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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM
10-K

☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

2020

or
☐
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 Namename of Registrantregistrant as Specifiedspecified in Its Charter)

its charter)
Texas
 
75-0944023

(State or Other Jurisdictionother jurisdiction of

Incorporation

incorporation or Organization)

organization)
 

(I.R.S. Employer

Identification No.)

400 Pine Street, Abilene, Texas
 
79601
(Address of Principal Executive Offices)principal executive offices)
 
(Zip Code)
Registrant’s telephone number,
including area code:
(325)
627-7155

Registrant’s telephone number, including area code: (325)627-7155

Securities registered pursuant to Section 12(b) of the Act:

Title of Class

each class
  

Trading
Symbol(s)
Name of Exchange exchange
on Which Registered

which registered
Common Stock, par value $0.01 per share
  
FFIN
The Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ☐  
No  ☒

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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K.    ☐

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 file”, “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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act).    Yes  ☐    No  ☒

As of June 30, 2017,2020, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s voting and
non-voting
common stock held by
non-affiliates
was $2.78$3.93 billion.

As of February 16, 2018,22, 2021, there were 67,574,990
 142,245,485 shares of common stock outstanding.

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Documents Incorporated by Reference

Certain information called forrequired by Part III is incorporated by reference to the proxy statement for our 20182021 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2017.

2020.

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FIRST FINANCIAL BANKSHARES, INC.
FORM
10-K
For the Year Ended December 31, 2020
INDEX
  Page 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

PART I
  1

PART I

ITEM 1.

Business  2 

ITEM 1A.

1.
 
Risk FactorsBusiness
   183 

ITEM 1B.

1A.
 
Unresolved Staff CommentsRisk Factors
   3022 

ITEM 2.

1B.
 
PropertiesUnresolved Staff Comments
   3036 

ITEM 3.

2.
 
Legal ProceedingsProperties
   3036 

ITEM 4.

3.
 
Mine Safety DisclosuresLegal Proceedings
   3036 

PART II

ITEM 4.
 
Mine Safety Disclosures
  36

ITEM 5.

 
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
   3037 

ITEM 6.

 
Selected Financial Data
   3339 

ITEM 7.

 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   3440 

ITEM 7A.

 
Quantitative and Qualitative Disclosures About Market Risk
   4959 

ITEM 8.

 
Financial Statements and Supplementary Data
   4960 

ITEM 9.

 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
   5162 

ITEM 9A.

 
Controls and Procedures
   5162 

ITEM 9B.

 
Other Information
   5364 

PART III

 
PART III
 

ITEM 10.

  
ITEM 10.
Directors, Executive Officers and Corporate Governance
   5465 

ITEM 11.

 
Executive Compensation
   5465 

ITEM 12.

 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
   5465 

ITEM 13.

 
Certain Relationships and Related Transactions, and Director Independence
   5465 

ITEM 14.

 
Principal AccountingAccountant Fees and Services
   5465 

PART IV

 

ITEM 15.

Exhibits, Financial Statement Schedules
PART IV
  55

EXHIBITS INDEX

  56
ITEM 15.
 

SIGNATURESExhibit and Financial Statement Schedules

   5766
ITEM 16.
Form 10-K Summary
68
SIGNATURES
68 

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PART I
CAUTIONARY STATEMENT REGARDING

FORWARD-LOOKING STATEMENTS

This Form
10-K
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-K,
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 listed in “Item
1A-Risk
Factors” and the following:

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

effect of the coronavirus (“COVID”) on our Company, the communities where we have our branches, the state of Texas and the United States, related to the economy and overall financial stability;
government and regulatory responses to the COVID pandemic;
effect of severe weather conditions, including hurricanes, tornadoes, flooding and droughts;

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

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

political and racial instability;

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

changes in our competitive environment from other financial institutions and financial service providers;

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

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

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

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

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

the accuracy of our estimates of future loancredit losses;

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

soundness of other financial institutions with which we have transactions;

inflation, interest rate, market and monetary fluctuations;

changes in consumer spending, borrowing and savings habits;

changes in commodity prices (e.g., oil and gas, cattle, and wind energy);

our ability to attract deposits and increase market share;

changes in our liquidity position;

changes in the reliability of our vendors, internal control system or information systems;

cyber attacks on our technology information systems, including fraud from our customers and external third partythird-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; and

acts of God or of war or terrorism.terrorism;

potential risk of environmental liability associated with lending activities; and
our success at managing the risk involved in the foregoing items.
Such forward-looking statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategystrategies 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).

PART I

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ITEM 1.
BUSINESS

General

First Financial Bankshares, Inc., a Texas corporation (the “Company”), is a financial holding company registered under the Bank Holding Company Act of 1956, as amended, or BHCA. As such, we are supervised by the Federal Reserve Board, as well as several other bank regulators. We were formed as a bank holding company in 1956 under the original name F & M Operating Company, but our banking operations date back to 1890, when Farmers and Merchants National Bank opened for business in Abilene, Texas. As of December 31, 2020, our wholly-owned subsidiaries were:
First Financial Bank, N.A., Abilene, Texas;
First Technology Services, Inc., Abilene, Texas, a wholly-owned subsidiary of First Financial Bank, N.A., Abilene, Texas;
First Financial Trust & Asset Management Company, N.A., Abilene, Texas;
First Financial Insurance Agency, Inc., Abilene, Texas; and
First Financial Investments, Inc., Abilene, Texas.
On January 1, 2018,2020, we acquired CommercialTB&T Bancshares, Inc. and its wholly ownedwholly-owned subsidiary, Commercial StateThe Bank Kingwood,& Trust of Bryan/College Station, Texas and merged these entities with and into the Company and our subsidiary bank, respectively. On July 31, 2015, we acquired FBC Bancshares, Inc. and its wholly owned subsidiary, First Bank, N.A., Conroe, Texas and merged these entities with and into the Company and our subsidiary bank, respectively. We also completed an asset purchase of 4Trust Mortgage, Inc. on June 1, 2015 that significantly increased our residential mortgages/loan originations that are sold in the secondary market. On January 1, 2015, our technology subsidiary, First Technology Services, Inc., was contributed to our bank subsidiary, First Financial Bank, National Association, Abilene, Texas, and therefore became an indirect subsidiary of the Company. As of December 31, 2017, our subsidiaries are:

First Financial Bank, National Association, Abilene, Texas;

First Technology Services, Inc., Abilene, Texas, a wholly owned subsidiary of First Financial Bank, National Association, Abilene, Texas;

First Financial Trust & Asset Management Company, National Association, Abilene, Texas;

First Financial Insurance Agency, Inc., Abilene, Texas; and

First Financial Investments, Inc., Abilene, Texas.

Through our subsidiaries, we conduct a full-service commercial banking business. Our banking centers are located primarily in Central, North Central, Southeast and West Texas. As of December 31, 2017,2020, we had 6978 financial centers across Texas, with eleven locations in Abilene, three locations in San AngeloBryan and Weatherford, two locations in Cleburne, College Station, Conroe, San Angelo, Stephenville, and Granbury, and one location each in Acton, Albany, Aledo, Alvarado, Beaumont, Boyd, Bridgeport, Brock, Burleson, Cisco, Clyde, Cut and Shoot, Decatur, Eastland, El Campo, Fort Worth, Fulshear, Glen Rose, Grapevine, Hereford, Huntsville, Keller, Kingwood, Magnolia, Mauriceville, Merkel, Midlothian, Mineral Wells, Montgomery, Moran, New Waverly, Newton, Odessa, Orange, Palacios, Port Arthur, Ranger, Rising Star, Roby, Southlake, Spring, Sweetwater, Tomball, Trent, Trophy Club, Vidor, Waxahachie, Willis and Willow Park, all in Texas.    On January 1, 2018, we completed our acquisition of Commercial Bancshares, Inc. and its wholly owned bank subsidiary, Commercial State Bank and, as a result, added branch locations in Kingwood, Fulshear, El Campo and Palacios.

Park.

Even though we operate in a growing number of Texas markets, we continue to believe that decisions are best made at the local level. Although we consolidated our bank charters into one charter in 2012, we continue to regionally manage our operations with local advisory boards of directors, local bank regionregional presidents and local decision-makers.decision-making processes. We have consolidated manysubstantially all of the backroom operations, such as investment securities, accounting, check processing, credit administration, risk management, marketing, call center, technology and employee benefits,human resources, which improvesimproved our efficiency and freesfreed management of our bank regions to concentrate on serving the banking needs of their local communities. On January 1, 2016, we combined our Huntsville and Conroe Regions and our Abilene, Sweetwater and Eastland Regions and established a Fort Worth Region that previously was a branch of our Weatherford Region. On January 1, 2018, we combined our Mineral Wells and Stephenville Regions.

In the past, we

We have chosen to keep our Company focused on the State of Texas, one of the nation’s largest, fastest-growing and most economically diverse states. With approximately 27.929.0 million residents as of December 31, 2019, Texas has more people than any other state except California. The population of Texas grew 19.3%17.1% from 2006-20162009-2019 according to the U.S. Census Bureau. Many of the communities in which we operate are also experiencing positive growth as shown below:

Population Growth 2006-2016*

Bridgeport and Wise County

   13.5%   Weatherford, Willow Park, Aledo and Parker County   23.6% 

Fort Worth and Tarrant County

   21.5%   Stephenville and Erath County   18.0% 

Cleburne and Johnson County

   11.7%   Conroe and Montgomery County   41.3% 

Granbury and Hood County

   31.1%   *Source: U. S. Census Bureau  

2009-2019 by City and County*

Bridgeport and Wise County
16.8% 
Bryan/College Station and Brazos County
26.7% 
Cleburne and Johnson County
11.9% 
Conroe and Montgomery County
36.1% 
*Source: U. S. Census Bureau
Fort Worth and Tarrant County
16.8% 
Granbury and Hood County
19.1% 
Stephenville and Erath County
17.7% 
Weatherford, Willow Park, Aledo and Parker County
23.8% 
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These economies include dynamic centers of higher education, agriculture, wind energy and natural resources, retail, military, technology, healthcare, tourism, retirement living, manufacturing and distribution.

We believe our community approach to doing business works best for us in small and
mid-size
markets, where we can play a prominent role in the economic, civic and cultural life of the community. Our goal is to serve these communities well and to experience growth as these markets continue to expand. In many instances, banking competition is less intense in smaller markets, making it easier for us to operate rationally and attract and retain high-caliber employees who prefer not only our community-banker concept but the high quality of life in smaller cities.

Over the years, we have grown in three ways: by growing organically, by opening new branch locations and by acquiring other banks. Since 1997, we have completed thirteenfourteen bank acquisitions and have increased our total assets from $1.57 billion to $7.25$10.90 billion as of December 31, 2017.2020. We have also establishedhave a trust and asset management company and a technology services company. First Financial Trust and& Asset Management Company, National

AssociationN.A. operates as a subsidiary of First Financial Bankshares, Inc. and First Technology Services, Inc. operates as a subsidiary of First Financial Bank, National Association, Abilene, Texas.N.A. Looking ahead, we intend to continue to grow organically by better serving the needs of our customers and putting them first in all of our decisions. We continually look for new branch locations, such as our latest branch opened in Spring, Texas which opened in January 2019, so we can provide more convenient service to our customers, and wecustomers. We are actively pursuing acquisition opportunities by calling on banks that we are interested in possibly acquiring.

When targeting a bank for acquisition, the subject bank generally needs to be well managed and profitable, while being located in the type of community that fits our profile. We seek to enter growing communities with good amenities – schools, infrastructure, commerce and lifestyle. We prefer
non-metropolitan
markets, either around Dallas/Fort Worth, Houston, San Antonio or Austin or along the Interstate 35, 45, 10 and 20 corridors in Texas. We might also consider the acquisition of banks in East Texas, the Texas Hill Country area or in states contiguous to Texas. Banks between $300$500 million and $1.0 billion in asset size fit our “sweet spot” for acquisition, but we would consider banks that are larger or smaller, or that are in other areas of Texas if we believe they would be a good fit for our Company.

Information on our revenues, profitsfinancial condition and losses and total assetsoperating results appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7 hereof.

First Financial Bankshares, Inc.

We provide management, technical resources and policy direction to our subsidiaries, which enable them to improve or expand their services while continuing their local activity and identity. Each of our subsidiaries operates under the
day-to-day
management of its own board of directors and officers, including advisory boards of directors for our bank regions. We provide resources and policy direction in, among other things, the following areas:

asset and liability management;

investments;

accounting;

budgeting;

budgeting and forecasting;
training;

marketing;

planning;

capital expenditures;
risk management;

loan review;

loan analysis;

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human resources;

insurance;

capitalization;

regulatory compliance; and

internal and external audit.

In particular, we assist our subsidiaries with, among other things, decisions concerning major capital expenditures, employee fringe benefits, including retirement plans and group medical coverage, dividend policies, and appointment of officers and directors, including advisory directors, and their compensation. We also perform, through corporate staff groups or by outsourcing to third parties, internal audits, compliance oversight and loan reviews of our subsidiaries. We provide advice and specialized services for our bank regions related to lending, investing, purchasing, advertising, public relations, and technology services.

We evaluate various potential financial institution acquisition opportunities and approve potential locations for new branch offices. We anticipate that funding for any acquisitions or expansions would be provided from our existing cash balances, available dividends from our subsidiaries, utilization of available lines of credit, issuance of common stock to the acquired company’s shareholders and future debt or equity offerings.

Services Offered by Our Subsidiaries

Our subsidiary bank, First Financial Bank, National Association,N.A. is a separate legal entity that operates under the
day-to-day
management of its board of directors and officers. Our multiple banking regions, which operate under our subsidiary bank, each have separate regional advisory boards that make recommendations and provide assistance to regional management of the bank regarding the operations of their respective region. Each of our bank regions provides general commercial banking services, which include accepting and holding checking, savings and time deposits, making loans, offering automated teller machines (“ATMs”),
drive-in
and night deposit services, safe deposit facilities, remote deposit capture, internet banking, mobile banking, payroll cards, transmitting funds, and performing other customary commercial banking services.
We also conduct full serviceprovide full-service trust and wealth management activities through First Financial Trust & Asset Management Company, National Association,N.A., our trust company. Our trust company has seventen locations which are located in Abilene, Bryan/College Station, Fort Worth, Houston, Odessa, Beaumont, San Angelo, San Antonio, Stephenville and Sweetwater, all in Texas. Through our trust company, we offer personal trust services, which include wealth management, the administration of estates, testamentary trusts, revocable and irrevocable trusts and agency accounts. We also administer all types of retirement and employee benefit accounts, which include 401(k) profit sharing plans and IRAs. The Company has been providing trust services since 1927. In addition, we provide securities brokerage services through arrangementsan arrangement with an unrelated third partythird-party in our Abilene Cleburne,and San Angelo and Weatherford banking regions.

Competition

Commercial banking in Texas is highly competitive, and because we hold less than 1% of the state’s deposits, we represent only a minorsmaller segment of the industry.market share in Texas. To succeed in this industry, we believe that we must have the capability to compete effectively in the areas of (1) interest rates paid or charged; (2) scope of services offered; and (3) prices charged for such services.services; as well as personalized customer service. Our bank regions compete in their respective service areas against highly competitive banks, thrifts, savings and loan associations, small loan companies, credit unions, mortgage companies, insurance companies, and brokerage firms, all of which are engaged in providing financial products and services and some of which are larger than us in terms of capital, resources and personnel.

Our business does not depend on any single customer or any few customers, and the loss of any one would not have a materially adverse effect upon our business. Although we have a broad base of customers that are not related to us, our customers also occasionally include our officers and directors, as well as other entities with which we are affiliated. Through our bank regions we may make loans to our officers and directors, and entities with which we
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are affiliated, in the ordinary course of business. We make these loans on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. Loans to our directors, officers and their affiliates are also subject to numerous restrictions under federal and state banking laws, which we describe in greater detail below, under the heading “Supervision and Regulation – Loans to Directors, Executive Officers and Principal Shareholders.”

Employees

Including

Overview of the Impact from the COVID Pandemic
During March 2020, the outbreak of the novel Coronavirus Disease 2019 was recognized as a pandemic by the World Health Organization and a national emergency by the President of the United States. The spread of COVID has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve across the State of Texas. National, state and local governmental responses to the pandemic have included orders to close or limit businesses activity not deemed essential and directing individuals to limit their movements and travel, observe social distancing, and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in overall temporary decreases in commercial and consumer activity. These responses and restrictions have led to a loss of revenues for certain industries and a sudden increase in unemployment, volatility in oil and gas prices and in business valuations, market downturns and volatility, changes in consumer behaviors, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.
Effective March 16, 2020, in an emergency response to stem the economic impact of COVID, the Federal Reserve lowered the federal funds target rate to a range of between zero to 0.25%. This action followed a prior reduction of the federal funds target rate to a range of 1.0% to 1.25% effective on March 4, 2020. Our earnings and related cash flows are largely dependent upon our net interest income representing the difference between interest income received on interest-earning assets, primarily loans and investment securities, and the interest expense paid on interest-bearing liabilities, primarily customer deposits and borrowed funds. As our balance sheet is more asset sensitive, our earnings are more adversely affected by decreases in market interest rates as the interest rates received on loans and other investments fall more quickly and to a larger degree than the interest rates paid on deposits and other borrowings. The decline in interest rates has already led to low yields across all maturity periods. The Federal Reserve has indicated that it expects to maintain the targeted federal funds rate at current levels until such time that labor market conditions have reached levels consistent with the Federal Open Market Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. However, should the Federal Reserve decrease the targeted federal funds rates even further in response to the economic effects of COVID, overall interest rates will decline further, which will likely negatively impact our net interest income and further compress our net interest margin.
Other actions taken by the Federal Reserve to provide monetary stimulus to counteract the economic disruption caused by COVID include:
Expanded reverse repo operations, adding liquidity to the banking system.
Restarted quantitative easing.
Lowered the interest rate on the discount window by 150 basis points to 25 basis points.
Reduced reserve requirement ratios to zero percent.
Encouraged banks to use their capital and liquidity buffers to lend.
Participated in the Main Street Loan Program.
Introduced and expanded several new programs that will operate on a temporary basis to help preserve market liquidity.
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Our financial position and results of operations are particularly susceptible to the ability of our subsidiaries,loan customers to meet loan obligations, the availability of our workforce, the availability of our vendors and the decline in the value of assets held by us. While its effects continue to materialize, the COVID pandemic has resulted in a decrease in commercial activity throughout the State of Texas as well as nationally. This decrease in commercial activity has caused and may continue to cause our customers (including affected businesses and individuals), vendors and counterparties to be unable to meet existing payment or other obligations to us. The resulting economic pressure on consumers and uncertainty regarding the sustainability of any economic improvements has impacted the creditworthiness of potential and current borrowers. Borrower loan defaults that adversely affect our earnings correlate with deteriorating economic conditions (such as the unemployment rate), which, in turn, are likely to impact our borrowers’ creditworthiness. See further information related to the risk exposure of our loan portfolio, including industries impacted by COVID and existence of loan deferral programs to assist our borrowers under the sections captioned “Loans” and “Allowance for Credit Losses” included in Note 3.
Although financial markets have rebounded from significant declines, many of the effects which emerged after the onset of the COVID pandemic have persisted through the end of the year. These changes have had and are likely to continue to impact our markets and the resulting demand for our products and services. See “Risk Factors-Other Risks” beginning on page 22.
The U.S. government has also enacted certain fiscal stimulus measures in several phases to counteract the economic disruption caused by COVID. The initial legislation, the Coronavirus Preparedness and Response Supplemental Appropriations Act, was enacted on March 6, 2020 and, among other things, authorized funding for research and development of vaccines and allocated money to state and local governments to aid containment and response measures. The next phase of legislation, the Families First Coronavirus Response Act, was enacted on March 18, 2020 and provides for paid sick/medical leave, establishes
no-cost
coverage for coronavirus testing, expands unemployment benefits, expands food assistance, and provides additional funding to states for the ongoing economic consequences of the pandemic, among other provisions. The following phase of legislation, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), was enacted on March 27, 2020. Among other provisions, the CARES Act (i) authorized the Secretary of the Treasury to make loans, loan guarantees and other investments, up to $500 billion, for assistance to eligible businesses, states and municipalities with limited, targeted relief for passenger air carriers, cargo air carriers, and businesses critical to maintaining national security, (ii) created a $349 billion loan program called the Paycheck Protection Program (the “PPP”) for loans to small businesses guaranteed by the Small Business Administration (“SBA”) for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments, (iii) provided certain credits against the 2020 personal income tax for eligible individuals and their dependents, (iv) expanded eligibility for unemployment insurance and provided eligible recipients with an additional $600 per week on top of the unemployment amount determined by each State and (v) expanded tele-health services in Medicare. This legislation was amended by the Paycheck Protection Program and Healthcare Enhancement Act of 2020 (the “PPPHE Act”), which was enacted on April 24, 2020. Among other things, the PPPHE Act provided an additional $310 billion of funding for the PPP of which, $30 billion is specifically allocated for use by banks and other insured depository institutions that have assets between $10 billion and $50 billion. On July 4, 2020, Congress enacted a new law that extended the deadline for applying for a PPP loan to August 8, 2020.
In December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal, included as a component of appropriations legislation, was enacted to provide economic stimulus to individuals and businesses in further response to the economic distress caused by the COVID pandemic. Among other things, the legislation includes (i) payments of $600 for individuals making up to $75,000 per year, (ii) extension of the Federal Pandemic Unemployment Compensation program to include a $300 weekly enhancement in unemployment benefits beginning after December 26, 2020 up to March 14, 2021, (iii) a temporary and targeted rental assistance program, and extends the eviction moratorium through January 31, 2021, (iv) targeted funding related to transportation, education, agriculture, nutrition and other public health measures and (v) approximately $325 billion for small business relief, including approximately $284 billion for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less.
We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S. government. The Federal Reserve created various additional lending facilities and expanded existing facilities to help provide financing in response to the financial disruptions caused by COVID. The programs include,
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among others, the Paycheck Protection Program Liquidity Facility (the “PPP Facility”), which is intended to extend loans to banks making PPP loans. The Federal Reserve announced extensions through March 31, 2021 for several of its lending facilities, including the PPP Facility, that were generally scheduled to expire on or around December 31, 2020.
Through December 31, 2020, we had funded approximately 6,500 PPP loans totaling $703.73 million. At December 31, 2020, the Company’s PPP loans have an outstanding balance of $483.66 million following repayments and forgiveness by the SBA. We did not participate in the PPP Facility program during 2020. Currently, the Company is assisting borrowers in the round 2 of the PPP under the December 2020 Relief Deal.
Among other things, our Company has taken significant actions to address the impact of COVID on our employees and customers with the stated goal of protecting all parties during the pandemic:
Established daily, at first, then weekly meetings of our management team to monitor and address COVID developments on our business and the impact to our customers and associates.
Implemented an internal communications plan to ensure our employees, customers and critical vendors are kept abreast of developments affecting our operations.
Restricted all
non-essential
travel and large external gatherings and instituted mandatory quarantine period for anyone that has known exposure to COVID.
We kept our branch locations open following the onset of COVID, except where the employees of the branch had direct COVID exposure. Each branch was deep cleaned daily and following potential exposure at a branch, the facility was sprayed to disinfect for the virus.
Expanded remote-access availability so that nearly all our workforce has the capability to work from home or other remote locations, if needed. All remotes access was provided in accordance with our compliance and information security policies designed to ensure customer data and other information is properly safeguarded. Much of our remote workforce has returned to the office.
Instituted mandatory social distancing policies for those employees not working remotely. Members of certain operations teams were split into separate buildings or locations to create redundancy for key functions across the organization.
The Company provided testing, free of charge, to all employees and we required testing of any employees with direct COVID exposure. Employees exposed were placed on quarantine based on the applicable CDC Guidelines.
We required employees and customers to wear masks, prior to the state mandates and publicly assisted in communicating that message to the public to increase awareness of the benefits of wearing masks.
We provided a vitamin and supplement package for employees to help build their immune systems as well as recover from the virus.
We are encouraging our employees to take the COVID vaccinations when available.
We also implemented a short-term loan modification process in late March 2020 to provide temporary payment relief to borrowers who meet certain qualifications. This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on the impact of the COVID pandemic to our financial statements and results of operations, as well as our business operations.
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Notwithstanding the foregoing actions, the COVID outbreak could still, among other things, greatly affect our routine and essential operations due to staff absenteeism, particularly among key personnel, further limit access to or result in further closures of our branch facilities and other physical offices, exacerbate operational, technical or security-related risks arising from a remote workforce, and result in adverse government or regulatory agency orders. The business and operations of our third-party service providers, many of whom perform critical services for our business, could also be significantly impacted, which in turn could impact us. As a result, we are currently unable to fully assess or predict the extent of the effects of COVID on our operations as the ultimate impact will depend on factors that are currently unknown and/or beyond our control.
Human Capital
We operate as a community bank offering a wide range of commercial banking services to consumers, small businesses, corporations,
non-profits,
governmental entities and others. A cornerstone of our operating model is based on personal relationships with our customers. Therefore, our model is heavily dependent on our personnel to execute our strategy within each region supported by our line of business and operational areas of the Company. Our executive leadership is critical to the success of our Company as each executive participates in developing our corporate strategy, policy setting, and oversight of each of their respective operating areas. The executive officers have significant banking experience and/or tenure with the Company, including our Chairman, CEO and President who will have forty-five years with the Company later this year. Our regional operating philosophy is heavily dependent on our Regional CEOs/Presidents who drive the daily execution of our strategy, customer service, and local decision-making, across our twelve regions. On average, our seventeen Regional CEOs/Presidents have approximately twenty-five years of banking experience and twelve years of service with the Company.
At December 31, 2020, the Company employed approximately 1,3001,400 full-time equivalentand 100 part-time employees at December 31, 2017.all located in the state of Texas. Our management believes that our employee relations have been and will continue to be good.

None of our employees are represented by collective bargaining agreements.

We seek to attract the best bankers in the markets we serve as well as key managers and associates to serve and build relationships with our customers. On a
day-to-day
basis, these associates execute on our “Excellence in Customer Service” culture, including our 21
Non-Negotiables
of Customer Service. Initially, each new associate attends New Employee Orientation to gain an understanding of our culture, including our customer service approach, our organization, and our operating and other policies. From there, associates also receive specific training for their applicable area of service.
We then provide a number of internally developed training programs and encourage associates to attend selected external programs. We require certain areas (lending, trust, risk, operations) to obtain certifications for their current and future roles in the organization (for example, lenders are required to obtain the Credit Risk Certification from the Risk Management Association). The Company also provides educational assistance for employees to further their professional development. In fact, seven of our Regional CEO/Presidents started their careers with the Company and progressed to their current levels over time.
We embrace and promote a culture of diversity, equity, and inclusion to attract, recruit, retain, develop, and promote employees who represent the diverse communities we serve. Our employees bring their own unique backgrounds, beliefs, cultures, and experiences to our organization. We celebrate our diverse and inclusive workplace as it brings new ideas, perspectives, and ways to enhance our overall customer and employee experience. Of our seventeen Regional CEO/Presidents, four are women (three of whom were promoted to these positions during their last eighteen months) and one is Hispanic.
The Company provides, in addition to competitive salaries, either at the Company’s expense or through employee deductions, benefits to its associates to help protect their health and well-being, including medical, dental, vision, employee assistance, short and long-term disability, life insurance, and vacation. Additionally, through our 401(k) retirement benefits, and profit-sharing contributions (which also contains an employee stock ownership plan or ESOP feature), the Company facilitates its associate’s future financial well-being. These benefits when combined with incentive compensation programs, both cash and equity based, serve as rewards for performance but also as retention vehicles for our employee base. The Company has strong relationships with its employee base leading to an average tenure of approximately six years with the Company (including its predecessor banks). During 2020 and 2019, the Company incurred expenses totaling approximately $27.20 million and $22.38 million, respectively, for these benefits.
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Understanding and supporting our communities has been a critical part of our Company’s success. Annually, we perform a Company-wide day of service to help improve the communities we live in and serve. In 2020, this amounted to over approximately 5,000 hours of community service across our footprint.
Overall, the attraction, development and retention of our executives, regional presidents and associates are integral to the performance of our Company which ultimately drives value to our shareholders in the form of dividends and price appreciation of our common stock. Accordingly, our Board of Directors participates in the oversight of our employment practices and policies, through the Compensation Committee. Our board sets the overall “tone at the top” and holds executive management accountable for embodying, maintaining and communicating our culture to employees.
Supervision and Regulation

Both federal and state laws extensively regulate bank holding companies, financial holding companies and banks. These laws (and the regulations promulgated thereunder) are primarily intended to protect depositors and the deposit insurance fund (the “DIF”) of the Federal Deposit Insurance Corporation, or the FDIC. The following information describes particular laws and regulatory provisions relating to financial holding companies and banks. This discussion is qualified in its entirety by reference to the particular laws and regulatory provisions. A change in any of these laws or regulations may have a material effect on our business and the business of our subsidiaries. Recent political developments, including the change in administration of the United States federal government, have added additional uncertainty in the implementation, scope and timing of regulatory reforms.

Bank Holding Companies and Financial Holding Companies

Historically, the activities of bank holding companies were limited to the business of banking and activities closely related or incidental to banking. Bank holding companies were generally prohibited from acquiring control of any company that was not a bank and from engaging in any business other than the business of banking or managing and controlling banks. The Gramm-Leach-Bliley Act, which took effect on March 12, 2000, dismantled many
Depression-era
restrictions against affiliations between banking, securities and insurance firms by permitting bank holding companies to engage in a broader range of financial activities, so long as certain safeguards are observed. Specifically, bank holding companies may elect to become “financial holding companies” that may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental to a financial activity. Thus, with the enactment of the Gramm-Leach-Bliley Act, banks, security firms and insurance companies find it easier to acquire or affiliate with each other and cross-sell financial products. The Gramm-Leach-Bliley Act permits a single financial services organization to offer a more complete array of financial products and services than historically was permitted.

A financial holding company is essentially a bank holding company with significantly expanded powers. Under the Gramm-Leach-Bliley Act, in addition to traditional lending activities, the following activities are among those that are deemed “financial in nature” for financial holding companies: securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, activities which the Federal Reserve Board determines to be closely related to banking, and certain merchant banking activities.

We elected to become a financial holding company in September 2001. As a financial holding company, we have very broad discretion to affiliate with securities firms and insurance companies, provide merchant banking services, and engage in other activities that the Federal Reserve Board has deemed financial in nature. In order to continue as a financial holding company, we must continue to be well-capitalized, well-managed and maintain compliance with the Community Reinvestment Act. Depending on the types of financial activities that we may elect to engage in, under the Gramm-Leach-Bliley Act’s functional regulation principles, we may become subject to supervision by additional government agencies. The election to be treated as a financial holding company increases our ability to offer financial products and services that historically we were either unable to provide or were only able to provide on a limited basis. As a result, we will face increased competition in the markets for any new financial products and services that we may offer. Likewise, an increased amount of consolidation among banks and securities firms or banks and insurance firms could result in a growing number of large financial institutions that could compete aggressively with us.

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Mergers and Acquisitions

We generally must obtain approval from the banking regulators before we can acquire other financial institutions. We may not engage in certain acquisitions if we are undercapitalized. Furthermore, the BHCA provides that the Federal Reserve Board cannot approve any acquisition, merger or consolidation that may substantially lessen competition in the banking industry, create a monopoly in any section of the country, or be a restraint of trade. However, the Federal Reserve Board may approve such a transaction if the convenience and needs of the community clearly outweigh any anti-competitive effects. Specifically, the Federal Reserve Board would consider, among other factors, the expected benefits to the public (greater convenience, increased competition, greater efficiency, etc.) against the risks of possible adverse effects (undue concentration of resources, decreased or unfair competition, conflicts of interest, unsound banking practices, etc.).

Under the BHCA, the Company must obtain the prior approval of the Federal Reserve Board, or acting under delegated authority, the Federal Reserve Bank of Dallas before (1) acquiring direct or indirect ownership or control of any class of voting securities of any bank or bank holding company if, after the acquisition, the Company would directly or indirectly own or control 5% or more of the class;class, (2) acquiring all or substantially all of the assets of another bank or bank holding company;company, or (3) merging or consolidating with another bank holding company.

The Change in Bank Control Act of 1978, as amended, or the CIBCA, and the related regulations of the Federal Reserve Board require any person or groups of persons acting in concert (except for companies required to make application under the BHCA), to file a written notice with the Federal Reserve Board before the person or group acquires control of the Company. The CIBCA defines “control” as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank. A rebuttable presumption of control arises under the CIBCA where a person or group controls 10% or more, but less than 25%, of a class of the voting stock of a company or insured bank which is a reporting company under the Securities Exchange Act of 1934, as amended, such as the Company, or such ownership interest is greater than the ownership interest held by any other person or group.

Banks

Federal and state laws and regulations that govern banks have the effect of, among other things, regulating the scope of business, investments, cash reserves, the purpose and nature of loans, the maximum interest rate chargeable on loans, the amount of dividends declared, and required capitalization ratios.

National Banking Associations.

Banks organized as national banking associations under the National Bank Act are subject to regulation and examination by the Office of the Comptroller of the Currency, or OCC. Effective December 30, 2012, we consolidated our then eleven bank charters into one, that being our Abilene charter. As a result, the OCC now supervises, regulates and regularly examines the following subsidiaries:

First Financial Bank, National Association, Abilene, Texas;N.A.;

First Financial Trust & Asset Management Company, National Association;N.A.; and

First Technology Services, Inc. (a wholly ownedwholly-owned subsidiary of First Financial Bank, National Association)N.A.)

The OCC’s supervision and regulation of banks is primarily intended to protect the interests of depositors. The National Bank Act:

requires each national banking association to maintain reserves against deposits;

restricts the nature and amount of loans that may be made and the interest that may be charged; and

restricts investments and other activities.

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Deposit Insurance Coverage and Assessments

Our subsidiary bank is a member of the FDIC. Through the DIF, the FDIC provides deposit insurance protection that covers all deposit accounts in FDIC-insured depository institutions up to applicable limits (currently, $250,000$250 thousand per depositor).    

Our subsidiary bank must pay assessments to the FDIC under a risk-based assessment system for this federal deposit insurance protection. FDIC-insured depository institutions that are members of the Bank Insurance Fund pay insurance premiums at rates based on their risk classification. Institutions assigned to higher risk classifications (i.e., institutions that pose a greater risk of loss to the DIF) pay assessments at higher rates than institutions assigned to lower risk classifications. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to bank regulators. Through June 30, 2017, the assessment rate for our subsidiary bank was at the lowest risk-based premium available, which was 3.00% of the assessment base per annum. In addition, the FDIC can impose special assessments to cover shortages in the DIF and has imposed special assessments in the past.

In October 2010, the FDIC adopted a new Restoration Plan for the DIF to ensure that the fund reserve ratio reachesreached 1.35% by September 30, 2020, as required by the Dodd-Frank Act. On April 26, 2016, the FDIC adopted a rule amending pricing for deposit insurance for institutions with less than $10 billion in assets effective the quarter after the fund reserve ratio reached 1.15%. AsThe fund reserve ratio reached 1.15% effective as of June 30, 2016, the FDIC announced that the fund reserve ratio had reached 1.15%.2016. As a result, the Company’sour subsidiary bank’s assessment rate was decreased to the rate stated above.above effective July 1, 2016. The Dodd-Frank Act also eliminated the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.
The Dodd-Frank Act requiresrequired the FDIC to offset the effect of increasing the reserve ratio on insured depository institutions with total consolidated assets of less than $10 billion. In September 2018, the reserve ratio reached 1.36% at which time banks with assets of less than $10 billion suchwere awarded assessment credits for their portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%. When the reserve ratio reached 1.40% in June 2019, the FDIC applied these credits to the September 30, 2019, December 31, 2019, March 31, 2020 and June 30, 2020 assessment invoices. Our subsidiary bank’s assessment credit totaled $1.85 million of which $522 thousand, $525 thousand, $541 thousand and $264 thousand, respectively, were used to fully offset the September 30, 2019, December 31, 2019 and March 31, 2020 assessment invoices while the June 30, 2020 assessment invoice was significantly reduced by the remaining credits. As a result of our subsidiary bank exceeding $10 billion in assets as the Company.

of December 31, 2020, our subsidiary bank is no longer eligible to utilize credits to offset its FDIC assessment.

As required by the Dodd-Frank Act, the FDIC also revised the deposit insurance assessment system, effective April 1, 2011, to base assessments on the average total consolidated assets of insured depository institutions during the assessment period, less the average tangible equity of the institution during the assessment period, as opposed to solely bankconsidering deposits at an institution. This base assessment change necessitated that the FDIC adjust the assessment rates to ensure that the revenue collected under the new assessment system will approximately equal that under the existing assessment system.

Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, or FIRREA, an FDIC-insured depository institution can be held liable for any losses incurred by the FDIC in connection with (1) the “default” of one of its FDIC-insured subsidiaries or (2) any assistance provided by the FDIC to one of its FDIC-receivers, and “in danger of default” is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance.

The FDIC is also empowered to regulate interest rates paid by insured banks. Approval of the FDIC is also required before an insured bank retires any part of its common or preferred stock, or any capital notes or debentures.

Payment of Dividends

We are a legal entity separate and distinct from our banking and other subsidiaries. We receive most of our revenue from dividends paid to us by our bank and trust company subsidiaries. Described below are some of the laws and regulations that apply when either we or our subsidiaries pay or paid dividends.

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The Federal Reserve Board, the OCC and the FDIC have issued policy statements that recommend that bank holding companies and insured banks should generally only pay dividends to the extent net income is sufficient to cover both cash dividends and a rate of earnings retention consistent with capital needs, asset quality and overall financial condition. Further, the Federal Reserve Board’s policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries. In addition, the Federal Reserve Board has indicated that each bank holding company should carefully review its dividend policy, and has discouraged payment ratios that are at maximum allowable levels, which is the maximum dividend amount that may be issued and allow the company to still maintain its target Tier 1 capital ratio, unless both asset quality and capital are very strong.

To pay dividends, our subsidiaries must maintain adequate capital above regulatory guidelines. Under federal law, our subsidiary bank cannot pay a dividend if, after paying the dividend, the bank would be “undercapitalized.” In addition, if the FDIC 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 FDIC may require, after notice and hearing, that such bank cease and desist from the unsafe practice. The FDIC and the OCC have each indicated paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice.

National banks are required by federal law to obtain the prior approval of the OCC in order 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. In addition, these banks may only pay dividends to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation).

Our subsidiaries paid aggregate dividends to us of $30.8$87.50 million in 20172020 and $48.8$84.50 million in 2016.2019. Under the dividend restrictions discussed above, as of December 31, 2017,2020, our subsidiaries could have declared in the aggregate additional dividends of approximately $205.75$289.68 million from retained net profits, without obtaining regulatory approvals.

Federal Income Tax

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law with sweeping modifications to the Internal Revenue Code. The primary change for the Company was to lower the corporate income tax rate to 21% from 35%. The Company’s deferred tax assets and liabilities were
re-measured
based on the income tax rates at which they are expected to reverse in the future, which is generally 21%. However, the Company continues to analyze certain aspects of the Act resulting in refinement of the calculation which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the
re-measurement
of the Company’s deferred tax liability balance was $7.65 million, a reduction of income tax expense for the year ended December 31, 2017.

The Company subsequently updated its estimate of the impact to our deferred tax balances based on the proposed regulations issued to date and recorded an additional reduction of income tax expense for the year ended December 31, 2018 of $664 thousand. No additional adjustment amounts were recorded for the years ended December 31, 2019 and 2020.

Affiliate Transactions

The Federal Reserve Act, the Federal Deposit Insurance Act (“FDIA”) and the rules adopted under these statutes restrict the extent to which we can borrow or otherwise obtain credit from, or engage in certain other transactions with, our subsidiaries. These laws regulate “covered transactions” between insured depository institutions and their subsidiaries, on the one hand, and their nondepository
non-depository
affiliates, on the other hand. The Dodd-Frank Act expanded the definition of affiliate to make any investment fund, including a mutual fund, for which a depository institution or its affiliates serve as an investment advisor an affiliate of the depository institution. “Covered transactions” include a loan or extension of credit to a
non-depository
affiliate, a purchase of securities issued by such an affiliate, a purchase of assets from such an affiliate (unless otherwise exempted by the Federal Reserve Board), an acceptance of securities issued by such an affiliate as collateral for a loan, and an issuance of a guarantee, acceptance, or letter of credit for the benefit of such an affiliate. The Dodd-Frank Act extended the limitations to derivative transactions, repurchase agreements and securities lending and borrowing transactions that create credit exposure to an affiliate or an insider. The “covered transactions” that an insured depository institution and its subsidiaries are permitted to engage in with their
non-depository
affiliates are limited to the following
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amounts: (1) in the case of any one such affiliate, the aggregate amount of “covered transactions” cannot exceed ten percent of the capital stock and the surplus of the insured depository institution; and (2) in the case of all affiliates, the aggregate amount of “covered transactions” cannot exceed twenty percent of the capital stock and surplus of the insured depository institution. In addition, extensions of credit that constitute “covered transactions” must be collateralized in prescribed amounts. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain
tie-in
arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Finally, when we and our subsidiaries conduct transactions internally among us, we are required to do so at arm’s length.

Loans to Directors, Executive Officers and Principal Shareholders

The authority of our subsidiary bank to extend credit to our directors, executive officers and principal shareholders, including their immediate family members, corporations and other entities that they control, is subject to substantial restrictions and requirements under Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder, as well as the Sarbanes-Oxley Act of 2002. These statutes and regulations impose specific limits on the amount of loans our subsidiary bank may make to directors and other insiders, and specified approval procedures must be followed in making loans that exceed certain amounts. In addition, all loans our subsidiary bank makes to directors and other insiders must satisfy the following requirements:

the loans must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not affiliated with us or our subsidiary bank;

the subsidiary bank must follow credit underwriting procedures at least as stringent as those applicable to comparable transactions with persons who are not affiliated with us or our subsidiary bank; and

the loans must not involve a greater than normal risk of
non-payment
or include other features not favorable to our subsidiary bank.

Furthermore, our subsidiary bank must periodically report all loans made to directors and other insiders to the bank regulators, and these loans are closely scrutinized by the regulators for compliance with Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O. Each loan to directors or other insiders must be
pre-approved
by the bank’s board of directors with the interested director abstaining from voting.

Capital

We and our bank subsidiary are each required to comply with applicable capital adequacy standards established by the Federal Reserve Board and the OCC, respectively. The current risk-based capital standards applicable to us and our bank subsidiary, parts of which are currently in the process of being
phased-in,
are based on the December 2010 final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision (the “Basel Committee”).

In July 2013, the federal bank regulators approved final rules (the “Basel III Rules”) implementing the Basel III framework as well as certain provisions of the Dodd-Frank Act. The Basel III Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries. The Basel III Rules became effective for us and our subsidiary bank on January 1, 2015 (subject to a
phase-in
period for certain provisions).

The Basel III Rules established three components of regulatory capital: (1) common equity tier 1 capital (“CET1”), (2) additional tier 1 capital, and (3) tier 2total capital. Tier 1 capital is the sum of CET1 and additional tier 1 capital instruments meeting certain revised requirements. Total capital is the sum of tier 1 capital and tier 2 capital.capital elements. Under the Basel III Rules, for most banking organizations, the most common form of additional tier 1 capital is
non-cumulative
perpetual preferred stock and the most common form of tier 2 capital is subordinated notes and a portion of the allocation for loan and leasecredit losses, in each case, subject to the Basel III Rules’ specific requirements. As of December 31, 2017,2020, we do not have any
non-cumulative
perpetual preferred stock or subordinated notes. CET1, tier 1 capital, and total capital serve as the numerators for three prescribed regulatory capital ratios. Risk-weighted assets, calculated using the standardized approach in the Basel III Capital Rules for us and our subsidiary bank, provide the denominator for such ratios. There is also a leverage capital ratio that compares tier 1 capital to average total assets.

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Pursuant to the Basel III Rules, the effects of certain accumulated other comprehensive income or loss (“AOCI”) items are not excluded; however,
“non-advanced
approaches banking organizations,” including us and our subsidiary bank, could make a
one-time
permanent election to continue to exclude these items. The Company made its a
one-time,
permanent election to continue to exclude AOCI from capital in its filing with the Federal Reserve Board and OCC for the quarter ended March 31, 2015. If the Company would not have made this election, unrealized gains and losses would have been included in the calculation of its regulatory capital. The Basel III Rules also preclude certain hybrid securities, such as trust preferred securities issued prior to May 19, 2010, from inclusion in our Tiertier 1 capital, subject to grandfathering in the case of companies, such as us, that had less than $15 billion in total consolidated assets as of December 31, 2009.

Under the Basel III Rules, the minimum capital ratios effective as of January 1, 2015 are:

4.5% CET1 to risk-weighted assets;

6.0% Tiertier 1 capital to risk-weighted assets;

8.0% Totaltotal capital to risk-weighted assets; and

4.0% Tiertier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).

The Basel III Rules also establishestablished a fully-phased “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital requirements. The conservation buffer, when added to the capital requirements, resultsresulted in the following minimum ratios: (i) a CET1 risk-based capital ratio of 7.0%, (ii) a Tiertier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The new capital conservation buffer requirement isbegan being phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increaseincreased by that amount each year until fully implemented in January 2019. At December 31, 2017,2020, the required capital conservation buffer was 1.50%2.5%. An institution is subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffer amount.

The Basel III Rules prescribeprescribed a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.

With respect to our bank subsidiary, the Basel III Rules also reviserevised the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.”

As of December 31, 2017,2020, we had a total risk-based capital ratio of 19.85%22.03%, a Tiertier 1 capital to risk-weighted asset ratio of 18.66%20.79%, a common equity Tier 1CET1 to risk-weighted assets ratio of 18.66%20.79% and a Tier 1 leverage ratio of 11.09%11.86%. These regulatory capital ratios were calculated under the Basel III rules.

Rules.

Prompt Corrective Action.

A banking organization’s capital plays an important role in connection with regulatory enforcement as well. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

Under current regulations, our subsidiary bank was “well capitalized” as of December 31, 2017.

2020.

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Our Support of Our Subsidiaries

Under Federal Reserve Board policy, we are expected to commit resources to act as a source of strength to support each of our subsidiaries. The Dodd-Frank Act codified this policy as a statutory requirement. This support may be required at times when, absent such Federal Reserve Board policy, we would not otherwise be required to provide it. In addition, any loans we make to our subsidiaries would be subordinate in right of payment to deposits and to other indebtedness of our subsidiaries. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and be subject to a priority of payment.

Under the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC (either as a result of the default of a banking subsidiary or related to FDIC assistance provided to a subsidiary in danger of default) our other subsidiaries may be assessed for the FDIC’s loss.

Safe and Sound Banking Practices.

Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve Board’s Regulation Y, for example, generally requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the bank holding company’s consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1.0 million for each day the activity continues.

Interstate Banking and Branching

Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 amended the Federal Deposit Insurance Act and certain other statutes to permit state and national banks with different home states to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a participating bank had passed legislation prior to May 31, 1997 expressly prohibiting interstate mergers. Under the Riegle-Neal Act amendments, once a state or national bank has established branches in a state, that bank may establish and acquire additional branches at any location in the state at which any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. If a state opted out of interstate branching within the specified time period, no bank in any other state may establish a branch in the state which has opted out, whether through an acquisition or de novo.

However, under the Dodd-Frank Act, the national branching requirements have been relaxed and national banks and state banks are able to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state.

The Federal Deposit Insurance Act, or FDIA, requires that the FDIC review (1) any merger or consolidation by or with an insured bank, or (2) any establishment of branches by an insured bank. Additionally, the Texas Department of Banking “Banking Department” accepts applications for interstate merger and branching transactions, subject to certain limitations on ages of the banks to be acquired and the total amount of deposits within the state a bank or financial holding company may control. Since our primary service area is Texas, we do not expect that the ability to operate in other states will have any material impact on our growth strategy. We may, however, face increased competition from
out-of-state
banks that branch or make acquisitions in our primary markets in Texas.

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Community Reinvestment Act of 1977

The Community Reinvestment Act of 1977, or CRA, subjects a bank to regulatory assessment to determine if the institution meets the credit needs of its entire community, including
low-
and moderate-income neighborhoods served by the bank, and to take that determination into account in its evaluation of any application made by such bank for, among other things, approval of the acquisition or establishment of a branch or other depository facility, an office relocation, a merger, or the acquisition of shares of capital stock of another financial institution. The regulatory authority prepares a written evaluation of an institution’s record of meeting the credit needs of its entire community and assigns a rating. These ratings are “Outstanding,” “Satisfactory,” “Needs Improvement” and “Substantial
Non-Compliance.”
Institutions with ratings lower than “Satisfactory” may be restricted from engaging in the aforementioned activities. We believe our subsidiary bank has taken and takes significant actions to comply withmeets the CRA, andcredit needs of the communities in which it operates. Our subsidiary bank received a “satisfactory”“Satisfactory” rating in its most recent reviewassessment of its performance under the CRA by federal regulators with respect to its compliance with the CRA.

regulators.

Monitoring and Reporting Suspicious Activity

Under the Bank Secrecy Act, or BSA, we are required to monitor and report unusual or suspicious account activity that might signify money laundering, tax evasion or other criminal activities, as well as transactions involving the transfer or withdrawal of amounts in excess of prescribed limits. The BSA is sometimes referred to as an “anti-money laundering” law (“AML”). Several AML acts, including provisions in Title III of the USA PATRIOT Act of 2001, have been enacted up to the present to amend the BSA. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures and controls generally require financial institutions to take reasonable steps:

to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;

to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;

to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and

to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.

Under the USA PATRIOT Act, financial institutions are also required to establish anti-money laundering programs. The USA PATRIOT Act sets forth minimum standards for these programs, including:

the development of internal policies, procedures, and controls;

the designation of a compliance officer;

an ongoing employee training program; and

an independent audit function to test the programs.

In addition, under the USA PATRIOT Act, the Secretary of the U.S. Department of the Treasury, or Treasury, has adopted rules addressing a number of related issues, including increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institution complying with these rules will not be deemed to violate the privacy provisions of the Gramm-Leach-Bliley Act that are discussed below. Finally, under the regulations of the Office of Foreign Asset Control, or OFAC, we are required to monitor and block transactions with certain “specially designated nationals” who OFAC has determined pose a risk to U.S. national security.

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Incentive Compensation

In June 2010, the Federal Reserve Board, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

The Federal Reserve Board will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

In addition, Section 956 of the Dodd-Frank Act required certain regulators (including the FDIC, SECSecurities and Exchanges Commission (“SEC”) and Federal Reserve Board) to adopt requirements or guidelines prohibiting excessive compensation. In April and MayJune 2016, the Federal Reserve, jointly with five other federal regulators, published a proposed rule in response to Section 956 of the Dodd-Frank Act, which requires implementation of regulations or guidelines to: (1) prohibit incentive-based payment arrangements that encourage inappropriate risks by certain financial institutions by providing excessive compensation or that could lead to material financial loss, and (2) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator.

The proposed rule identifies three categories of institutions that would be covered by these regulations based on average total consolidated assets, applying less prescriptive incentive-based compensation program requirements to the smallest covered institutions (Level 3) and progressively more rigorous requirements to the larger covered institutions (Level 1). Under the proposed rule, we would fall into the smallest category (Level 3), which applies to financial institutions with average total consolidated assets greater than $1$1.0 billion and less than $50 billion. The proposed rules would establish general qualitative requirements applicable to all covered entities, which would include (i) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (ii) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (iii) establishing requirements for performance measures to appropriately balance risk and reward; (iv) requiring board of director oversight of incentive arrangements; and (v) mandating appropriate recordkeeping. Under the proposed rule, larger financial institutions with total consolidated assets of at least $50 billion would also be subject to additional requirements applicable to such institutions’ “senior executive officers” and “significant risk-takers.” These additional requirements would not be applicable to us because we currently have less than $50 billion in total consolidated assets. Comments on the proposed rule were due by July 22, 2016. As of the date of this document, the final rule has not yet been published by these regulators.

In addition, the Dodd-Frank Act requires publicly traded companies to give stockholders a
non-binding
vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on
so-called “golden
“golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. The new legislation also authorizes the Securities and Exchange Commission (“SEC”)SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded or not. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

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Consumer Laws and Regulations

We are also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the following list is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, The Fair and Accurate Credit Transactions Act, The Real Estate Settlement Procedures Act and the Fair Housing Act, among others. These laws and regulations, among other things, prohibit discrimination on the basis of race, gender or other designated characteristics and mandate various disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. These and other laws also limit finance charges or other fees or charges earned in our activities. We must comply with the applicable provisions of these consumer protection laws and regulations as part of our ongoing customer relations.

Consumer Financial Protection Bureau

The Dodd-Frank Act created a new, independent federal agency called the Consumer Financial Protection Bureau (“CFPB”), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary

enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. Given the Bank has exceeded $10 billion in assets for each of the last three quarterly periods and expects to exceed $10 billion for the quarterly period ended March 31, 2021, the Bank will be subject to regulation by the CFPB going forward. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits the state attorney general to enforce compliance with both the state and federal laws and regulations.

The CFPB has finalized rules relating to, among other things, remittance transfers under the Electronic Fund Transfer Act, which requires companies to provide consumers with certain disclosures before the consumer pays for a remittance transfer. These rules became effective in October 2013. The CFPB has also amended certain rules under Regulation C relating to home mortgage disclosure to reflect a change in theasset-size exemption threshold for depository institutions based on the annual percentage change in the Consumer Price Index for Urban Wage Earners and Clerical Workers. In addition, on January 10, 2013, the CFPB released its final“Ability-to-Repay/Qualified Mortgage” rules, which amended the Truth in Lending Act (Regulation Z). Regulation Z prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer’s ability to repay the loan. The final amended rule implemented sections 1411 and 1412 of the Dodd-Frank Act, which generally require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding anopen-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified mortgages.” The final rule also implemented section 1414 of the Dodd-Frank Act, which limits prepayment penalties. Finally, the final rule requires creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated. This rule became effective January 10, 2014.

Technology Risk Management and Consumer Privacy

State and federal banking regulators have issued various policy statements emphasizing the importance of technology risk management and supervision in evaluating the safety and soundness of depository institutions with respect to banks that contract with outside vendors to provide data processing and core banking functions. The use of technology-related products, services, delivery channels and processes exposes a bank to various risks, particularly operational, privacy, security, strategic, reputation and compliance risk. Banks are generally expected to prudently manage technology-related risks as part of their comprehensive risk management policies by identifying, measuring, monitoring and controlling risks associated with the use of technology.

Under Section 501 of the Gramm-Leach-Bliley Act, the federal banking agencies have established appropriate standards for financial institutions regarding the implementation of safeguards to ensure the security and confidentiality of customer records and information, protection against any anticipated threats or hazards to the security or integrity of such records and protection against unauthorized access to or use of such records or information in a way that could result in substantial harm or inconvenience to a customer. Among other matters, the rules require each bank to implement a comprehensive written information security program that includes administrative, technical and physical safeguards relating to customer information.

Under the Gramm-Leach-Bliley Act, a financial institution must also provide its customers with a notice of privacy policies and practices. Section 502 prohibits a financial institution from disclosing nonpublic personal information about a customer to nonaffiliated third parties unless the institution satisfies various notice and
opt-out
requirements and the customer has not elected to opt out of the disclosure. Under Section 504, the agencies are
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authorized to issue regulations as necessary to implement notice requirements and restrictions on a financial institution’s ability to disclose nonpublic personal information about customers to nonaffiliated third parties. Under the final rule the regulators adopted, all banks must develop initial and annual privacy notices which describe in general terms the bank’s information sharing practices. Banks that share nonpublic personal information about customers with nonaffiliated third parties must also provide customers with an
opt-out
notice and a reasonable period of time for the customer to opt out of any such disclosure (with certain exceptions). Limitations are placed on the extent to which a bank can disclose an account number or access code for credit card, deposit or transaction accounts to any nonaffiliated third party for use in marketing.

Concentrated Commercial Real Estate Lending Regulations

The federal banking agencies including the FDIC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and
non-farm
residential properties and loans for construction, land development, and other land represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices that address the following key elements: including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending.

UDAP and UDAAP

Banking regulatory agencies have increasingly used a general consumer protection statute to address “unethical” or otherwise “bad” business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act, referred to as the FTC Act, which is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce. “Unjustified consumer injury” is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with UDAP laws and regulations. However, UDAP laws and regulations have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices,” referred to as UDAAP, which have been delegated to the CFPB for supervision. The CFPB has published its first Supervision and Examination Manual that addresses compliance with and the examination of UDAAP.

Monetary Policy

Banks are affected by the credit policies of monetary authorities, including the Federal Reserve Board, that affect the national supply of credit. The Federal Reserve Board regulates the supply of credit in order to influence general economic conditions, primarily through open market operations in United States government obligations, varying the discount rate on financial institution borrowings, varying reserve requirements against financial institution deposits, and restricting certain borrowings by financial institutions and their subsidiaries. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future.

Enforcement Powers of Federal Banking Agencies

The Federal Reserve Board and other state and federal banking agencies and regulators have broad enforcement powers, including the power to terminate deposit insurance, issue
cease-and-desist
orders, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Our failure to comply with applicable laws, regulations and other regulatory pronouncements could subject us, as well as our officers and directors, to administrative sanctions and potentially substantial civil penalties.

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Regulatory Reform and Legislation

From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the Company or our subsidiaries could have a material effect on the Company’s business, financial condition and results of operations.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Act, which was enacted in July 2010, effected a fundamental restructuring of federal banking regulation. In addition to those provisions discussed above, among the Dodd-Frank Act provisions that have affected us are the following:

creation of a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms;

elimination of the federal statutory prohibition against the payment of interest on business checking accounts;

prohibition on state-chartered banks engaging in derivatives transactions unless the loans to one borrower of the state in which the bank is chartered takes into consideration credit exposure to derivative transactions. For this purpose, derivative transactions include any contract, agreement, swap, warrant, note or option that is based in whole or in part on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodity securities, currencies, interest or other rates, indices or other assets;

requirement that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. On June 29, 2011, the Federal Reserve Board set the interchange rate cap at $0.21 per transaction and 5 basis points multiplied by the value of the transaction. While theThe restrictions on interchange fees do not apply to banks that, together with their affiliates, have assets of $10 billion or more; however, on November 20, 2020, the federal bank regulatory agencies announced an interim final rule that provides temporary relief for certain community banking organizations that have crossed the threshold as of December 31, 2020 if they had less than $10 billion in assets as of December 31, 2019. Under the interim final rule, could affectthese banks will generally have until 2022 to either reduce their size to below $10 billion in assets, or to prepare for the competitiveness of debit cards issued by smaller banks;regulatory and reporting standards under the Dodd Frank Act; and

restrictions under the Volcker Rule of the Company’s ability to engage in proprietary trading and to invest in, sponsor and engage in certain types of transactions with certain private funds. The Company initially had until July 15, 2015 to fully conform to the Volcker Rules restrictions. In 2018, banks smaller than $10 billion in assets were provided with an exception to the Volcker Rule. However, the Company is now subject to the Volcker Rule now that it has exceeded $10 billion in assets.

Many of the Dodd-Frank Act’s provisions are still subject to the final rulemaking by federal banking agencies, and the implication of the Dodd-Frank Act for the Company’s business will depend to a large extent on how such rules are adopted and implemented. The Company’s management continues to review actively the provisions of the Dodd–Frank Act and assess its probable impact on its business, financial condition, and results of operations.

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Available Information

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may readThe SEC maintains a website that contains reports, proxy and copy any document weinformation statements, and other information regarding issuers that file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please callelectronically with the SEC at1-800-SEC-0330 for further information
www.sec.gov
. You may obtain copies of our filings on the public reference room.SEC website. Our SEC filings are also available to the public at the SEC’s web site at http://www.sec.gov. Our web sitewebsite is
http://www.ffin.com
. You may also obtain copies of our annual, quarterly and special reports, proxy statements and certain other information filed with the SEC, as well as amendments thereto, free of charge from our web site.website. These documents are posted to our web site after we have filed them with the SEC. Our corporate governance guidelines, including our code of conduct applicable to all our employees, officers and directors, as well as the charters of our audit and nominating committees, are available at
www.ffin.com
. The foregoing information is also available in print to any shareholder who requests it. Except as explicitly provided, information on any web site is not incorporated into this Form
10-K
or our other securities filings and is not a part of them.

ITEM 1A.    RISK
RISK FACTORS

Our business, financial condition, operating results and cash flows can be impacted by a number of factors, including but not limited to those set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results and other forward-looking statements that we make from time to time in our news releases, annual reports and other written communications, as well as oral forward-looking statements, and other statements made from time to time by our representatives.

Risks Related to Our business faces unpredictableBusiness
Interest Rate Risks
We are subject to interest rate risk.
Our profitability is dependent to a large extent on our net interest income, which is the difference between interest income we earn as a result of interest paid to us on loans and investments and interest we pay to third parties such as our depositors and those from whom we borrow funds. Like most financial institutions, we are highly sensitive to many factors that are beyond our control, including general economic conditions whichand policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, and (iii) the average duration of our securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and investments, our net interest income, and earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and investments fall more quickly than the interest rates paid on deposits and other borrowings.
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. Today, there is substantial uncertainty regarding future interest rates. Increases in interest rates can have negative impacts on our business, including reducing our customers’ desire to borrow money from us or adversely affecting their ability to repay their outstanding loans by increasing their debt obligations through the periodic reset of adjustable interest rate loans. If our borrowers’ ability to pay their loans is impaired by increasing interest payment obligations, our level of
non-performing
assets would increase, producing an adverse effect on us.

General economic conditions impact the banking industry. The credit quality of our loan portfolio necessarily reflects, among other things, the general economic conditions in the areas in which we conduct our business. Our continued financial success depends somewhat on factors beyond our control, including:

general economic conditions, including national and localoperating results. Asset values, especially commercial real estate markets andas collateral, securities or other fixed rate earning assets, can decline significantly with relatively minor changes in interest rates. Conversely, decreases in interest rates can effect the priceamount of oil and gas and other commodity prices;

the supply of and demand for investable funds;

demand forinterest we earn on our loans and access to credit;

interest rates; and

federal, state and local laws affecting these matters.

Any substantial deterioration in any of the foregoing conditionsinvestment securities, which could have a material adverse effect on our financial condition, results of operations and liquidity, which would likely adversely affect the market price of our common stock.

Our business is concentrated in Texas and a downturn in the economy of Texas may adversely affect our business.

Our network of bank regions is concentrated in Texas, primarily in the Central, North Central, Southeast and Western regions of the state. Most of our customers and revenue are derived from this area. These economies include dynamic centers of higher education, agriculture, energy and natural resources, retail, military, healthcare, tourism, retirement living, manufacturing and distribution. Because we generally do not derive revenue or customers from other parts of the state or nation, our business and operations are dependent on economic conditions in our Texas markets. Any significant decline in one or more segments of the local economies could adversely affect our business, revenue, operations and properties.

The significant decline and volatility in oil and gas prices has resulted in uncertainty about the Texas economy. While we consider our exposure to credits related to the oil and gas industry to not be significant, at approximately 1.72% of total loans as of December 31, 2017, should the price of oil and gas decline further and/or remain at the current low price for an extended period, the general economic conditions in our Texas markets could be negatively affected, which could have a material adverse affect on our business,Company’s financial condition and results of operations.

Our Company lends primarily to small tomedium-sized businesses that may Although we have fewer resources to weather a downturnimplemented strategies which we believe reduce the potential effects of adverse changes in the economy, which could adversely impact the Company’s operating results.

The Company makes loans to privately-owned businesses, many of which are considered to be small tomedium-sized businesses. Small tomedium-sized businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need additional capital to expand or compete and may experience more volatility in operating results. Any one or more of these factors may impair the borrower’s ability to repay a loan. In addition, the success of a small tomedium-sized businesses often dependsinterest rates on the management talents and efforts of a small group of persons, and the death, disability or resignation of one or more of these persons could have adverse impact on the business and its ability to repay our loans. Economic downturns, a sustained decline in commodity prices and other events that could negatively impact the businesses could cause the Company to incur credit losses that could negatively affect the Company’s results of operations, these strategies may not always be successful. Any of these events could adversely affect our results of operations, financial condition and liquidity.

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Uncertainty relating to the London interbank offered rate (“LIBOR”) calculation process and potential phasing out of LIBOR may adversely affect us.
On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, debentures, or other securities or financial condition.

arrangements, given LIBOR’s role in determining market interest rates globally. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments and borrowings. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have an effect on our financial condition or results of operations.

Credit and Lending Risks
In our business, we must effectively manage our credit risk.

As a lender, we are exposed to the risk that our loan customers may not repay their loans according to the terms of these loans and the collateral securing the payment of these loans may be inadequately documented or may be insufficient to fully compensate us for the outstanding balance of the loan plus the costs to dispose of the collateral. We may experience significant loan losses, which could have a material adverse effect on our operating results and financial condition. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the diversification by industry of our commercial loan portfolio, the amount of nonperforming loans and related collateral, the volume, growth and composition of our loan portfolio, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers and the evaluation of our loan portfolio through our internal loan review process and other relevant factors.

We maintain an allowance for credit losses, which is an allowance established through a provision for loancredit losses charged to expense that represents management’s best estimate of probable losses inherent in our loan portfolio. Additional credit losses will likely occur in the future and may occur at a rate greater than we have experienced to date. In determining the amount of the allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to the allowance could materially decrease our net income.

In addition, banking regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize further charge-offs, based on judgments different than those of our management. Any increase in our allowance for credit losses or charge-offs as required by these regulatory agencies could have a material negative effect on our operating results and financial conditioncondition.
New accounting standard, effective January
 1, 2020, significantly changes how we recognize credit losses and liquidity.

Hurricanes, extended drought conditions, severe weather and natural disasters could significantly impact the Company’s business.

Hurricanes, extended drought conditions, severe weather and natural disasters and other adverse external events could have a significant impact on the Company’s ability to conduct business. In late August 2017 and continuing into the fourth quarter of 2017, Houston and the surrounding area around the Gulf Coast were significantly affected by Hurricane Harvey. Our Orange and Conroe regions of the Company are in these areas and were impacted by the severe winds and floods. See Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 33 for specific information of the impact of Hurricane Harvey on our Company. Such events affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of the collateral securing our loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. The occurrence of any such event in the future couldmay have a material adverse effectimpact on our financial condition or results of operations

.
Effective January 1, 2020, the Company’s business,Company implemented the provision of
Accounting Standards Update (“ASU”)
2016-13,
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”
ASU
2016-13
represents a comprehensive change in estimating the allowance for credit losses from the previous “incurred loss” model of losses inherent in the loan portfolio to a current “expected loss” model, which encompasses losses expected to be incurred over the life of the portfolio.
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The measurement of expected credit losses under ASU
2016-13
is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model previously required under generally accepted accounting principles, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of ASU
2016-13
could materially affect how we determine our allowance for credit losses and may require us to significantly increase our allowance. Moreover, ASU
2016-13
may create more volatility in turn,the level of our allowance for credit losses. If we are required to materially increase our level of allowance for credit losses for any reason, such increase could have a material adverse effect on the Company’sadversely affect our business, financial condition and resultresults of operations.

Changes in economic conditions could cause an increase in delinquencies andnon-performing assets, including loan charge-offs, which could depress our net income and growth.

Our loan portfolio includes many real estate secured loans, demand for which may decrease during economic downturns as a result of, among other things, an increase in unemployment, a decrease in real estate values and a slowdown in housing. If we see negative economic conditions develop in the United States as a whole or in the portions of Texas that we serve, we could experience higher delinquencies and loan charge-offs, which would reduce our net income and adversely affect our financial condition. Furthermore, to the extent that real estate collateral is obtained through foreclosure, the costs of holding and marketing the real estate collateral, as well as the ultimate values obtained from disposition, could reduce our earnings and adversely affect our financial condition.

The value of real estate collateral may fluctuate significantly resulting in an under-collateralized loan portfolio.

The market value of real estate, particularly real estate held for investment, can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for our loan portfolio were to decline materially, a significant part of our loan portfolio could become under-collateralized. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then, in the event of foreclosure, we may not be able to realize the amount of collateral that we anticipated at the time of originating the loan. This could have a material adverse effect on our provision for loan losses and our operating results and financial condition.

New lines of business or new products and services may subject the Company to additional risks.

From time to time, the Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or products and services the Company may invest significant time and resources. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. If we are unable to successfully manage these risks in the development and implementation of new lines of business or new products or services, it could have a material adverse effect on the Company’s business, financial condition and result of operations.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Environmental reviews of real property before initiating foreclosure actions may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, financial condition and results of operations.

The value of real estate collateral may fluctuate significantly resulting in an under-collateralized loan portfolio.
The market value of real estate, particularly real estate
held-for-investment
(“HFI”), can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for our loan portfolio were to decline materially, a significant part of our loan portfolio could become under-collateralized. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then, in the event of foreclosure, we may not be able to realize the amount of collateral that we anticipated at the time of originating the loan. This could have a material adverse effect on our provision for credit losses and our operating results and financial condition.
Liquidity Risk
We are subject to liquidity risk.
The Company requires liquidity to meet our deposit and other obligations as they come due. The Company’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry or the general economy. Factors that could reduce its access to liquidity sources include a downturn in the Texas market, difficult credit markets or adverse regulatory actions against the Company. The Company’s access to deposits may also be affected by the liquidity needs of its depositors. In particular, a substantial majority of the Company’s liabilities are demand, savings, interest checking and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or sold in the same time frame. The Company may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of its depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on the Company’s business, financial condition and result of operations.
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Operational Risks
Our accounting estimates and risk management processes rely on analytical and forecasting models.
The processes we use to estimate our allowance for credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates depends upon the use of analytical and forecasting models. In addition, these models are used to calculate fair value of our assets and liabilities when we acquire other financial institutions. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models we use for determining our current expected credit losses are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If the models we use to measure the fair value of financial instruments is inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations.
The value of our goodwill and other intangible assets may decline in the future.
As of December 31, 2020, we had $318.39 million of goodwill and other intangible assets. A significant decline in our financial condition, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of our common stock may necessitate taking charges in the future related to the impairment of our goodwill and other intangible assets. If we were to conclude that a future write-down of goodwill and other intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our financial condition and results of operations.
Breakdowns in our internal controls and procedures could have an adverse effect on us.
We believe our internal control system as currently documented and functioning is adequate to provide reasonable assurance over our internal controls. Nevertheless, because of the inherent limitation in administering a cost effective control system, misstatements due to error or fraud may occur and not be detected. Breakdowns in our internal controls and procedures could occur in the future, and any such breakdowns could have an adverse effect on us. See “Item 9A – Controls and Procedures” for additional information.
New lines of business or new products and services may subject the Company to additional risks.
From time to time, the Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or products and services, the Company may invest significant time and resources. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. If we are unable to successfully manage these risks in the development and implementation of new lines of business or new products or services, it could have a material adverse effect on the Company’s business, financial condition and result of operations.
Our reputation and business could be damaged by negative publicity.
Reputation risk, or the risk to our earnings and capital by negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, perception of our environmental, social and governance practices and disclosures, regulatory compliance, mergers and acquisitions, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct. Negative public opinion could also result from adverse news or publicity that impairs the reputation of the financial services industry. In addition, adverse publicity or negative information posted on social media, whether or not factually correct, may adversely impact our business prospects or financial results.
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First Financial Bankshares, Inc. relies on dividends from its subsidiaries for most of its revenue.
First Financial Bankshares
,
Inc. is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenue from dividends paid by its subsidiaries. These dividends are the principal source of funds to pay dividends on the Company’s common stock to shareholders and interest and principal on First Financial Bankshares, Inc. debt (to the extent we have balances outstanding). Various federal and/or state laws and regulations limit the amount of dividends that our bank and trust subsidiaries may pay to First Financial Bankshares, Inc. In the event our subsidiaries are unable to pay dividends to First Financial Bankshares, Inc., First Financial Bankshares, Inc. may not be able to service debt, if any, or pay dividends on the Company’s common stock. The inability to receive dividends from our subsidiaries could have a material adverse effect on the Company’s business, financial condition, results of operations and liquidity.
System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses.
The computer systems and network infrastructure we use could be vulnerable to unforeseen hardware and cybersecurity issues, including “hacking” and “identity theft.” Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our Internet banking activities, against damage from physical
break-ins,
cybersecurity breaches and other disruptive problems caused by the Internet or other users. Such computer
break-ins
and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us, damage our reputation and inhibit current and potential customers from our Internet banking services. Each year, we add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches including firewalls and penetration testing. We continue to investigate cost effective measures as well as insurance protection.
Furthermore, our customers could incorrectly blame the Company and terminate their accounts with the Company for a cyber-incident which occurred on their own system or with that of an unrelated third party. In addition, a security breach could also subject us to additional regulatory scrutiny and expose us to civil litigation and possible financial liability.
Our business may be adversely affected by security breaches at third parties.
Our customers interact with their own and other third-party systems, which pose operational risks to us. We may be adversely affected by data breaches at retailers and other third parties who maintain data relating to our customers that involve the theft of customers data, including the theft of customers’ debit card, merchant credit card, wire transfer and other identifying and/or access information used to make purchases or payments at retailers and other third parties.
In the event of a data breach at one or more retailers of considerable magnitude, the Company’s business, financial condition and results of operations may be adversely affected.
We are subject to claims and litigation pertaining to intellectual property.
We rely on technology companies to provide information technology products and services necessary to support our
day-to-day
operations. Technology companies frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of our vendors, or other individuals or companies, have from time to time claimed to hold intellectual property sold to us by its vendors. Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions frequently seek injunctions and substantial damages.
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Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, we may have to engage in litigation that could be expensive, time-consuming, disruptive to our operations, and distracting to management. If we are found to infringe one or more patents or other intellectual property rights, we may be required to pay substantial damages or royalties to a third-party. In certain cases, we may consider entering into licensing agreements for disputed intellectual property, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase our operating expenses. If legal matters related to intellectual property claims were resolved against us or settled, we could be required to make payments in amounts that could have a material adverse effect on our business, financial condition and results of operations.
We depend on the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit or enter into other transactions, we must rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. We also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business, financial condition and results of operations.

The repeal of prohibitions on paying interest on demand deposits could increase our interest expense.

Effective July 2011, all federal prohibitions on financial institutions paying interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, some financial institutions have commenced and are considering offering interest on demand deposits to compete for customers. If interest rates begin to rise, our interest expense could increase and our net interest margin could decrease if we begin offering interest on demand deposits to maintain current customers or attract new customers, which could have a material adverse effect on our financial condition and results of operations.

We do business with other financial institutions that could experience financial difficulty.

We do business through the purchase and sale of Federalfederal funds, check clearing and through the purchase and sale of loan participations with other financial institutions. Because these financial institutions have many risks, as do we, we could be adversely affected should one of these financial institutions experience significant financial difficulties or fail to comply with our agreements with them.

We are subject to possible claims and litigation pertaining to fiduciary responsibility.
From time to time, customers could make claims and take legal actions pertaining to our performance of our fiduciary responsibilities. Whether customer claims and legal actions related to our performance of our fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability and/or adversely affect our market perception of our products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
Our operations rely on certain external vendors.
We rely on certain external vendors to provide products and services necessary to maintain our
day-to-day
operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted agreements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendor’s organizational structure, financial condition, support for existing products or services or strategic focus or for any other reason, could be disruptive to our operations, which could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
Certain of our investment advisory and wealth management contracts are subject to termination on short notice, and termination of a significant number of investment advisory contracts could have a material adverse impact on our revenue.
Certain of our investment advisory and wealth management clients can terminate, with little or no notice, their relationships with us, reduce their aggregate assets under management, or shift their funds to other types of accounts with different rate structures for any number of reasons, including investment performance, changes in prevailing
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interest rates, inflation, changes in investment preferences of clients, changes in our reputation in the marketplace, change in management or control of clients, loss of key investment management personnel and financial market performance. We cannot be certain that our trust company subsidiary will be able to retain all of its clients. If its clients terminate their investment advisory and wealth management contracts, our trust company subsidiary, and consequently we, could lose a substantial portion of our revenues.
The trust wealth management fees we receive may decrease as a result of poor investment performance, in either relative or absolute terms, which could decrease our revenues and net earnings.
Our trust company subsidiary derives its revenues primarily from investment management fees based on assets under management. Our ability to maintain or increase assets under management is subject to a number of factors, including investors’ perception of our past performance, in either relative or absolute terms, market and economic conditions, including changes in oil and gas prices, and competition from investment management companies. Financial markets are affected by many factors, all of which are beyond our control, including general economic conditions, including changes in oil and gas prices; securities market conditions; the level and volatility of interest rates and equity prices; competitive conditions; liquidity of global markets; international and regional political conditions; regulatory and legislative developments; monetary and fiscal policy; investor sentiment; availability and cost of capital; technological changes and events; outcome of legal proceedings; changes in currency values; inflation; credit ratings; and the size, volume and timing of transactions. A decline in the fair value of the assets under management, caused by a decline in general economic conditions, would decrease our wealth management fee income.
Investment performance is one of the most important factors in retaining existing clients and competing for new wealth management clients. Poor investment performance could reduce our revenues and impair our growth in the following ways:
existing clients may withdraw funds from our wealth management business in favor of better performing products;
asset-based management fees could decline from a decrease in assets under management;
our ability to attract funds from existing and new clients might diminish; and
our wealth managers and investment advisors may depart to join a competitor or otherwise.
Even when market conditions are generally favorable, our investment performance may be adversely affected by the investment style of our wealth management and investment advisors and the particular investments that they make. To the extent our future investment performance is perceived to be poor in either relative or absolute terms, the revenues and profitability of our wealth management business will likely be reduced and our ability to attract new clients will likely be impaired. As such, fluctuations in the equity and debt markets can have a direct impact upon our net earnings. In addition, as approximately 10% of trust fees comes from management of oil and gas properties, a decline in the prices of oil and gas could lead to a loss of material amounts of our trust income.
External and Market Related Risks
Our business is concentrated in Texas and a downturn in the economy of Texas may adversely affect our business.
Our network of bank regions is concentrated in Texas, primarily in the Central, North Central, Southeast and Western regions of the state. Most of our customers and revenue are derived from these areas. These economies include dynamic centers of higher education, agriculture, energy and natural resources, retail, military, healthcare, tourism, retirement living, manufacturing and distribution. Because we generally do not derive revenue or customers from other parts of the state or nation, our business and operations are dependent on economic conditions in our Texas markets. Any significant decline in one or more segments of the local economies could adversely affect our business, revenue, operations and properties.
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The volatility in oil and gas prices results in uncertainty about the Texas economy. While we consider our exposure to credits related to the oil and gas industry to not be significant, at approximately 2.27% of total loans as of December 31, 2020, should the price of oil and gas decline further and/or remain at low prices for an extended period, the general economic conditions in our Texas markets could be negatively affected, which could have a material adverse affect on our business, financial condition and results of operations.
Our Company lends primarily to small to
medium-sized
businesses that may have fewer resources to weather a downturn in the economy, which could adversely impact the Company’s operating results.
The Company makes loans to privately-owned businesses, many of which are considered to be small to
medium-sized
businesses. Small to
medium-sized
businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need additional capital to expand or compete and may experience more volatility in operating results. Any one or more of these factors may impair the borrower’s ability to repay a loan. In addition, the success of a small to
medium-sized
businesses often depends on the management talents and efforts of a small group of persons, and the death, disability or resignation of one or more of these persons could have adverse impact on the business and its ability to repay our loans. Economic downturns, a sustained decline in commodity prices and other events that could negatively impact the businesses could cause the Company to incur credit losses that could negatively affect the Company’s results of operations and financial condition.
If we are unable to continue to originate residential real estate loans and sell them into the secondary market for a profit, our earnings could decrease.

We derive a portion of our noninterest income from the origination of residential real estate loans and the subsequent sale of such loans into the secondary market. If we are unable to continue to originate and sell residential real estate loans at historical or greater levels, our residential real estate loan volume would decrease, which could decrease our earnings. A rising interest rate environment, general economic conditions or other factors beyond our control could adversely affect our ability to originate residential real estate loans. We also are experiencing an increase in regulations and compliance requirements related to mortgage loan originations necessitating technology upgrades and other changes. If new regulations continue to increase and we are unable to make technology upgrades, our ability to originate mortgage loans will be reduced or eliminated. Additionally, we sell a large portion of our residential real estate loans to third party investors, and rising interest rates could negatively affect our ability to generate suitable profits on the sale of such loans. If interest rates increase after we originate the loans, our ability to market those loans is impaired as the profitability on the loans decreases. These fluctuations can have an adverse effect on the revenue we generate from residential real estate loans and in certain instances, could result in a loss on the sale of the loans.

Further, for the mortgage loans we sell in the secondary market, the mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first sixty to ninety days, or if documentation is determined not to be in compliance with regulations. While the Company’s historic losses as a result of these indemnities have been insignificant, we could be required to repurchase the mortgage loans or reimburse the purchaser of our loans for losses incurred. Both of these situations could have an adverse effect on the profitability of our mortgage loan activities and negatively impact our net income.

Difficult or changes in market conditions could adversely affect the financial services industry.

The financial markets have experienced volatility over the past several years. In some cases, the financial markets have produced downward pressure on stock prices and credit availability for certain companies without regard to those companies’ underlying financial strength. If financial market volatility worsens, or there are disruptions in these financial markets, including disruptions to the United States banking systems, there can be no assurance that we will not experience an adverse effect on our ability to access capital and our business, financial condition and result of operations could be adversely impacted.

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The value of certain securities in our investment portfolio may be negatively affected by changes or disruptions in the market for these securities.
Our investment portfolio securities include obligations of state and political subdivisions, corporate bonds, general obligation or revenue based municipal bonds and mortgage-backed securities guaranteed by government sponsored enterprises such as the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal Home Loan Bank or otherwise backed by Federal Housing Administration or Veteran’s Administration guaranteed loans; however, volatility or illiquidity in financial markets may cause investment securities held within our investment portfolio to fall in value or become less liquid. Increases in interest rates may cause a decline in the value of securities held by the Company. Uncertainty surrounding the credit risk associated with mortgage collateral or guarantors may cause material discrepancies in valuation estimates obtained from third parties. Volatile market conditions may reduce valuations due to the perception of heightened credit and liquidity risks in addition to interest rate risk typically associated with these securities. There can be no assurance that declines in market value associated with these disruptions will not result in impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our results of operations, equity and capital ratios.
We may need to raise additional capital and such funds may not be available when needed
.

We may need to raise additional capital in the future to provide us with sufficient capital resources to meet our commitments and business needs, particularly if our asset quality or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital and financial markets at that time, which are outside of our control, and our financial performance. Economic conditions and the loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital, other financial institution borrowings and borrowings from the discount window of the Federal Reserve. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of other financial institutions, or counterparties participating in the capital markets, may adversely affect our costs and our ability to raise capital. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our financial condition and results of operations.

Compliance and Regulatory Risks
We may be subject to more stringent capital and liquidity requirements which would adversely affect our net income and future growth.

On July 2, 2013, the

The Federal Reserve Board and on July 9, 2013, the FDIC and OCC, adopted a final rule that implementsimplemented the Basel III changes to the international regulatory capital framework and revisesrevised the U.S. risk-based and leverage capital requirements for U.S. banking organizations to strengthen identified areas of weakness in capital rules and to address relevant provisions of the Dodd-Frank Act.

The final rule established a stricter regulatory capital framework that requires banking organizations to hold more and higher-quality capital to act as a financial cushion to absorb losses and help banking organizations better withstand periods of financial stress. The final rule increased capital ratios for all banking organizations and introduced a “capital conservation buffer” which is in addition to each capital ratio. If a banking organization dips into its capital conservation buffer, it may be restricted in its ability to pay dividends and discretionary bonus payments to its executive officers. The final rule assigned a higher risk weight (150%) to exposuresloans that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also required unrealized gains and losses on certain
“available-for-sale”
securities holdings to be included for purposes of calculating regulatory capital requirements unless aone-timeopt-out
one-time
opt-out
is exercised. We exercised this
opt-out
right in our March 31, 2015 quarterly financial filing. The final rule also included changes in what constitutes regulatory capital, some of which are subject to atwo-year transition period. These changes included thephasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock are required to be deducted from capital, subject to atwo-year transition period.

capital. The final rule became effective for us on January 1, 2015. As of December 31, 2017,2020, we met all of these new requirements, including the full capital conservation buffer.

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Although we currently cannot predict the specific impact and long-term effects that Basel III will have on our Company and the banking industry more generally, the Company willmay be required to maintain higher regulatory capital levels which could impact our operations, net income and ability to grow. Furthermore, the Company’s failure to comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us which could restrict our future growth or operations.

The trust wealth management fees we receive may decrease as a result of poor investment performance, in either relative or absolute terms, which could decrease our revenues and net earnings.

Our trust company subsidiary derives its revenues primarily from investment management fees based on assets under management. Our ability to maintain or increase assets under management is subject to a number of factors, including investors’ perception of our past performance, in either relative or absolute terms, market and economic conditions, including changes in oil and gas prices, and competition from investment management companies. Financial markets are affected by many factors, all of which are beyond our control, including general economic conditions, including changes in oil and gas prices; securities market conditions; the level and volatility of interest rates and equity prices; competitive conditions; liquidity of global markets; international and regional political conditions; regulatory and legislative developments; monetary and fiscal policy; investor sentiment; availability and cost of capital; technological changes and events; outcome of legal proceedings; changes in currency values; inflation; credit ratings; and the size, volume and timing of transactions. A decline in the fair value of the assets under management, caused by a decline in general economic conditions, would decrease our wealth management fee income.

Investment performance is one of the most important factors in retaining existing clients and competing for new wealth management clients. Poor investment performance could reduce our revenues and impair our growth in the following ways:

existing clients may withdraw funds from our wealth management business in favor of better performing

products;

asset-based management fees could decline from a decrease in assets under management;

our ability to attract funds from existing and new clients might diminish; and

our wealth managers and investment advisors may depart, to join a competitor or otherwise.

Even when market conditions are generally favorable, our investment performance may be adversely affected by the investment style of our wealth management and investment advisors and the particular investments that they make. To the extent our future investment performance is perceived to be poor in either relative or absolute terms, the revenues and profitability of our wealth management business will likely be reduced and our ability to attract new clients will likely be impaired. As such, fluctuations in the equity and debt markets can have a direct impact upon our net earnings.

Certain of our investment advisory and wealth management contracts are subject to termination on short notice, and termination of a significant number of investment advisory contracts could have a material adverse impact on our revenue.

Certain of our investment advisory and wealth management clients can terminate, with little or no notice, their relationships with us, reduce their aggregate assets under management, or shift their funds to other types of accounts with different rate structures for any number of reasons, including investment performance, changes in prevailing interest rates, inflation, changes in investment preferences of clients, changes in our reputation in the marketplace, change in management or control of clients, loss of key investment management personnel and financial market performance. We cannot be certain that our trust company subsidiary will be able to retain all of its clients. If its clients terminate their investment advisory and wealth management contracts, our trust company subsidiary, and consequently we, could lose a substantial portion of our revenues.

We are subject to possible claims and litigation pertaining to fiduciary responsibility.

From time to time, customers could make claims and take legal action pertaining to our performance of our fiduciary responsibilities. Whether customer claims and legal action related to our performance of our fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability and/or adversely affect our market perception of our products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Our business is subject to significant government regulation.

We operate in a highly-regulated environment and are subject to supervision andor regulation by a number of governmental regulatory agencies, including the Texas Department of Banking, the Federal Reserve Board, the OCC, the FDIC and the FDIC.CFPB. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels and other aspects of our operations. The bank regulatory agencies possess broad authority to prevent or remedy unsafe or unsound practices or violations of law.

The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Other changes to statues, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to reduced revenues, additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of
non-banks
to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. Additionally, the banking regulations could prohibit and significantly delay the Company’s acquisition of other financial institutions.

Included in the Dodd-Frank Act are, for example, changes related to interchange fees and overdraft services. While the changes for interchange fees that can be charged for electronic debit transactions by payment card issuers relate only to banks with assets greaterof $10 billion or more, the federal bank regulatory agencies on November 20, 2020 announced an interim final rule that provides temporary relief for certain community banking organizations that have crossed this threshold as of December 31, 2020 if they had less than $10 billion concern exists that the regulationsin assets as of December 31, 2019. Under this interim final rule, these banks will also impact our Company. Beginninggenerally have until 2022 to either reduce their size to under $10 billion in the third quarter of 2010, we wereassets or prepare for reduced interchange fees. We are also prohibited from charging customers fees for paying overdrafts on automated teller machine and debit card transactions, unless the consumer opts in. We continue to monitor the impact of these new regulations and other developments on our service charge revenue.

Federal income tax reform could have unforeseen effects on our financial condition and results of operations.

On December 22, 2017, the President of the United States signed into law H.R. 1, originally known as the “Tax Cuts and Jobs Act.” The Company is still in the process of analyzing the Tax Cuts and Jobs Act and its possible effects on the Company. The Tax Cuts and Jobs Act includesincluded a number of provisions, including the lowering of the U.S. corporate tax rate from 35 percent35% to 21 percent,21%, effective January 1, 2018. There arewere also provisions that may partially offset the benefit of such rate reduction. Financial statement impacts include adjustments for, among other things, there-measurement of deferred tax assets and liabilities. While there are benefits, there is also substantial uncertainty regarding the details of U.S. Tax Reform. The intended and unintended consequences of Tax Cuts and Jobs Act on our business and on holders of our common shares is uncertain and could be adverse. The Company anticipates thatrecent changes in the impactpolitical makeup of the Senate and House of Representatives in the U.S. Congress could result also in the reversal of some or all of the effects of the Tax Cuts and Jobs Act, may be material to our business, financial condition and results of operations.

A new accounting standard will result in a significant change in how we recognize credit losses andwhich may have a material impact on our financial condition or results of operations.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss (“CECL”) model. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment andheld-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current generally accepted accounting principles (“GAAP”), which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

The new CECL standard will become effective for us for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. We are currently evaluating the impact the CECL model will have on our accounting, but we expect to recognize aone-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. We cannot yet determine the magnitude of any suchone-time cumulative adjustment or of the overall impact of the new standardadverse effect on our business, financial conditionconditions and results of operations.

Our FDIC insurance assessments could increase substantially resulting in higher operating costs.

We have historically paid the lowest premium rate available due to our sound financial position.position and in 2019 and 2020, we have received certain credits that further reduced the FDIC insurance premium paid. Should the number of bank failures increase or the FDIC insurance fund become depleted in others ways, FDIC premiums could increase or additional special assessments could be imposed. In addition, we are no longer eligible to utilize credits to reduce our FDIC insurance premiums as a result of our exceeding $10 billion in assets. These increased premiums would have an adverse effect on our net income and results of operations.

We compete with many larger financial institutions which have substantially greater financial resources than we have.

Competition among financial institutions in Texas is intense. We compete with other bank holding companies, state and national commercial banks, savings and loan associations, consumer financial companies, credit unions, securities brokers, insurance companies, mortgage banking companies, money market mutual funds, asset-basednon-bank lenders and other financial institutions. Many

31
Table of these competitors have substantially greater financial

resources, larger lending limits, larger branch networks and less regulatory oversight than we do, and are ableContents

Risks Related to offer a broader range of products and services than we can. Failure to compete effectively for deposit, loan and other banking customers in our markets could cause us to lose market share, slow our growth rate and may have an adverse effect on our financial condition, results of operations and liquidity.

We are subject to interest rate risk.

Our profitability is dependent to a large extent on our net interest income, which is the difference between interest income we earn as a result of interest paid to us on loans and investments and interest we pay to third parties such as our depositors and those from whom we borrow funds. Like most financial institutions, we are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, and (iii) the average duration of the Company’s securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and investments, our net interest income, and earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and investments fall more quickly than the interest rates paid on deposits and other borrowings.

Although we have implemented strategies which we believe reduce the potential effects of adverse changes in interest rates on our results of operations, these strategies may not always be successful. In addition, any substantial and prolonged increase in market interest rates could reduce our customers’ desire to borrow money from us or adversely affect their ability to repay their outstanding loans by increasing their credit costs since most of our loans have adjustable interest rates that reset periodically. Any of these events could adversely affect our results of operations, financial condition and liquidity.

We are subject to liquidity risk.

The Company requires liquidity to meet our deposit and other obligations as they come due. The Company’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry or the general economy. Factors that could reduce its access to liquidity sources include a downturn in the Texas market, difficult credit markets or adverse regulatory actions against the Company. The Company’s access to deposits may also be affected by the liquidity needs of its depositors. In particular, a substantial majority of the Company’s liabilities are demand, savings, interest checking and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or sold in the same time frame. The Company may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of its depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on the Company’s business, financial condition and result of operations.

The value of certain securities in our investment portfolio may be negatively affected by changes or disruptions in the market for these securities.

Our investment portfolio securities include obligations of, and mortgage-backed securities guaranteed by, government sponsored enterprises such as the Federal National Mortgage Association, referred to as Fannie Mae, the Government National Mortgage Association, referred to as Ginnie Mae, the Federal Home Loan Mortgage Corporation, referred to as Freddie Mac, and the Federal Home Loan Bank or otherwise backed by Federal Housing Administration or Veteran’s Administration guaranteed loans; however, volatility or illiquidity in financial markets may cause investment securities held within our investment portfolio to fall in value or become less liquid. The FRB’s actions to increase interest rates may cause a decline in the value of securities held by the Company. Uncertainty surrounding the credit risk associated with mortgage collateral or guarantors may cause material discrepancies in valuation estimates obtained from third parties. Volatile market conditions may reduce valuations due to the perception of heightened credit and liquidity risks in addition to interest rate risk typically associated with these securities. There can be no assurance that declines in market value associated with these disruptions will not result in impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our results of operations, equity and capital ratios.

First Financial Bankshares, Inc. relies on dividends from its subsidiaries for most of its revenue.

First Financial Bankshares,Inc. is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenue from dividends paid by its subsidiaries. These dividends are the principal source of funds to pay dividends on the Company’s common stock and interest and principal on First Financial Bankshares, Inc. debt (if we had balances outstanding). Various federal and/or state laws and regulations limit the amount of dividends that our bank and trust subsidiaries may pay to First Financial Bankshares, Inc. In the event our subsidiaries are unable to pay dividends to First Financial Bankshares, Inc., First Financial Bankshares, Inc. may not be able to service debt, if any, or pay dividends on the Company’s common stock. The inability to receive dividends from our subsidiaries could have a material adverse effect on the Company’s business, financial condition, results of operations and liquidity.

Acquisition Activities

To continue our growth, we are affected by our ability to identify and acquire other financial institutions.

We intend to continue our current growth strategy. This strategy includes opening new branches and acquiring other banks that serve customers or markets we find desirable. The market for acquisitions remains highly competitive, and we may be unable to find satisfactory acquisition candidates in the future that fit our acquisition and growth strategy. To the extent that we are unable to find suitable acquisition candidates, an important component of our growth strategy may be lost. Additionally, our completed acquisitions, or any future acquisitions, may not produce the revenue, earnings or synergies that we anticipated.

We may not be able to complete future acquisitions, may not be successful in realizing the benefits of any acquisitions that are completed, or may choose not to pursue acquisition opportunities we might find beneficial.

A substantial part of our historical growth has been a result of acquisitions of other financial institutions, and we may, from time to time, evaluate and engage in the acquisition of other financial institutions. We must generally satisfy a number of conditions prior to completing any such transaction, including certain bank regulatory approvals. Bank regulators consider a number of factors with regard to all institutions involved in the transaction when determining whether to approve a proposed transaction, including, among others, the ratings and compliance history, anti-money laundering and Bank Secrecy Act compliance history, CRA examinationevaluation results and the effect of the proposed transaction on the financial stability of the institutions involved and the market as a whole.

The process for obtaining required regulatory approvals has become substantially more difficult, time-consuming and unpredictable as a result of the financial crisis. We may fail to pursue, evaluate or complete strategic and competitively significant business opportunities as a result of our inability, or our perceived inability, to obtain required regulatory approvals in a timely manner or at all.

Assuming we are able to successfully complete one or more transactions, we may not be able to successfully integrate and realize the expected synergies from any completed transaction in a timely manner or at all. In particular, we may be charged by federal and state regulators with regulatory and compliance failures at an acquired business prior to the date of the acquisition, and these failures by the acquired company may have negative consequences for us, including the imposition of formal or informal enforcement actions. Completion and integration of any transaction may also divert management’s attention from other matters, result in additional costs and expenses, or adversely affect our relationships with our customers and employees, any of which may adversely affect our business or results of operations. As a result, our financial condition may be affected, and we may become more susceptible to general economic conditions and competitive pressures.

Use of our common stock for future acquisitions or to raise capital may be dilutive to existing stockholders.

When we determine that appropriate strategic opportunities exist, we may acquire other financial institutions and related businesses, subject to applicable regulatory requirements. We may use our common stock for such acquisitions. We may also seek to raise capital through selling additional common stock, although we have not historically done so. It is possible that the issuance of additional common stock in such acquisition or capital transactions may be dilutive to the interests of our existing shareholders.

Our accounting estimates and risk management processes rely on analytical and forecasting models.

The processes we use to estimate our allowance for loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates depends upon the use of analytical and forecasting models. In addition, these models are used to calculate fair value of our assets and liabilities when we acquire other financial institutions. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models we use for determining our probable loan losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs. If the models we use to measure the fair value financial instruments is inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations.

The value of our goodwill and other intangible assets may decline in the future.

As of December 31, 2017, we had $141.14 million of goodwill and other intangible assets and will add approximately $31.24 million of goodwill

Risks Associated with our acquisition of Commercial Bancshares, Inc. effective January 1, 2018. A significant declineCommon Stock
The trading volume in our financial condition, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of our common stock may necessitate taking charges inis less than other larger financial institutions.
Although the future related to the impairment of our goodwill and other intangible assets. If we were to conclude that a future write-down of goodwill and other intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our financial condition and results of operations.

We rely heavily on our management team, and the unexpected loss of key management or inability to recruit qualified personnel in the future may adversely affect our operations.

Our success to date has been strongly influenced by our ability to attract and to retain senior management experienced in banking in the markets we serve. Our ability to retain executive officers and the current management teams will continue to be important to the successful implementation of our strategies. We do not have employment agreements with these key employees other than executive agreements in the event of a change of control and a confidential information,non-solicitation andnon-competition agreements related to our stock options. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results. In addition, the scope and content of U.S. banking regulators’ policies on incentive compensation, as well as changes to these policies, could adversely affect our ability to hire, retain and motivate our key employees.

The Company’s stock price can be volatile.

Stock price volatility may make it more difficult for our shareholders to resell their common stock when they want and at prices they find attractive. The Company’sis listed for trading on the Nasdaq Global Select Market, the trading volume in our common stock price can fluctuate significantly in response to a variety of factors including, among other things:

actual or anticipated variations in quarterly results of operations;

recommendations by securities analysts;

operating and stock price performanceis less than that of other, companies that investors deem comparable to the Company;

new reports relating to trends, concerns and other issues in thelarger financial services industry or Texas economy, including oilcompanies although such volume has increased in recent years. A public trading market having the desired characteristics of depth, liquidity and gas and cattle prices;

perceptionsorderliness depends on the presence in the marketplace regardingof willing buyers and sellers of the Company and/or its competitors;

new technology used, or services offered, by competitors;

significant acquisitions or business combinations involvingCompany’s common stock at any given time. This presence depends on the Company or its competitors; and

changes in government regulations, including tax laws.

General market fluctuations, industry factorsindividual decisions of investors and general economic and politicalmarket conditions and events, such as economic slowdownsover which the Company has no control. Given the lower trading volume of the Company’s common stock, significant sales of the Company’s common stock, or recessions, interest rate changes or credit loss trendsthe expectation of these sales, could also cause the Company’s stock price to decrease regardlessfall.

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Table of operational results.

Contents

Our stock ownership has shifted to larger institutional shareholders
.
Our ownership base has shifted over the past several years resulting in a greater percentage of ownership by institutional investors and indexed funds as compared to shareholders located in our footprint. These institutional shareholders could decide to sell their holdings in our common stock and as such could result in lower market prices of our stock.
Certain banking laws may have an anti-takeover effect.
Provisions of federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. These provisions effectively inhibit a
non-negotiated
merger or other business combination, which, in turn, could adversely affect the market price of our common stock.
We may not continue to pay dividends on our common stock in the future.

Holders of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividends in the future. This could adversely affect the market price of our common stock. Also, we are a bank holding company, and our ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve Board regarding capital adequacy and dividends.

Certain banking laws

The Company’s stock price can be volatile.
Stock price volatility may have an anti-takeover effect.

Provisions of federal banking laws, including regulatory approval requirements, could make it more difficult for our shareholders to resell their common stock when they want and at prices they find attractive. The Company’s stock price can fluctuate significantly in response to a third partyvariety of factors including, among other things:

actual or anticipated variations in quarterly results of operations;
recommendations by securities analysts;
operating and stock price performance of other companies that investors deem comparable to the Company;
new reports relating to trends, concerns and other issues in the financial services industry or Texas economy, including oil and gas and cattle prices;
perceptions in the marketplace regarding the Company and/or its competitors;
new technology used, or services offered, by competitors;
significant acquisitions or business combinations involving the Company or its competitors; and
changes in government regulations, including tax laws.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends could also cause the Company’s stock price to decrease regardless of operational results.
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Table of Contents
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this Report. As a result, if you acquire our common stock, you may lose some or all of your investment.
Risks Related to the COVID Pandemic
The COVID pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID and to mitigate its effects, including quarantines, travel
bans, shelter-in-place
orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our
Form 10-K
could be exacerbated and such effects could have a material adverse impact on us even if doing soin a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance, as described previously.
General Risk Factors
Our business faces unpredictable economic conditions, which could have an adverse effect on us.
General economic conditions impact the banking industry. The credit quality of our loan portfolio necessarily reflects, among other things, the general economic conditions in the areas in which we conduct our business. Our continued financial success depends somewhat on factors beyond our control, including:
general economic conditions, including national and local real estate markets and the price of oil and gas, wind farm subsidies from the federal government and other commodity prices;
the supply of and demand for investable funds;
demand for loans and access to credit;
interest rates; and
federal, state and local laws affecting these matters.
Any substantial deterioration in any of the foregoing conditions could have a material adverse effect on our financial condition, results of operations and liquidity, which would be perceived to be beneficial to our shareholders. These provisions effectively inhibit anon-negotiated merger or other business combination, which, in turn, couldlikely adversely affect the market price of our common stock.

The trading volume in our common stock is less than other larger financial institutions.

Although

Hurricanes, extended drought conditions, severe weather and natural disasters could significantly impact the Company’s common stock is listed for tradingbusiness.
Hurricanes, extended drought conditions, severe weather and natural disasters and other adverse external events could have a significant impact on the Nasdaq Global Select Market,Company’s ability to conduct business. Such events affect the trading volume in our common stock is less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellersstability of the Company’s common stock at any given time. This presence depends ondeposit base, impair the individual decisionsability of investors and general economic and market conditions over whichborrowers to repay outstanding loans, impair the value of the collateral securing our loans, cause significant property damage, result in loss of revenue and/or cause the Company has no control. Given the lower trading volumeto incur additional expenses. The occurrence of the Company’s common stock, significant sales of the Company’s common stock, or the expectation of these sales, could cause the Company’s stock price to fall.

Breakdowns in our internal controls and procedures could have an adverse effect on us.

We believe our internal control system as currently documented and functioning is adequate to provide reasonable assurance over our internal controls. Nevertheless, because of the inherent limitation in administering a cost effective control system, misstatements due to error or fraud may occur and not be detected. Breakdowns in our internal controls and procedures could occurany such event in the future and any such breakdowns could have an adverse effect on us. See “Item 9A — Controls and Procedures” for additional information.

Our operations rely on certain external vendors.

We rely on certain external vendors to provide products and services necessary to maintain ourday-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted agreements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendor’s organizational structure, financial condition, support for existing products or services or strategic focus or for any other reason, could be disruptive to our operations, which could have a material adverse effect on ourthe Company’s business, and,which in turn, could have a material adverse effect on the Company’s business, financial condition and result of operations.

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Table of Contents
We compete with many larger financial institutions which have substantially greater financial resources than we have.
Competition among financial institutions in Texas is intense. We compete with other bank holding companies, state and national commercial banks, savings and loan associations, consumer financial companies, credit unions, securities brokers, insurance companies, mortgage banking companies, money market mutual funds, asset-based
non-bank
lenders and other financial institutions. Many of these competitors have substantially greater financial resources, larger lending limits, larger branch networks, enhanced technology and less regulatory oversight than we do, and are able to offer a broader range of products and services than we can. Failure to compete effectively for deposit, loan and other banking customers in our markets could cause us to lose market share, slow our growth rate and may have an adverse effect on our financial condition, and results of operations.

operations and liquidity.

We compete in an industry that continually experiences technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services.services and new fintech companies. In addition to improving the ability to serve customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for conveniences, as well as to create additional efficiencies in our operations. Many of our larger competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

System failure

If we are unable to continue our historical levels of growth, we may not be able to maintain our historical earnings trends.
To achieve our past levels of growth, we have focused on both internal growth and acquisitions. We may not be able to sustain our historical rate of growth or cybersecurity breachesmay not be able to grow at all. Additionally, we may not be able to obtain the financing necessary to fund additional growth and may not be able to find suitable acquisition candidates. Various factors, such as economic conditions, competition and heightened regulatory scrutiny, may impede or prohibit the opening of new banking centers and the completion of acquisitions. Further, we may be unable to attract and retain experienced bankers, which could adversely affect our network security could subject usinternal growth. If we are not able to increased operating costs as well as litigationcontinue our historical levels of growth, we may not be able to maintain our historical earnings trends.
We rely heavily on our management team, and other potential losses.

The computer systems and network infrastructure we use could be vulnerablethe unexpected loss of key management or inability to unforeseen hardware and cybersecurity issues, including “hacking” and “identity theft.” recruit qualified personnel in the future may adversely affect our operations.

Our operations are dependent uponsuccess to date has been strongly influenced by our ability to protectattract and to retain senior management experienced in banking in the markets we serve. Our ability to retain executive officers and the current management teams will continue to be important to the successful implementation of our computer equipment against damage from fire, powerstrategies. We do not have employment agreements with these key employees other than executive agreements in the event of a change of control and a confidential information,
non-solicitation
and
non-competition
agreements related to our stock options and restricted stock. The unexpected loss telecommunications failureof services of any key management personnel, or a similar catastrophic event. Any damage or failure that causes an interruptionthe inability to recruit and retain qualified personnel in our operationsthe future, could have an adverse effect on our business and financial condition and results of operations.results. In addition, our operations are dependent uponthe scope and content of U.S. banking regulators’ policies on incentive compensation, could adversely affect our ability to protect the computer systemshire, retain and network infrastructure utilized by us, includingmotivate our Internet banking activities, against damage from physicalbreak-ins, cybersecurity breaches and other disruptive problems caused by the Internet or other users. Such computerbreak-ins and other disruptions would jeopardize the securitykey employees.
35
Table of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us, damage our reputation and inhibit current and potential customers from our Internet banking services. Each year, we add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches including firewalls and penetration testing. We continue to investigate cost effective measures as well as insurance protection.

Furthermore, our customers could incorrectly blame the Company and terminate their accounts with the Company for a cyber-incident which occurred on their own system or with that of an unrelated third party. In addition, a security breach could also subject us to additional regulatory scrutiny and expose us to civil litigation and possible financial liability.

Our business may be adversely affected by security breaches at third parties.

Our customers interact with their own and other third party systems, which pose operational risks to us. We may be adversely affected by data breaches at retailers and other third parties who maintain data relating to our customers that involve the theft of customers data, including the theft of customers’ debit card, merchant credit card, wire transfer and other identifying and/or access information used to make purchases or payments at such retailers and to other third parties.

In the event of a data breach at one or more retailers of considerable magnitude, the Company’s business, financial condition and results of operations may be adversely affected.

We are subject to claims and litigation pertaining to intellectual property.

We rely on technology companies to provide information technology products and services necessary to support ourday-to-day operations. Technology companies frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of our vendors, or other individuals or companies, have from time to time claimed to hold intellectual property sold to us by its vendors. Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions frequently seek injunctions and substantial damages.

Contents

Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, we may have to engage in litigation that could be expensive, time-consuming, disruptive to our operations, and distracting to management. If we are found to infringe one or more patents or other intellectual property rights, we may be required to pay substantial damages or royalties to a third-party. In certain cases, we may consider entering into licensing agreements for disputed intellectual property, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase our operating expenses. If legal matters related to intellectual property claims were resolved against us or settled, we could be required to make payments in amounts that could have a material adverse effect on our business, financial condition and results of operations.

An investment in our common stock is not an insured deposit.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this Report. As a result, if you acquire our common stock, you may lose some or all of your investment.

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

ITEM 2.PROPERTIES

Our principal office is located in the First Financial Bank Building at 400 Pine Street in downtown Abilene, Texas. We lease fourtwo spaces in buildings owned by First Financial Bank, National Association, AbileneN.A. totaling approximately 9,00010,155 square feet. As of December 31, 2017,2020, our subsidiaries collectively own 6373 banking facilities, some of which are detached
drive-ins,
and also lease 1514 banking facilities and 1615 ATM locations. Our management considers all our existing locations to be well-suited for conducting the business of banking. We believe our existing facilities are adequate to meet our requirements and our subsidiaries’ requirements for the foreseeable future.

ITEM 3.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 our other direct and indirect 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 4.MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock, par value $0.01 per share, is traded on the Nasdaq Global Select Market under the trading symbol FFIN. See “Item 8—Financial Statements and Supplementary Data — Data—Quarterly Financial Data” for the high, low and closing sales prices as reported by the Nasdaq Global Select Market for our common stock for the periods indicated.

Record Holders

As of February 1, 2018,2021, we had 1,1481,015 registered shareholders of record with our stock transfer agent.

Dividends

See “Item 8 — 8—Financial Statements and Supplementary Data — Data—Quarterly Results of Operations” for the frequency and amount of cash dividends paid by us. Also, see “Item 1 —– Business —– Supervision and Regulation —– Payment of Dividends” and “Item 7 —– Management’s Discussion and Analysis of the Financial Condition and Results of Operations —– Liquidity —– Dividends” for restrictions on our present or future ability to pay dividends, particularly those restrictions arising under federal and state banking laws.

Equity Compensation Plans

See “Item 12 —– Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.

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PERFORMANCE GRAPH

The following performance graph compares cumulative total shareholder returns for our common stock, the Russell 3000 Index, and the SNL Bank Index, which is a banking index prepared by SNL Financial LC and is comprised of banks with $5 billion to $10 billion in total assets, for a five-year period (December 31, 20122015 to December 31, 2017)2020). The performance graph assumes $100 invested in our common stock at its closing price on December 31, 2012,2015, and in each of the Russell 3000 Index and the SNL Bank Index on the same date. The performance graph also assumes the reinvestment of all dividends. The dates on the performance graph represent the last trading day of each year indicated. The amounts noted on the performance graph have been adjusted to give effect to all stock splits and stock dividends.

First Financial Bankshares, Inc.

   Period Ending 

Index

  12/31/12   12/31/13   12/31/14   12/31/15   12/31/16   12/31/17 

First Financial Bankshares, Inc.

   100.00    172.67    158.94    163.76    250.31    253.94 

Russell 3000

   100.00    133.55    150.32    151.04    170.28    206.26 

SNL Bank$5B-$10B Index

   100.00    154.28    158.92    181.04    259.37    258.40 

Source : SNL Financial, an offering ofInc

.

   Period Ending 
Index  12/31/15   12/31/16   12/31/17   12/31/18   12/31/19   12/31/20 
First Financial Bankshares, Inc.   100.00    152.85    155.07    201.53    248.81    260.80 
Russell 3000 Index   100.00    112.74    136.56    129.40    169.54    204.95 
SNL Bank
$5B-$10B
Index
   100.00    143.27    142.73    129.17    160.06    145.37 
Source: S&P Global Market Intelligence

© 2017

www.snl.com

2021

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ITEM 6.SELECTED FINANCIAL DATA

The selected financial data presented below as of and for the years ended December 31, 2020, 2019, 2018, 2017, 2016, 2015, 2014, and 2013,2016, have been derived from our audited consolidated financial statements. The data set forth below may not be fully comparable from period to period due to acquisitions in 2020 and 2018 and changes in accounting, including the allowance for credit losses in 2020 (see Notes 1, 3 and 21 to the Notes to Consolidated Financial Statements for further information). The selected financial data should be read in conjunction with “Item 7 — 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and accompanying notes presented elsewhere in this Form
10-K.
The results of operations presented below are not necessarily indicative of the results of operations that may be achieved in the future. Management’s Discussion and Analysis of Financial Condition and Results of Operations incorporates information required to be disclosed by the SEC’s Industry Guide 3, “Statistical Disclosure by Bank Holding Companies.”

   Year Ended December 31, 
   2017  2016  2015  2014  2013 
   (dollars in thousands, except per share data) 

Summary Income Statement Information:

      

Interest income

  $245,975  $232,288  $221,623  $198,539  $176,369 

Interest expense

   9,288   5,451   4,088   4,181   4,088 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest income

   236,687   226,837   217,535   194,358   172,281 

Provision for loan losses

   6,530   10,212   9,685   4,465   3,753 

Noninterest income

   91,017   85,132   73,432   66,624   62,052 

Noninterest expense

   173,986   165,830   149,464   137,925   126,012 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Earnings before income taxes

   147,188   135,927   131,818   118,592   104,568 

Income tax expense

   26,817   31,153   31,437   29,033   25,700 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net earnings

  $120,371  $104,774  $100,381  $89,559  $78,868 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Per Share Data:

      

Earnings per share, basic

  $1.82  $1.59  $1.55  $1.40  $1.24 

Earnings per share, assuming dilution

   1.81   1.59   1.54   1.39   1.24 

Cash dividends declared

   0.75   0.70   0.62   0.55   0.52 

Book value atperiod-end

   13.93   12.68   12.20   10.63   9.18 

Earnings performance ratios:

      

Return on average assets

   1.72%   1.59%   1.61%   1.65%   1.64% 

Return on average equity

   13.63   12.36   13.60   14.00   13.75 

Summary Balance Sheet Data(Period-end):

      

Securities

  $3,087,473  $2,860,958  $2,734,177  $2,416,297  $2,058,407 

Loans

   3,500,699   3,384,205   3,350,593   2,937,991   2,689,448 

Total assets

   7,254,715   6,809,931   6,665,070   5,848,202   5,222,208 

Deposits

   5,962,961   5,478,539   5,190,169   4,750,255   4,135,075 

Total liabilities

   6,331,947   5,972,046   5,860,084   5,166,665   4,634,561 

Total shareholders’ equity

   922,768   837,885   804,986   681,537   587,647 

Asset quality ratios:

      

Allowance for loanlosses/period-end loans

   1.38%   1.35%   1.25%   1.25%   1.26% 

Nonperformingassets/period-end loans plus foreclosed assets

   0.57   0.86   0.89   0.74   1.16 

Net charge offs/average loans

   0.12   0.19   0.15   0.06   0.15 

Capital ratios:

      

Average shareholders’ equity/average assets

   12.65%   12.85%   11.86%   11.78%   11.95% 

Leverage ratio (1)

   11.09   10.71   9.96   9.89   9.84 

Tier 1 risk-based capital (2)

   18.66   17.30   15.90   16.05   15.82 

Common equity tier 1 capital (3)

   18.66   17.30   15.90   —     —   

Total risk-based capital (4)

   19.85   18.45   16.97   17.16   16.92 

Dividend payout ratio

   41.24   44.14   40.20   39.34   41.62 

   Year Ended December 31, 
   2020  2019  2018  2017  2016 
   (dollars in thousands, except per share data) 
Summary Income Statement Information:      
Interest income  $364,128  $319,192  $291,690  $245,975  $232,288 
Interest expense   14,243   30,102   18,930   9,288   5,451 
                     
Net interest income   349,885   289,090   272,760   236,687   226,837 
Provision for credit losses   19,517   2,965   5,665   6,530   10,212 
Noninterest income   139,935   108,428   101,764   91,017   85,132 
Noninterest expense   227,938   196,521   190,684   173,986   165,830 
                     
Earnings before income taxes   242,365   198,032   178,175   147,188   135,927 
Income tax expense   40,331   33,220   27,537   26,817   31,153 
                     
Net earnings  $202,034  $164,812  $150,638  $120,371  $104,774 
                     
Per Share Data:      
Earnings per share, basic  $1.42  $1.22  $1.11  $0.91  $0.80 
Earnings per share, diluted   1.42   1.21   1.11   0.91   0.80 
Cash dividends declared   0.51   0.47   0.41   0.38   0.35 
Book value at
period-end
   11.80   9.03   7.77   6.97   6.34 
Earnings performance ratios:      
Return on average assets   1.98%   2.08%   1.98%   1.72%   1.59% 
Return on average equity   12.93   14.37   15.37   13.63   12.36 
Dividend payout ratio   35.88   38.31   36.84   41.24   44.14 
Summary Balance Sheet Data
(Period-end):
      
Securities  $4,393,029  $3,413,317  $3,158,777  $3,087,473  $ 2,860,958 
Loans,
held-for-investment
   5,171,033   4,194,969   3,953,636   3,485,569   3,357,307 
Total assets   10,904,500   8,262,227   7,731,854   7,254,715   6,809,931 
Deposits   8,675,817   6,603,806   6,180,389   5,962,961   5,478,539 
Total liabilities   9,226,310   7,035,030   6,678,559   6,331,947   5,972,046 
Total shareholders’ equity   1,678,190   1,227,197   1,053,295   922,768   837,885 
Asset quality ratios:      
Allowance for credit
losses/period-end
loans
held-for-investment
   1.29%   1.25%   1.30%   1.38%   1.36% 
Nonperforming
assets/period-end
loans
held-for-investment
plus foreclosed assets
   0.83   0.61   0.75   0.58   0.86 
Net charge offs/average loans   0.06   0.04   0.07   0.12   0.19 
Capital ratios:      
Average shareholders’ equity/average assets   15.32%   14.44%   12.89%   12.65%   12.85% 
Leverage ratio (1)   11.86   12.60   11.85   11.09   10.71 
Tier 1 risk-based capital (2)   20.79   20.06   19.47   18.66   17.30 
Common equity tier 1 capital (3)   20.79   20.06   19.47   18.66   17.30 
Total risk-based capital (4)   22.03   21.13   20.61   19.85   18.45 
(1)
Calculated by dividing at
period-end,
shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets by fourth quarter average assets less intangible assets.
(2)
Calculated by dividing at
period-end,
shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets by risk-adjusted assets.
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(3)
Calculated by dividing at
period-end,
shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets by risk-adjusted assets.

(4)
Calculated by dividing at
period-end,
shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets plus allowance for loan losses to the extent allowed under regulatory guidelines by risk-adjusted assets.

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited to those listed in “Item 1A —– Risk Factors” and in the “Cautionary Statement Regarding Forward-Looking Statements” notice on page 1.

Introduction

As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, gain on sale of mortgage loans and service charges. Our primary source of funding for our loans and investments are deposits held by our bank subsidiary, First Financial Bank, National Association, Abilene, Texas.N.A. Our largest expenses are salaries and related employee benefits. We measure our performance by calculating our return on average assets, return on average equity, our regulatory leverage and risk based capital ratios, net interest margin 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 the major elements of our consolidated balance sheets as of December 31, 20172020 and 2016,2019, and consolidated statements of earnings for the years 20152018 through 20172020 should be read in conjunction with our consolidated financial statements, accompanying notes, and selected financial data presented elsewhere in this Form
10-K.

Critical Accounting Policies

We prepare consolidated financial statements based on generally accepted accounting principles (“GAAP”) and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions.

We deem a policy critical if (1) the accounting estimate required us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (2) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements.

We deem our most critical accounting policies to be (1) our allowance for loancredit losses and our provision for loancredit losses and (2) our valuation of securities.financial instruments. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period. A discussion of (1) our allowance for loancredit losses and our provision for loancredit losses and (2) our valuation of securitiesfinancial instruments is included in NoteNotes 1 and 10 to our Consolidated Financial Statements beginning on pageF-7.

Hurricane Harvey

Houston and the surrounding Gulf Coast region were significantly affected by Hurricane Harvey beginning in late August 2017 and continuing into the fourth quarter of 2017. Our Company has locations (i) north of Houston in Conroe, Willis, Tomball, Huntsville, Montgomery, Magnolia, New Waverly and Cut and Shoot and (ii) in Southeast Texas in Orange, Beaumont, Vidor, Newton, Mauriceville and Port Arthur. We continue to evaluate the effect of the hurricane on our branch facilities and our loan and investment portfolios. Our initial assessment of our physical buildings and equipment indicates damage primarily at our Mauriceville branch, and amounts not covered by insurance do not appear to be significant. At December 31, 2017, we had loans totaling $446.62 million in our Conroe region and $396.55 million in the Southeast Texas/Orange region. We are evaluating these loans and the related collateral and business operations underlying such loans. At December 31, 2017, we provided additional

F-9.

allowance for loan losses as deemed appropriate based on this analysis. We continue to evaluate these loans as we learn more information about the damage caused by the hurricane. Our tax exempt municipal bonds in the counties of Texas effected by the hurricane have been evaluated, including insurance on the bonds. At December 31, 2017, our municipal bonds in these counties totaled $458.16 million, but only $92.75 million do not have bond insurance. Based on analysis of these bonds and the related municipality, at December 31, 2017, we do not believe we have any credit related losses other than temporary impairment.

Acquisitions and Asset Purchase

On October 12, 2017,September 19, 2019, we entered into an agreement and plan of reorganization to acquire CommercialTB&T Bancshares, Inc. and its wholly ownedwholly-owned bank subsidiary, Commercial StateThe Bank Kingwood,& Trust of Bryan/College Station, Texas. On January 1, 2018,2020, the transaction closed.was completed. Pursuant to the agreement, we issued 1,289,3716.28 million shares of the Company’s common stockshares in exchange for all of the outstanding shares of CommercialTB&T Bancshares, Inc. In addition, in accordance with the plan of reorganization, CommercialTB&T Bancshares, Inc. paid a special dividend totaling $22.08$1.92 million to its shareholders prior to the closing of this transaction. At the closing, KingwoodBrazos Merger Sub.,Sub, Inc., a wholly-owned subsidiary of the Company, merged into CommercialTB&T Bancshares Inc., with CommercialTB&T Bancshares, Inc. surviving as a wholly-owned
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subsidiary of the Company. Immediately following such merger, CommercialTB&T Bancshares, Inc. was merged into the Company and Commercial StateThe Bank Kingwood,& Trust of Bryan/College Station, Texas was merged into First Financial Bank, National Association, Abilene, Texas,N.A., a wholly ownedwholly-owned subsidiary of the Company. The total purchase price of $220.27 million exceeded the estimated fair value of the net of assets acquired by approximately $31.24$141.92 million and the Company recorded such excess as goodwill. The balance sheet and results of operations of CommercialTB&T Bancshares, Inc. will behave been included in the financial statements of the Company effective January 1, 2018.

2020.

Stock Split and Increase in Authorized Shares
On April 1, 2015, we entered into an agreement and plan23, 2019, the Company’s Board of reorganization to acquire FBC Bancshares, Inc. and its wholly owned bank subsidiary, First Bank, N.A., Conroe, Texas. On July 31, 2015, the transaction was completed, which we refer to herein as the “Conroe acquisition.” Pursuant to the agreement, we issued 1,755,374 sharesDirectors declared a
two-for-one
stock split of the Company’s outstanding common shares effective 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 to be issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock in exchangethe consolidated financial statements as of and for allthe year ended December 31, 2019.
Stock Repurchase
On March 12, 2020, the Company’s Board of Directors authorized the outstandingrepurchase of up to 4,000,000 common shares through September 30, 2021. Previously, the Board of FBC Bancshares, Inc. At closing, FBC Bancshares, Inc. was merged intoDirectors had authorized the repurchase of up to 2,000,000 common shares through September 30, 2020. The stock repurchase plan authorizes management to repurchase and retire the stock at such time as repurchases are considered beneficial to the Company and First Bank, N.A.its stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Through December 31, 2020, 324,802 shares were repurchased and retired (all during the months of March and April of 2020) totaling $8,008,000 under this repurchase plan. Subsequent to December 31, 2020 and through February 22, 2021, no additional shares were repurchased. For the years ended December 31, 2019 and 2018, no shares were repurchased under this repurchase plan or the prior authorization that expired September 30, 2020.
Implementation of New Accounting Standard for Accounting for Allowance for Credit Losses
On January 1, 2020, Accounting Standards Update (“ASU”)
2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, Conroe, Texas,became effective for the Company. Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) replaced the previous “incurred loss” model for measuring credit losses with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and
held-to-maturity
debt securities. It also applies to
off-balance-sheet
(“OBS”, “reserve for unfunded commitments”) credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, ASC 326 made changes to the accounting for
available-for-sale
debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on
available-for-sale
debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
On March 27, 2020, the CARES Act was merged into First Financial Bank, National Association, Abilene, Texas, a wholly owned subsidiarysigned by the President of the Company. The total purchase price exceededUnited States that included an option for entities to delay the estimated fair valueimplementation of ASC 326 until the earlier of the termination date of the national emergency declaration by the President, or December 31, 2020. Under this option, the Company elected to delay implementation of CECL and calculated and recorded the provision for credit losses through the nine-months ended September 30, 2020 under the incurred loss model. At December 31, 2020, the Company elected to adopt ASC 326, effective as of January 1, 2020, through a transition charge to retained earnings of $589 thousand ($466 thousand net of assets acquiredapplicable income taxes). This transition adjustment was comprised of a decrease of $619 thousand in allowance for credit losses and an increase of $1.21 million in the reserve for unfunded commitments.
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The Company completed its CECL implementation plan by approximately $43.92 millionforming a cross-functional working group, under the direction of our Chief Credit Officer along with our Chief Accounting Officer, Chief Lending Officer and Chief Financial Officer. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. The implementation plan included assessment and documentation of processes, internal controls and data sources, model development, documentation and validation, and system configuration, among other things. The Company contracted with a third-party vendor to assist in the implementation of CECL.
Other New Accounting Standards Issued but Not Yet Effective
Accounting Standards Update (“ASU”)
2019-12,
“Simplifying the Accounting for Income Taxes.”
In December 2019, FASB released ASU
2019-12
- Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing multiple exceptions to the general principals in Topic 740. The standard is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020. The Company recorded such excessdoes not expect the adoption of this standard to have a material impact on the Company’s Consolidated Financial Statements.
Accounting Standards Update (“ASU”)
2020-04,
“Reference Rate Reform.”
In March 2020, FASB released ASU
2020-04
- Reference Rate Reform (Topic 848), which provides optional guidance to ease the accounting burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of LIBOR likely being discontinued as goodwill.

On April 8, 2015,an available benchmark rate. The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update are effective for all entities between March 12, 2020 and December 31, 2022. The Company announcedhas established a cross-functional working group to guide the Company’s transition from LIBOR and has begun efforts to transition to alternative rates consistent with industry timelines. The Company has identified its products that it had entered into an asset purchase agreement with 4Trust Mortgage, Inc. for a cash purchase price of $1.90 million.utilize LIBOR and has implemented enhanced fallback language to facilitate the transition to alternative reference rates. The asset purchase was finalized on June 1, 2015, which we referCompany is evaluating existing platforms and systems and preparing to herein as the “4Trust asset purchase.”The total asset purchase price exceeded the estimated fair value net of assets purchased by approximately $1.75 million and the Company recorded such excess as goodwill.

offer new rates.

Results of Operations

Performance Summary
. Net earnings for 20172020 were $120.37$202.03 million, an increase of $15.60$37.22 million, or 22.58%, over net earnings for 20162019 of $104.77$164.81 million. Of the $15.60 million increase in net income during 2017 when compared to 2016, $7.65 million resulted from the recent enactment of tax legislation that reduced the corporate income tax rate from 35 percent to 21 percent. This amount represents the net effect of the Company’s revaluation of its deferred tax assets and liabilities using the new tax rate. Net earnings for 20152018 were $100.38$150.64 million. Disregarding theThe increase that resulted from the change in tax rates, the increases in net earnings for 20172020 over 20162019 and 20162019 over 2015 were2018 was primarily attributable to the overall growth in net interest income and noninterest income.

Net earnings in 2020 also include a provision for credit losses of $19.52 million compared to $2.97 million in 2019 and $5.67 million in 2018. The provision for credit losses in 2020 reflects primarily the stress on our loan portfolio from the increase in unemployment and economic effects of the COVID pandemic.

On a basicdiluted net earnings per share basis, net earnings were $1.82$1.42 for 2017,2020, as compared to $1.59$1.21 for 20162019 and $1.55$1.11 for 2015.2018. The return on average assets was 1.72%1.98% for 2017,2020, as compared to 1.59%2.08% for 20162019 and 1.61%1.98% for 2015.2018. The return on average equity was 13.63%12.93% for 2017,2020, as compared to 12.36%14.37% for 20162019 and 13.60%to 15.37% for 2015. Excluding the $7.65 million tax adjustment mentioned above, the Company’s basic earnings per share would have been $1.70, its2018. The return on average assets would have been 1.61%tangible equity was 16.25% for 2020, as compared to 16.95% for 2019 and its return on average equity would have been 12.77%to 18.65% for 2017.

2018.

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 $262.18$361.15 million in 2017,2020, as compared to $251.78$295.88 million in 20162019, and $240.48$281.75 million in 2015. The increases2018. Average earning assets were $9.52 billion in 20172020, as compared to 2016 were$7.44 billion in 2019 and $7.12 billion in 2018. The increase in
tax-equivalent
net interest income in 2020 compared to 2019 was largely attributable to increases in the volumeinterest earning assets. The increase of $2.08 billion in average earning assets offset by ratein 2020 when compared to 2019 was primarily a result of increases on ourin loans of $1.08 billion and
tax-exempt
securities of $689.80 million when compared to 2019. The increase in
tax-equivalent
net interest bearing liabilities. Averageincome in 2019 compared to 2018 was also largely attributable to increases in interest earning assets. The increase of $326.97 million in average earning assets in 2019 when compared to 2018 was primarily a result of increases in loans of $246.63 million and
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taxable securities of $156.33 million. Average interest-bearing liabilities were $6.54$5.76 billion in 2017,2020, as compared to $6.17$4.61 billion in 20162019 and $5.84$4.47 billion in 2015. Average earning assets increased $373.50 million in 2017, when compared to 2016, due primarily from increases in loans and taxable securities. Average earning assets increased $333.39 million in 2016, when compared to 2015, due primarily from increases in loans and tax exempt securities. Average interest bearing liabilities were $4.21 billion in 2017, as compared to $4.02 billion in 2016 and $3.80 billion in 2015.2018. The yield on earning assets decreased twoforty-four basis points in 2017 due2020 when compared to 2019 while the mix of earningsrate paid on interest-bearing liabilities decreased forty basis points. The yield on earning assets whereasincreased fifteen basis points in 2019 when compared to 2018 while the rate paid on interest-bearing liabilities increased eighttwenty-three basis points when compared to 2016. The yield on earning assets decreased two basis points in 2016, whereas the rate paid on interest-bearing liabilities increased three basis points when compared to 2015.

points.

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):

   2017 Compared to 2016   2016 Compared to 2015 
   Change Attributable to   Total
Change		   Change Attributable to  Total
Change		 
   Volume  Rate     Volume  Rate  

Short-term investments

  $443  $899   $1,342   $23  $111  $134 

Taxable investment securities

   3,464   1,735    5,199    (1,218)   (829)   (2,047) 

Tax-exempt investment securities (1)

   1,173   677    1,850    6,548   (1,687)   4,861 

Loans (1) (2)

   4,998   851    5,849    12,037   (2,320)   9,717 
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Interest income

   10,078   4,162    14,240    17,390   (4,725)   12,665 

Interest-bearing deposits

   409   3,300    3,709    219   643   862 

Short-term borrowings

   (223)   351    128    24   477   501 
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Interest expense

   186   3,651    3,837    243   1,120   1,363 
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net interest income

  $9,892  $511   $10,403   $17,147  $(5,845)  $11,302 
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

   
2020 Compared to 2019
  
2019 Compared to 2018
 
   
Change Attributable to
  
Total
Change
  
Change Attributable to
  
Total
Change
 
   
Volume
   
Rate
  
Volume
  
Rate
 
Short-term investments
  $3,689   $(4,628)  $(939)  $(106)  $367  $261 
Taxable investment securities
   3,812    (8,026)   (4,214)   4,045   1,573   5,618 
Tax-exempt
investment securities (1)
   24,671    (8,932)   15,739   (2,634)   (2,203)   (4,837) 
Loans (1) (2)
   59,719    (20,900)   38,819   12,983   11,276   24,259 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Interest income
   91,891    (42,486)   49,405   14,288   11,013   25,301 
Interest-bearing deposits
   6,379    (20,382)   (14,003)   654   9,523   10,177 
Short-term borrowings
   1,223    (3,079)   (1,856)   (99)   1,095   996 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Interest expense
   7,602    (23,461)   (15,859)   555   10,618   11,173 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net interest income
  $84,289   $(19,025)  $65,264  $ 13,733  $395  $ 14,128 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
(1)
Computed on a
tax-equivalent
basis assuming a marginal tax rate of 35%21%.
(2)Non-accrual
Nonaccrual loans are included in loans.

The net interest margin in 20172020 was 4.01%3.79%, a decrease of sevennineteen basis points from 20162019. The net interest margin for 2019 was 3.98% which also decreasedwas an additional fourincrease of two basis points from 2015. The2018. which increased two basis points from 2018. We continued decrease into experience downward pressures on our net interest margin in 2017 was largely the result of2020 primarily due to (i) the extended period of fluctuating historically low levels of short-term interest rates.rates and (ii) the flat to inverted yield curve currently being experienced in the bond market. We have been able to somewhat mitigate the impact of lowthese 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 minimizingreducing the 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 bearing liabilities.yields. The Federal Reserve increased rates 100 basis points in 2018 but then decreased rates 75 basis points in 2017during the third and 25fourth quarters of 2019 and then an additional 150 basis points in both 2016 and 2015 and continuesthe first quarter of 2020, resulting in a current target rate range of zero to issue forward guidance plans to increase rates further in 2018. Although increasing, we expect interest rates to remain at lower levels, which will continue the downward pressure on our net interest margin.

25 basis points.

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Table of Contents
The net interest margin, which measures
tax-equivalent
net interest income as a percentage of average earning assets, is illustrated in Table 2 for the years 20152018 through 2017.

2020.

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

   2017  2016  2015 
   Average
Balance		  Income/
Expense		   Yield/
Rate		  Average
Balance		  Income/
Expense		   Yield/
Rate		  Average
Balance		  Income/
Expense		   Yield/
Rate		 

Assets

             

Short-term investments (1)

  $144,464  $1,684    1.17%  $63,882  $342    0.54%  $57,500  $208    0.36% 

Taxable investment securities (2)

   1,479,698   32,825    2.22   1,314,820   27,626    2.10   1,371,110   29,673    2.16 

Tax-exempt investment securities (2)(3)

   1,484,952   68,118    4.59   1,459,121   66,268    4.54   1,318,531   61,407    4.66 

Loans (3)(4)

   3,435,447   168,843    4.91   3,333,241   162,994    4.89   3,090,538   153,277    4.96 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total earning assets

   6,544,561  $271,470    4.15%   6,171,064  $257,230    4.17%   5,837,679  $244,565    4.19% 

Cash and due from banks

   162,255      152,648      148,369    

Bank premises and equipment, net

   123,595      120,538      109,725    

Other assets

   56,007      55,694      49,647    

Goodwill and other intangible assets, net

   142,473      143,986      117,491    

Allowance for loan losses

   (47,380)      (44,811)      (39,107)    
  

 

 

     

 

 

     

 

 

    

Total assets

  $6,981,511     $6,599,119     $6,223,804    
  

 

 

     

 

 

     

 

 

    

Liabilities and Shareholders’ Equity

             

Interest-bearing deposits

  $3,783,960  $8,213    0.22%  $3,469,005  $4,504    0.13%  $3,272,150  $3,642    0.11% 

Short-term borrowings

   422,285   1,075    0.25   552,041   947    0.17   524,365   446    0.08 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total interest-bearing liabilities

   4,206,245  $9,288    0.22%   4,021,046  $5,451    0.14%   3,796,515  $4,088    0.11% 

Noninterest-bearing deposits

   1,843,973      1,666,598      1,634,669    

Other liabilities

   48,480      63,609      54,331    
  

 

 

     

 

 

     

 

 

    

Total liabilities

   6,098,698      5,751,253      5,485,515    

Shareholders’ equity

   882,813      847,866      738,289    
  

 

 

     

 

 

     

 

 

    

Total liabilities and shareholders’ equity

  $6,981,511     $6,599,119     $6,223,804    
  

 

 

     

 

 

     

 

 

    

Net interest income

   $262,182     $251,779     $240,477   
   

 

 

     

 

 

     

 

 

   

Rate Analysis:

             

Interest income/earning assets

      4.15%      4.17%      4.19% 

Interest expense/earning assets

      0.14      0.09      0.07 
     

 

 

     

 

 

     

 

 

 

Net yield on earning assets

      4.01%      4.08%      4.12% 
     

 

 

     

 

 

     

 

 

 

   
2020
  
2019
  
2018
 
   
Average
Balance
  
Income/
Expense
   
Yield/
Rate
  
Average
Balance
  
Income/
Expense
   
Yield/
Rate
  
Average
Balance
  
Income/
Expense
   
Yield/
Rate
 
Assets
             
Short-term investments (1)
  $251,086  $953    0.38%  $84,430  $1,892    2.24%  $90,374  $1,631    1.80% 
Taxable investment securities (2)
   2,233,634   51,456    2.30   2,090,490   55,670    2.66   1,934,160   50,052    2.59 
Tax-exempt
investment securities (2)(3)
   1,882,711   58,403    3.10   1,192,908   42,664    3.58   1,262,947   47,501    3.76 
Loans (3)(4)
   5,152,531   264,576    5.13   4,074,667   225,757    5.54   3,828,040   201,498    5.26 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
   
 
 
 
Total earning assets
   9,519,962  $ 375,388    3.94%   7,442,495  $325,983    4.38%   7,115,521  $ 300,682    4.23% 
Cash and due from banks
   189,849      175,417      176,799    
Bank premises and equipment, net
   139,880      133,239      129,715    
Other assets
   92,612      66,003      62,595    
Goodwill and other intangible assets, net
   318,818      174,138      172,425    
Allowance for credit losses
   (67,606)      (52,170)      (50,323)    
  
 
 
     
 
 
     
 
 
    
Total assets
  $ 10,193,515     $7,939,122     $7,606,732    
  
 
 
     
 
 
     
 
 
    
Liabilities and Shareholders’ Equity
             
Interest-bearing deposits
  $5,198,554  $13,119    0.25%  $4,208,666  $27,122    0.64%  $4,052,614  $16,945    0.42% 
Short-term borrowings
   561,505   1,124    0.20   398,142   2,980    0.75   418,977   1,984    0.47 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
   
 
 
 
Total interest-bearing liabilities
   5,760,059  $14,243    0.25%   4,606,808  $30,102    0.65%   4,471,591  $18,929    0.42% 
Noninterest-bearing deposits
   2,782,896      2,137,089      2,124,004    
Other liabilities
   88,550      48,658      30,931    
  
 
 
     
 
 
     
 
 
    
Total liabilities
   8,631,505      6,792,555      6,626,526    
Shareholders’ equity
   1,562,010      1,146,567      980,206    
  
 
 
     
 
 
     
 
 
    
Total liabilities and shareholders’ equity
  $10,193,515     $7,939,122     $7,606,732    
  
 
 
     
 
 
     
 
 
    
Net interest income
   $361,145     $295,881     $281,753   
   
 
 
     
 
 
     
 
 
   
Rate Analysis:
             
Interest income/earning assets
      3.94%      4.38%      4.23% 
Interest expense/earning assets
      0.15      0.40      0.27 
     
 
 
     
 
 
     
 
 
 
Net interest margin
      3.79%      3.98%      3.96% 
     
 
 
     
 
 
     
 
 
 
(1)
Short-term investments are comprised of Fed Fundsfederal funds sold, interest bearinginterest-bearing deposits in banks and interestinterest- 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 35%21%.
(4)
Nonaccrual loans are included in loans.

Noninterest Income
. Noninterest income for 20172020 was $91.02$139.94 million, an increase of $5.89$31.51 million, or 6.91%29.06%, as compared to 2016.2019. Increases in certain categories of noninterest income included (1) trust fees (1) real estate mortgage operations income of $4.06$25.73 million, (2) gain on sale of
available-for-sale
securities of $2.90 million, (3) ATM, interchange and credit card fees of $1.78$2.61 million, (4) miscellaneous income of $2.12 million which includes $1.40 million in Main Street Lending Program fees and (3) service charges on deposit accounts(5) trust fees of $1.03$1.13 million when compared to 2016.2019. The mortgage related income increase was mainly due to a significant increase in the volume of loans originated to $1.21 billion in 2020 up from $551.77 million in 2019 driven by the lower rate environment and a strong housing market in Texas. The increase in ATM, interchange and credit card fees was driven by continued growth in the number of debit cards issued as well as our TB&T acquisition. The increase in trust fees resulted from an increase in assets under management over the prior year and higher oil and gas prices that increased related to trust fees by $364 thousand over 2016.year. The fair value of our trust assets managed, which are not reflected in our consolidated balance sheets, totaled $5.13$7.51 billion at December 31, 2017,2020, as compared to $4.37$6.75 billion at December 31, 2016. The2019. Offsetting these increases was a decline in ATM, interchange and credit cardservice charge revenue in 2020 when compared with 2019 of $1.47 million that was primarily driven by lower overdraft fees and service charges on deposit accounts are primarilyin the current year as a result of increases in the numbereffects of net new accountsthe pandemic and debit cards. Offsetting these increases were decreases in net recoveries of $984 thousand and real estate mortgage fees of $977 thousand.

related stimulus programs.

Noninterest income for 20162019 was $85.13$108.43 million, an increase of $11.70$6.66 million, or 15.93%6.55%, as compared to 2015.2018. Increases in certain categories of noninterest income included(1)included (1) real estate mortgage feesoperations income of $5.68$2.99 million, (2) ATM, interchange and credit card fees of $2.05$1.33 million, (3) interest on loan recoveries of $1.15 million, (4) service charges on deposit accounts of $1.22 million$376 thousand, and (4)(5) trust fees of $384$220 thousand when compared to 2015.2018. The increase in real estate mortgage fees primarily resulted fromwas a stronger mortgage marketresult of an increase in the volume of loans originated and the 4Trust asset purchase on June 1, 2015.Company’s decision to move to mandatory delivery from best efforts. The increasesincrease in ATM, interchange and credit
44
Table of Contents
card fees and service charges arewas primarily a result of increasesdue to the continued growth in the number of debit cards issued. Interest on loan recoveries increased as a result of several larger loan recoveries in 2019. The increase in service charges on deposit accounts was primarily due to the continued growth in net new accounts and debit cards boosted by the Conroe acquisition on July 31, 2015.accounts. The increase in trust fees resulted from an increase in assets under management over the prior year offsetting the effect of the declineyear; however, this was mostly offset by a decrease in income derived from oil and gas prices that reduced related trust fees by $296 thousand in 2016production activity when compared to 2015.2018. The fair value of our trust assets managed, which are not reflected in our consolidated balance sheets, totaled $4.37$6.75 billion at December 31, 20162019, as compared to $3.87$5.60 billion at December 31, 2015.

2018. Offsetting these increases was a decrease in net gains on sales of

available-for-sale
securities of $621 thousand.
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 inis limited to the sum of 21 cents per transaction and fiveplus 5 basis points multiplied by the value of the transaction. While we currently have assets under $10 billion, we are monitoringManagement has estimated the effectimpact of this reduction in per transaction fee income as we approachATM and interchange fees to approximate $14.00 million annually
(pre-tax)
once the Federal Reserve rules apply to the Company. Federal Reserve requirements stipulate that these rules would go into effect on July 1st following the
year-end
in which a financial institution’s total assets exceeded $10 billion at December 31st. At December 31, 2020, the Company’s total assets exceeded the $10 billion asset level.

threshold, due primarily to the effect of the Company’s participation in the PPP loan program and growth in deposits from related activities. However, on November 20, 2020, the federal bank regulatory agencies announced an interim final rule that provides temporary relief for certain community banking organizations that have crossed this threshold as of December 31, 2020 if they had less than $10 billion in assets as of December 31, 2019. Under the interim final rule, these banks, which includes us, will generally have until 2022 to either reduce their size, or to prepare for the regulatory and reporting standards under the Dodd-Frank Act. Management will continue to monitor the Company’s balance sheet levels and prepare for the effects of this future loss of debit card income.

Table 3 — Noninterest Income (in thousands):

   2017  Increase
(Decrease)		  2016   Increase
(Decrease)		  2015 

Trust fees

  $23,694  $4,058  $19,636   $384  $19,252 

Service charges on deposit accounts

   19,416   1,030   18,386    1,215   17,171 

ATM, interchange and credit card fees

   25,686   1,776   23,910    2,050   21,860 

Real estate mortgage operations

   15,109   (977)   16,086    5,677   10,409 

Net gain on sale ofavailable-for-sale securities

   1,828   558   1,270    838   432 

Net gain (loss) on sale of foreclosed assets

   (50)   (506)   456    (82)   538 

Net gain (loss) on sale of assets

   (396)   (564)   168    988   (820) 

Interest on loan recoveries

   1,128   (984)   2,112    1,062   1,050 

Other:

       

Check printing fees

   173   (17)   190    (40)   230 

Safe deposit rental fees

   529   (2)   531    7   524 

Credit life and debt protection fees

   617   (2)   619    (44)   663 

Brokerage commissions

   1,290   717   573    (190)   763 

Miscellaneous income

   1,993   798   1,195    (165)   1,360 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total other

   4,602   1,494   3,108    (432)   3,540 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total Noninterest Income

  $91,017  $5,885  $85,132   $11,700  $73,432 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

   
2020
   
Increase
(Decrease)
  
2019
   
Increase
(Decrease)
  
2018
 
Trust fees
  $29,531   $1,130  $28,401   $220  $28,181 
Service charges on deposit accounts
   20,572    (1,467)   22,039    376   21,663 
ATM, interchange and credit card fees
   32,469    2,606   29,863    1,331   28,532 
Gain on sale and fees of mortgage loans
   43,872    25,728   18,144    2,987   15,157 
Net gain on sale of
available-for-sale
securities
   3,633    2,900   733    (621)   1,354 
Net gain (loss) on sale of foreclosed assets
   159    (115)   274    158   116 
Net gain (loss) on sale of assets
   112    (207)   319    466   (147) 
Interest on loan recoveries
   856    (1,236)   2,092    1,154   938 
Other:
        
Wire transfer fees
   1,153    141   1,012    110   902 
Check printing fees
   293    82   211    (5)   216 
Safe deposit rental fees
   732    197   535    (9)   544 
Credit life and debt protection fees
   876    (102)   978    237   741 
Brokerage commissions
   1,310    (271)   1,581    (126)   1,707 
Miscellaneous income
   4,367    2,121   2,246    386   1,860 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
Total other
   8,731    2,168   6,563    593   5,970 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
Total Noninterest Income
  $139,935   $31,507  $108,428   $ 6,664  $101,764 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
Noninterest Expense
. Total noninterest expense for 20172020 was $173.99$227.94 million, an increase of $8.16$31.42 million, or 4.92%15.99%, as compared to 2016.2019. Noninterest expense for 20162019 amounted to $165.83$196.52 million, an increase of $16.37$5.84 million, or 10.95%3.06%, as compared to 2015.2018. An important measure in determining whether a financial institution effectively manages noninterest expenses 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 20172020 was 49.26%45.49%, as compared to 49.22%48.61% for 20162019 and 47.61%49.72% for 2015.

2018. The reduction in the Company’s efficiency ratio during 2020 primarily resulted from the growth in the Company’s balance sheet and interest-earning assets as a result of the Company’s participation in the PPP loan program and the deferral of $3.62 million in noninterest expenses related to PPP loan origination costs during the second quarter of 2020.

45
Table of Contents
Salaries and employee benefits for 20172020 totaled $95.29$135.12 million, an increase of $4.55$22.79 million, or 5.01%20.28%, as compared to 2016.2019. The increase was primarily driven by (i) the TB&T acquisition, (ii) annual merit-based pay increases that were effective March 1, 2020, (iii) an increase in our profit sharing and other incentive expenses, and (iv) higher mortgage related commissions. Also, in 2019 the Company incurred $2.67 million in expenses related to the termination of its pension plan when compared to $1.55 million in 2018.
All other categories of noninterest expense for 2020 totaled $92.82 million, an increase of $8.63 million, or 10.25%, as compared to 2019. Included in noninterest expense in 2020 were technology contract termination and conversion related expenses totaling $4.88 million related to the TB&T acquisition. Also included in noninterest expense during 2020 were increases in net occupancy expenses, professional and service fees and ATM, interchange and credit card expenses when compared to 2019 primarily due to the TB&T acquisition.
Salaries and employee benefits for 2019 totaled $112.34 million, an increase of $7.15 million, or 6.79%, as compared to 2018. The increase was primarily driven by (i) annual meritmerit-based pay increases that were effective March 1, 20172019, (ii) an increase in our profit sharing expenses, and (iii) an increase in stock optionour pension plan expenses, and stock grant expense of due to the stock option grant(iv) an increase in June 2017 and restricted stock grant in October 2017.

medical insurance costs.

All other categories of noninterest expense for 20172019 totaled $78.70$84.19 million, an increasea decrease of $3.61$1.31 million, or 4.80%1.53%, as compared to 2016. The increase2018. Included in noninterest expense in 2019 was largely attributable to increases$2.67 million, before income tax, in software amortization andpension settlement expense of $1.29 millionresulting from thewrite-off Company’s settlement and termination of internally developed software, operationalthe remaining portion of its defined benefit pension plan obligation. During 2018, the Company recorded $1.55 million, before income tax, in pension settlement expense for a partial settlement of this defined benefit pension obligation. Also included in noninterest expense during 2019 was an increase of $574 thousand in ATM, interchange and other losses of $1.02 million duecredit card expenses when compared to fraud and weather related losses and professional and service fees of $1.19 million.2018. Offsetting these increases in 2017 werenoninterest expense for 2019 when compared to 2018 was a decrease of $463 thousand in FDIC insurance premiums of $1.24 million due to the lower rate charged by the FDIC beginning in the third quarterassessment credit previously discussed.
46
Table of 2016.

Salaries and employee benefits for 2016 totaled $90.74 million, an increase of $9.74 million, or 12.02%, as compared to 2015. The increase was primarily driven by the addition of employees from the Conroe acquisition and the 4Trust asset purchase, annual merit pay increases and increases in healthcare claims. Offsetting these increases was a reduction in profit sharing and officer bonus expenses in 2016 when compared to 2015, which was caused by less net income growth in 2016 when compared to the prior year.

Contents

All other categories of noninterest expense for 2016 totaled $75.09 million, an increase of $6.63 million, or 9.68%, as compared to 2015. The increase in noninterest expense was largely attributable to increases in equipment expense of $1.26 million, largely resulting from the Company’s acquisition of Conroe. Telephone expenses increased $1.05 million due to costs to improve our technology infrastructure and professional and service fees increased $2.05 million due primarily to outsourcing expenses for certain technology providers, which offset salary costs. Offsetting these increases in 2016 were a decrease of $473 thousand in FDIC insurance due to the lower rate charged by the FDIC beginning in the third quarter of 2016.

Table 4 — Noninterest Expense (in thousands):

   2017   Increase
(Decrease)		  2016   Increase
(Decrease)		  2015 

Salaries

  $72,132   $2,135  $69,997   $7,294  $62,703 

Medical

   8,585    (174)   8,759    3,066   5,693 

Profit sharing

   4,735    1,514   3,221    (2,234)   5,455 

Pension

   127    (232)   359    342   17 

401(k) match expense

   2,392    61   2,331    288   2,043 

Payroll taxes

   5,009    200   4,809    427   4,382 

Stock option expense

   1,745    863   882    238   644 

Restricted stock expense

   562    181   381    319   62 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total salaries and employee benefits

   95,287    4,548   90,739    9,740   80,999 

Loss from partial settlement of pension plan

   —      (267)   267    267   —   

Net occupancy expense

   10,521    101   10,420    106   10,314 

Equipment expense

   13,765    286   13,479    1,257   12,222 

FDIC insurance premiums

   2,217    (463)   2,680    (473)   3,153 

ATM, interchange and credit card expenses

   7,452    221   7,231    847   6,384 

Professional and service fees

   8,063    1,186   6,877    2,046   4,831 

Printing, stationery and supplies

   1,989    (104)   2,093    (185)   2,278 

Amortization of intangible assets

   613    (125)   738    177   561 

Other:

        

Data processing fees

   1,119    656   463    63   400 

Postage

   1,663    (1)   1,664    (41)   1,705 

Advertising

   3,515    (21)   3,536    353   3,183 

Correspondent bank service charges

   868    (96)   964    39   925 

Telephone

   3,108    (145)   3,253    1,053   2,200 

Public relations and business development

   2,819    71   2,748    48   2,700 

Directors’ fees

   1,553    233   1,320    218   1,102 

Audit and accounting fees

   1,629    (83)   1,712    55   1,657 

Legal fees

   1,780    (316)   2,096    95   2,001 

Regulatory exam fees

   1,177    46   1,131    43   1,088 

Travel

   1,210    (32)   1,242    28   1,214 

Courier expense

   879    31   848    39   809 

Operational and other losses

   3,192    1,022   2,170    281   1,889 

Other real estate

   188    6   182    58   124 

Software amortization and expense

   3,294    1,288   2,006    (116)   2,122 

Other miscellaneous expense

   6,085    114   5,971    368   5,603 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total other

   34,079    2,773   31,306    2,584   28,722 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total Noninterest Expense

  $173,986   $8,156  $165,830   $16,366  $149,464 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

   
2020
   
Increase
(Decrease)
  
2019
   
Increase
(Decrease)
  
2018
 
Salaries
  $ 101,360   $ 17,079  $84,281   $4,807  $79,474 
Medical
   10,406    1,281   9,125    426   8,699 
Profit sharing
   10,740    3,079   7,661    612   7,049 
Pension
   —      (351)   351    529   (178) 
401(k) match expense
   3,374    615   2,759    171   2,588 
Payroll taxes
   6,565    890   5,675    306   5,369 
Stock option expense
   1,377    (112)   1,489    (19)   1,508 
Restricted stock expense
   1,301    306   995    315   680 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
Total salaries and employee benefits
   135,123    22,787   112,336    7,147   105,189 
Cost related to termination of pension plan
   —      (2,673)   2,673    1,127   1,546 
Net occupancy expense
   12,388    1,232   11,156    (17)   11,173 
Equipment expense
   8,396    (656)   9,052    (1,066)   10,118 
FDIC insurance premiums
   1,758    667   1,091    (1,242)   2,333 
ATM, interchange and credit card expenses
   11,235    1,379   9,856    574   9,282 
Professional and service fees
   9,346    1,493   7,853    (1,041)   8,894 
Printing, stationery and supplies
   2,163    351   1,812    (185)   1,997 
Amortization of intangible assets
   1,990    974   1,016    (256)   1,272 
Other:
        
Data processing fees
   1,619    69   1,550    88   1,462 
Postage
   1,446    (101)   1,547    (202)   1,749 
Advertising
   1,952    (1,655)   3,607    4   3,603 
Correspondent bank service charges
   908    201   707    (65)   772 
Telephone
   3,819    141   3,678    116   3,562 
Public relations and business development
   2,650    (556)   3,206    145   3,061 
Directors’ fees
   2,363    391   1,972    227   1,745 
Audit and accounting fees
   2,232    772   1,460    (165)   1,625 
Legal fees
   1,276    62   1,214    66   1,148 
Regulatory exam fees
   1,105    (74)   1,179    (96)   1,275 
Travel
   967    (674)   1,641    176   1,465 
Courier expense
   855    (3)   858    28   830 
Operational and other losses
   2,462    583   1,879    (309)   2,188 
Other real estate
   83    (119)   202    73   129 
Software amortization and expense
   8,862    1,557   7,305    1,285   6,020 
Other miscellaneous expense
   12,940    5,269   7,671    (575)   8,246 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
Total other
   45,539    5,863   39,676    796   38,880 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
Total Noninterest Expense
  $227,938   $31,417  $ 196,521   $5,837  $ 190,684 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
Income Taxes
. Income tax expense was $26.82$40.33 million for 2017,2020, as compared to $31.15$33.22 million for 20162019 and $31.44$27.54 million for 2015.2018. Our effective tax rates on pretax income were 18.22%16.64%, 22.92%16.78% and 23.85%15.46%, respectively, for the years 2017, 20162020, 2019 and 2015.2018. The effective tax rates differ from the statutory federal tax rate of 35.0%21.0% largely due to tax exempt interest income earned on certain investment securities and loans and the deductibility of dividends paid to our employee stock ownership plan and income tax deductions from the partial donation of two of our branch buildings to municipalities.

plan.

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law with sweeping modifications to the Internal Revenue Code. The primary change for the Company was to lower the corporate income tax rate to 21% from 35%. The Company’s deferred tax assets and liabilities were
re-measured
based on the income tax rates at which they are expected to reverse in the future, which is generally 21%. However, the Company continues to analyze certain aspects of the Act resulting in refinement of the calculation which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the
re-measurement
of the Company’s deferred tax balance was $7.65 million, a reduction of income tax expense for the year ended December 31, 2017.

However, the Company updated its estimate of the impact to our deferred tax balances based on the proposed regulations issued to date and recorded an additional reduction of income tax expense for the year ended December 31, 2018 of $664 thousand. No additional adjustment amounts were recorded for the years ended December 31, 2019 and 2020.

47

Table of Contents
Balance Sheet Review

Loans
. Our portfolio is comprised of loans made to businesses, professionals, individuals, and farm and ranch operations located in the primary trade areas served by our subsidiary bank. Real estate loans represent loans primarily for1-4 family residences and commercial real estate, which are primarily owner-occupied. The structure of loans in the real estate mortgage area generally providesre-pricing intervals to minimize the interest rate risk inherent in long-term fixed rate loans. As of December 31, 2017,2020, total loans held for investment
held-for-investment
were $3.49$5.17 billion, an increase of $128.26$976.06 million, as compared to December 31, 2016. 2019. The increase in the Company’s total loans
held-for-investment
in 2020 was primarily driven by the TB&T acquisition and the Company’s participation in the PPP loan program. On January 1, 2020, TB&T had $447.70 million in loan balances. During 2020, the Company originated $703.73 million in PPP loans of which $220.34 were forgiven during the year resulting in a balance of $479.43 million at December 31, 2020, which are included in the Company’s commercial loan totals. The average balance of PPP loans was $479.43 million for the year ended December 31, 2020. At December 31, 2020, $11.27 million of deferred loan fees related to PPP loans continues to be amortized over the shorter of the repayment period or the contractual life of 24 months.
As compared to
year-end 2016,
2019 balances, total real estate loans increased $113.15$495.89 million, total commercial loans increased $9.69$456.38 million, agricultural loans increased $10.52decreased $8.78 million and total consumer loans decreased $5.10increased $32.57 million. Loans averaged $3.44$5.15 billion during 2017,2020, an increase of $102.21 million$1.08 billion over the 20162019 average balances.

In conjunction with the adoption of ASC 326, the Company expanded its four loan portfolio segments used under the legacy disclosure requirements into the following ten portfolio segments. For modeling purposes, our loan portfolio segments include Commercial and Industrial (“C&I”), Municipal, Agricultural, Construction and Development, Farm,
Non-Owner
Occupied and Owner Occupied Commercial Real Estate (“CRE”), Residential, Consumer Auto and Consumer
Non-Auto.
This additional segmentation allows for a more precise pooling of loans with similar credit risk characteristics and credit monitor procedures for the Company’s calculation of its allowance for credit losses.
Table 5 outlines the composition of the Company’s
held-for-investment
loans. by portfolio segment. at December 31, 2020. For all periods prior to December 31, 2020, management has elected to maintain its previously disclosed loan portfolio segments.
Table 5 — Composition of Loans (in
Held-For-Investment
(in thousands):

   December 31, 
   2017   2016   2015   2014   2013 

Commercial

  $684,099   $674,410   $696,163   $639,954   $596,730 

Agricultural

   94,543    84,021    102,351    105,694    75,928 

Real estate

   2,302,998    2,189,844    2,136,233    1,822,854    1,678,514 

Consumer

   403,929    409,032    382,303    360,686    333,113 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loansheld-for-investment

  $3,485,569   $3,357,307   $3,317,050   $2,929,188   $2,684,285 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As

   December 31, 
   2020   2019   2018   2017   2016 
Commercial:
          
C&I
  $ 1,131,382   $N/A   $N/A   $N/A   $N/A 
Municipal
   181,325    N/A    N/A    N/A    N/A 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Commercial
   1,312,707    856,326    844,953    684,099    674,410 
Agricultural
   94,864    103,640    96,677    94,543    84,021 
Real Estate:
          
Construction & Development
   553,959    N/A    N/A    N/A    N/A 
Farm
   152,237    N/A    N/A    N/A    N/A 
Non-Owner
Occupied CRE
   617,686    N/A    N/A    N/A    N/A 
Owner Occupied CRE
   746,974    N/A    N/A    N/A    N/A 
Residential
   1,248,409    N/A    N/A    N/A    N/A 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Real Estate
   3,319,265    2,823,372    2,639,346    2,302,998    2,189,844 
Consumer:
          
Auto
   353,595    N/A    N/A    N/A    N/A 
Non-Auto
   90,602    N/A    N/A    N/A    N/A 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Consumer
   444,197    411,631    372,660    403,929    409,032 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $5,171,033   $4,194,969   $3,953,636   $3,485,569   $ 3,357,307 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
48
Table of December 31, 2017, our real estate loans represent approximately 66.07% of our loan portfolio and are comprised of (i) commercial real estate loans of 24.84%, generally owner occupied, (ii)1-4 family residence loans of 45.80%, (iii) residential development and construction loans of 8.28%, which includes our custom and speculation home construction loans, (iv) commercial development and construction loans of 6.21% and (v) other loans, which includes ranches, hospitals and universities of 14.87%.

Contents

Loansheld-for-sale, consisting of secondary market mortgage loans, totaled $15.13$83.97 million and $26.90$28.23 million at December 31, 20172020 and 2016, respectively, which2019, respectively. At December 31, 2020 and 2019, $4.38 million and $5.15 million are valued usingat the lower of cost or market method.

fair value, and the remaining amount is valued under the fair value option.

The Company has certain lending policies and procedures in place that are designed to maximize loan incomegrowth with an acceptable level of risk. Management reviews and approves these policies and procedures on an annual basis and makes changes as appropriate.appropriate with input from our Board of Directors. Management receives and reviews monthly reports related to loan originations, quality, concentrations, delinquencies, nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geographic location.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and include personal guarantees.

Agricultural loans are subject to underwriting standards and processes similar to commercial loans. These agricultural loans are based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most agricultural loans are secured by the agriculture related assets being financed, such as farm land, cattle or equipment, and include personal guarantees.

Real estate loans are also subject to underwriting standards and processes similar to commercial and agricultural loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing

the Company’s real estate portfolio are generally diverse in terms of type and geographic location within Texas. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry. Generally, real estate loans are owner-occupied which further reduces the Company’s risk.

Consumer loan underwriting utilizes methodical credit standards and analysis to supplement the Company’s underwriting policies and procedures. The Company’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimize the Company’s risk.

Table 6 — Maturity Distribution and Interest Sensitivity of Loans at December 31, 20172020 (in thousands):

The following tables summarize maturity and repricing information for the commercial and agricultural and the real estate-construction and development portion of our loan portfolio as of December 31, 2017:

   One Year
or less		   After One
Year
Through
Five Years		   After Five
Years		   Total 

Commercial and agricultural

  $348,129   $222,342   $208,171   $778,642 

Real estate — construction

   133,621    64,896    210,911    409,428 

   Maturities
After One
Year		 

Loans with fixed interest rates

  $414,091 

Loans with floating or adjustable interest rates

   292,229 

2020:

   One Year
or less		   After One
Year
Through
Five Years		   After Five
Years		   Total 
Commercial and agricultural
  $362,416   $803,779   $241,376   $1,407,571 
Real estate – construction and development
   255,960    91,816    206,183    553,959 
   Maturities
After One
Year		 
Loans with fixed interest rates
  $892,141 
Loans with floating or adjustable interest rates
   451,013 
49
Table of Contents
Asset Quality
. Our loan portfolio is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by bank regulatory agencies. Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were $20.12$42.90 million at December 31, 2017,2020, as compared to $29.00$25.77 million at December 31, 20162019 and $29.77$29.63 million at December 31, 2015.2018. As a percent of loans
held-for-investment
and foreclosed assets, these assets were 0.57%0.83% at December 31, 2017,2020, as compared to 0.86%0.61% at December 31, 20162019 and 0.89%0.75% at December 31, 2015.2018. As a percent of total assets, these assets were 0.28%0.39% at December 31, 2017,2020, as compared to 0.43%0.31% at December 31, 20162019 and 0.45%0.38% at December 31, 2015.2018. 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 December 31, 2017.

2020.

Supplemental Oil and Gas Information.
At December 31, 2017,2020, the Company’s exposure to the oil and gas industry was 1.72%2.27% of grossloans
held-for-investment,
excluding PPP loans, or $60.16$106.24 million, down 23.34% fromcompared to 2.86% of loans
held-for-investment,
or $119.79 million at December 31, 2016year-end levels,2019. These oil and gas loans consisted (based on collateral supporting the loan) of (i) development and production loans of 2.72%11.99%, (ii) oil and gas field servicing loans of 7.51%6.62%, (iii) real estate loans of 47.28%57.40%, (iv) accounts receivable and inventory of 24.47%4.04%, (v) automobile of 12.09% and (v)(vi) other of 18.02%7.86%. These loans have experienced increased stress due to lowerwarranted additional scrutiny because of fluctuating oil and gas prices although such prices improved in 2017.and the COVID pandemic. The Company instituted additional monitoring procedures for these loans and has classified and downgraded andcharged-off loans as appropriate. The following oil and gas information is as of and for the years ended December 31, 20172020 and 2016:

   December 31, 
   2017  2016 

Oil and gas related loans

  $60,164  $78,483 

Oil and gas related loans as a % of total loans

   1.72%   2.32% 

Classified oil and gas related loans

  $20,346  $32,518 

Nonaccrual oil and gas related loans

   1,414   4,092 

Net charge-offs for oil and gas related loans

   50   1,145 

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

   7.90%   6.28% 

2019:

   
December 31,
 
   
2020
  
2019
 
Oil and gas related loans, excluding PPP loans
  $ 106,237  $ 119,789 
Oil and gas related loans as a % of total loans
held-for-investment,
excluding PPP loans
   2.27%   2.86% 
Classified oil and gas related loans
  $13,298  $7,041 
Nonaccrual oil and gas related loans
  $4,774  $481 
Net charge-offs for oil and gas related loans for year then ended
  $825  $—   
Supplemental COVID Industry Exposure.
In addition, at December 31, 2020, loan balances in the retail/restaurant/hospitality industries totaled $359.33 million or 7.67% of the Company’s total loans
held-for-investment,
excluding PPP loans. Classified and nonperforming loans for these industries combined at December 31, 2020, totaled $31.19 million and $5.98 million, respectively. Net charge-offs related to this portfolio totaled $895 thousand for the year ended December 31, 2020. Additional information related to the Company’s retail/restaurant/hospitality industries follows below (in thousands, except percentages):
   
December 31,

2020
 
Retail loans
  $216,244 
Restaurant loans
   48,618 
Hotel loans
   71,716 
Other hospitality loans
   21,970 
Travel loans
   780 
  
 
 
 
Total Retail/Restaurant/Hospitality loans, excluding PPP loans
  $ 359,328 
  
 
 
 
Retail/Restaurant/Hospitality loans as a % of total loans
held-for-investment,
excluding PPP loans
   7.67% 
Classified Retail/Restaurant/Hospitality loans
  $31,192 
Nonaccrual Retail/Restaurant/Hospitality loans
   5,975 
Net Charge-Offs for Retail/Restaurant/Hospitality loans
   895 
50
Table of Contents
Table 7 — Nonaccrual, Past Due 90 Days or More and Still Accruing, Restructured Loans and Foreclosed Assets (in thousands, except percentages):

   At December 31, 
   2017  2016  2015  2014  2013 

Nonaccrual loans*

  $17,670  $27,371  $28,601  $20,194  $27,926 

Loans still accruing and past due 90 days or more

   288   284   341   261   133 

Troubled debt restructured loans**

   627   701   199   226   —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Nonperforming loans

   18,585   28,356   29,141   20,681   28,059 

Foreclosed assets

   1,532   644   627   1,035   3,069 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total nonperforming assets

  $20,117  $29,000  $29,768  $21,716  $31,128 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

As a % of loans and foreclosed assets

   0.57%   0.86%   0.89%   0.74%   1.16% 

As a % of total assets

   0.28   0.43   0.45   0.37   0.60 

   
At December 31,
 
   
2020
  
2019
  
2018
  
2017
  
2016
 
Nonaccrual loans
  $ 42,619  $ 24,582  $ 27,534  $ 17,670  $ 27,371 
Loans still accruing and past due 90 days or more
   113   153   1,008   288   284 
Troubled debt restructured loans*
   24   26   513   627   701 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Nonperforming loans
   42,756   24,761   29,055   18,585   28,356 
Foreclosed assets
   142   1,009   577   1,532   644 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total nonperforming assets
  $42,898  $25,770  $29,632  $20,117  $29,000 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
As a % of loans
held-for-investment
and foreclosed assets
   0.83%   0.61%   0.75%   0.58%   0.86% 
As a % of total assets
   0.39   0.31   0.38   0.28   0.43 
*Includes $618 thousand, $1.26 million, $2.18 million, $2.15 million and $2.71 million, respectively, of purchased credit impaired loans as of December 31, 2017, 2016, 2015, 2014 and 2013.

**
Troubled debt restructured loans of $7.41 million, $4.79 million, $3.84 million, $4.63 million $6.86 million, $6.11 million, $9.07 million and $13.30$6.86 million, respectively, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included innon-accrual nonaccrual loans as of December 31, 2020, 2019, 2018, 2017 2016, 2015, 2014 and 2013.2016.

We record interest payments received onnon-accrual nonaccrual loans as reductions of principal. Prior to the loans being placed onnon-accrual, nonaccrual, we recognized interest income on impairedthese loans as of December 31, 20172020 of approximately $263$255 thousand during the year ended December 31, 2017.2020. If interest on these impaired loans had been recognized on a full accrual basis during the year ended December 31, 2017,2020, such income would have approximated $2.15$4.46 million.

See Note 3 to the Consolidated Financial Statements beginning on pageF-16 for more information on these assets.

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 our accounting policies in Note 1 to the Consolidated Financial Statements beginning on pageF-7. The provision for loan losses was $6.53 million in 2017, as compared to $10.21 million in 2016 and $9.69 million in 2015. The continued provision for loan losses in 2017 reflects the continued growth in the loan portfolio, the continued levels of gross charge-offs and the effects related to Hurricane Harvey on the loan portfolio. As a percent of average loans, net loan charge-offs were 0.12% during 2017, 0.19% during 2016 and 0.15% during 2015. The allowance for loan losses as a percent of loans was 1.38% as of December 31, 2017, as compared to 1.35% as of December 31, 2016, and 1.25% as of December 31, 2015. Included in Tables 8 and 9 are further analysis of our allowance for loan losses.

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 downturn in the economy or lower employment could result in increased levels of nonaccrual, past due 90 days or more and still accruing, restructured loans, foreclosed assets, charge-offs, increased loan loss provisions and reductions in income. Additionally, as an integral part of their examination process, bank regulatory agencies periodically review the adequacy of our allowance for loan losses. The banking agencies could require additions to the loan loss allowance based on their judgment of information available to them at the time of their examinations of our bank subsidiary.

Table 8 — Loan Loss Experience and Allowance for Loan Losses (in thousands, except percentages):

   2017  2016  2015  2014  2013 

Balance at January 1,

  $45,779  $41,877  $36,824  $33,900  $34,839 

Charge-offs:

      

Commercial

   3,018   6,990   3,734   583   1,283 

Agricultural

   71   219   164   2   100 

Real estate

   1,215   682   441   1,075   1,970 

Consumer

   1,517   1,925   1,700   1,222   1,268 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total charge-offs

   5,821   9,816   6,039   2,882   4,621 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Recoveries:

      

Commercial

   942   952   344   346   402 

Agricultural

   33   25   55   18   39 

Real estate

   192   2,021   558   505   239 

Consumer

   501   508   450   472   337 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recoveries

   1,668   3,506   1,407   1,341   1,017 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net charge-offs

   4,153   6,310   4,632   1,541   3,604 

Transfer ofoff-balance sheet exposure to other liabilities

   —     —     —     —     (1,088) 

Provision for loan losses

   6,530   10,212   9,685   4,465   3,753 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31,

  $48,156  $45,779  $41,877  $36,824  $33,900 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans atyear-end

  $3,500,699  $3,384,205  $3,350,593  $2,937,991  $2,689,448 

Average loans

   3,435,447   3,333,241   3,090,538   2,786,011   2,431,872 

Net charge-offs/average loans

   0.12%   0.19%   0.15%   0.06%   0.15% 

Allowance for loanlosses/year-end loans*

   1.38   1.35   1.25   1.25   1.26

Allowance for loan losses/nonaccrual, past due 90 days still accruing and restructured loans

   259.11   161.44   143.70   178.06   120.82 

*Reflects the impact of loans acquired in the Orange acquisition in 2013 and the Conroe acquisition in 2015, which were initially recorded at fair value with no allocated allowance for loan losses.

Table 9 — Allocation of Allowance for Loan Losses (in thousands):

   2017   2016   2015   2014   2013 
   Allocation
Amount		   Allocation
Amount		   Allocation
Amount		   Allocation
Amount		   Allocation
Amount		 

Commercial

  $10,865   $11,707   $12,644   $7,990   $6,440 

Agricultural

   1,305    1,101    1,191    527    383 

Real estate

   29,896    26,864    24,375    26,657    24,940 

Consumer

   6,090    6,107    3,667    1,650    2,137 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $48,156   $45,779   $41,877   $36,824   $33,900 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percent of Loans in Each Category of Total Loans:

       2017          2016          2015          2014          2013     

Commercial

   19.63%   20.09%   20.99%   21.84%   22.23% 

Agricultural

   2.71   2.50   3.09   3.61   2.83 

Real estate

   66.07   65.23   64.40   62.23   62.53 

Consumer

   11.59   12.18   11.52   12.32   12.41 

Included in our loan portfolio are certain other loans not included in Table 7 that are deemed to be potential problem loans. Potential problem loans are those loans that are currently performing, but for which known information about trends, uncertainties or possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present repayment terms, possibly resulting in the transfer of such loans to nonperforming status. These potential problem loans totaled $4.37$10.76 million as of December 31, 2017.

2020.

See Note 3 to the Consolidated Financial Statements beginning on page
F-19
for more information on these assets.
Allowance for Credit Losses
. The allowance for credit losses is the amount we determine as of a specific date to be appropriate to absorb current expected credit losses on existing loans in which full collectability is unlikely based on our review and evaluation of the loan portfolio. For a discussion of our methodology, see our accounting policies in Note 1 to the Consolidated Financial Statements beginning on page
F-9.
The provision for credit losses was $19.52 million in 2020, as compared to $2.97 million in 2019 and $5.67 million in 2018. The provision for credit losses in 2020 reflects primarily the stress on our loan portfolio from the increase in unemployment and economic effects of the COVID pandemic. As a percent of average loans, net loan charge-offs were 0.06% during 2020, 0.04% during 2019 and 0.07% during 2018. The allowance for credit losses as a percent of loans
held-for-investment
was 1.29% as of December 31, 2020, as compared to 1.25% as of December 31, 2019 and 1.30% as of December 31, 2018. The allowance for credit losses as a percent of loans
held-for-investment,
excluding PPP loans, was 1.42% as of December 31, 2020, as compared to 1.25% as of December 31, 2019 and 1.30% as of December 31, 2018. Included in Tables 8 and 9 are further analysis of our allowance for credit losses.
Although we believe we use the best information available to make credit 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 downturn in the economy or lower employment could result in increased levels of nonaccrual, past due 90 days or more and still accruing, restructured loans, foreclosed assets, charge-offs, increased provision for credit losses and reductions in income. Additionally, as an integral part of their examination process, bank regulatory agencies periodically review the adequacy of our allowance for credit losses. The banking agencies could require additions to our allowance for credit losses based on their judgment of information available to them at the time of their examinations of our bank subsidiary.
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Table of Contents
Table 8 — Loan Loss Experience and Allowance for Credit Losses (in thousands, except percentages):
   
2020
  
2019
   
2018
   
2017
   
2016
 
Balance at January 1,
  $ 52,499  $ 51,202   $ 48,156   $ 45,779   $ 41,877 
Impact of adopting ASC 326
   (619)   —      —      —      —   
Initial allowance on acquired TB&T PCD loans
   1,678   —      —      —      —   
Charge-offs:
         
Commercial:
         
C&I
   2,516   N/A    N/A    N/A    N/A 
Municipal
   —     N/A    N/A    N/A    N/A 
  
 
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total Commercial
   2,516   1,545    1,418    3,018    6,990 
Agricultural
   372   319    —      71    219 
Real estate:
         
Construction & Development
   —     N/A    N/A    N/A    N/A 
Farm
   —     N/A    N/A    N/A    N/A 
Non-Owner
Occupied CRE
   563   N/A    N/A    N/A    N/A 
Owner Occupied CRE
   567   N/A    N/A    N/A    N/A 
Residential real estate
   373   N/A    N/A    N/A    N/A 
  
 
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total real estate
   1,503   1,335    1,479    1,215    682 
Consumer:
         
Auto
   548   N/A    N/A    N/A    N/A 
Non-Auto
   375   N/A    N/A    N/A    N/A 
  
 
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total Consumer
   923   927    1,550    1,517    1,925 
Total charge-offs
   5,314   4,126    4,447    5,821    9,816 
  
 
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Recoveries:
         
Commercial:
         
C&I
   1,315   N/A    N/A    N/A    N/A 
Municipal
   —     N/A    N/A    N/A    N/A 
  
 
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total Commercial
   1,315   1,364    839    942    952 
Agricultural
   31   158    15    33    25 
Real estate:
         
Construction & Development
   —     N/A    N/A    N/A    N/A 
Farm
   157   N/A    N/A    N/A    N/A 
Non-Owner
Occupied CRE
   131   N/A    N/A    N/A    N/A 
Owner Occupied CRE
   17   N/A    N/A    N/A    N/A 
Residential real estate
   151   N/A    N/A    N/A    N/A 
  
 
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total Real Estate
   456   404    462    192    2,021 
Consumer:
         
Auto
   269   N/A    N/A    N/A    N/A 
Non-Auto
   171   N/A    N/A    N/A    N/A 
  
 
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total Consumer
   440   532    512    501    508 
Total recoveries
   2,242   2,458    1,828    1,668    3,506 
  
 
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net charge-offs
   3,072   1,668    2,619    4,153    6,310 
  
 
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Provision for credit losses (excluding provision for unfunded commitment)
   16,048   2,965    5,665    6,530    10,212 
  
 
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Balance at December 31,
  $66,534  $52,499   $51,202   $48,156   $45,779 
  
 
 
  
 
 
   
 
 
   
 
 
   
 
 
 
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Table of Contents
   
2020
  
2019
  
2018
  
2017
  
2016
 
Loans,
held-for-investment
at
year-end
  $5,171,033  $4,194,969  $3,953,636  $3,485,569  $3,357,307 
Average loans
   5,152,531   4,074,667   3,828,040   3,435,447   3,333,241 
Net charge-offs/average loans
   0.06%   0.04%   0.07%   0.12%   0.19% 
Allowance for credit
losses/year-end
loans
held-for-
investment
   1.29%   1.25%   1.30%   1.38%   1.36% 
Allowance for credit losses/nonaccrual, past due 90 days still accruing and restructured loans
   155.61   212.02   176.22   259.11   161.44 
Table 9 — Allocation of Allowance for Credit Losses (in thousands):
   
At December 31,
 
   
2020
   
2019
   
2018
   
2017
   
2016
 
   
Allocation
Amount
   
Allocation
Amount
   
Allocation
Amount
   
Allocation
Amount
   
Allocation
Amount
 
Commercial:
          
C&I
  $ 13,609   $N/A   $N/A   $N/A   $N/A 
Municipal
   1,552    N/A    N/A    N/A    N/A 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Commercial
   15,161    12,122    11,948    10,865    11,707 
Agricultural
   1,255    1,206    1,446    1,305    1,101 
Real estate:
          
Construction & Development
   13,512    N/A    N/A    N/A    N/A 
Farm
   1,876    N/A    N/A    N/A    N/A 
Non-Owner
Occupied CRE
   8,391    N/A    N/A    N/A    N/A 
Owner Occupied CRE
   12,347    N/A    N/A    N/A    N/A 
Residential real estate
   12,601    N/A    N/A    N/A    N/A 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Real Estate
   48,727    33,974    32,342    29,896    26,864 
Consumer:
          
Auto
   1,020    N/A    N/A    N/A    N/A 
Non-Auto
   371    N/A    N/A    N/A    N/A 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Consumer
   1,391    5,197    5,466    6,090    6,107 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $66,534   $ 52,499   $ 51,202   $ 48,156   $ 45,779 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
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Table of Contents
Percent of Loans in Each Category of Total Loans:
   
2020
  
2019
  
2018
  
2017
  
2016
 
Commercial:
      
C&I
   21.78%   N/A   N/A   N/A   N/A 
Municipal
   3.51%   N/A   N/A   N/A   N/A 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Commercial
   25.29%   20.41%   21.37%   19.63%   20.09% 
Agricultural
   1.83%   2.47%   2.45%   2.71%   2.50% 
Real estate:
      
Construction & Development
   10.72%   N/A   N/A   N/A   N/A 
Farm
   2.94%   N/A   N/A   N/A   N/A 
Non-Owner
Occupied CRE
   10.55%   N/A   N/A   N/A   N/A 
Owner Occupied CRE
   14.45%   N/A   N/A   N/A   N/A 
Residential real estate
   25.59%   N/A   N/A   N/A   N/A 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Real Estate
   64.25%   67.31%   66.75%   66.07%   65.23% 
Consumer:
      
Auto
   6.89%   N/A   N/A   N/A   N/A 
Non-Auto
   1.74%   N/A   N/A   N/A   N/A 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Consumer
   8.63%   9.81%   9.43%   11.59%   12.18% 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
   100.00%   100.00%   100.00%   100.00%   100.00% 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Interest-Bearing Demand Deposits in Banks.
The Company had interest-bearing demand deposits in banks of $164.22 million and $50.28$517.97 million at December 31, 20172020 and 2016,$47.92 million at December 31, 2019, respectively. At December 31, 2017,2020, our interest-bearing deposits in banks included $162.09$517.57 million maintained at the Federal Reserve Bank of Dallas $1.46 million invested in FDIC-insured certificates of deposit and $677$403 thousand on deposit with the Federal Home Loan Bank of Dallas (FHLB). The average balance of interest-bearing deposits in banks was $141.37$249.70 million, $58.25$80.81 million and $49.69$87.03 million in 2017, 20162020, 2019 and 2015,2018, respectively. The average yield on interest-bearing deposits in banks was 1.17%0.38%, 0.55%2.22% and 0.36%1.79% in 2017, 20162020, 2019 and 2015,2018, respectively.

Available-for-Sale andHeld-to-Maturity
Securities
. At December 31, 2017,2020, securities with a fair value of $3.09$4.39 billion were classified as securities
available-for-sale.
There were no securities classified as
held-to-maturity
at December 31, 2017.2020 and 2019. As compared to December 31, 2016,2019, the
available-for-sale
portfolio at December 31, 2017,2020, reflected (1) a decrease of $10.67$10.02 million in U.S. Treasury securities; (2) a decreasean increase of $53.37 million in obligations of U.S. government sponsored enterprises and agencies; (3) a decrease of $143.43 million$1.14 billion in obligations of states and political subdivisions; (4)(3) a decrease of $40.93 million$151 thousand in corporate bonds and other; and (5) an increase(4) a decrease of $475.04$148.01 million in mortgage-backed securities. As compared to December 31, 2015,2018, the
available-for-sale
portfolio at December 31, 2016,2019, reflected (1) a decreasean increase of $127$57 thousand in U.S. Treasury securities; (2) a decrease of $34.85 million$301 thousand in obligations of U.S. government sponsored enterprises and agencies; (3) an increase of $113.15$31.11 million in obligations of states and political subdivisions; (4) a decrease of $35.56 million$90 thousand in corporate bonds and other; and (5) an increase of $84.33$223.76 million in mortgage-backed securities.
Securities-available-for-sale
included fair value adjustments of $44.86$215.85 million, $33.07$84.51 million and $79.01$5.21 million at December 31, 2017, 20162020, 2019 and 2015,2018, respectively. We did not hold any collateralized mortgage obligations or structured notes as of December 31, 2017 that we consider to be high risk. Our mortgage related securities are backed by GNMA, FNMA or FHLMC or are collateralized by securities backed by these agencies.

See Table 10 and Note 2 to the Consolidated Financial Statements for additional disclosures relating to the maturities and fair values of the investment portfolio at December 31, 20172020 and 2016.

2019.

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Table of Contents
Table 10 — Maturities and Yields of
Available-for-Sale
Held at December 31, 20172020 (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 

Obligations of U.S. government sponsored enterprises and agencies

  $34,981    1.30%  $25,349    1.51%  $—      —  %  $—      —  %  $60,330    1.39% 

Obligations of states and political subdivisions

   139,568    5.03   628,506    5.13   650,699    4.74   2,077    6.68   1,420,850    4.94 

Corporate bonds and other securities

   10,998    2.96   237    1.15   224    2.64   —      —     11,459    2.92 

Mortgage-backed securities

   55,430    1.66   1,027,515    2.31   459,286    2.69   52,603    2.93   1,594,834    2.42 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  $240,977    3.62%  $1,681,607    3.35%  $1,110,209    3.89%  $54,680    3.08%  $3,087,473    3.56% 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Amounts forheld-to-maturity securities are not included herein due to insignificance.

   
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
 
Obligations of states and political subdivisions
  $98,345    4.71%  $673,036    4.01%  $1,647,476    2.85%  $8,019    2.39%  $2,426,876    3.25% 
Corporate bonds and other securities
   4,557    1.86   —      —     —      —     —      —   4,557    1.86 
Mortgage-backed securities
   186,698    2.02   1,514,743    2.27   260,155    1.68   —      —   1,961,596    2.17 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total
  $289,600    2.93%  $2,187,779    2.81%  $1,907,631    2.69%  $8,019    2.39%  $4,393,029    2.76% 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 

All yields are computed on a
tax-equivalent
basis assuming a marginal tax rate of 35%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 December 31, 2017,2020, the investment portfolio had an overall tax equivalent yield of 3.56%2.76%, a weighted average life of 4.294.66 years and modified duration of 3.824.14 years compared to December 31, 2019, the investment portfolio had an overall tax equivalent yield of 3.17%, a weighted average life of 4.18 years and modified duration of 3.74 years.

Deposits
. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were $5.96$8.68 billion as of December 31, 2017,2020, as compared to $5.48$6.60 billion as of December 31, 20162019 and $5.19$6.18 billion as of December 31, 2015.2018. Table 11 provides a breakdown of average deposits and rates paid over the past three years and the remaining maturity of time deposits of $100,000 or more:

Table 11 — Composition of Average Deposits and Remaining Maturity of Time Deposits of $100,000 or More (in thousands, except percentages):

   2017  2016  2015 
   Average
Balance		   Average
Rate		  Average
Balance		   Average
Rate		  Average
Balance		   Average
Rate		 

Noninterest-bearing deposits

  $1,843,973    —    $1,666,598    —    $1,634,669    —   

Interest-bearing deposits

          

Interest-bearing checking

   1,902,699    0.27%   1,713,498    0.12%   1,622,331    0.09% 

Savings and money market accounts

   1,401,804    0.13   1,195,671    0.09   1,021,222    0.05 

Time deposits under $100,000

   267,754    0.13   237,419    0.18   261,255    0.20 

Time deposits of $100,000 or more

   211,703    0.40   322,417    0.31   367,342    0.31 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total interest-bearing deposits

   3,783,960    0.22%   3,469,005    0.13%   3,272,150    0.11% 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total average deposits

  $5,627,933    $5,135,603    $4,906,819   
  

 

 

    

 

 

    

 

 

   

   As of December 31,
2017		 

Three months or less

  $81,918 

Over three through six months

   64,396 

Over six through twelve months

   70,470 

Over twelve months

   33,670 
  

 

 

 

Total time deposits of $100,000 or more

  $250,454 
  

 

 

 

   
2020
  
2019
  
2018
 
   
Average
Balance
   
Average
Rate
  
Average
Balance
   
Average
Rate
  
Average
Balance
   
Average
Rate
 
Noninterest-bearing deposits
  $ 2,782,896    —  %  $2,137,089    —  %  $2,124,005    —  % 
Interest-bearing deposits
          
Interest-bearing checking
   2,513,627    0.21   2,097,109    0.68   2,025,810    0.53 
Savings and money market accounts
   2,214,569    0.20   1,679,168    0.54   1,558,889    0.28 
Time deposits under $100,000
   195,425    0.43   186,709    0.70   204,929    0.25 
Time deposits of $100,000 or more
   274,933    0.88   245,680    1.04   262,986    0.48 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total interest-bearing deposits
   5,198,554    0.25%   4,208,666    0.64%   4,052,614    0.42% 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total average deposits
  $7,981,450    $6,345,755    $6,176,619   
  
 
 
    
 
 
    
 
 
   
Total cost of deposits
     0.16%     0.42%     0.27% 
    
 
 
    
 
 
    
 
 
 
   As of December 31,
2020		 
Three months or less
  $109,096 
Over three through six months
   54,915 
Over six through twelve months
   79,159 
Over twelve months
   43,142 
  
 
 
 
Total time deposits of $100,000 or more
  $286,312 
  
 
 
 
Borrowings.
Included in borrowings were federal funds purchased, securities sold under repurchase agreements and advances from the FHLB of $331.00$430.09 million, $445.77$381.36 million and $615.68$468.71 million at December 31, 2017, 20162020, 2019 and 2015,2018, respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the short-term borrowing. The average balances of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were $422.29$561.51 million, $552.04$398.14 million,
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and $524.37$418.98 million in 2017, 20162020, 2019 and 2015,2018, respectively. The average rates paid on federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were 0.25%0.20%, 0.17%0.75% and 0.08%0.47% for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively. The weighted average interest rate on federal funds purchased, securities sold under repurchase agreements and advances from the FHLB was 0.10%0.08%, 0.12%0.48% and 0.17%0.78% at December 31, 2017, 20162020, 2019 and 2015,2018, respectively. The highest amount of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB at any month end
month-end
during 2017, 20162020, 2019 and 20152018 was $611.30$925.42 million, $598.77$423.67 million and $647.72$529.64 million, 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 $922.77 million,$1.68 billion, or 12.72%15.39% of total assets at December 31, 2017,2020, as compared to $837.89 million,$1.23 billion, or 12.30%14.85% of total assets at December 31, 2016.2019. Included in shareholders’ equity at December 31, 2020 and 2019 were $170.40 million and $67.51 million, respectively, in unrealized gains on investment securities

available-for-sale,
net of related income taxes. During 2017,2020, total shareholders’ equity averaged $882.81 million,$1.56 billion, or 12.65%15.32% of average assets, as compared to $847.87 million,$1.15 billion, or 12.85%14.44% of average assets during 2016.

2019.

Banking regulators measure capital adequacy by means of the risk-based capital ratios and leverage ratio under the Basel III regulatory capital framework and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and
off-balance-sheet
commitments and contingencies according to prescribed risk categories. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders’ equity less intangible assets by
quarter-to-date
average assets less intangible assets.

Beginning in January 2016,2015, 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 reachesreached 2.5% 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 divided payments and stock repurchase, and to pay discretionary bonuses to executive officers.

As of December 31, 20172020 and 2016,2019, we had a total risk-based capital ratio of 19.85%22.03% and 18.45%21.13%, a Tier 1 capital to risk-weighted assets ratio of 18.66%20.79% and 17.30%20.06%, a common equity Tier 1 capital to risk-weighted ratio of 18.66%20.79% and 17.30%20.06% and a Tier 1 leverage ratio of 11.09%11.86% and 10.71%12.60%, respectively. The regulatory capital ratios as of December 31, 20172020 and 20162019 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies.

We performed a preliminary assessment using the regulatory capital estimation tool made available by the OCC and believe the Company and Bank are prepared to meet the new requirements upon full implementation of the Basel III rules that will be effective December 31, 2019.

Our subsidiary bank made the election to continue to exclude most AOCIaccumulated other comprehensive income from capital in connection with its March 31, 2015 quarterly financial filing and, in effect, to retain the AOCIaccumulated other comprehensive income treatment under the prior capital rules.

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

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

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Table of Contents
As of December 31, 2017,2020, the model simulations projected that 100 and 200 basis point increases in interest rates would result in positive variances in net interest income of positive 0.58%4.75% and positive 0.50%9.51%, 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 variancenegative variances in a net interest income of negative 3.84%3.46% and 5.44% relative to the current financial statement structure over the next twelve months
. We consider the likelihood
Our model simulation as of a decrease in interest rates beyond 100 basis points after December 31, 2017 remote given current interest rate levels.2020 indicates that our balance sheet is relatively asset/liability neutral. 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 monthtwelve-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 liabilitiesre-price reprice 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, as detailed in Tables 12 and 13. 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, which amounted to $331.00$430.09 million at December 31, 2017,2020, and an unfunded $25.00 million revolving line of credit established with Frost Bank, a nonaffiliated bank, which matures on June 201930, 2021 (see next paragraph).Our.
Our subsidiary bank also has federal funds purchased lines of credit with two
non-affiliated
banks totaling $130.00 million. At December 31, 2017,2020, there were no amounts drawn on these lines of credit. Our subsidiary bank also has (i) an available a line of credit with the FHLB totaling $1.22$1.53 billion at December 31, 2017,2020, secured by portions of our loan portfolio and certain investment securities.securities and (ii) access to the Federal Reserve Bank of Dallas lending program. At December 31, 2017, no amounts were2020, the Company did not have any balances outstanding under this line of credit.

The Company renewed its loan agreement, effective June 30, 2017,2019, 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 credit. Prior to June 30, 2019,2021, interest is paid quarterly at
The Wall Street Journal
Prime Rate and the line of credit matures June 30, 2019.2021. If a balance exists at June 30, 2019,2021, the principal balance converts to a term facility payable quarterly over five years and interest is paid quarterly at our election at
The Wall Street
Journal
Prime Rate plus 50 basis points or LIBOR plus 250 basis points.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
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Table of Contents
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 December 31, 2017.2020. There was no outstanding balance under the line of credit as of December 31, 20172020 or 2016.

2019.

In addition, we anticipate that any future acquisition of financial institutions, expansion of branch locations or offering of new products could also place a demand on our cash resources. Available cash and cash equivalents at our parent company,the Company, which totaled $78.47$136.67 million at December 31, 2017,2020, investment securities which totaled $8.52$2.61 million at December 31, 2017 which matures2020 with maturities over 69 to 1310 years, available dividends from our subsidiaries which totaled $205.75$289.68 million at December 31, 2017,2020, 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.

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.

Table 12 — Contractual Obligations as of December 31, 20172020 (in thousands):

   Payment Due by Period 
   Total Amounts   Less than 1
year		   More than 1
year but less
than 3 years		   More than 3
year but less
than 5 years		   Over 5
years		 

Deposits with stated maturity dates

  $451,255   $384,668   $52,638   $13,949   $—   

Pension obligation

   10,567    1,064    2,054    2,140    5,309 

Operating leases

   909    385    476    48    —   

Outsourcing service contracts

   3,610    2,077    1,533    —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Contractual Obligations

  $466,341   $388,194   $56,701   $16,137   $5,309 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   
Payment Due by Period
 
   
Total Amounts
   
Less than 1
year
   
More than 1
year but less
than 3 years
   
More than 3
years but less
than 5 years
   
Over 5
years
 
Deposits with stated maturity dates
  $475,425   $391,638   $64,495   $19,267   $25 
Operating leases
   2,577    1,094    870    535    78 
Outsourcing service contracts
   15,278    7,469    6,002    1,807    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Contractual Obligations
  $493,280   $400,201   $71,367   $21,609   $ 103 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Amounts above for deposits do not include related accrued interest.

The above table also does not include balances related to the Company’s interest rate locks commitments (“IRLCs”) and forward mortgage-backed security trades.

Off-Balance Sheet Arrangements.
Sheet/Reserve for Unfunded Commitments.
We are a party to financial instruments withoff-balance-sheet OBS risk in the normal course of business to meet the financing needs of our customers. These financial instruments include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

At December 31, 2020, the Company’s reserve for unfunded commitments totaled $5.49 million which is recorded in other liabilities.

Our exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. We generally use the same credit policies in making commitments and conditional obligations as we do for
on-balance-sheet
instruments.

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

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

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Table of Contents
Table 13 —– Commitments as of December 31, 20172020 (in thousands):

   Total Notional
Amounts
Committed		   Less than 1
year		   More than 1
year but less
than 3 years		   More than 3
year but less
than 5 years		   Over 5
years		 

Unfunded lines of credit

  $534,468   $492,138   $24,394   $13,327   $4,609 

Unfunded commitments to extend credit

   244,658    147,735    18,401    11,781    66,741 

Standby letters of credit

   28,858    22,245    6,613    —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial Commitments

  $807,984   $662,118   $49,408   $25,108   $71,350 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   
Total Notional
Amounts
Committed
   
Less than 1
year
   
More than 1
year but less
than 3 years
   
More than 3
years but less
than 5 years
   
Over 5
years
 
Unfunded lines of credit
  $871,960   $608,972   $152,592   $ 20,846   $89,550 
Unfunded commitments to extend credit
   742,538    426,108    42,010    51,757    222,663 
Standby letters of credit
   40,050    36,849    3,166    5    30 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Commercial Commitments
  $1,654,548   $1,071,929   $197,768   $72,608   $312,243 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
We believe we have no otheroff-balance sheet OBS arrangements or transactions with unconsolidated, special purpose entities that would expose us to liability that is not reflected on the face of the financial statements.

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

Parent Company Funding
. Our ability to fund various operating expenses, dividends, and cash acquisitions is generally dependent on our own earnings (without giving effect to our subsidiaries), cash reserves and funds derived from our subsidiaries. These funds historically have been produced by intercompany dividends and management fees that are limited to reimbursement of actual expenses. We anticipate that our recurring cash sources will continue to include dividends and management fees from our subsidiaries. At December 31, 2017, approximately $205.752020, $289.68 million was available for the payment of intercompany dividends by our subsidiaries without the prior approval of regulatory agencies. Our subsidiaries paid aggregate dividends to us of $30.80$87.50 million in 20172020 and $48.80$84.50 million in 2016.

2019.

Dividends
. Our long-term dividend policy is to pay cash dividends to our shareholders of approximately 35% to 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 41.24%35.88%, 44.14%38.31% and 40.20%36.84% of net earnings, respectively, in 2017, 20162020, 2019 and 2015.2018. Given our current capital position, projected earnings and asset growth rates, we do not anticipate any significant change in our current dividend policy.

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

To pay dividends, we and our subsidiary bank must maintain adequate capital above regulatory guidelines. In addition, if the applicable regulatory authority believes that a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the authority may require, after notice and hearing, that such bank cease and desist from the unsafe practice. The Federal Reserve Board, 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.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management considers interest rate risk to be a significant market risk for the Company. See “Item 7 — 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations — Operations—Capital Resources — Resources—Interest Rate Risk” for disclosure regarding this market risk.

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Table of Contents
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and the report of our independent registered public accounting firm begin onpage
F-1.

Quarterly Results of Operations (in thousands, except per share and common stock data):

The following tables set forth certain unaudited historical quarterly financial data for each of the eight consecutive quarters in the fiscal years of 20172020 and 2016.2019. This information is derived from unaudited consolidated financial statements that include, in our opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation when read in conjunction with our consolidated financial statements and notes thereto included elsewhere in thisForm
10-K.

   2017 
   4th   3rd   2nd   1st 
   (dollars in thousands, except per share amounts) 

Summary Income Statement Information:

        

Interest income

  $63,456   $62,554   $61,182   $58,783 

Interest expense

   2,562    2,866    2,097    1,763 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   60,894    59,688    59,085    57,020 

Provision for loan losses

   1,440    1,415    1,725    1,950 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

   59,454    58,273    57,360    55,070 

Noninterest income

   22,298    23,185    22,423    21,283 

Net gain on securities transactions

   3    1,075    747    3 

Noninterest expense

   44,095    43,964    43,775    42,152 
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

   37,660    38,569    36,755    34,204 

Income tax expense

   1,517    9,195    8,500    7,605 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

  $36,143   $29,374   $28,255   $26,599 
  

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

        

Earnings per share, basic

  $0.55   $0.44   $0.43   $0.40 

Earnings per share, assuming dilution

   0.54    0.44    0.43    0.40 

Cash dividends declared

   0.19    0.19    0.19    0.18 

Book value atperiod-end

   13.93    13.69    13.41    12.99 

Common stock sales price:

        

High

  $48.85   $46.00   $44.80   $46.45 

Low

   43.05    37.31    36.85    37.55 

Close

   45.05    45.20    44.20    40.10 

   
2020
 
   
4
th
   
3
rd
   
2
nd
   
1
st
 
   
(dollars in thousands, except per share amounts)
 
Summary Income Statement Information:
        
Interest income
  $92,457   $91,373   $92,197   $88,100 
Interest expense
   1,920    2,163    2,962    7,198 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net interest income
   90,537    89,210    89,235    80,902 
Provision for credit losses
   (8,033)    9,000    8,700    9,850 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net interest income after provision for credit losses
   98,570    80,210    80,535    71,052 
Noninterest income
   35,686    38,539    35,407    26,670 
Net gain on securities transactions
   23    36    1,512    2,062 
Noninterest expense
   63,705    55,593    53,321    55,318 
  
 
 
   
 
 
   
 
 
   
 
 
 
Earnings before income taxes
   70,574    63,192    64,133    44,466 
Income tax expense
   12,099    10,335    10,663    7,234 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net earnings
  $ 58,475   $ 52,857   $ 53,470   $37,232 
  
 
 
   
 
 
   
 
 
   
 
 
 
Per Share Data:
        
Earnings per share, basic
  $0.41   $0.37   $0.38   $0.26 
Earnings per share, diluted
   0.41    0.37    0.38    0.26 
Cash dividends declared
   0.13    0.13    0.13    0.12 
Book value at
period-end
   11.80    11.40    11.14    9.03 
Common stock sales price:
        
High
  $36.43   $32.80   $33.81   $35.94 
Low
   27.49    26.71    23.44    20.70 
Close
   36.17    27.91    28.89    26.84 
   2016 
   4th   3rd   2nd   1st 
   (dollars in thousands, except per share amounts) 

Summary Income Statement Information:

        

Interest income

  $57,979   $58,093   $57,881   $58,335 

Interest expense

   1,443    1,366    1,330    1,312 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   56,536    56,727    56,551    57,023 

Provision for loan losses

   1,993    3,833    2,058    2,328 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

   54,543    52,894    54,493    54,695 

Noninterest income

   21,604    21,913    20,526    19,819 

Net gain (loss) on securities transactions

   117    239    912    2 

Noninterest expense

   41,990    42,003    40,756    41,081 
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

   34,274    33,043    35,175    33,435 

Income tax expense

   7,608    7,440    8,366    7,739 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

  $26,666   $25,603   $26,809   $25,696 
  

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

        

Earnings per share, basic

  $0.40   $0.39   $0.41   $0.39 

Earnings per share, assuming dilution

   0.40    0.39    0.41    0.39 

Cash dividends declared

   0.18    0.18    0.18    0.16 

Book value atperiod-end

   12.68    13.14    13.11    12.70 

Common stock sales price:

        

High

  $46.70   $37.06   $34.50   $30.75 

Low

   35.05    30.95    27.72    24.12 

Close

   45.20    36.44    32.79    29.58 

60
Table of Contents

   
2019
 
   
4
th
   
3
rd
   
2
nd
   
1
st
 
   
(dollars in thousands, except per share amounts)
 
Summary Income Statement Information:
        
Interest income
  $82,123   $80,591   $79,576   $76,901 
Interest expense
   6,801    7,953    7,961    7,387 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net interest income
   75,322    72,638    71,615    69,514 
Provision for loan losses
   950    450    600    965 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net interest income after provision for loan losses
   74,372    72,188    71,015    68,549 
Noninterest income
   27,342    28,617    27,300    24,437 
Net gain on securities transactions
   5    52    676    — 
Noninterest expense
   51,938    48,910    48,304    47,367 
  
 
 
   
 
 
   
 
 
   
 
 
 
Earnings before income taxes
   49,781    51,947    50,687    45,619 
Income tax expense
   8,393    8,867    8,594    7,367 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net earnings
  $41,388   $43,080   $42,093   $38,252 
  
 
 
   
 
 
   
 
 
   
 
 
 
Per Share Data:
        
Earnings per share, basic
  $0.30   $0.32   $0.31   $0.28 
Earnings per share, diluted
   0.30    0.32    0.31    0.28 
Cash dividends declared
   0.12    0.12    0.12    0.11 
Book value at
period-end
   9.03    8.87    8.58    8.16 
Common stock sales price:
        
High
  $36.45   $33.97   $31.54   $32.65 
Low
   32.01    29.50    28.00    27.13 
Close
   35.10    33.33    30.79    28.89 
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Table of Contents
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.
CONTROLS AND PROCEDURES

As of December 31, 2017,2020, 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 December 31, 2017.

2020.

Subsequent to our evaluation, there were no significant changes in our internal control over financial reporting or other factors that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of First Financial Bankshares, Inc. and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting. First Financial Bankshares, Inc. and subsidiaries’ internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

First Financial Bankshares, Inc. and subsidiaries’ management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2020. In making this assessment, it used the criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (COSO) in
Internal Control —– Integrated
Framework
. Based on our assessment we believe that, as of December 31, 2017,2020, the Company’s internal control over financial reporting, as such term is defined inRule
13a-15(f)
of the Securities Exchange Act of 1934, is effective based on those criteria.

First Financial Bankshares, Inc. and subsidiaries’ independent auditors have issued an audit report, dated February 16, 2018,22, 2021, on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.

REPORT OF INDEPENDENT PUBLIC ACCOUNTING FIRM

2020.

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Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of First Financial Bankshares, Inc.

Opinion on Internal Control over Financial Reporting

We have audited First Financial Bankshares, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, First Financial Bankshares, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172020 and 2016, and2019, the related consolidated statements of earnings, comprehensive earnings, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 20172020 and the related notes and our report dated February 16, 201822, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control overOver Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Table of Contents
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Dallas, Texas

February 16, 2018

22, 2021
ITEM 9B.
OTHER INFORMATION

None.

None.
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Table of Contents
PART III

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 is hereby incorporated by reference from our proxy statement for our 2018 annual meeting2021 Annual Meeting of shareholdersShareholders which will be filed with the SEC not later than 120 days after December 31, 2017.

2020.
ITEM 11.
EXECUTIVE COMPENSATION

The information required by Item 11 is hereby incorporated by reference from our proxy statement for our 2018 annual meeting2021 Annual Meeting of shareholdersShareholders which will be filed with the SEC not later than 120 days after December 31, 2017.

2020.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 related to security ownership of certain beneficial owners and management is hereby incorporated by reference from our proxy statement for our 20182021 annual meeting of shareholders. The following chart gives aggregate information under our equity compensation plans as of December 31, 2017.

   Number of Securities
To be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights		   Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights		   Number of Securities
Remaining Available
For Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in
Far Left Column)		 

Equity compensation plans approved by security holders

   1,325,965   $33.01    2,267,193 

Equity compensation plans not approved by security holders

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Total

   1,325,965   $33.01    2,267,193 
  

 

 

   

 

 

   

 

 

 

2020. Additional information regarding stock-based compensation plans is presented in Note 18 – Stock Option Plan and Restricted Stock Plan in the notes to consolidated financial statements.

   
Number of Shares
To be Issued Upon
Exercise of
Outstanding
Awards
  
Weighted
Average
Exercise
Price of
Outstanding
Awards
  
Number of Shares
Remaining Available
For Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in
Far Left Column)
 
Equity compensation plans approved by security holders
   1,928,945(1)  $20.85(2)   4,177,826 
Equity compensation plans not approved by security holders
   —     —     —   
  
 
 
  
 
 
  
 
 
 
Total
   1,928,945  $ 20.85   4,177,826 
  
 
 
  
 
 
  
 
 
 
(1)
Includes 1,833,057 shares related to the Company’s stock option plan and 95,888 shares related to the Company’s restricted stock plan.
(2)
Excludes outstanding restricted stock which are granted for no consideration.
The remainder of the information required by Item 12 is incorporated by reference from our proxy statement for our 2018 annual meeting2021 Annual Meeting of shareholders.

Shareholders.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 is hereby incorporated by reference from our proxy statement for our 2018 annual meeting2021 Annual Meeting of shareholdersShareholders which will be filed with the SEC not later than 120 days after December 31, 2017.

2020.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is hereby incorporated by reference from our proxy statement for our 2018 annual meeting2021 Annual Meeting of shareholdersShareholders which will be filed with the SEC not later than 120 days after December 31, 2017.

2020.

65

Table of Contents

PART IV

ITEM 15.
EXHIBITS,
EXHIBIT AND FINANCIAL STATEMENT SCHEDULES

(a)
The following documents are filed as part of this report:

 (1)
Financial Statements:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2017 and 2016

Consolidated Statements of Earnings for the years ended December 31, 2017, 2016 and 2015

Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2017, 2016 and 2015

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015

Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015

Notes to the Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Earnings for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
 (2)
Financial Statement Schedules:

These schedules have been omitted because they are not required, are not applicable or have been included in our consolidated financial statements.

 (3)
Exhibits:

The information required by this Item 15(a)(3) is set forth in the Exhibit Index immediately following our signature pages. The exhibits listed herein will be furnished upon written request to J. Bruce Hildebrand, Executive Vice President, First Financial Bankshares, Inc., 400 Pine Street, Abilene, Texas 79601, and payment of a reasonable fee that will be limited to our reasonable expense in furnishing such exhibits.

Exhibits Index

The following exhibits are filed as partincluded or incorporated by reference in this Annual Report on Form
10-K:
66
Table of this report:

Contents
    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 RegulationS-K) (incorporated by reference from Exhibit 2.1 to Registrant’s Form8-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 Form8-K10-Q filed AprilJuly 30, 2015)2019).
    3.2  
—   
Amended and Restated Bylaws of the Registrant (incorporated by reference fromto Exhibit 99.13.1 of the Registrant’s Form8-K filed January 24, 2012)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 Form8-A filed on Form8-A/A No. 1 on January 7, 1994).
    4.2
—   Description of Registrant’s Securities*
  10.1  
—   
2002 Incentive Stock Option Plan (incorporated by reference from Exhibit 10.3 of the Registrant’s Form10-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 Form8-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 Form8-K filed June 30, 2015).
  10.5  
—   
Second Amendment to Loan Agreement, dated June 30, 2017, between First Financial Bankhares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form8-K filed June 30, 2017).
  10.6  
—   
2015 Restricted Stock PlanThird Amendment to Loan Agreement, dated June 30, 2019, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Appendix AExhibit 10.1 of the Registrant’s Definitive Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934Form 8-K filed March 2, 2015)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 Form8-K filed August 26, 2016)June 30, 2020).++
  21.1  
—   
Subsidiaries of Registrant.*
  23.1  
—   
Consent of Ernst & Young LLP.*
  24.1  
—   
Power of Attorney (included on signature page of this Form10-K).*
  31.1  
—   
Rule13a-14(a) /15(d)-14(a) Certification of Chief Executive Officer of First Financial Bankshares, Inc.*
  31.2  
—   
Rule13a-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 with 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.*
101.PRE  
—   
XBRL Taxonomy Extension Presentation Linkbase Document.*

*
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.

67
Table of Contents
ITEM 16.
FORM
10-K
SUMMARY
The Registrant has not selected the option to provide the summary information in this Item 16.
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: February 16, 201822, 2021  By: 
/s/ F. SCOTT DUESERScott Dueser
   F. SCOTT DUESER
   

Chairman of the Board, Director, President and

Chief Executive Officer

(Principal Executive Officer)

The undersigned directors and officers of First Financial Bankshares, Inc. hereby constitute and appoint J. Bruce Hildebrand,James R. Gordon, with full power to act and with full power of substitution and resubstitution, our true and lawful
attorney-in-fact
with full power to execute in our name and behalf in the capacities indicated below any and all amendments to this report and to file the same, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission and hereby ratify and confirm all that such
attorney-in-fact
or his substitute shall lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name

  

Title

  

Date

/s/ F. SCOTT DUESER

Scott Dueser

F. Scott Dueser

  

Chairman of the Board, Director, President, and Chief Executive

Officer

(Principal (Principal Executive Officer)

  February 16, 201822, 2021

/s/ J. BRUCE HILDEBRAND

J. Bruce Hildebrand

James R. Gordon
James R. Gordon
  

Executive Vice President and Chief
Financial Officer

(Principal Financial Officer, Secretary and

Treasurer (Principal Financial Officer and Principal Accounting Officer)

  February 16, 201822, 2021

/s/ APRIL K. ANTHONY

April K. Anthony

April K. Anthony
  Director  February 16, 201822, 2021

/s/ STEVEN L. BEAL

Steven L. Beal

Vianei Lopez Braun
Vianei Lopez Braun
  Director  February 16, 201822, 2021

/s/ TUCKER S. BRIDWELL

Tucker S. Bridwell

Tucker S. Bridwell
  Director  February 16, 201822, 2021

/s/ DAVID COPELAND

David L. Copeland

David L. Copeland
  Director  February 16, 201822, 2021

68
Table of Contents

Name

  

Title

  

Date

/s/ MURRAY EDWARDS

Murray Edwards

Michael B. Denny
Michael B. Denny
  Director  February 16, 201822, 2021

/s/ RON GIDDIENS

Ron Giddiens

Murray H. Edwards
Murray H. Edwards
  Director  February 16, 201822, 2021

/s/ TIM LANCASTER

I. Tim Lancaster

I. Tim Lancaster
  Director  February 16, 201822, 2021

/s/ KADE L. MATTHEWS

Kade L. Matthews

Kade Matthews
  Director  February 16, 201822, 2021

/s/ ROSS H. SMITH, JR.

Ross H. Smith, Jr.

Robert C. Nickles
Robert C. Nickles
  Director  February 16, 201822, 2021

/s/ JOHNNY TROTTER

Johnny Trotter

Johnny Trotter
  Director  February 16, 201822, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

69
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of First Financial Bankshares, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of First Financial Bankshares, Inc. (a Texas corporation) and subsidiaries (the Company) as of December 31, 20172020 and 2016, and2019, the related consolidated statements of earnings, comprehensive earnings, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 20172020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 20172020 and 2016,2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control — Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 16, 201822, 2021 expressed an unqualified opinion thereon.

Adoption of ASU
No. 2016-13
As discussed in Note 1 of the consolidated financial statements, the Company changed its method of accounting for allowance for loan losses. As explained below, auditing the Company’s allowance for loan losses was a critical audit matter.
Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
F-1
Table of Contents
Allowance for Loan Losses
Description of the Matter
As of December 31, 2020, the Company’s loan portfolio totaled $5.2 billion and the related allowance for loan losses (ALL) was $66.5 million. As noted above and in Note 1, as of January 1, 2020, the Company adopted ASU
2016-13,
Financial Instruments – Credit Losses, which introduces a forward-looking expected loss model (the “Current Expected Credit Losses (CECL)” model) to estimate credit losses over the remaining expected life of the Company’s loan portfolio. As discussed in Notes 1 and 3 of the consolidated financial statements, the ALL is an amount which represents management’s best estimate of expected credit losses over the contractual life of the Company’s loan portfolio as of the balance sheet date. The ALL includes credit loss estimates for loans evaluated using common risk characteristics such as financial asset type, collateral type and industry of the borrower. Historical losses are correlated to economic variables that are determined to be the most relevant indicators of expected losses. Those economic variables are forecasted over the reasonable and supportable forecast period to determine the current expected credit losses. Qualitative adjustments are then made to account for factors that management does not believe are captured in the CECL quantitative models. Management applies judgment in estimating the ALL and, in particular, in identifying and quantifying qualitative adjustments included within the ALL.
Auditing management’s estimate of the allowance for loan losses involved a high degree of subjectivity due to the complexity of the models and the qualitative adjustments included in the estimate. Management’s identification and measurement of the qualitative adjustments is highly judgmental and could have a significant impact on the allowance for loan losses.
How We Addressed the Matter in Our Audit
We obtained an understanding of the Company’s process for establishing the allowance for loan losses, including the models used and the qualitative adjustments made to the ALL. We evaluated the design and tested the operating effectiveness of the controls and governance over the model methodology and qualitative adjustment methodology, including the validation and monitoring procedures performed over the models, the identification and the assessment of the need for qualitative adjustments, the reliability and accuracy of data used to estimate the various components of the qualitative adjustments, and management’s review and approval of the qualitative adjustments.
To test the models, with the support of specialists, we evaluated the model methodology and design, including the Company’s selection of economic variables that were deemed to be the most relevant indicators of expected credit losses, as well as performed procedures over the Company’s correlation of those economic variables to historical losses. On a sample basis, we independently tested and agreed the key inputs used in the models to internal and external sources. Additionally, on a sample basis, we performed an independent recalculation of the models’ output. To test the qualitative adjustments, we evaluated the identification and measurement of the adjustments, including the basis for concluding the adjustments were warranted when considering the model methodology and the historical data used in the adjustments. We tested the completeness and accuracy of data used by the Company to estimate the qualitative adjustments by agreeing underlying data to internal sources and recalculated the analyses used by the Company to measure the adjustments. We also reviewed peer-bank allowance coverage ratios and subsequent event information and considered whether it corroborated or contradicted the Company’s overall estimate of the ALL.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.

/s/ Ernst & Young LLP

Dallas, Texas

February 16, 2018

22, 2021

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Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 20172020 and 2016

2019

(Dollars in thousands, except share and per share amounts)

ASSETS  2017  2016 

CASH AND DUE FROM BANKS

  $209,583  $204,782 

FEDERAL FUNDS SOLD

   —     3,130 

INTEREST-BEARING DEPOSITS IN BANKS

   162,764   48,574 
  

 

 

  

 

 

 

Total cash and cash equivalents

   372,347   256,486 

INTEREST-BEARING TIME DEPOSITS IN BANKS

   1,458   1,707 

SECURITIESAVAILABLE-FOR-SALE, at fair value

   3,087,473   2,860,837 

SECURITIESHELD-TO-MATURITY (fair value of $- and $124 at December 31, 2017 and 2016, respectively)

   —     121 

LOANS:

   

Held for investment

   3,485,569   3,357,307 

Less — allowance for loan losses

   (48,156)   (45,779) 
  

 

 

  

 

 

 

Net loans held for investment

   3,437,413   3,311,528 

Held for sale

   15,130   26,898 
  

 

 

  

 

 

 

Net loans

   3,452,543   3,338,426 

BANK PREMISES AND EQUIPMENT, net

   124,026   122,685 

INTANGIBLE ASSETS

   141,143   143,603 

OTHER ASSETS

   75,725   86,066 
  

 

 

  

 

 

 

Total assets

  $7,254,715  $6,809,931 
  

 

 

  

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

   

NONINTEREST-BEARING DEPOSITS

  $2,041,650  $1,717,722 

INTEREST-BEARING DEPOSITS

   3,921,311   3,760,817 
  

 

 

  

 

 

 

Total deposits

   5,962,961   5,478,539 

DIVIDENDS PAYABLE

   12,589   11,897 

BORROWINGS

   331,000   445,770 

OTHER LIABILITIES

   25,397   35,840 
  

 

 

  

 

 

 

Total liabilities

   6,331,947   5,972,046 
  

 

 

  

 

 

 

COMMITMENTS AND CONTINGENCIES

   

SHAREHOLDERS’ EQUITY:

   

Common stock — $0.01 par value; authorized 120,000,000 shares; 66,260,444 and 66,094,695 shares issued at December 31, 2017 and 2016, respectively

   663   661 

Capital surplus

   378,062   372,245 

Retained earnings

   517,257   446,534 

Treasury stock (shares at cost: 495,964 and 507,409 at December 31, 2017 and 2016, respectively)

   (7,148)   (6,671) 

Deferred Compensation

   7,148   6,671 

Accumulated other comprehensive earnings

   26,786   18,445 
  

 

 

  

 

 

 

Total shareholders’ equity

   922,768   837,885 
  

 

 

  

 

 

 

Total liabilities and shareholders’ equity

  $7,254,715  $6,809,931 
  

 

 

  

 

 

 

   
2020
  
2019
 
ASSETS
         
CASH AND DUE FROM BANKS
  $211,113  $231,534 
FEDERAL FUNDS SOLD
   —     3,150 
INTEREST-BEARING DEMAND DEPOSITS IN BANKS
   517,971   47,920 
          
Total cash and cash equivalents
   729,084   282,604 
SECURITIES
AVAILABLE-FOR-SALE,
at fair value (amortized cost of these
securities was
$4,177,179 and
$3,327,805 as of December 31, 2020 and 2019, respectively)
   4,393,029   3,413,317 
LOANS:
         
Held-for-investment
   5,171,033   4,194,969 
Less – allowance for loan losses
   (66,534)   (52,499) 
          
Net loans held
-
for
-
investment
   5,104,499   4,142,470 
Held-for-sale
($79,585 and $23,076 under fair value option as of December 31, 2020 and
2019
,
 respectively)
   83,969   28,228 
BANK PREMISES AND EQUIPMENT, net
   142,269   131,022 
INTANGIBLE ASSETS
, net
   318,392   173,667 
OTHER ASSETS
   133,258   90,919 
          
Total assets
  $10,904,500  $8,262,227 
          
LIABILITIES AND SHAREHOLDERS’ EQUITY
         
NONINTEREST-BEARING DEPOSITS
  $2,982,697  $2,065,128 
INTEREST-BEARING DEPOSITS
   5,693,120   4,538,678 
          
Total deposits
   8,675,817   6,603,806 
DIVIDENDS PAYABLE
   18,484   16,306 
BORROWINGS
   430,093   381,356 
OTHER LIABILITIES
   101,916   33,562 
          
Total liabilities
   9,226,310   7,035,030 
          
COMMITMENTS AND CONTINGENCIES
   0    0  
SHAREHOLDERS’ EQUITY:
         
Common stock—$0.01 par value; authorized 200,000,000 shares; 142,161,834 and 135,891,755 shares issued at December 31, 2020 and 2019, respectively
   1,422   1,359 
Capital surplus
   669,644   450,676 
Retained earnings
   836,729   707,656 
Treasury stock (shares at cost: 938,591 and 927,408 at
        
December 31, 2020 and 2019, respectively)
   (9,126)   (8,222) 
Deferred
c
ompensation
   9,126   8,222 
Accumulated other comprehensive earnings
   170,395   67,506 
          
Total shareholders’ equity
   1,678,190   1,227,197 
          
Total liabilities and shareholders’ equity
  $10,904,500  $8,262,227 
          
The accompanying notes are an integral part of these consolidated financial statements.

F-2

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Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statement of Earnings

December 31, 2017, 20162020, 2019 and 2015

2018

(Dollars in thousands, except share and per share amounts)

   2017  2016   2015 

INTEREST INCOME:

     

Interest and fees on loans

  $166,807  $161,018   $151,662 

Interest on investment securities:

     

Taxable

   32,825   27,626    29,673 

Exempt from federal income tax

   44,659   43,302    40,080 

Interest on federal funds sold and interest-bearing deposits in banks

   1,684   342    208 
  

 

 

  

 

 

   

 

 

 

Total interest income

   245,975   232,288    221,623 
  

 

 

  

 

 

   

 

 

 

INTEREST EXPENSE:

     

Interest on deposits

   8,213   4,503    3,642 

Other

   1,075   948    446 
  

 

 

  

 

 

   

 

 

 

Total interest expense

   9,288   5,451    4,088 
  

 

 

  

 

 

   

 

 

 

Net interest income

   236,687   226,837    217,535 

PROVISION FOR LOAN LOSSES

   6,530   10,212    9,685 
  

 

 

  

 

 

   

 

 

 

Net interest income after provision for loan losses

   230,157   216,625    207,850 
  

 

 

  

 

 

   

 

 

 

NONINTEREST INCOME:

     

Trust fees

   23,694   19,636    19,252 

Service charges on deposit accounts

   19,416   18,386    17,171 

ATM, interchange and credit card fees

   25,686   23,910    21,860 

Real estate mortgage operations

   15,109   16,086    10,409 

Net gain on sale ofavailable-for-sale securities (includes $1,828, $1,270 and $432 for the years ended December 31, 2017, 2016 and 2015, respectively, related to accumulated comprehensive earnings reclassifications)

   1,828   1,270    432 

Net gain (loss) on sale of foreclosed assets

   (50)   456    538 

Net gain (loss) on sale of assets

   (396)   168    (820) 

Interest on loan recoveries

   1,128   2,112    1,050 

Other

   4,602   3,108    3,540 
  

 

 

  

 

 

   

 

 

 

Total noninterest income

   91,017   85,132    73,432 
  

 

 

  

 

 

   

 

 

 

NONINTEREST EXPENSE:

     

Salaries and employee benefits

   95,287   90,739    80,999 

Loss from partial settlement of pension plan

   —     267    —   

Net occupancy expense

   10,521   10,420    10,314 

Equipment expense

   13,765   13,479    12,222 

FDIC insurance premiums

   2,217   2,680    3,153 

ATM, interchange and credit card expenses

   7,452   7,231    6,384 

Professional and service fees

   8,063   6,877    4,831 

Printing, stationery and supplies

   1,989   2,093    2,278 

Operational and other losses

   3,192   2,170    1,889 

Amortization of intangible assets

   613   738    561 

Other

   30,887   29,136    26,833 
  

 

 

  

 

 

   

 

 

 

Total noninterest expense

   173,986   165,830    149,464 
  

 

 

  

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAXES

   147,188   135,927    131,818 

INCOME TAX EXPENSE (includes $640, $445 and $151 for the years ended December 31, 2017, 2016 and 2015, respectively, related to income tax expense from reclassification items)

   26,817   31,153    31,437 
  

 

 

  

 

 

   

 

 

 

NET EARNINGS

  $120,371  $104,774   $100,381 
  

 

 

  

 

 

   

 

 

 

NET EARNINGS PER SHARE, BASIC

  $1.82  $1.59   $1.55 
  

 

 

  

 

 

   

 

 

 

NET EARNINGS PER SHARE, ASSUMING DILUTION

  $1.81  $1.59   $1.54 
  

 

 

  

 

 

   

 

 

 

   2020   2019   2018 
INTEREST INCOME:
               
Interest and fees on loans
  $263,320   $224,556   $200,347 
Interest on investment securities:
               
Taxable
   51,456    55,670    50,052 
Exempt from federal income tax
   48,399    37,075    39,661 
Interest on federal funds sold and interest-bearing deposits in banks
   953    1,891    1,630 
                
 
Total interest income
   364,128    319,192    291,690 
                
INTEREST EXPENSE:
               
Interest on deposits
   13,118    27,122    16,946 
Other
   1,125    2,980    1,984 
                
Total interest expense
   14,243    30,102    18,930 
                
 
Net interest income
   349,885    289,090    272,760 
PROVISION FOR CREDIT LOSSES
   19,517    2,965    5,665 
                
 
Net interest income after provisions for credit losses
   330,368    286,125    267,095 
                
NONINTEREST INCOME:
               
Trust fees
   29,531    28,401    28,181 
Service charges on deposit accounts
   20,572    22,039    21,663 
ATM, interchange and credit card fees
   32,469    29,863    28,532 
Gain on sale and fees on mortgage loans
   43,872    18,144    15,157 
Net gain on sale of
available-for-sale
securities
   3,633    733    1,354 
Net gain (loss) on sale of foreclosed assets
   159    274    116 
Net gain (loss) on sale of assets
   112    319    (147) 
Interest on loan recoveries
   856    2,092    938 
Other
   8,731    6,563    5,970 
                
 
Total noninterest income
   139,935    108,428    101,764 
                
NONINTEREST EXPENSE:
               
Salaries and employee benefits
   135,123    112,336    105,189 
Cost related to termination of pension plan
   —      2,673    1,546 
Net occupancy expense
   12,388    11,156    11,173 
Equipment expense
   8,396    9,052    10,118 
FDIC insurance premiums
   1,758    1,091    2,333 
ATM, interchange and credit card expenses
   11,235    9,856    9,282 
Professional and service fees
   9,346    7,853    8,894 
Printing, stationery and supplies
   2,163    1,812    1,997 
Operational and other losses
   2,462    1,879    2,188 
Software amortization and expense
   8,862    7,305    6,020 
Amortization of intangible assets
   1,990    1,016    1,272 
Other
   34,215    30,492    30,672 
                
 
Total noninterest expense
   227,938    196,521    190,684 
                
EARNINGS BEFORE INCOME TAXES
   242,365    198,032    178,175 
INCOME TAX EXPENSE
   40,331    33,220    27,537 
                
NET EARNINGS
  $202,034   $164,812   $150,638 
                
NET EARNINGS PER SHARE, BASIC
  $1.42   $1.22   $1.11 
                
NET EARNINGS PER SHARE,
DILUTED
  $1.42   $1.21   $1.11 
                
The accompanying notes are an integral part of these consolidated financial statements.

F-3

F-4
Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Earnings

Years Ended December 31, 2017, 20162020, 2019 and 2015

2018

(Dollars in thousands)

   2017  2016  2015 

NET EARNINGS

  $120,371  $104,774  $100,381 

OTHER ITEMS OF COMPREHENSIVE EARNINGS (LOSS):

    

Change in unrealized gain (loss) on investment securitiesavailable-for-sale, before income tax

   23,266   (44,679)   2,273 

Reclassification adjustment for realized losses (gains) on investment securities included in net earnings, before income tax

   (1,828)   (1,270)   (432) 

Minimum liability pension adjustment, before income tax

   257   1,410   (1,986) 
  

 

 

  

 

 

  

 

 

 

Total other items of comprehensive earnings (losses)

   21,695   (44,539)   (145) 

Income tax benefit (expense) related to:

    

Investment securities

   (13,774)   16,082   (644) 

Minimum liability pension adjustment

   420   (493)   695 
  

 

 

  

 

 

  

 

 

 

Total income tax benefit (expense)

   (13,354)   15,589   51 
  

 

 

  

 

 

  

 

 

 

COMPREHENSIVE EARNINGS

  $128,712  $75,824  $100,287 
  

 

 

  

 

 

  

 

 

 

   2020  2019  2018 
NET EARNINGS
  $202,034  $164,812  $150,638 
OTHER ITEMS OF COMPREHENSIVE EARNINGS (LOSS):
             
Change in unrealized gain (loss) on investment securities
available-for-sale,
before income tax
   133,872   80,906   (38,185) 
Reclassification adjustment for realized gains on investment securities included in net earnings, before income tax
   (3,633)   (733)   (1,354) 
Minimum liability pension adjustment, before income tax
   —     1,676   1,970 
              
Total other items of comprehensive earnings (losses)
   130,239   81,849   (37,569) 
Income tax benefit (expense) related to:
             
Investment securities
   (28,113)   (16,990)   8,019 
Reclassification adjustment for realized gains on investment securities included in net earnings
  
763
   
154
   
284
 
Minimum liability pension adjustment
   —     (352)   (414) 
              
Total income tax benefit (expense)
   (27,350)   (17,188)   7,889 
              
COMPREHENSIVE EARNINGS
  $304,923  $229,473  $120,958 
              
The accompanying notes are an integral part of these consolidated financial statements.

F-4

F-5
Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

Years Ended December 31, 2017, 20162020, 2019 and 2015

2018

(Dollars in thousands)

   

 

Common Stock

   Capital
Surplus		   Retained
Earnings		  

 

Treasury Stock

  Deferred
Compensation		   Accumulated
Other
Comprehensive
Earnings
(Losses)		  Total
Shareholders’
Equity		 
   Shares   Amount      Shares  Amounts     

BALANCE, December 31, 2014

   64,089,921   $641   $305,429   $327,978   (529,563)  $(5,878)  $5,878   $47,489  $681,537 

Net earnings

   —      —      —      100,381   —     —     —      —     100,381 

Stock issued in acquisition of FBC Bancshares, Inc.

   1,755,374    18    59,630    —     —     —     —      —     59,648 

Stock option exercises

   105,121    1    1,544    —     —     —     —      —     1,545 

Restricted Stock grant

   39,818    —      1,350    —     —     —     —      —     1,350 

Cash dividends declared, $0.62 per share

   —      —      —      (40,353)   —     —     —      —     (40,353) 

Minimum liability pension adjustment, net of related income taxes

   —      —      —      —     —     —     —      (1,291)   (1,291) 

Change in unrealized gain (loss) in investment securitiesavailable-for-sale, net of related income taxes

   —      —      —      —     —     —     —      1,197   1,197 

Additional tax benefit related to directors’ deferred compensation plan

   —      —      328    —     —     —     —      —     328 

Shares purchased in connection with directors’ deferred compensation plan, net

   —      —      —      —     8,912   (418)   418    —     —   

Stock option expense

   —      —      644    —     —     —     —      —     644 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

BALANCE, December 31, 2015

   65,990,234   $660   $368,925   $388,006   (520,651)  $(6,296)  $6,296   $47,395  $804,986 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Net earnings

   —      —      —      104,774   —     —     —      —     104,774 

Stock option exercises

   82,871    1    1,259    —     —     —     —      —     1,260 

Restricted Stock grant

   21,590    —      809    —     —     —     —      —     809 

Cash dividends declared, $0.70 per share

   —      —      —      (46,246)   —     —     —      —     (46,246) 

Minimum liability pension adjustment, net of related income taxes

   —      —      —      —     —     —     —      917   917 

Change in unrealized gain (loss) in investment securitiesavailable-for-sale, net of related income taxes

   —      —      —      —     —     —     —      (29,867)   (29,867) 

Additional tax benefit related to directors’ deferred compensation plan

   —      —      370    —     —     —     —      —     370 

Shares purchased in connection with directors’ deferred compensation plan, net

   —      —      —      —     13,242   (375)   375    —     —   

Stock option expense

   —      —      882    —     —     —     —      —     882 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

BALANCE, December 31, 2016

   66,094,695   $661   $372,245   $446,534   (507,409)  $(6,671)  $6,671   $18,445  $837,885 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Net earnings

   —      —      —      120,371   —     —     —      —     120,371 

Stock option exercises

   140,250    2    2,933     —     —     —      —     2,935 

Restricted Stock grant

   25,499    —      1,139     —     —     —      —     1,139 

Cash dividends declared, $0.75 per share

   —      —      —      (49,648)   —     —     —      —     (49,648) 

Minimum liability pension adjustment, net of related income taxes

   —      —      —      —     —     —     —      677   677 

Change in unrealized gain (loss) in investment securitiesavailable-for-sale, net of related income taxes

   —      —      —      —     —     —     —      7,664   7,664 

Shares purchased (redeemed) in connection with directors’ deferred compensation plan, net

   —      —      —      —     11,445   (477)   477    —     —   

Stock option expense

   —      —      1,745    —     —     —     —      —     1,745 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

BALANCE, December 31, 2017

   66,260,444   $663   $378,062   $517,257   (495,964)  $(7,148)  $7,148   $26,786  $922,768 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

   
 
 
Common Stock
   
Capital
Surplus
   Retained
Earnings		  Treasury Stock  Deferred
Compensation		   
Accumulated
Other
Total
Comprehensive
Earnings
(Losses)
  Shareholders’
Equity		 
  Shares   Amount  Shares  Amounts 
BALANCE, December 31, 2017
  
 
66,260,444
 
  
$
663
 
  
$
378,062
 
  
$
517,257
 
 
 
(495,964
) 
 
$
(7,148
) 
 
$
7,148
 
  
$
26,786
 
 
$
922,768
 
Net earnings
   —      —      —      150,638   —     —     —      —     150,638 
Stock option exercises
   173,822    2    3,861            —     —      —     3,863 
Restricted stock grant, net
   29,496    —      1,609        —     —     —      —     1,609 
Cash dividends declared, $0.41
per share
   —      —      —      (55,499)   —     —     —      —     (55,499) 
Stock issued in acquisition of
 
Commercial
Bancshares, Inc.
   1,289,371    13    58,074    —     —     —     —      —     58,087 
Minimum liability pension adjustment, net of related income taxes
   —      —      —      —     —     —     —      1,556   1,556 
Change in unrealized gain (loss) in investment securities
available-for-sale,
net of related income taxes
   —      —      —      —     —     —     —      (31,235)   (31,235) 
Shares purchased in connection with directors’ deferred compensation plan, net
   —      —      —      —     28,153   (359)   359    —     —   
Stock option expense
   —      —      1,508    —     —     —     —      —     1,508 
Reclassification of certain income tax effects related to the U.S. statutory federal income tax rate under the Tax Cuts and Jobs Acts to retained earnings
   —      —      —      (5,759)   —     —     0
  
    5,759   —   
Reclassification of unrealized gain in equity securities At December 31, 2017 from accumulated other Comprehensive earnings to retained earnings
   —      —      —      21   —     —     —      (21)   —   
BALANCE, December 31, 2018
   67,753,133   $678   $443,114   $606,658   (467,811)  $(7,507)  $7,507   $2,845  $1,053,295 
Net earnings
   —      —      —      164,812   —     —     —      —     164,812 
Stock option exercises
   241,725    2    4,291    —     —     —     —      —     4,293 
Restricted stock grant, net
   56,687    —      1,782    —     —     —     —      —     1,782 
Cash dividends declared, $0.47
per share
   —      —      —      (63,135)   —     —     —      —     (63,135) 
Minimum liability pension adjustment, net of related income taxes
   —      —      —      —     —     —     —      1,324   1,324 
Change in unrealized gain in investment securities
available-for-sale,
net of related income taxes
   —      —      —      —     —     —     —      63,337   63,337 
Shares purchased in connection with directors’ deferred compensation plan, net
   —      —      —      —     4,742   (715)   715    —     —   
Stock option expense
   —      —      1,489    —     —     —     —      —     1,489 
Two-for-one
stock split in the form of 100% stock dividend
   67,840,210    679    —      (679)   (464,339)   —     —      0
  
   —   
BALANCE, December 31, 2019
   135,891,755   $1,359   $450,676   $707,656   (927,408)  $(8,222) ��
$
8,222   $67,506  $1,227,197 
(continued)
The accompanying notes are an integral part of these consolidated financial statements.

F-6

Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Shareholders’ Equity

Years Ended December 31, 2017, 20162020, 2019 and 2015

2018

(Dollars in thousands)

   2017  2016  2015 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net earnings

  $120,371  $104,774  $100,381 

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Depreciation and amortization

   12,916   11,573   11,145 

Provision for loan losses

   6,530   10,212   9,685 

Securities premium amortization, net

   30,310   29,005   27,705 

Gain on sale of assets, net

   (1,167)   (1,894)   (150) 

Deferred federal income tax expense (benefit)

   (53)   673   320 

Change in loans held for sale

   11,769   6,645   (24,739) 

Change in other assets

   9,313   2,397   (16,919) 

Change in other liabilities

   285   (2,643)   1,664 
  

 

 

  

 

 

  

 

 

 

Total adjustments

   69,903   55,968   8,711 
  

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

   190,274   160,742   109,092 
  

 

 

  

 

 

  

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Cash paid for asset acquisition of 4Trust Mortgage, Inc., net

   —     —     (1,931) 

Cash received in acquisition of FBC Bancshares, Inc., net

   —     —     65,197 

Net decrease in interest-bearing time deposits in banks

   249   1,788   13,507 

Activity inavailable-for-sale securities:

    

Sales

   120,576   40,510   35,580 

Maturities

   4,392,131   3,509,113   2,717,724 

Purchases

   (4,768,420)   (3,737,865)   (3,055,117) 

Activity inheld-to-maturity securities — maturities

   124   157   163 

Net increase in loans

   (134,627)   (48,836)   (144,320) 

Purchases of bank premises and equipment and other assets

   (14,162)   (20,399)   (17,433) 

Proceeds from sale of bank premises and equipment and other assets

   6,085   3,572   2,405 
  

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

   (398,044)   (251,960)   (384,225) 
  

 

 

  

 

 

  

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase (decrease) in noninterest-bearing deposits

   323,928   (28,230)   23,473 

Net increase in interest-bearing deposits

   160,494   316,600   72,857 

Net increase (decrease) in borrowings

   (114,770)   (169,905)   235,440 

Common stock transactions:

    

Proceeds from stock issuances

   2,934   1,260   1,545 

Dividends paid

   (48,955)   (44,907)   (38,767) 
  

 

 

  

 

 

  

 

 

 

Net cash provided by financing activities

   323,631   74,818   294,548 
  

 

 

  

 

 

  

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   115,861   (16,400)   19,415 

CASH AND CASH EQUIVALENTS, beginning of year

   256,486   272,886   253,471 
  

 

 

  

 

 

  

 

 

 

CASH AND CASH EQUIVALENTS, end of year

  $372,347  $256,486  $272,886 
  

 

 

  

 

 

  

 

 

 

Cumulative effect of adopting ASC 326
on January 1, 2020, net of related income taxes
   —     —     —     (466)   —     —     —      —      (466) 
Total shareholders’ equity at beginning of period, as adjusted
   135,891,755   1,359   450,676   707,190   (927,408)   (8,222)  8,222    67,506    1,226,731 
Stock issued in acquisition of TB&T Bancshares, Inc.
   6,275,574   63   220,210   —     —     —     —      —      220,273 
Net earnings
   —     —     —     202,034   —     —     —      —      202,034 
Stock option exercises
   295,093   3   4,714   —     —     —     —      —      4,717 
Restricted stock grant, net
   24,214   —     672   —     —     —     —      —      672 
Cash dividends declared, $0.51
per share
   —     —     —     (72,495)   —     —     —      —      (72,495) 
Change in unrealized gain in investment securities
available-for-sale,
net of related income taxes
   —     —     —     —     —     —     —      102,889    102,889 
Shares purchased in connection with directors’ deferred compensation plan, net
   —     —     —     —     (11,183)   (904)   904    —      —   
Stock option expense
   —     —     1,377   —     —     —     —      —      1,377 
Shares repurchased and retired under stock repurchase authorization
   (324,802)   (3)   (8,005)   —     —     —     —      —      (8,008) 
BALANCE, December 31, 2020
   142,161,834  $1,422  $669,644  $836,729   (938,591)  $(9,126) $9,126   $170,395   $1,678,190 
The accompanying notes are an integral part of these consolidated financial statements.

F-7
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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
   2020  2019  2018 
CASH FLOWS FROM OPERATING ACTIVITIES:
             
Net earnings
  $202,034  $164,812  $150,638 
Adjustments to reconcile net earnings to net cash provided by operating activities:
             
Depreciation and amortization
   12,793   11,665   12,549 
Provision for credit losses
   19,517   2,965   5,665 
Securities premium amortization, net
   41,959   25,788   27,467 
Discount accretion on purchased loans
   (3,780)   (1,666)   (2,636) 
Gain on sale of assets, net
   (4,001)   (1,477)   (1,216) 
Deferred federal income tax (expense) benefit
   (5,249)   (29)   (250) 
Change in loans
held-for-sale
   (53,494)   (5,830)   (5,791) 
Change in other assets
   (23,233)   1,851   (1,697) 
Change in other liabilities
   24,122   4,374   1,621 
              
Total adjustments
   8,634   37,641   35,712 
              
Net cash provided by operating activities
   210,668   202,453   186,350 
              
CASH FLOWS FROM INVESTING ACTIVITIES:
             
Cash received in acquisition of TB&T Bancshares, Inc., net
   61,028   —     —   
Cash received in acquisition of Commercial Bancshares, Inc., net
   —     —     18,653 
Net decrease in interest-bearing time deposits in banks
   —     1,458   —   
Activity in
available-for-sale
securities:
             
Sales
   263,042   67,414   220,259 
Maturities
   6,075,017   4,460,703   3,439,028 
Purchases
   (7,117,151)   (4,727,430)   (3,731,821) 
Net increase in loans
held-for-investment
   (529,144)   (243,524)   (202,602) 
Purchases of bank premises and equipment
   (16,450)   (8,671)   (17,646) 
Proceeds from sale of bank premises and equipment and other assets
   1,456   2,249   844 
              
Net cash used in investing activities
   (1,262,202)   (447,801)   (273,285) 
              
CASH FLOWS FROM FINANCING ACTIVITIES:
             
Net increase (decrease) in noninterest-bearing deposits
   679,744   (50,979)   (87,583) 
Net increase (decrease) in interest-bearing deposits
   843,142   474,396   (36,891) 
Net increase (decrease) in borrowings
   48,737   (87,350)   137,706 
Common stock transactions:
             
Proceeds from stock option exercises
   4,717   4,294   3,864 
Dividends paid
   (70,318)   (61,056)   (53,861) 
Repurchase of stock
   (8,008)   —     —   
              
Net cash provided by (used in) financing activities
   1,498,014   279,305   (36,765) 
              
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   446,480   33,957   (123,700) 
CASH AND CASH EQUIVALENTS, beginning of year
   282,604   248,647   372,347 
              
CASH AND CASH EQUIVALENTS, end of year
  $729,084  $282,604  $248,647 
              
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

2018

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Nature of Operations

First Financial Bankshares, Inc. (a Texas corporation) (“Bankshares”, “Company”, “we” or “us”) is a financial holding company which owns all of the capital stock of one bank with 6978 locations located in Texas as of December 31, 2017.2020. The Company’s subsidiary bank is First Financial Bank, National Association, Abilene.N.A. The bank’sCompany’s primary source of revenue is providing loans and banking services to consumers and commercial customers in the market area in which the subsidiaryFirst Financial Bank, N.A., is located. In addition, the Company also owns First Financial Trust & Asset Management Company, National Association,N.A., First Financial Insurance Agency, Inc.,
First Technology Services,
Inc. and First Technology Services,Financial Investments, Inc.

Basis of Presentation
A summary of significant accounting policies of Banksharesthe 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 U.S. GAAPUnited 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 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 loancredit losses and its valuation of financial instruments.

Consolidation

The accompanying consolidated financial statements include the accounts of Bankshares and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated.

Stock Repurchase

Split and Increase in Authorized Shares

On June 25, 2017,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 year ended December 31, 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. Previously, the Board of Directors had authorized the repurchase of up to 1,500,000 common shares through September 30, 2017. The stock buybackrepurchase plan authorizes management to repurchase and retire the stock at such time as repurchases and retirements are considered beneficial to the Company and its stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no0 minimum number of shares that the Company is required to repurchase. Through December 31, 2020, 324,802 shares were repurchased and retired (all during the months of March and April of 2020) totaling $8,008,000 under this repurchase plan. Subsequent to December 31, 2020 and through February 
22
, 2021, 0 additional shares were repurchased. For the years ended December 31, 2017, 20162019 and 2015, no2018, 0 shares were repurchased under this repurchase plan or the prior authorization that expired September 30, 2017.

Acquisitions2020.

F-9
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and Asset Purchase

2018

Acquisition
On July 31, 2015,January 1, 2018, the Company acquired 100% of the outstanding capital stock of FBCCommercial Bancshares, Inc. through the merger of a wholly-owned subsidiary with and into FBCCommercial Bancshares, Inc. Following such merger, FBCCommercial Bancshares, Inc. and its wholly-owned subsidiary, FirstCommercial State Bank, N.A.Kingwood, Texas were merged into the Company and First Financial Bank, National Association, respectively. The results of operations of FBCCommercial Bancshares, Inc. subsequent to the acquisition date, are include in the consolidated earnings of the Company. See Note 20 for additional information.
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, N.A., 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 1821 for additional information.

Adoption of New Accounting Standards
On JuneJanuary 1, 2015,2020, Accounting Standards Update (“ASU”)
2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, became effective for the Company. Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) replaced the previous “incurred loss” model for measuring credit losses with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and
held-to-maturity
debt securities. It also applies to OBS credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, ASC 326 made changes to the accounting for
available-for-sale
debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on
available-for-sale
debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
On March 27, 2020, the CARES Act was signed by the President of the United States that included an option for entities to delay the implementation of ASC 326 until the earlier of the termination date of the national emergency declaration by the President, or December 31, 2020. Under this option, the Company completedelected to delay implementation of CECL and calculated and recorded the asset purchaseprovision for credit losses through the nine-months ended September 30, 2020 under the incurred loss model. At December 31, 2020, the Company elected to adopt ASC 326, effective as of 4Trust Mortgage, Inc. The resultsJanuary 1, 2020, through a transition charge to retained earnings of operation$589,000 ($466,000 net of 4Trust Mortgage Inc. subsequentapplicable income taxes). This transition adjustment was comprised of a decrease of $619,000 in allowance for credit losses and an increase of $1,208,000 in the reserve for unfunded commitments.
With the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections which are described below. Prior to January 1, 2020, allowance for credit losses were based on the asset purchase date, areincurred loss methodology in accordance with accounting policies disclosed in Note 1 of the Consolidated Financial Statements included in the consolidated earningsCompany’s 2019 Form
10-K.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost, net investment in leases and OBS credit exposures.
The Company adopted ASC 326 using the prospective transition approach for securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost basis remains the same before and after the effective date of ASC 326. The effective interest rate on these debt securities was not changed. We did not have any securities for which OTTI had been recognized as of December 31, 2019.
The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC
310-30.
In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the Company. See Note 18 for additional information.

date of adoption. For the periods ended December 31, 2020 and 2019, amounts related to the Company’s PCD and PCI loans were insignificant and disclosures related to these balances have been omitted.

F-10
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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

Increase in Authorized Shares

On April 28, 2015, the Company’s shareholders approved an amendment to the Company’s Amended and Restated Certificate of Formation to increase the number of authorized common shares to 120,000,000.

2018

Investment Securities

Management classifies debt and equity securities as
held-to-maturity,
available-for-sale,
or trading based on its intent. Debt securitiesSecurities that management has the positive intent and ability to hold to maturity are classified as
held-to-maturity
and recorded at amortized cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using the interest method. Securities not classified as
held-to-maturity
or trading are classified as
available-for-sale
and recorded at fair value, with all unrealized holding gains and unrealized losses judged to be temporary,(those for which no allowance for credit losses are recorded) reported as a component of other comprehensive income, net of deferredtax. Management determines the appropriate classification of securities at the time of purchase.
Interest income taxes, excluded from earningsincludes amortization of purchase premiums and reported indiscounts over the consolidated statements of comprehensive earnings.Available-for-saleperiod to maturity using a level-yield method, except for premiums on callable securities, that have unrealizedwhich are amortized to their earliest call date. Realized gains and losses are excludedrecorded on the sale of securities in noninterest income.
The Company has made a policy election to exclude accrued interest from earnings and reported net of tax in accumulated other comprehensive income until realized. Declines in the fair value ofavailable-for-sale 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 recognizedsecurities and report accrued interest separately in other comprehensive income. In estimating other-than-temporary impairment losses, we consider (1)assets on the lengthconsolidated balance sheets. A security is placed on nonaccrual status at the time any principal or interest payments become more than
90 days
delinquent or if full collection 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 issuerinterest or principal becomes uncertain. Accrued interest for a period of time sufficientsecurity placed on nonaccrual is reversed against interest income. There was no accrued interest related to allowsecurities reversed against interest income for any anticipated recovery in fair value.

the year ended December 31, 2020. 

The Company records its
available-for-sale and trading
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.

When the fair value of a 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 andheld-to-maturity securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) whether we have the intent to sell our securities prior to recovery and/or maturity, (ii) whether it is more likely than not that we will have to sell our 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 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 currently consists of U.S. Treasury securities, obligations of U.S. government sponsored enterprises and agencies, 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 partythird-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 quarterly, on a sample basis, prices supplied by the independent pricing services by comparison to prices obtained from other third party sources.

Loans and third-party sources on a quarterly basis.

Allowance for LoanCredit Losses

Loans held –

Available-for-Sale
Securities
For
available-for-sale
securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, any previously recognized allowances are
charged-off
and the security’s amortized cost basis is written down to fair value through income as a provision for investmentcredit losses. For
available-for-sale
securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are stated atcompared to the amountamortized cost basis of unpaid principal, reduced by unearned incomethe security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Management has made the accounting policy election to exclude accrued interest receivable on
available-for-sale
securities from the estimate of credit losses. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit losses.
Available-for-sale
securities are
charged-off
against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.
F-11
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
Prior to the adoption of ASC 326, declines in the fair value of securities below their cost that were deemed to be other-than-temporary were reflected in earnings as realized losses. In estimating other-than-temporary impairment losses prior to January 1, 2020, management considered, among other things, the length of time and the extent to which the fair value had been less than cost, the financial condition and near-term prospects of the issuer and the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.​​​​​​​​​​​​​​​​​​​​​
Allowance
for Credit Losses – Held-to-Maturity
Securities
The allowance for credit losses on
held-to-maturity
securities is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of
held-to-maturity
securities to present management’s best estimate of the net amount expected to be collected.
Held-to-maturity
securities are
charged-off
against the allowance when deemed uncollectible by management. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Management measures expected credit losses on
held-to-maturity
securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on
held-to-maturity
securities from the estimate of credit losses.
At December 31, 2020 and 2019, the Company held 0 securities that were classified as
held-to-maturity.
Loans
Held-for-Investment
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, net of the allowance for credit losses. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, fair value hedge accounting adjustments, deferred loan losses. fees and costs. The Company has made a policy election to exclude accrued interest from the amortized cost basis of loans and report accrued interest separately from the related loan balance in other assets on the condensed consolidated balance sheets.
Interest on loans is calculated by using the simple interest method on daily balances of

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

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 againstconsidered past due if the allowance for loan losses when management believes the collectability of therequired 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 portfolioand interest payments have not been received as of the balance sheet date. The allowance for loan losses is comprised of three elements: (i) specific reserves determined baseddate such payments were due. Loans are placed 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 externalnonaccrual status when, in management’s opinion, the borrower may be unable to the Company. The allowance for loan losses is increased by charges to income and decreased bycharge-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. 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 suchmeet payment obligations 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.

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 and employment could result in increased levels ofnon-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 examinationthey become due, as well as changeswhen required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to our methodology.

Accrualcollateral position. Regulatory provisions would typically require the placement of a loan on nonaccrual status if principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or full payment of principal and interest is not expected. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on a loan andnonaccrual loans is recognized only to the extent that cash payments are applied toreceived in excess of 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 onnon-accrual. Loans aredue. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future paymentsprincipal and interest amounts contractually due are reasonably assured. Consumer

Prior to the adoption of ASC 326 on January 1, 2020, loans are generallycharged-off when a loan becomes past due 90 days. For other loans in the portfolio, facts and circumstances are evaluated in makingcharge-off decisions.

Loans are consideredwere reported as impaired when, based on then current information and events, management determines that it iswas probable we willwould be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment was evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan iswas impaired, a specific valuation allowance iswas allocated, if necessary.necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. Interest payments on impaired loans arewere typically applied to principal unless collectabilitycollectibility of the principal amount iswas reasonably assured, in which case interest iswas recognized on a cash basis. Impaired loans, or portions thereof, arewere charged off when deemed uncollectable.

uncollectible.

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
Further information regarding our accounting policies related to past due loans, nonaccrual loans and troubled-debt restructurings is presented in Note 3.
Acquired Loans
Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value. The allowance for credit losses related to the acquired loan portfolio is not carried over. Acquired loans are classified into two categories based on the credit risk characteristics of the underlying borrowers as either purchased credit deteriorated (“PCD”) loans, or loans with no evidence of credit deterioration
(“non-PCD”).
PCD loans are defined as a loan or pool of loans that have experienced more-than-insignificant credit deterioration since the origination date. The Company uses a combination of individual and pooled review approaches to determine if acquired loans are PCD. At acquisition, the Company considers a number of factors to determine if an acquired loan or pool of loans has experienced more-than-insignificant credit deterioration.
The initial allowance related to PCD loans that share similar risk characteristics is established using a pooled approach. The Company uses either a discounted cash flow or weighted average remaining life method to determine the required level of the allowance. PCD loans that were classified as nonaccrual as of the acquisition date and are collateral dependent are assessed for allowance on an individual basis.
For PCD loans, an initial allowance is established on the acquisition date and combined with the fair value of the loan to arrive at acquisition date amortized cost. Accordingly, no allowance for credit losses is recognized on PCD loans at the acquisition date.
Subsequent to the acquisition date, the initial allowance for credit losses on PCD loans will increase or decrease based on future evaluations, with changes recognized in the provision for credit losses. 
Non-PCD
loans are pooled into segments together with originated loans that share similar risk characteristics and have an allowance established on the acquisition date, which is recognized in the current period provision for credit losses.
Determining the fair value of the acquired loans involves estimating the principal and interest payment cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life, interest rate profile, market interest rate environment, payment schedules, risk ratings, probability of default and loss given default, and estimated prepayment rates. For PCD loans, the
non-credit
discount or premium is allocated to individual loans as determined by the difference between the loan’s unpaid principal balance and amortized cost basis. The
non-credit
premium or discount is recognized into interest income on a level yield basis over the remaining expected life of the loan. For
non-PCD
loans, the fair value discount or premium is allocated to individual loans and recognized into interest income on a level yield basis over the remaining expected life of the loan.
Prior to January 1, 2020, loans acquired in a business combination that had evidence of credit impairment and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable were considered PCI. PCI loans were accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit grade, loan type, and date of origination.
Allowance for Credit Losses—Loans
The allowance for credit losses (“allowance” or “ACL”) is a contra-asset valuation account, calculated in accordance with
ASC 326, that is deducted from the amortized cost basis of loans. The ACL represents an amount which, in management’s judgement, is adequate to absorb the lifetime expected credit losses that may be experienced on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The allowance for credit losses is measured and recorded upon the initial recognition of a
F-13
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
financial asset. Determination of the adequacy of the allowance is inherently complex and requires the use of significant and highly subjective estimates. Loans are
charged-off
against the allowance when deemed uncollectible by management. Expected recoveries do not exceed the aggregate of amounts previously
charged-off
and expected to be
charged-off.
Adjustments to the allowance are reported in our income statement as a component of the provision for credit losses. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses.
The Company’s policy requires measurementmethodology for estimating the allowance includes: (1) a collective quantified reserve that reflects the Company’s historical default and loss experience adjusted for expected economic conditions throughout a reasonable and supportable period and the Company’s prepayment and curtailment rates; (2) collective qualitative factors that consider concentrations of the loan portfolio, expected changes to the economic forecasts, large relationships, early delinquencies, and factors related to credit administrations, including, among others,
loan-to-value
ratios, borrowers’ risk rating and credit score migrations; and (3) individual allowances on loans where borrowers are experiencing financial difficulty or when the Company determines that the foreclosure is probable.
In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk profiles. Common characteristics and risk profiles include the type/purpose of loan, underlying collateral, geographical similarity and historical/expected credit loss patterns. In developing these loan pools for the purposes of modeling expected credit losses, we also analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors. For modeling purposes, our loan portfolio segments include C&I, Municipal, Agricultural, Construction and Development, Farm, Non-Owner Occupied and Owner Occupied CRE, Residential, Consumer Auto and Consumer Non-Auto. We periodically reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary. Refer to Note 3 for more details on the Company’s portfolio segments.
The Company applies two methodologies to estimate the allowance on its pooled portfolio segments; discounted cash flows method and weighted average remaining life method. Allowance estimates on the following portfolio segments are calculated using the discounted cash flows method: C&I, Municipal, Construction and Development, Farm, Non-Owner Occupied and Owner Occupied CRE and Residential. Allowance estimates on the following portfolio segments are calculated using the remaining life method: Agriculture, Consumer Auto and Consumer Non-Auto. The models related to these methodologies utilize the Company’s historical default and loss experience adjusted for future economic forecasts. The reasonable and supportable forecast period represents a one-year economic outlook for the applicable economic variables. Following the end of the reasonable and supportable forecast period expected losses revert back to the historical mean over the next two years on a straight-line basis. Economic variables that have the most significant impact on the allowance include; Texas unemployment rate, Texas house price index and Texas retail sales index. Contractual loan level cash flows within the discounted cash flows methodology are adjusted for the Company’s historical prepayment and curtailment rate experience. 
In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for an impaired,credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk rating of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent loanwhen, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral less cost to sell. Otherat the measurement date, adjusted for estimated selling costs if satisfaction of the loan impairments fornon-collateral dependent loans are measured baseddepends on the present valuesale of expected future cash flows or the loan’s observable market price. At December 31, 2017 and 2016, all significant impaired loans have been determined to be collateral dependent andcollateral. We reevaluate the allowance for loss has been measured utilizing the estimated fair value of collateral supporting collateral dependent loans on an ongoing basis.
Management qualitatively adjusts model results for risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the collateral less cost to sell.

From time to time,expected credit losses within our loan pools. These qualitative factor

(“Q-Factor”)
adjustments may increase or decrease management’s estimate of expected credit losses by a calculated percentage or amount based upon 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 Companyestimated level of risk. The various risks that would not otherwisemay be considered in making
Q-Factor
adjustments include, among other things, the impact of (i) changes in lending policies and procedures, including changes in underwriting standards and practices for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reductioncollections, write-offs, and recoveries, (ii) actual and expected
F-14
Table of principal, or a

Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

longer term to maturity. For all impaired loans, including2018

changes in national, regional, and local economic and business conditions and developments that affect the Company’s troubled debt restructurings, the Company performs a periodic, well-documented credit evaluationcollectability of the borrower’s financial conditionloan pools, (iii) changes in the nature, volume and prospects for repayment to assesssize of a loan or the likelihood that all principalloan pools and interest payments required underin the terms of the agreement will be collectedunderlying loans, (iv) changes in full. When doubt existsthe experience, ability, and depth of our lending management and staff, (v) changes in volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets, (vi) changes in the quality of our credit review function, (vii) changes in the value of the underlying collateral for loans that are
non-collateral
dependent, (viii) the existence, growth, and effect of any concentrations of credit and (ix) other factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters or health pandemics.
Management believes it uses relevant information available to make determinations about the ultimate collectability of principalallowance and interest,that it has established the troubled debt restructuring remains onnon-accrual status and payments received are applied to reduce principal toexisting allowance in accordance with GAAP. However, the extent necessary to eliminate such doubt. This determination of accrual status is judgmentalthe allowance requires significant judgment, and is based on facts and circumstances related to each troubled debt restructuring. Eachestimates of these loans is individually evaluated for impairment and a specific reserve is recorded based on probableexpected lifetime losses taking into consideration the related collateral, modified loan terms and cash flow. As of December 31, 2017 and 2016, substantially all of the Company’s troubled debt restructured loans are included in thenon-accrual totals.

The Company originates certain mortgage loans for sale in the secondary market. Accordingly, these loans are classified asheld-for-sale and are carried at the lower of cost or fair value on an aggregate basis. 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.

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 asportfolio can vary significantly from the amounts actually observed. While management uses available information to recognize expected losses, future additions to the allowance may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest income on a level-yield method overrate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the lifefinancial condition of borrowers.

The adoption 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 generallyCECL standard did not result in a recoverysignificant change to any other credit risk management and monitoring processes, including identification of any previously recordedpast due or delinquent borrowers, nonaccrual practices, assessment of troubled debt restructurings or charge-off policies. 
Allowance for Credit Losses—Off-Balance-Sheet/Reserve for Unfunded Commitments 
The allowance for loan loss,credit losses on
off-balance-sheet
credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. These obligations include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. No allowance is recognized if we have the unconditional right to cancel the obligation. The allowance is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. Adjustments to the extent applicable, and/orallowance are reported in our income statement as a reclassification fromcomponent of the nonaccretable 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 purchasedprovision for credit impaired loans atlosses. At December 31, 2017 and 2016 were $618,000 and $1,256,000, respectively, compared to a contractual balance of $755,000 and $1,865,000, respectively. Other purchased credit impaired loan disclosures were omitted due to immateriality.

2020, the Company’s reserve for unfunded commitments totaled $5,486,000.

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 loancredit 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.

shorter

.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

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 and totaled $139,971,000$313,481,000 and $171,565,000, at both December 31, 20172020 and 2016.2019, respectively. There was no0 impairment recorded for the years ended December 31, 2017, 20162020, 2019 and 2015.

2018.

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Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
The carrying amount of goodwill arising from acquisitions that qualify as an asset purchase for federal income tax purposes was $74,376,000 both$16,048,000 and $18,680,000 at December 31, 20172020 and 2016,2019, respectively, and is deductible for federal income tax purposes.

Also included in other intangible assets are mortgage servicing rights totaling $1,795,000 at December 31, 2016. These servicing rights were sold to an unrelated third party in 2017 resulting in a loss on sale of approximately $215,000.

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 $29,156,000$170,395,000 and $21,492,000$67,506,000 at December 31, 20172020 and 2016, respectively, and the minimum pension liability (after applicable income tax benefit) totaling $2,370,000 and $3,047,000 at December 31, 2017 and 2016,2019, respectively, are included in accumulated other comprehensive income.

There were 0 amounts under the minimum pension liability at December 31, 2020 or 2019 (see Note 14).

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 $1,745,000, $882,000, and $644,000 forgrant date fair value is amortized over the years ended December 31, 2017, 2016 and 2015, respectively.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

vesting period which generally is six years. 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 $483,000 and $562,000, respectively, for the year ended December 31, 2017, $278,000 and $381,000, respectively, for the year ended December 31, 2016, and $139,000 and $62,000, respectively, for the year ended December 31, 2015.

shares which generally vests over periods of one to three years. See Note 1518 for further information.

Advertising Costs

Advertising costs are expensed as incurred.

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Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
Per Share Data

Net earnings per share (“EPS”) are computed by dividing net earnings by the weighted average number of common stock shares outstanding during the period. The Company calculates dilutivediluted 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 reflecteddetermined by application of the treasury stock method, whereby the proceeds from the exercised options and unearned compensation for restricted stock are assumed to be used to purchase common stockshares at the average market price during the respective year. ForAnti-dilutive shares for the yearyears ended December 31, 2015, 442,368 weighted average outstanding stock options2020 were anti-dilutive
399,300 and have beenwere excluded from the EPS calculations.computation of EPS. There were no such anti-dilutive stock options for the years ended December 31, 20172019 and 2016.2018. The following table reconciles the computation of basic EPS to dilutivediluted EPS:

   Net Earnings
(in thousands)		   Weighted
Average
Shares		   Per Share
Amount		 

For the year ended December 31, 2017:

      

Net earnings per share, basic

  $120,371    66,126,863   $1.82 

Effect of stock options and stock grants

   —      197,467    (0.01) 
  

 

 

   

 

 

   

 

 

 

Net earnings per share, assuming dilution

  $120,371    66,324,330   $1.81 
  

 

 

   

 

 

   

 

 

 

For the year ended December 31, 2016:

      

Net earnings per share, basic

  $104,774    66,013,004   $1.59 

Effect of stock options and stock grants

   —      89,882    —   
  

 

 

   

 

 

   

 

 

 

Net earnings per share, assuming dilution

  $104,774    66,102,886   $1.59 
  

 

 

   

 

 

   

 

 

 

For the year ended December 31, 2015:

      

Net earnings per share, basic

  $100,381    64,892,934   $1.55 

Effect of stock options and stock grants

   —      175,096    (0.01) 
  

 

 

   

 

 

   

 

 

 

Net earnings per share, assuming dilution

  $100,381    65,068,030   $1.54 
  

 

 

   

 

 

   

 

 

 

For the year ended December 31, 2020:  Net Earnings
(in thousands)		   Weighted
Average
Shares		   Per Share
Amount		 
Net earnings per share, basic
  $202,034    142,032,420   $1.42 
Effect of stock options and stock grants
   0      512,571    0 
                
Net earnings per share, diluted
  $202,034    142,544,991   $1.42 
                
For the year ended December 31, 2019:
               
Net earnings per share, basic
  $164,812    135,647,354   $1.22 
Effect of stock options and stock grants
   0      698,665    (0.01) 
                
Net earnings per share, diluted
  $164,812    136,346,019   $1.21 
                
For the year ended December 31, 2018:
               
Net earnings per share, basic
  $150,638    135,218,734   $1.11 
Effect of stock options and stock grants
   0      747,294    0   
                
Net earnings per share, diluted
  $150,638    135,966,028   $1.11 
                
Recently Issued and Effective Authoritative Accounting Guidance

Accounting Standards Update (“ASU”)2014-09, “Revenue from Contracts with Customers.”ASU2014-09 implements a comprehensive new revenue recognition standard that will supersede substantially all existing revenue recognition guidance. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU2015-4 “Revenue from Contracts with Customers – Deferral of the Effective Date” deferred the effective date of ASU2014-09 by one year and as a result, the new standard will be effective the first quarter of 2018. The Company’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU2014-09, andnon-interest income. Based on the Company’s analysis of the effect of the new standard on its recurring revenue streams, the Company did not expect and did not experience an impact on the Company’s financial statements upon adoption in the first quarter of 2018. No adjustments to opening retained earnings was recorded on January 1, 2018.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

ASU2014-15, “Presentation of Financial Statements — Going Concern.”ASU2014-15 requires management to evaluate an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management must evaluate whether conditions and events raise substantial doubt about an entity’s ability to continue as a going concern and then whether its plans alleviate that doubt. ASU2014-15 was effective in 2016 and management has performed and continues to perform such required evaluation and has concluded there were no such conditions or events that raised substantial doubt about the Company’s ability to continue as a going concern.

ASU2015-01, “Income Statement — Extraordinary and Unusual Items.” ASU2015-01 eliminated from U.S. GAAP the concept of extraordinary items, which, among other things, required an entity to show the item separately in the income statement, net of tax, after income from continuing operations. The new guidance became effective for the Company beginning January 1, 2016, and did not have a significant impact on the Company’s financial statements.

ASU2015-05, “Intangibles — Goodwill and Other —Internal-Use Software — Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.”ASU2015-05 addresses accounting for fees paid by a customer in cloud computing arrangements such as (i) software as a service, (ii) platform as a service, (iii) infrastructure as a service and (iv) other similar hosting arrangements. ASU2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU2015-05 became effective on January 1, 2016 and did not have a significant impact on the Company’s financial statements.

ASU2015-16, “Business Combinations — Simplifying the Accounting Measurement Period Adjustments.” ASU2015-16 amended business combination guidance to require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer must record, in the same period’s financial statements, the effect of earnings on changes in depreciation, amortization, or other income effects, if any, as a result of the changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Additionally, the entity is required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amended guidance became effective for the Company on January 1, 2016, and did not have a significant impact on the Company’s financial statements.

ASU2016-1, “Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.”ASU2016-1, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related toavailable-for-sale securities. ASU2016-1 became effective on January 1, 2018 and did not have a significant impact on the Company’s financial statements.

ASU2016-02, “Leases.”ASU2016-02 will amend 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) aright-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

specified asset for the lease term.

ASU2016-02 does 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 will be effective in the first quarter of 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company continues to evaluate the provision of the new lease standard but, due to the small number of lease agreements presently in effect for the Company, does not expect the new guidance will have a significant impact on the Company’s financial statements.

ASU2016-09, “Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting.”ASU2016-09 will amend current guidance such that all excess tax benefits and tax deficiencies related to share-based payment awards will be recognized as income tax expense or benefit in the income statement during the period in which they occur. Additionally, excess tax benefits will be classified along with other income tax cash flows as an operating activity rather than a financing activity. ASU2016-09 also provides that any entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, which is the current requirement, or account for forfeitures when they occur. ASU2016-09 became effective January 1, 2017 and did not have a significant impact on the Company’s financial statements.

ASU2016-13, “Financial Instruments — Credit Losses.” ASU2016-13 implements a comprehensive change in estimating the allowances for loan losses from the current model of losses inherent in the loan portfolio to a current expected credit loss model that generally is expected to result in earlier recognition of allowances for losses. Additionally, purchase accounting rules have been modified as well as credit losses onheld-to-maturity debt securities. ASU2016-13 will be effective in the first quarter of 2020. While the Company generally expects that the implementation of ASU2016-13 will increase their allowance for loan losses balance, the Company is continuing to evaluate the potential impact on the Company’s financial statements.

ASU

2017-04, “Intangibles —
“Intangibles – Goodwill and Other.”
ASU
2017-04 will amend
amended and simplifysimplified 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 quantitativequalitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. ASU
2017-04 will be
became effective for the Company on January 1, 2020 and isdid not expected to have a significant impact on the Company’s financial statements.

ASU2017-07, “Compensation — Retirement Benefits, Improving
2018-13,
“Fair Value Measurement (Topic 820). – Disclosure Framework—Changes to the PresentationDisclosure Requirements for Fair Value Measurement.”
ASU
2018-13
modified 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 Net Periodic Pension Costcertain disclosures, and Net Periodic Post-Retirement Benefit Cost.” ASU2017-17 will require employers that sponsor defined benefit pension plans to present the service cost component of net periodic benefit cost in the same income statement line itemadd disclosure requirements identified as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost will be presented separately from the service cost component. relevant.
ASU2017-17
2018-13
became effective in 2018on January 1, 2020 and as the Company froze its defined benefit pension plan in 2004, there is no service cost component of its net periodic benefit cost and therefore the new standard had nodid not have a significant impact on the Company’s financial statements.

ASU2017-08, “Receivables — Nonrefundable Fees and Other Cost: Premium Amortization on Purchased Callable Debt Securities.” ASU2017-08 addresses
2019-12,
“Income Taxes (Topic 740): Simplifying the amortization methodAccounting for all callable bonds purchased at a premium to par. UnderIncome Taxes.”
ASU
2019-12,
simplifies the revised guidance, entities will be required to amortize premiums on callable bondsaccounting for income taxes by eliminating certain exceptions related to the earliest call date.approach for intra-period tax 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. ASU2017-08
2019-12
is effective in 2019 although early adoption for the Company for annual reporting periods after December 15, 2020, and interim periods within. Adoption of ASU
2019-12
is permitted. The Company electednot expected to early adopt ASU2017-08 in the first quarter of 2017. The adoption of this guidance did not have a material impact on the Company’s financial statements.

ASU 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassificationstatements and related disclosures.

F-17
Table of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017 that changed the Company’s income tax rate from 35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December 15, 2018 although early adoption is permitted. The Company determined it will early adopt ASU 2018-02 in the first quarter of 2018 and will reclassify its stranded tax debit of $5,761,000 within accumulated other comprehensive income to retained earnings at March 31, 2018.

Contents

FIRST FINANCIAL
BANKSHARES
, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

2018

2.INTEREST-BEARING TIME DEPOSITS IN BANKS AND
SECURITIES:

Interest-bearing time deposits

Debt securities have been classified in banks totaled $1,458,000the condensed consolidated balance sheets according to management’s intent. The amortized cost, related gross unrealized gains and $1,707,000 at December 31, 2017losses, allowance for credit losses and 2016, respectively, and have original maturities generally ranging from one to three years.

A summarythe fair value of the Company’s

available-for-sale
securities as of December 31, 2017 and 2016 are as follows (in(dollars in thousands):

   December 31, 2017 
   Amortized
Cost Basis		   Gross
Unrealized
Holding
Gains		   Gross
Unrealized
Holding
Losses		   Estimated
Fair Value		 

Securitiesavailable-for-sale:

        

Obligations of U.S. government sponsored enterprises and agencies

  $60,516   $—     $(186)   $60,330 

Obligations of state and political subdivisions

   1,369,295    52,491    (936)    1,420,850 

Corporate bonds and other

   11,421    43    (5)    11,459 

Residential mortgage-backed securities

   1,223,452    4,561    (8,916)    1,219,097 

Commercial mortgage-backed securities

   377,934    263    (2,460)    375,737 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total securitiesavailable-for-sale

  $3,042,618   $57,358   $(12,503)   $3,087,473 
  

 

 

   

 

 

   

 

 

   

 

 

 
   December 31, 2016 
   Amortized
Cost Basis		   Gross
Unrealized
Holding
Gains		   Gross
Unrealized
Holding
Losses		   Estimated
Fair Value		 

Securitiesavailable-for-sale:

        

U.S. Treasury securities

  $10,649   $19   $—     $10,668 

Obligations of U.S. government sponsored enterprises and agencies

   113,450    253    —      113,703 

Obligations of state and political subdivisions

   1,534,095    40,194    (10,013)    1,564,276 

Corporate bonds and other

   51,920    476    (3)    52,393 

Residential mortgage-backed securities

   848,614    8,260    (5,513)    851,361 

Commercial mortgage-backed securities

   269,044    622    (1,230)    268,436 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total securitiesavailable-for-sale

  $2,827,772   $49,824   $(16,759)   $2,860,837 
  

 

 

   

 

 

   

 

 

   

 

 

 

Disclosures related to​​​​​​​​​​​​​​

   December 31, 2020 
   Amortized
Cost Basis		   Gross
Unrealized
Holding Gains		   Gross
Unrealized
Holding Losses		  Estimated
 
Fair
Value		 
Securities
available-for-sale:
                   
Obligations of state and political subdivisions  $2,283,616   $143,339   $(79)  $2,426,876 
Residential mortgage-backed securities
   1,421,922    50,473    (115)   1,472,280 
Commercial mortgage-backed securities
   467,243    22,077    (4)   489,316 
Corporate bonds and other
   4,398    159    0     4,557 
                    
Total securities
available-for-sale
  $4,177,179   $216,048   $(198)  $4,393,029 
                    
   December 31, 2019 
   Amortized
Cost Basis		   Gross
Unrealized
Holding Gains		   Gross
Unrealized
Holding Losses		  Estimated
Fair Value		 
Securities
available-for-sale:
                   
U.S. Treasury securities
  $9,997   $22   $—    $10,019 
Obligations of state 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 did 0t hold any securities classified as
held-to-maturity
for the Company’sheld-to-maturity securities, which totaled $121,000 atyears ended December 31, 2016, have not been presented due to insignificance. There were noheld-to-maturity securities owned by the Company at December 31, 2017.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 20162020 and 2015

2019.

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 December 31, 2017,2020, were computed by using scheduled amortization of balances and historical prepayment rates. At December 31, 2017 and 2016, the Company did not hold any CMOs that entail higher risks than standard mortgage-backed securities.

The amortized cost and estimated fair value of
available-for-sale
securities at December 31, 2017,2020, by contractual and expected maturity, are shown below (in thousands):

   Amortized
Cost Basis		   Estimated
Fair Value		 

Due within one year

  $184,538   $185,547 

Due after one year through five years

   631,376    654,092 

Due after five years through ten years

   623,628    650,923 

Due after ten years

   1,690    2,077 

Mortgage-backed securities

   1,601,386    1,594,834 
  

 

 

   

 

 

 

Total

  $3,042,618   $3,087,473 
  

 

 

   

 

 

 

   Amortized
Cost Basis		   Estimated
Fair Value		 
Due within one year
  $285,774   $289,600 
Due after one year through five years
   2,078,388    2,187,779 
Due after five years through ten years
   1,805,324    1,907,631 
Due after ten years
   7,693    8,019 
           
Total
  $4,177,179   $4,393,029 
           
F-18
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
The following tables disclose, as of December 31, 20172020 and 2016,2019, 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 

December 31, 2017

  Fair Value   Unrealized
Loss		   Fair Value   Unrealized
Loss		   Fair Value   Unrealized
Loss		 

Obligations of U.S. government sponsored enterprises and agencies

  $60,329   $186   $—     $—     $60,329   $186 

Obligations of state and political subdivisions

   66,361    219    44,938    717    111,299    936 

Corporate bonds and other

   224    2    237    3    461    5 

Residential mortgage-backed securities

   701,252    3,988    239,641    4,928    940,893    8,916 

Commercial mortgage-backed securities

   239,548    1,500    92,549    960    332,097    2,460 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,067,714   $5,895   $377,365   $6,608   $1,445,079   $12,503 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   Less than 12 Months   12 Months or Longer   Total 

December 31, 2016

  Fair Value   Unrealized
Loss		   Fair Value   Unrealized
Loss		   Fair Value   Unrealized
Loss		 

Obligations of state and political subdivisions

  $446,052   $9,997   $1,209   $16   $447,261   $10,013 

Corporate bonds and other

   244    3    —      —      244    3 

Residential mortgage-backed securities

   372,331    4,532    33,227    981    405,558    5,513 

Commercial mortgage-backed securities

   193,495    1,180    13,263    50    206,758    1,230 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,012,122   $15,712   $47,699   $1,047   $1,059,821   $16,759 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   Less than 12 Months   12 Months or Longer   Total 
December 31, 2020
  Fair
Value		   Unrealized
Loss		   Fair
Value		   Unrealized
Loss		   Fair
Value		   Unrealized
Loss		 
Obligations of state and political subdivisions
  $25,214   $79   $0     $0     $25,214   $79 
Residential mortgage-backed securities
   36,017    96    3,156    19    39,173    115 
Commercial mortgage-backed securities
   16,218    4    0      0      16,218    4 
                               
Total
  $77,449   $179   $3,156   $19   $80,605   $198 
                               
   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   $0     $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 
                               
The number of investments in an unrealized loss position totaled 33824 at December 31, 2017. We do not believe these2020. Any unrealized losses are “other-than-temporary”. In estimating other-than-temporary impairment losses, management considers, among other things,in the length of timeU.S. treasuries and the extent to which the fair value has been less than costgovernment agencies, state and the financial conditionmunicipal, mortgage-backed and near-term prospects of the issuer. Additionally management does not (i) have the intent to sell ourasset-backed investment 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 and (iii) that the length of time and extent that fair value has been

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

less than cost is not indicative of recoverability. The unrealized losses noted are interest rate related due to the level of interest rates at December 31, 2017 compared2020 are due to thechanges in interest rates and not credit-related events. As such, no allowance for credit losses is required at December 31, 2020. Unrealized losses on investment securities are expected to recover over 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.securities approach maturity. Our mortgage related securities are backed by GNMA, FNMA and FHLMC or are collateralized by securities backed by these agencies. At December 31, 2017, 82.98%2020 and 2019, 80.87% and 86.34%, respectively, of our

available-for-sale
securities that are obligations of states and political subdivisions were issued within the State of Texas, of which 31.21% are51.57% and 41.35%, respectively, were guaranteed by the Texas Permanent School Fund.

Securities, carried at approximately $2,018,420,000$3,005,084,000 and $1,940,460,000 at$2,329,784,000 December 31, 20172020 and 2016,2019, respectively, were pledged as collateral for public or trust fund deposits, repurchase agreements and for other purposes required or permitted by law.

During 2017, 20162020, 2019 and 2015,2018, sales of investment securities that were classified as
available-for-sale
totaled $120,576,000, $40,510,000$263,042,000, $67,414,000 and $35,580,000.$220,259,000. Gross realized gains from 2017, 20162020, 2019 and 2015,2018, securities sales were $2,643,000, $1,579,000$3,637,000, $752,000 and $443,000,$1,847,000, respectively. Gross realized losses from 2017, 20162020, 2019 and 20152018 securities sales were $815,000, $309,000$4,000, $19,000 and $11,000,$493,000, respectively.
The specific identification method was used to determine cost in order to compute the realized gains and losses.

3.
LOANS AND ALLOWANCE FOR LOANCREDIT LOSSES:

Loansheld-for-investment

In conjunction with the adoption of ASC 326, the Company expanded its four loan portfolios into ten portfolio segments.
For the year ended December 31, 2020, the tables to follow outline the Company’s loan portfolio by classthe ten portfolio segments where applicable. For all prior periods, management has elected to maintain its previously disclosed loan segments.
F-19
Table of financing receivablesContents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
Loans
held-for-investment
by portfolio segment are as follows (in(dollars in thousands):

   December 31, 
   2017   2016 

Commercial

  $684,099   $674,410 

Agricultural

   94,543    84,021 

Real estate

   2,302,998    2,189,844 

Consumer

   403,929    409,032 
  

 

 

   

 

 

 

Total loansheld-for-investment

  $3,485,569   $3,357,307 
  

 

 

   

 

 

 

Loansheld-for-sale totaled $15,130,000 and $26,898,000

   December 31, 
   2020   2019 
Commercial:
          
C&I
  $1,131,382   $N/A 
Municipal
   181,325    N/A 
           
Total Commercial
   1,312,707    856,326 
Agricultural
   94,864    103,640 
Real Estate:
          
Construction & Development
   553,959    N/A 
Farm
   152,237    N/A 
Non-Owner
Occupied
CRE
   617,686    N/A 
Owner Occupied
CRE
   746,974    N/A 
Residential
   1,248,409    N/A 
           
Total Real Estate
   3,319,265    2,823,372 
Consumer:
          
Auto
   353,595    N/A 
Non-Auto
   90,602    N/A 
           
Total Consumer
   444,197    411,631 
           
Total Loans
   5,171,033    4,194,969 
           
Less: Allowance for credit losses
   (66,534)    (52,499) 
           
Loans, net
  $5,104,499   $4,142,470 
Outstanding loan balances at December 31, 20172020 and 2016, respectively, which2019, are valued usingnet of unearned income, including net deferred loan fees.
Our subsidiary bank has established a line of credit with the lowerFederal Home Loan Bank of cost or fair value.

Dallas (“FHLB”) to provide liquidity and meet pledging requirements for those customers eligible to have securities pledged to secure certain uninsured deposits. At December 31, 2020, $3,239,207,000 in loans held by our bank subsidiary were subject to blanket liens as security for this line of credit. At December 31, 2020, there was no balance outstanding under this line of credit.

The Company completed the implementation of the CECL standard effective January 1, 2020. The new guidance requires additional disclosures and introduces certain changes to definitions previously used under allowance for loan losses guidance. Accordingly, the following sections present separate disclosures compliant with the new and the legacy disclosure requirements.
The Company’snon-accrual nonaccrual loans, loanloans still accruing and past due 90 days or more and restructured loans are as follows (in(dollars in thousands):

   December 31, 
   2017   2016 

Non-accrual loans*

  $17,670   $27,371 

Loans still accruing and past due 90 days or more

   288    284 

Troubled debt restructured loans**

   627    701 
  

 

 

   

 

 

 

Total

  $18,585   $28,356 
  

 

 

   

 

 

 

   December 31, 
   2020   2019 
Nonaccrual loans
  $42,619   $24,582 
Loans still accruing and past due 90 days or more
   113    153 
Troubled debt restructured loans*
   24    26 
           
Total
  $42,756   $24,761 
           
*Includes $618,000
Troubled debt restructured loans of $7,407,000 and $1,256,000, respectively, of purchased credit impaired$4,791,000, for which interest collection is doubtful, are included in nonaccrual loans as of December 31, 20172020 and 2016.2019, respectively.

F-2
0
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND
SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

**Our troubled debt restructured loans of $4,629,000 and $6,863,000, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included innon-accrual loans as of December 31, 2017 and 2016, respectively.

The Company’s recorded investment in impaired loans and the related valuation allowance are as follows (in thousands):

December 31, 2017   December 31, 2016 
Recorded Investment   Valuation Allowance   Recorded Investment   Valuation Allowance 
 $17,670   $3,996   $27,371   $5,012 

 

 

   

 

 

   

 

 

   

 

 

 

2018

The Company
 had $20,117,000 $
42,898,000
and $29,000,000 $
25,770,000
innon-accrual,
nonaccrual
,
past due 90 days or more and still accruing, restructured loans and foreclosed assets at December 31, 20172020 and 2016,2019, respectively.Non-accrual
Nonaccrual
loans totaled $17,670,000$42,619,000 and $27,371,000$24,582,000 at December 31, 20172020 and 2016,2019, respectively, and consisted of the following amounts by type (in thousands):

   December 31, 
   2017   2016 

Commercial

  $3,612   $7,284 

Agricultural

   134    99 

Real Estate

   12,838    18,754 

Consumer

   1,086    1,234 
  

 

 

   

 

 

 

Total

  $17,670   $27,371 
  

 

 

   

 

 

 

No

   December 31, 
   2020   2019 
Commercial:
          
C&I
  $5,015   $N/A 
Municipal
   —      N/A 
           
Total Commercial
   5,015    3,093 
Agricultural
   1,076    1,376 
Real Estate:
          
Construction & Development
   3,838    N/A 
Farm
   7,299    N/A 
Non-Owner
Occupied
CRE
   5,243    N/A 
Owner Occupied
CRE
   10,797    N/A 
Residential
   8,851    N/A 
           
Total Real Estate
   36,028    19,787 
Consumer:
          
Auto
   407    N/A 
Non-Auto
   93    N/A 
           
Total Consumer
   500    326 
           
 
Total
  $42,619   $24,582 
           
The Company recognized interest income on
nonaccrual
 loans prior to being recognized as
nonaccrual
of approximately $1,006,000, $750,000 and $948,000 during the years ended De
c
ember 31, 2020, 2019 and 2018, respectively.
NaN significant additional funds are committed to be advanced in connection with impaired
nonaccrual
loans as of December 31, 2017.

The Company’s impaired loans and related2020.

Summary information on the allowance as offor credit losses for the year ended December 31, 2017 and 2016 are summarized2020, in line with the new CECL disclosure requirements, is outlined by portfolio segment in the following tables by class(in thousands):
December 31, 2020
  C&I  Municipal  Agricultural  Construction &
Development		  Farm 
Beginning balance, prior to adoption of ASC 326
  $11,010  $1,112  $1,206  $6,045  $663 
Impact of adopting ASC 326
   (155)   (16)   (8)   (75)   (8) 
Initial allowance on acquired TB&T PCD loans   —     —     —     —     727 
Provision for loan losses
   3,955   456   398   7,542   337 
Recoveries
   1,315   —     31   —     157 
Charge-offs
   (2,516)   —     (372)   —     —   
                      
Ending balance
  $13,609  $1,552  $1,255  $13,512  $1,876 
                      
F-21
Table of financing receivables (in thousands). No interest income was recognized on impaired loans subsequent to their classification as impaired.

December 31, 2017

  Unpaid
Contractual
Principal
Balance		   Recorded
Investment
With No
Allowance*		   Recorded
Investment
With
Allowance		   Total
Recorded
Investment		   Related
Allowance		   12 Month
Average
Recorded
Investment		 

Commercial

  $5,597   $518   $3,094   $3,612   $1,194   $4,849 

Agricultural

   147    —      134    134    31    120 

Real Estate

   16,823    2,348    10,490    12,838    2,316    13,835 

Consumer

   1,284    143    943    1,086    455    1,258 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $23,851   $3,009   $14,661   $17,670   $3,996   $20,062 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

*Includes $618,000 of purchased credit impaired loans.

December 31, 2016

  Unpaid
Contractual
Principal
Balance		   Recorded
Investment
With No
Allowance*		   Recorded
Investment
With
Allowance		   Total
Recorded
Investment		   Related
Allowance		   12 Month
Average
Recorded
Investment		 

Commercial

  $13,389   $1,148   $6,136   $7,284   $2,128   $4,921 

Agricultural

   103    —      99    99    25    50 

Real Estate

   23,466    6,229    12,525    18,754    2,428    16,170 

Consumer

   1,421    280    954    1,234    431    914 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $38,379   $7,657   $19,714   $27,371   $5,012   $22,055 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

*Includes $1,256,000 of purchased credit impaired loans.

Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 2016
3
1, 2020, 2019 and 2015

The Company recognized interest income2018

December 31, 2020 (continued)
  
Non-Owner

Occupied
CRE
  Owner
Occupied
CRE
  Residential  Auto  Non-
Auto		  Total 
Beginning balance, prior to adoption of ASC 326
  $7,341  $9,533  $10,392  $3,900  $1,297  $52,499 
Impact of adopting ASC 326
   (91)   (118)   (129)   (14)   (5)   (619) 
Initial allowance on acquired TB&T PCD loans   —     847   104   —     —     1,678 
Provision for loan losses
   1,573   2,635   2,456   (2,587)   (717)   16,048 
Recoveries
   131   17   151   269   171   2,242 
Charge-offs
   (563)   (567)   (373)   (548)   (375)   (5,314) 
                          
Ending balance
  $8,391  $12,347  $12,601  $1,020  $371  $66,534 
                          
Summary information on impaired loans prior to being recognized as impaired of approximately $624,000, $829,000 and $922,000 during the yearsallowance for loan losses for the year ended December 31, 2017, 20162019, in line with the legacy disclosure requirements, is outlined by portfolio segment in the following tables (in thousands):
December 31, 2019
  Commercial  Agricultural  Real Estate  Consumer  Total 
Beginning balance
  $11,948  $1,446  $32,342  $5,466  $51,202 
Provision for loan losses
   398   (79)   2,520   126   2,965 
Recoveries
   1,364   158   404   532   2,458 
Charge-offs
   (1,588)   (319)   (1,292)   (927)   (4,126) 
                      
Ending balance
  $12,122  $1,206  $33,974  $5,197  $52,499 
                      
Additionally, the Company records a reserve for unfunded commitments in other liabilities which totaled $5,486,000 and 2015,$809,000 at December 31, 2020 and 2019, respectively.

The provision for loan losses above of $16,048,000 is combined with the provision for unfunded commitments of $3,469,000 and reported in the aggregate under the provision for credit losses in the statement of earnings for the year ended December 31, 2020.
F-22
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
The Company’s loans that are individually evaluated for credit losses (both collateral and
non-collateral
dependent) and their related allowances as of December 31, 2020, are summarized in the following table by loan segment in accordance with the new CECL disclosure requirements (in thousands):
December 31, 2020
  Collateral
Dependent Loans
Individually
Evaluated for
Credit Losses
Without an
Allowance		   Collateral
Dependent Loans
Individually
Evaluated for
Credit Losses
With an
Allowance		   
Non-Collateral

Dependent
Loans
Individually
Evaluated for
Credit Losses		   Total Loans
Individually
Evaluated
for Credit
Losses		   Related
Allowance
on Collateral
Dependent
Loans		   Related
Allowance
on
 
Non-
Collateral

Dependent
Loans		   Total
Allowance for
Credit Losses
on Loans
Individually
Evaluated for
Credit Losses		 
Commercial:
                                   
C&I  $1,544   $3,471   $25,629   $30,644   $799   $4,592   $5,391 
Municipal
   —      —      9,439    9,439    —      1,435    1,435 
                                    
Total Commercial
   1,544    3,471    35,068    40,083    799    6,027    6,826 
Agricultural
   470    606    5,572    6,648    96    886    982 
Real Estate:
                                   
Construction & Development
   1,176    2,661    11,368    15,205    35    617    652 
Farm
   2,614    4,685    3,349    10,648    654    658    1,312 
Non-Owner
Occupied
CRE
   4,009    1,234    17,383    22,626    500    1,421    1,921 
Owner Occupied
CRE
   7,279    3,518    51,933    62,730    657    5,172    5,829 
Residential
   4,347    4,504    28,196    37,047    676    2,431    3,107 
                                    
Total Real Estate
   19,425    16,602    112,229    148,256    2,522    10,299    12,821 
Consumer:
                                   
Auto
   —      407    1,523    1,930    1    5    6 
Non-Auto
   —      94    440    534    1    1    2 
                                    
Total Consumer
   —      501    1,963    2,464    2    6    8 
                                    
Total
  $21,439   $21,180   $154,832   $197,451   $3,419   $17,218   $20,637 
                                    
The following table presents the recorded investment with respect to impaired loans, the associated allowance by the applicable portfolio segment and the unpaid contractual principal balance of the impaired loans at December 31, 2019, in accordance with the legacy disclosure requirements (in thousands):
December 31, 2019
  Unpaid
Contractual
Principal
Balance		   Recorded
Investment
With No
Allowance		   Recorded
Investment
With
Allowance		   Total
Recorded
Investment		   Related
Allowance		   12 Month
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 
                               
F-23
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
The Company’s allowance for loans that are individually evaluated for credit losses and collectively evaluated for credit losses as of December 31, 2020, are summarized in the following table by loan segment in accordance with the new CECL disclosure requirements (in thousands). Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
December 31, 2020
  C&I   Municipal   Agricultural   Construction 
&
Development		   Farm 
Loans individually evaluated for credit losses 
$
5,391
  
$
1,435
  
$
982
  
$
652
  
$
1,312
 
Loans collectively evaluated for credit losses  
8,218
   
117
   
273
   
12,860
   
564
 
                          
Total
 
$
13,609
  
$
1,552
  
$
1,255
  
$
13,512
  
$
1,876
 
                          
December 31, 2020 (continued)
  
Non-Owner

Occupied
C
RE
   Owner
Occupied
C
R
E
   Residential   Auto   Non-Auto   Total 
Loans individually evaluated for credit losses 
$
1,921
  
$
5,829
  
$
3,107
  
$
6
  
$
2
  
$
20,637
 
Loans collectively evaluated for credit losses  
6,470
   
6,518
   
9,494
   
1,014
   
369
   
45,897
 
                               
Total
 
$
8,391
  
$
12,347
  
$
12,601
  
$
1,020
  
$
371
  
$
66,534
 
                               
The Company’s allowance for loans that are individually evaluated for credit losses and collectively evaluated for credit losses as of December 31, 2019, are summarized in the following table by loan segment in accordance with the legacy disclosure requirements (in thousands).
December 31, 2019
  Commercial   Agricultural   Real
 
Estate		   Consumer   Total 
Loans individually evaluated for 
impairment
 
$
1,042
  
$
235
  
$
1,950
  
$
1
  
$
3,228
 
Loan collectively evaluated for 
impairment
  
11,080
   
971
   
32,024
   
5,196
   
49,271
 
                          
Total
 
$
12,122
  
$
1,206
  
$
33,974
  
$
5,197
  
$
52,499
 
                          
The Company’s recorded investment in loans as of December 31, 2020, related to the balance in the allowance for credit losses on the basis of the Company’s evaluation methodology in accordance with the new CECL disclosure requirements follows below (in thousands).
December 31, 2020
  C&I   Municipal   Agriculture   Construction
&
Development		   Farm 
Loans individually evaluated for credit losses
 
$
30,644
  
$
9,439
  
$
6,648
  
$
15,205
  
$
10,648
 
Loans collectively evaluated for credit losses
  
1,100,738
   
171,886
   
88,216
   
538,754
   
141,589
 
                          
Total
 
$
1,131,382
  
$
181,325
  
$
94,864
  
$
553,959
  
$
152,237
 
                          
December 31, 2020 (continued)
  
Non
-
Owner
Occupied
CRE
   Owner
Occupied
CRE		   Residential   Auto   Non-Auto   Total 
Loans individually evaluated for credit losses
 
$
22,626
  
$
62,730
  
$
37,047
  
$
1,930
  
$
534
  
$
197,451
 
Loans collectively evaluated for credit losses
  
595,060
   
684,244
   
1,211,362
   
351,665
   
90,068
   
4,973,582
 
                               
Total
 
$
617,686
  
$
746,974
  
$
1,248,409
  
$
353,595
  
$
90,602
  
$
5,171,033
 
                               
F-24
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
The Company’s recorded investment in loans as of December 31, 2019, related to the balance in the allowance for loan losses on the basis of the Company’s legacy impairment methodology follows below (in thousands).
December 31, 2019
  Commercial   Agricultural   Real Estate   Consumer   Total 
Loans individually evaluated for impairment
  $3,093   $1,376   $19,787   $326   $24,582 
Loan 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 
                          
From a credit risk standpoint, the Company rates its loans in one of fourfive categories: (i) pass, (ii) special mention, (iii) substandard, (iv) doubtful or (iv) doubtful. Loans rated as(v) loss (which arecharged-off.

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).

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 onnon-accrual.

nonaccrual.

The following summarizestables summarize the Company’s internal ratings of its loans
held-for-investment,
including the year of origination, by class of financing receivables and portfolio segments, which classes are the same, at December 31, 2017 and 20162020 under the new CECL disclosure requirements (in thousands)millions):

December 31, 2017

  Pass   Special
Mention		   Substandard   Doubtful   Total 

Commercial

  $649,166   $6,282   $28,651   $—     $684,099 

Agricultural

   90,457    1,527    2,559    —      94,543 

Real Estate

   2,227,302    29,089    46,607    —      2,302,998 

Consumer

   401,434    181    2,314    —      403,929 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $3,368,359   $37,079   $80,131   $—     $3,485,569 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2016

  Pass   Special
Mention		   Substandard   Doubtful   Total 

Commercial

  $629,756   $5,769   $38,885   $—     $674,410 

Agricultural

   81,620    715    1,686    —      84,021 

Real Estate

   2,111,947    18,091    59,806    —      2,189,844 

Consumer

   406,182    212    2,638    —      409,032 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $3,229,505   $24,787   $103,015   $—     $3,357,307 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31,
  2020   2019   2018   2017   2016   Prior   Revolving
Loans 
Amort
Cost Basis		   Total 
C&I
                                        
Risk rating:
                                        
Pass
  $874   $101   $70   $28   $10   $16   $—     $1,099 
Special mention
   9    2    —      1     —      —      —      12 
Substandard
   12    4    4    —      —      —      —      20 
Doubtful
   —      —      —    —      —      —      —      —   
                                         
Total
  $895   $107   $74   $29   $10   $16   $—     $1,131 
                                         
F-25 

Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

2018

December 31,
  2020   2019   2018   2017   2016   Prior    Revolving
Loans 
Amort
Cost Basis		   Total 
Municipal
                                        
Risk rating:
                                        
Pass
  $26   $19   $29   $14   $13   $71   $—     $172 
Special mention
   —      —      —      —      —      —      —      —   
Substandard
   2    —      —      5    1    1    —      9 
Doubtful
   —      —      —    —      —      —      —      —   
                                         
Total
  $28   $19   $29   $19   $14   $72   $—     $181 
                                         
         
December 31,
  2020   2019   2018   2017   2016   Prior   Revolving
Loans
Amort
Cost
 
Basis		   Total 
Agricultural
                                        
Risk rating:
                                        
Pass
  $57   $19   $9   $3   $1   $—     $—     $89 
Special mention
   —      —      —      —      —      —      —      —   
Substandard
   6     —      —      —      —      —      —      6   
Doubtful
   —    —    —    —      —      —      —      — 
                                         
Total
  $63   $19   $9   $3   $1   $0     $—     $95 
                                         
         
December 31,
  2020   2019   2018   2017   2016   Prior   Revolving
Loans
Amort
Cost Basis		   Total 
Construction & Development
                                        
Risk rating:
                                        
Pass
  $371   $97   $36   $19   $7   $9   $—     $539 
Special mention
   2    4    —      —      —      —      —      6 
Substandard
   4    1    —      3    —      1    —      9 
Doubtful
   —      —      —    —      —      —      —      —   
                                         
Total
  $377   $102   $36   $22   $7   $10   $—     $554 
                                         
         
December 31,
  2020   2019   2018   2017   2016   Prior   Revolving
Loans Amort
Cost Basis		   Total 
                                         
Farm
                                        
Risk rating:
                                        
Pass
  $57   $22   $18   $11   $11   $23   $—     $142 
Special mention
   —      —      —      —      —      —      —      —   
Substandard
   7    1    0    1    —      1    —      10 
Doubtful
   —      —      —    —      —      —      —      —   
                                         
Total
  $64   $23   $18   $12   $11   $24   $—     $152 
                                         
F-26 
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
December 31,
  2020   2019   2018   2017   2016   Prior   Revolving
Loans
Amort
Cost Basis		   Total 
Non-Owner
Occupied CRE
                                        
Risk rating:
                                        
Pass
  $ 197   $ 117   $93   $44   $55   $88   $ —     $ 594 
Special mention
   1    —      1    8    1    —      —      11 
Substandard
   —      2    —      —      —      11    —      13 
Doubtful
   —      —      —      —      —      —      —      0   
                                         
Total
  $198   $119   $94   $52   $56   $99   $—     $618 
                                         
December 31,
  2020   2019   2018   2017   2016   Prior   Revolving
Loans
Amort
Cost Basis		   Total 
Owner Occupied CRE
                                        
Risk rating:
                                        
Pass
  $ 176   $ 132   $ 105   $75   $65   $ 132   $ —     $ 685 
Special mention
   5    5    2    4    1    1    —      18 
Substandard
   5    4    20    4    1    10    —      44 
Doubtful
   —      —      —      —      —      —      —      —   
                                         
Total
  $186   $141   $127   $83   $67   $143   $—     $747 
                                         
December 31,
  2020   2019   2018   2017   2016   Prior   Revolving
Loans
Amort
Cost Basis		   Total 
Residential
                                        
Risk rating:
                                        
Pass
  $373   $172   $134   $101   $101   $237   $93   $1,211 
Special mention
   3    1    1    1    1    3    —      10 
Substandard
   5    3    3    3    1    10    2    27 
Doubtful
   —      —      —      —      —      —      —      —   
                                         
Total
  $ 381   $ 176   $ 138   $ 105   $ 103   $ 250   $95   $ 1,248 
                                         
December 31,
  2020   2019   2018   2017   2016   Prior   Revolving
Loans
Amort
Cost Basis		   Total 
Auto
                                        
Risk rating:
                                        
Pass
  $177   $104   $39   $21   $9   $2   $—     $352 
Special mention
   —      —      —      —      —      —      —      —   
Substandard
   1    1    —      —      —      —      —      2 
Doubtful
   —      —      —      —      —      —      —      —   
                                         
Total
  $ 178   $ 105   $39   $21   $9   $2   $ —     $ 354 
                                         
F-27
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
December 31,
  2020   2019   2018   2017   2016   Prior   Revolving
Loans
Amort
Cost Basis		   Total 
Non-Auto
                                        
Risk rating:
                                        
Pass
  $48   $21   $7   $4   $1   $2   $7   $90 
Special mention
   —      —      —      —      —      —      —      —   
Substandard
   —      —      —      —      —      1    —      1 
Doubtful
   —      —      —    —      —      —      —      —   
                                         
Total
  $48   $21   $7   $4   $1   $3   $7   $91 
                                         
December 31,
  2020   2019   2018   2017   2016   Prior   Revolving
Loans
Amort
Cost Basis		   Total 
Total Loans
                                        
Risk rating:
                                        
Pass
  $2,356   $ 804   $ 540   $ 320   $ 273   $ 580   $ 100   $4,973 
Special mention
   20    12    4    14    3    4    —      57 
Substandard
   42    16    27    16    3    35    2    141 
Doubtful
   —      —      —    —      —      —      —      —   
                                         
Total
  $2,417   $834   $571   $349   $280   $619   $102   $5,171 
                                         
The following tables summarize the Company’s internal ratings of its loans
held-for-investment,
at December 31, 2019 under the legacy disclosure requirements (in million):
December 31, 2019
  Pass   Special
Mention		   Substandard   Doubtful   Total 
Commercial
  $825   $21   $10   $—     $856 
Agricultural
   102    —      2    —      104 
Real Estate
   2,717    42    64    —      2,823 
Consumer
   411    —      1    —      412 
                          
Total
  $ 4,055   $63   $ 77   $ —     $ 4,195 
                          
F-28
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
At December 31, 20172020 and 2016,2019, the Company’s past due loans are as follows (in thousands):

December 31, 2017

  15-59
Days
Past
Due*		   60-89
Days
Past
Due		   Greater
Than
90
Days		   Total
Past Due		   Total
Current		   Total Loans   Total 90
Days
Past Due
Still
Accruing		 

Commercial

  $2,039   $1,104   $1,081   $4,224   $679,875   $684,099   $7 

Agricultural

   640    —      —      640    93,903    94,543    —   

Real Estate

   12,308    511    1,198    14,017    2,288,981    2,302,998    216 

Consumer

   1,360    361    135    1,856    402,073    403,929    65 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $16,347   $1,976   $2,414   $20,737   $3,464,832   $3,485,569   $288 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2016

  15-59
Days
Past
Due*		   60-89
Days
Past
Due		   Greater
Than
90
Days		   Total
Past Due		   Total
Current		   Total Loans   Total 90
Days
Past Due
Still
Accruing		 

Commercial

  $3,908   $1,122   $2,220   $7,250   $667,160   $674,410   $10 

Agricultural

   185    —      —      185    83,836    84,021    —   

Real Estate

   13,172    1,301    5,268    19,741    2,170,103    2,189,844    272 

Consumer

   1,845    368    122    2,335    406,697    409,032    2 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $19,110   $2,791   $7,610   $29,511   $3,327,796   $3,357,307   $284 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 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:
                                   
C&I
  $3,647   $406   $576   $4,629   $1,126,753   $1,131,382   $21 
Municipal
   —      —    —      —      181,325    181,325    —   
                                    
Total Commercial
   3,647    406    576    4,629    1,308,078    1,312,707    21 
Agricultural
   193    95    0      288    94,576    94,864    —   
Real Estate:
                                   
Construction & Development
   4,775    44    —      4,819    549,140    553,959    —   
Farm
   708    —      —      708    151,529    152,237    —   
Non-Owner
Occupied
CRE
   613    —      —      613    617,073    617,686    —   
Owner Occupied
CRE
   1,393    322    133    1,848    745,126    746,974    —   
Residential
   8,072    18    275    8,365    1,240,044    1,248,409    33 
                                    
Total Real Estate
   15,561    384    408    16,353    3,302,912    3,319,265    33 
Consumer:
                                   
Auto
   551    158    75    784    352,811    353,595    59 
Non-Auto
   214    24    —      238    90,364    90,602    —   
                                    
Total Consumer
   765    182    75    1,022    443,175    444,197    59 
                                    
Total
  $20,166   $1,067   $1,059   $22,292   $5,148,741   $5,171,033   $113 
                                    
December 31, 2019
  
15-59

Days

Past
 
Due*
   
60-89

Days

Past
Due
   Greater
Than
90
Days		   Total
Past
Due		   Current   Total
Loans		   
Total 90
Days
 
Past Du
e
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 at December 31, 2017 and 2016 by portfolio segment (in thousands). There were no allowances for purchased credit impaired loans at December 31, 2017 or 2016. Allocation

F-29 
Table of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

December 31, 2017

  Commercial   Agricultural   Real
Estate		   Consumer   Total 

Loans individually evaluated for impairment

  $1,194   $31   $2,316   $455   $3,996 

Loan collectively evaluated for impairment

   9,671    1,274    27,580    5,635    44,160 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $10,865   $1,305   $29,896   $6,090   $48,156 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2016

  Commercial   Agricultural   Real
Estate		   Consumer   Total 

Loans individually evaluated for impairment

  $2,128   $25   $2,428   $431   $5,012 

Loan collectively evaluated for impairment

   9,579    1,076    24,436    5,676    40,767 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $11,707   $1,101   $26,864   $6,107   $45,779 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in the allowance for loan losses for the years ended December 31, 2017 and 2016 are summarized as follows (in thousands):

December 31, 2017

  Commercial  Agricultural  Real
Estate		  Consumer  Total 

Beginning balance

  $11,707  $1,101  $26,864  $6,107  $45,779 

Provision for loan losses

   1,233   243   4,055   999   6,530 

Recoveries

   943   32   192   501   1,668 

Charge-offs

   (3,018)   (71)   (1,215)   (1,517)   (5,821) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  $10,865  $1,305  $29,896  $6,090  $48,156 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

December 31, 2016

  Commercial  Agricultural  Real
Estate		  Consumer  Total 

Beginning balance

  $12,644  $1,191  $24,375  $3,667  $41,877 

Provision for loan losses

   5,101   104   1,150   3,857   10,212 

Recoveries

   952   25   2,021   508   3,506 

Charge-offs

   (6,990)   (219)   (682)   (1,925)   (9,816) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  $11,707  $1,101  $26,864  $6,107  $45,779 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

2018

The Company’s recorded investmentrestructuring of a loan is considered a “troubled debt restructuring” if both the borrower is experiencing financial difficulties and the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules, reductions in loans as of December 31, 2017collateral and 2016 relatedother actions intended to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology was as follows (in thousands). Purchased credit impaired loans of $618,000 and $1,256,000, respectively, at December 31, 2017 and 2016 are included in loans individually evaluated for impairment.

December 31, 2017

  Commercial   Agricultural   Real Estate   Consumer   Total 

Loans individually evaluated for impairment

  $3,612   $134   $12,838   $1,086   $17,670 

Loan collectively evaluated for impairment

   680,487    94,409    2,290,160    402,843    3,467,899 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $684,099   $94,543   $2,302,998   $403,929   $3,485,569 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2016

  Commercial   Agricultural   Real Estate   Consumer   Total 

Loans individually evaluated for impairment

  $7,284   $99   $18,754   $1,234   $27,371 

Loan collectively evaluated for impairment

   667,126    83,922    2,171,090    407,798    3,329,936 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $674,410   $84,021   $2,189,844   $409,032   $3,357,307 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

minimize potential losses.

The Company’s loans that were modified in the years ended December 31, 20172020 and 2016,2019, and considered troubled debt restructurings are as follows (in thousands):

   Year Ended December 31, 2017   Year Ended December 31, 2016 
   Number   Pre-Modification
Recorded
Investment		   Post-
Modification
Recorded
Investment		   Number   Pre-Modification
Recorded
Investment		   Post-
Modification
Recorded
Investment		 

Commercial

   11   $895   $895    15   $3,208   $3,208 

Agricultural

   —      —      —      —      —      —   

Real Estate

   5    625    625    6    1,460    1,460 

Consumer

   1    25    25    7    189    189 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   17   $1,545   $1,545    28   $4,857   $4,857 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   Year Ended December 31, 2020 
       
Pre-Modification
   
Post-
Modification
 
       Recorded   Recorded 
   Number   Investment   Investment 
Commercial:
               
C&I
   11   $1,151   $1,151 
Municipal
   —      —      —   
                
Total Commercial
   11    1,151    1,151 
Agricultural
   1    134    134 
Real Estate:
               
Construction & Development
   1    81    81 
Farm
   —      —      —   
Non-Owner
Occupied
CRE
   —      —      —   
Owner Occupied
CRE
   3    3,508    3,508 
Residential
   2    152    152 
                
Total Real Estate
   6    3,741    3,741 
Consumer:
               
Auto
   —      —      —   
Non-Auto
   1    14    14 
                
Total Consumer
   1    14    14 
                
Total
   19   $5,040   $5,040 
                
   Year Ended December 31, 2019 
   Number   
Pre-Modification

Recorded
Investment
   
Post-
Modification

Recorded
Investment
 
Commercial
   7   $551   $551 
Agricultural
   11    812    812 
Real Estate
   7    1,397    1,397 
Consumer
   —      —      —   
                
Total
   25   $2,760   $2,760 
                
F-30 
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
The balances below provide information as to how the loans were modified as troubled debtdeb
t
 restructured loans during the years ended December 31, 20172020 and 20162019 (in thousands):

   Year Ended December 31, 2017   Year Ended December 31, 2016 
   Adjusted
Interest
Rate		   Extended
Maturity		   Combined
Rate and
Maturity		   Adjusted
Interest
Rate		   Extended
Maturity		   Combined
Rate and
Maturity		 

Commercial

  $—     $195   $700   $—     $2,560   $648 

Agricultural

   —      —      —      —      —      —   

Real Estate

   —      312    313    —      298    1,162 

Consumer

   —      25    —      —      70    119 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $—     $532   $1,013   $—     $2,928   $1,929 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   Year Ended December 31, 2020 
   Adjusted       Combined 
   Interest   Extended   Rate and 
   Rate   Maturity   Maturity 
Commercial:
               
C&I
  $—     $918   $233 
Municipal
   —      —      —   
                
Total Commercial
   —      918    233 
Agricultural
   —      134    —   
Real Estate:
               
Construction & Development
   —      —      81 
Farm
   —      —      —   
Non-Owner
Occupied
CRE
   —      —      —   
Owner
Occupied
CRE
   —      1,546    1,962 
Residential
   —      —      152 
                
Total Real Estate
   —      1,546    2,195 
Consumer:
               
Auto
   —      —      —   
Non-Auto
   —      14    —   
                
Total Consumer
   —      14    —   
                
Total
  $—     $2,612   $2,428 
                

   Year Ended December 31, 2019 
   Adjusted
Interest
Rate		   Extended
Maturity		   Combined
Rate and
Maturity		 
Commercial
  $—     $389   $162 
Agricultural
   —      354    458 
Real Estate
   —      494    903 
Consumer
   —      —    —   
                
Total
  $—     $1,237   $1,523 
                
F-31 
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

2018

During the yearsyear ended December 31, 20172020 no loans were modified as troubled debt restructured loans within the previous 12 months and 2016,for which there was a payment default. During the year ended December 31, 2019, certain loans were modified as a troubled debt restructured loans 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 or more due or results in the foreclosure and repossession of the applicable collateral. The loans with payment default are as follows (dollars in(in thousands):

   Year Ended
December 31, 2017		   Year Ended
December 31, 2016		 
   Number   Balance   Number   Balance 

Commercial

   2   $88    4   $1,690 

Agriculture

   —      —      —      —   

Real Estate

   —      —      3    921 

Consumer

   —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   2   $88    7   $2,611 
  

 

 

   

 

 

   

 

 

   

 

 

 

As of

   Year Ended December 31, 2019 
   Number   Balance 
Commercial
   —     $—   
Agriculture
   7    267 
Real Estate
   —      —   
Consumer
   —      —   
           
Total
   7   $267 
           
December 31, 2017,2020, the Company has no0 commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

Beginning in
mid-March
of 2020, the Company began offering deferral modification of principle and/or interest payments, for varying periods but typically no more than 90 days, to selected borrowers on a
case-by-case
basis. At December 31, 2020, the Company had approximately 59 loans totaling 
 $2,691,000
 in outstanding loans subject to deferral and modification agreements. The CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID 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 did not include balances related to COVID modifications.
An analysis of the changes in loans to officers, directors, principal shareholders, or associates of such persons for the year ended December 31, 20172020 (determined as of each respective
year-end)
follows (in thousands):

   Beginning
Balance		  Additional
Loans		  Payments  Ending
Balance

Year ended December 31, 2017

  $44,429  $58,420  $46,945  $55,904

   
Beginning

Balance
   
Additional

Loans
   Payments   
Ending

Balance
 
Year ended December 31, 2020
  $85,364   $107,837   $102,237   $90,964 
In the opinion of management, those loans are on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unaffiliated persons.

Our subsidiary bank has established a line of credit with the Federal Home Loan Bank of Dallas (FHLB) to provide liquidity

4.
LOANS
HELD-FOR-SALE:
Loans held for sale totaled $83,969,000 and meet pledging requirements for those customers eligible to have securities pledged to secure certain uninsured deposits.$28,228,000 at December 31, 2020 and 2019, respectively. At December 31, 2017, $2,163,425,0002020 and 2019, $4,384,000 and $5,152,000, respectively, are valued at the lower of cost or fair value, and the remaining amount 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, heldwhich are sold on a servicing released basis, are valued using a market approach by our bank subsidiary wereutilizing 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
F-32 
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
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. The Company has no continuing ownership in any of these 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.
5.
DERIVATIVE FINANCIAL INSTRUMENTS
:
The Company enters into 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 for accounting purposes 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 blanket liensthe 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 securityLevel 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 this linethe particular derivative contract and these instruments are therefore classified as Level 2 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 credit. Atthese 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 (in thousands):
December 31, 2020:
  
Outstanding

Notional

Balance
   
Asset

Derivative

Fair Value
   
Liability

Derivative

Fair Value
 
IRLCs
  $202,906   $4,618   $0   
Forward mortgage-backed securities trades
   198,000    0      1,560 
December 31, 2019:
  
Outstanding

Notional

Balance
   
Asset

Derivative

Fair 
Value
   
Liability

Derivative

Fair 
Value
 
IRLCs
  $47,415   $886   $0   
Forward mortgage-backed securities trades
   78,500    0      152 
F-33 
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2017, there was no balance outstanding under this line of credit.

4.2020, 2019 and 2018

6.
BANK PREMISES AND EQUIPMENT
:

The following is a summary of bank premises and equipment (in thousands):

   

Useful Life

  December 31, 
     2017   2016 

Land

  —    $29,508   $28,266 

Buildings

  20 to 40 years   119,728    115,566 

Furniture and equipment

  3 to 10 years   58,672    58,145 

Leasehold improvements

  Lesser of lease term or 5 to 15 years   4,118    4,783 
    

 

 

   

 

 

 
     212,026    206,760 

Less-accumulated depreciation and amortization

   (88,000)    (84,075) 
    

 

 

   

 

 

 

Total Bank Premises and Equipment

  $124,026   $122,685 
    

 

 

   

 

 

 

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

   
Useful Life
   December 31, 
       2020   2019 
Land
   
–
   $34,266   $30,800 
Buildings
   
20 to 40 years
    148,630    138,110 
Furniture and equipment
   
3 to 10 years
    57,283    60,200 
Leasehold improvements
   
Lesser of lease
 
term
or 5 to 15 years
    3,016    3,364 
                
         243,195    232,474 
Less
:
 accumulated depreciation and amortization
    (100,926)    (101,452) 
                
Total Bank Premises and Equipment
   $142,269   $131,022 
                
Depreciation expense for the years ended December 31, 2017, 20162020, 2019 and 20152018 amounted to $9,810,000, $9,390,000,$9,865,000, $9,801,000 and $9,125,000,$10,130,000, respectively, and is included in the captions net occupancy expense and equipment expense in the accompanying consolidated statements of earnings.

The Company is lessor for portions of its banking premises. Total rental income for all leases included in net occupancy expense is approximately $2,367,000, $2,139,000$2,789,000, $2,831,000 and $1,949,000,$2,682,000, for the years ended December 31, 2017, 20162020, 2019 and 2015, respectively.

During the years ended December 31, 2017, 2016 and 2015, the Company recorded gains (losses) on sale of the bank premises and equipment totaling ($396,000), $168,000 and ($820,000)2018, respectivel

y
. In 2017, the Company sold its San Angelo main region branch building for $1,586,000 and recorded a gain of $210,000 and cancelled its San Angelo grocery store branch lease and recorded a write off of leasehold improvements of $360,000. In 2016, the Company sold its Weatherford and Orange main region branch building for $1,385,000 and $2,000,000 and recorded a gain of $560,000 and a loss of $31,000, respectively. The Company recorded a write down of $1,000,000 in 2015 in anticipation of the Orange branch building sale.

5.

7.
DEPOSITS AND BORROWINGS:

Time deposits of $250,000 or more totaled approximately $115,203,000$153,962,000 and $130,385,000$117,716,000 at December 31, 20172020 and 2016,2019, respectively.

At December 31, 2017,2020, the scheduled maturities of time deposits (in thousands) were, as follows:

Year ending December 31,

    

2018

  $384,668 

2019

   38,031 

2020

   14,607 

2021

   6,645 

2022

   7,304 

Thereafter

   —   
  

 

 

 
  $451,255 
  

 

 

 

Year ending December 31,
    
2021
  $391,638 
2022
   46,762 
2023
   17,733 
2024
   9,838 
2025
   9,429 
Thereafter
   25 
      
   $475,425 
      
Deposits received from related parties at December 31, 20172020 and 20162019 totaled $74,270,000$98,413,000 and $114,513,000,$87,027,000, respectively.

Borrowings at December 31, 20172020 and 20162019 consisted of the following (dollars in(in thousands):

   December 31, 
   2017   2016 

Securities sold under agreements with customers to repurchase

  $320,450   $360,820 

Federal funds purchased

   10,550    9,950 

Advances from Federal Home Loan Bank of Dallas

   —      75,000 
  

 

 

   

 

 

 

Total

  $331,000   $445,770 
  

 

 

   

 

 

 

   December 31, 
   2020   2019 
Securities sold under agreements
with customers to repurchase.
  $412,743   $375,106 
Federal funds purchased
   17,350    6,250 
Advances from Federal Home
Loan Bank of Dallas
   0      0   
           
Total
  $430,093   $381,356 
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Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
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.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

At December 31, 2016, the Company had advances from the Federal Home Loan Bank of Dallas of $75,000,000 that were repaid in 2017. The interest rate on this advance was 0.46% at December 31, 2016. There were no such advances outstanding at December 31, 2017.

6.

8.
LINE OF CREDIT:

The Company renewed its loan agreement, effective June 30, 2017,2019, with Frost Bank. Under the loan agreement, as renewed and amended, we are permitted to draw up to $25,000,000 on a revolving line of credit. Prior to June 30, 2019,2021, interest iswill be paid quarterly at
The Wall Street Journal
Prime Rate and the line of credit matures June 30, 2019.2021. If a balance exists at June 30, 2019,2021, the principal balance converts to a term facility payable quarterly over five years and interest is paid quarterly at our election at
The Wall Street
Journal
Prime Rate plus 50 basis points or LIBOR plus 250 basis points.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 December 31, 2017.2020. There was no0 outstanding balance under the line of credit as of December 31, 20172020 or 2016.

7.2019.

9.
INCOME TAXES:

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law with sweeping modifications to the Internal Revenue Code. The primary change for the Company was to lower the corporate income tax rate to 21% from 35%. The Company’s deferred tax assets and liabilities were
re-measured
based on the income tax rates at which they are expected to reverse in the future, which is generally 21%. However, the Company continues to analyze certain aspects of the Act resulting in refinement of the calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the
re-measurement
of the Company’s deferred tax balance was $7,650,000, a reduction of income tax expense for the year ended December 31, 2017.

Additionally,
the Company updated its estimate of the impact to our deferred tax balances based on the proposed regulations issued to date and recorded an additional reduction of income tax expense for the year ended December 31, 2018 of $664,000. NaN additional adjustment amounts were recorded for the years ended December 31, 2020 and 2019.
The Company files a consolidated federal income tax return. Income tax expense is comprised of the following (dollars in(in thousands):

   Year Ended December 31, 
   2017   2016   2015 

Current federal income tax

  $34,421   $30,381   $31,014 

Current state income tax

   99    99    103 

Deferred federal income tax expense (benefit)

   (53)    673    320 

Restatement of net deferred tax liability due to change in income tax rate

   (7,650)    —      —   
  

 

 

   

 

 

   

 

 

 

Income tax expense

  $26,817   $31,153   $31,437 
  

 

 

   

 

 

   

 

 

 

   Year Ended December 31, 
   2020   2019   2018 
Current federal income tax
  $45,133   $33,099   $28,359 
Current state income tax
   447    150    92 
Deferred federal income tax expense (benefit)
   (5,249)    (29)    (250) 
Restatement of net deferred tax liability due to change in income tax rate
   —      —      (664) 
                
Income tax expense
  $40,331   $33,220   $27,537 
                
F-35 

Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

2018

Income tax expense, as a percentage of pretax earnings, differs from the statutory federal income tax rate as follows:

   As a Percent of Pretax
Earnings		 
   2017  2016  2015 

Statutory federal income tax rate

   35.0%   35.0%   35.0% 

Restatement of net deferred tax liability due to change in income tax rate

   (5.3)   —     —   

Reductions in tax rate resulting from interest income exempt from federal income tax

   (11.5)   (12.1)   (11.4) 

Effect of state income tax

   0.1   0.1   0.1 

ESOP tax deduction

   (0.2)   (0.2)   (0.2) 

Other

   0.1   0.1   0.3 
  

 

 

  

 

 

  

 

 

 

Effective income tax rate

   18.2%   22.9%   23.8% 
  

 

 

  

 

 

  

 

 

 

   As a Percent of Pretax Earnings 
   2020  2019  2018 
Statutory federal income tax rate
   21.0%   21.0%   21.0% 
              
Restatement of net deferred tax liability due to change in income tax rate
   —     —     (0.4) 
Reductions in tax rate resulting from interest income exempt from federal income tax
   (4.6)   (4.5)   (5.2) 
Effect of state income tax
   0.2   0.1   0.1 
ESOP tax deduction
   (0.1)   (0.1)   (0.1) 
Other
   0.1   0.3   0.1 
              
Effective income tax rate
   16.6%   16.8%   15.5% 
              
The approximate effects of each type of difference that gave rise to the Company’s deferred tax assets and liabilities at December 31, 20172020 and 20162019 are as follows (dollars in(in thousands):

   2017   2016 

Deferred tax assets:

    

Tax basis of loans in excess of financial statement basis

  $10,550   $17,006 

Minimum liability in defined benefit plan

   766    1,641 

Recognized for financial reporting purposes but not yet for tax purposes:

    

Deferred compensation

   1,818    2,807 

Write-downs and adjustments to other real estate owned and repossessed assets

   11    9 

Other deferred tax assets

   79    226 
  

 

 

   

 

 

 

Total deferred tax assets

  $13,224   $21,689 
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Financial statement basis of fixed assets in excess of tax basis

  $3,343    5,870 

Intangible asset amortization deductible for tax purposes, but not for financial reporting purposes

   9,926    15,191 

Recognized for financial reporting purposes but not yet for tax purposes:

    

Accretion on investment securities

   1,039    1,788 

Pension plan contributions

   1,086    1,799 

Net unrealized gain on investment securitiesavailable-for-sale

   9,420    11,573 

Other deferred tax liabilities

   31    83 
  

 

 

   

 

 

 

Total deferred tax liabilities

  $24,845   $36,304 
  

 

 

   

 

 

 

Net deferred tax asset (liability)

  $(11,621)   $(14,615) 
  

 

 

   

 

 

 

   2020   2019 
Deferred tax assets:
          
Tax basis of loans in excess of financial statement basis
  $19,193   $12,245 
Recognized for financial reporting purposes but not yet for tax purposes: Deferred compensation   2,479    2,254 
Write-downs and adjustments to other real estate owned and repossessed assets
   —      48 
Other deferred tax assets
   746    157 
           
Total deferred tax assets
  $22,418   $14,704 
           
Deferred tax liabilities:
          
Financial statement basis of fixed assets in excess of tax basis
  $5,712   $4,651 
Intangible asset amortization deductible for tax purposes, but not for financial reporting purposes
   13,400    11,935 
Recognized for financial reporting purposes but not yet for tax purposes:
          
Accretion on investment securities
   698    755 
Net unrealized gain on investment securities
available-for-sale
   45,295    17,945 
Other deferred tax liabilities
   46    51 
           
Total deferred tax liabilities
  $65,151   $35,337 
           
Net deferred tax asset (liability)
  $(42,733)   $(20,633) 
           
At December 31, 20172020 and 2016,2019, management believes that it is more likely than not that all of the deferred tax amountsassets shown above will be realized and therefore no0 valuation allowance was recorded.

Current authoritative accounting guidance prescribes arecognitiona recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets themore-likely-than-not recognition threshold is measured at the largest amount of cumulative benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet themore-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

recognized tax positions that no longer meet themore-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Current authoritative accounting guidance also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The Company concluded the tax 

F-36 
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
benefits of positions taken and expected to be taken on its tax returns should be recognized in the financial statements under this guidance. The Company files income tax returns in the U.S. federal jurisdiction and several U.S. state jurisdictions.margin tax returns in the state of Texas. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 20142016 or Texas state tax examinations by tax authorities for years before 2013.2017. As of December 31, 20172020 and 2016,2019, the Company believes that there are no0 uncertain tax positions.

8.

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.

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:

follow
s
:
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

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

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.

F-37 
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
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.
There were no0 transfers between Level 2 and Level 3 during the yearyears ended December 31, 2017, 20162020, 2019 and 2015.

2018.

The following table summarizes financial assets the Company’s
available-for-sale
securities, loans
held-for-sale,
and financial liabilitiesderivatives which are measured at fair value on a recurring basis as of December 31, 20172020 and 20162019 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

December 31, 2017

  Level 1
Inputs		   Level 2
Inputs		   Level 3
Inputs		   Total Fair
Value		 

Available-for-sale investment securities:

        

Obligations of U.S. government sponsored enterprises and agencies

  $—     $60,330   $—     $60,330 

Obligations of state and political subdivisions

   —      1,420,850    —      1,420,850 

Corporate bonds

   —      7,031    —      7,031 

Residential mortgage-backed securities

   —      1,219,097    —      1,219,097 

Commercial mortgage-backed securities

   —      375,737    —      375,737 

Other securities

   4,428    —      —      4,428 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $4,428   $3,083,045   $—     $3,087,473 
  

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2016

  Level 1
Inputs		   Level 2
Inputs		   Level 3
Inputs		   Total Fair
Value		 

Available-for-sale investment securities:

        

U.S. Treasury securities

  $10,668   $—     $—     $10,668 

Obligations of U.S. government sponsored enterprises and agencies

   —      113,703    —      113,703 

Obligations of state and political subdivisions

   —      1,564,276    —      1,564,276 

Corporate bonds

   —      47,965    —      47,965 

Residential mortgage-backed securities

   —      851,361    —      851,361 

Commercial mortgage-backed securities

   —      268,436    —      268,436 

Other securities

   4,428    —      —      4,428 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $15,096   $2,845,741   $—     $2,860,837 
  

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2020
  
Level 1

Inputs
   
Level 2

Inputs
   
Level 3

Inputs
   
Total Fair

Value
 
Available-for-sale
investment securities:
                    
Obligations of state and political subdivisions
  $—     $2,426,876   $—     $2,426,876 
Residential mortgage-backed securities
   —      1,472,280    —      1,472,280 
Commercial mortgage-backed securities
   —      489,316    —      489,316 
Other securities
   4,557    —      —      4,557 
                     
Total
  $4,557   $4,388,472   $—     $4,393,029 
                     
Loans
held-for-sale
  $—     $79,585   $—     $79,585 
IRLCs
  $—     $4,618   $—     $4,618 
Forward mortgage-backed securities traded
  $—   $(1,560)  $—     $(1,560) 
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 state 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 traded
  $—   $(152)   $—     $(152) 
F-38 
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
The following table summarizes the Company’s loans
held-for-sale
at fair value and the net unrealized gains as of the balance sheet dates shown below (in thousands):
   
December 31,
 
   
2020
   
2019
 
Unpaid principal balance on loans
held-for-sale
  $76,602   $22,340 
Net unrealized gains on loans
held-for-sale
   2,983    736 
           
Loans
held-for-sale
at fair value
  $79,585   $23,076 
           
The following table summarizes the Company’s gains on sale and fees of mortgage loans for the years ended December 31, 2020, 2019 and 2018 (in thousands):
   
Years ended December 31,
 
   
2020
   
2019
   
2018
 
Realized gain on sale and fees on mortgage loans*
  $39,378   $17,748   $14,595 
Change in fair value on loans
held-for-sale
and IRLCs
   5,900    145    919 
Change in forward mortgage-backed securities trades
   (1,406)    251    (357) 
                
Total gain on sale of mortgage loans
  $43,872   $18,144   $15,157 
                
* This includes gain on loans
held-for-sale
carried under the fair value method and lower of cost or market.
NaN residential
mortgage loans held-for-sale were 90 days or more past due or considered nonaccrual as of December
 31, 2020 or 2019. NaN significant credit losses were recognized on mortgage loans
held-for-sale
for the years ended December 31, 2020, 2019 and 2018.
Certain financial
non-financial
assets and financial
non-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). Financial assets and financial liabilities measured at fair value on anon-recurring basis include the following at December 31, 2017:

Impaired Loans — 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 December 31, 2017, impaired loans with a carrying value of $17,670,000 were reduced by specific valuation reserves totaling $3,996,000 resulting in a net fair value of $13,674,000.

LoansHeld-for-Sale — Loansheld-for-sale are reported at the lower of cost or fair value. The Company originates conforming loans that are sold in the secondary market in which loan pricing is available. In

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

determining whether the fair value of loansheld-for-sale is less than cost and quoted prices are available for similar assets. These loans are considered Level 2 of the fair value hierarchy. At December 31, 2017, the Company’s mortgage loansheld-for-sale was recorded at cost as fair value exceeded cost.

Certainnon-financial assets andnon-financial liabilities measured at fair value on anon-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 anon-recurring nonrecurring basis during the yearyears ended December 31, 20172020 and 20162019 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. Reevaluation
Re-evaluation
of other real estate owned is performed at least annually as required by regulatory guidelines or more often if particular circumstances arise. The following table presentsThere were no other real estate owned properties that were
re-measured
subsequent to their initial transfer to other real estate owned (dollars in thousands):

   Year Ended
December 31,		 
   2017   2016 

Carrying value of other real estate owned prior tore-measurement

  $1,067   $—   

Write-downs included in gain (loss) on sale of other real estate owned

   (306)    —   
  

 

 

   

 

 

 

Fair value

  $761   $—   
  

 

 

   

 

 

 

during the years ended December 31, 2020 and 2019.

At December 31, 20172020 and 2016,2019, other real estate owned totaled $1,347,000$119,000 and $413,000,$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.

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.

F-39 
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
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.

hierarch

y

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

.

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.

The estimated fair values and carrying values of all financial instruments under current authoritative guidance at December 31, 20172020 and 2016,2019, were as follows (dollars in(in thousands):

   2017   2016   Fair Value
Hierarchy
   Carrying
Value		   Estimated
Fair Value		   Carrying
Value		   Estimated
Fair Value		   

Cash and due from banks

  $209,583   $209,583   $204,782   $204,782   Level 1

Federal funds sold

   —      —      3,130    3,130   Level 1

Interest-bearing deposits in banks

   162,764    162,764    48,574    48,574   Level 1

Interest-bearing time deposits in banks

   1,458    1,458    1,707    1,709   Level 2

Available-for-sale securities

   3,087,473    3,087,473    2,860,837    2,860,837   Levels 1 and 2

Held-to-maturity securities

   —      —      121    124   Level 2

Loans

   3,452,543    3,470,133    3,338,426    3,361,735   Level 3

Accrued interest receivable

   36,081    36,081    36,469    36,469   Level 2

Deposits with stated maturities

   451,255    452,000    508,996    510,304   Level 2

Deposits with no stated maturities

   5,511,706    5,511,706    4,969,543    4,969,543   Level 1

Borrowings

   331,000    331,000    445,770    445,770   Level 2

Accrued interest payable

   197    197    225    225   Level 2

9.

   
2020
  
2019
     
   
Carrying
  
Estimated
  
Carrying
  
Estimated
  
Fair Value
 
   
Value
  
Fair Value
  
Value
  
Fair Value
  
Hierarchy
 
Cash and due from banks
  $211,113  $211,113  $231,534  $231,534   Level 1 
Federal funds sold
   —     —     3,150   3,150   Level 1 
Interest-bearing demand deposits in banks
   517,971   517,971   47,920   47,920   Level 1 
Available-for-sale
securities
   4,393,029   4,393,029   3,413,317   3,413,317   Levels
1 and 2		 
Loans
held-for-investment,
net of allowance for credit losses
   5,104,499   5,109,885   4,142,470   4,157,327   Level 3 
Loans
held-for-sale
   83,969   84,233   28,228   28,343   Level 2 
Accrued interest receivable
   53,433   53,433   36,894   36,894   Level 2 
Deposits with stated maturities
   475,542   477,218   420,013   421,397   Level 2 
Deposits with no stated maturities
   8,200,275   8,200,275   6,183,793   6,183,793   Level 1 
Borrowings
   430,093   430,093   381,356   381,356   Level 2 
Accrued interest payable
   377   377   628   628   Level 2 
IRLCs
   4,618   4,618   886   886   Level 2 
Forward mortgage-backed securities trades
   (1,560)   (1,560)   (152)   (152)   Level 
2
 
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Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
11.
COMMITMENTS AND CONTINGENCIES:

The Company is engaged in legal actions arising from the normal course of business. In management’s opinion, the Company has adequate legal defenses with respect to these actions, and as of December 31, 20172020 the resolution of these matters is not expected to have material adverse effects upon the results of operations or financial condition of the Company.

The Company leases a portion of its bank premises and equipment under operating leases. At December 31, 2017,2020, future minimum lease commitments were: 2018 — $385,000, 2019 — $303,000, 2020 — $173,000, 2021 — $41,000- $1,049,000, 2022 - $494,000, 2023 - $376,000, 2024 $317,000 and 2022 — $7,000.

10.2025 $218,000 and thereafter - $78,000.

12.
FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET
RISK:

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 the consolidated balance sheets.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At December 31, 2017, 2016 and 2015

2020, the Company’s reserve for unfunded commitments totaled $5,486,000 which is recorded in other liabilities.

Our exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. We generally use the same credit policies in making commitments and conditional obligations as we do foron-balance-sheet
on-balance
sheet instruments.

   Total Notional
Amounts Committed
December 31, 2017
(in thousands)		 

Financial instruments whose contract amounts represent credit risk:

  

Unfunded lines of credit

  $534,468 

Unfunded commitments to extend credit

   244,658 

Standby letters of credit

   28,858 
  

 

 

 

Total commercial commitments

  $807,984 
  

 

 

 

   
December 31, 2020

(in thousands)
 
Financial instruments whose contract amounts represent credit risk:
     
Unfunded lines of credit
  $871,960 
Unfunded commitments to extend credit
   742,538 
Standby letters of credit
   40,050 
      
Total commercial commitments
  $1,654,548 
      
The above table also does not include balances related to the Company’s IRLCs and forward mortgage-backed security trades.
Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a
case-by-case
basis. The amount of collateral obtained, as we deem necessary upon extension of credit, is based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment and income-producing commercial properties.

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

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.

11.

13.
CONCENTRATION OF CREDIT RISK:

The Company grants commercial, retail, agriculture and residential real estate loans to customers primarily in North Central, Southeastern and West Texas. Although the Company has a diversified loan portfolio, a substantial portion of its borrowers’ ability to honor their commitments is dependent upon each local economic sector. In addition, the Company holds mortgage related securities which are guaranteed by GNMA, FNMA or FHLMC or are collateralized by loans backed by these agencies.

12.

F-41 
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
14.
PENSION AND PROFIT SHARING PLANS:

PLAN:

The Company’sCompany had a defined benefit pension plan that was frozen effective January 1, 2004, whereby no new participants will bewere added to the Plan and no additional years of service will accrueaccrued to participants, unless the pension plan is reinstated at a future date.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 benefits for each employee were based on years of service and a percentageCompany annuitized approximately 53% of the employee’s qualifying compensation during the final years of employment. The Company’s funding policy was and is to contribute annually the amount necessary to satisfy the Internal Revenue Service’s funding standards. Contributions to the pension plan, prior to freezing the plan, were intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. As a result of the Pension Protection Act of 2006 (the “Protection Act”), the Company will be required to contribute amounts in future years to fund any shortfalls. The Company has evaluated the provisions of the Protection Act as well as the Internal Revenue Service’s funding standards to develop a plan for funding in future years. As a result, the Company made no contribution in 2017 and made a contribution totaling $500,000 in 2016, and is continuing to evaluate future funding amounts.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

Using an actuarial measurement date of December 31, 2017 and 2016, benefit obligation activityat that time and fair value of plan assetsrecorded a loss on settlement totaling $1,546,000 for the yearsyear ended December 31, 20172018. In 2019, the Company continued to take steps to completely settle and 2016,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 statement ofgain on hedging instrument entered into to minimize interest rate movement during the funded status as oftermination period. At December 31, 2017 and 2016, are as follows (dollars in thousands):

   2017   2016 

Reconciliation of benefit obligations:

    

Benefit obligation at January 1

  $15,453   $16,002 

Interest cost on projected benefit obligation

   635    665 

Actuarial loss

   486    139 

Benefits paid, including partial settlement of certain participant balances

   (1,043)    (1,353) 
  

 

 

   

 

 

 

Benefit obligation at December 31

  $15,531   $15,453 
  

 

 

   

 

 

 

Reconciliation of fair value of plan assets:

    

Fair value of plan assets at January 1

  $15,787   $14,820 

Actual return on plan assets

   2,302    1,820 

Employer contributions

   —      500 

Benefits paid, including partial settlement of certain participant balances

   (1,043)    (1,353) 
  

 

 

   

 

 

 

Fair value of plan assets at December 31

   17,046    15,787 
  

 

 

   

 

 

 

Funded status

  $1,515   $334 
  

 

 

   

 

 

 

Amounts recognized as a component of accumulated other comprehensive earnings as ofyear-end that have not been recognized as a component of the net period benefit cost of the Company’s defined benefit pension plan are as follows (in thousands):

   2017   2016 

Net actuarial loss

  $(3,597)   $(4,688) 

Deferred tax benefit

   1,227    1,641 
  

 

 

   

 

 

 

Amounts included in accumulated other comprehensive earnings, net of tax

  $(2,370)   $(3,047) 
  

 

 

   

 

 

 

Net periodic benefit cost for the years ended December 31, 2017, 2016 and 2015, are as follows (dollars in thousands):

   Year Ended December 31, 
   2017   2016   2015 

Service cost — benefits earned during the period

  $—     $—     $—   

Interest cost on projected benefit obligation

   635    665    622 

Expected return on plan assets

   (974)    (912)    (948) 

Amortization of unrecognized net loss

   249    375    222 

Recognized loss on partial settlement of certain participant balances

   —      267    —   
  

 

 

   

 

 

   

 

 

 

Net periodic pension benefit expense (benefit)

  $(90)   $395   $(104) 
  

 

 

   

 

 

   

 

 

 

The following table sets forth the rates used in the actuarial calculations of the present value of benefit obligations and net periodic pension cost and the rate of return on plan assets:

   2017  2016  2015 

Weighted average discount rate

   3.50%   4.25%   4.25% 

Expected long-term rate of return on assets

   6.25%   6.25%   6.25% 

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

The weighted average discount rate is estimated based on setting a discount rate to establish an obligation for pension benefits equivalent to an amount that, if invested in high quality fixed income securities, would produce a return that matches the expected benefit payment stream. The expected long-term rate of return on plan assets is based on historical returns and expectations of future returns based on asset mix, after consultation with our investment advisors and actuaries.

The major type of plan assets2019, all balances in the pension plan were zero and the targeted allocation percentage as of December 31, 2017 and 2016 is as follows:

   December 31,
2017
Allocation		  December 31,
2016
Allocation		  Targeted
Allocation		 

Equity securities

   75%   77%   75% 

Debt securities

   24%   22%   25% 

Cash and equivalents

   1%   1%   —   

The range and weighted average final maturities of debt securities held in the pension plan as of December 31, 2017 are 1.52 to 19.76 years and approximately 5.64 years, respectively. Assets held in the pension plan are considered either Level 1 consisting of the money market funds, publicly traded common stocks and publicly traded mutual funds or Level 2 consisting of obligations of state and political subdivisions, corporate bonds and mortgage-backed securities. There were no Level 3 securities. See note 8 for a discussion of the fair value hierarchy. The breakdown by level is as follows (dollars in thousands):

   Level 1
Inputs		   Level 2
Inputs		   Level 3
Inputs		   Total Fair
Value		 

Money market fund

  $274   $—     $—     $274 

U.S. Treasury notes

   —      149    —      149 

Obligations of state and political subdivisions

   —      634    —      634 

Corporate bonds

   —      868    —      868 

Mortgage-backed securities

   —      1,130    —      1,130 

Corporate stocks and mutual funds

   13,991    —      —      13,991 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $14,265   $2,781    —     $17,046 
  

 

 

   

 

 

   

 

 

   

 

 

 

First Financial Trust & Asset Management Company, National Association, a wholly owned subsidiary of the Company, manages the pension plan assets as well as the profit sharing plan assets (see below). The investment strategy and targeted allocations are based on similar strategies First Financial Trust & Asset Management Company, National Association employs for most of its managed accounts whereby appropriate diversification is achieved. First Financial Trust & Asset Management Company, National Association is prohibited from holding investments deemed to be high risk by the Office of the Comptroller of the Currency.

An estimate of the undiscounted projected future payments to eligible participants for the next five years and the following five years in the aggregate is as follows (in thousands):

Year Ending December 31,

    

2018

  $1,064 

2019

  $1,018 

2020

  $1,036 

2021

  $1,077 

2022

  $1,063 

2023 forward

  $5,309 

Company’s obligation has been extinguished.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

As of December 31, 2017 and 2016, the pension plan’s total assets included First Financial Bankshares, Inc. common stock valued at approximately $2,776,000 and $2,786,000, respectively.

15.
EMPLOYEE BENEFIT PLANS:
The Company also provides a 401(k) plan and profit sharing plan which covers substantially all full-time employees. The profit sharing401(k) plan is a defined contribution plan and allows employees to contribute a percentage of their base annual salary.salary with a corresponding employer match. The profit sharing plan is a defined contribution plan and includes an employee stock ownership feature (“ESOP”). Employees are fully vested to the extent of their contributions and become fully vested in the Company’s contributions over a
six-year
vesting period. Costs related to the Company’s defined contribution plan totaled approximately $4,735,000, $3,221,000 and $5,455,000 in 2017, 2016 and 2015, respectively, and are included in salaries and employee benefits in the accompanying consolidated statements of earnings. As of December 31, 2017 and 2016, the profit sharing plan’s assets included First Financial Bankshares, Inc. common stock valued at approximately $55,796,000 and $60,270,000, respectively.

In 2004, after freezing our pension plan, we added a safe harbor match to the 401(k) plan. We match a maximum of 4% on employee deferrals of 5% of their employee compensation. Total expense for this matching in 2017, 20162020, 2019 and 20152018 was $2,392,000, $2,331,000$3,374,000, $2,759,000 and $2,043,000,$2,588,000, respectively, and is included in salaries and employee benefits in the statements of earnings.

Costs related to the Company’s profit sharing plan totaled approximately $10,740,000, $7,661,000 and $7,049,000 in 2020, 2019 and 2018, respectively, and are included in salaries and employee benefits in the accompanying consolidated statements of earnings. As of December 31, 2020 and 2019, the profit sharing plan’s assets included First Financial Bankshares, Inc. common stock valued at approximately $81,605,000 and $83,014,000, respectively.
The Company has a
non-qualified
“excess benefit” plan whereunder executives, whose Company contributions to the profit sharing plan and employer match under the 401(k) feature are curtailed due to Internal Revenue Service limitations, received contributions from the Company equal to the amount under qualified plans as if there had been no Internal Revenue Service limitations. This plan used the same contribution formula and vesting requirements as the 401(k) plan. Th
is
"
Make Whole Plan
"
was frozen to new participants and contributions effective December 31, 2018. As of December 31, 2020 and 2019, the Make Whole Plan held 115,614 and 137,861 shares, respectively, in trust for the Company’s executives. The Company made contributions totaling $349,000 during the year ended December 31, 2018. There were 0 contributions to this plan during the years ended December 31, 20
20
 and 20
19
.
The Company adopted a Supplemental Executive
Retirement
Plan (“SERP”), effective January 1, 2019. The SERP benefits certain key senior executives of the Company who are selected by the Board to participate. The SERP is intended to provide a benefit from the Company upon retirement, death, disability or voluntary or involuntary termination of services (other than “for cause”). Under the SERP, the Company may, but is not required to, make discretionary contributions to the executive’s accounts from time to time. The contributions may be fully vested or subject to vesting conditions imposed by the Board of Directors with respect to the contributions; provided, however, that all unvested amounts credited to an executive’s account will become fully vested upon the executive’s death or disability or upon the occurrence of a change of control (as defined in the SERP). Company contributions to the SERP on behalf of an executive are credited with earnings and losses based on the executive’s investment elections. The investment options under the SERP are currently the same as those offered under the Company’s profit sharing plan, except that Company stock is not an available investment option under the SERP. An executive’s vested account is payable to the participant following hi
s
F-42
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
or her termination in a single lump sum or installments, as elected by the participant. At December 31, 2020, securities
available-for-sale
and other assets on the consolidated balance sheet include $522,000 
of SERP balances. The Company made 
contributions totaling $719,000 and $477,000 to the SERP for the years ended December 31, 2020 and 2019
,
subsequent to the respective year ends, for certain 
executive officers. There were no contributions to this plan during the year ended December 31, 2018.
The Company has a directors’ deferred compensation plan whereby the directors may elect to defer up to 100% of their directors’ fees. All deferred compensation is invested in the Company’s common stock held in a rabbi trust.trust wherein the funds are used to purchase Company common shares on the open market. The stock is held in nominee name of the trustee, and the principal and earnings of the trust are held separate and apart from other funds of the Company and are used exclusively for the uses and purposes of the deferred compensation agreement. The accounts of the trust have been consolidated in the financial statements of the Company.

13.DIVIDENDS FROM SUBSIDIARIES:

As of December 31, 2020 and 2019, the rabbi trust held 938,591 and 927,408 shares, respectively, in trust for the Company’s directors

and are reflected as treasury shares on the consolidated financial statements. 
The Company has acquired life insurance policies on certain current and former executives and directors of acquired entities. At December 31, 2017, approximately $205,751,0002020 and 2019, other assets on the consolidated balance sheet include $31,584,000 and $15,299,000 and reported cash value income (net of related insurance premium expenses) of $822,000, $359,000 and $396,000 in 2020, 2019 and 2018, respectively.
16.
DIVIDENDS FROM SUBSIDIARIES:
At December 31, 2020, $289,684,000 was available for the declaration of dividends by the Company’s subsidiaries without the prior approval of regulatory agencies.

14.

17.
REGULATORY MATTERS:

Banking regulators measure capital adequacy by means of the risk-based capital ratios and the leverage ratio under the Basel III regulatory capital framework and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and
off-balance-sheet
commitments and contingencies according to prescribed risk categories. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders’ equity less intangible assets by
quarter-to-date
average assets less intangible assets.

Beginning in January 2016,2015, 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 increasingincreased 0.625% each year thereafter, until it reaches 2.5%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 December 31, 20172020 and 2016,2019, we had a total risk-based capital ratio of 19.85%22.03% and 18.45%21.13%, a Tier 1 capital to risk-weighted assets ratio of 18.66%20.79% and 17.30%20.06%; a common equity Tier 1 capital to risk-weighted assets ratio of 18.66%20.79% and 17.30%20.06%, and a Tier 1 leverage ratio of 11.09%11.86% and 10.71%12.60%, respectively. The regulatory capital ratios as of December 31, 20172020 and 20162019 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies.

F-43 

Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

2018

As of December 31, 20172020 and 2016,2019, the regulatory capital ratios of the Company and Bank under the Basel III regulatory capital framework are as follows:

   Actual  Minimum Capital
Required Under
Basel IIIPhase-In		  Minimum Capital
Required-Basel III
FullyPhased-In		  Required to be
Considered Well-
Capitalized		 

As of December 31, 2017:

  Amount   Ratio  Amount   Ratio  Amount   Ratio  Amount   Ratio 
Total Capital to Risk-Weighted Assets:             

Consolidated

  $814,634    19.85%  $379,578    9.250%  $430,872    10.50%   —      N/A 

First Financial Bank, N.A

  $723,563    17.68%  $378,614    9.250%  $429,777    10.50%  $409,312    10.00% 
Tier 1 Capital to Risk-Weighted Assets:             

Consolidated

  $765,882    18.66%  $297,507    7.250%  $348,801    8.50%   —      N/A 

First Financial Bank, N.A

  $674,811    16.49%  $296,751    7.250%  $347,915    8.50%  $327,450    8.00% 
Common Equity Tier 1 Capital to Risk-Weighted Assets:             

Consolidated

  $765,882    18.66%  $235,954    5.750%  $287,248    7.00%   —      N/A 

First Financial Bank, N.A

  $674,811    16.49%  $235,354    5.750%  $286,518    7.00%  $266,053    6.50% 
Leverage Ratio:             

Consolidated

  $765,882    11.09%  $276,296    4.000%  $276,296    4.00%   —      N/A 

First Financial Bank, N.A

  $674,811    9.80%  $275,320    4.000%  $275,320    4.00%  $344,151    5.00% 

   Actual  Minimum Capital
Required Under
Basel IIIPhase-In		  Minimum Capital
Required-Basel III
FullyPhased-In		  Required to be
Considered Well-
Capitalized		 

As of December 31, 2016:

  Amount   Ratio  Amount   Ratio  Amount   Ratio  Amount   Ratio 
Total Capital to Risk-Weighted Assets:             

Consolidated

  $739,959    18.45%  $345,827    8.625%  $421,007    10.50%   —      N/A 

First Financial Bank, N.A

  $633,403    15.84%  $344,930    8.625%  $419,915    10.50%  $399,919    10.00% 
Tier 1 Capital to Risk-Weighted Assets:             

Consolidated

  $693,584    17.30%  $265,635    6.625%  $340,815    8.50%   —      N/A 

First Financial Bank, N.A

  $587,028    14.68%  $264,946    6.625%  $339,931    8.50%  $319,935    8.00% 

Common Equity Tier 1 Capital

to Risk-Weighted Assets:

             

Consolidated

  $693,584    17.30%  $205,491    5.125%  $280,671    7.00%   —      N/A 

First Financial Bank, N.A

  $587,028    14.68%  $204,959    5.125%  $279,943    7.00%  $259,947    6.50% 
Leverage Ratio:             

Consolidated

  $693,584    10.71%  $258,978    4.00%  $258,978    4.00%   —      N/A 

First Financial Bank, N.A

  $587,028    9.10%  $257,941    4.00%  $257,941    4.00%  $322,426    5.00% 

We have performed a preliminary assessment using the regulatory capital estimation tool made available by the OCC and believe the Company and Bank are prepared to meet the new requirements upon full adoption of Basel III that will be effective December 31, 2019.

   
Actual
  
Minimum Capital
Required-Basel III
Fully
Phased-In*
  
Required to be
Considered Well-
Capitalized
 
As of December 31, 2020:
  
Amount
   
Ratio
  
Amount
   
Ratio
  
Amount
   
Ratio
 
Total Capital to Risk-Weighted Assets:
                            
Consolidated
  $1,273,749    22.03%  $607,038    10.50%  $578,131    10.00% 
First Financial Bank, N.A
  $1,123,275    19.47%  $605,830    10.50%  $576,981    10.00% 
Tier 1 Capital to Risk-Weighted Assets:
                            
Consolidated
  $1,201,729    20.79%  $491,412    8.50%  $346,879    6.00% 
First Financial Bank, N.A
  $1,051,255    18.22%  $490,434    8.50%  $461,585    8.00% 
Common Equity Tier 1 Capital
 
to Risk-Weighted Assets:
                            
Consolidated
  $1,201,729    20.79%  $404,692    7.00%   —      N/A 
First Financial Bank, N.A
  $1,051,255    18.22%  $403,887    7.00%  $375,038    6.50% 
Leverage Ratio:
                            
Consolidated
  $1,201,729    11.86%  $405,268    4.00%   —      N/A 
First Financial Bank, N.A
  $1,051,255    10.41%  $404,002    4.00%  $505,002    5.00% 
*At
December 31, 2020 the Capital Conservative Buffer Basel III has been fully
phased-in.
   
Actual
  
Minimum Capital
Required-Basel III
Fully
Phased-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 most accumulated other comprehensive income from
available-for-sale
securities (“AOCI”) from capital in connection with its March 31, 2015 quarterly financial filing and, in effect, to retain the AOCI treatment under the prior capital rules.

In connection with the First Financial Trust & Asset Management Company, National Association’sN.A.’s (the “Trust Company”) 
application to obtain our trust charter, the Trust Company is required to maintain tangible net assets of $2,000,000 at all times. As of December 31, 2017,2020, our Trust Company had tangible net assets totaling $16,602,000.

$33,513,000.

F-44 

Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

2018

Our subsidiary bank may be required at times to maintain reserve balances with the Federal Reserve Bank.
At December 31, 20172020 there was 0
 subsidiary bank’s reserve balance required and 2016,at December 31, 2019, the subsidiary bank’s reserve balances were $11,504,000 and $4,340,000, respectively.

15.balance required was 

$17,274,000.
18.
STOCK OPTION PLAN AND RESTRICTED STOCK PLAN:

The Company has antwo incentive stock planplans previously approved by the Company’s shareholders to provide for the granting of options to employees of the Company at prices not less than market at the date of grant. At December 31, 2017,2020, the Company had allocated 3,180,000 reserved
5,378,359
shares of stock for issuance under the plan. The plan provides that options granted are exercisable after
two years
from date of grant at a rate of
20%
each year cumulatively during the10-year term of the option. Shares are issued under the stock option plan from available authorized shares. An analysis of stock option activity for the year ended December 31, 20172020 is presented in the table and narrative below:

   Shares   Weighted-
Average
Ex. Price		   Weighted-
Average
Remaining
Contractual
Term
(Years)		   Aggregate
Intrinsic
Value
($000)		 

Outstanding, beginning of year

   1,094,035   $27.40     

Granted

   452,450    42.35     

Exercised

   (140,250)    20.92     

Cancelled

   (80,270)    30.33     
  

 

 

   

 

 

     

Outstanding, end of year

   1,325,965    33.01    7.12   $15,966 
  

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at end of year

   458,715   $23.94    4.66   $9,684 
  

 

 

   

 

 

   

 

 

   

 

 

 

   
Shares
  
Weighted-
Average Ex. Price
   
Weighted-
Average
Remaining
Contractual
Term (Years)
   
Aggregate 
Intrinsic
Value ($000)
 
Outstanding, beginning of year
   2,138,196  $ 20.12           
Granted
   11,250   34.55           
Exercised
   (294,645)   15.96           
Cancelled
   (21,744)   22.04           
                    
Outstanding, end of year
   1,833,057   20.85    5.81   $ 28,098 
                    
Exercisable at end of year
   892,957  $17.20    4.46   $16,936 
                    
The options outstanding at December 31, 20172020 had exercise prices ranging between $16.78$7.87 and $42.35.$34.55. Stock options have been adjusted retroactively for the effects of stock dividends and splits.

split

s
.
The following table summarizes information concerning outstanding and vested stock options as of December 31, 2017:

Exercise Price  Number Outstanding   Remaining Contracted
Life (Years)		  Number Vested 
$16.78   87,640   1.4   87,640 
  15.73   142,620   3.8   142,620 
  30.85   270,505   5.8   156,225 
  33.89   382,750   7.8   72,230 
$42.35   442,450   9.5   —   

2020:

Exercise
Price		   Number
Outstanding		   Remaining
Contracted
Life (Years)		   Number Vested 
$7.87   42,020   0.8   42,020 
$15.43   258,507   2.8   258,507 
$16.95   477,294   4.8   355,654 
$21.18   656,736   6.4   236,776 
$29.70   388,050   8.5   —   
$34.55   11,250   9.1   —   
The fair value of the options granted during 20172020 and 20152019 were 
estimated using the Black-Scholes options pricing model with the following weighted-average assumptions: risk-free interest ratesrate of 1.89% and 1.89%1.83%; expected dividend yieldsyield of 1.79% and 1.89%1.62%; expected liveslife of 6.24 years and 5.78 years;6.64; and expected volatilitiesvolatility of 26.51% and 23.36%, respectively.

26.69%.

The weighted-average grant-date fair value of options granted during 20172020 and 20152019 was $9.90 and $6.72,$7.31, respectively. There were no0 grants during 2016.2018. The total intrinsic value of options exercised during the years ended December 31, 2017, 20162020, 2019 and 2015,2018, was $3,082,000, $1,226,000$4,052,000, $5,742,000 and $1,539,000, $5,476,000,
respectively.

The Company recorded stock option expense totaling $1,377,000, $1,489,000 and $1,508,000 for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2017,2020, there was $5,031,000$4,977,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.211.86 years. The total fair value of shares vested during the years ended December 31, 2017, 20162020, 2019 and 20152018 was $1,246,000, $592,000$1,293,000, $1,693,000 and $810,000.

The aggregate intrinsic value$888,000.

F-45 
Table of vested stock options at December 31, 2017 totaled $10,981,000.

Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

2018

On April 28, 2015, shareholders of the Company approved a restricted stock plan for selected employees, officers,
non-employee
directors and consultants. At December 31, 2017,2020, the Company had allocated 413,000633,524 shares of stock for issuance under the plan.

On July 21, 2015, 7,070 shares were granted to the tennon-employee directors. Total

The following table summarized information about vested and unvested restricted stock outstanding at December 31, 2020, 2019 and 2018, respectively.
   For the year ended   For the year ended   For the year ended 
   2020   2019   2018 
   Restricted
Stock
Outstanding		  Weighted
Average
Grant Date
Fair Value		   Restricted
Stock
Outstanding		  Weighted
Average
Grant Date
Fair Value		   Restricted
Stock
Outstanding		  Weighted
Average
Grant Date
Fair Value		 
Balance at beginning of period
   105,309   $  29.93    97,192  $25.45    94,679   $ 20.12 
Grants
   56,480   29.22    67,331   31.80    73,470   26.95 
Vesting
   (65,662)   29.39    (57,406)   31.49    (65,411)   25.79 
Forfeited/expired
   (239)   29.70    (1,808)   27.67    (5,546)   22.85 
                            
Balance at end of period
   95,888   $  29.89    105,309   $ 29.93    97,192   $ 25.45 
The total fair value of these shares totaled $250,000restricted stock vested was $1,924,000, $1,597,000 and was expensed over$1,385,000 for the period from grant date to April 26, 2016,years ended December 31, 2020, 2019 and 2018, respectively.
The Company recorded restricted stock expense for officers of $1,301,000, $995,000 and $680,000, respectively, for the next scheduled annual shareholders’ meeting at which the directors’ current term expired. On April 26, 2016, uponre-election of existing directors, 7,660 shares with a total value of $250,000 were granted to the tennon-employee directorsyears ended December 31, 2020, 2019 and was expensed over the period from grant day to April 25, 2017, the next scheduled annual shareholders’ meeting at which the directors’ current term expired. On April 25, 2017, uponre-election of existing directors, 14,650 restricted shares with a total value of $600,000 were granted to the tennon-employee directors and is being expensed over the period from grant day to April 24, 2018, the Company’s next shareholders’ meeting at which the directors term expires.2018. The Company recorded director expense related to these restricted stock grants of $483,000, $278,000$635,000, $620,000 and $139,000$560,000 for the yearyears ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively.

On October 27, 2015, the Company granted 31,273 shares with

As of December 31, 2020 and 2019, there were $2,157,000 and $2,456,000, respectively, of total unrecognized compensation cost related to unvested restricted stock which is expected to be recognized over a total value of $1,060,000 to certain officers that is being expensed over the vestingweighted-average period of three years. On October 25, 2016, the Company granted 15,405 shares with a total value of $560,000 to certain officers that is being expensed over the vesting period of three years. On October 24, 2017, the Company granted 14,191 restricted shares with a total value of $655,000 to certain officers that is being expensed over the vesting period of one to three years. The Company recorded restricted stock expense for officers of $562,000, $381,0001.69 years and $62,000, respectively, for the year ended1.67 years, respectively. At December 31, 2017, 20162020 and 2015.

16.2019, there was $49,000 and $46,000, respectively, accrued in other liabilities related to dividends declared to be paid upon vesting.

19.
CONDENSED FINANCIAL INFORMATION—PARENT COMPANY:

Condensed Balance Sheets-December 31, 20172020 and 2016

   2017   2016 
ASSETS    

Cash in subsidiary bank

  $14,272   $15,070 

Cash in unaffiliated banks

   2    2 

Interest-bearing deposits in subsidiary bank

   64,195    78,179 
  

 

 

   

 

 

 

Total cash and cash equivalents

   78,469    93,251 

Securitiesavailable-for-sale, at fair value

   8,515    11,593 

Investment in and advances to subsidiaries, at equity

   847,445    744,971 

Intangible assets

   723    723 

Other assets

   2,654    2,668 
  

 

 

   

 

 

 

Total assets

  $937,806   $853,206 
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY    

Total liabilities

  $15,038   $15,321 

Shareholders’ equity:

    

Common stock

   663    661 

Capital surplus

   378,062    372,245 

Retained earnings

   517,257    446,534 

Treasury stock

   (7,148)    (6,671) 

Deferred compensation

   7,148    6,671 

Accumulated other comprehensive earnings

   26,786    18,445 
  

 

 

   

 

 

 

Total shareholders’ equity

   922,768    837,885 
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $937,806   $853,206 
  

 

 

   

 

 

 

2019

ASSETS
 2020   2019 
Cash in subsidiary bank
 (1)
  $67,904   $44,422 
Cash in unaffiliated banks
 
(1)
   2    2 
Interest-bearing deposits in subsidiary bank
 
(1)
   68,760    80,652 
           
Total cash and cash equivalents
   136,666    125,076 
Securities
available-for-sale,
at fair value
   2,610    6,297 
Investment in and advances to subsidiaries, at equity
 
(1)
   1,558,851    1,111,955 
Intangible assets
   723    723 
Other assets
   2,982    2,701 
           
Total assets
  $1,701,832   $1,246,752 
           
F-46 

Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

2018

LIABILITIES AND SHAREHOLDERS’ EQUITY
          
Total liabilities
  $23,642   $19,555 
Shareholders’ equity:
          
Common stock
   1,422    1,359 
Capital surplus
   669,644    450,676 
Retained earnings
   836,729    707,656 
Treasury stock
   (9,126)    (8,222) 
Deferred compensation
   9,126    8,222 
Accumulated other comprehensive earnings
   170,395    67,506 
           
Total shareholders’ equity
   1,678,190    1,227,197 
           
Total liabilities and shareholders’ equity
  $1,701,832   $1,246,752 
           
(1)
Eliminates in consolidation.
Condensed Statements of Earnings-

For the Years Ended December 31, 2017, 20162020, 2019 and 2015

   2017   2016   2015 

Income:

      

Cash dividends from subsidiaries

  $30,800   $48,800   $51,200 

Excess of earnings over dividends of subsidiaries

   92,929    58,809    52,911 

Other

   6,590    4,184    4,185 
  

 

 

   

 

 

   

 

 

 

Total Income

   130,319    111,793    108,296 
  

 

 

   

 

 

   

 

 

 

Expenses:

      

Salaries and employee benefits

   8,606    5,655    6,067 

Other operating expenses

   3,871    3,531    4,439 
  

 

 

   

 

 

   

 

 

 

Total Expense

   12,477    9,186    10,506 
  

 

 

   

 

 

   

 

 

 

Earnings before income taxes

   117,842    102,607    97,790 

Income tax benefit

   2,529    2,167    2,591 
  

 

 

   

 

 

   

 

 

 

Net earnings

  $120,371   $104,774   $100,381 
  

 

 

   

 

 

   

 

 

 

2018

   2020   2019   2018 
Income:
               
Cash dividends from subsidiaries (1)
  $87,500   $84,500   $74,100 
Excess of earnings over dividends of subsidiaries (1)
   122,997    86,956    82,323 
Other
   8,368    7,937    7,269 
                
Total income
   218,865    179,393    163,692 
                
Expenses:
               
Salaries and employee benefits
   13,795    11,963    9,966 
Other operating expenses
   5,599    4,756    4,781 
                
Total expense
   19,394    16,719    14,747 
                
Earnings before income taxes
   199,471    162,674    148,945 
Income tax benefit
   2,563    2,138    1,693 
                
Net earnings
  $202,034   $164,812   $150,638 
                

(1)
Eliminates in consolidation.
F-47
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

2018

Condensed Statements of Cash Flows-

For the Years Ended December 31, 2017, 20162020, 2019 and 2015

   2017   2016   2015 

Cash flows from operating activities:

      

Net earnings

  $120,371   $104,774   $100,381 

Adjustments to reconcile net earnings to net cash provided by operating activities:

      

Excess of earnings over dividends of subsidiary bank

   (92,929)    (58,809)    (52,911) 

Depreciation and amortization, net

   207    208    197 

Decrease (increase) in other assets

   438    1,702    507 

Increase (decrease) in other liabilities

   183    (1,374)    3,743 

Other

   2    8    —   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

   28,272    46,509    51,917 
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Cash received in connection with acquisition of banks

   —      —      13,125 

Maturity ofavailable-for-sale security

   2,997    —      —   

Purchases of bank premises and equipment

   (30)    (94)    (107) 

Repayment from investment in and advances to subsidiaries, net

   —      —      5,800 

Other

   —      10    —   
  

 

 

   

 

 

   

 

 

 

Net cash used in (provided by) investing activities

   2,967    (84)    18,818 
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Repayment of subordinated debt

   —      —      (13,125) 

Proceeds of stock issuances

   2,934    1,260    1,545 

Cash dividends paid

   (48,955)    (44,907)    (38,767) 
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

   (46,021)    (43,647)    (50,347) 
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   (14,782)    2,778    20,388 

Cash and cash equivalents, beginning of year

   93,251    90,473    70,085 
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

  $78,469   $93,251   $90,473 
  

 

 

   

 

 

   

 

 

 

2018

   2020   2019   2018 
Cash flows from operating activities:
               
Net earnings
  $202,034   $164,812   $150,638 
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Excess of earnings over dividends of subsidiary bank
   (122,997)    (86,956)    (82,323) 
Depreciation and amortization, net
   198    246    331 
Gain on sale of assets, net
   (38)    —      —   
Decrease (increase) in other assets
   164    1,508    560 
Increase (decrease) in other liabilities
   2,083    990    1,932 
Other
   35    —      (2) 
                
 
Net cash provided by operating activities
   81,479    80,600    71,136 
                
Cash flows from investing activities:
               
Maturity of
available-for-sale
securities
   3,720    —      2,000 
Purchases of bank premises and equipment and software
   —      (24)    (346) 
                
Net cash provided by (used in) investing activities
   3,720    (24)    1,654 
                
Cash flows from financing activities:
               
Proceeds of stock issuances
   4,717    4,294    3,864 
Cash dividends paid
   (70,318)    (61,056)    (53,861) 
Repurchase of stock
   (8,008)    —      —   
                
Net cash used in financing activities
   (73,609)    (56,762)    (49,997) 
                
Net increase in cash and cash equivalents
   11,590    23,814    22,793 
Cash and cash equivalents, beginning of year
   125,076    101,262    78,469 
                
Cash and cash equivalents, end of year
  $136,666   $125,076   $101,262 
                
F-48 

Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2017, 20162020, 2019 and 2015

17.CASH FLOW INFORMATION:

2018

20.
CASH FLOW INFORMATION:
Supplemental information on cash flows and noncash transactions is as follows (dollars in thousands):

   Year Ended December 31, 
   2017   2016   2015 

Supplemental cash flow information:

      

Interest paid

  $9,316   $5,465   $4,085 

Federal income taxes paid

   29,695    28,348    29,674 

Schedule of noncash investing and financing activities:

      

Assets acquired through foreclosure

   2,211    2,269    203 

Investment securities purchased but not settled

   —      12,381    —   

Restricted stock grant to officers and directors

   1,139    810    1,310 

18.ACQUISITIONS AND ASSET PURCHASE:

   Year Ended December 31, 
   2020   2019   2018 
Supplemental cash flow information:
               
Interest paid
  $14,494   $29,882   $18,709 
Federal income taxes paid
   44,381    30,726    26,578 
Schedule of noncash investing and financing activities:
               
Assets acquired through foreclosure
   164    1,463    126 
Investment securities purchased but not settled
   14,641    —      —   
Restricted stock granted to officers and directors
   672    1,782    1,609 
Stock issued in acquisition of TB&T Bancshares, Inc.
   220,273    —      —   
Stock issued in acquisition of Commercial Bancshares, Inc.
   —      —      58,087 
21.
ACQUISITIONS
Commercial Bancshares, Inc.
On April 1, 2015,October 12, 2017, we entered into an agreement and plan of reorganization to acquire FBCCommercial Bancshares, Inc. and its wholly owned bank subsidiary, FirstCommercial State Bank, N.A., Conroe,Kingwood, Texas. On July 31, 2015,January 1, 2018, the transaction was completed. Pursuant to the agreement, we issued 1,755,3741,289,371 shares of the Company’s common stock in exchange for all of the outstanding shares of FBC Bancshares, Inc. At closing, FBC Bancshares, Inc. was merged into the Company and First Bank, N.A., Conroe, 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 along Interstate Highway 45 in southern Texas, north of Houston. Factors that contributed to a purchase price resulting in goodwill include First Bank, N.A.’s historic record of earnings, 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 August 1, 2015.

The assets acquired and liabilities assumed were recorded on the consolidated balance sheet at estimated fair value on the acquisition date. The acquisition was not considered to be a significant business combination. The following table presents the amounts recorded on the consolidated balance sheet on the acquisition date (dollars in thousands):

Fair value of consideration paid:

  

Common stock issued (1,755,374 shares)

  $59,648 
  

 

 

 

Fair value of identifiable assets acquired:

  

Cash and cash equivalents

   65,197 

Securitiesavailable-for-sale

   42,903 

Loans

   248,380 

Identifiable intangible assets

   2,343 

Other assets

   15,262 
  

 

 

 

Total identifiable assets acquired

   374,085 
  

 

 

 

Fair value of liabilities assumed:

  

Deposits

   343,583 

Subordinated debt

   13,125 

Other liabilities

   1,651 
  

 

 

 

Total liabilities assumed

   358,359 
  

 

 

 

Fair value of net identifiable assets acquired

   15,726 
  

 

 

 

Goodwill resulting from acquisition

  $43,922 
  

 

 

 

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.

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

The subordinated debt of $13,125,000 was paid off August 3, 2015, subsequent to closing.

The fair value of total loans acquired was $248,380,000 at acquisition compared to contractual amounts of $252,458,000. The fair value of purchased credit impaired loans at acquisition was $1,398,000 compared to contractual amounts of $1,704,000. Additional purchased credit impaired loan disclosures were omitted due to immateriality. All other acquired loans were considered performing loans.

First Bank, N.A. had branches in Conroe, Magnolia, Tomball, Willis, Cut and Shoot and Huntsville, all located north of Houston, Texas. In February 2016, the Company closed First Bank’s Huntsville location and consolidated the branch with the Company’s existing Huntsville location.

On April 8, 2015, the Company announced that it had entered into an asset purchase agreement with 4Trust Mortgage, Inc. for a cash purchase price of $1,900,000. The asset purchase was finalized on June 1, 2015. The total asset purchase price exceeded the estimated fair value of assets purchased by approximately $1,750,000 and the Company recorded such excess as goodwill.

19.SUBSEQUENT EVENT

On January 1, 2018, the Company acquired 100% of the outstanding capital stock of Commercial Bancshares, Inc. through the merger of a wholly owned subsidiary with and into Commercial Bancshares, Inc. Following such merger, Commercial Bancshares, Inc. and its wholly owned subsidiary, Commercial State Bank, Kingwood, Texas, were merged into the Company and First Financial Bank, National Association, respectively. Considerations paid to the shareholders of Commercial Bancshares, Inc. totaled 1,289,371 shares of the company’s common stock with an aggregate value of $59,400,000 at January 1, 2018.

In addition, Commercial Bancshares, Inc. made a $22,075,000 special dividend to its shareholders prior to closing of the transaction, which was increased for the amount by which Commercial Bancshares, Inc.’s consolidated shareholders’ equity as of January 1, 2018 exceeded $42,402,000, after certain adjustments per the merger agreement.

At December 31, 2017,closing, Commercial Bancshares, Inc. was merged into the Company and Commercial State Bank, Kingwood, 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 around Houston. Factors that contributed to a purchase price resulting in goodwill include Commercial State Bank’s 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, 2018.
F-49 
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
The following table presents the amounts recorded on the consolidated balance sheet on the acquisition date (dollars in thousands):
Fair value of consideration paid:
     
Common stock issued (1,289,371 shares)
  $58,087 
      
Fair value of identifiable assets acquired:
     
Cash and cash equivalents
   18,653 
Securities
available-for-sale
   64,501 
Loans
   266,327 
Identifiable intangible assets
   3,167 
Other assets
   15,375 
      
Total identifiable assets acquired
   368,023 
      
Fair value of liabilities assumed:
     
Deposits
   341,902 
Other liabilities
   (373) 
      
Total liabilities assumed
   341,529 
      
Fair value of net identifiable assets acquired
   26,494 
Goodwill resulting from acquisition
  $31,593 
      
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 $266,327,000 at acquisition compared to contractual amounts of $271,714,000. The fair value of purchased credit impaired loans at acquisition was $3,013,000 compared to contractual amounts of $3,806,000. Additional purchased credit impaired loan disclosures were omitted due to immateriality. All other acquired loans were considered performing loans.
Commercial State Bank had grossbranches in Kingwood, Fulshear, El Campo and Palacios, all located around Houston, Texas.
TB&T Bancshares, Inc.
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, N.A., 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.
F-50 
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2020, 2019 and 2018
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 totaling $271,533,000, total depositsacquired was $447,702,000 at acquisition compared to contractual amounts of $345,908,000 and total assets of $390,112,000.

F-40

$455,181,000.
F-51