June 30, 2020 and 0.83% at December 31, 2020.

As a percent of total assets, these assets were 0.24% at June 30, 2021, as compared to 0.38% at June 30, 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 June 30, 2021.

Supplemental Oil and Gas Information

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

As of June 30, 2021, the Company’s exposure to the oil and gas industry totaled 2.07% of total loans held-for-investment,

excluding PPP loans, or $103.17 million, down $3.07 million 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 12.20%, (ii) oil and gas field servicing loans of 5.77%, (iii) real estate loans of 55.64%, (iv) accounts receivable and inventory of 3.53%, (v) automobile of 7.40% and (vi) other of 15.46%.

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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):

The following oil and gas information is as of and for the quarters ended June 30, 2021 and 2020, and the year ended December 31, 2020 (in thousands, except percentages):

Oil and gas related loans, excluding PPP loans

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Classified oil and gas related loans

Nonaccrual oil and gas related loans

oil and gas related loans

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

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Industry Exposure.

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,

In addition, at June 30, 2021, loan balances in the retail/restaurant/hospitality industries totaled $483.13 million or 9.69% of the Company’s total loans held-for-investment,

excluding PPP loans.

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.

These loans comprised $42.64 million of classified loans, including $5.60 million in non-accrual

There were no net charge-offs related to this portfolio for the three or six months ended June 30, 2021.

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

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Classified Retail/Restaurant/Hospitality loans

Nonaccrual Retail/Restaurant/Hospitality loans

Retail/Restaurant/Hospitality loans

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

Table 6 – Non-accrual,

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

Loans still accruing and past due 90 days or more

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As a % of total assets

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.

Troubled debt restructured loans of $7.31 million, $7.28 million and $7.41 million, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in non-accrual

loans at June 30, 2021 and 2020, and December 31, 2020, 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 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.

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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 provision for credit losses for the second quarter of 2021 was a reversal of $1.21 million, which was made up of a reversal of provision for loan losses of $1.04 million combined with a reversal of $167 thousand of provision for unfunded commitments for the second quarter of 2021, as compared to $8.70 million for the second quarter of 2020.

The provision for credit losses for the six months ended June 30, 2021 was a reversal of $3.20 million, which was made up of a reversal of provision for loan losses of $4.47 million offset by a $1.27 million provision for unfunded commitments, as compared to $18.55 million for the same period in 2020.

The net reversal of the Company’s 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 recoveries were 0.02% for the second quarter of 2021, as compared to net charge-offs of 0.01% for the second 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.

was 1.17% as of June 30, 2021, as compared to 1.31% as of June 30, 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.

excluding PPP loans, was 1.25% as of June 30, 2021, as compared to 1.52% as of June 30, 2020 and 1.42% as of December 31, 2020.

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

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Average loans for period

Net charge-offs/average loans (annualized)

Net charge-offs (recoveries)/average loans (annualized)

Allowance for loan losses/period-end

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Interest-Bearing Demand Deposits in Banks.

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.

At June 30, 2021, our interest-bearing deposits in banks were $654.53 million compared to $196.43 million at June 30, 2020 and $517.97 million at December 31, 2020, respectively.

At June 30, 2021, interest-bearing deposits in banks included $654.03 million maintained at the Federal Reserve Bank of Dallas and $504 thousand on deposit with the FHLB.

Available-for-Sale

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

At June 30, 2021, securities with a fair value of $5.58 billion were classified as securities available-for-sale.

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

portfolio at March 31, 2021

portfolio at June 30, 2021

reflected (i) an increase of $188.21 million in obligations of states and political subdivisions, (ii) an increase of $33.25 million in corporate bonds and other, and (iii) an increase of $963.56 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 March 31, 2021 and 2020, and December 31, 2020.

See Note 2 to the consolidated financial statements (unaudited) for additional disclosures relating to the investment portfolio at June 30, 2021 and 2020, and December 31, 2020.

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

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

Securities Held at June 30, 2021 (in thousands, except percentages):

Maturing by Contractual Maturity

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

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.

As of June 30, 2021, the investment portfolio had an overall tax equivalent yield of 2.39%, a weighted average life of 4.87 years and modified duration of 4.38 years.

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

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.

Total deposits were $9.78 billion as of June 30, 2021, as compared to $8.16 billion as of June 30, 2020 and $8.68 billion as of December 31, 2020.

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

periods ended June 30, 2021 and 2020, respectively.

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

Three-Months Ended March 31,

Three-Months Ended June 30,

Noninterest-bearing deposits

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Total cost of deposits

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.

Ended June 30,

Noninterest-bearing deposits

Interest-bearing deposits:

Interest-bearing checking

Savings and money market accounts

Time deposits under $250,000

Time deposits of $250,000 or more

Total interest-bearing deposits

Total average deposits

Total cost of deposits

Included in borrowings were federal funds purchased, securities sold under repurchase agreements and advances from the FHLB of $549.97 million, $449.22 million and $430.09 million at June 30, 2021 and 2020 and December 31, 2020, respectively.

Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the short-term borrowings.

The average 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.

The average balance of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were $527.67 million and $877.08 million in the second quarters of 2021 and 2020, respectively.

The weighted average interest rates paid on these borrowings were 0.07% and 0.19% for the second quarters of 2021 and 2020, respectively.

The average balance of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were $492.34 million and $668.84 million for the six-months

ended June 30, 2021 and 2020, respectively.

The weighted average interest rates paid on these borrowings were 0.08% and 0.28% for the six-month

periods ended June 30, 2021 and 2020, 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 $1.67 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,

Total shareholders’ equity was $1.72 billion, or 13.95% of total assets at June 30, 2021, as compared to $1.58 billion, or 15.30% of total assets at June 30, 2020, and $1.68 billion, or 15.39% of total assets at December 31, 2020.

Included in shareholders’ equity at June 30, 2021 and 2020 and December 31, 2020 were $136.49 million, $151.24 million and $170.40 million, respectively, in unrealized gains on investment securities available-for-sale,

net of related income taxes.

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.

For the second quarter of 2021, total shareholders’ equity averaged $1.69 billion, or 14.09% of average assets, as compared to $1.54 billion, or 14.68% of average assets, during the same period in 2020.

For the first six months of 2021, total shareholders’ equity averaged $1.68 billion, or 14.44% of average assets, as compared to $1.51 billion, or 15.35% 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.

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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 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%;

As of June 30, 2021 and 2020, and December 31, 2020, we had a total capital to risk-weighted assets ratio of 21.12%, 22.03% and 22.03%, a Tier 1 capital to risk-weighted assets ratio of 20.04%, 20.78% and 20.79%;

a common equity Tier 1 to risk-weighted assets ratio of 20.04%, 20.78% and 20.79% and a leverage ratio of 11.10%, 11.25% and 11.86%, respectively.

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 as of June 30, 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:

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Required-Basel III

Fully Phased-In*

Required to be

Considered Well-

As of March 31, 2021:

As of June 30, 2021:

Total Capital to Risk-Weighted Assets:

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First Financial Bank, N.A

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

Minimum Capital

Required-Basel III

Fully Phased-In*

Required to be

Considered Well-

As of March 31, 2020:

As of June 30, 2020:

Total Capital to Risk-Weighted Assets:

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Minimum Capital

Required Under

Basel III Phase-In

Required Basel III

Required to be

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(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.

The results for the net interest income simulations as of June 30, 2021, June 30, 2020 and December 31, 2020 resulted in an asset sensitive position.

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

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banks totaling $130.00 million.

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.

At June 30, 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 $1.58 billion at June 30, 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 June 30, 2021, the Company had no outstanding advances from the FHLB.

The Company renewed its loan agreement, effective June 30, 2021, with Frost Bank.

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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 March 31, 2021.

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

Since 1995, we have historically declared dividends as a percentage of our consolidated net income in a range of 35% (low) in 2021 to 53% (high) in 2003 and 2006.

The Company was in compliance with the financial and operational covenants at June 30, 2021.

There was no outstanding balance under the line of credit as of June 30, 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 $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.

Available cash and cash equivalents at our parent company which totaled $105.86 million at June 30, 2021, investment securities which totaled $2.54 million at June 30, 2021 and mature over 9 to 10 years, available dividends from our subsidiaries which totaled $316.05 million at June 30, 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.

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

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.

As of June 30, 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.

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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 March 31, 2021, the Company’s reserve for unfunded commitments totaled $6.92 million which is recorded in other liabilities.

At June 30, 2021, the Company’s reserve for unfunded commitments totaled $6.75 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.

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We evaluate each customer’s creditworthiness on a case-by-case

The amount of collateral obtained, as we deem necessary upon extension of credit, is based on our credit evaluation of the counterparty.

The amount of collateral obtained, as we deem necessary upon extension of credit, is based

on our credit evaluation of the counterparty.

Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment and income-producing commercial properties.

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

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

Table 10 – Commitments as of June 30, 2021 (in thousands):

Total Notional

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

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.

At June 30, 2021, $316.05 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 $9.00 million and $5.00 million for the six-month

periods ended June 30, 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 32.50% and 45.82% of net earnings for the first three months of 2021 and 2020, respectively.

The cash dividend payout ratios have amounted to 35.18% and 39.17% of net earnings for the first six 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.

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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