FIRST FINANCIAL BANKSHARES, INC.

(FFIN)
  Report
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
SummaryMost relevantAll NewsAnalyst Reco.Other languagesPress ReleasesOfficial PublicationsSector news

FIRST FINANCIAL BANKSHARES INC Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

11/02/2021 | 01:53pm EDT

Forward-Looking Statements




This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this Form 10-Q, words such as "anticipate,"
"believe," "estimate," "expect," "intend," "indicate," "predict," "project," and
similar expressions, as they relate to us or our management, identify
forward-looking statements. These forward-looking statements are based on
information currently available to our management. Actual results could differ
materially from those contemplated by the forward-looking statements as a result
of certain factors, including, but not limited, to those discussed in Part I,
Item 1A of the Company's Annual Report on Form 10-K for the year ended December
31, 2020, under the heading "Risk Factors," 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;
?
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 ("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;
?
changes in our competitive environment from other financial institutions and
financial service providers;
?
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 ("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, 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;
?
soundness of other financial institutions with which we have transactions;
?
inflation, interest rate, market and monetary fluctuations;
?
changes in consumer spending, borrowing and savings habits;
?
changes in commodity prices (e.g., oil and gas, cattle, and wind energy);
?
our ability to attract deposits and increase market share;
?
changes in our liquidity position;
?
changes in the reliability of our vendors, internal control system or
information systems;
?
cyber attacks on our technology information systems, including fraud from our
customers and external third-party vendors;
?
our ability to attract and retain qualified employees;
?
acquisitions and integration of acquired businesses;
?
the possible impairment of goodwill and other intangibles associated with our
acquisitions;
?
consequences of continued bank mergers and acquisitions in our market area,
resulting in fewer but much larger and stronger competitors;
?
expansion of operations, including branch openings, new product offerings and
expansion into new markets;
?
changes in our compensation and benefit plans;

                                       39

--------------------------------------------------------------------------------


?
acts of God or of war or terrorism;
?
potential risk of environmental liability associated with lending activities;
and
?
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
strategies and liquidity. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this paragraph. We undertake no obligation to
publicly update or otherwise revise any forward-looking statements, whether as a
result of new information, future events or otherwise (except as required by
law).



Introduction



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



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:


?
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. See
Participation in the PPP Loan Program in the following section. 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.
?
COVID continues to be a source of disruption in the U.S. supply chain impacting
the overall economic recovery currently. Continued delays in the supply chain
may cause delays in the future economic recovery in the United States.

Recent actions taken by the U.S. government to further mitigate the economic
effects of COVID may also have an impact on our financial position and results
of operations.

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 generally accepted
accounting principles ("GAAP") and customary practices in the banking industry.
These policies, in certain areas, require us to make significant estimates and
assumptions.

We deem a policy critical if (1) the accounting estimate required us to make
assumptions about matters that are highly uncertain at the time we make the
accounting estimate; 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 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

                                       40

--------------------------------------------------------------------------------


financial statements, but we believe these other policies either do not
generally require us to make estimates and judgments that are difficult or
subjective, or it is less likely they would have a material impact on our
reported results for a given period. A discussion of (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.

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

Acquisition

On September 19, 2019, we entered into an agreement and plan of reorganization
to acquire TB&T Bancshares, Inc. and its wholly-owned bank subsidiary, The Bank
& Trust of Bryan/College Station, Texas. On January 1, 2020, the transaction was
completed. Pursuant to the agreement, we issued 6.28 million shares of the
Company's common shares in exchange for all of the outstanding shares of TB&T
Bancshares, Inc. In addition, in accordance with the plan of reorganization,
TB&T Bancshares, Inc. 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. surviving as a wholly-owned
subsidiary of the Company. Immediately following such merger, TB&T Bancshares,
Inc. was merged into the Company and The Bank & Trust of Bryan/College Station,
Texas was merged into First Financial Bank, N.A., a wholly-owned subsidiary of
the Company. 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. have been included in the financial statements of the
Company effective January 1, 2020. See Note 10 to the consolidated financial
statements for additional information and disclosure.

Participation in PPP Loan Program


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 September 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 the expiration of the program on May 31, 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 nine months of
2021, the Company recognized $19.13 million in interest income related to PPP
loan fees. The remainder of the PPP loan deferred fees totaled approximately
$6.09 million at September 30, 2021, including approximately $6.03 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 Amounts as of September 30, 2021

                                                                                                                       Recognized
                                                                                                    Recognized        Fees During
                                                                                                    Fees During           the
                                                                    Period-                         the Quarter       Nine-Months
                             Number                    Number         End                              Ended             Ended
                               of                        of         Amount,      Un-amortized      September 30,     September 30,
                              Loans       Amount        Loans         Net            Fees              2021               2021
PPP Round 1                    6,530     $ 703,450          51     $   4,324     $          63     $       1,044     $       11,210
PPP Round 2                    3,179       267,423       1,298       135,010             6,025             6,590              7,916
PPP Total                      9,709     $ 970,873       1,349     $ 139,334     $       6,088     $       7,634     $       19,126






                                       41
--------------------------------------------------------------------------------

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

On March 27, 2020, the 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. 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.
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 2021 were $58.93 million, up $6.07 million or 11.49%, when compared with earnings of $52.86 million for the third quarter of 2020. Diluted earnings per share was $0.41 for the third quarter of 2021 compared with $0.37 in the same quarter a year ago.


The return on average assets was 1.90% for the third quarter of 2021, as
compared to 2.01% for the third quarter of 2020. The return on average equity
was 13.43% for the third quarter of 2021 as compared to 13.14% for the third
quarter of 2020.

Net earnings for the nine-month period ended September 30, 2021 were $172.23 million compared to $143.56 million for the same period in 2020. Diluted earnings per share for the first nine months of 2021 were $1.20 compared to $1.01 for the same period in 2020.


The return on average assets was 1.94% for the first nine months of 2021 as
compared to 1.91% for the same period a year ago. The return on average equity
was 13.55% for the first nine months of 2021 as compared to 12.46% for the first
nine months of 2020.

Net Interest Income. Net interest income is the difference between interest income on earning assets and interest expense on liabilities incurred to fund those assets. Our earning assets consist primarily of loans and investment securities. Our liabilities to fund those assets consist primarily of noninterest-bearing and interest-bearing deposits.


Tax-equivalent net interest income was $99.45 million for the third quarter of
2021, as compared to $92.38 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 swift deployment of the PPP loan
program which brought new business from other banks. Average earning assets were
$11.58 billion for the third quarter of 2021, as compared to $9.80 billion
during the third quarter of 2020. The increase of $1.77 billion in average
earning assets in 2021 when compared to 2020 was primarily a result of increases
of tax-exempt securities of $484.57 million, interest-bearing deposits in
nonaffiliated banks of $389.45 million and taxable securities of $893.67 million
when compared to September 30, 2020 balances. Average interest-bearing
liabilities were $6.95 billion for the third quarter of 2021, as compared to
$5.75 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 38 basis points while the rate paid on interest-bearing
liabilities decreased seven basis points for the third quarter of 2021 compared
to the third quarter of 2020.

Tax-equivalent net interest income was $286.41 million for the first nine months
of 2021 as compared to $267.25 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 swift deployment of the PPP loan
program which brought new business from other banks. Average earning assets
increased $1.77 billion for the first nine months of 2021 over the same period
in 2020. Average tax exempt securities increased $722.10 million,
interest-bearing deposits in nonaffiliated banks increased $414.23 million and
loans increased $255.26 million, respectively, for the first nine months of 2021
over the first nine months of 2020. Average interest-bearing liabilities
increased $983.95 million for the first nine 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 49 basis points while the rate paid on interest-bearing
liabilities decreased 19 basis points for the first nine months of 2021 compared
to the first nine months of 2020.



                                       42

--------------------------------------------------------------------------------

Table 1 allocates the change in tax-equivalent net interest income between the amount of change attributable to volume and to rate.

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



                                          Three-Months Ended September 30, 2021              Nine-Months Ended September 30, 2021
                                              Compared to Three-Months Ended                     Compared to Nine-Months Ended
                                                    September 30, 2020                                September 30, 2020
                                           Change Attributable to             Total           Change Attributable to           Total
                                         Volume              Rate            Change         Volume              Rate           Change
Short-term investments                $        102       $          74       $   176     $      1,377       $      (1,665 )   $   (288 )
Taxable investment securities                4,928              (4,869 )          59            6,834             (13,748 )     (6,914 )
Tax-exemptinvestment securities (1)          3,705              (1,741 )       1,964           17,331              (6,911 )     10,420
Loans (1) (2)                                   45               4,081         4,126            9,853              (1,387 )      8,466
Interest income                              8,780              (2,455 )       6,325           35,395             (23,711 )     11,684
Interest-bearing deposits                      421              (1,145 )        (724 )          2,349              (9,047 )     (6,698 )
Short-term borrowings                           25                 (48 )         (23 )           (188 )              (582 )       (770 )
Interest expense                               446              (1,193 )        (747 )          2,161              (9,629 )     (7,468 )
Net interest income                   $      8,334       $      (1,262 )     $ 7,072     $     33,234       $     (14,082 )   $ 19,152




(1)

Computed on a tax-equivalent basis assuming a marginal tax rate of 21%. (2) Non-accrual loans are included in loans.


The net interest margin, on a tax equivalent basis, was 3.41% for the third
quarter of 2021, a decrease of 34 basis points from the same period in 2020. The
net interest margin for the first nine months of 2021 was 3.43%, a decrease of
38 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 third quarter of 2021 as a result of the overall
level of excess liquidity, which totaled $561.14 million at September 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. In March 2020, as the market experienced volatility, we took
advantage of that volatility to purchase high quality municipal bonds at
favorable tax-equivalent interest yields. The Federal Reserve increased rates
100 basis points in 2018 but then decreased rates 75 basis points during the
third and fourth quarters of 2019 and then an additional 150 basis points in the
first quarter of 2020, resulting in a current target rate range of zero to 25
basis points.

                                       43
--------------------------------------------------------------------------------

The net interest margin, which measures tax-equivalent net interest income as a percentage of average earning assets, is illustrated in Table 2.


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



                                                       Three-Months Ended September 30,
                                                2021                                      2020
                                 Average         Income/      Yield/        Average        Income/      Yield/
                                 Balance         Expense       Rate         Balance        Expense       Rate
Assets
Short-term investments (1)     $    614,105     $     238        0.15 %   $    225,113     $     62        0.11 %
Taxable investment
securities (2)                    3,081,215        12,122        1.57        2,187,547       12,063        2.21
Tax-exempt investment
securities (2)(3)                 2,542,606        17,701        2.78        2,058,032       15,737        3.06
Loans (3)(4)                      5,337,807        70,807        5.26        5,334,174       66,681        4.97
Total earning assets             11,575,733     $ 100,868        3.46 %      9,804,866     $ 94,543        3.84 %
Cash and due from banks             205,929                                    186,177
Bank premises and equipment,
net                                 147,071                                    139,758
Other assets                         97,827                                     98,261
Goodwill and other
intangible assets, net              317,327                                    319,059
Allowance for credit losses         (63,055 )                                  (71,881 )
Total assets                   $ 12,280,832                               $ 10,476,240
Liabilities and
Shareholders' Equity
Interest-bearing deposits      $  6,346,267     $   1,340        0.08 %   $  5,270,600     $  2,064        0.16 %
Short-term borrowings               599,934            76        0.05          482,555           99        0.08
Total interest-bearing
liabilities                       6,946,201     $   1,416        0.08 %      5,753,155     $  2,163        0.15 %
Noninterest-bearing deposits      3,490,685                                  3,016,700
Other liabilities                   103,446                                    106,295
Total liabilities                10,540,332                                  8,876,150
Shareholders' equity              1,740,500                                  1,600,090
Total liabilities and
shareholders' equity           $ 12,280,832                               $ 10,476,240
Net interest income                             $  99,452                                  $ 92,380
Rate Analysis:
Interest income/earning
assets                                                           3.46 %                                    3.84 %
Interest expense/earning
assets                                                          (0.05 )                                   (0.09 )
Net interest margin                                              3.41 %                                    3.75 %




(1)
Short-term investments are comprised of federal funds sold, interest-bearing
deposits in banks and interest-bearing time deposits in banks.
(2)
Average balances include unrealized gains and losses on available-for-sale
securities.
(3)
Computed on a tax-equivalent basis assuming a marginal tax rate of 21%.
(4)
Non-accrual loans are included in loans.



                                       44

--------------------------------------------------------------------------------

                                                         Nine-Months Ended September 30,
                                                 2021                                       2020
                                  Average         Income/      Yield/        Average         Income/      Yield/
                                  Balance         Expense       Rate         Balance         Expense       Rate
Assets
Short-term investments (1)      $    684,263     $     615        0.12 %   $    269,704     $     903        0.45 %
Taxable investment securities
(2)                                2,665,988        33,834        1.69        2,283,064        40,748        2.38
Tax-exempt investment
securities (2)(3)                  2,458,352        52,090        2.83        1,736,250        41,670        3.20
Loans (3)(4)                       5,339,398       204,721        5.13        5,084,136       196,255        5.16
Total earning assets              11,148,001     $ 291,260        3.49 %      9,373,154     $ 279,576        3.98 %
Cash and due from banks              204,246                                    188,241
Bank premises and equipment,
net                                  144,566                                

139,600

Other assets                          97,234                                

91,324

Goodwill and other intangible
assets, net                          317,726                                    318,902
Allowance for credit losses          (64,446 )                                  (64,742 )
Total assets                    $ 11,847,327                               $ 10,046,479
Liabilities and Shareholders'
Equity
Interest-bearing deposits       $  6,165,740     $   4,595        0.10 %   $  5,104,096     $  11,293        0.30 %
Short-term borrowings                528,599           260        0.07          606,291         1,030        0.23
Total interest-bearing
liabilities                        6,694,339     $   4,855        0.10 %      5,710,387     $  12,323        0.29 %
Noninterest-bearing deposits       3,349,719                                  2,714,173
Other liabilities                    103,354                                     82,670
Total liabilities                 10,147,412                                  8,507,230
Shareholders' equity               1,699,915                                  1,539,249
Total liabilities and
shareholders' equity            $ 11,847,327                               $ 10,046,479
Net interest income                              $ 286,405                                  $ 267,253
Rate Analysis:
Interest income/earning
assets                                                            3.49 %                                     3.98 %
Interest expense/earning
assets                                                           (0.06 )                                    (0.17 )
Net interest margin                                               3.43 %                                     3.81 %




(1)
Short-term investments are comprised of federal funds sold, interest-bearing
deposits in banks and interest-bearing time deposits in banks.
(2)
Average balances include unrealized gains and losses on available-for-sale
securities.
(3)
Computed on a tax-equivalent basis assuming a marginal tax rate of 21%.
(4)
Non-accrual loans are included in loans.

Noninterest Income. Noninterest income for the third quarter of 2021 was $37.73
million compared to $38.58 million in the same quarter of 2020. Increases in
certain categories of noninterest income included (1) trust fees of $2.02
million, (2) service charges on deposits of $664 thousand, (3) ATM, interchange
and credit card fees of $1.15 million and (4) interest on loan recoveries of
$1.54 million when compared to the third quarter of 2020. Mortgage related
income was $8.79 million in the third quarter of 2021 compared to $15.23 million
in the third quarter of 2020 due to lower overall origination volumes. The
increase in trust fees resulted from an increase in assets under management over
the prior year and overall improvement in market prices. The fair value of trust
assets managed, which are not reflected in our consolidated balance sheets,
totaled $8.08 billion at September 30, 2021, up 16.23% when compared to $6.95
billion at September 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 nine-month period ended September 30, 2021 was
$107.27 million, an increase of $3.05 million compared to the same period in
2020. Trust fees increased $4.62 million to $26.48 million for the first
nine-months of 2021 compared to the same period of 2020. The fair value of Trust
assets managed increased to $8.08 billion at September 30, 2021 when compared
with $6.95 billion at September 30, 2020. ATM, interchange and credit card fees
increased $4.23 million, or 17.56%, to $28.32 million compared with $24.09
million in the same period last year due to continued growth in debit cards.
Interest on loan recoveries increased to $2.83 million for the nine-months ended
September 30, 2021 as compared to $621 thousand for the same period of 2020.
Mortgage related income was $26.97 million in the first nine months of 2021
compared to $32.76 million in the same period of 2020 due to lower overall
origination volumes. Gains on available-for-sale securities were $814 thousand
for the first nine months of 2021 compared to $3.61 million for the same period
in 2020.



                                       45
--------------------------------------------------------------------------------

ATM and interchange fees are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. ATM and interchange fees consist of income from debit card usage, point of sale income for debit card transactions and ATM service fees.


Federal Reserve rules applicable to financial institutions that have assets of
$10 billion or more provide that the maximum permissible interchange fee for an
electronic debit transaction is limited to the sum of 21 cents per transaction
plus 5 basis points multiplied by the value of the transaction. Management has
estimated the impact of this reduction in ATM and interchange fees to
approximate $16 million annually (pre-tax) once the Federal Reserve rules apply
to the Company. Federal Reserve requirements stipulate that these rules would go
into effect on July 1st following the year-end in which a financial
institution's total assets exceeded $10 billion at December 31st. At September
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. 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                          Nine-Months Ended
                                               September 30,                               September 30,
                                                  Increase                                    Increase
                                     2021        (Decrease)        2020         2021         (Decrease)        2020
Trust fees                         $  9,484     $      2,023     $  7,461     $  26,475     $      4,616     $  21,859
Service charges on deposit
accounts                              5,673              664        5,009        15,394              152        15,242
ATM, interchange and credit card
fees                                  9,793            1,149        8,644        28,323            4,230        24,093
Gain on sale and fees on
mortgage loans                        8,788           (6,440 )     15,228        26,973           (5,783 )      32,756
Net gain on sale of
available-for-sale securities             1              (35 )         36           814           (2,796 )       3,610
Net gain on sale of foreclosed
assets                                   27                8           19            83               11            72
Net gain on sale of assets               (6 )             (4 )         (2 )         213              123            90
Interest on loan recoveries           1,746            1,544          202         2,832            2,211           621

Other:

Check printing fees                      88               33           55           155              (22 )         177
Safe deposit rental fees                192                7          185           690              135           555
Credit life fees                        256              126          130           835              139           696
Brokerage commissions                   337               36          301         1,039               19         1,020
Wire transfer fees                      367               61          306         1,037              198           839
Miscellaneous income                    980              (21 )      1,001         2,410             (186 )       2,596
Total other                           2,220              242        1,978         6,166              283         5,883
Total Noninterest Income           $ 37,726     $       (849 )   $ 38,575     $ 107,273     $      3,047     $ 104,226




Noninterest Expense. Total noninterest expense for the third quarter of 2021 was
$62.94 million, an increase of $7.35 million, or 13.21%, 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 basis and noninterest income. Lower ratios indicate
better efficiency since more income is generated with a lower noninterest
expense total. Our efficiency ratio for the third quarter of 2021 was 45.88 %
compared to 42.45% for the same quarter in 2020.

Salaries, commissions and employee benefits for the third quarter of 2021
totaled $37.09 million, compared to $33.65 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 and (ii) increases in incentive
compensation and profit sharing expenses in the third quarter of 2021. All other
categories of noninterest expense for the third quarter of 2021 totaled $25.85
million, up from $21.94 million in the same quarter a year ago.

Total noninterest expense for the first nine months of 2021 was $180.04 million, an increase of $15.80 million when compared to $164.23 million in the same period in 2020. Our efficiency ratio for the first nine months of 2021 was 45.73%, compared to 44.21% for the same period in 2020.


Salaries, commissions and employee benefits for the first nine months of 2021
totaled $107.07 million, an increase of $12.96 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) increases in incentive compensation and
profit sharing expenses in the first nine months of 2021 and (iii) the deferral
of $3.62 million PPP origination costs in the first nine months of 2020. All
other categories of noninterest expense for the first nine months of 2021
totaled $72.97 million, an increase of $2.84 million when compared to the same
period of 2020. Included in noninterest expense 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.

                                       46

--------------------------------------------------------------------------------

Table 4 - Noninterest Expense (in thousands):



                                         Three-Months Ended September 30,                 Nine-Months Ended September 30,
                                                       Increase                                         Increase
                                      2021            (Decrease)         2020           2021           (Decrease)        2020
Salaries and commissions           $    28,107       $       1,637     $ 26,470     $     81,079      $      8,636     $  72,443
Medical                                  3,200                 739        2,461            8,795             1,353         7,442
Profit sharing                           2,630               1,085        1,545            7,035             2,540         4,495
401(k) match expense                       881                  41          840            2,771               195         2,576
Payroll taxes                            1,627                  57        1,570            5,471               371         5,100
Stock based compensation                   645                (118 )        763            1,916              (133 )       2,049
Total salaries and employee
benefits                                37,090               3,441       33,649          107,067            12,962        94,105
Net occupancy expense                    3,288                  95        3,193            9,676               355         9,321
Equipment expense                        2,450                 293        2,157            6,791               549         6,242
FDIC assessment fees                       815                 228          587            2,282             1,187         1,095
ATM, interchange and credit card
expense                                  2,935                 106        2,829            8,746               322         8,424
Professional and service fees            2,406                 169        2,237            6,936              (391 )       7,327
Printing, stationery and
supplies                                   432                (183 )        615            1,246              (468 )       1,714
Operational and other losses             1,087                 466          621            1,908               (17 )       1,925
Software amortization and
expense                                  2,855                 590        2,265            8,303             2,004         6,299
Amortization of intangible
assets                                     398                 (92 )        490            1,222              (285 )       1,507
Other:
Data processing fees                       501                 134          367            1,345               111         1,234
Postage                                    420                  43          377            1,086                24         1,062
Advertising                                856                 608          248            2,182             1,129         1,053
Correspondent bank service
charges                                    267                  32          235              757                91           666
Telephone                                  679                (233 )        912            2,777               (11 )       2,788
Public relations and business
development                                890                 342          548            2,344               395         1,949
Directors' fees                            588                  41          547            1,800                17         1,783
Audit and accounting fees                  515                 (50 )        565            1,501              (278 )       1,779
Legal fees and other related
costs                                      438                  99          339            1,869               832         1,037
Regulatory exam fees                       374                  98          276            1,048               219           829
Travel                                     348                 128          220              945               213           732
Courier expense                            234                  17          217              698                64           634
Other real estate owned                     10                  (8 )         18               49               (40 )          89
Other                                    3,063                 982        2,081            7,458            (3,181 )      10,639
Total other                              9,183               2,233        6,950           25,859              (415 )      26,274
Total Noninterest Expense          $    62,939       $       7,346     $ 55,593     $    180,036      $     15,803     $ 164,233




Balance Sheet Review

Loans. 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 September 30, 2021, total loans
held-for-investment were $5.29 billion, an increase of $115.46 million, as
compared to December 31, 2020. During the third quarter of 2021, $181.06 million
of PPP loans originated were forgiven. Total PPP loans outstanding were $139.33
million at September 30, 2021, which are included in the Company's commercial
loan totals. PPP loan balances accounted for $229.81 million in average balances
for the quarter ended September 30, 2021. At September 30, 2021, approximately
$6.09 million of deferred loan fees related to PPP loans, including
approximately $6.03 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 $368.32
million, total commercial loans decreased $327.26 million, agricultural loans
increased $4.08 million and total consumer loans increased $70.33 million. Loans
averaged $5.34 billion for the third quarter of 2021, an increase of $3.63
million from the prior year third quarter average balances. Loans averaged $5.34
billion for the first nine months of 2021, an increase of $255.26 million from
the prior year nine-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. 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 41, are included in the C&I loan portfolio segment as of September 30, 2021 and December 31, 2020.

                                       47

--------------------------------------------------------------------------------


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,             December 31,
                                2021            2020              2020
Commercial:
C&I *                        $   819,597             N/A     $    1,131,382
Municipal                        165,847             N/A            181,325
Total Commercial                 985,444       1,488,345          1,312,707
Agricultural                      98,947          93,972             94,864
Real Estate:
Construction & Development       656,530             N/A            553,959
Farm                             203,064             N/A            152,237
Non-Owner Occupied CRE           674,958             N/A            617,686
Owner Occupied CRE               824,231             N/A            746,974
Residential                    1,328,798             N/A          1,248,409
Total Real Estate              3,687,581       3,287,605          3,319,265
Consumer:
Auto                             394,072             N/A            353,595
Non-Auto                         120,450             N/A             90,602
Total Consumer                   514,522         423,757            444,197
Total                        $ 5,286,494     $ 5,293,679     $    5,171,033



* All disclosures for the C&I loan segment include PPP loan balances, net of deferred fees, as disclosed on the face of the consolidated balance sheet.




Loans held-for-sale, consisting of secondary market mortgage loans, totaled
$47.72 million, $101.06 million, and $83.97 million at September 30, 2021 and
2020, and December 31, 2020, respectively. At September 30, 2021 and 2020, and
December 31, 2020, $1.64 million, $6.39 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 non-accrual status when, in the
judgment of management, the collectability of principal or interest under the
original terms becomes doubtful. Non-accrual, past due 90 days or more and still
accruing, and restructured loans plus foreclosed assets were $25.28 million at
September 30, 2021, as compared to $43.05 million at September 30, 2020 and
$42.90 million at December 31, 2020. As a percent of loans held-for-investment
and foreclosed assets, these assets were 0.48% at September 30, 2021, as
compared to 0.81% at September 30, 2020 and 0.83% at December 31, 2020. As a
percent of total assets, these assets were 0.20% at September 30, 2021, as
compared to 0.41% at September 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 September
30, 2021.

Supplemental Oil and Gas Information. As of September 30, 2021, the Company's
exposure to the oil and gas industry totaled 1.87% of total loans
held-for-investment, excluding PPP loans, or $96.47 million, down $9.77 million
from December 31, 2020 year-end levels. These oil and gas loans consisted (based
on collateral supporting the loan) of (i) development and production loans of
13.65%, (ii) oil and gas field servicing loans of 6.24%, (iii) real estate loans
of 47.58%, (iv) accounts receivable and inventory of 2.93%, (v) automobile of
6.58% and (vi) other of 23.02%. 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 September 30, 2021 and 2020, and the year ended
December 31, 2020 (in thousands, except percentages):



                                                  September 30,              December 31,
                                               2021            2020              2020
Oil and gas related loans, excluding PPP
loans                                       $   96,469      $  118,567      $      106,237
Oil and gas related loans as a % of total
loans held-for-
  investment, excluding PPP loans                 1.87 %          2.58 %              2.27 %
Classified oil and gas related loans        $   10,831      $   26,823      $       13,298
Non-accrual oil and gas related loans            3,058           6,800      

4,774

Net charge-offs (recoveries) on oil and
gas related loans for
  quarter/year then ended                          (71 )             -                 825




                                       48
--------------------------------------------------------------------------------


Supplemental COVID-19 Industry Exposure. In addition, at September 30, 2021,
loan balances in the retail/restaurant/hospitality industries totaled $496.52
million or 9.65% of the Company's total loans held-for-investment, excluding PPP
loans. These loans comprised $34.34 million of classified loans, including $2.00
million in non-accrual loans. There were net recoveries related to this
portfolio for the three and nine-months ended September 30, 2021 of $506
thousand. Additional information related to the Company's
retail/restaurant/hospitality industries follows below (in thousands, except
percentages):



                                                  September 30,             December 31,
                                               2021           2020              2020
Retail loans                                 $ 348,797      $ 229,386      $      216,244
Restaurant loans                                59,031         39,523              48,618
Hotel loans                                     60,733         63,273              71,716
Other hospitality loans                         27,369         26,041              21,970
Travel loans                                       593            801                 780
Total Retail/Restaurant/Hospitality loans,
excluding
  PPP loans                                  $ 496,523      $ 359,024      $      359,328
Retail/Restaurant/Hospitality loans as a %
of total loans held-for-investment,
excluding PPP loans                               9.65 %         7.82 %              7.67 %
Classified Retail/Restaurant/Hospitality
loans                                        $  34,341      $  28,171      $       31,192
Non-accrual Retail/Restaurant/Hospitality
loans                                            1,995          5,689       

5,975

Net charge-offs (recoveries) on
Retail/Restaurant/Hospitality
  loans quarter/year then ended                   (506 )           26                 895



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



                                                  September 30,             December 31,
                                               2021           2020              2020
Non-accrual loans                            $  25,210      $  42,673      $       42,619
Loans still accruing and past due 90 days
or more                                             23             23       

113

Troubled debt restructured loans*                   22             25                  24
Nonperforming loans                             25,255         42,721              42,756
Foreclosed assets                                   28            331                 142
Total nonperforming assets                   $  25,283      $  43,052      $       42,898
As a % of loans held-for-investment and
foreclosed assets                                 0.48 %         0.81 %              0.83 %
As a % of total assets                            0.20           0.41                0.39




* Troubled debt restructured loans of $4.73 million, $4.48 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 September 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. Such amounts for the 2021 and 2020 interim periods
were not significant.

Allowance for Credit Losses. The allowance for credit losses is the amount we
determine as of a specific date to be appropriate to absorb current expected
credit losses on existing loans 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). There was no provision for credit losses or provision
for unfunded commitments for the third quarter of 2021 as compared to $9.00
million for the third quarter of 2020, which was the aggregate of a $7.50
million provision for loan losses and $1.50 million provision for unfunded
commitments. The provision for credit losses for the nine-months ended September
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 $27.55 million for the same period in
2020, which was made up of $26.05 million of provision for loan losses and $1.50
million provision for unfunded commitments. The net reversal of the Company's
provision for credit losses year-to-date in 2021 reflects the continued
improvement in the economic outlook for our markets across Texas and overall
improvements in asset quality offset by loan growth. As a percent of average
loans, net loan recoveries were 0.09% for the third quarter of 2021, as compared
to net charge-offs of 0.03% for the third quarter of 2020. The allowance for
credit losses as a percent of loans held-for-investment was 1.20% as of
September 30, 2021, as compared to 1.44% as of September 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 1.23% as of September 30, 2021, as
compared to 1.66% as of September 30, 2020 and 1.42% as of December 31, 2020.

                                       49

--------------------------------------------------------------------------------


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



                                       Three-Months Ended               Nine-Months Ended
                                         September 30,                    September 30,
                                     2021             2020            2021             2020
Allowance for credit losses at
period-end                        $    63,370      $    76,038     $    63,370      $    76,038
Loans held-for-investment at
period-end                          5,286,494        5,293,679       5,286,494        5,293,679
Average loans for period            5,337,807        5,334,174       5,339,398        5,084,136
Net charge-offs
(recoveries)/average
  loans (annualized)                    (0.09 )%          0.03 %         (0.03 )%          0.07 %
Allowance for loan
losses/period-end
  loans held-for-investment              1.20 %           1.44 %          1.20 %           1.44 %
Allowance for loan
losses/non-accrual loans,
  past due 90 days still
accruing and
  restructured loans                   250.92 %         177.99 %        250.92 %         177.99 %



Interest-Bearing Demand Deposits in Banks. At September 30, 2021, our interest-bearing deposits in banks were $359.24 million compared to $58.93 million at September 30, 2020 and $517.97 million at December 31, 2020, respectively. At September 30, 2021, interest-bearing deposits in banks included $356.04 million maintained at the Federal Reserve Bank of Dallas and $3.20 million on deposit with the FHLB.


Available-for-Sale Securities. At September 30, 2021, securities with a fair
value of $6.12 billion were classified as securities available-for-sale. As
compared to December 31, 2020, the available-for-sale portfolio at September 30,
2021 reflected (i) an increase of $238.49 million in obligations of states and
political subdivisions, (ii) an increase of $32.90 million in corporate bonds
and other, and (iii) an increase of $1.46 billion 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, 2021 and 2020,
and December 31, 2020.

Table 8 - Maturities and Yields of Available-for-Sale Securities Held at September 30, 2021 (in thousands, except percentages):

Maturing by Contractual Maturity

                                                    After One Year            After Five Years
                             One Year                  Through                    Through                    After
                             or Less                  Five Years                 Ten Years                 Ten Years                   Total
Available-for-Sale:     Amount       Yield        Amount        Yield        Amount        Yield       Amount       Yield        Amount        Yield
Obligations of
states and
  political
subdivisions           $ 196,413       4.20 %   $   719,539       3.86 %  
$ 1,723,726       2.63 %   $  25,689       3.12 %   $ 2,665,367       3.08 %
Corporate bonds and
other
  securities               4,468       1.26               -          -          32,984       1.65             -          -          37,452       1.61
Mortgage-backed
securities               277,666       1.80       2,303,636       1.65         774,533       1.54        61,330       1.74       3,417,165       1.64
Total                  $ 478,547       2.78 %   $ 3,023,175       2.18 %   $ 2,531,243       2.28 %   $  87,019       2.15 %   $ 6,119,984       2.27 %




All yields are computed on a tax-equivalent basis assuming a marginal tax rate
of 21%. Yields on available-for-sale securities are based on amortized cost.
Maturities of mortgage-backed securities are based on contractual maturities and
could differ due to prepayments of underlying mortgages. Maturities of other
securities are reported at the earlier of maturity date or call date.

As of September 30, 2021, the investment portfolio had an overall tax equivalent
yield of 2.27%, a weighted average life of 4.87 years and modified duration of
4.40 years.

At September 30, 2021, the investment portfolio included $174.25 million of investments which have not yet settled and is reflected as a liability on the consolidated balance sheet.




                                       50

--------------------------------------------------------------------------------


Deposits. Deposits held by our subsidiary bank represent our primary source of
funding. Total deposits were $9.89 billion as of September 30, 2021, as compared
to $8.29 billion as of September 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 nine-month periods ended September 30, 2021 and 2020, respectively.

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



                                               Three-Months Ended September 30,
                                              2021                          2020
                                      Average        Average        Average        Average
                                      Balance         Rate          Balance         Rate
Noninterest-bearing deposits        $ 3,490,685            -%     $ 3,016,700            -%
Interest-bearing deposits:
Interest-bearing checking             3,142,769          0.07       2,498,641          0.10
Savings and money market accounts     2,732,149          0.06       2,301,920          0.12
Time deposits under $250,000            317,843          0.26         332,431          0.46
Time deposits of $250,000 or more       153,506          0.43         137,608          1.01
Total interest-bearing deposits       6,346,267          0.08 %     5,270,600          0.16 %
Total average deposits              $ 9,836,952                   $ 8,287,300
Total cost of deposits                                   0.05 %                        0.10 %




                                                Nine-Months Ended September 30,
                                              2021                          2020
                                      Average        Average        Average        Average
                                      Balance         Rate          Balance         Rate
Noninterest-bearing deposits        $ 3,349,719            -%     $ 2,714,173            -%
Interest-bearing deposits:
Interest-bearing checking             3,030,830          0.08       2,477,035          0.26
Savings and money market accounts     2,658,570          0.08       2,156,906          0.24
Time deposits under $250,000            320,743          0.29         338,237          0.61
Time deposits of $250,000 or more       155,597          0.51         131,918          1.14
Total interest-bearing deposits       6,165,740          0.10 %     5,104,096          0.30 %
Total average deposits              $ 9,515,459                   $ 7,818,269
Total cost of deposits                                   0.06 %                        0.19 %




Borrowings. Included in borrowings were federal funds purchased, securities sold
under repurchase agreements and advances from the FHLB of $648.68 million,
$503.16 million and $430.09 million at September 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 $599.93 million and $482.56 million
in the third quarters of 2021 and 2020, respectively. The weighted average
interest rates paid on these borrowings were 0.05% and 0.08% for the third
quarters of 2021 and 2020, respectively. The average balance of federal funds
purchased, securities sold under repurchase agreements and advances from the
FHLB were $528.60 million and $606.29 million for the nine-months ended
September 30, 2021 and 2020, respectively. The weighted average interest rates
paid on these borrowings were 0.07% and 0.23% for the nine-month periods ended
September 30, 2021 and 2020, respectively.

Capital Resources


We evaluate capital resources by our ability to maintain adequate regulatory
capital ratios to do business in the banking industry. Issues related to capital
resources arise primarily when we are growing at an accelerated rate but not
retaining a significant amount of our profits or when we experience significant
asset quality deterioration.

Total shareholders' equity was $1.73 billion, or 13.82% of total assets at
September 30, 2021, as compared to $1.62 billion, or 15.33% of total assets at
September 30, 2020, and $1.68 billion, or 15.39% of total assets at December 31,
2020. Included in shareholders' equity at September 30, 2021 and 2020 and
December 31, 2020 were $109.45 million, $152.06 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 2021, total shareholders'
equity averaged $1.74 billion, or 14.17% of average assets, as compared to $1.60
billion, or 15.27% of average assets, during the same period in 2020. For the
first nine months of 2021, total shareholders' equity averaged $1.70 billion, or
14.35% of average assets, as compared to $1.54 billion, or 15.32% 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. The risk-based capital rules provide
for the weighting of assets and off-balance-sheet commitments and contingencies
according to prescribed risk categories. Regulatory capital is then divided by
risk-weighted assets to determine the risk-adjusted capital ratios. The leverage
ratio is computed by dividing shareholders' equity less intangible assets by
quarter-to-date average assets less intangible assets.

                                       51

--------------------------------------------------------------------------------


Beginning in January 2015, under the Basel III regulatory capital framework, the
implementation of the capital conservation buffer was effective for the Company
starting at the 0.625% level and increasing 0.625% each year thereafter, until
it reached 2.50% on January 1, 2019. The capital conservation buffer is designed
to absorb losses during periods of economic stress and requires increased
capital levels for the purpose of capital distributions and other payments.
Failure to meet the amount of the buffer will result in restrictions on the
Company's ability to make capital distributions, including dividend payments and
stock repurchases, and to pay discretionary bonuses to executive officers.

As of September 30, 2021 and 2020, and December 31, 2020, we had a total capital
to risk-weighted assets ratio of 20.76%, 21.82% and 22.03%, a Tier 1 capital to
risk-weighted assets ratio of 19.71%, 20.56% and 20.79%; a common equity Tier 1
to risk-weighted assets ratio of 19.71%, 20.56% and 20.79% and a leverage ratio
of 11.19%, 11.65% and 11.86%, respectively. The regulatory capital ratios as of
September 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:



                                                                                          Required to be
                                                               Minimum Capital           Considered Well-
                                       Actual                Required-Basel III             Capitalized
As of September 30, 2021:        Amount         Ratio        Amount         Ratio       Amount        Ratio
Total Capital to
Risk-Weighted Assets:
Consolidated                   $ 1,389,929       20.76 %   $   702,959       10.50 %   $ 669,485       10.00 %
First Financial Bank, N.A      $ 1,246,266       18.65 %   $   701,572       10.50 %   $ 668,164       10.00 %
Tier 1 Capital to
Risk-Weighted Assets:
Consolidated                   $ 1,319,809       19.71 %   $   569,062        8.50 %   $ 401,691        6.00 %
First Financial Bank, N.A      $ 1,176,146       17.60 %   $   567,939        8.50 %   $ 534,531        8.00 %
Common Equity Tier 1 Capital
to Risk-Weighted
  Assets:
Consolidated                   $ 1,319,809       19.71 %   $   468,639        7.00 %           -         N/A
First Financial Bank, N.A      $ 1,176,146       17.60 %   $   467,715        7.00 %   $ 434,306        6.50 %
Leverage Ratio:
Consolidated                   $ 1,319,809       11.19 %   $   471,745        4.00 %           -         N/A
First Financial Bank, N.A      $ 1,176,146       10.00 %   $   470,355        4.00 %   $ 587,944        5.00 %




                                                                                          Required to be
                                                               Minimum Capital           Considered Well-
                                       Actual                Required-Basel III             Capitalized
As of September 30, 2020:        Amount         Ratio        Amount         Ratio       Amount        Ratio
Total Capital to
Risk-Weighted Assets:
Consolidated                   $ 1,231,395       21.82 %   $   592,680       10.50 %   $ 564,457       10.00 %
First Financial Bank, N.A      $ 1,102,365       19.57 %   $   591,382       10.50 %   $ 563,221       10.00 %
Tier 1 Capital to
Risk-Weighted Assets:
Consolidated                   $ 1,160,742       20.56 %   $   479,788        8.50 %   $ 338,674        6.00 %
First Financial Bank, N.A      $ 1,031,864       18.32 %   $   478,738        8.50 %   $ 450,577        8.00 %
Common Equity Tier 1 Capital
to Risk-Weighted
  Assets:
Consolidated                   $ 1,160,742       20.56 %   $   395,120        7.00 %           -         N/A
First Financial Bank, N.A      $ 1,031,864       18.32 %   $   394,255        7.00 %   $ 366,094        6.50 %
Leverage Ratio:
Consolidated                   $ 1,160,742       11.65 %   $   398,660        4.00 %           -         N/A
First Financial Bank, N.A      $ 1,031,864       10.39 %   $   397,410        4.00 %   $ 496,763        5.00 %




                                       52
--------------------------------------------------------------------------------

                                                                                          Required to be
                                                               Minimum Capital           Considered Well-
                                       Actual                Required Basel III             Capitalized
As of December 31, 2020:         Amount         Ratio        Amount         Ratio       Amount        Ratio
Total Capital to
Risk-Weighted Assets:
Consolidated                   $ 1,273,749       22.03 %   $   607,038       10.50 %   $ 578,131       10.00 %
First Financial Bank, N.A      $ 1,123,275       19.47 %   $   605,830       10.50 %   $ 576,981       10.00 %
Tier 1 Capital to
Risk-Weighted Assets:
Consolidated                   $ 1,201,729       20.79 %   $   491,412        8.50 %   $ 346,879        6.00 %
First Financial Bank, N.A      $ 1,051,255       18.22 %   $   490,434        8.50 %   $ 461,585        8.00 %
Common Equity Tier 1 Capital
to Risk-Weighted
  Assets:
Consolidated                   $ 1,201,729       20.79 %   $   404,692        7.00 %           -         N/A
First Financial Bank, N.A      $ 1,051,255       18.22 %   $   403,887        7.00 %   $ 375,038        6.50 %
Leverage Ratio:
Consolidated                   $ 1,201,729       11.86 %   $   405,268        4.00 %           -         N/A
First Financial Bank, N.A      $ 1,051,255       10.41 %   $   404,002        4.00 %   $ 505,002        5.00 %




In connection with the adoption of the Basel III regulatory capital framework,
our subsidiary bank made the election to continue to exclude accumulated other
comprehensive income from available-for-sale securities ("AOCI") from capital in
connection with its quarterly financial filing and, in effect, to retain the
AOCI treatment under the prior capital rules.

Interest Rate Risk

Interest rate risk results when the maturity or re-pricing intervals of interest-earning assets and interest-bearing liabilities are different. Our exposure to interest rate risk is managed primarily through our strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities that generate favorable earnings while limiting the potential negative effects of changes in market interest rates. We use no off-balance-sheet financial instruments to manage interest rate risk.


Our subsidiary bank has an asset liability management committee that monitors
interest rate risk and compliance with investment policies. The subsidiary bank
utilizes an earnings simulation model as the primary quantitative tool in
measuring the amount of interest rate risk associated with changing market
rates. The model quantifies the effects of various interest rate scenarios on
projected net interest income and net income over the next twelve months. The
model measures the impact on net interest income relative to a base case
scenario of hypothetical fluctuations in interest rates over the next twelve
months. These simulations incorporate assumptions regarding balance sheet growth
and mix, pricing and the re-pricing and maturity characteristics of the existing
and projected balance sheet.

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



                                   Percentage change in net interest income:
Change in interest rates:             September 30,                    December 31,
(in basis points)               2021                 2020                  2020
 +400                               8.60 %              15.02 %                18.18 %
 +300                               7.13 %              11.54 %                13.99 %
 +200                               5.23 %               7.81 %                 9.51 %
 +100                               3.04 %               3.93 %                 4.75 %
 -100                              (5.57 )%             (4.23 )%               (3.46 )%
 -200                              (8.24 )%             (6.21 )%               (5.44 )%




The results for the net interest income simulations as of September 30, 2021,
September 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 will remain
constant over the relevant twelve-month measurement period and that changes in
market interest rates are instantaneous and sustained across the yield curve
regardless of duration of pricing characteristics on specific assets or
liabilities. Also, this analysis does not contemplate any actions that we might
undertake in response to changes in market interest rates. We believe these
estimates are not necessarily indicative of what actually could occur in the
event of immediate interest rate increases or decreases of this magnitude. As
interest-bearing assets and liabilities re-price in different time frames and
proportions to market interest rate movements, various assumptions must be made
based on historical relationships of these variables in reaching any conclusion.
Since these correlations are based on competitive and market conditions, we
anticipate that our future results will likely be different from the foregoing
estimates, and such differences could be material.

Should we be unable to maintain a reasonable balance of maturities and
re-pricing of our interest-earning assets and our interest-bearing liabilities,
we could be required to dispose of our assets in an unfavorable manner or pay a
higher than market rate to fund our activities. Our asset liability committee
oversees and monitors this risk.

                                       53

--------------------------------------------------------------------------------

Liquidity


Liquidity is our ability to meet cash demands as they arise. Such needs can
develop from loan demand, deposit withdrawals or acquisition opportunities.
Potential obligations resulting from the issuance of standby letters of credit
and commitments to fund future borrowings to our loan customers are other
factors affecting our liquidity needs. Many of these obligations and commitments
are expected to expire without being drawn upon; therefore the total commitment
amounts do not necessarily represent future cash requirements affecting our
liquidity position. The potential need for liquidity arising from these types of
financial instruments is represented by the contractual notional amount of the
instrument. Asset liquidity is provided by cash and assets which are readily
marketable or which will mature in the near future. Liquid assets include cash,
federal funds sold, and short-term investments in time deposits in banks.
Liquidity is also provided by access to funding sources, which include core
depositors and correspondent banks that maintain accounts with and sell federal
funds to our subsidiary bank. Other sources of funds include our ability to
borrow from short-term sources, such as purchasing federal funds from
correspondent banks, sales of securities under agreements to repurchase and
advances from the FHLB (see below) and an unfunded $25.00 million revolving line
of credit established with Frost Bank, a nonaffiliated bank, which matures in
June 2023 (see next paragraph). Our subsidiary bank also has federal funds
purchased lines of credit with two non-affiliated banks totaling $130.00
million. At September 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 $1.64 billion at September 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 September 30, 2021, the Company had
no outstanding advances from the FHLB.

The Company renewed its loan agreement, effective June 30, 2021, with Frost
Bank. Under the loan agreement, as renewed and amended, we are permitted to draw
up to $25.00 million on a revolving line of credit. Prior to June 30, 2023,
interest is paid quarterly at The Wall Street Journal Prime Rate and the line of
credit matures June 30, 2023. If a balance exists at June 30, 2023, the
principal balance converts to a term facility payable quarterly over five years
and interest is paid quarterly at The Wall Street Journal Prime Rate. The line
of credit is unsecured. Among other provisions in the credit agreement, we must
satisfy certain financial covenants during the term of the loan agreement,
including, without limitation, covenants that require us to maintain certain
capital, tangible net worth, loan loss reserve, non-performing asset and cash
flow coverage ratios. In addition, the credit agreement contains certain
operational covenants, which among others, restricts the payment of dividends
above 55% of consolidated net income, limits the incurrence of debt (excluding
any amounts acquired in an acquisition) and prohibits the disposal of assets
except in the ordinary course of business. Since 1995, we have historically
declared dividends as a percentage of our consolidated net income in a range of
36% (low) in 2021 to 53% (high) in 2003 and 2006. The Company was in compliance
with the financial and operational covenants at September 30, 2021. There was no
outstanding balance under the line of credit as of September 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 $129.21 million at September 30, 2021, investment
securities which totaled $2.50 million at September 30, 2021 and mature over 8
to 9 years, available dividends from our subsidiaries which totaled $334.51
million at September 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. Liquidity risk
management is an important element in our asset/liability management process. We
regularly model liquidity stress scenarios to assess potential liquidity
outflows or funding problems resulting from economic disruptions, volatility in
the financial markets, unexpected credit events or other significant occurrences
deemed potentially problematic by management. These scenarios are incorporated
into our contingency funding plan, which provides the basis for the
identification of our liquidity needs. As of September 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. Given the strong core deposit base and relatively low loan
to deposit ratios maintained at our subsidiary bank, we consider our current
liquidity position to be adequate to meet our short-term and long-term liquidity
needs. In addition, management is not aware of any regulatory recommendations
regarding liquidity that would have a material adverse effect on us.

Off-Balance Sheet ("OBS")/Reserve for Unfunded Commitments. We are a party to
financial instruments with OBS risk in the normal course of business to meet the
financing needs of our customers. These financial instruments include unfunded
lines of credit, commitments to extend credit and federal funds sold to
correspondent banks and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in our consolidated balance sheets. At September 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. We generally use the same credit policies in making
commitments and conditional obligations as we do for on-balance-sheet
instruments.

Unfunded lines of credit and commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. These commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. We
evaluate each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, as we deem necessary upon extension of credit, is based on
our credit evaluation of the counterparty. Collateral held varies but may
include accounts receivable, inventory, property, plant, and equipment and
income-producing commercial properties.

Standby letters of credit are conditional commitments we issue to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The average collateral value held on letters of credit
usually exceeds the contract amount.

                                       54

--------------------------------------------------------------------------------

Table 10 - Commitments as of September 30, 2021 (in thousands):



                                         Total Notional
                                            Amounts
                                           Committed
Unfunded lines of credit                $        961,094
Unfunded commitments to extend credit            818,316
Standby letters of credit                         39,080
Total commercial commitments            $      1,818,490




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. Our ability to fund various operating expenses,
dividends, and cash acquisitions is generally dependent on our own earnings
(without giving effect to our subsidiaries), cash reserves and funds derived
from our subsidiaries. These funds historically have been produced by
intercompany dividends and management fees that are limited to reimbursement of
actual expenses. We anticipate that our recurring cash sources will continue to
include dividends and management fees from our subsidiaries. At September 30,
2021, $334.51 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 $53.50 million and $46.00 million for
the nine-months ended September 30, 2021 and 2020, respectively.

Dividends. 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 35.55% and 37.62% of net earnings for the first nine
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.

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

To pay dividends, we and our subsidiary bank must maintain adequate capital
above regulatory guidelines. In addition, if the applicable regulatory authority
believes that a bank under its jurisdiction is engaged in or is about to engage
in an unsafe or unsound practice (which, depending on the financial condition of
the bank, could include the payment of dividends), the authority may require,
after notice and hearing, that such bank cease and desist from the unsafe
practice. The Federal Reserve, the FDIC and the OCC have each indicated that
paying dividends that deplete a bank's capital base to an inadequate level would
be an unsafe and unsound banking practice. The Federal Reserve, the OCC and the
FDIC have issued policy statements that recommend that bank holding companies
and insured banks should generally only pay dividends out of current operating
earnings.



                                       55

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses

All news about FIRST FINANCIAL BANKSHARES, INC.
05/09INSIDER BUY : First Financial Bankshares
MT
05/06INSIDER BUY : First Financial Bankshares
MT
05/06FIRST FINANCIAL BANKSHARES INC Management's Discussion and Analysis of Financial Condi..
AQ
05/05INSIDER BUY : First Financial Bankshares
MT
05/04INSIDER BUY : First Financial Bankshares
MT
05/03INSIDER BUY : First Financial Bankshares
MT
05/02INSIDER BUY : First Financial Bankshares
MT
04/29FIRST FINANCIAL BANKSHARES : 1st Quarter 2022 Investor Presentation(Opens in a new window)
PU
04/27FIRST FINANCIAL BANKSHARES : 2022 Annual Shareholders' Meeting Presentation(Opens in a new..
PU
04/27FIRST FINANCIAL BANKSHARES : ANNOUNCES BOARD ELECTION AND INCREASED DIVIDEND AT ANNUAL MEE..
PU
More news
Analyst Recommendations on FIRST FINANCIAL BANKSHARES, INC.
More recommendations