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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
Commission file number
0-7674
 
 
FIRST FINANCIAL BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Texas
  
75-0944023
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
400 Pine Street, Abilene, Texas
 
79601
(Address of principal executive offices)
  
(Zip Code)
(325)
627-7155
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
   
Trading Symbol(s)
   
Name of each exchange on which registered
Common Stock, $0.01 par value    FFIN    The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
☒
    No  
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
☒
    No  
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer   ☒    Accelerated filer   ☐
Non-accelerated filer   ☐    Smaller reporting company   ☐
     Emerging growth company   ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act).    Yes  
☐
    No  ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class
  
Outstanding at July 28, 2020
Common Stock, $0.01 par value per share   142,035,396
 
 
 
Table of Contents
TABLE OF
CONTENTS
 
 
 
  
 
PART I
 
     
 
 
  
 
FINANCIAL INFORMATION
 
         
 
 
 
 
Item
 
 
  
Page
 
         
 
 
  
 
      1.   
 
  
 
3
 
 
 
  
 
  
 
  
 
4
 
 
 
  
 
  
 
  
 
5
 
 
 
  
 
  
 
  
 
6
 
 
 
  
 
  
 
  
 
7
 
 
 
  
 
  
 
  
 
9
 
 
 
  
 
  
 
  
 
10
 
         
 
 
  
 
2.   
 
  
 
37
 
         
 
 
  
 
3.   
 
  
 
60
 
         
 
 
  
 
4.   
 
  
 
60
 
     
 
 
  
 
PART II
 
     
 
 
  
 
OTHER INFORMATION
 
         
 
 
  
 
1.   
 
  
 
61
 
         
 
 
  
 
1A.
 
  
 
61
 
         
 
 
  
 
2.   
 
  
 
61
 
         
 
 
  
 
3.   
 
  
 
61
 
         
 
 
  
 
4.   
 
  
 
62
 
         
 
 
  
 
5.   
 
  
 
62
 
         
 
 
  
 
6.   
 
  
 
63
 
         
 
 
  
 
  
 
  
 
65
 
 
2
Table of Contents
PART I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
The consolidated balance sheets of First Financial Bankshares, Inc. and Subsidiaries (the “Company” or “we”) at June 30, 2020 and 2019 (unaudited) and December 31, 2019, and the consolidated statements of earnings, comprehensive earnings and shareholders’ equity for the three and
six-months
ended June 30, 2020 and 2019 (unaudited), and the consolidated statements of cash flows for the
six-months
ended June 30, 2020 and 2019 (unaudited) and notes to consolidated financial statements (unaudited), follow on pages
4
through 3
6
.
 
3
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
  
June 30,
    
December 31,
  
    2020     2019     2019  
  
(Unaudited)
    
 
ASSETS
      
CASH AND DUE FROM BANKS
  $
188,373
    $
178,345
    $
231,534
 
FEDERAL FUNDS SOLD
   
—  
      
700
     
3,150
 
INTEREST-BEARING DEMAND DEPOSITS IN BANKS
   
196,426
     
128,652
     
47,920
 
                         
Total cash and cash equivalents
   
384,799
     
307,697
     
282,604
 
                         
INTEREST-BEARING TIME DEPOSITS IN BANKS
   
—  
      
960
     
—  
  
                         
SECURITIES
AVAILABLE-FOR-SALE,
at fair value
    
4,118,863
     
3,259,492
     
3,413,317
 
                         
LOANS:
   
     
     
 
Held for investment
   
5,253,067
     
4,040,952
     
4,194,969
 
Less - allowance for loan losses
    
(68,947
 )    
(51,820
 )    
(52,499
 )
                         
Net loans held for investment
   
5,184,120
     
3,989,132
     
4,142,470
 
Held for sale ($63,293, $18,981 and $23,076 at fair value at June 30, 2020 and 2019 and December 31, 2019, respectively)
   
66,370
     
22,305
     
28,228
 
                         
 
  
 
 
 
 
 
 
 
 
 
 
  
Net loans
   
5,250,490
     
4,011,437
     
4,170,698
 
                         
BANK PREMISES AND EQUIPMENT, net
   
138,933
     
134,322
     
131,022
 
GOODWILL AND INTANGIBLE ASSETS, net
   
319,365
     
174,151
     
173,667
 
OTHER ASSETS
   
127,367
     
91,234
     
90,919
 
                         
Total assets
  $
10,339,817
    $
7,979,293
    $
8,262,227
 
                         
LIABILITIES AND SHAREHOLDERS’ EQUITY
      
NONINTEREST-BEARING DEPOSITS
  $
2,941,679
    $
2,167,552
    $
2,065,128
 
INTEREST-BEARING DEPOSITS
   
5,215,963
     
4,202,214
     
4,538,678
 
                         
 
  
 
 
 
 
 
 
 
 
 
 
  
Total deposits
   
8,157,642
     
6,369,766
     
6,603,806
 
                         
DIVIDENDS PAYABLE
   
18,462
     
16,294
     
16,306
 
BORROWINGS
   
449,224
     
362,005
     
381,356
 
OTHER LIABILITIES
   
132,040
     
66,480
     
33,562
 
                         
Total liabilities
   
8,757,368
     
6,814,545
     
7,035,030
 
                         
COMMITMENTS AND CONTINGENCIES
 
 
 
  
 
 
  
 
 
                         
SHAREHOLDERS’ EQUITY:
 
 
 
  
 
 
  
 
 
Common stock
-
($0.01 par value, authorized 200,000,000 shares; 142,035,396, 135,809,224 and 135,891,755 shares issued at June 30, 2020 and 2019 and December 31, 2019, respectively)
   
1,420
     
1,358
     
1,359
 
Capital surplus
   
666,963
     
448,349
     
450,676
 
Retained earnings
   
762,830
     
655,794
     
707,656
 
Treasury stock (shares at cost: 932,018, 929,441 and 927,408 at June 30, 2020 and 2019 and December 31,
 
2019, respectively)
   
(8,697
 )    
(7,823
 )    
(8,222
 )
Deferred compensation
   
8,697
     
7,823
     
8,222
 
Accumulated other comprehensive earnings, net of income taxes
   
151,236
     
59,247
     
67,506
 
                         
Total shareholders’ equity
   
1,582,449
     
1,164,748
     
1,227,197
 
                         
 
  
 
 
 
 
 
 
 
 
 
 
  
Total liabilities and shareholders’ equity
  $
10,339,817
    $
7,979,293
    $
8,262,227
 
                         
See notes to consolidated financial statements.
 
4
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)
(Dollars in thousands, except per share amounts)
 
     Three Months Ended June 30,      Six Months Ended June 30,  
 
2020
    
2019
    
2020
    
2019
  
INTEREST INCOME:
 
 
 
  
 
 
  
 
 
  
 
 
Interest and fees on loans
  $
65,932
    $
55,740
    $
128,927
    $
108,971
 
Interest on investment securities:
   
     
     
     
 
Taxable
   
14,029
     
13,925
     
28,684
     
27,213
 
Exempt from federal income tax
   
12,149
     
9,244
     
21,844
     
19,007
 
Interest on federal funds sold and interest-bearing deposits in banks
   
87
     
667
     
842
     
1,286
 
                                 
Total interest income
   
92,197
     
79,576
     
180,297
     
156,477
 
INTEREST EXPENSE:
 
 
 
  
 
 
  
 
 
  
 
 
Interest on deposits
   
2,550
     
7,286
     
9,230
     
13,947
 
Other
   
412
     
675
     
929
     
1,401
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest expense
   
2,962
     
7,961
     
10,159
     
15,348
 
                                 
Net interest income
   
89,235
     
71,615
     
170,138
     
141,129
 
PROVISION FOR LOAN LOSSES
    
8,700
     
600
     
18,550
     
1,565
 
                                 
Net interest income after provision for loan losses
   
80,535
     
71,015
     
151,588
     
139,564
 
                                 
NONINTEREST INCOME:
 
 
 
  
 
 
  
 
 
  
 
 
Trust fees
   
6,961
     
7,027
     
14,398
     
14,006
 
Service charges on deposit accounts
   
4,318
     
5,374
     
10,233
     
10,550
 
ATM, interchange and credit card fees
   
8,049
     
7,352
     
15,449
     
14,192
 
Gain on sale and fees on mortgage loans
   
13,676
     
4,721
     
17,528
     
8,195
 
Net gain on sale of
available-for-sale
securities (includes $1,512 and $676 for the three
-
months ended June 30, 2020 and 2019, respectively, and $3,574 and $676 for the six
-
months ended June 30, 2020 and 2019, respectively, related to accumulated other comprehensive earnings reclassifications)
    
1,512
     
676
     
3,574
     
676
 
Net gain on sale of foreclosed assets
   
52
     
53
     
53
     
122
 
Net gain (loss) on sale of assets
   
(24
 )    
6
     
92
     
6
 
Interest on loan recoveries
   
154
     
903
     
419
     
1,241
 
Other
   
2,221
     
1,864
     
3,905
     
3,425
 
                                 
Total noninterest income
   
36,919
     
27,976
     
65,651
     
52,413
 
NONINTEREST EXPENSE:
 
 
 
  
 
 
  
 
 
  
 
 
Salaries, commissions and employee benefits
   
30,814
     
27,394
     
60,456
     
53,918
 
Loss from partial settlement of pension plan
   
—  
      
—  
      
—  
      
900
 
Net occupancy expense
   
3,101
     
2,779
     
6,128
     
5,542
 
Equipment expense
   
2,010
     
2,331
     
4,085
     
4,784
 
FDIC insurance premiums
   
463
     
538
     
508
     
1,076
 
ATM, interchange and credit card expenses
   
2,610
     
2,427
     
5,595
     
4,810
 
Professional and service fees
   
2,497
     
1,987
     
5,090
     
3,820
 
Printing, stationery and supplies
   
533
     
502
     
1,099
     
868
 
Operational and other losses
   
728
     
480
     
1,304
     
746
 
Software amortization and expense
   
2,010
     
1,783
     
4,034
     
3,380
 
Amortization of intangible assets
   
508
     
264
     
1,017
     
532
 
Other
   
8,047
     
7,819
     
19,324
     
15,297
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total noninterest expense
   
53,321
     
48,304
     
108,640
     
95,673
 
                                 
EARNINGS BEFORE INCOME TAXES
    
64,133
     
50,687
     
108,599
     
96,304
 
I
NCOME TAX EXPENSE
(includes $318 and $142 for the three months ended June 30, 2020 and 2019, respectively, and $751 and $142 for the six months ended June 30, 2020 and 2019, respectively, related to income tax expense from reclassification items)
    
10,663
     
8,594
     
17,898
     
15,959
 
                                 
NET EARNINGS
   $
53,470
    $
42,093
    $
90,701
    $
80,345
 
                                 
EARNINGS PER SHARE, BASIC
   $
0.38
    $
0.31
    $
0.64
    $
0.59
 
                                 
EARNINGS PER SHARE, DILUTED
   $
0.38
 
 
   $
0.31
    $
0.64
    $
0.59
 
                                 
DIVIDENDS PER SHARE
   $
0.13
    $
0.12
    $
0.25
    $
0.23
 
                                 
See notes to consolidated financial statements.
 
5
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED)
(Dollars in thousands)
 
     Three Months Ended June 30,     Six Months Ended June 30,  
 
2020
    
2019
    
2020
    
2019
  
NET EARNINGS
   $
53,470
    $
42,093
    $
90,701
    $
80,345
 
                                 
OTHER ITEMS OF COMPREHENSIVE EARNINGS:
 
 
 
  
 
 
  
 
 
  
 
 
Change in unrealized gain on investment securities
available-for-sale,
before income taxes
    
36,524
     
37,057
     
109,561
     
72,071
 
                                 
Reclassification adjustment for realized gains on investment securities included in net earnings,
 
before income tax
   
(1,512
 )    
(676
 )    
(3,574
 )    
(676
 )
                                 
Total other items of comprehensive earnings
   
35,012
     
36,381
     
105,987
     
71,395
 
                                 
Income tax expense related to other items of comprehensive earnings
   
(7,352
 )    
(7,640
 )    
(22,257
 )    
(14,993
 )
                                 
COMPREHENSIVE EARNINGS
   $
81,130
    $
70,834
    $
174,431
    $
136,747
 
                                 
See notes to consolidated financial statements.
6
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
 
     Common Stock     Capital     Retained     Treasury Stock     Deferred     
Accumulated
Other
Comprehensive
     
Total
Shareholders’
  
     Shares     Amount     Surplus     Earnings     Shares     Amounts     Compensation      Earnings      Equity  
Balances at March 31, 2019 (unaudited)
 
 
135,680,420
 
 
$
1,356
 
 
$
445,672
 
 
$
629,988
 
 
 
(928,678
)
 
$
(7,660
)
 
$
7,660
 
 
$
30,506
 
 
$
1,107,522
 
Net earnings (unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
42,093
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
42,093
 
Stock option exercises (unaudited)
 
 
81,272
 
 
 
2
 
 
 
938
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
940
 
Restricted stock grant (unaudited)
 
 
47,532
 
 
 
—  
 
 
 
1,426
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
1,426
 
Cash dividends declared, $0.12
per share (unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(16,287
)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(16,287
)
Change in unrealized gain in investment securities available-for-sale, net of related income taxes (unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
28,741
 
 
 
28,741
 
Shares purchased (redeemed) in connection with directors’
deferred compensation plan, net
(unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(763
)
 
 
(163
)
 
 
163
 
 
 
—  
 
 
 
—  
 
Stock option expense (unaudited)
 
 
—  
 
 
 
—  
 
 
 
313
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
313
 
                                                                         
Balances at June 30, 2019 (unaudited)
 
 
135,809,224
 
 
$
1,358
 
 
$
448,349
 
 
$
655,794
 
 
 
(929,441
)
 
$
(7,823
)
 
$
7,823
 
 
$
59,247
 
 
$
1,164,748
 
                                                                         
Balances at March 31, 2020 (unaudited)
 
 
142,314,930
 
 
$
1,423
 
 
$
673,535
 
 
$
727,828
 
 
 
(928,417
)
 
$
(8,437
)
 
$
8,437
 
 
$
123,576
 
 
$
1,526,362
 
Net earnings (unaudited)
 
 
—  
 
 
 
—
  
 
 
 
—  
 
 
 
53,470
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
53,470
 
Stock option exercises (unaudited)
 
 
16,532
 
 
 
—  
 
 
 
289
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
289
 
Restricted stock grant (unaudited)
 
 
28,736
 
 
 
—  
 
 
 
795
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
795
 
Cash dividends declared, $0.13
per
share (unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(18,468
)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(18,468
)
Change in unrealized gain in investment securities available-for-sale, net of related income taxes (unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
27,660
 
 
 
27,660
 
Shares purchased (redeemed) in
connection with directors’
deferred compensation plan, net
(unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(3,601
)
 
 
(260
)
 
 
260
 
 
 
—  
 
 
 
—  
 
Stock option expense (unaudited)
 
 
—  
 
 
 
—  
 
 
 
349
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
349
 
Shares repurchased under stock
repurchase authorization
(unaudited)
 
 
(324,802
)
 
 
(3
)
 
 
(8,005
)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(8,008
)
                                                                         
Balances at June 30, 2020 (unaudited)
 
 
142,035,396
 
 
$
1,420
 
 
$
666,963
 
 
$
762,830
 
 
 
(932,018
)
 
$
(8,697
)
 
$
8,697
 
 
$
151,236
 
 
$
1,582,449
 
                                                                         
 
(continued)
 
7
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
 
     Common Stock     Capital     Retained     Treasury Stock     Deferred     
Accumulated
Other
Comprehensive
     
Total
Shareholders’
  
     Shares     Amount     Surplus     Earnings     Shares     Amounts     Compensation      Earnings      Equity  
Balances at December 31, 2018
 
 
67,753,133
 
 
$
678
 
 
$
443,114
 
 
$
606,658
 
 
 
(467,811
)
 
$
(7,507
)
 
$
7,507
 
 
$
2,845
 
 
$
1,053,295
 
Net earnings (unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
80,345
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
80,345
 
Stock option exercises (unaudited)
 
 
168,349
 
 
 
2
 
 
 
3,184
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
3,186
 
Restricted stock grant (unaudited)
 
 
47,532
 
 
 
—  
 
 
 
1,426
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
1,426
 
Cash dividends declared, $0.23

per share (unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(30,531
)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(30,531
)
Change in unrealized gain in investment securities available-for-sale, net of related income taxes (unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
56,402
 
 
 
56,402
 
Shares purchased (redeemed) in
connection with directors’
deferred compensation plan, net
(unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
2,709
 
 
 
(316
)
 
 
316
 
 
 
—  
 
 
 
—  
 
Stock option expense (unaudited)
 
 
—  
 
 
 
—  
 
 
 
625
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
625
 
Two-for-one
stock split in the form of a
100% stock dividend (unaudited)
 
 
67,840,210
 
 
 
678
 
 
 
—  
 
 
 
(678
)
 
 
(464,339
)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
                                                                         
Balances at June 30, 2019 (unaudited)
 
 
135,809,224
 
 
$
1,358
 
 
$
448,349
 
 
$
655,794
 
 
 
(929,441
)
 
$
(7,823
)
 
$
7,823
 
 
$
59,247
 
 
$
1,164,748
 
                                                                         
Balances at December 31, 2019
 
 
135,891,755
 
 
$
1,359
 
 
$
450,676
 
 
$
707,656
 
 
 
(927,408
)
 
$
(8,222
)
 
$
8,222
 
 
$
67,506
 
 
$
1,227,197
 
Stock issued in acquisition of TB&T
Bancshares, Inc. (unaudited)
 
 
6,275,574
 
 
 
63
 
 
 
220,210
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
220,273
 
Net earnings (unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
90,701
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
90,701
 
Stock option exercises (unaudited)
 
 
160,720
 
 
 
1
 
 
 
2,480
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
2,481
 
Restricted stock grant (unaudited)
 
 
32,149
 
 
 
—  
 
 
 
913
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
913
 
Cash dividends declared, $0.25

per share (unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(35,527
)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(35,527
)
Change in unrealized gain in investment securities available-for-sale, net of related income taxes (unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
83,730
 
 
 
83,730
 
Shares purchased (redeemed) in
connection with directors’
deferred compensation plan, net
(unaudited)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(4,610
)
 
 
(475
)
 
 
475
 
 
 
—  
 
 
 
—  
 
Stock option expense (unaudited)
 
 
—  
 
 
 
—  
 
 
 
689
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
689
 
Shares repurchased under stock
repurchase authorization
(unaudited)
 
 
(324,802
)
 
 
(3
)
 
 
(8,005
)
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(8,008
)
                                                                         
Balances at June 30, 2020 (unaudited)
 
 
142,035,396
 
 
$
1,420
 
 
$
666,963
 
 
$
762,830
 
 
 
(932,018
)
 
$
(8,697
)
 
$
8,697
 
 
$
151,236
 
 
$
1,582,449
 
                                                                         
See notes to consolidated financial statements.
 
8
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(Dollars in thousands)
 
  
Six Months Ended June 30,
 
 
2020
   
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
  
 
 
Net earnings
 
$
90,701
    $
80,345
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
   
     
 
Depreciation and amortization
   
5,935
     
5,946
 
Provision for loan losses
   
18,550
     
1,565
 
Securities premium amortization (discount accretion), net
   
17,018
     
12,217
 
Gain on sale of assets, net
   
(3,719
 )    
(804
) 
Deferred federal income tax (expense) benefit
    
(407
 )    
2,206
 
Change in loans
held-for-sale
   
(36,018
 )    
(631
 )
Change in other assets
   
(16,452
 )    
2,649
 
Change in other liabilities
   
38,274
     
5,219
 
                 
Total adjustments
   
23,181
     
28,367
 
                 
Net cash provided by operating activities
   
113,882
     
108,712
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
  
 
 
Cash received in acquisition of TB&T Bancshares, Inc.
   
61,028
     
—  
  
Net decrease in interest-bearing time deposits in banks
   
—  
      
498
 
Activity in
available-for-sale
securities:
    
     
 
Sales
   
252,958
     
66,052
 
Maturities
   
5,654,371
     
2,201,877
 
Purchases
   
(6,392,611
 )    
(2,280,686
 )
Net increase in loans
   
(614,577
 )    
(88,629
 )
Purchases of bank premises and equipment
   
(7,681
 )    
(6,360
 )
Proceeds from sale of bank premises and equipment and other assets
   
1,144
     
187
 
                 
Net cash used in investing activities
   
(1,045,368
 )    
(107,061
 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
  
 
 
Net increase in noninterest-bearing deposits
   
638,726
     
51,445
 
Net increase in interest-bearing deposits
   
365,985
     
137,932
 
Net increase (decrease) in borrowings
   
67,868
     
(106,701
 )
Common stock transactions:
   
     
 
Proceeds from stock issuances
   
2,481
     
3,186
 
Dividends paid
   
(33,371
 )    
(28,463
 )
Repurchase of stock
   
(8,008
 )    
—  
  
                 
Net cash provided by financing activities
   
1,033,681
     
57,399
 
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
   
102,195
     
59,050
 
                 
CASH AND CASH EQUIVALENTS, beginning of period
   
282,604
     
248,647
 
                 
CASH AND CASH EQUIVALENTS, end of period
 
$
384,799
    $
307,697
 
                 
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS:
   
     
 
Interest paid
 
$
10,246
    $
15,062
 
Federal income taxes paid
   
—  
      
12,752
 
Transfer of loans and bank premises to other real estate
   
45
     
364
 
Investment securities purchased but not settled
   
33,554
     
29,355
 
Restricted stock grant to officers and directors
   
913
     
1,426
 
Stock issued in acquisition of TB&T Bancshares, Inc.
      220,273       —    
See notes to consolidated financial statements.
 
9
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
First Financial Bankshares, Inc. (a Texas corporation) (“Company”, “we” or “us”) is a financial holding company which owns all of the capital stock of one bank with 78 locations located in Texas as of June 30, 2020. The Company’s subsidiary bank is First Financial Bank, National Association, Abilene, Texas. The Company’s primary source of revenue is providing loans and banking services to consumers and commercial customers in the market area in which First Financial Bank, National Association, is located. In addition, the Company also owns First Financial Trust & Asset Management Company, National Association, First Financial Insurance Agency, Inc., and First Technology Services, Inc.
A summary of significant accounting policies of the Company and its subsidiaries applied in the preparation of the accompanying consolidated financial statements follows. The accounting principles followed by the Company and the methods of applying them are in conformity with both United States generally accepted accounting principles (“GAAP”) and prevailing practices of the banking industry.
The Company evaluated subsequent events for potential recognition through the date the consolidated financial statements were issued.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates include its allowance for loan losses and its valuation of securities.
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated.
Stock Split and Increase in Authorized Shares
On April 23, 2019, the Company’s Board of Directors declared a two-for-one stock split of the Company’s outstanding common
 
shares in the form of a 100% stock dividend
 effective on June 3, 2019. In addition, the shareholders of the Company approved an amendment to the Amended and Restated Certificate of Formation to increase the number of authorized shares to 200,000,000. All per share amounts in this report have been restated to reflect this stock split. An amount equal to the par value of the additional common shares issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock in the consolidated financial statements as of and for the six
-
months ended June 30, 2019.
Stock Repurchase
On March 12, 2020, the Company’s Board of Directors authorized the repurchase of up to 4,000,000 common shares through September 30, 2021. Previously, the Board of Directors had authorized the repurchase of up to 2,000,000 common shares through September 30, 2020. The stock repurchase plan
 
10
Table of Contents
authorizes management to repurchase the stock at such time as repurchases are considered beneficial to
the Company and stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Through June 30, 2020, 324,802 shares were repurchased totaling $8,008,000 under this repurchase plan. Subsequent to June 30, 2020 and through July 28, 2020, no additional shares were repurchased.
 The s
hares
repurch
ased
were
 reti
red.
Acquisition
On January 1, 2020, the Company acquired 100% of the outstanding capital stock of TB&T Bancshares, Inc. through the merger of a wholly-owned subsidiary with and into TB&T Bancshares, Inc. Following such merger, TB&T Bancshares, Inc. and its wholly-owned subsidiary, The Bank & Trust of Bryan/College Station, Texas were merged into the Company and First Financial Bank, National Association, respectively. The results of operations of TB&T Bancshares, Inc. subsequent to the acquisition date, are included in the consolidated earnings of the Company. See note 11 for additional information.
Status of New Accounting Standard for Accounting for Allowance for Credit Losses
On January 1, 2020, ASU
2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, became effective for the Company which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. It also applies to
off-balance
sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, ASU
2016-13
made changes to the accounting for
available-for-sale
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 Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States that included an option for entities to delay the implementation of ASU
2016-13
until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. The Company elected to delay its implementation of ASU
2016-13
and has calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASU
2016-13.
Prior to the CARES Act being signed and our election to delay the implementation of CECL, we were completing our CECL implementation plan with our cross-functional working group, under the direction of our Chief Credit Officer along with our Chief Accounting Officer, Chief Lending Officer and Chief Financial Officer. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. Our
 co
nti
nuing
 implementation plan include
s
 assessment and documentation of processes, internal controls and data sources; model development, documentation and validation; and system configuration, among other things. We contracted with a third-party vendor to assist us in the implementation of CECL.
Other Recently Issued and Effective Authoritative Accounting Guidance
ASU 2016-02, “Leases.”
ASU
2016-02
amended current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a
right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU
2016-02
did not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. The amended guidance was effective in the first quarter of 2019 and required transition using a modified retrospective approach for leases
 
11
Table of Contents
existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company evaluated the provision of the new lease standard and, due to the small dollar amounts and number of lease agreements, all considered operating leases, the effect for the Company on January 1, 2019 was not significant.
ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs
:
Premium Amortization on Purchased Callable Debt Securities.”
ASU
2017-08
addressed the amortization method for all callable bonds purchased at a premium to par. Under the revised guidance, entities are required to amortize premiums on callable bonds to the earliest call date. ASU
2017-08
was effective in 2019 although early adoption was permitted. The Company elected to early adopt ASU
2017-08
in the first quarter of 2017. The adoption of this guidance did not have a material impact on the Company’s financial statements.
ASU 2017-04, “Intangibles – Goodwill and Other.”
ASU
2017-04
will amend and simplify current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the
qualitative
assessment for a reporting unit to determine if a quantitative impairment test is necessary. ASU
2017-04
became effective for the Company on January 1, 2020 and did not have a significant impact on the Company’s financial statements.
ASU 2018-13, “Fair Value Measurement (Topic 820). – Disclosure Framework
-
 Changes to the Disclosure Requirements for Fair Value Measurement.”
ASU
2018-13
modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU
2018-13
remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU
2018-13
became effective on January 1, 2020 and did not have a significant impact on the Company’s financial statements.
ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.”
ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for
intraperiod
tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019
-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for the Company for annual reporting periods beginning after December 15, 2020, and interim periods within. Adoption of ASU 2019-12 is not expected to have a material impact on the Company’s financial statements.
Investment Securities
Management classifies debt and equity securities as
held-to-maturity,
available-for-sale,
or trading based on its intent. Debt securities that management has the positive intent and ability to hold to maturity are classified as
held-to-maturity
and recorded at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using the interest method. Debt securities not classified as
held-to-maturity
or trading are classified as
available-for-sale
and recorded at fair value, with all unrealized gains and unrealized losses judged to be temporary, net of deferred income taxes, excluded from earnings and reported in the consolidated statements of comprehensive earnings.
Available-for-sale
debt securities that have unrealized gains and losses are excluded from earnings and reported net of tax in accumulated other comprehensive income until realized. Declines in the fair value of
available-for-sale
debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as a realized loss if there is no ability or intent to hold to recovery. If the Company does not intend to sell and will not be required to sell prior to recovery of its amortized cost basis, only the credit component of the impairment is reflected in earnings as a realized loss with the noncredit portion recognized in other comprehensive income. In estimating other-than-temporary impairment losses, we consider (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Increases or decreases in the fair value of equity securities are recorded in earnings.
The Company records its
available-for-sale
debt and equity securities portfolio at fair value. Fair values of these securities are determined based on methodologies in accordance with current authoritative accounting guidance. Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, credit ratings and yield curves. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market specific to the type of security.
12
Table of Contents
When the fair value of a debt security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exists.
Available-for-sale
and
held-to-maturity
debt securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) whether we have the intent to sell our debt securities prior to recovery and/or maturity, (ii) whether it is more likely than not that we will have to sell our debt securities prior to recovery and/or maturity, (iii) the length of time and extent to which the fair value has been less than amortized cost, and (iv) the financial condition of the issuer. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the debt security may be different than previously estimated, which could have a material effect on the Company’s results of operations and financial condition.
The Company’s investment portfolio consists of U.S. Treasury securities, obligations of state and political subdivisions, mortgage pass-through securities, corporate bonds and general obligation or revenue based municipal bonds. Pricing for such securities is generally readily available and transparent in the market. The Company utilizes independent third-party pricing services to value its investment securities, which the Company reviews as well as the underlying pricing methodologies for reasonableness and to ensure such prices are aligned with pricing matrices. The Company validates prices supplied by the independent pricing services by comparison to prices obtained from other third-party sources on a quarterly basis.
Loans
Held-for-Investment
and Allowance for Loan Losses
Loans held for investment are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amounts outstanding. The Company defers and amortizes net loan origination fees and costs as an adjustment to yield. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectability of the principal is unlikely.
The allowance for loan losses is an amount which represents management’s best estimate of probable losses that are inherent in the Company’s loan portfolio as of the balance sheet date. The allowance for loan losses is comprised of three elements: (i) specific reserves determined based on probable losses on specific classified loans; (ii) a historical valuation reserve component that considers historical loss rates and estimated loss emergence periods; and (iii) qualitative reserves based upon general economic conditions and other qualitative risk factors both internal and external to the Company. The allowance for loan losses is increased by charges to income and decreased by
charge-offs
(net of recoveries). Management’s periodic evaluation of the appropriateness of the allowance is based on general economic conditions, the financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio. For purposes of determining our historical valuation reserve, the loan portfolio, less cash secured loans, government guaranteed loans and classified loans, is multiplied by the Company’s historical loss rate adjusted for the estimated loss emergence period. Specific allocations are increased or decreased in accordance with deterioration or improvement in credit quality and a corresponding increase or decrease in risk of loss on a particular loan. In addition, we adjust our allowance for qualitative factors such as current local economic conditions and trends, including, without limitations, unemployment, oil and gas prices, drought conditions, changes in lending staff, policies and procedures, changes in credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans. This qualitative reserve serves to estimate for additional areas of losses inherent in our portfolio that are not reflected in our historic loss factors.
13
Table of Contents
Although we believe we use the best information available to make loan loss allowance determinations, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making our initial determinations. A decline in the economy could result in increased levels of
non-performing
assets and charge-offs, increased loan provisions and reductions in income. Additionally, bank regulatory agencies periodically review our allowance for loan losses and methodology and could require, in accordance with U.S. GAAP, additional provisions to the allowance for loan losses based on their judgment of information available to them at the time of their examination as well as changes to our methodology.
Accrual of interest is discontinued on a loan and payments are applied to principal when management believes, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. Except consumer loans, generally all loans past due greater than 90 days, based on contractual terms, are placed on
non-accrual.
Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Consumer loans are generally
charged-off
when a loan becomes past due 90 days. For other loans in the portfolio, facts and circumstances are evaluated in making
charge-off
decisions.
Loans are considered impaired when, based on current information and events, management determines that it is probable we will be unable to collect all amounts due in accordance with the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectable.
The Company’s policy requires measurement of the allowance for an impaired, collateral dependent loan based on the fair value of the collateral less cost to sell. Other loan impairments for
non-collateral
dependent loans are measured based on the present value of expected future cash flows or the loan’s observable market price. At June 30, 2020 and 2019 and December 31, 2019, all significant impaired loans have been determined to be collateral dependent and the allowance for loss has been measured utilizing the estimated fair value of the collateral less cost to sell.
From time to time, the Company modifies its loan agreement with a borrower. A modified loan is considered a troubled debt restructuring when two conditions are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity. For all impaired loans, including the Company’s troubled debt restructurings, the Company performs a periodic, well-documented credit evaluation of the borrower’s financial condition and prospects for repayment to assess the likelihood that all principal and interest payments required under the terms of the agreement will be collected in full. When doubt exists about the ultimate collectability of principal and interest, the troubled debt restructuring remains on
non-accrual
status and payments received are applied to reduce principal to the extent necessary to eliminate such doubt. This determination of accrual status is judgmental and is based on facts and circumstances related to each troubled debt restructuring. Each of these loans is individually evaluated for impairment and a specific reserve is recorded based on probable losses, taking into consideration the related collateral, modified loan terms and cash flow. As of June 30, 2020 and 2019, and December 31, 2019, substantially all of the Company’s troubled debt restructured loans 
were on
 
non-accrual
.
The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to
COVID-19
made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the
COVID-19
national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act.
14
Table of Contents
Loans acquired, including loans acquired in a business combination, are initially recorded at fair value with no valuation allowance. Acquired loans are segregated between those considered to be credit impaired and those deemed performing. To make this determination, management considers such factors as past due status,
non-accrual
status and credit risk ratings. The fair value of acquired performing loans is determined by discounting expected cash flows, both principal and interest, at prevailing market interest rates. The difference between the fair value and principal balances at acquisition date, the fair value discount, is accreted into interest income over the estimated life of the acquired portfolio.
Purchased credit impaired loans are those loans that showed evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all amounts contractually owed. Their acquisition fair value, which includes a credit component at the acquisition date, was based on the estimate of cash flows, both principal and interest, expected to be collected or estimated collateral values if cash flows are not estimable, discounted at prevailing market rates of interest. The difference between the discounted cash flows expected at acquisition and the investment in the loan is recognized as interest income on a level-yield method over the life of the loan, unless management was unable to reasonably forecast cash flows in which case the loans were placed on nonaccrual. Subsequent to the acquisition date, increases in expected cash flows will generally result in a recovery of any previously recorded allowance for loan loss, to the extent applicable, and/or a reclassification from the
non-accretable
difference to accretable yield, which will be recognized prospectively. Decreases in expected cash flows subsequent to acquisition are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition. The carrying amount of purchased credit impaired loans at June 30, 2020 and 2019 and December 31, 2019 were $7,275,000, $464,000 and $251,000, respectively, compared to a contractual balance of $9,818,000, $750,000 and $345,000, respectively. Other purchased credit impaired loan disclosures have been omitted due to immateriality.
Other Real Estate
Other real estate owned is foreclosed property held pending disposition and is initially recorded at fair value, less estimated costs to sell. At foreclosure, if the fair value of the real estate, less estimated costs to sell, is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Any subsequent reduction in value is recognized by a charge to income. Operating and holding expenses of such properties, net of related income, and gains and losses on their disposition are included in net gain (loss) on sale of foreclosed assets as incurred.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the respective lease or the estimated useful lives of the improvements, whichever is shorter.
Business Combinations, Goodwill and Other Intangible Assets
The Company accounts for all business combinations under the purchase method of accounting. Tangible and intangible assets and liabilities of the acquired entity are recorded at fair value. Intangible assets with
finite useful lives represent the future benefit associated with the acquisition of the core deposits and are amortized over seven years, utilizing a method that approximates the expected attrition of the deposits. Goodwill with an indefinite life is not amortized, but rather tested annually for impairment as of June 30 each year. There was no impairment recorded for the three and six
-
months ended June 30, 2020 or 2019
, respectively.
15
Table of Contents
Securities Sold Under Agreements To Repurchase
Securities sold under agreements to repurchase, which are classified as borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of the cash received in connection with the transaction. The Company may be required to provide additional collateral based on the estimated fair value of the underlying securities.
Segment Reporting
The Company has determined that its banking regions meet the aggregation criteria of the current authoritative accounting guidance since each of its banking regions offer similar products and services, operate in a similar manner, have similar customers and report to the same regulatory authority, and therefore operate one line of business (community banking) located in a single geographic area (Texas).
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks, including interest-bearing deposits in banks with original maturity of 90 days or less, and federal funds sold.
Accumulated Other Comprehensive Income (Loss)
Unrealized net gains on the Company’s
available-for-sale
securities (after applicable income tax expense) totaling $151,236,000 and $60,571,000 at June 30, 2020 and 2019, respectively, and the minimum pension liability (after applicable income tax benefit) totaling ($1,324,000) at June 30, 2019, are included in accumulated other comprehensive income. There were no amounts under the minimum pension liability at June 30, 2020 (see note 9).
Income Taxes
The Company’s provision for income taxes is based on income before income taxes adjusted for permanent differences between financial reporting and taxable income. Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the grant date. The Company recorded stock option expense totaling $349,000 and $313,000 for the three-months ended June 30, 2020 and 2019, respectively. The Company recorded stock option expense totaling $689,000 and $625,000 for the
six-months
ended June 30, 2020 and 2019, respectively.
The Company also grants restricted stock for a fixed number of shares. The Company recorded expenses associated with its director and officer restricted stock grants totaling $482,000 and $345,000, for the three-months ended June 30, 2020 and 2019, respectively. The Company recorded expenses associated with its director and officer restricted stock grants totaling $932,000 and $685,000 for the
six-months
ended June 30, 2020 and 2019, respectively.
See note 8 for further information.
Advertising Costs
Advertising costs are expensed as incurred.
 
16
Table of Contents
Per Share Data
Net earnings per share (“EPS”) are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. The Company calculates dilutive EPS assuming all outstanding stock options to purchase common shares and unvested restricted stock shares have been exercised and/or vested at the beginning of the year (or the time of issuance, if later.) The dilutive effect of the outstanding options and restricted stock is reflected by application of the treasury stock method, whereby the proceeds from the exercised options and restricted stock are assumed to be used to purchase common shares at the average market price during the respective
period
. Anti-dilutive shares for the three and
six-months
ended June 30, 2020 were 448,000 and 35,000, respectively, and excluded from the computation of EPS. For the three and
six-
 
months
ended June 30, 2019, there were no anti-dilutive. The following table reconciles the computation of basic EPS to dilutive EPS:
 
  
Net
Earnings
(in thousands)
   
Weighted
Average
Shares
   
Per Share
Amount
 
For the three-months ended June 30, 2020:
   
     
     
 
Net earnings per share, basic
  $
53,470
     
141,973,522
    $
0.38
 
Effect of stock options and stock grants
   
—  
      
480,561
      
—  
  
                         
Net earnings per share, diluted
  $
53,470
     
142,454,083
    $
0.38
 
                         
 
Net
Earnings
(in thousands)
   
Weighted
Average
Shares
   
Per Share
Amount
 
For the
six-months
ended June 30, 2020:
    
     
     
 
Net earnings per share, basic
  $
90,701
     
142,045,779
    $
0.64
 
Effect of stock options and stock grants
   
—  
      
473,529
      
—  
  
                         
Net earnings per share, diluted
  $
90,701
     
142,519,308
    $
0.64
 
                         
 
Net
Earnings
(in thousands)
   
Weighted
Average
Shares
   
Per Share
Amount
 
For the three-months ended June 30, 2019:
   
     
     
 
Net earnings per share, basic
  $
42,093
     
135,650,599
    $
0.31
 
Effect of stock options and stock grants
   
—  
      
567,636
      
—  
  
                         
Net earnings per share, diluted
  $
42,093
     
136,218,235
    $
0.31
 
                         
 
Net
Earnings
(in thousands)
   
Weighted
Average
Shares
   
Per Share
Amount
 
For the
six-months
ended June 30, 2019:
    
     
     
 
Net earnings per share, basic
  $
80,345
     
135,572,859
    $
0.59
 
Effect of stock options and stock grants
   
—  
      
622,952
      
—  
  
                         
Net earnings per share, diluted
  $
80,345
     
136,195,811
    $
0.59
 
                         
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Table of Contents
Note 2
-
 Securities
A summary of the Company’s
available-for-sale
securities follows (in thousands):
  
June 30, 2020
 
  
Amortized
Cost Basis
   
Gross
Unrealized
Holding Gains
   
Gross
Unrealized
Holding Losses
   
Estimated
Fair Value
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
  $
 
10,083
    $
40
    $
(1
 )   $
10,122
 
Obligations of states and political subdivisions
   
1,836,572
     
113,757
     
(50
 )    
1,950,279
 
Corporate bonds and other
   
4,398
     
171
     
—  
      
4,569
 
Residential mortgage-backed securities
   
1,517,139
     
54,652
     
(118
 )    
1,571,673
 
Commercial mortgage-backed securities
   
559,062
     
23,159
     
(1
 )    
582,220
 
                                 
Total securities
available-for-sale
  $
 
3,927,254
    $
191,779
    $
(170
 )
 
   $
 
4,118,863
 
                                 
  
June 30, 2019
 
  
Amortized
Cost Basis
   
Gross
Unrealized
Holding Gains
   
Gross
Unrealized
Holding Losses
   
Estimated
Fair Value
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
  $
9,984
    $
36
    $
—  
     $
10,020
 
Obligations of states and political subdivisions
   
1,103,682
     
53,593
     
(61
 )    
1,157,214
 
Corporate bonds and other
   
4,643
     
51
     
—  
      
4,694
 
Residential mortgage-backed securities
   
1,579,544
     
19,732
     
(3,101
 )    
1,596,175
 
Commercial mortgage-backed securities
   
484,919
     
6,929
     
(459
 )    
491,389
 
                                 
Total securities
available-for-sale
  $
 
3,182,772
    $
80,341
    $
(3,621
 )
 
   $
 
3,259,492
 
                                 
  
December 31, 2019
 
  
Amortized
Cost Basis
   
Gross
Unrealized
Holding Gains
   
Gross
Unrealized
Holding Losses
   
Estimated
Fair Value
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
  $
9,997
    $
22
    $
—  
     $
10,019
 
Obligations of states and political subdivisions
   
1,231,619
     
57,764
     
(400
 )    
1,288,983
 
Corporate bonds and other
   
4,643
     
65
     
—  
      
4,708
 
Residential mortgage-backed securities
   
1,586,872
     
23,139
     
(1,148
 )    
1,608,863
 
Commercial mortgage-backed securities
   
494,674
     
6,356
     
(286
 )    
500,744
 
                                 
Total securities
available-for-sale
  $
 
3,327,805
    $
87,346
    $
(1,834
 )
 
   $
 
3,413,317
 
                                 
The Company invests in mortgage-backed securities that have expected maturities that differ from their contractual maturities. These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty. These securities include collateralized mortgage obligations (CMOs) and other asset backed securities. The expected maturities of these securities at June 30, 2020 were computed by using scheduled amortization of balances and historical prepayment rates. At June 30, 2020 and 2019, and December 31, 2019, the Company did not hold CMOs that entail higher risks than standard mortgage-backed securities.
18
Table of Contents
The amortized cost and estimated fair value of
available-for-sale
securities at June 30, 2020 by contractual and expected maturity, are shown below (in thousands):
  
Amortized
Cost Basis
   
Estimated
Fair Value
 
Due within one year
  $
128,535
    $
129,521
 
Due after one year through five years
   
625,856
     
669,229
 
Due after five years through ten years
   
1,079,767
     
1,148,866
 
Due after ten years
   
16,895
     
17,354
 
Mortgage-backed securities
   
2,076,201
     
2,153,893
 
                 
Total
  $
3,927,254
    $
4,118,863
 
                 
The following tables disclose the Company’s investment securities that have been in a continuous
unrealized-loss
position for less than 12 months and for 12 or more months (in thousands):
                                                                                         
 
Less than 12 Months
   
12 Months or Longer
   
Total
 
June 30, 2020
   
Fair Value
     
Unrealized
Loss
     
Fair Value
     
Unrealized
Loss
     
Fair Value
     
Unrealized
Loss
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
  $
 
 
5,055
    $
1
    $
 
—  
     $
 
 —  
     $
5,055
    $
 
 
1
 
Obligations of states and political subdivisions
   
18,249
     
50
     
—  
      
—  
      
18,249
     
50
 
Residential mortgage-backed securities
   
12,590
     
45
     
6,454
     
73
     
19,044
     
118
 
Commercial mortgage-backed securities
   
4,936
     
1
     
—  
      
—  
      
4,936
     
1
 
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
  $
40,830
    $
97
    $
6,454
    $
73
    $
47,284
    $
170
 
                                                 
                                                                                         
 
Less than 12 Months
   
12 Months or Longer
   
Total
 
June 30, 2019
   
Fair Value
     
Unrealized
Loss
     
Fair Value
     
Unrealized
Loss
     
Fair Value
     
Unrealized
Loss
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
  $
 
—  
     $
 
—  
     $
 
9,777
    $
 
61
    $
 
9,777
    $
 
 
61
 
Residential mortgage-backed securities
   
17,594
     
77
     
404,946
     
3,024
     
422,540
     
3,101
 
Commercial mortgage-backed securities
   
—  
      
—  
      
134,881
     
459
     
134,881
     
459
 
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
  $
17,594
    $
77
    $
549,604
    $
3,544
    $
567,198
    $
3,621
 
                                                 
 
                                                                                         
 
Less than 12 Months
   
12 Months or Longer
   
Total
 
December 31, 2019
   
Fair Value
     
Unrealized
Loss
     
Fair Value
     
Unrealized
Loss
     
Fair Value
     
Unrealized
Loss
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
  $
 
 
65,787
    $
 
400
    $
 
326
    $
 
 —  
     $
 
 
66,113
    $
  
400
 
Residential mortgage-backed securities
   
100,004
     
306
     
103,983
     
842
     
203,987
     
1,148
 
Commercial mortgage-backed securities
   
74,560
     
178
     
35,178
     
108
     
109,738
     
286
 
                                                 
Total
  $
240,351
    $
884
    $
139,487
    $
950
    $
379,838
    $
 
 
1,834
 
                                                 
 
19
Table of Contents
The number of investments in an unrealized loss position totaled 14 at June 30, 2020. We do not believe these unrealized losses are “other-than-temporary” as (i) we do not have the intent to sell our securities prior to recovery and/or maturity and (ii) it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity. In making this determination, we also consider the length of time and extent to which fair value has been less than cost and the financial condition of the issuer. The unrealized losses noted are interest rate related due to the level of interest rates at June 30, 2020 compared to the time of purchase. We have reviewed the ratings of the issuers and have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities. Our mortgage related securities are backed by GNMA, FNMA and FHLMC or are collateralized by securities backed by these agencies. At June 30, 2020, 88.76% of our
available-for-sale
securities that are obligations of states and political subdivisions were issued within the State of Texas, of which 51.14% are guaranteed by the Texas Permanent School Fund.
At June 30, 2020, $2,685,828,000 of
the Company’s securities were pledged as collateral for public or trust fund deposits, repurchase agreements, a borrowing line with the Federal Reserve Bank of Dallas and for other purposes required or permitted by law.
During the three months ended June 30, 2020 and 2019, sales of investment securities that were classified as
available-for-sale
totaled $157,521,000 and $65,821,000, respectively. Gross realized gains from security sales during the second quarter of 2020 and 2019 totaled $1,516,000 and $689,000, respectively. Gross realized losses from security sales during
the three-month period ended June 30,
2
020 and 2019 totaled $4,000 and $13,000, respectively.
During the six months ended June 30, 2020 and 2019, sales of investment securities classified as
available-for-sale
totaled $252,958,000 and $66,052,000, respectively. Gross realized gains from security sales during the
six-month
periods ended June 30, 2020 and 2019 totaled $3,578,000 and $693,000, respectively. Gross realized losses from security sales during the
six-month
periods ended June 30, 2020 and 2019 totaled $4,000 and $17,000, respectively.
The specific identification method was used to determine cost in order to compute the realized gains and losses.
20
Table of Contents
Note 3 – Loans Held-for-Investment and Allowance for Loan Losses
Loans
held-for-investment
by class of financing receivables are as follows (in thousands):
 
                                                     
    
June 30,
     
December 31,
  
  
2020
   
2019
   
2019
 
Commercial
  $
1,509,454
    $
813,887
    $
856,326
 
Agricultural
   
97,448
     
97,535
     
103,640
 
Real estate
   
3,235,208
     
2,730,585
     
2,823,372
 
Consumer
   
410,957
     
398,945
     
411,631
 
                         
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
held-for-investment
  $
5,253,067
    $
4,040,952
    $
4,194,969
 
                         
The Company’s
non-accrual
loans, loans still accruing and past due 90 days or more and restructured loans are as follows (in thousands):
 
                                                     
    
June 30,
     
December 31,
  
  
202
0
    
2019
   
2019
 
Non-accrual
loans*
   $
39,320
    $
26,408
    $
24,582
 
Loans still accruing and past due 90 days or more
   
92
     
300
     
153
 
Troubled debt restructured
loans
 
still
accruing**
    
25
     
471
     
26
 
                         
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
  $
39,437
    $
27,179
    $
24,761
 
                         
 
* Includes $7,275,000, $464,000 and $251,000 of purchased credit impaired loans as of June 30, 2020 and 2019, and December 31, 2019, respectively.
** Troubled debt restructured loans of $4,673,000, $3,906,000 and $4,791,000, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in
non-accrual
loans at June 30, 2020 and 2019, and December 31, 2019, respectively.
The Company’s recorded investment in impaired loans and the related valuation allowance are as follows (in thousands):
 
June 30, 2020
     
June 30, 2019
     
December 31, 2019
  
Recorded
Investment
   
Valuation
Allowance
   
Recorded
Investment
   
Valuation
Allowance
   
Recorded
Investment
   
Valuation
Allowance
 
                                             
$
39,320
    $
3,046
    $
26,408
    $
3,866
    $
24,582
    $
3,228
 
                                             
The Company had $39,724,000, $27,860,000 and $25,770,000 in
non-accrual,
past due 90 days or more and still accruing, restructured loans and foreclosed assets at June 30, 2020 and 2019, and December 31, 2019, respectively.
Non-accrual
loans at June 30, 2020 and 2019, and December 31, 2019, consisted of the following by class of financing receivables (in thousands):
 
                                                     
    
June 30,
     
December 31,
  
  
2020
   
2019
   
2019
 
Commercial
  $
4,618
    $
8,189
    $
3,093
 
Agricultural
   
1,056
     
1,047
     
1,376
 
Real estate
   
33,170
     
16,787
     
19,787
 
Consumer
   
476
     
385
     
326
 
                         
Total
  $
39,320
    $
26,408
    $
24,582
 
                         
21
Table of Contents
No significant additional funds are committed to be advanced in connection with impaired loans as of June 30, 2020.
The Company’s impaired loans and related allowance are summarized in the following tables by class of financing receivables (in thousands). No interest income was recognized on impaired loans subsequent to their classification as impaired.
 
June 30, 2020
 
Unpaid
Contractual
Principal
Balance
   
Recorded
Investment
With No
Allowance*
   
Recorded
Investment
With
Allowance
   
Total
Recorded
Investment
   
Related
Allowance
   
Year-to-date
Average
Recorded
Investment
   
Three-
Month
Average
Recorded
Investment
 
Commercial
  $
6,013
    $
739
    $
3,879
    $
4,618
    $
1,250
    $
24,270
    $
23,572
 
Agricultural
   
1,287
     
529
     
527
     
1,056
     
83
     
219
     
179
 
Real Estate
   
45,703
     
20,370
     
12,800
     
33,170
     
1,711
     
17,586
     
17,107
 
Consumer
   
585
     
—  
      
476
     
476
     
2
     
606
     
552
 
                                                         
Total
  $
53,588
    $
21,638
    $
17,682
    $
39,320
    $
3,046
    $
42,681
    $
41,410
 
                                                         
 
* Includes $7,275,000 of purchased credit impaired loans.
 
June 30, 2019
 
Unpaid
Contractual
Principal
Balance
   
Recorded
Investment
With No
Allowance*
   
Recorded
Investment
With
Allowance
   
Total
Recorded
Investment
   
Related
Allowance
   
Year-to-date

Average
Recorded
Investment
   
Three-
Month
Average
Recorded
Investment
 
Commercial
  $
9,340
    $
6,212
    $
1,977
    $
8,189
    $
1,022
    $
8,699
    $
8,562
 
Agricultural
   
1,108
     
434
     
613
     
1,047
     
119
     
1,090
     
1,071
 
Real Estate
   
24,262
     
5,034
     
11,753
     
16,787
     
2,515
     
18,054
     
17,105
 
Consumer
   
525
     
27
     
358
     
385
     
210
     
465
     
427
 
                                                         
Total
  $
35,235
    $
11,707
    $
14,701
    $
26,408
    $
3,866
    $
28,308
    $
27,165
 
                                                         
 
* Includes $464,000 of purchased credit impaired loans.
 
December 31, 2019
 
Unpaid
Contractual
Principal
Balance
   
Recorded
Investment
With No
Allowance*
   
Recorded
Investment
With
Allowance
   
Total
Recorded
Investment
   
Related
Allowance
   
Year-to
-
date

Average

Recorded

Investment
 
Commercial
  $
4,511
    $
630
    $
2,463
    $
3,093
    $
1,042
    $
3,488
 
Agricultural
   
1,603
     
658
     
718
     
1,376
     
235
     
1,644
 
Real Estate
   
27,366
     
7,081
     
12,706
     
19,787
     
1,950
     
21,726
 
Consumer
   
469
     
—  
      
326
     
326
     
1
     
449
 
                                                 
Total
  $
33,949
    $
8,369
    $
16,213
    $
24,582
    $
3,228
    $
27,307
 
                                                 
 
* Includes $251,000 of purchased credit impaired loans.
The Company recognized interest income on impaired loans prior to being recognized as impaired of approximately $750,000 during the year ended December 31, 2019. Such amounts for the three-month and
six-month
periods ended June 30, 2020 and 2019 were not significant.
From a credit risk standpoint, the Company rates its loans in one of f
ive
 categories: (i) pass, (ii) special mention, (iii) substandard, (iv) doubtful or (v) loss (which are
charged-off).
The ratings of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on our credits as part of our
on-going
monitoring of the credit quality of our loan portfolio. Ratings are adjusted to reflect the degree of risk and loss that are felt to be inherent in each credit as of each reporting period. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).
22
Table of Contents
Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness, however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.
Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.
Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on
non-accrual.
The following summarizes the Company’s internal ratings of its loans
held-for-investment
by class of financing receivables and portfolio segments, which are the same (in thousands):
 
June 30, 2020
 
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
Commercial
  $
1,465,595
    $
8,950
    $
34,909
    $
 —  
     $
1,509,454
 
Agricultural
   
90,824
     
4,790
     
1,834
     
—  
      
97,448
 
Real Estate
   
3,086,894
     
49,493
     
98,821
     
—  
      
3,235,208
 
Consumer
   
408,857
     
256
     
1,844
     
—  
      
410,957
 
                                         
Total
  $
5,052,170
    $
63,489
    $
137,408
    $
—  
     $
5,253,067
 
                                         
 
June 30, 2019
 
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
Commercial
  $
767,275
    $
31,124
    $
15,488
    $
—  
     $
813,887
 
Agricultural
   
94,481
     
58
     
2,996
     
—  
      
97,535
 
Real Estate
   
2,656,139
     
20,044
     
54,402
     
—  
      
2,730,585
 
Consumer
   
397,017
     
264
     
1,664
     
—  
      
398,945
 
                                         
Total
  $
3,914,912
    $
51,490
    $
74,550
    $
 —  
     $
4,040,952
 
                                         
 
December 31, 2019
 
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
Commercial
  $
825,775
    $
20,971
    $
9,580
    $
—  
     $
856,326
 
Agricultural
   
101,614
     
64
     
1,962
     
—  
      
103,640
 
Real Estate
   
2,717,227
     
42,036
     
64,109
     
—  
      
2,823,372
 
Consumer
   
409,698
     
300
     
1,633
     
—  
      
411,631
 
                                         
Total
  $
4,054,314
    $
63,371
    $
77,284
    $
—  
     $
4,194,969
 
                                         
23
Table of Contents
The Company’s past due loans are as follows (in thousands):
 
June 30, 2020
 
15-59

Days
Past
Due*
   
60-89

Days
Past
Due
   
Greater
Than
 
90
Days
   
Total
Past
Due
   
Current
   
Total
Loans
   
90 Days
Past Due
Still
Accruing
 
Commercial
  $
 
4,563
    $
 
474
    $
129
    $
5,166
    $
1,504,288
    $
1,509,454
    $
—  
  
Agricultural
   
1,080
     
15
     
—  
      
1,095
     
96,353
     
97,448
     
—  
  
Real Estate
   
13,678
     
110
     
726
     
14,514
     
3,220,694
     
3,235,208
     
—  
  
Consumer
   
410
     
83
     
105
     
598
     
410,359
     
410,957
     
92
 
                                                         
Total
  $
19,731
    $
682
    $
960
    $
21,373
    $
5,231,694
    $
5,253,067
    $
92
 
                                                         
 
June 30, 2019
 
15-59

Days
Past
Due*
   
60-89

Days
Past
Due
   
Greater
Than
90
Days
   
Total
Past
Due
   
Current
   
Total
Loans
   
90 Days
Past Due
Still
Accruing
 
Commercial
  $
 
2,671
    $
352
    $
610
    $
3,633
    $
810,254
    $
813,887
    $
58
 
Agricultural
   
315
     
163
     
30
     
508
     
97,027
     
97,535
     
30
 
Real Estate
   
16,130
     
712
     
865
     
17,707
     
2,712,878
     
2,730,585
     
180
 
Consumer
   
821
     
99
     
40
     
960
     
397,985
     
398,945
     
32
 
                                                         
Total
  $
19,937
    $
1,326
    $
1,545
    $
22,808
    $
4,018,144
    $
4,040,952
    $
300
 
                                                         
 
December 31, 2019
 
15-59

Days
Past
Due*
   
60-89

Days
Past
Due
   
Greater
Than
90
Days
   
Total
Past
Due
   
Current
   
Total
Loans
   
90 Days
Past Due
Still
Accruing
 
Commercial
  $
3,257
    $
557
    $
722
    $
4,536
    $
851,790
    $
856,326
    $
112
 
Agricultural
   
183
     
44
     
400
     
627
     
103,013
     
103,640
     
—  
  
Real Estate
   
12,890
     
288
     
195
     
13,373
     
2,809,999
     
2,823,372
     
—  
  
Consumer
   
572
     
151
     
45
     
768
     
410,863
     
411,631
     
41
 
                                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Total
  $
16,902
    $
1,040
    $
1,362
    $
19,304
    $
4,175,665
    $
4,194,969
    $
153
 
                                                         
 
* The Company monitors commercial, agricultural and real estate loans after such loans are 15 days past due. Consumer loans are monitored after such loans are 30 days past due.
The following table details the allowance for loan losses by portfolio segment (in thousands). There were no allowances for purchased credit impaired loans at June 30, 2020 and 2019, and December 31, 2019. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
 
June 30, 2020
 
Commercial
   
Agricultural
   
Real Estate
   
Consumer
   
Total
 
Loans individually evaluated for impairment
  $
1,250
    $
83
    $
1,711
    $
2
    $
3,046
 
Loans collectively evaluated for impairment
   
17,322
     
2,461
     
40,912
     
5,206
     
65,901
 
                                         
Total
  $
18,572
    $
2,544
    $
42,623
    $
5,208
    $
68,947
 
                                         
 
June 30, 2019
 
Commercial
   
Agricultural
   
Real Estate
   
Consumer
   
Total
 
Loans individually evaluated for impairment
  $
1,022
    $
119
    $
2,515
    $
210
    $
3,866
 
Loans collectively evaluated for impairment
   
12,877
     
1,241
     
28,284
     
5,552
     
47,954
 
                                         
Total
  $
13,899
    $
1,360
    $
30,799
    $
5,762
    $
51,820
 
                                         
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Table of Contents
December 31, 2019
    Commercial      Agricultural      Real Estate      Consumer      Total  
Loans individually evaluated for impairment
  $
1,042
    $
235
    $
1,950
    $
1
    $
3,228
 
Loans collectively evaluated for impairment
   
11,080
     
971
     
32,024
     
5,196
     
49,271
 
                                         
Total
  $
12,122
    $
1,206
    $
33,974
    $
5,197
    $
52,499
 
                                         
Changes in the allowance for loan losses are summarized as follows by portfolio segment (in thousands):
 
Three months ended June 30, 2020
    Commercial     Agricultural      Real Estate     Consumer     Total  
Beginning balance
  $
11,773
    $
2,154
    $
41,256
    $
5,257
    $
60,440
 
Provision for loan losses
   
6,820
     
361
     
1,469
     
50
     
8,700
 
Recoveries
   
540
     
29
     
59
     
73
     
701
 
Charge-offs
   
(561
 )    
—  
      
(161
 )    
(172
 )    
(894
 ) 
                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
  $
18,572
    $
2,544
    $
42,623
    $
5,208
    $
68,947
 
                                         
 
Three months ended June 30, 2019
    Commercial     Agricultural     Real Estate     Consumer     Total  
Beginning balance
  $
12,475
    $
1,430
    $
31,887
    $
5,793
    $
51,585
 
Provision for loan losses
   
1,418
     
61
     
(929
 )    
50
     
600
 
Recoveries
   
423
     
5
     
60
     
209
     
697
 
Charge-offs
   
(417
 )    
(136
 )    
(219
 )    
(290
 )    
(1,062
 ) 
                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
  $
13,899
    $
1,360
    $
30,799
    $
5,762
    $
51,820
 
                                         
 
Six months ended June 30, 2020
    Commercial     Agricultural     Real Estate     Consumer     Total  
Beginning balance
  $
12,122
    $
1,206
    $
33,974
    $
5,197
    $
52,499
 
Provision for loan losses
   
7,615
     
1,310
     
9,390
     
235
     
18,550
 
Recoveries
   
690
     
30
     
135
     
164
     
1,019
 
Charge-offs
   
(1,855
 )    
(2
 )    
(876
 )    
(388
 )    
(3,121
 ) 
                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
  $
18,572
    $
2,544
    $
42,623
    $
5,208
    $
68,947
 
                                         
 
Six months ended June 30, 2019
    Commercial     Agricultural     Real Estate     Consumer     Total  
Beginning balance
  $
11,948
    $
1,446
    $
32,342
    $
5,466
    $
51,202
 
Provision for loan losses
   
1,612
     
42
     
(531
 )    
442
     
1,565
 
Recoveries
   
1,073
     
7
     
149
     
349
     
1,578
 
Charge-offs
   
(734
 )    
(135
 )    
(1,161
 )    
(495
 )    
(2,525
 ) 
                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
  $
13,899
    $
1,360
    $
30,799
    $
5,762
    $
51,820
 
                                         
The Company’s recorded investment in loans related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology is as follows (in thousands). Purchased credit impaired loans of $7,275,000, $464,000 and $251,000 at June 30, 2020 and 2019, and December 31, 2019, respectively, are included in loans individually evaluated for impairment.
 
June 30, 2020
    Commercial      Agricultural      Real Estate      Consumer      Total  
Loans individually evaluated for impairment
  $
4,618
    $
1,056
    $
33,170
    $
476
    $
39,320
 
Loans collectively evaluated for impairment
   
1,504,836
     
96,392
     
3,202,038
     
410,481
     
5,213,747
 
                                         
Total
  $
1,509,454
    $
97,448
    $
3,235,208
    $
410,957
    $
5,253,067
 
                                         
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Table of Contents
June 30, 2019
 
Commercial
   
Agricultural
   
Real Estate
   
Consumer
   
Total
 
Loans individually evaluated for impairment
  $
8,189
    $
1,047
    $
16,787
    $
385
    $
26,408
 
Loans collectively evaluated for impairment
   
805,698
     
96,488
     
2,713,798
     
398,560
     
4,014,544
 
                                         
Total
  $
813,887
    $
97,535
    $
2,730,585
    $
398,945
    $
4,040,952
 
                                         
 
December 31, 2019
 
Commercial
   
Agricultural
   
Real Estate
   
Consumer
   
Total
 
Loans individually evaluated for impairment
  $
3,093
    $
1,376
    $
19,787
    $
326
    $
24,582
 
Loans collectively evaluated for impairment
   
853,233
     
102,264
     
2,803,585
     
411,305
     
4,170,387
 
                                         
Total
  $
856,326
    $
103,640
    $
2,823,372
    $
411,631
    $
4,194,969
 
                                         
The Company’s loans that were modified and considered troubled debt restructurings are as follows (in thousands):
 
  
Three Months Ended June 30, 2020
   
Six Months Ended June 30, 2020
 
 
Number
   
Pre-

Modification
Recorded
Investment
    
Post-
Modification
Recorded
Investment
   
Number
   
Pre-

Modification
Recorded
Investment
    
Post-
Modification
Recorded
Investment
 
Commercial
   
4
    $
196
    $
196
     
9
    $
484
    $
484
 
Agricultural
   
—  
      
—  
      
—  
      
1
     
134
     
134
 
Real Estate
   
1
     
123
     
123
     
1
     
123
     
123
 
Consumer
   
—  
      
—  
      
—  
      
1
     
14
     
14
 
                                                 
Total
   
5
    $
319
    $
319
     
12
    $
755
    $
755
 
                                                 
 
  
Three Months Ended June 30, 2019
   
Six Months Ended June 30, 2019
 
 
Number
   
Pre-

Modification
Recorded
Investment
    
Post-
Modification
Recorded
Investment
   
Number
   
Pre-

Modification
Recorded
Investment
    
Post-
Modification
Recorded
Investment
 
Commercial
   
2
    $
122
    $
122
     
3
    $
279
    $
279
 
Agricultural
   
2
     
253
     
253
     
10
     
619
     
619
 
Real Estate
   
—  
      
—  
      
—  
      
4
     
650
     
650
 
Consumer
   
—  
      
—  
      
—  
      
—  
      
—  
      
—  
  
                                                 
Total
   
4
    $
375
    $
375
     
17
    $
1,548
    $
1,548
 
                                                 
The balances below provide information as to how the loans were modified as troubled debt restructured loans (in thousands):
 
  
Three Months Ended June 30, 2020
   
Six Months Ended June 30, 2020
 
 
Adjusted
Interest
Rate
   
Extended
Maturity
   
Combined
Rate and
Maturity
   
Adjusted
Interest
Rate
   
Extended
Maturity
   
Combined
Rate and
Maturity
 
Commercial
  $
—  
     $
—  
     $
196
    $
—  
     $
260
    $
224
 
Agricultural
   
—  
      
—  
      
—  
      
—  
      
134
     
—  
  
Real Estate
   
—  
      
—  
      
123
     
—  
      
—  
      
123
 
Consumer
   
—  
      
—  
      
—  
      
—  
      
14
     
—  
  
                                                 
Total
  $
—  
     $
—  
     $
319
    $
—  
     $
408
    $
347
 
                                                 
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Table of Contents
  
Three Months Ended June 30, 2019
   
Six Months Ended June 30, 2019
 
 
Adjusted
Interest
Rate
   
Extended
Maturity
   
Combined
Rate and
Maturity
   
Adjusted
Interest
Rate
   
Extended
Maturity
   
Combined
Rate and
Maturity
 
Commercial
  $
—  
     $
122
    $
—  
     $
—  
     $
279
    $
—  
  
Agricultural
   
—  
      
253
     
—  
      
—  
      
354
     
265
 
Real Estate
   
—  
      
—  
      
—  
      
—  
      
202
     
448
 
Consumer
   
—  
      
—  
      
—  
      
—  
      
—  
      
—  
  
                                                 
Total
  $
—  
     $
375
    $
—  
     $
—  
     $
835
    $
713
 
                                                 
During the three
-
months ended June 30, 2020 and 2019, no loans were modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default. During the six
-
months ended June 30, 2020 and 2019, no loans were modified as a troubled debt
restructured
loan within the previous 12 months and for which there was a payment default. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or more or results in the foreclosure and repossession of the applicable collateral.
As of June 30, 2020, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.
As discussed in note 1 to these financial statements, the CARES Act provided banks an option to elect to not account for certain loan modifications related to
COVID-19
as troubled debt restructurings as long as the borrowers were not more than 30 days past due as of December 31, 2019. The above disclosed troubled debt restructurings were not related to
COVID-19
modifications.
Beginning in mid-March of 2020, the Company began offering deferral and modification of principle and/or interest payments to selected borrowers on a case-by-case basis. At June 30, 2020, the Company had approximately 2,
2
00 loans totaling $468,539,000 million in outstanding loans subject to deferral and modification agreements, representing 10.30% of outstanding loans held for investment, excluding PPP loans.
Our subsidiary bank has established a line of credit with the Federal Home Loan Bank of Dallas (FHLB) to provide liquidity and meet pledging requirements for those customers eligible to have securities pledged to secure certain uninsured deposits. At June 30, 2020, $3,134,584,000 in loans held by our bank subsidiary were subject to blanket liens as security for this line of credit. At June 30, 2020, there was no balance outstanding under this line of credit.
Note 4 - Loans Held for Sale
Loans held for sale totaled $66,370,000, $22,305,000 and $28,228,000 at June 30, 2020 and 2019, and December 31, 2019, respectively. At June 30, 2020 and 2019, and December 31, 2019, $3,077,000, $3,324,000 and $5,152,000 are valued at the lower of cost or fair value, and the remaining amounts are valued under the fair value option. The change to the fair value option for loans held for sale was effective at June 30, 2018 and was done in conjunction with the Company’s move to mandatory delivery in the secondary market and the purchase of forward mortgage-backed securities to manage the changes in fair value (see note 5 for additional information).
These loans, which are sold on a servicing released basis, are valued using a market approach by utilizing either: (i) the fair value of the securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures (see note 10). Interest income on mortgage loans held for sale is recognized based on the contractual rates and reflected in interest income on loans in the consolidated statements of earnings.
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Table of Contents
The Company has no continuing ownership in any residential mortgage loans sold.
The Company originates certain mortgage loans for sale in the secondary market. The mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first three to six months, or if documentation is determined not to be in compliance with regulations. The Company’s historic losses as a result of these indemnities have been insignificant.
Note 5 
-
Derivative Financial Instruments
The Company enters into interest rate lock commitments (“IRLCs”) with customers to originate residential mortgage loans at a specific interest rate that are ultimately sold in the secondary market. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company.
The Company purchases forward mortgage-backed securities contracts to manage the changes in fair value associated with changes in interest rates related to a portion of the IRLCs. These instruments are typically entered into at the time the IRLC is made in the aggregate.
These financial instruments are not designated as hedging instruments and are used for asset and liability management needs. All derivatives are carried at fair value in either other assets or other liabilities, through earnings in the statement of earnings.
The fair values of IRLCs are based on current secondary market prices for underlying loans and estimated servicing value with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability (pull-through rate) net of estimated costs to originate the loan. The fair value of IRLCs is subject to change primarily due to changes in interest rates and the estimated pull-through rate. These commitments are classified as Level 2 in the fair value disclosures (see note 10), as the valuations are based on observable market inputs.
Forward mortgage-backed securities contracts are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract and these instruments are therefore classified as Level 
1
in the fair value disclosures (see note 10). The estimated fair values are subject to change primarily due to changes in interest rates. The impact of these forward contracts is included in gain on sale and fees on mortgage loans in the statement of earnings.
The following table provides the outstanding notional balances and fair values of outstanding derivative positions (dollars in thousands):
 
June 30, 2020:
 
Outstanding
Notional
Balance
   
Asset
Derivative
Fair Value
   
Liability
Derivative
Fair Value
 
IRLCs
  $
190,431
    $
5,037
    $
—  
  
Forward mortgage-backed securities trades
   
201,500
     
—  
      
1,099
 
 
June 30, 2019:
 
Outstanding
Notional
Balance
   
Asset
Derivative
Fair Value
   
Liability
Derivative
Fair Value
 
IRLCs
  $
89,655
    $
1,525
    $
 —  
  
Forward mortgage-backed securities trades
   
72,500
     
—  
      
254
 
 
December 31, 2019:
 
Outstanding
Notional
Balance
   
Asset
Derivative
Fair Value
   
Liability
Derivative
Fair Value
 
IRLCs
  $
47,415
    $
886
    $
 —  
  
Forward mortgage-backed securities trades
   
78,500
     
—  
      
152
 
 
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Table of Contents
Note 6 – Borrowings
Borrowings consisted of the following (dollars in thousands):
 
  
June 30,
   
December 31,
 
 
2020
   
2019
   
2019
 
Securities sold under agreements with customers to repurchase
  $
444,249
    $
356,555
    $
375,106
 
Federal funds purchased
   
4,975
     
5,450
     
6,250
 
Advances from Federal Home Loan Bank of Dallas
   
—  
      
—  
      
—  
  
                         
Total
  $
449,224
    $
362,005
    $
381,356
 
                         
Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which the Company pledges certain securities that have a fair value equal to at least the amount of the borrowings. The agreements mature daily and therefore the risk arising from a decline in the fair value of the collateral pledged is minimal. The securities pledged are mortgage-backed securities. These agreements do not include “right of
set-off”
provisions and therefore the Company does not offset such agreements for financial reporting purposes.
Note 7
-
 Income Taxes
Income tax expense was $10,663,000 for the second quarter of 2020 as compared to $8,594,000 for the same period in 2019. The Company’s effective tax rates on pretax income were 16.63% and 16.96% for the second quarters of 2020 and 2019, respectively. Income tax expense was $17,898,000 for the six months ended June 30, 2020 as compared to $15,959,000 for the same period in 2019. The Company’s effective tax rates on pretax income were 16.48% and 16.57% for the six months ended June
 
30,
 2020 and 2019, respectively. The effective tax rates differ from the statutory federal tax rate of 21% primarily due to tax exempt interest income earned on certain investment securities and loans, the deductibility of dividends paid to our employee stock ownership plan and excess tax benefits related to our directors’ deferred compensation plan.
Note 8
-
 Stock Option Plan and Restricted Stock Plan
The Company grants incentive stock options for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant to employees. On June 26, 2019, the Company granted 398,850 incentive stock options with an exercise price of $29.70 per share. The fair value of the options was $7.31 per option and was estimated using the Black-Scholes options pricing model with the following weighted average assumptions: risk free interest rate of 1.83%; expected dividend yield of 1.62%; expected life of 6.64 years; and expected volatility of 26.69%. On January 28, 2020, the Company granted 11,250 incentive stock options with an exercise price of $34.55 per share. Other stock option disclosures for this grant have not been provided due to insignificance.
The Company recorded stock option expense totaling $349,000 and $313,000 for the three-month periods ended June 30, 2020 and 2019, respectively. The Company recorded stock option expense totaling $689,000 and $625,000 for the six months ended June 30, 2020 and 2019, respectively. The additional disclosure requirements under authoritative accounting guidance have been omitted due to the amounts being insignificant.
On April 24, 2018, upon
re-election
of nine of the existing directors, 21,420 restricted shares with a total value of $540,000 were granted to these
non-employee
directors and were expensed over the period from grant date to April 23, 2019, the date of the next annual shareholders’ meeting at which the directors’ term expired. On April 23, 2019, upon
re-election
of nine of the existing directors and two new directors, 21,714 restricted shares with a total value of $660,000 were granted to these
non-employee
directors and was expensed over the period from the grant date to April 28, 2020, the Company’s next annual
 
shareholders’ meeting at which the directors’ term expired. On January 28, 2020, upon the election of a new director, 434 restricted shares with a total value of $15,000 were granted to this
non-employee
director and was expensed over the period from the grant date to April 28, 2020, the Company’s next annual
29
Table of Contents
shareholders’ meeting at which the director term expired. On April 28, 2020, upon the
re-election
of ten of the existing directors, 21,560 restricted shares with a total value of $600,000 were granted to these
non-employee
directors and will be expensed over the period from the grant date to April 27, 2021, the Company’s next annual shareholders’ meeting at which the directors’ term expires. The Company recorded director expense related to these restricted share grants of $160,000 and $135,000 for the three-month periods ended June 30, 2020 and 2019, respectively. The Company recorded director expense related to these restricted stock grants of $335,000 and $270,000 for the six months ended June 30, 2020 and 2019, respectively.
On October 24, 2017, the Company granted 28,382 restricted shares with a total value of $655,000 to certain officers that are being expensed over the vesting period of one to three years. On October 23, 2018, the Company granted 52,042 restricted shares with a total value of $1,440,000 to certain officers that are being expensed over a three-year vesting period. On June 26, 2019, the Company granted 23,428 restricted shares with a total value of $695,000 to certain officers that are being expensed over the vesting period of three years. On October 22, 2019, the Company granted 22,188 restricted shares with a total value of $785,000 to certain officers that will be expensed over a three-year vesting period. On January 28, 2020, the Company granted 2,979 restricted shares with a total value of $103,000 to certain officers that will be expensed over a three-year vesting period. On May 18, 2020, the Company granted 7,176 restricted shares with a total value of $200,000
 
to
an officer
that will be expensed over a three-year vesting period. The Company recorded restricted stock expense for officers of $322,000 and $210,000 for the three-month periods ended June 30, 2020 and 2019, respectively. The Company recorded restricted stock expense for officers of $597,000 and $415,000 for the six-month periods ended June 30, 2020 and 2019, respectively.
Note 9
-
 Pension Plan
The Company had a defined benefit pension plan that was frozen effective January 1, 2004, whereby no new participants were added to the Plan and no additional years of service accrued to participants. The pension plan covered substantially all of the Company’s employees at the time. In December 2018, the Company determined it was in the best interest of its shareholders to work toward terminating its pension obligation. The Company annuitized approximately 53% of the pension benefit obligation at that time and recorded a loss on settlement totaling $1,546,000 for the year ended December 31, 2018. In 2019, the Company continued to take steps to completely settle and terminate its remaining pension obligation and recorded loss associated with the final termination of $2,673,000. The loss incurred included unrealized loss previously recorded in other comprehensive income and refunding to remaining participants for funding balance overages offset by a gain on hedging instrument entered into to minimize interest rate movement during the termination period. At December 31, 2019, all balances in the pension plan were zero and the Company’s obligation has been extinguished. For the three- and
six-month
periods ended June 30, 2019, the Company recorded pension related expense totaling $19,000 and $942,000, respectively.
Note 10 - Fair Value Disclosures
The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
30
Table of Contents
The authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
 
 
•
 
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
 
 
•
 
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
 
 
•
 
Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Securities classified as
available-for-sale
and trading are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market spreads, cash flows, the United States Treasury yield curve, live trading levels, trade execution data, dealer quotes, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other items.
See notes 4 and 5 related to the determination of fair value for loans
held-for-sale,
IRLCs and forward mortgage-backed securities trades.
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Table of Contents
There were no transfers between Level 1 and Level 2 or Level 2 and Level 3 during the three and six
-
months ended June 30, 2020 and 2019, and the year ended December 31, 2019.
The following table summarizes the Company’s
available-for-sale
securities, loans
held-for-sale,
and derivatives which are measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):
June 30, 2020
 
     Level 1
Inputs		      Level 2
Inputs		      Level 3
Inputs		      Total Fair
Value		  
Available-for-sale
investment securities:
    
     
     
     
 
U.S. Treasury securities
  $
10,122
    $
—  
     $
 —  
     $
10,122
 
Obligations of states and political subdivisions
   
—  
      
1,950,279
     
—  
      
1,950,279
 
Residential mortgage-backed securities
   
—  
      
1,571,673
     
—  
      
1,571,673
 
Commercial mortgage-backed securities
   
—  
      
582,220
     
—  
      
582,220
 
Other securities
   
4,569
     
—  
      
—  
      
4,569
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
  $
14,691
    $
4,104,172
    $
 —  
     $
4,118,863
 
                                 
Loans
held-for-sale
  $
—  
     $
63,293
    $
 —  
     $
63,293
 
                                 
IRLCs
  $
—  
     $
5,037
    $
 —  
     $
5,037
 
                                 
Forward mortgage-backed securities trades
  $
(1,099
)
   $
—
    $
 —  
     $
(1,099
)
                                 
June 30, 2019
 
     Level 1
Inputs		      Level 2
Inputs		      Level 3
Inputs		      Total Fair
Value		  
Available-for-sale
investment securities:
    
     
     
     
 
U.S. Treasury securities
  $
10,020
    $
—  
     $
—  
     $
10,020
 
Obligations of states and political subdivisions
   
—  
      
1,157,214
     
—  
      
1,157,214
 
Corporate bonds
   
—  
      
228
     
—  
      
228
 
Residential mortgage-backed securities
   
—  
      
1,596,175
     
—  
      
1,596,175
 
Commercial mortgage-backed securities
   
—  
      
491,389
     
—  
      
491,389
 
Other securities
   
4,466
     
—  
      
—  
      
4,466
 
                                 
Total
  $
14,486
    $
3,245,006
    $
 —  
     $
3,259,492
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
held-for-sale
  $
 —  
     $
18,981
    $
 —  
     $
18,981
 
                                 
IRLCs
  $
 —  
     $
1,525
    $
 —  
     $
1,525
 
                                 
Forward mortgage-backed securities trades
  $ (254
)
   $
—
    $
 —  
     $
(254
)
                                 
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Table of Contents
December 31, 2019
 
  
Level 1
Inputs
   
Level 2
Inputs
   
Level 3
Inputs
   
Total Fair
Value
 
Available-for-sale
investment securities:
    
     
     
     
 
U.S. Treasury securities
  $
10,019
    $
—  
     $
 —  
     $
10,019
 
Obligations of states and political subdivisions
   
—  
      
1,288,983
     
     
1,288,983
 
Corporate bonds
   
—  
      
230
     
—  
      
230
 
Residential mortgage-backed securities
   
—  
      
1,608,863
     
—  
      
1,608,863
 
Commercial mortgage-backed securities
   
—  
      
500,744
     
—  
      
500,744
 
Other securities
   
4,478
     
—  
      
—  
      
4,478
 
                                 
Total
  $
14,497
    $
3,398,820
    $
 —  
     $
3,413,317
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
held-for-sale
  $
—  
     $
23,076
    $
—  
     $
23,076
 
                                 
IRLCs
  $
—  
     $
886
    $
—  
     $
886
 
                                 
Forward mortgage-backed securities trades
  $
(152
) 
   $
—
     $
 —  
     $
(152
 )
                                 
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Impaired loans are reported at the fair value of the underlying collateral less selling costs if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data. At June 30, 2020, impaired loans with a carrying value of $17,682,000 were reduced by specific valuation reserves totaling $3,046,000 resulting in a net fair value of $14,636,000.
Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include other real estate owned, goodwill and other intangible assets and other non-financial long-lived assets. Non-financial assets measured at fair value on a non-recurring basis during the three
and six-
months ended
June 30
, 2020 and 2019 include other real estate owned which
, subsequent to their initial transfer to other real estate owned from loans, were
re-measured
at fair value through a write-down included in gain (loss) on sale of foreclosed assets. During the reported periods, all fair value measurements for foreclosed assets utilized Level 2 inputs based on observable market data, generally third-party appraisals, or Level 3 inputs based on customized discounting criteria. These appraisals are evaluated individually and discounted as necessary due to the age of the appraisal, lack of comparable sales, expected holding periods of property or special use type of the property. Such discounts vary by appraisal based on the above factors but generally range from 5% to 25% of the appraised value.
Re-evaluation
of other real estate owned is performed at least annually as required by regulatory guidelines or more often if particular circumstances arise. There were no other real estate owned properties that were
re-measured
subsequent to their initial transfer to other real estate owned during the three- and
six-months
ended June 30, 2020 and 2019.
At June 30, 2020 and 2019, and December 31, 2019, other real estate owned totaled $202,000, $635,000 and $982,000, respectively.
The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instrument assets and liabilities including those subject to the requirements discussed above. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.
33
Table of Contents
The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
Cash and due from banks, federal funds sold, interest-bearing deposits and time deposits in banks and accrued interest receivable and payable are liquid in nature and considered Levels 1 or 2 of the fair value hierarchy.
Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities and are considered Levels 2 and 3 of the fair value hierarchy. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the carrying value and are considered Level 1 of the fair value hierarchy.
The carrying value and the estimated fair value of the Company’s contractual
off-balance-sheet
unfunded lines of credit, loan commitments and letters of credit, which are generally priced at market at the time of funding, are not material.
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Table of Contents
The estimated fair values and carrying values of all financial instruments under current authoritative guidance were as follows (in thousands).
 
     June 30,      December 31,       
     2020      2019      2019       
     Carrying
Value		      Estimated
Fair Value		      Carrying
Value		      Estimated
Fair Value		      Carrying
Value		      Estimated
Fair Value		      Fair Value
Hierarchy
Cash and due from banks
  $
188,373
    $
188,373
    $
178,345
    $
178,345
    $
231,534
    $
231,534
   
Level 1
Federal Funds Sold
   
—  
      
—  
      
700
     
700
     
3,150
     
3,150
   
Level 1
Interest-bearing demand deposits in banks
   
196,426
     
196,426
     
128,652
     
128,652
     
47,920
     
47,920
   
Level 1
Interest-bearing time deposits in banks
   
—  
      
—  
      
960
     
960
     
—  
      
—  
    
Level 2
Available-for-sale
securities
    
4,118,863
     
4,118,863
     
3,259,492
     
3,259,492
     
3,413,317
     
3,413,317
   
Levels 1 and 2
Loans held for investment
   
5,184,120
     
5,174,126
     
3,989,132
     
4,026,543
     
4,142,470
     
4,209,826
   
Level 3
Loans held for sale
   
66,370
     
66,630
     
22,305
     
22,347
     
28,228
     
28,343
   
Level 2
Accrued interest receivable
   
45,801
     
45,801
     
36,954
     
36,954
     
36,894
     
36,894
   
Level 2
Deposits with stated maturities
   
466,122
     
468,819
     
433,511
     
433,811
     
420,013
     
421,397
   
Level 2
Deposits with no stated maturities
   
7,691,520
     
7,691,520
     
5,936,255
     
5,936,255
     
6,183,793
     
6,183,793
   
Level 1
Borrowings
   
449,224
     
449,224
     
362,005
     
362,005
     
381,356
     
381,356
   
Level 2
Accrued interest payable
   
541
     
541
     
694
     
694
     
628
     
628
   
Level 2
IRLCs
   
5,037
     
5,037
     
1,525
     
1,525
     
886
     
886
   
Level 2
Forward mortgage-backed securities trades
   
1,099
     
1,099
     
254
     
254
     
152
     
152
   
Level 1
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Table of Contents
Note 11 – 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 6,275,574 shares of the Company’s common stock in exchange for all of the outstanding shares of TB&T Bancshares, Inc. In addition, TBT Bancshares, Inc. made a $1,920,000 special dividend to its shareholders prior to closing of the transaction.
At closing, a wholly
-
owned subsidiary of the Company merged into TB&T Bancshares, Inc. and immediately thereafter TB&T Bancshares, Inc. was merged into the Company and The Bank & Trust of Bryan/College Station, Texas, was merged into First Financial Bank, National Association, Abilene, Texas, a wholly-owned subsidiary of the Company. The primary purpose of the acquisition was to expand the Company’s market share near the Houston market. Factors that contributed to a purchase price resulting in goodwill include their record of earnings, strong management and board of directors, strong local economic environment and opportunity for growth. The results of operations from this acquisition are included in the consolidated earnings of the Company commencing January 1, 2020.
The following table presents the preliminary amounts recorded on the consolidated balance sheet on the acquisition date (dollars in thousands):
Fair value of consideration paid:
   
Common stock issued (6,275,574 shares)
  $
220,273
 
         
 
 
 
 
 
Fair value of identifiable assets acquired:
   
 
Cash and cash equivalents
 
$
61,028
 
Securities
available-for-sale
   
93,967
 
Loans
   
447,702
 
Identifiable intangible assets
   
4,798
 
Other assets
   
25,377
 
         
Total identifiable assets acquired
 
$
632,872
 
         
Fair value of liabilities assumed:
   
 
Deposits
 
$
549,125
 
Other liabilities
   
5,397
 
         
Total liabilities assumed
 
$
554,522
 
         
Fair value of net identifiable assets acquired
   
78,350
 
         
 
 
 
 
 
Goodwill resulting from acquisition
  $
141,923
 
         
Goodwill recorded in the acquisition was accounted for in accordance with the authoritative business combination guidance. Accordingly, goodwill will not be amortized but will be tested for impairment annually. The goodwill recorded is not deductible for federal income tax purposes.
The fair value of total loans acquired was $447,702,000 at acquisition compared to contractual amounts of $455,181,000. The fair value of purchased credit impaired loans at acquisition was $7,517,000 compared to contractual amounts of $10,061,000. Additional purchased credit impaired loan disclosures were omitted due to immateriality. All other acquired loans were considered performing loans.
36
Table of Contents
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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,” “predict,” “project,” and similar expressions, as they relate to us or our management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited, to those discussed in Part I, Item 1A of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019 and Part II, Item 1A of the Company’s Quarterly Report on Form
10-Q
for the quarter ended March 31, 2020, in each case under the heading “Risk Factors,” and the following:
 
  •  
general economic conditions, including local, state, national and international, and the impact they may have on us and our customers;
 
  •  
effect of the coronavirus
(COVID-19)
on our Company, the communities where we have our branches, the state of Texas and the United States, related to the economy and overall financial stability;
 
  •  
impact of reduction in interchange fees if assets exceed $10 billion;
 
  •  
government and regulatory responses to the
COVID-19
pandemic;
 
  •  
effect of severe weather conditions, including hurricanes, tornadoes, flooding and droughts;
 
  •  
volatility and disruption in national and international financial and commodity markets and oil and gas prices;
 
  •  
government intervention in the U.S. financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by the federal banking authorities and the Tax Cuts and Jobs Act;
 
  •  
political instability;
 
  •  
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, the Financial Accounting Standards Board and other accounting standard setters;
 
  •  
the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we and our subsidiaries must comply;
 
  •  
changes in the demand for loans;
 
  •  
fluctuations in the value of collateral securing our loan portfolio and in the level of the allowance for loan losses;
 
  •  
potential risk of environmental liability associated with lending activities;
 
  •  
the accuracy of our estimates of future loan losses;
 
  •  
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;
 
37
Table of Contents
  •  
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, pandemic, war or terrorism; 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 strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise (except as required by law).
Introduction
As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, and service charges. Our primary source of funding for our loans and investments are deposits held by our subsidiary, First Financial Bank, National Association, Abilene, Texas. Our largest expense is salaries and related employee benefits. We usually measure our performance by calculating our return on average assets, return on average equity, our regulatory leverage and risk-based capital ratios and our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income, on a tax equivalent basis and noninterest income.
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 2019 Annual Report on Form
10-K.
Coronavirus Update/Status
The coronavirus
(COVID-19)
pandemic has placed significant health, economic and other major pressure throughout the communities we serve, the state of Texas, the United States and the entire world. We have implemented a number of procedures in response to the pandemic to support the safety and well being of our employees, customers and shareholders that continue through the date of this report:
 
  •  
We have addressed the safety of our 78 branches and other locations, following the guidelines of the Center for Disease Control, and while the branches generally remain open to customers, we have taken steps, and continue to evaluate, to push as much traffic and transactions as possible to our motor banks;
 
  •  
We hold executive meetings weekly or more as needed to address issues that are changing rapidly;
 
  •  
We moved our Annual Shareholders’ Meeting from a physical meeting to a virtual meeting;
 
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  •  
Provided extensions and deferrals to loan customers effected by
COVID-19
provided such customers were not 30 days past due at December 31, 2019;
 
  •  
We chose to participate in the CARES Act Paycheck Protection Program (PPP) that provided government guaranteed and forgivable loans to our customers. Through June 30, 2020, we completed approximately 6,500 applications and funded $703.12 million of such loans (see below). We believe these loans and our participation in the program was good for our customers and the communities we serve; and
 
  •  
We chose to participate in the Federal Reserve’s Main Street Lending Program to provide ongoing loans for our customers. No loans have yet been funded as of June 30, 2020.
We continue to closely monitor this pandemic and expect to make future changes to respond to the pandemic as this situation continues to evolve.
Critical Accounting Policies
We prepare consolidated financial statements based on 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 loan losses and our provision for loan loss expense and (2) our valuation of securities. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period. Our policy for (1) our allowance for loan losses and our provision for loan loss expense and (2) our valuation of securities is included in note 1 to our notes to consolidated financial statements (unaudited) which begins on page 10. 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 Split
On April 23, 2019, the Company’s Board of Directors declared a
two-for-one
stock split in the form of a 100% stock dividend effective June 3, 2019. All per share amounts in this report have been restated to reflect this stock split. An amount equal to the par value of the additional common shares to be issued pursuant to the stock split was reflected as a transfer from retained earnings to common shares in the consolidated financial statements as of and for the six-months ended June 30, 2019.
Stock Repurchase
On March 12, 2020, the Company’s Board of Directors authorized the repurchase of up to 4,000,000 common shares through September 30, 2021. The stock buyback plan authorizes management to repurchase the stock at such time as repurchases are considered beneficial to the Company and stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Through June 30, 2020, the Company repurchased 324,802 shares totaling $8.0 million under this repurchase plan. Subsequent to June 30, 2020 and through July 28, 2020, no additional shares were repurchased.
 
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Table of Contents
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 closed. 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, National Association, Abilene, Texas, a wholly owned subsidiary of the Company. The total purchase price exceeded the estimated fair value of the net assets acquired by approximately $141.92 million and the Company recorded such excess as goodwill. The 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 11 to the consolidated financial statements for additional information and disclosure.
Participation in PPP Loans
The Company elected to participate in the PPP loan program, subject to prepayment, processing approximately 6,500 loans and funded $703.12 million. The Company received fees totaling approximately $26.07 million and incurred incremental direct origination costs of $3.62 million, both of which have been deferred and are being amortized over the shorter of the repayment period or 24 months, the contractual life of these loans. The Company recognized $2.83 million of this net amount into interest income in the second quarter of 2020.
Status of New Accounting Standard for Allowance for Credit Losses
On January 1, 2020, ASU
2016-13
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, became effective for the Company which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. It also applies to
off-balance
sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, ASU
2016-13
made changes to the accounting for
available-for-sale
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 Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States that included an option for entities to delay the implementation of ASC 326 until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. The Company elected to delay its implementation of ASU
2016-13
and has calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASU
2016-13.
Prior to the CARES Act being signed and our decision to delay the implementation of CECL, we were continuing our CECL implementation plan with our cross-functional working group, under the direction of our Chief Credit Officer along with our Chief Accounting Officer, Chief Lending Officer and Chief Financial Officer. The working group includes individuals from various functional areas including credit, risk management, accounting and information technology, among others. Our implementation plan
 
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included assessment and documentation of processes, internal controls and data sources; model development, documentation and validation; and system configuration, among other things. We contracted with a third-party vendor to assist us in the implementation of CECL. Had we completed the adoption and implementation of CECL, we believe our allowance for loan losses amount at January 1, 2020 would have been approximately $52.0 million. At December 31, 2019, our allowance for loan losses totaled $52.5 million. In addition, we have evaluated our expected credit losses for certain debt securities and other financial assets and do not expect these allowances to be significant. Additionally, the adoption and implementation of ASU
2016-13
is not expected to have a significant impact on our regulatory capital ratios.
As we continue to evaluate the provisions of ASU
2016-13
as of and for the three- and
six-
months ended June 30, 2020, we have considered the following in developing our forecast and its effect on our CECL calculations:
 
  •  
duration, extent and severity of
COVID-19;
 
  •  
effect of government assistance;
 
  •  
unemployment and effect on economies and markets;
 
  •  
price of oil and gas and effect on economy;
 
  •  
value of real estate; and
 
  •  
effect of our TB&T Bancshares, Inc. acquisition on our combined loan portfolio.
We are unable as of the date of this report to provide an estimate of our allowance for loan losses under the CECL model as of June 30, 2020 and the provision for loan losses for the three- and
six-
months then ended.
 
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Table of Contents
Results of Operations
Performance Summary
. Net earnings for the second quarter of 2020 were $53.47 million, up $11.38 million when compared with earnings of $42.09 million in the same quarter last year. Basic earnings per share were $0.38 for the second quarter of 2020 compared with $0.31 in the same quarter a year ago.
The return on average assets was 2.06% for the second quarter of 2020, as compared to 2.14% for the second quarter of 2019. The return on average equity was 14.00% for the second quarter of 2020 as compared to 15.04% for the second quarter of 2019. The return on average tangible equity was 17.67% for the second quarter of 2020 compared to 17.81% for the second quarter of 2019.
Net earnings for the
six-month
period ended June 30, 2020 were $90.70 million compared to $80.35 million for the same period in 2019. Basic earnings per share for the first six months of 2020 were $0.64 compared to $0.59 for the same period in 2019.
The return on average assets was 1.86% for the first six months of 2020, as compared to 2.08% for the same period a year ago. The return on average equity was 12.09% for the first six months of 2020 as compared to 14.78% for the first six months of 2019. The return on average tangible equity was 15.33% for the first six months of 2020 as compared to 17.58% for the first six months of 2019.
Net 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 $92.14 million for the second quarter of 2020, as compared to $73.28 million for the same period last year. The increase in 2020 compared to 2019 was largely attributable to the increase in interest earning assets primarily from our TB&T acquisition, an increase in investment securities held and the impact of the Company’s participation in the PPP loan
programax-exempt
securities increased $1.20 billion and $630.45 million, respectively, for the second quarter of 2020 over the same quarter of 2019. Average interest-bearing liabilities increased $1.44 billion for the second quarter of 2020, as compared to the same period in 2019 primarily from our customers depositing their PPP loan amounts into our Bank, the TB&T acquisition and internal organic growth. The yield on earning assets decreased 51 basis points while the rate paid on interest-bearing liabilities decreased 50 basis points for the second quarter of 2020 compared to the second quarter of 2019.
Tax-equivalent
net interest income was $174.87 million for the first six months of 2020, as compared to $144.61 million for the same period last year. The increase in 2020 compared to 2019 was largely attributable to the increase in interest earning assets primarily from our TB&T acquisition, an increase in investment securities held and the impact of the Company’s participation in the PPP loan program. Average earning assets increased $1.85 billion for the first six months of 2020 over the same period in 2019. Average loans and
tax-exempt
securities increased $949.47 million and $375.58 million, respectively, for the first six months of 2020 over the first six months of 2019.
Average interest-bearing liabilities increased $1.13 billion for the first six months of 2020, as compared to the same period in 2019 primarily from our customers depositing their PPP loan amounts into our Bank, the TB&T acquisition and internal organic growth. The yield on earning assets decreased 35 basis points while the rate paid on interest-bearing liabilities decreased 32 basis points for the first six months of 2020 compared to the first six months of 2019.
 
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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 June 30, 2020
Compared to Three Months Ended

June 30, 2019
    
Six Months Ended June 30, 2020
Compared to Six Months Ended

June 30, 2019
  
    
Change Attributable to
    
Total
Change
    
Change Attributable to
    
Total
Change
  
    
Volume
     
Rate
    
Volume
     
Rate
  
Short-term investments
    $ 1,401      $ (1,981 )    $ (580 )    $ 2,132      $ (2,576 )    $ (444 ) 
Taxable investment securities
      2,268        (2,163 )      105       4,596        (3,124 )      1,472  
Tax-exempt
investment securities (1)
      5,720        (1,602 )      4,118       6,863        (2,823 )      4,040  
Loans (1) (2)
      16,700        (6,484 )      10,216       25,953        (5,950 )      20,003  
  
 
 
     
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
Interest income
      26,089        (12,230 )      13,859       39,544        (14,473 )      25,071  
Interest-bearing deposits
      1,632        (6,368 )      (4,736 )      2,842        (7,558 )      (4,716 ) 
Short-term borrowings
      890        (1,153 )      (263 )      981        (1,454 )      (473 ) 
  
 
 
     
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
Interest expense
      2,522        (7,521 )      (4,999 )      3,823        (9,012 )      (5,189 ) 
  
 
 
     
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
Net interest income (1)
    $ 23,567      $ (4,709 )    $ 18,858     $ 35,721      $ (5,461 )    $ 30,260  
  
 
 
     
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
 
(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 for the second quarter of 2020 was
3.78%, a decrease of 20 basis points from the same period in 2019. The net interest margin for the first six months of 2020 was 3.84%, a decrease of 15 basis points from the same period in 2019. We continue to experience downward pressures on our net interest margin in 2020 and 2019 primarily due to the extended period of fluctuating historically low levels of short-term interest rates and a flat to inverted yield curve currently being experienced in the bond market. We have been able to somewhat mitigate the impact of these lower short-term interest rates and the flat/inverted yield curve by establishing minimum interest rates on certain of our loans, improving the pricing for loan risk, and minimizing rates paid on interest bearing liabilities. In March 2020, as the market experienced volatility, we took advantage of that volatility to purchase high quality municipal bonds at favorable tax equivalent interest yields. The Federal Reserve increased rates 100 basis points in 2018 but then decreased rates 75 basis points during the third and fourth quarters of 2019 and then an additional 150 basis points in the first quarter of 2020, resulting in a current target rate range of zero to 25 basis points. The Company’s participation in the PPP loan program impacted the net interest margin from (i) the amortization of loan fees (positive) and (ii) the 1% loan rate (negative).
 
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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 June 30,
  
    
2020
    
2019
  
    
Average
Balance
    
Income/
Expense
     
Yield/
Rate
    
Average
Balance
    
Income/
Expense
     
Yield/
Rate
  
Assets
               
Short-term investments (1)
    $ 353,468     $ 87        0.10 %    $ 112,817     $ 667        2.37 % 
Taxable investment securities (2)
      2,399,364       14,030        2.34       2,063,497       13,925        2.70  
Tax-exempt
investment securities (2)(3)
      1,800,339       14,733        3.27       1,169,889       10,615        3.63  
Loans (3)(4)
      5,248,052       66,249        5.08       4,043,055       56,033        5.56  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
  
Total earning assets
      9,801,223     $ 95,099        3.90 %      7,389,258     $ 81,240        4.41 % 
Cash and due from banks
      181,752            167,764       
Bank premises and equipment, net
      138,744            134,280       
Other assets
      87,091            63,629       
Goodwill and other intangible assets, net
      319,200            174,263       
Allowance for loan losses
      (63,192 )           (52,005 )      
  
 
 
         
 
 
       
Total assets
    $ 10,464,818          $ 7,877,189       
  
 
 
         
 
 
       
Liabilities and Shareholders’ Equity
               
Interest-bearing deposits
    $ 5,135,772     $ 2,550        0.20 %    $ 4,196,123     $ 7,286        0.70 % 
Short-term borrowings
      877,076       412        0.19       378,389       675        0.72  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
  
Total interest-bearing liabilities
      6,012,848     $ 2,962        0.20 %      4,574,512     $ 7,961        0.70 % 
Noninterest-bearing deposits
      2,830,960            2,136,264       
Other liabilities
      84,501            44,097       
  
 
 
         
 
 
       
Total liabilities
      8,928,309            6,754,873       
Shareholders’ equity
      1,536,509            1,122,316       
  
 
 
         
 
 
       
Total liabilities and shareholders’ equity
    $ 10,464,818          $ 7,877,189       
  
 
 
         
 
 
       
Net interest income (3)
      $ 92,137          $ 73,279     
    
 
 
         
 
 
     
Rate Analysis:
               
Interest income/earning assets
           3.90 %           4.41 % 
Interest expense/earning assets
           (0.12 )           (0.43 ) 
       
 
 
         
 
 
  
Net interest margin
           3.78 %           3.98 % 
       
 
 
         
 
 
  
 
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Six Months Ended June 30,
  
    
2020
    
2019
  
    
Average
Balance
    
Income/
Expense
     
Yield/
Rate
    
Average
Balance
    
Income/
Expense
     
Yield/
Rate
  
Assets
               
Short-term investments (1)
    $ 292,245     $ 842        0.58 %    $ 109,005     $ 1,286        2.38 % 
Taxable investment securities (2)
      2,331,347       28,685        2.46       1,994,563       27,213        2.73  
Tax-exempt
investment securities (2)(3)
      1,573,591       25,933        3.30       1,198,016       21,893        3.65  
Loans (3)(4)
      4,957,744       129,572        5.26       4,008,275       109,569        5.51  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
  
Total earning assets
      9,154,927     $ 185,032        4.06 %      7,309,859     $ 159,961        4.41 % 
Cash and due from banks
      189,285            177,601       
Bank premises and equipment, net
      139,520            134,239       
Other assets
      87,818            64,004       
Goodwill and other intangible assets, net
      318,822            174,396       
Allowance for loan losses
      (61,134 )           (52,146 )      
  
 
 
         
 
 
       
Total assets
    $ 9,829,238          $ 7,807,953       
  
 
 
         
 
 
       
Liabilities and Shareholders’ Equity
               
Interest-bearing deposits
    $ 5,019,929     $ 9,231        0.37 %    $ 4,170,250     $ 13,947        0.67 % 
Short-term borrowings
      668,840       928        0.28       393,432       1,401        0.72  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
  
Total interest-bearing liabilities
      5,688,769     $ 10,159        0.36 %      4,563,682     $ 15,348        0.68 % 
Noninterest-bearing deposits
      2,561,248            2,109,640       
Other liabilities
      70,726            38,758       
  
 
 
         
 
 
       
Total liabilities
      8,320,743            6,712,080       
Shareholders’ equity
      1,508,495            1,095,873       
  
 
 
         
 
 
       
Total liabilities and shareholders’ equity
    $ 9,829,238          $ 7,807,953       
  
 
 
         
 
 
       
Net interest income (3)
      $ 174,873          $ 144,613     
    
 
 
         
 
 
     
Rate Analysis:
               
Interest income/earning assets
           4.06 %           4.41 % 
Interest expense/earning assets
           (0.22 )           (0.42 ) 
       
 
 
         
 
 
  
Net interest margin
           3.84 %           3.99 % 
       
 
 
         
 
 
  
 
(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 second quarter of 2020 increased to $36.92 million compared to $27.98 million in same period in 2019. Mortgage related income increased 189.68% to $13.68 million compared with $4.72 million in the same quarter a year ago due to a significant increase in the volume of loans originated. The Company’s mortgage loan pipeline increased to $182.14 million as of June 30, 2020 when compared to $65.90 million at June 30, 2019. ATM, interchange and credit card fees increased 9.48% to $8.05 million compared with $7.35 million in the same quarter last year due to continued growth in the number of debit cards issued and our TB&T acquisition. Also included in noninterest income during the second quarter of 2020 was a gain on sale of securities of $1.51 million compared to $676 thousand from the same quarter a year ago. Trust fees decreased $66 thousand to $6.96 million in the second quarter of 2020 compared with $7.03 million in the same quarter last year due primarily to reduced mineral and lease bonus fees. The fair value of Trust assets managed increased to $6.78 billion from $6.19 billion a year ago. Service charges on deposits decreased to $4.32 million compared with $5.37 million in the same quarter a year ago due largely to the lack of economic activity caused by the pandemic during the second quarter of 2020.
Noninterest income for the
six-month
period ended June 30, 2020 was $65.65 million, an increase of $13.24 million compared to the same period in 2019. Mortgage related income increased in the first six months of 2020 to $17.53 million when compared to $8.20 million in the same period a year ago due to a significant increase in the volume of loans originated and additional income from the change to mandatory delivery related to sales in the secondary mortgage market (see notes 4 and 5 to the consolidated financial statements (unaudited)). ATM, interchange and credit card fees increased 8.86% to $15.45 million compared with $14.19 million in the same period last year due to continued growth in
 
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debit cards and our TB&T acquisition. Also included in noninterest income during the first six months of 2020 was a gain on sale of securities of $3.57 million compared to $676 thousand from the same quarter a year ago. Trust fees increased slightly to $14.40 million in the first six months of 2020 compared with $14.01 million in the same period in 2019. The fair value of Trust assets managed increased to $6.78 billion from $6.19 billion a year ago, but our revenue from oil and gas management decreased by $438 thousand due to decreased volumes in oil and gas production. Offsetting these increases was a $822 thousand decrease in interest on loan recoveries to $419 thousand for the first six months of 2020 compared to $1.24 million in the same period in 2019 due to the collection of a larger loan during the first six months of 2019 that had previously been on nonaccrual. In addition, service charges on deposits decreased to $10.23 million compared with $10.55 million in the same period last year ago due largely to the lack of economic activity caused by the pandemic during the second quarter of 2020.
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 $12.00 million annually
(pre-tax)
once the Company reaches $10 billion. Federal Reserve requirements stipulate that these rules would go into effect on July 1
st
following the
year-end
in which a financial institution’s total assets exceeded $10 billion at December 31
st
. At June 30, 2020, the Company’s total assets exceeded the $10 billion threshold, due primarily to the effect of the Company’s participation in the PPP loan program. Management continues to monitor the Company’s balance sheet levels and may utilize strategies to reduce the Company’s asset levels below $10 billion to mitigate the loss of debit card income.
Table 3 - Noninterest Income (in thousands):
 
    
Three Months Ended

June 30,
     
Six Months Ended

June 30,
  
    
2020
    
Increase
(Decrease)
    
2019
     
2020
     
Increase
(Decrease)
    
2019
  
Trust fees
    $ 6,961     $ (66 )    $ 7,027      $ 14,398      $ 392     $ 14,006  
Service charges on deposit accounts
      4,318       (1,056 )      5,374        10,233        (317 )      10,550  
ATM, interchange and credit card fees
      8,049       697       7,352        15,449        1,257       14,192  
Gain on sale and fees on mortgage loans
      13,676       8,955       4,721        17,528        9,333       8,195  
Net gain on sale of
available-for-sale
securities
      1,512       836       676        3,574        2,898       676  
Net gain on sale of foreclosed assets
      52       (1 )      53        53        (69 )      122  
Net gain (loss) on sale of assets
      (24 )      (30 )      6        92        86       6  
Interest on loan recoveries
      154       (749 )      903        419        (822 )      1,241  
Other:
               
Check printing fees
      60       12       48        122        33       89  
Safe deposit rental fees
      177       58       119        370        57       313  
Credit life fees
      394       (26 )      420        566        (48 )      614  
Brokerage commissions
      334       (83 )      417        719        (44 )      763  
Miscellaneous income
      1,256       396       860        2,128        482       1,646  
  
 
 
    
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
Total other
      2,221       357       1,864        3,905        480       3,425  
  
 
 
    
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
Total Noninterest Income
    $ 36,919     $ 8,943     $ 27,976      $ 65,651      $ 13,238     $ 52,413  
  
 
 
    
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
 
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Noninterest Expense
. Total noninterest expense for the second quarter of 2020 was $53.32 million, an increase of $5.02 million compared to $48.30 million in the same period of 2019. 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 second quarter of 2020 was 41.32% compared to 47.71% for the same quarter in 2019. The reduction in the Company’s efficiency ratio during the second quarter of 2020 primarily resulted from the deferral of $3.62 million in noninterest expenses related to PPP loan origination costs.
Salaries, commissions and employee benefits for the second quarter of 2020 totaled $30.81 million, an increase of $3.42 million compared to the same period in 2019. The increase was primarily driven by (i) the TB&T acquisition, (ii) annual merit-based pay increases that were effective March 1, 2020 and (iii) higher mortgage related commission, offset by the deferral of $3.62 million PPP origination costs. All other categories of noninterest expense for the second quarter of 2020 totaled $22.51 million, up from $20.91 million in the same quarter a year ago. Included in noninterest expense in the second quarter of 2020 were technology contract termination and conversion related costs totaling $583 thousand related to the TB&T acquisition.
Total noninterest expense for the first six months of 2020 was $108.64 million, an increase of $12.97 million when compared to $95.67 million in the same period in 2019. Our efficiency ratio for the first six months of 2020 was 45.17%, compared to 48.56% from the same period in 2019. Management notes the reduction in the Company’s efficiency ratio for the first six months of 2020 primarily resulted from the deferral of $3.62 million in noninterest expenses related to PPP loan origination costs.
Salaries, commissions and employee benefits for the first six months of 2020 totaled $60.46 million, an increase of $6.54 million when compared to the same period in 2019. The increase was primarily driven by (i) the TB&T acquisition, (ii) annual pay increases that were effective March 1, 2020 and (iii) higher mortgage related commission, offset by the deferral of $3.62 million PPP origination costs. All other categories of noninterest expense for the first six months of 2020 totaled $48.18 million, an increase of $6.43 million when compared to the same period in 2019. Included in noninterest expense in the first six months period of 2020 were technology contract termination and conversion related costs totaling $4.39 million related to the TB&T acquisition.
 
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Table 4 - Noninterest Expense (in thousands):
 
    
Three Months Ended June 30,
     
Six Months Ended June 30,
  
    
2020
     
Increase
(Decrease)
    
2019
     
2020
     
Increase
(Decrease)
    
2019
  
Salaries and commissions
    $ 23,270      $ 2,703     $ 20,567      $ 45,973      $ 5,729     $ 40,244  
Medical
      2,284        (4 )      2,288        4,981        198       4,783  
Profit sharing
      1,978        94       1,884        2,950        (425 )      3,375  
Pension
      —          (19 )      19        —          (42 )      42  
401(k) match expense
      897        196       701        1,736        311       1,425  
Payroll taxes
      1,714        302       1,412        3,530        521       3,009  
Stock option and stock grant expense
      671        148       523        1,286        246       1,040  
  
 
 
     
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
Total salaries and employee benefits
      30,814        3,420       27,394        60,456        6,538       53,918  
Loss from partial settlement of pension plan
      —          —         —          —          (900 )      900  
Net occupancy expense
      3,101        322       2,779        6,128        586       5,542  
Equipment expense
      2,010        (321 )      2,331        4,085        (699 )      4,784  
FDIC assessment fees
      463        (75 )      538        508        (568 )      1,076  
ATM, interchange and credit card expense
      2,610        183       2,427        5,595        785       4,810  
Professional and service fees
      2,497        510       1,987        5,090        1,270       3,820  
Printing, stationery and supplies
      533        31       502        1,099        231       868  
Operational and other losses
      728        248       480        1,304        558       746  
Software amortization and expense
      2,010        227       1,783        4,034        654       3,380  
Amortization of intangible assets
      508        244       264        1,017        485       532  
Other:
                
Data processing fees
      444        92       352        867        100       767  
Postage
      384        (22 )      406        685        (156 )      841  
Advertising
      485        (393 )      878        805        (957 )      1,762  
Correspondent bank service charges
      227        51       176        431        84       347  
Telephone
      913        (50 )      963        1,876        (47 )      1,923  
Public relations and business development
      526        (226 )      752        1,401        (115 )      1,516  
Directors’ fees
      611        123       488        1,236        291       945  
Audit and accounting fees
      770        286       484        1,214        288       926  
Legal fees
      404        118       286        698        115       583  
Regulatory exam fees
      277        (14 )      291        553        (29 )      582  
Travel
      200        (336 )      536        512        (363 )      875  
Courier expense
      201        11       190        417        27       390  
Other real estate owned
      31        (31 )      62        71        (1 )      72  
Other miscellaneous expense
      2,574        619       1,955        8,558        4,790       3,768  
  
 
 
     
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
Total other
      8,047        228       7,819        19,324        4,027       15,297  
  
 
 
     
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
Total Noninterest Expense
    $ 53,321      $ 5,017     $ 48,304      $ 108,640      $ 12,967     $ 95,673  
  
 
 
     
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
 
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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. Real estate loans represent loans primarily for
1-4
family residences and commercial real estate. The structure of loans in the real estate mortgage area generally provides
re-pricing
intervals to minimize the interest rate risk inherent in long-term fixed rate loans. As of June 30, 2020, total loans held for investment were $5.25 billion, an increase of $1.06 billion, as compared to December 31, 2019 balances. This increase is due primarily from our participation in the PPP loan program and our TB&T acquisition. As compared to December 31, 2019, commercial loans increased $653.13 million, agricultural loans decreased $6.19 million, real estate loans increased $411.84 million and consumer loans decreased $674 thousand. Loans averaged $5.25 billion during the second quarter of 2020, an increase of $1.20 billion from the prior year second quarter average balances. Loans averaged $4.96 billion during the first six months of 2020, an increase of $949.47 million from the prior year
six-month
period average balances.
Table 5 - Composition of Loans (in thousands):
 
    
June 30,
     
December 31,

2019
  
    
2020
     
2019
  
Commercial
    $ 1,509,454      $ 813,887      $ 856,326  
Agricultural
      97,448        97,535        103,640  
Real estate
      3,235,208        2,730,585        2,823,372  
Consumer
      410,957        398,945        411,631  
  
 
 
     
 
 
     
 
 
  
Total loans
held-for-investment
    $ 5,253,067      $ 4,040,952      $ 4,194,969  
  
 
 
     
 
 
     
 
 
  
At June 30, 2020, our real estate loans represented approximately 61.59% of our loan portfolio and were comprised of (i)
1-4
family residence loans of 39.45%, (ii) commercial real estate loans of 29.58%, generally owner occupied, (iii) other loans, which includes ranches, hospitals and universities, of 14.51%, (iv) residential development and construction loans of 9.29%, which includes our custom and speculative home construction loans and (v) commercial development and construction loans of 7.17%.
Loans held for sale, consisting of secondary market mortgage loans, totaled $66.37 million, $22.31 million, and $28.23 million at June 30, 2020 and 2019, and December 31, 2019, respectively. At June 30, 2020 and 2019 and December 31, 2019, $3.08 million, $3.32 million and $5.15 million, respectively, are valued using the lower of cost or fair value method and the remaining amounts are valued under the fair value option method. See notes 4 and 5 to the consolidated financial statements (unaudited) related to the change to mandatory delivery for sales in the secondary mortgage market.
Asset Quality
. Our loan portfolio is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by the Office of the Comptroller of the Currency (“OCC”). Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were $39.72 million at June 30, 2020, as compared to $27.86 million at June 30, 2019 and $25.77 million at December 31, 2019. As a percent of loans and foreclosed assets, these assets were 0.75% at June 30, 2020, as compared to 0.69% at June 30, 2019 and 0.61% at December 31, 2019. As a percent of total assets, these assets were 0.38% at June 30, 2020, as compared to 0.35% at June 30, 2019 and 0.31% at December 31, 2019. We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming at June 30, 2020.
Supplemental Oil and Gas Information
. As of June 30, 2020, the Company’s exposure to the oil and gas industry totaled 2.78% of total loans, excluding PPP loans, or $128.14 million, up $8.35 million from December 31, 2019
 
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Table of Contents
year-end
levels, and consisted (based on collateral supporting the loan) of (i) development and production loans of 10.09%, (ii) oil and gas field servicing loans of 7.36%, (iii) real estate loans of 41.50%, (iv) accounts receivable and inventory of 2.15%, (v) automobile of 10.82% and (vi) other of 28.08%. The following oil and gas information is as of and for the quarters ended June 30, 2020 and 2019, and December 31, 2019:
 
    
June 30,
    
December 31,

2019
  
    
2020
    
2019
  
Oil and gas related loans, excluding PPP loans
    $ 128,143     $ 107,097     $ 119,789  
Oil and gas related loans as a % of total loans, excluding PPP loans
      2.78 %      2.64 %      2.84 % 
Classified oil and gas related loans
    $ 28,366     $ 3,438     $ 7,041  
Non-accrual
oil and gas related loans
      3,702       621       481  
Net charge-offs for oil and gas related loans for quarter/year then ended
      195       —         —    
Allowance for oil and gas related loans as a % of oil and gas loans
      4.17 %      2.95 %      2.54 % 
Supplemental
COVID-19
Industry Exposure.
In addition, at June 30, 2020, loan balances in the retail/restaurant/hospitality industries totaled $338.76 million or 7.34% of the Company’s total loans, excluding PPP loans. Classified and nonperforming loans for these industries combined at June 30, 2020, totaled $15.84 million and $5.75 million, respectively. Net charge-offs related to this portfolio totaled $178 thousand and $308 thousand for the three and
six-months
ended June 30, 2020, respectively. Additional information related to the Company’s retail/restaurant/hospitality industries follows below:
 
    
June 30,
    
March 31,
  
    
2020
    
2020
  
Retail loans
    $ 216,244     $ 217,380  
Restaurant loans
      46,418       25,570  
Hotel loans
      51,957       46,690  
Other hospitality loans
      23,230       8,470  
Travel loans
      908       937  
  
 
 
    
 
 
  
Total Retail/Restaurant/Hospitality loans, excluding PPP loans
    $ 338,757     $ 299,047  
  
 
 
    
 
 
  
Retail/Restaurant/Hospitality as a % of total loans, excluding PPP loans
      7.34 %      6.39 % 
Classified Retail/Restaurant/Hospitality loans
    $ 15,837     $ 5,680  
Nonaccrual Retail/Restaurant/Hospitality loans
      5,752       867  
Net Charge-Offs for Retail/Restaurant/Hospitality loans
      178       130  
 
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Table of Contents
Table 6 –
Non-accrual,
Past Due 90 Days or More and Still Accruing, Restructured Loans and Foreclosed Assets (in thousands, except percentages):
 
    
June 30,
    
December 31,

2019
  
    
2020
    
2019
  
Non-accrual
loans*
    $ 39,320     $ 26,408     $ 24,582  
Loans still accruing and past due 90 days or more
      92       300       153  
Troubled debt restructured loans**
      25       471       26  
  
 
 
    
 
 
    
 
 
  
Nonperforming Loans
      39,437       27,179       24,761  
Foreclosed assets
      287       681       1,009  
  
 
 
    
 
 
    
 
 
  
Total nonperforming assets
    $ 39,724     $ 27,860     $ 25,770  
  
 
 
    
 
 
    
 
 
  
As a % of loans and foreclosed assets
      0.75 %      0.69 %      0.61 % 
As a % of total assets
      0.38       0.35       0.31  
 
*
Includes $7.28 million, $464 thousand and $251 thousand of purchased credit impaired loans as of June 30, 2020 and 2019, and December 31, 2019, respectively.
 
**
Other troubled debt restructured loans of $4.67 million, $3.91 million and $4.79 million, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in
non-accrual
loans at June 30, 2020 and 2019, and December 31, 2019, respectively.
We record interest payments received on
non-accrual
loans as reductions of principal. Prior to the loans being placed on
non-accrual,
we recognized interest income on impaired loans of approximately $151 thousand for the year ended December 31, 2019. If interest on these impaired loans had been recognized on a full accrual basis during the year ended December 31, 2019, such income would have approximated $2.39 million. Such amounts for the 2020 and 2019 interim periods were not significant.
 
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Table of Contents
Provision and Allowance for Loan Losses
. The allowance for loan losses is the amount we determine as of a specific date to be appropriate to absorb probable losses on existing loans in which full collectability is unlikely based on our review and evaluation of the loan portfolio. For a discussion of our methodology, see note 1 to our notes to the consolidated financial statements (unaudited). The provision for loan losses was $8.70 million for the second quarter of 2020, as compared to $600 thousand for the second quarter of 2019. The provision for loan losses was $18.55 million for the
six-month
period ended June 30, 2020 as compared to $1.57 million for the same period in 2019. The provision for loan losses in 2020 reflects primarily the stress on our loan portfolio from the increase in unemployment and economic effects of the
COVID-19
pandemic and the decrease in oil and gas prices. As a percent of average loans, net loan charge-offs were 0.01% for the second quarter of 2020, as compared to 0.04% for the second quarter of 2019. As a percentage of average loans, net loan charge-offs were 0.09% for the first six months of 2020, as compared to 0.05% for the first six months of 2019. The allowance for loan losses as a percent of total loans was 1.30% as of June 30, 2020, as compared to 1.28% as of June 30, 2019 and 1.24% as of December 31, 2019. While we note that our allowance for loan losses as a percentage of total loans has remained relatively flat, we acquired $455.18 million in loans in the TB&T Bancshares, Inc. acquisition that were recorded at fair value, including credit considerations, with no corresponding allowance for loan losses being recorded. The Company recorded a $7.65 million discount on the acquired loan portfolio at acquisition date and such amounts totaled $6.69 million at June 30, 2020.
Table 7 - Loan Loss Experience and Allowance for Loan Losses (in thousands, except percentages):
 
    
Three Months Ended

June 30,
    
Six Months Ended

June 30,
  
    
2020
    
2019
    
2020
    
2019
  
Allowance for loan losses at
period-end
    $ 68,947     $ 51,820     $ 68,947     $ 51,820  
Loans held for investment at
period-end
      5,253,067       4,040,952       5,253,067       4,040,952  
Average total loans for period
      5,248,052       4,043,055       4,957,744       4,008,275  
Net charge-offs/average loans (annualized)
      0.01 %      0.04 %      0.09 %      0.05 % 
Allowance for loan
losses/period-end
total loans
      1.30 %      1.28 %      1.30 %      1.28 % 
Allowance for loan
losses/non-accrual
loans, past due 90 days still accruing and restructured loans
      174.83 %      190.66 %      174.83 %      190.66 % 
Interest-Bearing Demand Deposits in Banks.
At June 30, 2020, our interest-bearing deposits in banks were $196.43 million compared to $129.61 million at June 30, 2019 and $47.92 million at December 31, 2019, respectively. At June 30, 2020, interest-bearing deposits in banks included $196.12 million maintained at the Federal Reserve Bank of Dallas and $302 thousand on deposit with the Federal Home Loan Bank of Dallas (“FHLB”).
Available-for-Sale
Securities
. At June 30, 2020, securities with a fair value of $4.12 billion were classified as securities
available-for-sale.
As compared to December 31, 2019, the
available-for-sale
portfolio at June 30, 2020
reflected (i) an increase in U.S. Treasury securities of $103 thousand, (ii) an increase of $661.30 million in obligations of states and political subdivisions, (iii) a decrease of $139 thousand in corporate bonds and other, and (iv) an increase of $44.29 million in mortgage-backed securities. We have seen an increase in our purchases of state and political subdivisions bonds in the first half of 2020 due to favorable shifts in tax equivalent yields. Our mortgage related securities are backed by GNMA, FNMA or FHLMC or are collateralized by securities backed by these agencies.
See note 2 to the consolidated financial statements (unaudited) for additional disclosures relating to the investment portfolio at June 30, 2020 and 2019, and December 31, 2019.
 
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Table of Contents
Table 8 - Maturities and Yields of
Available-for-Sale
Securities Held at June 30, 2020 (in thousands, except percentages):
 
    
Maturing
  
    
One Year

or Less
    
After One Year

Through

Five Years
    
After Five Years

Through

Ten Years
    
After

Ten Years
    
Total
  
Available-for-Sale:
   
Amount
     
Yield
    
Amount
     
Yield
    
Amount
     
Yield
    
Amount
     
Yield
    
Amount
     
Yield
  
U.S. Treasury securities
    $ 10,122        0.85 %    $ —          —   %    $ —          —   %    $ —          —   %    $ 10,122        0.85 % 
Obligations of states and political subdivisions
      114,830        4.81       669,229        4.09       1,148,866        3.27       17,354        3.39       1,950,279        3.64  
Corporate bonds and other securities
      4,569        2.11       —          —         —          —         —          —         4,569        2.11  
Mortgage-backed securities
      120,484        2.30       1,686,942        2.54       346,467        2.43       —          —         2,153,893        2.51  
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
Total
    $ 250,005        3.39 %    $ 2,356,171        2.98 %    $ 1,495,333        3.07 %    $ 17,354        3.39 %    $ 4,118,863        3.04 % 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
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 June 30, 2020, the investment portfolio had an overall tax equivalent yield of 3.04%, a weighted average life of 4.42 years and modified duration of 3.94 years.
Deposits
. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were $8.16 billion as of June 30, 2020, as compared to $6.37 billion as of June 30, 2019 and $6.60 billion as of December 31, 2019. Table 9 provides a breakdown of average deposits and rates paid for the three and
six-month
periods ended June 30, 2020 and 2019, respectively.
Table 9 — Composition of Average Deposits (in thousands, except percentages):
 
    
Three Months Ended June 30,
  
    
2020
    
2019
  
    
Average
Balance
     
Average

Rate
    
Average

Balance
     
Average

Rate
  
Noninterest-bearing deposits
    $ 2,830,960        —   %    $ 2,136,264        —   % 
Interest-bearing deposits:
           
Interest-bearing checking
      2,486,194        0.14       2,054,770        0.77  
Savings and money market accounts
      2,183,507        0.16       1,705,154        0.56  
Time deposits under $100,000
      196,165        0.31       188,188        0.69  
Time deposits of $100,000 or more
      269,906        0.92       248,011        1.04  
  
 
 
     
 
 
    
 
 
     
 
 
  
Total interest-bearing deposits
      5,135,772        0.20 %      4,196,123        0.70 % 
  
 
 
     
 
 
    
 
 
     
 
 
  
Total average deposits
    $ 7,966,732        $ 6,332,387     
  
 
 
       
 
 
     
Total cost of deposits
         0.13 %         0.46 % 
     
 
 
       
 
 
  
 
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Table of Contents
    
Six Months Ended June 30,
  
    
2020
    
2019
  
    
Average
Balance
     
Average

Rate
    
Average

Balance
     
Average

Rate
  
Noninterest-bearing deposits
    $ 2,561,248        —   %    $ 2,109,640        —   % 
Interest-bearing deposits:
           
Interest-bearing checking
      2,466,112        0.33       2,056,068        0.74  
Savings and money market accounts
      2,083,604        0.31       1,675,909        0.56  
Time deposits under $100,000
      197,960        0.56       189,921        0.62  
Time deposits of $100,000 or more
      272,253        1.03       248,352        0.94  
  
 
 
     
 
 
    
 
 
     
 
 
  
Total interest-bearing deposits
      5,019,929        0.37 %      4,170,250        0.67 % 
  
 
 
     
 
 
    
 
 
     
 
 
  
Total average deposits
    $ 7,581,177        $ 6,279,890     
  
 
 
       
 
 
     
Total cost of deposits
         0.25 %         0.45 % 
     
 
 
       
 
 
  
Borrowings.
Included in borrowings were federal funds purchased, securities sold under repurchase agreements and advances from the FHLB of $449.22 million, $362.01 million and $381.36 million at June 30, 2020 and 2019 and December 31, 2019, respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the borrowings. The average balance of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were $877.08 million and $378.39 million in the second quarters of 2020 and 2019, respectively. The weighted average interest rates paid on these borrowings were 0.19% and 0.72% for the second quarters of 2020 and 2019, respectively. The average balances of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB was $668.84 million and $393.43 million for the
six-month
periods ended June 30, 2020 and 2019, respectively. The weighted average interest rate on these short-term borrowings was 0.28% and 0.72% for the first six months of 2020 and 2019, respectively.
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 $1.58 billion, or 15.30% of total assets at June 30, 2020, as compared to $1.16 billion or 14.60% of total assets at June 30, 2019 and $1.23 billion, or 14.85% of total assets at December 31, 2019. Included in shareholders’ equity at June 30, 2020 and 2019 and December 31, 2019, were $151.24 million, $60.57 million and $67.51 million, respectively, in unrealized gains (losses) on investment securities
available-for-sale,
net of related income taxes. For the second quarter of 2020, total shareholders’ equity averaged $1.54 billion, or 14.68% of average assets, as compared to $1.12 billion, or 14.25% of average assets, during the same period in 2019. For the six months ended June 30, 2020, total shareholders’ equity averaged $1.51 billion or 15.35%, as compared to $1.10 billion or 14.04% of total assets during the same period in 2019.
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
 
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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 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 June 30, 2020 and 2019, and December 31, 2019, we had a total capital to risk-weighted assets ratio of 22.03%, 21.16% and 21.13%, a Tier 1 capital to risk-weighted assets ratio of 20.78%, 20.04% and 20.06%; a common equity Tier 1 to risk-weighted assets ratio of 20.78%, 20.04% and 20.06% and a leverage ratio of 11.25%, 12.29% and 12.60%, respectively. The regulatory capital ratios as of June 30, 2020 and 2019, and December 31, 2019 were calculated under Basel III rules.
The regulatory capital ratios of the Company and Bank under the Basel III regulatory capital framework are as follows:
 
    
Actual
    
Minimum Capital

Required-Basel III

Fully
Phased-In*
    
Required to be

Considered Well-
Capitalized
  
As of June 30, 2020:
   
Amount
     
Ratio
    
Amount
     
Ratio
    
Amount
     
Ratio
  
Total Capital to Risk-Weighted Assets:
                
Consolidated
    $ 1,191,492        22.03 %    $ 567,829        10.50 %    $ 540,789        10.00 % 
First Financial Bank, N.A
    $ 1,086,019        20.13 %    $ 566,561        10.50 %    $ 539,582        10.00 % 
Tier 1 Capital to Risk-Weighted Assets:
                
Consolidated
    $ 1,123,866        20.78 %    $ 459,671        8.50 %    $ 324,474        6.00 % 
First Financial Bank, N.A
    $ 1,018,543        18.88 %    $ 458,645        8.50 %    $ 431,666        8.00 % 
Common Equity Tier 1 Capital to Risk-Weighted Assets:
                
Consolidated
    $ 1,123,866        20.78 %    $ 378,552        7.00 %      —          N/A  
First Financial Bank, N.A
    $ 1,018,543        18.88 %    $ 377,708        7.00 %    $ 350,728        6.50 % 
Leverage Ratio:
                
Consolidated
    $ 1,123,866        11.25 %    $ 399,750        4.00 %      —          N/A  
First Financial Bank, N.A
    $ 1,018,543        10.22 %    $ 398,459        4.00 %    $ 498,074        5.00 % 
 
*
At June 30, 2020, the capital conservation buffer under Basel III has been fully
phased-in.
 
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Actual
    
Minimum Capital
Required-Basel III
Fully
Phased-In*
    
Required to be
Considered Well-
Capitalized
  
As of June 30, 2019:
   
Amount
     
Ratio
    
Amount
     
Ratio
    
Amount
     
Ratio
  
Total Capital to Risk-Weighted Assets:
                
Consolidated
    $ 995,299        21.16 %    $ 493,803        10.50 %    $ 470,288        10.00 % 
First Financial Bank, N.A
    $ 901,188        19.21 %    $ 492,484        10.50 %    $ 469,032        10.00 % 
Tier 1 Capital to Risk-Weighted Assets:
                
Consolidated
    $ 942,670        20.04 %    $ 399,745        8.50 %    $ 282,173        6.00 % 
First Financial Bank, N.A
    $ 848,560        18.09 %    $ 398,677        8.50 %    $ 375,226        8.00 % 
Common Equity Tier 1 Capital to Risk-Weighted Assets:
                
Consolidated
    $ 942,670        20.04 %    $ 329,202        7.00 %      —          N/A  
First Financial Bank, N.A
    $ 848,560        18.09 %    $ 328,323        7.00 %    $ 304,871        6.50 % 
Leverage Ratio:
                
Consolidated
    $ 942,670        12.29 %    $ 306,707        4.00 %      —          N/A  
First Financial Bank, N.A
    $ 848,560        11.11 %    $ 305,515        4.00 %    $ 381,893        5.00 % 
 
    
Actual
    
Minimum Capital
Required Under
Basel III
Phase-In
    
Required to be
Considered Well-
Capitalized
  
As of December 31, 2019:
   
Amount
     
Ratio
    
Amount
     
Ratio
    
Amount
     
Ratio
  
Total Capital to Risk-Weighted Assets:
                
Consolidated
    $ 1,051,029        21.13 %    $ 522,275        10.50 %    $ 497,405        10.00 % 
First Financial Bank, N.A
    $ 908,778        18.31 %    $ 521,081        10.50 %    $ 496,268        10.00 % 
Tier 1 Capital to Risk-Weighted Assets:
                
Consolidated
    $ 997,721        20.06 %    $ 422,794        8.50 %    $ 298,443        6.00 % 
First Financial Bank, N.A
    $ 855,470        17.24 %    $ 421,828        8.50 %    $ 397,014        8.00 % 
Common Equity Tier 1 Capital to Risk-Weighted Assets:
                
Consolidated
    $ 997,721        20.06 %    $ 348,184        7.00 %      —          N/A  
First Financial Bank, N.A
    $ 855,470        17.24 %    $ 347,388        7.00 %    $ 322,574        6.50 % 
Leverage Ratio:
                
Consolidated
    $ 997,721        12.60 %    $ 316,850        4.00 %      —          N/A  
First Financial Bank, N.A
    $ 855,470        10.84 %    $ 315,570        4.00 %    $ 394,463        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 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
 
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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.
As of June 30, 2020, the model simulations projected that 100 and 200 basis point increases in interest rates would result in positive variances in net interest income of 4.43% and 8.86%, respectively, relative to the current financial statement structure over the next twelve months, while a decrease in interest rates of 100 and 200 basis points would result in a negative variance in net interest income of 3.05% and 5.03%, respectively, relative to the current financial statement structure over the next twelve months. 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 with Frost Bank, a nonaffiliated bank, which matures in June 2021 (see next paragraph).
Our subsidiary bank also has federal funds purchased lines of credit with two
non-affiliated
banks totaling $130.00 million. At June 30, 2020, no amounts were drawn on these lines of credit. Our subsidiary bank also has (i) an available a line of credit with the FHLB totaling $1.79 billion at June 30, 2020, secured by portions of our loan portfolio and certain investment securities and (ii) access to the Federal Reserve Bank of Dallas lending program. At June 30, 2020, the Company had no outstanding advances under these lines of credit.
The Company renewed its loan agreement, effective June 30, 2019, with Frost Bank. Under the loan agreement, as renewed and amended, we are permitted to draw up to $25.00 million on a revolving line of
 
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credit. Prior to June 30, 2021, interest is paid quarterly at
The Wall Street Journal
Prime Rate and the line of credit matures June 30, 2021. If a balance exists at June 30, 2021, 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 37% (low) in 1995 to 53% (high) in 2003 and 2006. The Company was in compliance with the financial and operational covenants at June 30, 2020. There was no outstanding balance under the line of credit as of June 30, 2020 or December 31, 2019.
In addition, we anticipate that future acquisitions of financial institutions, expansion of branch locations or offerings of new products could also place a demand on our cash resources. Available cash and cash equivalents at our parent company which totaled $89.85 million at June 30, 2020, investment securities which totaled $3.62 million at June 30, 2020 and mature over 9 to 10 years, available dividends from our subsidiaries which totaled $257.09 million at June 30, 2020, utilization of available lines of credit, and future debt or equity offerings are expected to be the source of funding for these potential acquisitions or expansions.
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 June 30, 2020, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. 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 Arrangements.
We are a party to financial instruments with
off-balance
sheet risk in the normal course of business to meet the financing needs of our customers. 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.
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.
 
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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.
Table 10 – Commitments as of June 30, 2020 (in thousands):
 
    
Total Notional
Amounts
Committed
  
Unfunded lines of credit
    $ 810,957  
Unfunded commitments to extend credit
      520,515  
Standby letters of credit
      40,214  
  
 
 
  
Total commercial commitments
    $ 1,371,686  
  
 
 
  
We believe we have no other
off-balance
sheet arrangements or transactions with unconsolidated, special purpose entities that would expose us to liability that is not reflected on the face of the financial statements. Amounts related to interest rate lock commitments are not included in this table.
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 June 30, 2020, approximately $257.09 million was available for the payment of intercompany dividends by our subsidiaries without the prior approval of regulatory agencies. Our subsidiaries paid aggregate dividends of $5.00 million and $4.00 million for the
six-month
periods ended June 30, 2020 and 2019, respectively.
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 39.17% and 38.00% of net earnings for the first six months of 2020 and 2019, respectively. Given our current capital position and projected earnings and asset growth rates, we do not anticipate any significant change in our current dividend policy. On April 28, 2020 the Board of Directors declared a $0.13 per share cash dividend for the second quarter of 2020, an 8.33% increase over 2019.
Our bank subsidiary, which is a national banking association and a member of the Federal Reserve System, is required by federal law to obtain the prior approval of the OCC to declare and pay dividends if the total of all dividends declared in any calendar year would exceed the total of (1) such bank’s net profits (as defined and interpreted by regulation) for that year plus (2) its retained net profits (as defined and interpreted by regulation) for the preceding two calendar years, less any required transfers to surplus.
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.
 
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Table of Contents
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Management considers interest rate risk to be a significant market risk for the Company. See “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources - Interest Rate Risk” for disclosure regarding this market risk.
 
Item 4.
Controls and Procedures
As of June 30, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule
13a-15(e)
or
15d-15(e)
of the Securities Exchange Act of 1934). Our management, which includes our principal executive officer and our principal financial officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Our principal executive officer and principal financial officer have concluded, based on our evaluation of our disclosure controls and procedures, that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2020.
Subsequent to our evaluation, there were no significant changes in internal controls over financial reporting or other factors that have materially affected, or are reasonably likely to materially affect, these internal controls.
 
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PART II
OTHER INFORMATION
 
Item 1.
Legal Proceedings
From time to time we and our subsidiaries are parties to lawsuits arising in the ordinary course of our banking business. However, there are no material pending legal proceedings to which we, our subsidiaries, or any of their properties, are currently subject. Other than regular, routine examinations by state and federal banking authorities, there are no proceedings pending or known to be contemplated by any governmental authorities.
 
Item 1A.
Risk Factors
There has been no material change in the risk factors previously disclosed under Part I, Item 1A of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019 and Part II, Item 1A of the Company’s Quarterly Report on Form
10-Q
for the quarter ended March 31, 2020.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Repurchase of Common Stock
On March 12, 2020, the Company’s Board of Directors authorized the repurchase of up to 4,000,000 common shares through September 30, 2021. The stock repurchase plan authorizes management to repurchase the stock at such time as repurchases are considered beneficial to the Company and stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Through June 30, 2020, 324,802 shares were repurchased totaling $8,008,000 under this repurchase plan.
The following table presents shares that have been repurchased under the Company’s repurchase program:
 
Period
   
(a)

Total number

of shares

purchased
     
(b)

Average

price paid

per share
     
(c)

Total number of shares

purchased as part of

publicly announced plans or

programs
     
(d)

Maximum number of shares

that may yet be purchased

under the plans or programs
  
April 1, 2020 through April 30, 2020
      324,802      $ 24.7530        324,802        3,675,198  
May 1, 2020 through May 31, 2020
      —          —          —          3,675,198  
June 1, 2020 through June 30, 2020
      —          —          —          3,675,198  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
      324,802      $ 24.7530        324,802        3,675,198  
  
 
 
     
 
 
     
 
 
     
 
 
  
 
Item 3.
Defaults Upon Senior Securities
Not Applicable
 
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Table of Contents
Item 4.
Mine Safety Disclosures
Not Applicable
 
Item 5.
Other Information
As previously reported in the Company’s Current Report on Form 8-K filed with the SEC on April 24, 2020, J. Bruce Hildebrand, the Chief Financial Officer of the Company, will retire effective August 2, 2020. James R. Gordon will succeed Mr. Hildebrand as Chief Financial Officer of the Company effective July 29, 2020.
 
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Table of Contents
Item 6.
Exhibits
 
    2.1
    —    Agreement and Plan of Reorganization, dated October 12, 2017, by and among First Financial Bankshares, Inc., Kingwood Merger Sub, Inc., and Commercial Bancshares, Inc. (schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K) (incorporated by reference from Exhibit 2.1 to Registrant’s Form 8-K filed October 12, 2017).
    2.2
    —    Agreement and Plan of Reorganization, dated September 19, 2019, by and among First Financial Bankshares, Inc., Brazos Merger Sub, Inc., and TB&T Bancshares, Inc. (schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K) (incorporated by reference from Exhibit 2.1 to Registrant’s Form 8-K filed September 20, 2019).
    3.1
    —    Amended and Restated Certificate of Formation (incorporated by reference from Exhibit 3.1 of the Registrant’s Form 10-Q filed July 30, 2019).
    3.2
    —    Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrant’s Form 8-K filed April 3, 2020).
    4.1
    —    Specimen certificate of First Financial Common Stock (incorporated by reference from Exhibit 3 of the Registrant’s Amendment No. 1 to Form 8-A filed on Form 8-A/A No. 1 on January 7, 1994).
    4.2
    —    Description of Registrant’s Securities (incorporated by reference from Exhibit 4.2 of the Registrant’s Form 10-K filed February 14, 2020).
  10.1
    —    2002 Incentive Stock Option Plan (incorporated by reference from Exhibit 10.3 of the Registrant’s Form 10-Q filed May 4, 2010).++
  10.2
    —    2012 Incentive Stock Option Plan (incorporated by reference from Appendix A of the Registrant’s Definitive Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 filed March 1, 2012).++
  10.3
    —    Loan agreement dated June 30, 2013, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed July 1, 2013).
  10.4
    —    First Amendment to Loan Agreement, dated June 30, 2015, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed June 30, 2015).
  10.5
    —    Second Amendment to Loan Agreement, dated June 30, 2017, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed June 30, 2017).
  10.6
    —    Third Amendment to Loan Agreement, dated June 30, 2019, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed July 1, 2019).
  10.7
    —    2015 Restricted Stock Plan as Amended and Restated April 28, 2020 (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed May 1, 2020).++
  10.8
    —    Form of Executive Recognition Agreement (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed June 30, 2020).++
  31.1
    —    Rule 13a-14(a) / 15(d)-14(a) Certification of Chief Executive Officer of First Financial Bankshares, Inc.*
  31.2
    —    Rule 13a-14(a) / 15(d)-14(a) Certification of Chief Financial Officer of First Financial Bankshares, Inc.*
  32.1
    —    Section 1350 Certification of Chief Executive Officer of First Financial Bankshares, Inc.+
  32.2
    —    Section 1350 Certification of Chief Financial Officer of First Financial Bankshares, Inc.+
101.INS
    —    XBRL Instance Document.- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*
101.SCH
    —    XBRL Taxonomy Extension Schema Document.*
101.CAL
    —    XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF
    —    XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB
    —    XBRL Taxonomy Extension Label Linkbase Document.*
 
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*
Filed herewith
+
Furnished herewith. This Exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
++
Management contract or compensatory plan on arrangement.
 
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
   
FIRST FINANCIAL BANKSHARES, INC.
Date: July 28, 2020
    
By:
  
/s/ F. Scott Dueser
     
F. Scott Dueser
     
President and Chief Executive Officer
Date: July 28, 2020
    
By:
  
/s/ J. Bruce Hildebrand
     
J. Bruce Hildebrand
     
Executive Vice President and Chief Financial Officer
 
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