FIRST FINANCIAL BANKSHARES, INC. 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 endedDecember 31, 2020 and the following:
• general economic conditions, including our local, state and national
real estate markets and employment trends;
• effect of the coronavirus ("COVID") on our Company, the communities
where we have our branches, the state of Texas and the United States ,
related to the economy and overall financial stability;
• government and regulatory responses to the COVID pandemic;
• effect of severe weather conditions, including hurricanes, tornadoes,
flooding and droughts;
• volatility and disruption in national and international financial and
commodity markets;
• government intervention in 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 ofGovernors 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 andinsurance) with
which we and our subsidiaries must comply;
• changes in the demand for loans, including loans originated for sale
in the secondary market;
46--------------------------------------------------------------------------------
Table of Contents
• 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;
• 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).
47
--------------------------------------------------------------------------------
Table of Contents
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
are salaries and related employee benefits. We measure our performance by
calculating our return on average assets, return on average equity, regulatory
capital ratios, net interest margin and efficiency ratio, which is calculated by
dividing noninterest expense by the sum of net interest income on a tax
equivalent basis and noninterest income.
The following discussion and analysis of operations and financial condition
should be read in conjunction with the financial statements and accompanying
footnotes included in Item 1 of this Form
10-Q
as well as those included in the Company's 2020 Annual Report on Form
10-K.
Recent Coronavirus Developments
During March 2020 , the outbreak of the novel Coronavirus Disease 2019 was
recognized as a pandemic by the World Health Organization and a national
emergency by the President of the United States . The spread of COVID has created
a global public health crisis that has resulted in unprecedented uncertainty,
volatility and disruption in financial markets and in governmental, commercial
and consumer activity in the United States and globally, including the markets
that we serve across the State of Texas . National, state and local governmental
responses to the pandemic have included orders to close or limit businesses
activity not deemed essential and directing individuals to limit their movements
and travel, observe social distancing, and shelter in place. These actions,
together with responses to the pandemic by businesses and individuals, have
resulted in decreases in commercial and consumer activity. These responses and
restrictions have led to a loss of revenues for certain industries and a sudden
increase in unemployment, volatility in oil and gas prices and in business
valuations, market downturns and volatility, changes in consumer behaviors,
related emergency response legislation and an expectation that Federal Reserve
policy will maintain a low interest rate environment for the foreseeable future.
The following is an update on our response through the date of filing:
• Currently, the Company is assisting borrowers in the second round of the
PPP under the
Deal. Through
in total from both the first and second rounds of PPP loans totaling
outstanding balance of
forgiveness by the SBA. We did not participate in the PPP Facility
program.
• We are continuing to encourage our employees to take the COVIDvaccinations when available and allowing employees and customers to wear
a mask on an optional basis based on their preferences.
Recent actions taken by theU.S. government to further mitigate the economic effects of COVID will also have an impact on our financial position and results of operations. These actions are further discussed below.
• During the first quarter of 2021,
executive orders relating to stimulus and relief measures. These orders
include, among other things, (i) an extension, through
the moratorium on evictions and foreclosures, (ii) an extension, through
interest and (iii) an extension, through
mortgage forbearance programs and guidelines.
48--------------------------------------------------------------------------------
Table of Contents
• On
was enacted, implementing a
proposals. Among other things, the ARP Act provides (i) additional
funding for the PPP program and an expansion of the program for the
benefit of certain nonprofits, (ii) funding for the Small Business
Administration ("SBA") to make targeted grants for restaurants and
similar establishments, (iii) direct cash payments of up to
individuals, subject to income provisions, (iv) an increase in the
maximum annual Child Tax Credit, subject to income limitation provisions,
(v) $300 a week in expanded unemployment insurance lasting through
September 6, 2021 and makes $10,200 in unemployment benefits tax free for
households, subject to income limitation provisions, (vi) tax relief
making any student loan forgiveness incurred between December 31, 2020 ,
and January 1, 2026
non-taxable
income, and (vii) funding to support state and local governments;
K-12
schools and higher education; the Centers for Disease Control ; public
transit; rental assistance; child care; and airline industry workers.
• On March 27, 2021 , the
COVID-19
Bankruptcy Relief Extension Act of 2021 was enacted, extending thebankruptcy relief provisions enacted in the CARES Act of 2020 bill until
March 27, 2022 . These provisions provide financially distressed small businesses and individuals greater access to bankruptcy relief.
• On
the Paycheck Protection Program ("PPP") from its previous expiration date
of March 31, 2021 to June 30, 2021 . Beginning June 1, 2021 , the SBA may
only process applications submitted prior to that date, and it may not
accept any new loan applications. We are continuing to monitor thepotential development of additional legislation and further actions taken
by the
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 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.
49
--------------------------------------------------------------------------------
Table of Contents
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 . Previously, the
Board of Directors had authorized the repurchase of up to 2.00 million common
shares through September 30, 2020 . The stock repurchase plan authorizes
management to repurchase and retire the stock at such time as repurchases are
considered beneficial to the Company and its stockholders. Any repurchase of
stock will be made through the open market, block trades or in privately
negotiated transactions in accordance with applicable laws and regulations.
Under the repurchase plan, there is no minimum number of shares that the Company
is required to repurchase. Through March 31, 2021 , the Company repurchased and
retired 324,802 shares (all during the months of March and April of 2020)
totaling $8.01 million under this repurchase plan.
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 8,546 loans and funded $920.13 million from
March 31, 2020 through March 31, 2021 . The Company received fees totaling
approximately $26.26 million and incurred incremental direct origination costs
of $3.62 million related to the first round of PPP loans from March 31, 2020
through December 31, 2020 , both of which have been deferred and are being
amortized over the shorter of the repayment period or 24 months, the contractual
life of these loans. During the first quarter of 2021, the Company recognized
$6.25 million in interest income related to PPP loan fees. The remainder of the
PPP loan deferred fees totaled approximately $16 million at March 31, 2021 ,
including approximately $11 million for 2021 originations for the second round
of PPP loans. These remaining deferred fees related to the second round of PPP
loans will be amortized over the shorter of the repayment period or the
contractual life of 60 months. Additional information related to the Company's
PPP loan balances are included in the following table (dollars in thousands):
50--------------------------------------------------------------------------------
Table of Contents
PPP Loans Originated
PPP Loans Outstanding at
Number of Dollars of Number of Dollars of
Loans Loans Loans Loans
PPP Round 1 6,530 $ 703,450 2,759 $ 315,879
PPP Round 2 2,016 216,683 1,990 215,931
PPP Totals 8,546 $ 920,133 4,749 $ 531,810
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.
51
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Performance Summary
. Net earnings for the first quarter of 2021 were $56.92 million , up
$19.69 million or 52.87%, when compared with earnings of $37.23 million for the
first quarter of 2020. Diluted earnings per share was $0.40 for the first
quarter of 2021 compared with $0.26 in the same quarter a year ago. The increase
in earnings for the first quarter of 2021 over the first quarter of 2020 was
primarily attributable to the overall growth in net interest income and
noninterest income.
The return on average assets was 2.05% for the first quarter of 2021, as
compared to 1.63% for the first quarter of 2020. The return on average equity
was 13.83% for the first quarter of 2021 as compared to 10.11% for the first
quarter of 2020.
Net 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 $92.37 million for the first quarter of 2021, as
compared to $82.74 million for the same period last year. The increase in 2021
compared to 2020 was largely attributable to the increase in interest-earning
assets primarily derived from an increase in investment securities held and the
impact of the Company's participation in the PPP loan program (see above).
Average earning assets were $10.56 billion for the first quarter of 2021, as
compared to $8.50 billion during the first quarter of 2020. The increase of
$2.06 billion in average earning assets in 2021 when compared to 2020 was
primarily a result of increases of loans of $628.71 million and
tax-exempt
securities of $1.02 billion when compared to March 31, 2020 balances. Average
interest-bearing liabilities were $6.37 billion for the first quarter of 2021,
as compared to $5.36 billion in the same period in 2020. The increase in average
interest-bearing liabilities primarily resulted from our customers depositing
their PPP loan amounts into our Bank and organic growth. The yield on earning
assets decreased 63 basis points while the rate paid on interest-bearing
liabilities decreased 43 basis points for the first quarter of 2021 compared to
the first quarter of 2020.
52
--------------------------------------------------------------------------------
Table of Contents
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 March 31, 2021
Compared to Three-Months Ended March 31, 2020
Change Attributable to Total
Volume Rate Change
Short-term investments $ 1,401 $ (1,994 ) $ (593 )
Taxable investment securities (77 ) (4,314 ) (4,391 )
Tax-exempt
investment securities (1) 8,497 (2,718 ) 5,779
Loans (1) (2) 8,530 (5,100 ) 3,430
Interest income 18,351 (14,126 ) 4,225
Interest-bearing deposits 1,380 (6,364 ) (4,984 )
Short-term borrowings (5 ) (421 ) (426 )
Interest expense 1,375 (6,785 ) (5,410 )
Net interest income $ 16,976 $ (7,341 ) $ 9,635
(1) Computed on a
tax-equivalentbasis 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 3.55% for the first quarter of 2021, a decrease of 36 basis points from the same period in 2020. We have continued to experience downward pressures on our net interest margin in 2021 and 2020 primarily due to (i) the extended period of fluctuating historically low levels of short-term interest rates and (ii) the flat to inverted yield curve currently being experienced in the bond market. Additionally, the net interest margin was particularly impacted in the first quarter of 2021 as a result of the overall level of excess liquidity, which totaled$1.08 billion atMarch 31, 2021 , pending investment. We have been able to somewhat mitigate the impact of these lower short-term interest rates and the flat/inverted yield curve by establishing minimum interest rates on certain of our loans, improving the pricing for loan risk and reducing the rates paid on our interest-bearing liabilities. InMarch 2020 , as the market experienced volatility, we took advantage of that volatility to purchase high quality municipal bonds at favorable tax-equivalent interest yields. TheFederal Reserve increased rates 100 basis points in 2018 but then decreased rates 75 basis points during the third and fourth quarters of 2019 and then an additional 150 basis points in the first quarter of 2020, resulting in a current target rate range of zero to 25 basis points. 53 -------------------------------------------------------------------------------- Table of Contents The net interest margin, which measures tax-equivalent net interest income as a percentage of average earning assets, is illustrated in Table 2. Table 2 - Average Balances and Average Yields and Rates (in thousands, except percentages): Three-Months Ended March 31, 2021 2020 Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets Short-term investments (1)$ 639,071 $ 162 0.10 %$ 223,618 $ 755 1.36 % Taxable investment securities (2) 2,251,419 10,264 1.82 2,263,329 14,655 2.59 Tax-exempt investment securities (2)(3) 2,368,615 16,979 2.87 1,346,842 11,200 3.33 Loans (3)(4) 5,296,149 66,753 5.11 4,667,436 63,323 5.46 Total earning assets 10,555,254$ 94,158 3.62 % 8,501,225$ 89,933 4.25 % Cash and due from banks 209,438 204,220 Bank premises and equipment, net 141,901 140,295 Other assets 98,301 88,548Goodwill and other intangible assets, net 318,141 318,445 Allowance for credit losses (67,231 ) (59,076 ) Total assets$ 11,255,804 $ 9,193,657 Liabilities and Shareholders' Equity Interest-bearing deposits$ 5,916,237 $ 1,696 0.12 %$ 4,904,087 $ 6,680 0.55 % Short-term borrowings 456,620 91 0.08 460,605 517 0.45 Total interest-bearing liabilities 6,372,857$ 1,787 0.11 % 5,364,692$ 7,197 0.54 % Noninterest-bearing deposits 3,114,656 2,291,535 Other liabilities 99,581 56,950 Total liabilities 9,587,094 7,713,177 Shareholders' equity 1,668,710 1,480,480 Total liabilities and shareholders' equity$ 11,255,804 $ 9,193,657 Net interest income$ 92,371 $ 82,736 Rate Analysis: Interest income/earning assets 3.62 % 4.25 % Interest expense/earning assets (0.07 ) (0.34 ) Net interest margin 3.55 % 3.91 %
(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-equivalentbasis assuming a marginal tax rate of 21%.
(4) Non-accrual
loans are included in loans.
Noninterest Income . Noninterest income for the first quarter of 2021 was$34.88 million , an increase of$6.14 million , or 21.38%, as compared to the same quarter of 2020. Increases in certain categories of noninterest income included (1) real estate mortgage operations income of$6.04 million , (2) ATM, interchange and credit card fees of$1.28 million and (3) trust fees of$862 thousand when compared to the first quarter of 2020. The mortgage related income increase was mainly due to a significant increase in the volume of loans originated driven by the lower rate environment and a strong housing market inTexas . The increase in ATM, interchange and credit card fees was driven by continued growth in the number of net new accounts and debit cards issued and overall customer utilization. The increase in trust fees resulted from an increase in assets under management over the prior year. The fair value of trust assets managed, which are not reflected in our consolidated balance sheets, totaled$7.54 billion atMarch 31, 2021 , up 22.55% when compared to$6.15 billion atMarch 31, 2020 . Offsetting these increases was a decline in service charge revenue of$1.12 million in the first quarter of 2021 when compared to the first quarter of 2020. The decrease in service charge revenue was primarily driven by lower overdraft fees in the current quarter as a result of the effects of the pandemic and related stimulus programs. Additionally, there was also a decline in net gain on sale of available for sale securities of$1.25 million in the first quarter of 2021 when compared to the first quarter of 2020. 54 -------------------------------------------------------------------------------- Table of Contents 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 of21 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$14.00 million annually (pre-tax) once theFederal Reserve rules apply to the Company.Federal Reserve requirements stipulate that these rules would go into effect onJuly 1 st following the year-end in which a financial institution's total assets exceeded$10 billion atDecember 31 st . AtMarch 31, 2021 , the Company's total assets exceeded the$10 billion threshold, due primarily to the effect of the Company's participation in the PPP loan program and growth in deposits from related activities. However, onNovember 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 ofDecember 31, 2020 if they had less than$10 billion in assets as ofDecember 31, 2019 . Under the interim final rule, these banks, which includes us, will generally have until 2022 to either reduce their size, or to prepare for the regulatory and reporting standards under the Dodd-Frank Act. Management will continue to monitor the Company's balance sheet levels and prepare for the effects of this future loss of debit card income. Table 3 - Noninterest Income (in thousands): Three-Months Ended March 31, Increase 2021 (Decrease) 2020 Trust fees$ 8,299 $ 862 $ 7,437 Service charges on deposit accounts 4,793 (1,122 )
5,915
ATM, interchange and credit card fees 8,677 1,277
7,400
Gain on sale and fees on mortgage loans 9,894 6,042 3,852 Net gain on sale of available-for-sale securities 808 (1,254 ) 2,062 Net gain on sale of foreclosed assets 55 54 1 Net gain on sale of assets 145 29 116 Interest on loan recoveries 382 117 265 Other: Check printing fees 34 (28 ) 62 Safe deposit rental fees 306 113 193 Credit life fees 215 43 172 Brokerage commissions 345 (40 ) 385 Wire transfer fees 315 52 263 Miscellaneous income 606 (3 ) 609 Total other 1,821 137 1,684 Total Noninterest Income$ 34,874 $ 6,142 $ 28,732 Noninterest Expense . Total noninterest expense for the first quarter of 2021 was$57.72 million , an increase of$2.41 million , or 4.35%, as compared to the same period of 2020. 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 first quarter of 2021 was 45.36% compared to 49.63% for the same quarter in 2020. The reduction in the Company's efficiency ratio during the first quarter of 2021 primarily resulted from the growth in the Company's revenues from higher levels of interest-earning assets while controlling expenses. 55 -------------------------------------------------------------------------------- Table of Contents Salaries, commissions and employee benefits for the first quarter of 2021 totaled$34.93 million , compared to$29.64 million for the same period in 2020. The increase over the prior year was primarily driven by (i) annual merit-based pay increases that were effectiveMarch 1, 2021 , (ii) higher mortgage related commission expenses and (iii) increases in incentive compensation and profit sharing expenses. All other categories of noninterest expense for the first quarter of 2021 totaled$22.79 million , down from$25.68 million in the same quarter a year ago. Included in other noninterest expense in the first quarter of 2020 were technology contract termination and conversion related costs totaling$3.81 million related to theTB&T Bancshares, Inc. acquisition. Table 4 - Noninterest Expense (in thousands): Three-Months Ended March 31, Increase 2021 (Decrease) 2020 Salaries and commissions$ 26,094 $ 3,391 $ 22,703 Medical 2,840 143 2,697 Profit sharing 2,295 1,323 972 401(k) match expense 963 124 839 Payroll taxes 2,131 316 1,815 Stock option and stock grant expense 608 (8 )
616
Total salaries and employee benefits 34,931 5,289 29,642 Net occupancy expense 3,147 120 3,027 Equipment expense 2,164 89 2,075 FDIC assessment fees 701 656 45 ATM, interchange and credit card expense 2,772 (213 )
2,985
Professional and service fees 2,139 (455 )
2,594
Printing, stationery and supplies 325 (241 )
566
Operational and other losses 287 (289 )
576
Software amortization and expense 2,619 595
2,024
Amortization of intangible assets 412 (97 ) 509 Other: Data processing fees 406 (17 ) 423 Postage 377 76 301 Advertising 721 401 320 Correspondent bank service charges 230 26
204
Telephone 1,276 313
963
Public relations and business development 667 (208 ) 875 Directors' fees 616 (9 ) 625 Audit and accounting fees 346 (98 ) 444 Legal fees and other related costs 522 228 294 Regulatory exam fees 337 61 276 Travel 245 (67 ) 312 Courier expense 206 (10 ) 216 Other real estate owned 28 (12 ) 40 Other 2,249 (3,733 ) 5,982 Total other 8,226 (3,049 ) 11,275 Total Noninterest Expense$ 57,723 $ 2,405 $ 55,318 56
-------------------------------------------------------------------------------- Table of Contents 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 ofMarch 31, 2021 , total loans held-for-investment were$5.32 billion , an increase of$151.53 million , as compared toDecember 31, 2020 . During the first quarter of 2021,$167.54 million of PPP loans originated in 2020 were forgiven and$216.68 million of new PPP loans were originated. Total PPP loans outstanding were$531.81 million atMarch 31, 2021 , which are included in the Company's commercial loan totals. PPP loan balances accounted for$499.35 million in average balances for the quarter endedMarch 31, 2021 . AtMarch 31, 2021 , approximately$16 million of deferred loan fees related to PPP loans, including approximately$11 million for 2021 originations, continues to be amortized over the shorter of the repayment period or the contractual life of 24 to 60 months. As compared to year-end 2020 balances, total real estate loans increased$95.49 million , total commercial loans increased$42.37 million , agricultural loans decreased$4.50 million and total consumer loans increased$18.17 million . Loans averaged$5.30 billion for the first quarter of 2021, an increase of$628.71 million from the prior year first quarter average balances. In conjunction with the adoption of ASC 326, the Company expanded its four loan portfolio segments used under its legacy disclosures into the following ten portfolio segments. For modeling purposes, our loan portfolio segments include C&I, Municipal, Agricultural, Construction and Development, Farm, Non-Owner Occupied and Owner Occupied CRE, Residential, Consumer Auto and Consumer Non-Auto. This additional segmentation allows for a more precise pooling of loans with similar credit risk characteristics and credit monitor procedures for the Company's calculation of its allowance for credit losses. The loans originated as a result of the Company's participation in the PPP program, discussed in further detail on page 50, are included in the C&I loan portfolio segment as ofMarch 31, 2021 andDecember 31, 2020 . Table 5 outlines the composition of the Company's held-for-investment loans by portfolio segment. For all periods prior toDecember 31, 2020 , management has elected to maintain its previously disclosed loan portfolio segments. 57 -------------------------------------------------------------------------------- Table of Contents Table 5 - Composition of Loans (in thousands): March 31, December 31, 2021 2020 2020 Commercial: C&I$ 1,178,126 $ N/A$ 1,131,382 Municipal 176,949 N/A 181,325 Total Commercial 1,355,075 869,450 1,312,707 Agricultural 90,366 99,582 94,864 Real Estate: Construction & Development 587,928 N/A 553,959 Farm 162,046 N/A 152,237 Non-Owner Occupied CRE 650,144 N/A 617,686 Owner Occupied CRE 759,906 N/A 746,974 Residential 1,254,727 N/A 1,248,409Total Real Estate 3,414,751 3,249,249 3,319,265 Consumer: Auto 370,027 N/A 353,595 Non-Auto 92,343 N/A 90,602 Total Consumer 462,370 421,108 444,197 Total$ 5,322,562 $ 4,639,389 $ 5,171,033 Loans held-for-sale, consisting of secondary market mortgage loans, totaled$65.41 million ,$42.03 million , and$83.97 million atMarch 31, 2021 and 2020, andDecember 31, 2020 , respectively. AtMarch 31, 2021 and 2020 andDecember 31, 2020 ,$3.89 million ,$2.38 million and$4.38 million , respectively, are valued using the lower of cost or fair value, and the remaining amounts are valued under the fair value option. Asset Quality . Our loan portfolio is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by bank regulatory agencies. Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were$39.66 million atMarch 31, 2021 , as compared to$40.44 million atMarch 31, 2020 and$42.90 million atDecember 31, 2020 . As a percent of loans held-for-investment and foreclosed assets, these assets were 0.75% atMarch 31, 2021 , as compared to 0.87% atMarch 31, 2020 and 0.83% atDecember 31, 2020 . As a percent of total assets, these assets were 0.33% atMarch 31, 2021 , as compared to 0.42% atMarch 31, 2020 and 0.39% atDecember 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 atMarch 31, 2021 . 58 -------------------------------------------------------------------------------- Table of Contents Supplemental Oil and Gas Information . As ofMarch 31, 2021 , the Company's exposure to the oil and gas industry totaled 2.20% of total loans held-for-investment, excluding PPP loans, or$105.26 million , down$976 thousand fromDecember 31, 2020 year-end levels. These oil and gas loans consisted (based on collateral supporting the loan) of (i) development and production loans of 11.02%, (ii) oil and gas field servicing loans of 5.76%, (iii) real estate loans of 56.71%, (iv) accounts receivable and inventory of 2.47%, (v) automobile of 8.17% and (vi) other of 15.87%. These have warranted additional scrutiny because of fluctuating oil and gas prices and the COVID pandemic. The Company instituted additional monitoring procedures for these loans and has classified and downgraded loans as appropriate. The following oil and gas information is as of and for the quarters endedMarch 31, 2021 and 2020, and the year endedDecember 31, 2020 (in thousands, except percentages): March 31,
2021 2020 2020
Oil and gas related loans, excluding PPP loans$ 105,261 $ 117,223 $ 106,237 Oil and gas related loans as a % of total loans held-for-investment, excluding PPP loans 2.20 % 2.53 % 2.27 % Classified oil and gas related loans$ 10,079 $ 22,032 $ 13,298 Nonaccrual oil and gas related loans 4,759 3,477 4,774 Net charge-offs for oil and gas related loans for quarter/year then ended 40 606 825 Supplemental COVID-19 Industry Exposure. In addition, atMarch 31, 2021 , loan balances in the retail/restaurant/hospitality industries totaled$430.20 million or 8.98% of the Company's total loans held-for-investment, excluding PPP loans. These loans comprised$45.21 million of classified loans, including$6.58 million in nonaccrual loans. There were no net charge-offs related to this portfolio for the quarter endedMarch 31, 2021 . Additional information related to the Company's retail/restaurant/hospitality industries follows below (in thousands, except percentages): 59
--------------------------------------------------------------------------------
Table of Contents
March 31, December 31,
2021 2020 2020
Retail loans $ 282,310 $ 217,380 $ 216,244
Restaurant loans 51,772 25,570 48,618
Hotel loans 71,435 46,690 71,716
Other hospitality loans 24,014 8,470 21,970
Travel loans 664 937 780
Total Retail/Restaurant/Hospitality loans,
excluding PPP loans $ 430,195 $ 299,047 Retail/Restaurant/Hospitality loans as a % of total loans held-for-investment, excluding PPP loans 8.98 % 6.45 % 7.67 % Classified Retail/Restaurant/Hospitality loans$ 45,214 $ 5,680 $ 31,192 Nonaccrual Retail/Restaurant/Hospitality loans 6,575 867 5,975 Net Charge-Offs for Retail/Restaurant/Hospitality loans quarter/year then ended - 130 561
Table 6 - Nonaccrual, Past Due 90 Days or More and Still Accruing, Restructured Loans and Foreclosed Assets (in thousands, except percentages):
March 31, December 31,
2021 2020 2020
Nonaccrual loans $ 39,333 $ 39,226 $ 42,619
Loans still accruing and past due 90 days
or more 2 209 113
Troubled debt restructured loans* 23 26 24
Nonperforming loans 39,358 39,461 42,756
Foreclosed assets 300 983 142
Total nonperforming assets $ 39,658 $ 40,444 $ 42,898
As a % of loans
held-for-investment
and foreclosed assets 0.75 % 0.87 % 0.83 %
As a % of total assets 0.33 0.42 0.39
* Troubled debt restructured loans of
business conditions and collection efforts, is doubtful are included in
nonaccrual loans at March 31, 2021 and 2020, and December 31, 2020 ,
respectively.
60-------------------------------------------------------------------------------- Table of Contents We record interest payments received on nonaccrual loans as reductions of principal. Prior to the loans being placed on nonaccrual, we recognized interest income on these loans of approximately$255 thousand for the year endedDecember 31, 2020 . If interest on these loans had been recognized on a full accrual basis during the year endedDecember 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). The provision for credit losses was a reversal of$2.00 million , which was made up of a reversal of provision for loan losses of$3.43 million offset by a$1.43 million provision for unfunded commitments for the first quarter of 2021, as compared to$9.85 million for the first quarter of 2020. The net reversal provision for credit losses in 2021 reflects the continued improvement in the economic outlook for our markets acrossTexas and overall improvements in asset quality. As a percent of average loans, net loan charge-offs were 0.01% for the first quarter of 2021, as compared to 0.16% for the first quarter of 2020. The allowance for credit losses as a percent of loans held-for-investment was 1.18% as ofMarch 31, 2021 , as compared to 1.30% as ofMarch 31, 2020 and 1.29% as ofDecember 31, 2020 . The allowance for credit losses as a percent of loans held-for-investment, excluding PPP loans, was 1.31% as ofMarch 31, 2021 , as compared to 1.30% as ofMarch 31, 2020 and 1.42% as ofDecember 31, 2020 . Table 7 - Loan Loss Experience and Allowance for Credit Losses (in thousands, except percentages): Three-Months Ended March 31, 2021 2020 Allowance for credit losses at period-end$ 62,974 $ 60,440 Loans held-for-investment at period-end 5,322,562 4,639,389 Average loans for period 5,296,149 4,667,436 Net charge-offs/average loans (annualized) 0.01 % 0.16 % Allowance for loan losses/period-end loans held-for-investment 1.18 % 1.30 % Allowance for loan losses/non-accrual loans, past due 90 days still accruing and restructured loans 160.00 %
153.16 %
Interest-Bearing Demand Deposits in Banks. AtMarch 31, 2021 , our interest-bearing deposits in banks were$893.22 million compared to$76.38 million atMarch 31, 2020 and$517.97 million atDecember 31, 2020 , respectively. AtMarch 31, 2021 , interest-bearing deposits in banks included$892.82 million maintained at theFederal Reserve Bank of Dallas and$403 thousand on deposit with the FHLB. Available-for-Sale Securities . AtMarch 31, 2021 , securities with a fair value of$5.11 billion were classified as securities available-for-sale. As compared toDecember 31, 2020 , the available-for-sale portfolio atMarch 31, 2021 reflected (i) an increase of$90.14 million in obligations of states and political subdivisions, (ii) an increase of$32.41 million in corporate bonds and other, and (iii) an increase of$594.05 million in mortgage-backed securities. Our mortgage related securities are backed by GNMA,FNMA or FHLMC or are collateralized by securities backed by these agencies. See Note 2 to the consolidated financial statements (unaudited) for additional disclosures relating to the investment portfolio atMarch 31, 2021 and 2020, andDecember 31, 2020 . 61 -------------------------------------------------------------------------------- Table of Contents Table 8 - Maturities and Yields of Available-for-Sale Securities Held atMarch 31, 2021 (in thousands, except percentages): Maturing by Contractual Maturity After One Year After Five Years One Year Through Through After or Less Five Years Ten Years Ten Years Total Available-for-Sale: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Obligations of states and political subdivisions$ 130,649 4.72 % $
732,873 3.89 %
$ 2,517,017 3.25 % Corporate bonds and other securities 4,477 1.42 - - 32,490 1.65 - - 36,967 1.62 Mortgage-backed securities 160,019 1.97 1,724,083 2.02 569,992 1.61 101,553 2.07 2,555,647 1.93 Total$ 295,145 3.18 % $
2,456,956 2.58 %
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 ofMarch 31, 2021 , the investment portfolio had an overall tax equivalent yield of 2.53%, a weighted average life of 5.13 years and modified duration of 4.55 years. Deposits . Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were$9.41 billion as ofMarch 31, 2021 , as compared to$7.21 billion as ofMarch 31, 2020 and$8.68 billion as ofDecember 31, 2020 . Table 9 provides a breakdown of average deposits and rates paid for the three-month periods endedMarch 31, 2021 and 2020, respectively. Table 9 - Composition of Average Deposits (in thousands, except percentages): Three-Months Ended March 31, 2021 2020 Average Average Average Average Balance Rate Balance Rate Noninterest-bearing deposits$ 3,114,656 - %$ 2,291,535 - % Interest-bearing deposits: Interest-bearing checking 2,901,819 0.09 2,446,031 0.53 Savings and money market accounts 2,535,474 0.09 1,983,701 0.47 Time deposits under$250,000 324,758 0.34
341,514 0.87
Time deposits of
Total interest-bearing deposits 5,916,237 0.12 % 4,904,087 0.55 % Total average deposits$ 9,030,893 $ 7,195,622 Total cost of deposits 0.08 % 0.37 % 62
-------------------------------------------------------------------------------- Table of Contents Borrowings. Included in borrowings were federal funds purchased, securities sold under repurchase agreements and advances from the FHLB of$548.60 million ,$857.87 million and$430.09 million atMarch 31, 2021 and 2020 andDecember 31, 2020 , respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the short-term borrowings. The average balance of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were$456.62 million and$460.61 million in the first quarters of 2021 and 2020, respectively. The weighted average interest rates paid on these borrowings were 0.08% and 0.45% for the first quarters of 2021 and 2020, respectively. 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$1.67 billion , or 13.76% of total assets atMarch 31, 2021 , as compared to$1.53 billion , or 15.73% of total assets atMarch 31, 2020 , and$1.68 billion , or 15.39% of total assets atDecember 31, 2020 . Included in shareholders' equity atMarch 31, 2021 and 2020 andDecember 31, 2020 were$117.01 million ,$123.58 million and$170.40 million , respectively, in unrealized gains on investment securities available-for-sale, net of related income taxes. For the first quarter of 2021, total shareholders' equity averaged$1.67 billion , or 14.83% of average assets, as compared to$1.48 billion , or 16.10% of average assets, during the same period in 2020. Banking regulators measure capital adequacy by means of the risk-based capital ratios and the leverage ratio under the Basel III regulatory capital framework and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and off-balance-sheet commitments and contingencies according to prescribed risk categories. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders' equity less intangible assets by quarter-to-date average assets less intangible assets. Beginning inJanuary 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% onJanuary 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 ofMarch 31, 2021 and 2020, andDecember 31, 2020 , we had a total capital to risk-weighted assets ratio of 21.47%, 20.65% and 22.03%, a Tier 1 capital to risk-weighted assets ratio of 20.32%, 19.55% and 20.79%; a common equity Tier 1 to risk-weighted assets ratio of 20.32%, 19.55% and 20.79% and a leverage ratio of 11.55%, 12.49% and 11.86%, respectively. The regulatory capital ratios as ofMarch 31, 2021 and 2020, andDecember 31, 2020 were calculated under Basel III rules. 63
--------------------------------------------------------------------------------
Table of Contents The regulatory capital ratios of the Company and Bank under the Basel III regulatory capital framework are as follows:
Minimum Capital
Required-Basel III Required to be
Fully Considered Well-
Actual Phased-In* Capitalized
As of March 31, 2021: Amount Ratio Amount Ratio Amount Ratio
Total Capital to Risk-Weighted
Assets:
Consolidated $ 1,312,779 21.47 % $ 642,092 10.50 % $ 611,516 10.00 %
First Financial Bank, N.A $ 1,174,022 19.24 % $ 640,757 10.50 % $ 610,245 10.00 %
Tier 1 Capital to Risk-Weighted
Assets:
Consolidated $ 1,242,887 20.32 % $ 519,788 8.50 % $ 366,909 6.00 %
First Financial Bank, N.A $ 1,104,130 18.09 % $ 518,708 8.50 % $ 488,196 8.00 %
Common Equity Tier 1 Capital to
Risk-Weighted Assets:
Consolidated $ 1,242,887 20.32 % $ 428,061 7.00 % - N/A
First Financial Bank, N.A $ 1,104,130 18.09 % $ 427,172 7.00 % $ 396,659 6.50 %
Leverage Ratio:
Consolidated $ 1,242,887 11.55 % $ 430,308 4.00 % - N/A
First Financial Bank, N.A $ 1,104,130 10.30 % $
428,971 4.00 %
* AtMarch 31, 2021 , the capital conservation buffer under Basel III has been fully phased-in. Minimum Capital Required-Basel III Required to be Fully Considered Well- Actual Phased-In* Capitalized As of March 31, 2020: Amount Ratio Amount Ratio Amount Ratio Total Capital to Risk-Weighted Assets: Consolidated$ 1,156,657 20.65 %$ 588,194 10.50 %$ 560,185 10.00 % First Financial Bank, N.A$ 1,026,860 18.37 %$ 586,949 10.50 %$ 558,999 10.00 % Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,095,409 19.55 %$ 476,157 8.50 %$ 336,111 6.00 % First Financial Bank, N.A$ 965,612 17.27 %$ 475,149 8.50 %$ 447,200 8.00 % Common Equity Tier 1 Capital to Risk-Weighted Assets: Consolidated$ 1,095,409 19.55 %$ 392,129 7.00 % - N/A First Financial Bank, N.A$ 965,612 17.27 %$ 391,300 7.00 %$ 363,350 6.50 % Leverage Ratio: Consolidated$ 1,095,409 12.49 %$ 350,764 4.00 % - N/A First Financial Bank, N.A$ 965,612 11.05 %$ 349,495 4.00 %$ 436,869 5.00 % 64
--------------------------------------------------------------------------------
Table of Contents
Minimum Capital
Required Under Required to be
Basel III Considered Well-
Actual Phase-In 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 %
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 repricing intervals of
interest-earning assets and interest-bearing liabilities are different. Our
exposure to interest rate risk is managed primarily through our strategy of
selecting the types and terms of interest-earning assets and interest-bearing
liabilities that generate favorable earnings while limiting the potential
negative effects of changes in market interest rates. We use no
off-balance-sheet
financial instruments to manage interest rate risk.
Our subsidiary bank has an asset liability management committee that monitors
interest rate risk and compliance with investment policies. The subsidiary bank
utilizes an earnings simulation model as the primary quantitative tool in
measuring the amount of interest rate risk associated with changing market
rates. The model quantifies the effects of various interest rate scenarios on
projected net interest income and net income over the next twelve months. The
model measures the impact on net interest income relative to a base case
scenario of hypothetical fluctuations in interest rates over the next
twelve months. These simulations incorporate assumptions regarding balance sheet
growth and mix, pricing and the
re-pricing
and maturity characteristics of the existing and projected balance sheet.
The following analysis depicts the estimated impact on net interest income of
immediate changes in interest rates at the specified levels for period
presented.
Percentage change in net interest income:
Change in interest rates: March 31, December 31,
(in basis points) 2021 2020 2020
+400 17.54 % 0.31 % 18.18 %
+300 13.39 % 0.38 % 13.99 %
+200 9.05 % 0.19 % 9.51 %
+100 4.51 % 0.03 % 4.75 %
-100 (4.72 )% (0.88 )% (3.46 )%
-200 (7.21 )% (1.70 )% (5.44 )%
65-------------------------------------------------------------------------------- Table of Contents The results for the net interest income simulations as ofMarch 31, 2021 andDecember 31, 2020 resulted in an asset sensitive position. Our model simulation as ofMarch 31, 2020 , indicated that our balance sheet is relatively asset sensitive. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each year-end 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 repricing of our interest-earning assets and our interest-bearing liabilities, we could be required to dispose of our assets in an unfavorable manner or pay a higher than market rate to fund our activities. Our asset liability committee oversees and monitors this risk. 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 withFrost Bank , a nonaffiliated bank, which matures inJune 2021 (see next paragraph). Our subsidiary bank also has federal funds purchased lines of credit with two non-affiliated banks totaling$130.00 million . AtMarch 31, 2021 , there were no amounts drawn on these lines of credit. Our subsidiary bank also has (i) an available line of credit with the FHLB totaling$1.53 billion atMarch 31, 2021 , secured by portions of our loan portfolio and certain investment securities and (ii) access to theFederal Reserve Bank of Dallas lending program. AtMarch 31, 2021 , the Company had no outstanding advances from the FHLB.The Company renewed its loan agreement, effectiveJune 30, 2019 , withFrost 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 toJune 30, 2021 , interest is paid quarterly atThe Wall Street Journal Prime Rate and the line of credit maturesJune 30, 2021 . If a balance exists atJune 30, 2021 , the principal balance converts to a term facility payable quarterly over five years and interest is paid quarterly atThe 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 66 -------------------------------------------------------------------------------- Table of Contents dividends as a percentage of our consolidated net income in a range of 37% (low) in 1995 to 53% (high) in 2003 and 2006. The Company was in compliance with the financial and operational covenants atMarch 31, 2021 . There was no outstanding balance under the line of credit as ofMarch 31, 2021 and 2020, orDecember 31, 2020 . In addition, we anticipate that future acquisitions of financial institutions, expansion of branch locations or offerings of new products could also place a demand on our cash resources. Available cash and cash equivalents at our parent company which totaled$121.79 million atMarch 31, 2021 , investment securities which totaled$2.54 million atMarch 31, 2021 and mature over 9 to 10 years, available dividends from our subsidiaries which totaled$260.95 million atMarch 31, 2021 , utilization of available lines of credit, and future debt or equity offerings are expected to be the source of funding for these potential acquisitions or expansions. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. 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 ofMarch 31, 2021 , management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. We are monitoring closely the economic impact of the coronavirus on our customers and the communities we serve. 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. AtMarch 31, 2021 , the Company's reserve for unfunded commitments totaled$6.92 million which is recorded in other liabilities. Our exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. We generally use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, as we deem necessary upon extension of credit, is based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment and income-producing commercial properties. Standby letters of credit are conditional commitments we issue to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The average collateral value held on letters of credit usually exceeds the contract amount. 67 -------------------------------------------------------------------------------- Table of Contents Table 10 - Commitments as ofMarch 31, 2021 (in thousands): Total Notional Amounts Committed Unfunded lines of credit$ 886,274 Unfunded commitments to extend credit 788,842 Standby letters of credit 41,202 Total commercial commitments$ 1,716,318 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. AtMarch 31, 2021 ,$260.95 million was available for the payment of intercompany dividends by our subsidiaries without the prior approval of regulatory agencies. Our subsidiaries paid aggregate dividends of$6.00 million and$2.50 million for the three-month periods endedMarch 31, 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 withFrost Bank to dividend no greater than 55% of net income, as defined in such loan agreement. The cash dividend payout ratios have amounted to 32.50% and 45.82% of net earnings for the first three months of 2021 and 2020, respectively. 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 theFederal 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. TheFederal Reserve , theFDIC 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. TheFederal Reserve , the OCC and theFDIC have issued policy statements that recommend that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. 68
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
