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Published: 2020-11-04 13:08:35 ET
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10-Q
P1YP3YP3YP3YP3Yfalse2020Q3--12-31FIRST FINANCIAL BANKSHARES INC0000036029Troubled debt restructured loans of $4,478,000, $3,983,000 and $4,791,000, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in non-accrual loans at September 30, 2020 and 2019, and December 31, 2019, respectively.Includes $5,978,000, $342,000 and $251,000 of purchased credit impaired loans as of September 30, 2020 and 2019, and December 31, 2019, respectively. 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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
Commission file number
0-7674
 
 
FIRST FINANCIAL BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Texas
  
75-0944023
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
400 Pine Street, Abilene, Texas
  
79601
(Address of principal executive offices)
  
(Zip Code)
(325)
627-7155
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading
Symbol(s)
  
Name of each exchange
on which registered
Common Stock, $0.01 par value
  
FFIN
  
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer   ☒    Accelerated filer   ☐
Non-accelerated
filer		   ☐    Smaller reporting company   ☐
     Emerging growth company   ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act).    Yes  ☐    No  ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class
  
Outstanding at November 4, 2020
Common Stock, $0.01 par value per share
  
142,113,899
 
 
 
Table of Contents
TABLE OF
CONTENTS
 
 
 
      
Page
  
1.
   Consolidated Financial Statements - Unaudited      3  
      Consolidated Balance Sheets – Unaudited      4  
      Consolidated Statements of Earnings – Unaudited      5  
      Consolidated Statements of Comprehensive Earnings – Unaudited      6  
      Consolidated Statements of Shareholders’ Equity – Unaudited      7  
      Consolidated Statements of Cash Flows – Unaudited      9  
      Notes to Consolidated Financial Statements – Unaudited      10  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations      39  
  Quantitative and Qualitative Disclosures About Market Risk      63  
  Controls and Procedures      63  
 
 
1.
   Legal Proceedings      64  
1A.
   Risk Factors      64  
2.
   Unregistered Sales of Equity Securities and Use of Proceeds      64  
3.
   Defaults Upon Senior Securities      65  
4.
   Mine Safety Disclosures      65  
5.
   Other Information      65  
6.
   Exhibits      66  
  Signatures      68  
 
2
Table of Contents
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The consolidated balance sheets of First Financial Bankshares, Inc. and Subsidiaries (the “Company” or “we”) at September 30, 2020 and 2019 (unaudited) and December 31, 2019, and the consolidated statements of earnings, comprehensive earnings and shareholders’ equity for the three and nine-months ended September 30, 2020 and 2019 (unaudited), and the consolidated statements of cash flows for the nine-months ended September 30, 2020 and 2019 (unaudited) and notes to consolidated financial statements (unaudited), follow on pages 4 through 38.
 
3
Table of Contents
 
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
 
  
September 30,
 
 
December 31,
 
 
  
2020
 
 
2019
 
 
2019
 
 
  
(Unaudited)
 
 
 
 
ASSETS
  
      
 
      
CASH AND DUE FROM BANKS
    $ 175,088     $ 198,855     $ 231,534  
FEDERAL FUNDS SOLD
      —         —         3,150  
INTEREST-BEARING DEMAND DEPOSITS IN BANKS
      58,933       31,410       47,920  
  
 
 
    
 
 
    
 
 
  
Total cash and cash equivalents
      234,021       230,265       282,604  
SECURITIES
AVAILABLE-FOR-SALE,
at fair value
      4,431,280       3,397,156       3,413,317  
LOANS:
       
Held-for-investment
      5,293,679       4,100,316       4,194,969  
Less - allowance for loan losses
      (76,038 )      (51,889 )      (52,499 ) 
  
 
 
    
 
 
    
 
 
  
Net loans
held-for-investment
      5,217,641       4,048,427       4,142,470  
Held-for-sale ($94,666, $39,735 and $23,076 at fair value at September 30, 2020 and 2019 and
 
 
 
December 31, 2019, respectively)
      101,055       40,499       28,228  
  
 
 
    
 
 
    
 
 
  
Net loans
      5,318,696       4,088,926       4,170,698  
BANK PREMISES AND EQUIPMENT, net
      141,002       132,367       131,022  
GOODWILL AND INTANGIBLE ASSETS, net
      318,875       173,905       173,667  
OTHER ASSETS
      123,778       91,220       90,919  
  
 
 
    
 
 
    
 
 
  
Total assets
    $ 10,567,652     $ 8,113,839     $ 8,262,227  
  
 
 
    
 
 
    
 
 
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
       
NONINTEREST-BEARING DEPOSITS
    $ 2,950,407     $ 2,210,997     $ 2,065,128  
INTEREST-BEARING DEPOSITS
      5,344,481       4,186,686       4,538,678  
  
 
 
    
 
 
    
 
 
  
Total deposits
      8,294,888       6,397,683       6,603,806  
DIVIDENDS PAYABLE
      18,476       16,299       16,306  
BORROWINGS
      503,163       400,155       381,356  
OTHER LIABILITIES
      131,624       94,604       33,562  
  
 
 
    
 
 
    
 
 
  
Total liabilities
      8,948,151       6,908,741       7,035,030  
  
 
 
    
 
 
    
 
 
  
COMMITMENTS AND CONTINGENCIES
       
SHAREHOLDERS’ EQUITY:
       
Common stock - ($0.01 par value, authorized 200,000,000 shares; 142,121,595, 135,822,456 and
 135,891,755 shares issued at September 30, 2020 and 2019 and December 31, 2019, respectively)
      1,421       1,358       1,359  
Capital surplus
      668,815       448,968       450,676  
Retained earnings
      797,202       682,575       707,656  
Treasury stock (shares at cost: 934,859, 928,287 and 927,408 at September 30, 2020 and 2019 and
 
 
 
 
December 31, 2019, respectively)
      (8,780 )      (8,042 )      (8,222 ) 
Deferred compensation
      8,780       8,042       8,222  
Accumulated other comprehensive earnings, net of income taxes
      152,063       72,197       67,506  
  
 
 
    
 
 
    
 
 
  
Total shareholders’ equity
      1,619,501       1,205,098       1,227,197  
  
 
 
    
 
 
    
 
 
  
Total liabilities and shareholders’ equity
    $ 10,567,652     $ 8,113,839     $ 8,262,227  
  
 
 
    
 
 
    
 
 
  
See notes to consolidated financial statements.
 
4
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)
(Dollars in thousands, except per share amounts)
 
     Three
-
Months Ended
 
September 30,		     
Nine
-
Months
Ended
 
September 30,
  
     2020     2019      2020      2019  
INTEREST INCOME:
           
Interest and fees on loans
    $ 66,372     $ 57,123      $ 195,299      $ 166,095  
Interest on investment securities:
           
Taxable
      12,063       14,292        40,748        41,505  
Exempt from federal income tax
      12,877       8,795        34,721        27,801  
Interest on federal funds sold and interest-bearing
demand
deposits in banks
      61       381        903        1,668  
  
 
 
    
 
 
     
 
 
     
 
 
  
Total interest income
      91,373       80,591        271,671        237,069  
INTEREST EXPENSE:
           
Interest on deposits
      2,063       7,123        11,293        21,070  
Other
      100       830        1,030        2,231  
  
 
 
    
 
 
     
 
 
     
 
 
  
Total interest expense
      2,163       7,953        12,323        23,301  
  
 
 
    
 
 
     
 
 
     
 
 
  
Net interest income
      89,210       72,638        259,348        213,768  
PROVISION FOR
CREDIT
 LOSSES
      9,000       450        27,550        2,015  
  
 
 
    
 
 
     
 
 
     
 
 
  
Net interest income after provision
s
 for
c
redit
 losses
      80,210       72,188        231,798        211,753  
  
 
 
    
 
 
     
 
 
     
 
 
  
NONINTEREST INCOME:
           
Trust fees
      7,461       7,051        21,859        21,057  
Service charges on deposit accounts
      5,009       5,629        15,242        16,179  
ATM, interchange and credit card fees
      8,644       7,728        24,093        21,920  
Gain on sale and fees on mortgage loans
      15,228       5,733        32,756        13,928  
Net gain on sale of
available-for-sale
securities (includes $36 and $52 for the three
-
months ended September 30, 2020 and 2019, respectively, and $3,610 and $728 for the nine
-
months ended September 30, 2020 and 2019, respectively, related to accumulated other comprehensive earnings reclassifications)
      36       52        3,610        728  
Net gain on sale of foreclosed assets
      19       71        72        193  
Net gain (loss) on sale of assets
      (2 )      235        90        241  
Interest on loan recoveries
      202       575        621        1,815  
Other
      1,978       1,595        5,883        5,020  
  
 
 
    
 
 
     
 
 
     
 
 
  
Total noninterest income
      38,575       28,669        104,226        81,081  
NONINTEREST EXPENSE:
           
Salaries, commissions and employee benefits
      33,649       28,550        94,105        82,468  
Loss from partial settlement of pension plan
      —       —        —        900  
Net occupancy expense
      3,193       2,830        9,321        8,372  
Equipment expense
      2,157       2,225        6,242        7,009  
FDIC insurance premiums
      587       15        1,095        1,091  
ATM, interchange and credit card expenses
      2,829       2,627        8,424        7,437  
Professional and service fees
      2,237       1,902        7,327        5,721  
Printing, stationery and supplies
      615       480        1,714        1,348  
Operational and other losses
      621       507        1,925        1,253  
Software amortization and expense
      2,265       1,767        6,299        5,147  
Amortization of intangible assets
      490       246        1,507        778  
Other
      6,950       7,761        26,274        23,059  
  
 
 
    
 
 
     
 
 
     
 
 
  
Total noninterest expense
      55,593       48,910        164,233        144,583  
  
 
 
    
 
 
     
 
 
     
 
 
  
EARNINGS BEFORE INCOME TAXES
      63,192       51,947        171,791        148,251  
INCOME TAX EXPENSE
(includes $8 and $11 for the three
-months
ended September 30, 2020 and 2019, respectively, and $758 and $153 for the nine
-months
ended September 30, 2020 and 2019, respectively, related to income tax expense from reclassification items)
      10,335       8,867        28,233        24,827  
  
 
 
    
 
 
     
 
 
     
 
 
  
NET EARNINGS
    $ 52,857     $ 43,080      $ 143,558      $ 123,424  
  
 
 
    
 
 
     
 
 
     
 
 
  
EARNINGS PER SHARE, BASIC
    $ 0.37     $ 0.32      $ 1.01      $ 0.91  
  
 
 
    
 
 
     
 
 
     
 
 
  
EARNINGS PER SHARE, DILUTED
    $ 0.37     $ 0.32      $ 1.01      $ 0.91  
  
 
 
    
 
 
     
 
 
     
 
 
  
DIVIDENDS PER SHARE
    $ 0.13     $ 0.12      $ 0.38      $ 0.35  
  
 
 
    
 
 
     
 
 
     
 
 
  
See notes to consolidated financial statements.
 
5
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED)
(Dollars in thousands)
 
     Three
-
Month
s
 
Ended
September 30,		     Nine
-
Months Ended
September 30,		  
     2020     2019     2020     2019  
NET EARNINGS
    $ 52,857     $ 43,080     $ 143,558     $ 123,424  
OTHER ITEMS OF COMPREHENSIVE EARNINGS:
         
Change in unrealized gain on investment securities
available-for-sale,
before income taxes
      1,083       16,446       110,644       88,517  
Reclassification adjustment for realized gains on investment securities included in net earnings,
 
 
 
before income tax
      (36 )      (52 )      (3,610 )      (728 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Total other items of comprehensive earnings
      1,047       16,394       107,034       87,789  
Income tax expense related to other items of comprehensive earnings
      (220 )      (3,444 )      (22,477 )      (18,437 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
COMPREHENSIVE EARNINGS
    $ 53,684     $ 56,030     $ 228,115     $ 192,776  
  
 
 
    
 
 
    
 
 
    
 
 
  
See notes to consolidated financial statements.
 
6
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
Accumulated
 
  
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
Other
 
  
Total
 
 
  
Common Stock
 
  
Capital
Surplus
 
  
Retained
Earnings
 
 
Treasury Stock
 
 
Deferred
Compensation
 
  
Comprehensive
Earnings
 
  
Shareholders’
Equity
 
 
  
Shares
 
  
Amount
 
 
Shares
 
 
Amounts
 
Balances at June 30, 2019 (unaudited)
     135,809,224     $ 1,358     $ 448,349     $ 655,794       (929,441 )    $ (7,823 )    $ 7,823     $ 59,247     $ 1,164,748  
Net earnings (unaudited)
     —         —         —         43,080       —         —         —         —         43,080  
Stock option exercises (unaudited)
     13,232       —         188       —         —         —         —         —         188  
Cash dividends declared, $0.12 per share (unaudited)
     —         —         —         (16,299 )      —         —         —         —         (16,299 ) 
Change in unrealized gain in investment securities
available-for-sale,
net of related income taxes (unaudited)
     —         —         —         —         —         —         —         12,950       12,950  
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)
     —         —         —         —         1,154       (219 )      219       —         —    
Stock option expense (unaudited)
     —         —         431       —         —         —         —         —         431  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balances at September 30, 2019 (unaudited)
     135,822,456     $ 1,358     $ 448,968     $ 682,575       (928,287 )    $ (8,042 )    $ 8,042     $ 72,197     $ 1,205,098  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balances at June 30, 2020 (unaudited)
     142,035,396     $ 1,420     $ 666,963     $ 762,830       (932,018 )    $ (8,697 )    $ 8,697     $ 151,236     $ 1,582,449  
Net earnings (unaudited)
     —         —         —         52,857       —         —         —         —         52,857  
Stock option exercises (unaudited)
     86,199       1       1,508       —         —         —         —         —         1,509  
Cash dividends declared, $0.13 per share (unaudited)
     —         —         —         (18,485 )      —         —         —         —         (18,485 ) 
Change in unrealized gain in investment securities
available-for-sale,
net of related income taxes (unaudited)
     —         —         —         —         —         —         —         827       827  
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)
     —         —         —         —         (2,841 )      (83 )      83       —         —    
Stock option expense (unaudited)
     —         —         344       —         —         —         —         —         344  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balances at September 30, 2020 (unaudited)
     142,121,595     $ 1,421     $ 668,815     $ 797,202       (934,859 )    $ (8,780 )    $ 8,780     $ 152,063     $ 1,619,501  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
(continued)
 
7
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
 
     Common Stock     Capital     Retained     Treasury Stock     Deferred      Accumulated
Other
Comprehensive		      Total
Shareholders’		  
     Shares     Amount     Surplus     Earnings     Shares     Amounts     Compensation      Earnings      Equity  
Balances at December 31, 2018
      67,753,133     $ 678     $ 443,114     $ 606,658       (467,811 )    $ (7,507 )    $ 7,507      $ 2,845      $ 1,053,295  
Net earnings (unaudited)
      —         —         —         123,424       —         —         —          —          123,424  
Stock option exercises (unaudited)
      185,779       2       3,491       —         —         —         —          —          3,493  
Restricted stock grant (unaudited)
      43,334       —         1,307       —         —         —         —          —          1,307  
Cash dividends declared, $0.35 per share (unaudited)
      —         —         —         (46,829 )      —         —         —          —          (46,829 ) 
Change in unrealized gain in investment securities
available-for-sale,
net of related income taxes (unaudited)
      —         —         —         —         —         —         —          69,352        69,352  
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)
      —         —         —         —         3,863       (535 )      535        —          —    
Stock option expense (unaudited)
      —         —         1,056       —         —         —         —          —          1,056  
Two-for-one
stock split in the form of a 100% stock
 
dividend
(unaudited)
      67,840,210       678       —         (678 )      (464,339 )      —         —          —          —    
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
     
 
 
  
Balances at September 30, 2019 (unaudited)
      135,822,456     $ 1,358     $ 448,968     $ 682,575       (928,287 )    $ (8,042 )    $ 8,042      $ 72,197      $ 1,205,098  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
     
 
 
  
Balances at December 31, 2019
      135,891,755     $ 1,359     $ 450,676     $ 707,656       (927,408 )    $ (8,222 )    $ 8,222      $ 67,506      $ 1,227,197  
Stock issued in acquisition of TB&T Bancshares, Inc. (unaudited)
      6,275,574       63       220,210       —         —         —         —          —          220,273  
Net earnings (unaudited)
      —         —         —         143,558       —         —         —          —          143,558  
Stock option exercises (unaudited)
      246,919       2       3,988       —         —         —         —          —          3,990  
Restricted stock grant (unaudited)
      32,149       —         913       —         —         —         —          —          913  
Cash dividends declared, $0.38 per share (unaudited)
      —         —         —         (54,012 )      —         —         —          —          (54,012 ) 
Change in unrealized gain in investment securities
available-for-sale,
net of related income taxes (unaudited)
      —         —         —         —         —         —         —          84,557        84,557  
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)
      —         —         —         —         (7,451 )      (558 )      558        —          —    
Stock option expense (unaudited)
      —         —         1,033       —         —         —         —          —          1,033  
Shares repurchased under stock repurchase authorization (unaudited)
      (324,802 )      (3 )      (8,005 )      —         —         —         —          —          (8,008 ) 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
     
 
 
  
Balances at September 30, 2020 (unaudited)
      142,121,595     $ 1,421     $ 668,815     $ 797,202       (934,859 )    $ (8,780 )    $ 8,780      $ 152,063      $ 1,619,501  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
     
 
 
  
See notes to consolidated financial statements.
 
8
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(Dollars in thousands)
 
 
  
Nine-Months Ended
September 30,
 
 
  
2020
 
 
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES:
     
Net earnings
    $ 143,558     $ 123,424  
Adjustments to reconcile net earnings to net cash provided by operating activities:
     
Depreciation and amortization
      9,493       8,730  
Provision for credit losses
      27,550       2,015  
Securities premium amortization, net
      28,586       18,690  
Discount accret
ion on purchased loans
 
 
 
(3,209
)
 
 
 
(1,282
)
 
Gain on sale of assets, net
      (3,882 )      (1,312 ) 
Deferred federal income tax (expense) benefit
      7,080       1,720  
Change in loans
held-for-sale
      (69,987 )      (18,491 ) 
Change in other assets
      (13,064 )      1,789  
Change in other liabilities
      8,780       9,097  
  
 
 
    
 
 
  
Total adjustments
      (8,653 )      20,956  
  
 
 
    
 
 
  
Net cash provided by operating activities
      134,905       144,380  
  
 
 
    
 
 
  
CASH FLOWS FROM INVESTING ACTIVITIES:
     
Cash received in acquisition of TB&T Bancshares, Inc.
      61,028       —    
Net decrease in interest-bearing time deposits in banks
      —         1,458  
Activity in
available-for-sale
securities:
     
Sales
      263,042       67,404  
Maturities
      5,851,760       4,342,074  
Purchases
      (6,902,770 )      (4,526,709 ) 
Net increase in loans
 held
-for-investment
      (653,105 )      (148,271 ) 
Purchases of bank premises and equipment
      (12,539 )      (7,541 ) 
Proceeds from sale of bank premises and equipment and other assets
      1,192       1,344  
  
 
 
    
 
 
  
Net cash used in investing activities
      (1,391,392 )      (270,241 ) 
  
 
 
    
 
 
  
CASH FLOWS FROM FINANCING ACTIVITIES:
     
Net increase in noninterest-bearing deposits
      647,454       94,890  
Net increase in interest-bearing deposits
      494,503       122,404  
Net increase (decrease) in borrowings
      121,807       (68,551 ) 
Common stock transactions:
     
Proceeds from stock 
option exercises
      3,990       3,493  
Dividends paid
      (51,842 )      (44,757 ) 
Repurchase of stock
      (8,008 )      —    
  
 
 
    
 
 
  
Net cash provided by financing activities
      1,207,904       107,479  
  
 
 
    
 
 
  
NET
DE
CREASE
 IN CASH AND CASH EQUIVALENTS
      (48,583 )      (18,382 ) 
CASH AND CASH EQUIVALENTS, beginning of period
      282,604       248,647  
  
 
 
    
 
 
  
CASH AND CASH EQUIVALENTS, end of period
    $ 234,021     $ 230,265  
  
 
 
    
 
 
  
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS:
 
  
Interest paid
    $ 12,466     $ 22,963  
Federal income taxes paid
      33,534       22,141  
Transfer of loans and bank premises to other real estate
      45       1,208  
Investment securities purchased but not settled
      53,730       51,181  
Restricted stock grant to officers and directors
      913       1,307  
Stock issued in acquisition of TB&T Bancshares, Inc.
      220,273       —    
See notes to consolidated financial statements.
 
9
Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
First Financial Bankshares, Inc. (a Texas corporation) (“Company,” “we” or “us”) is a financial holding company which owns all of the capital stock of one bank with 78 locations located in Texas as of September 30, 2020. The Company’s subsidiary bank is First Financial Bank, N. A. The Company’s primary source of revenue is providing loans and banking services to consumers and commercial customers in the market area in which First Financial Bank, N.A., is located. In addition, the Company also owns First Financial Trust & Asset Management Company, National Association, First Financial Insurance Agency, Inc., and First Technology Services, Inc.
A summary of significant accounting policies of the Company and its subsidiaries applied in the preparation of the accompanying consolidated financial statements follows. The accounting principles followed by the Company and the methods of applying them are in conformity with both United States generally accepted accounting principles (“GAAP”) and prevailing practices of the banking industry.
The Company evaluated subsequent events for potential recognition through the date the consolidated financial statements were issued.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates include its allowance for loan losses and its valuation of financial instruments.
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated.
Stock Split and Increase in Authorized Shares
On April 23, 2019, the Company’s Board of Directors declared a two-for-one stock split of the Company’s outstanding common shares in the form of a 100% stock dividend effective on June 3, 2019. In addition, the shareholders of the Company approved an amendment to the Amended and Restated Certificate of Formation to increase the number of authorized shares to 200,000,000. All per share amounts in this report have been restated to reflect this stock split. An amount equal to the par value of the additional common shares issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock in the consolidated financial statements as of and for the
nine-months
ended September 30, 2019.
 
10
Stock Repurchase
On March 12, 2020, the Company’s Board of Directors authorized the repurchase of up to 4,000,000 common shares through September 30, 2021. Previously, the Board of Directors had authorized the repurchase of up to 2,000,000 common shares through September 30, 2020. The stock repurchase plan authorizes management to repurchase
and ret
ire
the stock at such time as repurchases
 a
nd
retirem
ents
 are considered beneficial to the Company and stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Through September 30, 2020, 324,802 shares were repurchased totaling $8,008,000 under this repurchase plan. Subsequent to September 30, 2020 and through
November 4
,
 
2020
,
no additional shares were repurchased.
Acquisition
On January 1, 2020, the Company acquired 100% of the outstanding capital stock of TB&T Bancshares, Inc. through the merger of a wholly-owned subsidiary with and into TB&T Bancshares, Inc. Following such merger, TB&T Bancshares, Inc. and its wholly-owned subsidiary, The Bank & Trust of Bryan/College Station, Texas were merged into the Company and First Financial Bank,
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 11 for additional information.
Status of New Accounting Standard for Accounting for Allowance for Credit Losses
On January 1, 2020, ASU
2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, became effective for the Company which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. CECL also applies to
off-balance
sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, ASU
2016-13
made changes to the accounting for
available-for-sale
debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on
available-for-sale
debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States that included an option for entities to delay the implementation of ASU
2016-13
until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. The Company elected to delay its implementation of ASU
2016-13
and has calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASU
2016-13
for the three and nine-months ended September 30, 2020.
Prior to the CARES Act being signed and our election to delay the implementation of CECL, we were completing our CECL implementation plan with our cross-functional working group, under the direction of our Chief Credit Officer along with our Chief Accounting Officer, Chief Lending Officer and Chief Financial Officer. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. Our implementation plan included assessment and documentation of processes, internal controls and data sources; model development, documentation and validation; and system configuration, among other things. We contracted with a third-party vendor to assist us in the implementation of CECL.
Currently we expect to adopt CECL during the fourth quarter of 2020 with retroactive application to January 1, 2020 which may require adjustments to the amounts for provision for credit losses for the three and nine-months ended September 30, 2020.
 
11
Other Recently Issued and Effective Authoritative Accounting Guidance
ASU
2016-02,
“Leases.”
ASU
2016-02
amended current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a
right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU
2016-02
did not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. The amended guidance was effective in the first quarter of 2019 and required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company evaluated the provision of the new lease standard and, due to the small dollar amounts and number of lease agreements, all considered operating leases, the effect for the Company on January 1, 2019 was not significant.
ASU
2017-08,
“Receivables – Nonrefundable Fees and Other Costs
:
Premium Amortization on Purchased Callable Debt Securities.”
ASU
2017-08
addressed the amortization method for all callable bonds purchased at a premium to par. Under the revised guidance, entities are required to amortize premiums on callable bonds to the earliest call date. ASU
2017-08
was effective in 2019 although early adoption was permitted. The Company elected to early adopt ASU
2017-08
in the first quarter of 2017. The adoption of this guidance did not have a material impact on the Company’s financial statements.
ASU
2017-04,
“Intangibles – Goodwill and Other.”
ASU
2017-04
amended and simplified current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. ASU
2017-04
became effective for the Company on January 1, 2020 and did not have a significant impact on the Company’s financial statements.
ASU
2018-13,
“Fair Value Measurement (Topic 820). – Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.”
ASU
2018-13
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 certain disclosures, and add disclosure requirements identified as relevant. ASU
2018-13
became effective on January 1, 2020 and did not have a significant impact on the Company’s financial statements.
ASU
2019-12,
“Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.”
ASU
2019-12,
simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a
step-up
in the tax basis of goodwill. ASU
2019-12
is effective for the Company for annual reporting periods after December 15, 2020, and interim periods within. Adoption of ASU
2019-12
is not expected to have a material impact on the Company’s financial statements.
 
12
Investment Securities
Management classifies debt and equity securities as
held-to-maturity,
available-for-sale,
or trading based on its intent. Debt securities that management has the positive intent and ability to hold to maturity are classified as
held-to-maturity
and recorded at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using the interest method. Debt securities not classified as
held-to-maturity
or trading are classified as
available-for-sale
and recorded at fair value, with all unrealized gains and unrealized losses judged to be temporary, net of deferred income taxes, excluded from earnings and reported in the consolidated statements of comprehensive earnings.
Available-for-sale
debt securities that have unrealized gains and losses are excluded from earnings and reported net of tax in accumulated other comprehensive income until realized. Declines in the fair value of
available-for-sale
debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as a realized loss if there is no ability or intent to hold to recovery. If the Company does not intend to sell and will not be required to sell prior to recovery of its amortized cost basis, only the credit component of the impairment is reflected in earnings as a realized loss with the noncredit portion recognized in other comprehensive income. In estimating other-than-temporary impairment losses, we consider (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Increases or decreases in the fair value of equity securities are recorded in earnings.
The Company records its
available-for-sale
debt and equity securities portfolio at fair value. Fair values of these securities are determined based on methodologies in accordance with current authoritative accounting guidance. Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, credit ratings and yield curves. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market specific to the type of security.
When the fair value of a debt security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exists.
Available-for-sale
and
held-to-maturity
debt securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) whether we have the intent to sell our debt securities prior to recovery and/or maturity, (ii) whether it is more likely than not that we will have to sell our debt securities prior to recovery and/or maturity, (iii) the length of time and extent to which the fair value has been less than amortized cost, and (iv) the financial condition of the issuer. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the debt security may be different than previously estimated, which could have a material effect on the Company’s results of operations and financial condition.
The Company’s investment portfolio
currently
 
consists
of obligations of state and political subdivisions, mortgage pass-through securities, corporate bonds and general obligation or revenue based municipal bonds. Pricing for such securities is generally readily available and transparent in the market. The Company utilizes independent third-party pricing services to value its investment securities, which the Company reviews as well as the underlying pricing methodologies for reasonableness and to ensure such prices are aligned with pricing matrices. The Company validates prices supplied by the independent pricing services by comparison to prices obtained from other third-party sources on a quarterly basis.
 
13
Loans
Held-for-Investment
and Allowance for Loan Losses
Loans
held-for-investment
are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amounts outstanding. The Company defers and amortizes net loan origination fees and costs as an adjustment to yield. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectability of the principal is unlikely.
The allowance for loan losses is an amount which represents management’s best estimate of probable losses that are inherent in the Company’s loan portfolio as of the balance sheet date. The allowance for loan losses is comprised of three elements: (i) specific reserves determined based on probable losses on specific classified loans; (ii) a historical valuation reserve component that considers historical loss rates and estimated loss emergence periods; and (iii) qualitative reserves based upon general economic conditions and other qualitative risk factors both internal and external to the Company. The allowance for loan losses is increased by charges to income and decreased by
charge-offs
(net of recoveries). Management’s periodic evaluation of the appropriateness of the allowance is based on general economic conditions, the financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio. For purposes of determining our historical valuation reserve, the loan portfolio, less cash secured loans, government guaranteed loans and classified loans, is multiplied by the Company’s historical loss rate adjusted for the estimated loss emergence period. Specific allocations are increased or decreased in accordance with deterioration or improvement in credit quality and a corresponding increase or decrease in risk of loss on a particular loan. In addition, we adjust our allowance
for loan
losses
 
for
qualitative factors such as current local economic conditions and trends, including, without limitations, unemployment, oil and gas prices, drought conditions, changes in lending staff, policies and procedures, changes in credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans. This qualitative reserve serves to estimate for additional areas of losses inherent in our portfolio that are not reflected in our historic loss factors.
Although we believe we use the best information available to make loan loss allowance determinations, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making our initial determinations. A decline in the economy could result in increased levels of
non-performing
assets and charge-offs, increased loan provisions and reductions in income. Additionally, bank regulatory agencies periodically review our allowance for loan losses and methodology and could require, in accordance with U.S. GAAP, additional provisions to the allowance for loan losses based on their judgment of information available to them at the time of their examination as well as changes to our methodology.
Accrual of interest is discontinued on a loan and payments are applied to principal when management believes, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. Except consumer loans, generally all loans past due greater than 90 days, based on contractual terms, are placed on
nonaccrual.
Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Consumer loans are generally
charged-off
when a loan becomes past due 90 days. For other loans in the portfolio, facts and circumstances are evaluated in making
charge-off
decisions.
Loans are considered impaired when, based on current information and events, management determines that it is probable we will be unable to collect all amounts due in accordance with the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectable.
 
14
The Company’s policy requires measurement of the allowance for an impaired, collateral dependent loan based on the fair value of the collateral less cost to sell. Other loan impairments for
non-collateral
dependent loans are measured based on the present value of expected future cash flows or the loan’s observable market price. At September 30, 2020 and 2019 and December 31, 2019, all significant impaired loans have been determined to be collateral dependent and the allowance for loss has been measured utilizing the estimated fair value of the collateral less cost to sell.
From time to time, the Company modifies its loan agreement with a borrower. A modified loan is considered a troubled debt restructuring when two conditions are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity. For all impaired loans, including the Company’s troubled debt restructurings, the Company performs a periodic, well-documented credit evaluation of the borrower’s financial condition and prospects for repayment to assess the likelihood that all principal and interest payments required under the terms of the agreement will be collected in full. When doubt exists about the ultimate collectability of principal and interest, the troubled debt restructuring remains on
non-accrual
status and payments received are applied to reduce principal to the extent necessary to eliminate such doubt. This determination of accrual status is judgmental and is based on facts and circumstances related to each troubled debt restructuring. Each of these loans is individually evaluated for impairment and a specific reserve is recorded based on probable losses, taking into consideration the related collateral, modified loan terms and cash flow. As of September 30, 2020 and 2019, and December 31, 2019, substantially all of the Company’s troubled debt restructured loans were on
non-accrual.
The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to
COVID-19
made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the
COVID-19
national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act.
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.
 
15
Table of Contents
Purchased credit impaired loans are those loans that showed evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all amounts contractually owed. Their acquisition fair value, which includes a credit component at the acquisition date, was based on the estimate of cash flows, both principal and interest, expected to be collected or estimated collateral values if cash flows are not estimable, discounted at prevailing market rates of interest. The difference between the discounted cash flows expected at acquisition and the investment in the loan is recognized as interest income on a level-yield method over the life of the loan, unless management was unable to reasonably forecast cash flows in which case the loans were placed on nonaccrual. Subsequent to the acquisition date, increases in expected cash flows will generally result in a recovery of any previously recorded allowance for loan loss, to the extent applicable, and/or a reclassification from the
non-accretable
difference to accretable yield, which will be recognized prospectively. Decreases in expected cash flows subsequent to acquisition are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition. The carrying amount of purchased credit impaired loans at September 30, 2020 and 2019 and December 31, 2019 were $5,978,000, $342,000 and $251,000, respectively, compared to a contractual balance of $8,469,000, $605,000 and $345,000, respectively. Other purchased credit impaired loan disclosures have been omitted due to immateriality.
Other Real Estate
Other real estate owned is foreclosed property held pending disposition and is initially recorded at fair value, less estimated costs to sell. At foreclosure, if the fair value of the real estate, less estimated costs to sell, is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Any subsequent reduction in value is recognized by a charge to income. Operating and holding expenses of such properties, net of related income, and gains and losses on their disposition are included in net gain (loss) on sale of foreclosed assets as incurred.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the respective lease or the estimated useful lives of the improvements, whichever is shorter.
Business Combinations, Goodwill and Other Intangible Assets
The Company accounts for all business combinations under the purchase method of accounting. Tangible and intangible assets and liabilities of the acquired entity are recorded at fair value. Intangible assets with finite useful lives represent the future benefit associated with the acquisition of the core deposits and are amortized over seven years, utilizing a method that approximates the expected attrition of the deposits. Goodwill with an indefinite life is not amortized, but rather tested annually for impairment as of June 30 each year. There was no impairment recorded for the three and
nine-months 
ended September 30, 2020 or 2019, respectively.
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.
 
16
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 Earnings (Loss)
Unrealized net gains on the Company’s
available-for-sale
securities (after applicable income tax
e
s
) totaling $152,063,000
,
$73,521,000
and
 
$67,506,000
a
t
 
September 30, 2020 and 2019
 and December 31, 2019
,
 respectively, and the minimum pension liability (after applicable income tax benefit) totaling ($1,324,000) at September 30, 2019, are included in accumulated other comprehensive
earnings
. There were no amounts under the minimum pension liability at September 30, 2020
 or December 31, 2019
(see note 9).
Income Taxes
The Company’s provision for income taxes is based on income before income taxes adjusted for permanent differences between financial reporting and taxable income. Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the grant date. The Company recorded stock option expense totaling $344,000 and $431,000 for the three-months ended September 30, 2020 and 2019, respectively. The Company recorded stock option expense totaling $1,033,000 and $1,056,000 for the nine-months ended September 30, 2020 and 2019, respectively.
The Company also grants restricted stock for a fixed number of shares. The Company recorded expenses associated with its director and officer restricted stock grants totaling $569,000 and $433,000, for the three-months ended September 30, 2020 and 2019, respectively. The Company recorded expenses associated with its director and officer restricted stock grants totaling $1,501,000 and $1,116,000 for the nine-months ended September 30, 2020 and 2019, respectively.
See note 8 for further information.
Advertising Costs
Advertising costs are expensed as incurred.
 
17
Per Share Data
Net earnings per share (“EPS”) are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. The Company calculates dilutive EPS assuming all outstanding stock options to purchase common shares and unvested restricted stock shares have been exercised and/or vested at the beginning of the year (or the time of issuance, if later.) The dilutive effect of the outstanding options and restricted stock is reflected by application of the treasury stock method, whereby the proceeds from the exercised options and unearned compensation for restricted stock are assumed to be used to purchase common shares at the average market price during the respective period. Anti-dilutive shares for the three and nine-months ended September 30, 2020
 
were
 
approximately
 
400,000
and
15,000
 respectively, and
were
excluded from the computation of EPS.
 
For the three and nine-months ended September 30, 2019, there were no anti-dilutive
 shares
.
The following table reconciles the computation of basic EPS to dilutive EPS:
 
     Net      Weighted         
     Earnings      Average      Per Share  
     (in thousands)      Shares      Amount  
For the three-months ended September 30, 2020:
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings per share, basic
    $  52,857        141,980,707      $  0.37  
Effect of stock options and stock grants
      —          548,535      —    
  
 
 
     
 
 
     
 
 
  
Net earnings per share, diluted
    $ 52,857        142,529,242      $ 0.37  
  
 
 
     
 
 
     
 
 
  
 
     Net      Weighted         
     Earnings      Average      Per Share  
     (in thousands)      Shares      Amount  
Fo
r the nine-month
s
ended September 30, 2020
:
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings per share, basic
    $  143,558        142,023,930      $  1.01  
Effect of stock options and stock grants
      —          495,518      —    
  
 
 
     
 
 
     
 
 
  
Net earnings per share, diluted
    $ 143,558        142,519,448      $ 1.01  
  
 
 
     
 
 
     
 
 
  
 
     Net      Weighted         
     Earnings      Average      Per Share  
     (in thousands)      Shares      Amount  
For
 the three-months ended September 30, 2019
:
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings per share, basic
    $  43,080        135,693,901      $  0.32  
Effect of stock options and stock grants
      —          675,427      —    
  
 
 
     
 
 
     
 
 
  
Net earnings per share, diluted
    $ 43,080        136,369,328      $ 0.32  
  
 
 
     
 
 
     
 
 
  
 
     Net      Weighted         
     Earnings      Average      Per Share  
     (in thousands)      Shares      Amount  
For the nine-months ended Septe
mber 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings per share, basic
    $  123,424        135,613,646      $  0.91  
Effect of stock options and stock grants
      —          660,696      —    
  
 
 
     
 
 
     
 
 
  
Net earnings per share, diluted
    $ 123,424        136,274,342      $ 0.91  
  
 
 
     
 
 
     
 
 
  
 
18
Note 2 - Securities
A summary of the Company’s
available-for-sale
securities follows (in thousands):
 
     September 30, 2020  
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Estimated  
     Cost Basis      Holding Gains      Holding Losses      Fair Value  
Obligations of states and political subdivisions
    $ 2,252,412      $ 119,952      $ (4,875 )     $ 2,367,489  
Residential mortgage-backed securities
      1,454,422        54,744       
(112
)
 		      1,509,054  
Commercial mortgage-backed securities
      527,392        22,776        —        550,168  
Corporate bonds and other
      4,398        171        —          4,569  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total securities
available-for-sale
    $  4,238,624      $
 
 
 
 
 
 
 
 197,643      $ (4,987 )     $
 
  4,431,280  
  
 
 
     
 
 
     
 
 
     
 
 
  
 
     September 30, 2019  
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Estimated  
     Cost Basis      Holding Gains      Holding Losses      Fair Value  
U.S. Treasury securities
    $ 9,990      $ 31      $ —        $ 10,021  
Obligations of states and political subdivisions
      1,182,549        59,734        (86 )       1,242,197  
Corporate bonds and other
      4,643        87        —          4,730  
Residential mortgage-backed securities
      1,597,807        27,001        (1,428 )       1,623,380  
Commercial mortgage-backed securities
      509,019        8,069        (260 )       516,828  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total securities
available-for-sale
    $ 3,304,008      $ 94,922      $ (1,774 )     $ 3,397,156  
  
 
 
     
 
 
     
 
 
     
 
 
  
 
     December 31, 2019  
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Estimated  
     Cost Basis      Holding Gains      Holding Losses      Fair Value  
U.S. Treasury securities
    $ 9,997      $ 22      $ —        $ 10,019  
Obligations of states and political subdivisions
      1,231,619        57,764        (400 )       1,288,983  
Corporate bonds and other
      4,643        65        —          4,708  
Residential mortgage-backed securities
      1,586,872        23,139        (1,148 )       1,608,863  
Commercial mortgage-backed securities
      494,674        6,356        (286 )       500,744  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total securities
available-for-sale
    $ 3,327,805      $ 87,346      $ (1,834 )     $ 3,413,317  
  
 
 
     
 
 
     
 
 
     
 
 
  
The Company invests in mortgage-backed securities that have expected
maturities
that differ from their contractual maturities. These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty. These securities include collateralized mortgage obligations (CMOs) and other asset backed securities. The expected maturities of these securities at September 30, 2020 were computed by using scheduled amortization of balances and historical prepayment rates.
 
19
The amortized cost and estimated fair value of
available-for-sale
securities at September 30, 2020 by contractual and expected maturity, are shown below (in thousands):
 
     Amortized      Estimated  
     Cost Basis      Fair Value  
Due within one year    $ 118,519      $ 120,206  
Due after one year through five years      623,518        669,407  
Due after five years through ten years      1,468,748        1,536,734  
Due after ten years      46,025        45,711  
Mortgage-backed securities      1,981,814        2,059,222  
  
 
 
     
 
 
  
Total
    $ 4,238,624      $ 4,431,280  
  
 
 
     
 
 
  
The following tables disclose the Company’s investment securities that have been in a continuous
unrealized-loss
position for less than 12 months and for 12 or more months (in thousands):
 
     
              
      
              
      
              
      
              
      
              
      
              
  
 
  
Less than 12 Months
 
  
12 Months or Longer
 
  
Total
 
September 30, 2020
  
Fair Value
 
  
Unrealized
Loss
 
  
Fair
Value
 
  
Unrealized
Loss
 
  
Fair Value
 
  
Unrealized
Loss
 
Obligations of states and political subdivisions
    $  395,729      $  4,875      $ —        $  —        $  395,729      $  4,875  
Residential mortgage-backed securities
      49,559        76        4,916        36        54,475        112  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 445,288      $ 4,951      $  4,916      $ 36      $ 450,204      $ 4,987  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
     
              
      
              
      
              
      
              
      
              
      
              
  
 
  
Less than 12 Months
 
  
12 Months or Longer
 
  
Total
 
September 30, 2019
  
Fair Value
 
  
Unrealized
Loss
 
  
Fair Value
 
  
Unrealized
Loss
 
  
Fair Value
 
  
Unrealized
Loss
 
Obligations of states and political subdivisions
    $ 11,140      $ 86      $ 828      $ —        $ 11,968      $ 86  
Residential mortgage-backed securities
      91,850        75        146,449        1,353        238,299        1,428  
Commercial mortgage-backed securities
      42,310        115        74,873        145        117,183        260  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  145,300      $  276      $ 222,150      $  1,498      $  367,450      $  1,774  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
     
              
      
              
      
              
      
              
      
              
      
              
  
 
  
Less than 12 Months
 
  
12 Months or Longer
 
  
Total
 
December 31, 2019
  
Fair Value
 
  
Unrealized
Loss
 
  
Fair Value
 
  
Unrealized
Loss
 
  
Fair Value
 
  
Unrealized
Loss
 
Obligations of state and
political subdivisions
    $ 65,787      $  400      $ 326      $  —        $ 66,113      $ 400  
Residential mortgage-backed securities
      100,004        306        103,983        842        203,987        1,148  
Commercial mortgage-backed securities
      74,560        178        35,178        108        109,738        286  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  240,351      $ 884      $  139,487      $ 950      $  379,838      $  1,834  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
20
The number of investments in an unrealized loss position totaled 80 at September 30, 2020. We do not believe these unrealized losses are “other-than-temporary” as (i) we do not have the intent to sell our securities prior to recovery and/or maturity and (ii) it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity. In making this determination, we also consider the length of time and extent to which fair value has been less than cost and the financial condition of the issuer. The unrealized losses noted are interest rate related due to the level of interest rates at September 30, 2020 compared to the time of purchase. We have reviewed the ratings of the issuers and have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities. Our mortgage related securities are backed by GNMA, FNMA and FHLMC or are collateralized by securities backed by these agencies. At September 30, 2020, 80.94% of our
available-for-sale
securities that are obligations of states and political subdivisions were issued within the State of Texas, of which 52.04% are guaranteed by the Texas Permanent School Fund.
At September 30, 2020, $2,884,337,000 of the Company’s securities were pledged as collateral for public or trust fund deposits, repurchase agreements, a borrowing line with the Federal Reserve Bank of Dallas and for other purposes required or permitted by law.
During the three
-
months ended September 30, 2020 and 2019, sales of investment securities that were classified as
available-for-sale
totaled $10,084,000 and $1,352,000, respectively. Gross realized gains from security sales during the third quarter of 2020 and 2019 totaled $36,000 and $54,000, respectively. Gross realized losses from security sales during the three-month period ended September 30, 2019 totaled $2,000. There were no gross realized losses from security sales during the three-month period ended September 30, 2020.
During the nine
-
months ended September 30, 2020 and 2019, sales of investment securities classified as
available-for-sale
totaled $263,042,000 and $67,404,000, respectively. Gross realized gains from security sales during the nine-month periods ended September 30, 2020 and 2019 totaled $3,614,000 and $747,000, respectively. Gross realized losses from security sales during the nine-month periods ended September 30, 2020 and 2019 totaled $4,000 and $19,000, respectively.
The specific identification method was used to determine cost in order to compute the realized gains and losses.
Note 3 – Loans
Held-for-Investment
and Allowance for Loan Losses
Loans
held-for-investment
by class of financing receivables are as follows (in thousands):
 
   September 30,      December 31,  
     2020      2019      2019  
Commercial
    $  1,488,345      $ 836,644      $ 856,326  
Agricultural
      93,972        102,054        103,640  
Real estate
      3,287,605        2,749,552        2,823,372  
Consumer
      423,757        412,066        411,631  
  
 
 
     
 
 
     
 
 
  
Total loans
held-for-investment
    $ 5,293,679      $  4,100,316      $ 4,194,969  
  
 
 
     
 
 
     
 
 
  
Our subsidiary bank has established a line of credit with the Federal Home Loan Bank of Dallas (FHLB) to provide liquidity and meet pledging requirements for those customers eligible to have securities pledged to secure certain uninsured deposits. At September 30, 2020, $3,150,534,000 in loans held by our bank subsidiary were subje
c
t to blanket liens as security for this line of credit. At September 30, 2020, there was $30,000,000 outstanding under this line of credit.
The Company’s
non-accrual
loans, loans still accruing and past due 90 days or more and restructured loans are as follows (in thousands):
 
     
            
      
            
      
            
  
 
  
September 30,
 
  
December 31,
 
 
  
202
0
 
  
2019
 
  
2019
 
Non-accrual
loans*
    $
 
 
 42,673      $ 25,717      $ 24,582  
Loans still accruing and past due 90 days or more
      23        104        153  
Troubled debt restructured loans still accruing**
      25        27        26  
  
 
 
     
 
 
     
 
 
  
Total
    $
 
 
 
 
  42,721      $  25,848      $  24,761  
  
 
 
     
 
 
     
 
 
  
21
*
Includes $5,978,000, $342,000 and $251,000 of purchased credit impaired loans as of September 30, 2020 and 2019, and December 31, 2019, respectively.
**
Troubled debt restructured loans of $4,478,000, $3,983,000 and $4,791,000, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in
non-accrual
loans at September 30, 2020 and 2019, and December 31, 2019,
respectively.
The Company’s recorded investment in impaired loans and the related valuation allowance are as follows (in thousands):
     
            
      
            
      
            
  
 
  
September 30,
 
  
December 31,
 
 
  
2020
 
  
2019
 
  
2019
 
Recorded Investment
  
$
42,673
 
  
$
25,717
 
  
$
24,582
 
Valuation Allowance
  
 
3,241
 
  
 
4,194
 
  
 
3,228
 
The Company had $43,052,000, $27,212,000 and $25,770,000 in
non-accrual,
past due 90 days or more and still accruing, restructured loans and foreclosed assets at September 30, 2020 and 2019, and December 31, 2019, respectively.
Non-accrual
loans at September 30, 2020 and 2019, and December 31, 2019, consisted of the following by class of financing receivables (in thousands):
 
 
  
September 30,
 
  
December 31,
 
 
  
2020
 
  
2019
 
  
2019
 
Commercial
    $ 6,915      $ 8,802      $ 3,093  
Agricultural
      967        1,502        1,376  
Real estate
      34,318        15,095        19,787  
Consumer
      473        318        326  
  
 
 
     
 
 
     
 
 
  
Total
    $  42,673      $
 
  25,717      $  24,582  
  
 
 
     
 
 
     
 
 
  
 
No significant additional funds are committed to be advanced in connection with impaired loans as of September 30, 2020.
The Company’s impaired loans and related allowance are summarized in the following tables by class of financing receivables (in thousands). No interest income was recognized on impaired loans subsequent to their classification as impaired.
 
September 30, 2020
    Unpaid
Contractual
Principal
Balance		      Recorded
Investment
With No
Allowance*		      Recorded
Investment
With
Allowance		      Total
Recorded
Investment		      Related
Allowance		     
Year –to-
date

Average
Recorded
Investment		      Three-
Month
Average
Recorded
Investment		  
Commercial
    $ 8,226      $ 967      $ 5,948      $ 6,915      $  1,234      $ 8,403      $ 7,293  
Agricultural
      1,195        378        589        967        100        1,114        1,026  
Real Estate
      46,973        20,739        13,579        34,318        1,905        37,216        38,128  
Consumer
      603        6        467        473        2        547        514  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  56,997      $  22,090      $  20,583      $  42,673      $ 3,241      $  47,280      $  46,961  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
*
Includes $5,978,000 of purchased credit impaired loans.
22
 
September 30, 2019
    Unpaid
Contractual
Principal
Balance		      Recorded
Investment
With No
Allowance*		      Recorded
Investment
With
Allowance		      Total
Recorded
Investment		      Related
Allowance		     
Year-
to-date

Average
Recorded
Investment		      Three-
Month
Average
Recorded
Investment		  
Commercial
    $ 10,250      $ 5,885      $ 2,917      $ 8,802      $ 1,448      $ 9,586      $ 9,263  
Agricultural
      1,701        406        1,096        1,502        247        1,707        1,609  
Real Estate
      22,535        4,143        10,952        15,095        2,314        16,739        15,577  
Consumer
      444        9        309        318        185        416        346  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  34,930      $  10,443      $  15,274      $  25,717      $  4,194      $  28,448      $  26,795  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
*
Includes $342,000 of purchased credit impaired loans.
 
December 31, 2019
    Unpaid
Contractual
Principal
Balance		      Recorded
Investment
With No
Allowance*		      Recorded
Investment
With
Allowance		      Total
Recorded
Investment		      Related
Allowance		     
Year-to-date

Average
Recorded
Investment		  
Commercial
    $ 4,511      $ 630      $ 2,463      $ 3,093      $ 1,042      $ 3,488  
Agricultural
      1,603        658        718        1,376        235        1,644  
Real Estate
      27,366        7,081        12,706        19,787        1,950        21,726  
Consumer
      469        —          326        326        1        449  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  33,949      $  8,369      $  16,213      $  24,582      $  3,228      $  27,307  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
*
Includes $251,000 of purchased credit impaired loans.
The Company recognized interest income on impaired loans prior to being recognized as impaired of approximately $750,000 during the year ended December 31,
2019.    Such amounts for the three-month and nine-month periods ended September 30, 2020 and 2019 were not significant.
From a credit risk standpoint, the Company rates its loans in one of five categories: (i) pass, (ii) special mention, (iii) substandard, (iv) doubtful or (v) loss (which are
charged-off).
The ratings of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on our credits as part of our
on-going
monitoring of the credit quality of our loan portfolio. Ratings are adjusted to reflect the degree of risk and loss that are felt to be inherent in each credit as of each reporting period. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).
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.
 
23
Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on
non-accrual.
The following summarizes the Company’s internal ratings of its loans
held-for-investment
by class of financing receivables and portfolio segments, which are the same (in thousands):
 
September 30, 2020
    Pass      Special
Mention		      Substandard      Doubtful      Total  
Commercial
    $ 1,440,272      $ 15,952      $ 32,121      $ —        $ 1,488,345  
Agricultural
      87,136        4,970        1,866        —          93,972  
Real Estate
      3,142,479        44,919        100,207        —          3,287,605  
Consumer
      421,749        193        1,815        —        423,757  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 5,091,636      $ 66,034      $  136,009      $  —        $ 5,293,679  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
September 30, 2019
    Pass      Special
Mention		      Substandard      Doubtful      Total  
Commercial
    $ 797,444      $ 24,836      $ 14,364      $ —        $ 836,644  
Agricultural
      99,586        61        2,407        —          102,054  
Real Estate
      2,673,591        21,171        54,790        —          2,749,552  
Consumer
      410,491        232        1,343        —        412,066  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 3,981,112      $ 46,300      $  72,904      $  —        $ 4,100,316  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
December 31, 2019
    Pass      Special
Mention		      Substandard      Doubtful      Total  
Commercial
    $ 825,775      $ 20,971      $ 9,580      $ —        $ 856,326  
Agricultural
      101,614        64        1,962        —          103,640  
Real Estate
      2,717,227        42,036        64,109        —          2,823,372  
Consumer
      409,698        300        1,633        —        411,631  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  4,054,314      $ 63,371      $  77,284      $  —        $ 4,194,969  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The Company’s past due loans are as follows (in thousands):
 
                                                                                                                                                    
September 30, 2020
   
15-59

Days
Past
Due*		     
60-89

Days
Past
Due		      Greater
Than
90
Days		      Total
Past
Due		      Current      Total
Loans		      90 Days
Past Due
Still
Accruing		  
Commercial
    $ 5,165      $ 476      $ 116      $ 5,757      $  1,482,588      $ 1,488,345      $  —    
Agricultural
      103        50        6        159        93,813        93,972        —    
Real Estate
      10,905        —          306        11,211        3,276,394        3,287,605        1  
Consumer
      541        80        31        652        423,105        423,757        22  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 16,714      $  606      $  459      $ 17,779      $ 5,275,900      $ 5,293,679      $ 23  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
                                                                                                                                                    
September 30, 2019
   
15-59

Days
Past
Due*		     
60-89

Days
Past
Due		      Greater
Than
90
Days		      Total
Past
Due		      Current      Total
Loans		      90 Days
Past Due
Still
Accruing		  
Commercial
    $ 2,740      $ 815      $ 619      $ 4,174      $ 832,470      $ 836,644      $ —    
Agricultura
l
      605        232        202        1,039        101,015        102,054        —    
Real Estate
      14,216        1,563        239        16,018        2,733,534        2,749,552        69  
Consumer
      595        164        40        799        411,267        412,066        35  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 18,156      $  2,774      $  1,100      $ 22,030      $ 4,078,286      $ 4,100,316      $  104  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
24
December 31, 2019
   
15-59

Days
Past
Due*		     
60-89

Days
Past
Due		      Greater
Than
90
Days		      Total
Past
Due		      Current      Total
Loans		      90 Days
Past Due
Still
Accruing		  
Commercial
    $ 3,257      $ 557      $ 722      $ 4,536      $ 851,790      $ 856,326      $ 112  
Agricultural
      183        44        400        627        103,013        103,640        —    
Real Estate
      12,890        288        195        13,373        2,809,999        2,823,372        —    
Consumer
      572        151        45        768        410,863        411,631        41  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 16,902      $ 1,040      $ 1,362      $ 19,304      $ 4,175,665      $ 4,194,969      $  153  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
*
The Company monitors commercial, agricultural and real estate loans after such loans are 15 days past due. Consumer loans are monitored after such loans are 30 days past due.
The following table details the allowance for loan losses by portfolio segment (in thousands). There were no allowances for purchased credit impaired loans at September 30, 2020 and 2019, and December 31, 2019. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
 
September 30, 2020
    Commercial      Agricultural      Real Estate      Consumer      Total  
Loans individually evaluated for impairment
    $ 1,234      $ 100      $ 1,905      $
 
 2      $ 3,241  
Loans collectively evaluated for impairment
      18,957        2,231        45,220        6,389        72,797  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  20,191      $  2,331      $  47,125      $  6,391      $ 76,038  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
September 30, 2019
    Commercial      Agricultural      Real Estate      Consumer      Total  
Loans individually evaluated for impairment
    $ 1,448      $ 247      $ 2,314      $
 
 185      $ 4,194  
Loans collectively evaluated for impairment
      11,018        1,000        30,022        5,655        47,695  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  12,466      $  1,247      $  32,336      $  5,840      $ 51,889  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
December 31, 2019
    Commercial      Agricultural      Real Estate      Consumer      Total  
Loans individually evaluated for impairment
    $ 1,042      $ 235      $ 1,950      $
 
 1      $ 3,228  
Loans collectively evaluated for impairment
      11,080        971        32,024        5,196        49,271  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 12,122      $  1,206      $  33,974      $ 5,197      $ 52,499  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Changes in the allowance for loan losses are summarized as follows by portfolio segment (in thousands):
 
Three
-
months ended
September 30, 2020
    Commercial     Agricultural      Real Estate     Consumer     Total  
Beginning balance
    $ 18,572     $ 2,544      $ 42,623     $ 5,208     $ 68,947  
Provision for loan losses
      1,955       (214 )       4,416       1,343       7,500  
Recoveries
      200       1        138       105       444  
Charge-offs
      (536 )      —          (52 )      (265 )      (853 ) 
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Ending balance
    $  20,191     $  2,331      $ 47,125     $  6,391     $ 76,038  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
 
25
Three
-
months ended
September 30, 2019
    Commercial     Agricultural     Real Estate     Consumer     Total  
Beginning balance
    $ 13,899     $ 1,360     $ 30,799     $ 5,762     $
 
 
 51,820  
Provision for loan losses
      (1,174 )      (32 )      1,531       125       450  
Recoveries
      90       85       100       111       386  
Charge-offs
      (349 )      (166 )      (94 )      (158 )      (767 ) 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance
    $  12,466     $  1,247     $
 
 
 
  32,336     $
 
 
 
 
  5,840     $  51,889  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
Nine
-
months ended
September 30, 2020
    Commercial     Agricultural     Real Estate     Consumer     Total  
Beginning balance
    $ 12,122     $ 1,206     $ 33,974     $ 5,197     $
 
 
 52,499  
Provision for loan losses
      9,571       1,096       13,806       1,577       26,050  
Recoveries
      890       31       272       271       1,464  
Charge-offs
      (2,392 )      (2 )      (927 )      (654 )      (3,975 ) 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance
    $  20,191     $  2,331     $
 
 
 
  47,125     $
 
 
 
 
  6,391     $  76,038  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
Nine
-
months ended
September 30, 2019
    Commercial     Agricultural     Real Estate     Consumer     Total  
Beginning balance
    $ 11,948     $ 1,446     $ 32,342     $ 5,466     $
 
 
 51,202  
Provision for loan losses
      439       10       998       568       2,015  
Recoveries
      1,163       92       250       459       1,964  
Charge-offs
      (1,084 )      (301 )      (1,254 )      (653 )      (3,292 ) 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance
    $  12,466     $  1,247     $
 
 
 
  32,336     $
 
 
 
 
  5,840     $  51,889  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Additionally
, the Company records a reserve for unfunded commitments in other liabilities which totaled $2,300,000 at September 30, 2020 and $800,000 at September 30, 2019 and December 31, 2019. The increase is the result of a $1,500,000 provision for unfunded commitments during the three-months ended September 30, 2020.
 
The provision for loan losses above is combined with the provision for unfunded commitments and reported as provision for credit losses in the statement of earnings.
The Company’s recorded investment in loans related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology is as follows (in thousands). Purchased credit impaired loans of $5,978,000, $342,000 and $251,000 at September 30, 2020 and 2019, and December 31, 2019, respectively, are included in loans individually evaluated for impairment
.
 
September 30, 2020
    Commercial      Agricultural      Real Estate      Consumer      Total  
Loans individually evaluated for impairment
    $ 6,915      $ 967      $ 34,318      $ 473      $ 42,673  
Loans collectively evaluated for impairment
      1,481,430        93,005        3,253,287        423,284        5,251,006  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  1,488,345      $  93,972      $ 3,287,605      $  423,757      $ 5,293,679  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
September 30, 2019
    Commercial      Agricultural      Real Estate      Consumer      Total  
Loans individually evaluated for impairment
    $ 8,802      $ 1,502      $ 15,095      $ 318      $ 25,717  
Loans collectively evaluated for impairment
      827,842        100,552        2,734,457        411,748        4,074,599  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  836,644      $  102,054      $ 2,749,552      $  412,066      $ 4,100,316  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
December 31, 2019
    Commercial      Agricultural      Real Estate      Consumer      Total  
Loans individually evaluated for impairment
    $ 3,093      $ 1,376      $ 19,787      $ 326      $ 24,582  
Loans collectively evaluated for impairment
      853,233        102,264        2,803,585        411,305        4,170,387  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  856,326      $  103,640      $ 2,823,372      $  411,631      $ 4,194,969  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
26
The Company’s loans that were modified and considered troubled debt restructurings are as follows (in thousands):
 
     Three
-
Months Ended September 30, 2020		      Nine
-
Months Ended September 30, 2020		  
           
Pre-
Modification
     
Post-
Modification
            
Pre-
Modification
      Post-
Modification		  
            Recorded      Recorded             Recorded      Recorded  
     Number      Investment      Investment      Number      Investment     
 
 
Investment
 
 
  
Commercial
      2      $ 667      $ 667        11      $ 1,151      $
 
 1,151  
Agricultural
      —          —          —          1        134        134  
Real Estate
      2        112        112        3        236        236  
Consumer
      —          —          —          1        14        14  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      4      $ 779      $ 779        16      $ 1,535      $ 1,535  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
     Three
-
Months Ended September 30, 2019		      Nine
-
Months Ended September 30, 2019		  
           
Pre-
Modification
     
Post-
Modification
            
Pre-
Modification
      Post-
Modification		  
            Recorded      Recorded             Recorded      Recorded  
     Number     
 
 
Investment
 
 
      Investment      Number     
 
 
Investment
 
 
      Investment  
Commercial
      2      $ 100      $ 100        5      $ 379      $ 379  
Agricultural
      —          —          —          10        619        619  
Real Estate
      1        42        42        5        692        692  
Consumer
      —          —          —          —          —          —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      3      $ 142      $ 142        20      $ 1,690      $ 1,690  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The balances below provide information as to how the loans were modified as troubled debt restructured loans (in thousands):
 
     Three
-
Months Ended September 30, 2020		      Nine
-
Months Ended September 30, 2020		  
     Adjusted
Interest
Rate		      Extended
Maturity		      Combined
Rate and
Maturity		      Adjusted
Interest
Rate		      Extended
Maturity		      Combined
Rate and
Maturity		  
Commercial
    $ —        $ 658      $ 9      $ —        $ 918      $ 233  
Agricultural
      —          —          —          —          134        —    
Real Estate
      —          —          112        —          —          236  
Consumer
      —          —          —          —          14        —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ —        $ 658      $ 121      $ —        $ 1,066      $ 469  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
     Three
-

 
Months Ended September 30, 2019		      Nine
-

 
Months Ended September 30, 2019		  
     Adjusted
Interest
Rate		      Extended
Maturity		      Combined
Rate and
Maturity		      Adjusted
Interest
Rate		      Extended
Maturity		      Combined
Rate and
Maturity		  
Commercial
    $ —        $ —        $ 100      $ —        $ 279      $ 100  
Agricultural
      —          —          —          —          354        265  
Real Estate
      —          —          42        —          202        490  
Consumer
      —          —          —          —          —          —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ —        $ —        $ 142      $ —        $ 835      $ 855  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
27
During the
three
 and nine
-
months ended September 30, 2020, no loans were modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default.
During the three and nine-months ended September 30, 2019, two loans totaling $28,000 were modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default.
A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or more or results in the foreclosure and repossession of the applicable collateral.
As of September 30, 2020, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.
As discussed in note 1 to these financial statements, the CARES Act provided banks an option to elect to not account for certain loan modifications related to
COVID-19
as troubled debt restructurings as long as the borrowers were not more than 30 days past due as of December 31, 2019. The above disclosed troubled debt restructurings were not related to
COVID-19
modifications.
Beginning in
mid-March
of 2020, the Company began offering deferral and modification of principle and/or interest
payments,
for
varying
periods but typically no more than 90 days,
to selected borrowers on a
case-by-case
basis.
At September 30, 2020, the Company had approximately 122 loans 
totaling $18,650,000 in outstanding loans subject to deferral and modification agreements, representing 0.41% of outstanding loans
held-for-investment,
excluding PPP loans.
Note 4 - Loans
Held-for-Sale
Loans held-for-sale
totaled $101,055,000, $40,499,000 and $28,228,000 at September 30, 2020 and 2019, and December 31, 2019, respectively. At September 30, 2020 and 2019, and December 31, 2019, $6,389,000, $764,000 and $5,152,000 are valued at the lower of cost or fair value, and the remaining amounts are valued under the fair value option. The change to the fair value option for
loans held-for-sale
was effective at June 30, 2018 and was done in conjunction with the Company’s move to mandatory delivery in the secondary market and the purchase of forward mortgage-backed securities to manage the changes in fair value (see note 5 for additional information).
These loans, which are sold on a servicing released basis, are valued using a market approach by utilizing either: (i) the fair value of the securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures (see note 10). Interest income on mortgage loans held for sale is recognized based on the contractual rates and reflected in interest income on loans in the consolidated statements of earnings. The Company has no continuing ownership in any residential mortgage loans sold
.
The Company originates certain mortgage loans for sale in the secondary market. The mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first three to six months, or if documentation is determined not to be in compliance with regulations. The Company’s historic losses as a result of these indemnities have been insignificant.
28
Note 5 - Derivative Financial Instruments
The Company enters into interest rate lock commitments (“IRLCs”) with customers to originate residential mortgage loans at a specific interest rate that are ultimately sold in the secondary market. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company.
The Company purchases forward mortgage-backed securities contracts to manage the changes in fair value associated with changes in interest rates related to a portion of the IRLCs. These instruments are typically entered into at the time the IRLC is made in the aggregate.
These financial instruments are not designated as hedging instruments and are used for asset and liability management needs. All derivatives are carried at fair value in either other assets or other liabilities, through earnings in the statement of earnings.
The fair values of IRLCs are based on current secondary market prices for underlying loans and estimated servicing value with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability (pull-through rate) net of estimated costs to originate the loan. The fair value of IRLCs is subject to change primarily due to changes in interest rates and the estimated pull-through rate. These commitments are classified as Level 2 in the fair value disclosures (see note 10), as the valuations are based on observable market inputs.
Forward mortgage-backed securities contracts are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract and these instruments are therefore classified as Level 1 in the fair value disclosures (see note 10). The estimated fair values are subject to change primarily due to changes in interest rates. The impact of these forward contracts is included in gain on sale and fees on mortgage loans in the statement of earnings.
The following table provides the outstanding notional balances and fair values of outstanding derivative positions (dollars in thousands):
 
September 30, 2020:
    Outstanding
Notional
Balance		      Asset
Derivative
Fair Value		      Liability
Derivative
Fair Value		  
IRLCs
    $ 247,751      $ 5,967      $ —    
Forward mortgage-backed securities trades
      232,000        —          872  
 
September 30, 2019:
    Outstanding
Notional
Balance		      Asset
Derivative
Fair Value		      Liability
Derivative
Fair Value		  
IRLCs
    $   82,330      $ 1,320      $ —    
Forward mortgage-backed securities trades
      126,500        —       
41
  
 
December 31, 2019:
    Outstanding
Notional
Balance		      Asset
Derivative
Fair Value		      Liability
Derivative
Fair Value		  
IRLCs
    $   47,415      $   886      $ —    
Forward mortgage-backed securities trades
      78,500        —          152  
 
29
Note 6 - Borrowings
Borrowings consisted of the following (dollars in thousands):
 
     September 30,      December 31,  
     2020      2019      2019  
Securities sold under agreements with customers to repurchase
    $
 
 468,913      $ 358,155      $ 375,106  
Federal funds purchased
      4,250        7,000        6,250  
Advances from Federal Home Loan
 
Bank of Dallas
      30,000        35,000        —    
  
 
 
     
 
 
     
 
 
  
Total
    $ 503,163      $
 
 400,155      $ 381,356  
  
 
 
     
 
 
     
 
 
  
Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which the Company pledges certain securities that have a fair value equal to at least the amount of the borrowings. The agreements mature daily and therefore the risk arising from a decline in the fair value of the collateral pledged is minimal. The securities pledged are mortgage-backed securities. These agreements do not include “right of
set-off”
provisions and therefore the Company does not offset such agreements for financial reporting purposes.
Note 7 - Income Taxes
Income tax expense was $10,335,000 for the third quarter of 2020 as compared to $8,867,000 for the same period in 2019. The Company’s effective tax rates on pretax income were 16.35% and 17.07% for the third quarters of 2020 and 2019, respectively. Income tax expense was $28,233,000 for the
nine
-
months ended September 30, 2020 as compared to $24,827,000 for the same period in 2019. The Company’s effective tax rates on pretax income were 16.43% and 16.75% for the nine
-
months ended September 30, 2020 and 2019, respectively. The effective tax rates differ from the statutory federal tax rate of 21% primarily due to tax exempt interest income earned on certain investment securities and loans, the deductibility of dividends paid to our employee stock ownership plan and excess tax benefits related to our directors’ deferred compensation plan.
Note 8 - Stock Option Plan and Restricted Stock Plan
The Company grants incentive stock options for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant to employees. On June 26, 2019, the Company granted 398,850 incentive stock options with an exercise price of $29.70 per share. The fair value of the options was $7.31 per option and was estimated using the Black-Scholes options pricing model with the following weighted average assumptions: risk free interest rate of 1.83%; expected dividend yield of 1.62%; expected life of 6.64 years; and expected volatility of 26.69%. On January 28, 2020, the Company granted 11,250 incentive stock options with an exercise price of $34.55 per share. Other stock option disclosures for this grant have not been provided due to insignificance.
The Company recorded stock option expense totaling $344,000 and $431,000 for the three-month periods ended September 30, 2020 and 2019, respectively. The Company recorded stock option expense totaling $1,033,000 and $1,056,000 for the nine
-
months ended September 30, 2020 and 2019, respectively. The additional disclosure requirements under authoritative accounting guidance have been omitted due to the amounts being insignificant.
30
On April 24, 2018, upon
re-election
of nine of the existing directors, 21,420 restricted shares with a total value of $540,000 were granted to these
non-employee
directors and were expensed over the period from grant date to April 23, 2019, the date of the next annual shareholders’ meeting at which the directors’ term expired. On April 23, 2019, upon
re-election
of nine of the existing directors and two new directors, 21,714 restricted shares with a total value of $660,000 were granted to these
non-employee
directors and was expensed over the period from the grant date to April 28, 2020, the
date of the
 next annual
 
shareholders’ meeting at which the directors’ term expired. On January 28, 2020, upon the election of a new director, 434 restricted shares with a total value of $15,000 were granted to this
non-employee
director and was expensed over the period from the grant date to April 28, 2020, the
date of the
next annual shareholders’ meeting at which the director term expired. On April 28, 2020, upon the
re-election
of ten of the existing directors, 21,560 restricted shares with a total value of $600,000 were granted to these
non-employee
directors and will be expensed over the period from the grant date to April 27, 2021, the Company’s next annual shareholders’ meeting at which the directors’ term expires. The Company recorded director expense related to these restricted share grants of $150,000 and $185,000 for the three-month periods ended September 30, 2020 and 2019, respectively. The Company recorded director expense related to these restricted stock grants of $485,000 and $455,000 for the nine
-
months ended September 30, 2020 and 2019, respectively.
On October 24, 2017, the Company granted 28,382 restricted shares with a total value of $655,000 to certain officers that are being expensed over the vesting period of one to three years. On October 23, 2018, the Company granted 52,042 restricted shares with a total value of $1,440,000 to certain officers that are being expensed over a three-year vesting period. On June 26, 2019, the Company granted 23,428 restricted shares with a total value of $695,000 to certain officers that are being expensed over the vesting period of three years. On October 22, 2019, the Company granted 22,188 restricted shares with a total value of $785,000 to certain officers that will be expensed over a three-year vesting period. On January 28, 2020, the Company granted 2,979 restricted shares with a total value of $103,000 to certain officers that will be expensed over a three-year vesting period. On May 18, 2020, the Company granted 7,176 restricted shares with a total value of $200,000 to an officer that will be expensed over a three-year vesting period. The Company recorded restricted stock expense for officers of $419,000 and $248,000 for the three-month periods ended September 30, 2020 and 2019, respectively. The Company recorded restricted stock expense for officers of $1,016,000 and $661,000 for the nine-month periods ended September 30, 2020 and 2019, respectively.
Note 9 - Pension Plan
The Company had a defined benefit pension plan that was frozen effective January 1, 2004, whereby no new participants were added to the Plan and no additional years of service accrued to participants. The pension plan covered substantially all of the Company’s employees at the time. In December 2018, the Company determined it was in the best interest of its shareholders to work toward terminating its pension obligation. The Company annuitized approximately 53% of the pension benefit obligation at that time and recorded a loss on settlement totaling $1,546,000 for the year ended December 31, 2018. In 2019, the Company continued to take steps to completely settle and terminate its remaining pension obligation and recorded loss associated with the final termination of $2,673,000. The loss incurred included unrealized loss previously recorded in other comprehensive income and refunding to remaining participants for funding balance overages offset by a gain on hedging instrument entered into to minimize interest rate movement during the termination period. At December 31, 2019, all balances in the pension plan were zero and the Company’s obligation has been extinguished. For the three and nine-month periods ended September 30, 2019, the Company recorded pension related expense totaling $31,000 and $973,000, respectively.
 
31
Note 10 - Fair Value Disclosures
The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
The authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied.    Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest
priority
to unobservable inputs. The fair value hierarchy is as follows:
 
  •  
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
 
  •  
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
 
  •  
Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
 
32
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 no transfers between Level 1 and Level 2 or Level 2 and Level 3 during the three and nine-months ended September 30, 2020 and 2019, and the year ended December 31, 2019.
The following table summarizes the Company’s
available-for-sale
securities, loans
held-for-sale,
and derivatives which are measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):
September
 30, 2020
 
 
  
Level 1
Inputs
 
  
Level 2
Inputs
 
  
Level 3
Inputs
 
  
Total Fair
Value
 
Available-for-sale
investment securities:
  
      
  
      
  
      
  
      
Obligations of states and political subdivisions
    $ —        $ 2,367,489      $ —        $ 2,367,489  
Residential mortgage-backed securities
      —          1,509,054        —          1,509,054  
Commercial mortgage-backed securities
      —          550,168        —          550,168  
Other securities
      4,569        —          —          4,569  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  4,569      $
 
 4,426,711      $ —        $
 
 4,431,280  
  
 
 
     
 
 
     
 
 
     
 
 
  
Loans
held-for-sale
    $ —        $ 94,666      $ —        $ 94,666  
  
 
 
     
 
 
     
 
 
     
 
 
  
IRLCs
    $ —        $ 5,967      $ —        $ 5,967  
  
 
 
     
 
 
     
 
 
     
 
 
  
Forward mortgage-backed securities trades
    $ (872 )     $ —        $ —        $ (872 ) 
  
 
 
     
 
 
     
 
 
     
 
 
  
33
September
 30, 2019
 
 
  
Level 1
Inputs
 
  
Level 2
Inputs
 
  
Level 3
Inputs
 
  
Total Fair
Value
 
Available-for-sale
investment securities:
  
      
  
      
  
      
  
      
U.S. Treasury securities
    $ 10,021      $ —        $ —        $ 10,021  
Obligations of states and political subdivisions
      —          1,242,197        —          1,242,197  
Corporate bonds
      —          229        —          229  
Residential mortgage-backed securities
      —          1,623,380        —          1,623,380  
Commercial mortgage-backed securities
      —          516,828        —          516,828  
Other securities
      4,501        —          —          4,501  
Total
    $
 
 14,522      $
 
 3,382,634      $ —        $
 
 3,397,156  
Loans
held-for-sale
    $ —        $ 39,735      $ —        $ 39,735  
IRLCs
    $ —        $ 1,320      $ —        $ 1,320  
Forward mortgage-backed securities trades
    $ (41 )     $ —        $ —        $ (41 ) 
December
 31, 2019
 
 
  
Level 1
Inputs
 
  
Level 2
Inputs
 
  
Level 3
Inputs
 
  
Total Fair
Value
 
Available-for-sale
investment securities:
            
U.S. Treasury securities
    $
 
 10,019      $ —        $ —        $ 10,019  
Obligations of states and political subdivisions
      —          1,288,983           1,288,983  
Corporate bonds
      —          230        —          230  
Residential mortgage-backed securities
      —          1,608,863        —          1,608,863  
Commercial
mortgage
-backed securities
      —          500,744        —          500,744  
Other securities
      4,478        —          —          4,478  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 14,497      $ 3,398,820      $ —        $
 
 3,413,317  
  
 
 
     
 
 
     
 
 
     
 
 
  
Loans
held-for-sale
    $ —        $ 23,076      $ —        $ 23,076  
  
 
 
     
 
 
     
 
 
     
 
 
  
IRLCs
    $ —        $ 886      $ —        $ 886  
  
 
 
     
 
 
     
 
 
     
 
 
  
Forward mortgage-backed securities trades
    $ (152 )     $ —        $ —        $ (152 ) 
  
 
 
     
 
 
     
 
 
     
 
 
  
The following table summarize
s
the Company’s loans
held-for-sale
at fair value and the net unrealized gains as of the balance sheet dates
 show
n
below
(in thousands):
 
 
  
September 30,
 
  
December 31,
 
 
  
2020
 
  
2019
 
  
2019
 
Unpaid principal balance on loans
held-for-sale
  
$
91,091
 
  
$
38,647
 
  
$
22,340
 
Net unrealized gains on loans
held-for-sale
  
 
3,575
 
  
 
1,088
 
  
 
736
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Loans
held-for-sale
at fair value
  
$
94,666
 
  
$
39,735
 
  
$
23,076
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
34
The following table summarize the Company’s gains on sale
and fees
of mortgage loans for the three and nine
-
months ended September 30, 2020 and 2019 (in thousand):
 
 
  
Three-Months ended
September 30,
 
  
Nine-Months ended
September 30,
 
 
  
2020
 
  
2019
 
  
2020
 
  
2019
 
Realized gain on sale
and fees on
mortgage loans*
  
$
13,494
 
  
$
5,336
 
  
$
25,676
 
  
$
12,789
 
Change in fair value on loans
held-for-sale
and IRLCs
  
 
1,508
 
  
 
184
 
  
 
7,800
 
  
 
776
 
Change in 
forward mortgage-backed securities trades
  
 
226
 
  
 
213
 
  
 
(720
) 
  
 
363
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total gain on sale of mortgage loans
  
$
15,228
 
  
$
5,733
 
  
$
32,756
 
  
$
13,928
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
*
This includes gains on loans
held-for-sale
carried under the fair value method and
lower
 
of
 
cost
 
or
 
market.
No residential mortgage loans
held-for-sale
were 90 days or more past due or considered impaired as of September 30, 2020 or 2019, or December 31, 2019. No significant credit losses were recognized on residential mortgage loans
held-for-sale
for the
three and
 
nine month periods ended September 30, 2020 and 2019.
Certain financial assets and
financial
liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Impaired loans are reported at the fair value of the underlying collateral less selling costs if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data. At September 30, 2020, impaired loans with a carrying value of $20,583,000 were reduced by specific valuation reserves totaling $3,241,000 resulting in a net fair value of $17,342,000.
Certain
non-financial
assets and
non-financial
liabilities measured at fair value on a
non-recurring
basis include other real estate owned,
goodwill
and other intangible assets and other
non-financial
long-lived assets.
Non-financial
assets measured at fair value on a
non-recurring
basis during the three and nine-months ended September 30, 2020 and 2019 include other real estate owned which, subsequent to their initial transfer to other real estate owned from loans, were
re-measured
at fair value through a write-down included in gain (loss) on sale of foreclosed assets. During the reported periods, all fair value measurements for foreclosed assets utilized Level 2 inputs based on observable market data, generally third-party appraisals, or Level 3 inputs based on customized discounting criteria. These appraisals are evaluated individually and discounted as necessary due to the age of the appraisal, lack of comparable sales, expected holding periods of property or special use type of the property. Such discounts vary by appraisal based on the above factors but generally range from 5% to 25% of the appraised value.
Re-evaluation
of other real estate owned is performed at least annually as required by regulatory guidelines or more often if particular circumstances arise. There were no other real estate owned properties that were
re-measured
subsequent to their initial transfer to other real estate owned during the three and nine-months ended September 30, 2020 and 2019.
At September 30, 2020 and 2019, and December 31, 2019, other real estate owned totaled $157,000, $1,329,000 and $982,000, respectively.
The Company is required under current authoritative accounting guidance to disclose the
estimated
fair value of their financial instrument assets and liabilities including those subject to the requirements discussed above. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.
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.
 
35
In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
Cash and due from banks, federal funds sold, interest-bearing deposits and time deposits in banks and accrued interest receivable and payable are liquid in nature and considered Levels 1 or 2 of the fair value hierarchy.
Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities and are considered Levels 2 and 3 of the fair value hierarchy. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the carrying value and are considered Level 1 of the fair value hierarchy.
The carrying value and the estimated fair value of the Company’s contractual
off-balance-sheet
unfunded lines of credit, loan commitments and letters of credit, which are generally priced at market at the time of funding, are not material.
 
36
The estimated fair values and carrying values of all financial instruments under current authoritative guidance were as follows (in thousands).
 
     September 30,      December 31,  
 
   
 
  
     2020      2019      2019  
 
   
 
  
     Carrying
Value
      Estimated
Fair Value
      Carrying
 
Value
      Estimated
Fair Value
      Carrying
 
Value
      Estimated
Fair Value
  
 
   
 
 Fair Value
Hierarchy
Cash and due from banks
    $ 175,088      $ 175,088      $ 198,855      $ 198,855      $ 231,534      $ 231,534  
 
   
 
 Level 1
Federal 
funds sold
      —          —          —          —          3,150        3,150  
 
   
 
 Level 1
Interest-bearing demand deposits in banks
      58,933        58,933        31,410        31,410        47,920        47,920  
 
   
 
 Level 1
Available-for-sale securities
 4,431,280 4,431,280 3,397,156 3,397,156 3,413,317 3,413,317
 
   
 
Levels
 
1 and 2
Loans held-for-investment, net of allowance for loan losses
      5,217,641        5,212,972        4,048,427        4,068,755        4,142,470        4,209,826  
 
   
 
 Level 3
Loans
 
held
-
for
-
sale
      101,055        101,480        40,499        40,542        28,228        28,343  
 
   
 
 Level 2
Accrued interest receivable
      39,804        39,804        29,606        29,606        36,894        36,894  
 
   
 
 Level 2
Deposits with stated maturities
      469,978        472,193        428,192        429,522        420,013        421,397  
 
   
 
 Level 2
Deposits with no stated maturities
      7,824,910        7,824,910        5,969,491        5,969,491        6,183,793        6,183,793  
 
   
 
 Level 1
Borrowings
      503,163        503,163        400,155        400,155        381,356        381,356  
 
   
 
 Level 2
Accrued interest payable
      485        485        746        746        628        628  
 
   
 
 Level 2
IRLCs
      5,967        5,967        1,320        1,320        886        886  
 
   
 
 Level 2
Forward mortgage-backed securities trades
      (872 )       (872 )       (41 )       (41 )       (152 )       (152 ) 
 
   
 
 Level 1
 
37
Note 11 - Acquisition
On September 19, 2019, we entered into an agreement and plan of reorganization to acquire TB&T Bancshares, Inc. and its wholly-owned bank subsidiary, The Bank & Trust of Bryan/College Station, Texas. On January 1, 2020, the transaction was completed. Pursuant to the agreement, we issued 6,275,574 shares of the Company’s common stock in exchange for all of the outstanding shares of TB&T Bancshares, Inc. In addition, TBT Bancshares, Inc. made a $1,920,000 special dividend to its shareholders prior to closing of the transaction.
At closing, a wholly-owned subsidiary of the Company merged into TB&T Bancshares, Inc. and immediately thereafter TB&T Bancshares, Inc. was merged into the Company and The Bank & Trust of Bryan/College Station, Texas, was merged into First Financial Bank, 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.
The following table presents the preliminary amounts recorded on the consolidated balance sheet on the acquisition date (dollars in thousands):
 
Fair value of consideration paid:
   
Common stock issued (6,275,574 shares)
    $ 220,273  
  
 
 
  
Fair value of identifiable assets acquired:
   
Cash and cash equivalents
   
$
 61,028  
Securities
available-for-sale
      93,967  
Loans
      447,702  
Identifiable intangible assets
      4,798  
Other assets
      25,377  
  
 
 
  
Total identifiable assets acquired
   
$
 632,872  
  
 
 
  
Fair value of liabilities assumed:
   
Deposits
   
$
 549,125  
Other liabilities
      5,397  
  
 
 
  
Total liabilities assumed
   
$
 554,522  
  
 
 
  
Fair value of net identifiable assets acquired
      78,350  
  
 
 
  
Goodwill resulting from acquisition
    $ 141,923  
  
 
 
  
Goodwill recorded in the acquisition was accounted for in accordance with the authoritative business combination guidance. Accordingly, goodwill will not be amortized but will be tested for impairment annually. The goodwill recorded is not deductible for federal income tax purposes.
The fair value of total loans acquired was $447,702,000 at acquisition compared to contractual amounts of $455,181,000. The fair value of purchased credit impaired loans at acquisition was $7,517,000 compared to contractual amounts of $10,061,000. Additional purchased credit impaired loan disclosures were omitted due to immateriality. All other acquired loans were considered performing loans.
 
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Table of Contents
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Form
10-Q
contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form
10-Q,
words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “indicate,” “predict,” “project,” and similar expressions, as they relate to us or our management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited, to those discussed in Part I, Item 1A of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019 and Part II, Item 1A of the Company’s Quarterly Reports on Form
10-Q
for the quarter ended March 31, 2020 and the quarter ended June 30, 2020, in each case under the heading “Risk Factors,” and the following:
 
  •  
general economic conditions, including local, state, national and international, and the impact they may have on us and our customers;
 
  •  
effect of the coronavirus
(COVID-19)
on our Company, the communities where we have our branches, the state of Texas and the United States, related to the economy and overall financial stability;
 
  •  
impact of reduction in interchange fees if assets exceed $10 billion;
 
  •  
government and regulatory responses to the
COVID-19
pandemic;
 
  •  
effect of severe weather conditions, including hurricanes, tornadoes, flooding and droughts;
 
  •  
volatility and disruption in national and international financial and commodity markets and oil and gas prices;
 
  •  
government intervention in the U.S. financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by the federal banking authorities and the Tax Cuts and Jobs Act;
 
  •  
political instability;
 
  •  
the ability of the Federal government to address the national economy;
 
  •  
changes in our competitive environment from other financial institutions and financial service providers;
 
  •  
the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”);
 
  •  
the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;
 
  •  
the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we and our subsidiaries must comply;
 
  •  
changes in the demand for loans;
 
  •  
fluctuations in the value of collateral securing our loan portfolio and in the level of the allowance for loan losses;
 
  •  
potential risk of environmental liability associated with lending activities;
 
  •  
the accuracy of our estimates of future loan losses;
 
  •  
the accuracy of our estimates and assumptions regarding the performance of our securities portfolio;
 
  •  
soundness of other financial institutions with which we have transactions;
 
  •  
inflation, interest rate, market and monetary fluctuations;
 
39
Table of Contents
  •  
changes in consumer spending, borrowing and savings habits;
 
  •  
changes in commodity prices (e.g., oil and gas, cattle and wind energy);
 
  •  
our ability to attract deposits and increase market share;
 
  •  
changes in our liquidity position;
 
  •  
changes in the reliability of our vendors, internal control system or information systems;
 
  •  
cyber attacks on our technology information systems, including fraud from our customers and external third party vendors;
 
  •  
our ability to attract and retain qualified employees;
 
  •  
acquisitions and integration of acquired businesses;
 
  •  
the possible impairment of goodwill and other intangibles associated with our acquisitions;
 
  •  
consequences of continued bank mergers and acquisitions in our market area, resulting in fewer but much larger and stronger competitors;
 
  •  
expansion of operations, including branch openings, new product offerings and expansion into new markets;
 
  •  
changes in our compensation and benefit plans;
 
  •  
acts of God, pandemic, war or terrorism; and
 
  •  
our success at managing the risk involved in the foregoing items.
Such forward-looking statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise (except as required by law).
Introduction
As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, and service charges. Our primary source of funding for our loans and investments are deposits held by our subsidiary, First Financial Bank, N.A. Our largest expense is salaries and related employee benefits. We usually measure our performance by calculating our return on average assets, return on average equity, return on average tangible equity, our regulatory leverage and risk-based capital ratios and our efficiency ratio, which is calculated net interest margin by dividing noninterest expense by the sum of net interest income, on a tax equivalent basis, and noninterest income.
The following discussion and analysis of operations and financial condition should be read in conjunction with the financial statements and accompanying footnotes included in Item 1 of this Form
10-Q
as well as those included in the Company’s 2019 Annual Report on Form
10-K.
Coronavirus Update/Status
The coronavirus
(COVID-19)
pandemic has placed significant health, economic and other major pressures throughout the communities we serve, the state of Texas, the United States and the entire world. We have implemented a number of procedures in response to the pandemic to support the safety and well being of our employees, customers and shareholders that continue through the date of this report:
 
  •  
We have addressed the safety of our 78 branches and other locations, following the guidelines of the Center for Disease Control, and while the branches
have remained
open to customers, we have taken steps, and continue to evaluate, to push as much traffic and transactions as possible to our motor banks and our online services;
 
  •  
We 
have held
 executive meetings weekly or as needed to address issues that are changing rapidly;
 
40
Table of Contents
  •  
We moved our Annual Shareholders’ Meeting from a physical meeting to a virtual meeting;
 
  •  
Provided extensions and deferrals to loan customers effected by
COVID-19
provided such customers were not 30 days past due at December 31, 2019;
 
  •  
We chose to participate in the CARES Act Paycheck Protection Program (PPP) that provided government guaranteed and forgivable loans to our customers. Through September 30, 2020, we completed approximately 6,500 loans and funded $703.73 million of such loans. We believe these loans and our participation in the program was good for our customers and the communities we serve; and
 
  •  
We chose to participate in the Federal Reserve’s Main Street Lending Program to provide ongoing loans for our customers. One loan has been funded as of September 30, 2020 under this program.
We continue to closely monitor this pandemic and continue to make changes to protect our employees and customers as we respond to the pandemic as this situation continues to evolve.

Critical Accounting Policies
We prepare consolidated financial statements based on U.S. GAAP and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions.
We deem a policy critical if (1) the accounting estimate required us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (2) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements.
We deem our most critical accounting policies to be (1) our allowance for loan losses and our provision for loan loss expense and (2) our valuation of securities. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period. Our policy for (1) our allowance for loan losses and our provision for loan loss expense and (2) our valuation of securities is included in note 1 to our notes to consolidated financial statements (unaudited) which begins on page 10. Additional detailed information is included in notes 4 and 5 to our notes to the consolidated financial statements (unaudited) and should be read in conjunction with this analysis.
Stock Split
On April 23, 2019, the Company’s Board of Directors declared a
two-for-one
stock split in the form of a 100% stock dividend effective June 3, 2019. All per share amounts in this report have been restated to reflect this stock split. An amount equal to the par value of the additional common shares to be issued pursuant to the stock split was reflected as a transfer from retained earnings to common shares in the consolidated financial statements as of and for the nine-months ended September 30, 2019.
 
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Table of Contents
Stock Repurchase
On March 12, 2020, the Company’s Board of Directors authorized the repurchase of up to 4.00 million common shares through September 30, 2021. The stock buyback plan authorizes management to repurchase and retire the stock at such time as repurchases
are
considered beneficial to the Company and stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Through September 30, 2020, the Company repurchased 324,802 shares totaling $8.01 million under this repurchase plan. Subsequent to September 30, 2020 and through November 4, 2020, no additional shares were repurchased.
Acquisition
On September 19, 2019, we entered into an agreement and plan of reorganization to acquire TB&T Bancshares, Inc. and its wholly-owned bank subsidiary, The Bank & Trust of Bryan/College Station, Texas. On January 1, 2020, the transaction was completed. Pursuant to the agreement, we issued 6.28 million shares of the Company’s common shares in exchange for all of the outstanding shares of TB&T Bancshares, Inc. In addition, in accordance with the plan of reorganization, TB&T Bancshares, Inc. paid a special dividend totaling $1.92 million to its shareholders prior to the closing of this transaction. At the closing, Brazos Merger Sub., Inc., a wholly-owned subsidiary of the Company, merged into TB&T Bancshares Inc., with TB&T Bancshares, Inc. surviving as a wholly-owned subsidiary of the Company. Immediately following such merger, TB&T Bancshares, Inc. was merged into the Company and The Bank & Trust of Bryan/College Station, Texas was merged into First Financial Bank, N.A., a wholly-owned subsidiary of the Company. The total purchase price exceeded the estimated fair value of the net assets acquired by approximately $141.92 million and the Company recorded such excess as goodwill. The balance sheet and results of operations of TB&T Bancshares, Inc. have been included in the financial statements of the Company effective January 1, 2020. See note 11 to the consolidated financial statements for additional information and disclosure.                
Participation in PPP Loans
The Company elected to participate in the PPP loan program processing approximately 6,500 loans and funded $703.73 million. The Company received fees totaling approximately $26.26 million and incurred incremental direct origination costs of $3.62 million, both of which have been deferred and are being amortized over the shorter of the repayment period or 24 months, the contractual life of these loans. During the second and third quarters of 2020, the Company recognized $2.83 million each quarter of this net amount into interest income. At September 30, 2020, the Company had approximately $15.97 million in unrecognized deferred loan fees on PPP loans.
Status of New Accounting Standard for Allowance for Credit Losses
On January 1, 2020, ASU
2016-13
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, became effective for the Company which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. It also applies to
off-balance
sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, ASU
2016-13
made changes to the accounting for
available-for-sale
debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on
available-for-sale
debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
 
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Table of Contents
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. The Company elected to delay its implementation of ASU
2016-13
and has calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASU
2016-13.
Prior to the CARES Act being signed and our decision to delay the implementation of CECL, we were completing our CECL implementation plan with our cross-functional working group, under the direction of our Chief Credit Officer along with our Chief Accounting Officer, Chief Lending Officer and Chief Financial Officer. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. Our implementation plan included assessment and documentation of processes, internal controls and data sources; model development, documentation and validation; and system configuration, among other things. We contracted with a third-party vendor to assist us in the implementation of CECL. Had we completed the adoption and implementation of CECL, we believe our allowance for loan losses amount at January 1, 2020 would have been approximately $52.0 million. At December 31, 2019, our allowance for loan losses totaled $52.5 million under the incurred model. In addition, we have evaluated our expected credit losses for certain debt securities and other financial assets and do not expect these allowances to be significant. Additionally, the adoption and implementation of ASU
2016-13
is not expected to have a significant impact on our regulatory capital ratios.
As we continue to evaluate the provisions of ASU
2016-13
as of and for the three and nine-months ended September 30, 2020, we have considered the following in developing our forecast and its effect on our future CECL calculations:
 
  •  
duration, extent and severity of
COVID-19;
 
  •  
utilization of unfunded commitments;
 
  •  
effects of government assistance;
 
  •  
unemployment and the corresponding effects on the economy;
 
  •  
volatility of oil and gas prices;
 
  •  
value of real estate; and
 
  •  
the effect of our TB&T Bancshares, Inc. acquisition on our combined loan portfolio.
We are unable as of the date of this report to provide an estimate of our allowance for loan losses under the CECL model as of September 30, 2020 and the provision for loan losses for the three and nine- months then ended.
 
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Table of Contents
Results of Operations
Performance Summary
. Net earnings for the third quarter of 2020 were $52.86 million compared with $43.08 million for the third quarter of 2019, represented in 22.69% increase. Basic and diluted earnings per share were $0.37 for the third quarter of 2020 compared with $0.32 in the same quarter a year ago.
The return on average assets was 2.01% for the third quarter of 2020, as compared to 2.15% for the third quarter of 2019. The return on average equity was 13.14% for the third quarter of 2020 as compared to 14.46% for the third quarter of 2019. The return on average tangible equity was 16.41% for the third quarter of 2020 compared to 16.96% for the third quarter of 2019.
Net earnings for the nine month period ended September 30, 2020 were $143.56 million compared to $123.42 million for the same period in 2019, representing a 16.31% increase. Basic and diluted earnings per share for the first nine months of 2020 were $1.01 compared to $0.91 for the same period in 2019.
The return on average assets was 1.91% for the first nine months of 2020, as compared to 2.10% for the same period a year ago. The return on average equity was 12.46% for the first nine months of 2020 as compared to 14.67% for the same period in 2019. The return on average tangible equity was 15.71% for the first nine months of 2020 as compared to 17.36% a year ago.
Net Interest Income
. Net interest income is the difference between interest income on earning assets and interest expense on liabilities incurred to fund those assets. Our earning assets consist primarily of loans and investment securities. Our liabilities to fund those assets consist primarily of noninterest-bearing and interest-bearing deposits.
Tax-equivalent
net interest income was $92.38 million for the third quarter of 2020, as compared to $74.21 million for the same period last year. The increase in 2020 compared to 2019 was largely attributable to the increase in interest-earning assets primarily derived from our TB&T acquisition, an increase in investment securities held and the impact of the Company’s participation in the PPP loan program (see above). Average earning assets increased $2.33 billion for the third quarter of 2020 over the same period in 2019. Average loans and
tax-exempt
securities increased $1.24 billion and $925.75 million, respectively, for the third quarter of 2020 over the same quarter of 2019. Average interest-bearing liabilities increased $1.21 billion for the third quarter of 2020, as compared to the same period in 2019 primarily from our customers depositing their PPP loan amounts into our Bank, the TB&T acquisition and organic growth. The yield on earning assets decreased 52 basis points while the rate paid on interest-bearing liabilities decreased 54 basis points for the third quarter of 2020 compared to the third quarter of 2019.
Tax-equivalent
net interest income was $267.25 million for the first nine months of 2020, as compared to $218.83 million for the same period last year. The increase in 2020 compared to 2019 was largely attributable to the increase in interest earning assets primarily from our TB&T acquisition, an increase in investment securities held and the impact of the Company’s participation in the PPP loan program (see above). Average earning assets increased $2.01 billion for the first nine months of 2020 over the same period in 2019. Average loans and
tax-exempt
securities increased $1.05 billion and $560.39 million, respectively, for the first nine months of 2020 over the first nine months of 2019.
Average interest-bearing liabilities increased $1.15 billion for the first nine months of 2020, as compared to the same period in 2019 primarily from our customers depositing their PPP loan amounts into our Bank, the TB&T acquisition and organic growth. The yield on earning assets decreased 42 basis points while the rate paid on interest-bearing liabilities decreased 39 basis points for the first nine months of 2020 compared to the first nine months of 2019.

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Table of Contents
Table 1 allocates the change in
tax-equivalent
net interest income between the amount of change attributable to volume and to rate.
Table 1 - Changes in Interest Income and Interest Expense (in thousands):
 
    
Three-Months Ended September 30,

2020 Compared to Three-Months
Ended September 30, 2019
    
Nine-Months Ended September 30, 2020

Compared to Nine-Months Ended

September 30, 2019
  
    
Change Attributable to
    
Total
Change
    
Change Attributable to
    
Total
Change
  
    
Volume
     
Rate
    
Volume
     
Rate
  
Short-term investments
    $ 949      $ (1,269 )      $ (320)       $ 3,081      $ (3,845 )      $ (764)  
Taxable investment securities
      24        (2,253 )      (2,229 )      4,531        (5,288 )      (757 ) 
Tax-exempt
investment securities (1)
      8,237        (2,575 )      5,662       15,235        (5,533 )      9,702  
Loans (1) (2)
      17,388        (8,124 )      9,264       43,301        (14,033 )      29,268  
  
 
 
     
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
Interest income
      26,598        (14,221 )      12,377       66,148        (28,699 )      37,449  
Interest-bearing deposits
      1,908        (6,967 )      (5,059 )      4,746        (14,524 )      (9,778 ) 
Short-term borrowings
      202        (933 )      (731 )      1,450        (2,650 )      (1,200 ) 
  
 
 
     
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
Interest expense
      2,110        (7,900 )      (5,790 )      6,196        (17,174 )      (10,978 ) 
  
 
 
     
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
Net interest income
    $ 24,488      $ (6,321 )    $ 18,167     $ 59,952      $ (11,525 )    $ 48,427  
  
 
 
     
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
(1) Computed on a
tax-equivalent
basis assuming a marginal tax rate of 21%.
(2)
Non-accrual
loans are included in loans.
The net interest margin for the third quarter of 2020 was 3.75%, a decrease of 19 basis points from the same period in 2019. The net interest margin for the first nine months of 2020 was 3.81%, a decrease of 16 basis points from the same period in 2019. We continue to experience downward pressures on our net interest margin in 2020 and 2019 primarily due to (i) the extended period of fluctuating historically low levels of short-term interest rates and (ii) the flat to inverted yield curve currently being experienced in the bond market. We have been able to somewhat mitigate the impact of these lower short-term interest rates and the flat/inverted yield curve by establishing minimum interest rates on certain of our loans, improving the pricing for loan risk and reducing the rates paid on our interest-bearing liabilities. In March 2020, as the market experienced volatility, we took advantage of that volatility to purchase high quality municipal bonds at favorable
tax-equivalent
interest yields. The Federal Reserve increased rates 100 basis points in 2018 but then decreased rates 75 basis points during the third and fourth quarters of 2019 and then an additional 150 basis points in the first quarter of 2020, resulting in a current target rate range of zero to 25 basis points. The Company’s participation in the PPP loan program
negatively
impacted the net interest margin from (i) the amortization of net deferred loan fees and (ii) the 1% loan rate.
The net interest margin, which measures
tax-equivalent
net interest income as a percentage of average earning assets, is illustrated in Table 2.
 
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Table of Contents
Table 2 - Average Balances and Average Yields and Rates (in thousands, except percentages):
 
    
Three-Months Ended September 30,
  
    
2020
    
2019
  
    
Average
Balance
    
Income/
Expense
     
Yield/
Rate
    
Average
Balance
    
Income/
Expense
     
Yield/
Rate
  
Assets
               
Short-term investments (1)
    $ 225,113     $ 62        0.11 %    $ 64,471     $ 382        2.35 % 
Taxable investment securities (2)
      2,187,547       12,063        2.21       2,183,930       14,292        2.62  
Tax-exempt
investment securities (2)(3)
      2,058,032       15,737        3.06       1,132,279       10,075        3.56  
Loans (3)(4)
      5,334,174       66,681        4.97       4,094,235       57,417        5.56  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
  
Total earning assets
      9,804,866     $ 94,543        3.84 %      7,474,915     $ 82,166        4.36 % 
Cash and due from banks
      186,177            165,868       
Bank premises and equipment, net
      139,758            133,191       
Other assets
      98,261            68,519       
Goodwill and other intangible assets, net
      319,059            174,005       
Allowance for loan losses
      (71,881 )           (52,137 )      
  
 
 
         
 
 
       
Total assets
    $ 10,476,240          $ 7,964,361       
  
 
 
         
 
 
       
Liabilities and Shareholders’ Equity
               
Interest-bearing deposits
    $ 5,270,600     $ 2,064        0.16 %    $ 4,156,850     $ 7,123        0.68 % 
Short-term borrowings
      482,555       99        0.08       388,235       830        0.85  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
  
Total interest-bearing liabilities
      5,753,155     $ 2,163        0.15 %      4,545,085     $ 7,953        0.69 % 
Noninterest-bearing deposits
      3,016,700            2,180,200       
Other liabilities
      106,295            57,262       
  
 
 
         
 
 
       
Total liabilities
      8,876,150            6,782,547       
Shareholders’ equity
      1,600,090            1,181,814       
  
 
 
         
 
 
       
Total liabilities and shareholders’ equity
    $ 10,476,240          $ 7,964,361       
  
 
 
         
 
 
       
Net interest income
      $ 92,380          $ 74,213     
    
 
 
         
 
 
     
Rate Analysis:
               
Interest income/earning assets
           3.84 %           4.36 % 
Interest expense/earning assets
           (0.09 )           (0.42 ) 
       
 
 
         
 
 
  
Net interest margin
           3.75 %           3.94 % 
       
 
 
         
 
 
  
 
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Nine-Months Ended September 30,
  
    
2020
    
2019
  
    
Average
Balance
    
Income/
Expense
     
Yield/
Rate
    
Average
Balance
    
Income/
Expense
     
Yield/
Rate
  
Assets
               
Short-term investments (1)
    $ 269,704     $ 903        0.45 %    $ 93,997     $ 1,667        2.37 % 
Taxable investment securities (2)
      2,283,064       40,748        2.38       2,058,380       41,505        2.69  
Tax-exempt
investment securities (2)(3)
      1,736,250       41,670        3.20       1,175,863       31,968        3.62  
Loans (3)(4)
      5,084,136       196,255        5.16       4,037,243       166,987        5.53  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
  
Total earning assets
      9,373,154     $ 279,576        3.98 %      7,365,483     $ 242,127        4.40 % 
Cash and due from banks
      188,241            173,647       
Bank premises and equipment, net
      139,600            133,886       
Other assets
      91,324            65,525       
Goodwill and other intangible assets, net
      318,902            174,264       
Allowance for loan losses
      (64,742 )           (52,143 )      
  
 
 
         
 
 
       
Total assets
    $ 10,046,479          $ 7,860,662       
  
 
 
         
 
 
       
Liabilities and Shareholders’ Equity
               
Interest-bearing deposits
    $ 5,104,096     $ 11,293        0.30 %    $ 4,165,735     $ 21,071        0.68 % 
Short-term borrowings
      606,291       1,030        0.23       391,680       2,230        0.76  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
  
Total interest-bearing liabilities
      5,710,387     $ 12,323        0.29 %      4,557,415     $ 23,301        0.68 % 
Noninterest-bearing deposits
      2,714,173            2,133,418       
Other liabilities
      82,670            44,994       
  
 
 
         
 
 
       
Total liabilities
      8,507,230            6,735,827       
Shareholders’ equity
      1,539,249            1,124,835       
  
 
 
         
 
 
       
Total liabilities and shareholders’ equity
    $ 10,046,479          $ 7,860,662       
  
 
 
         
 
 
       
Net interest income
      $ 267,253          $ 218,826     
    
 
 
         
 
 
     
Rate Analysis:
               
Interest income/earning assets
           3.98 %           4.40 % 
Interest expense/earning assets
           (0.17 )           (0.43 ) 
       
 
 
         
 
 
  
Net interest margin
           3.81 %           3.97 % 
       
 
 
         
 
 
  
 
(1)
Short-term investments are comprised of federal funds sold, interest-bearing deposits in banks and interest-bearing time deposits in banks.
(2)
Average balances include unrealized gains and losses on
available-for-sale
securities.
(3)
Computed on a
tax-equivalent
basis assuming a marginal tax rate of 21%.
(4)
Non-accrual
loans are included in loans.
Noninterest Income
. Noninterest income for the third quarter of 2020 increased to $38.58 million compared to $28.67 million in same period in 2019. Mortgage related income increased to $15.23 million compared with $5.73 million in the same quarter a year ago due to a significant increase in the volume of loans originated driven by the lower rate environment and a strong housing market in Texas. The Company’s mortgage loan pipeline increased to $235.63 million as of September 30, 2020 when compared to $62.79 million at September 30, 2019. ATM, interchange and credit card fees increased to $8.64 million compared with $7.73 million in the same quarter last year, driven by continued growth in the number of debit cards issued as well as our TB&T acquisition. Trust fees increased to $7.46 million in the third quarter of 2020 compared with $7.05 million in the same quarter last year. The fair value of Trust assets managed increased to $6.95 billion, up 9.36% at September 30, 2020, from $6.36 billion a year ago. Service charges on deposits were $5.01 million compared with $5.63 million in the same quarter a year ago. The decline in service charge revenue in 2020 when compared with 2019 has primarily been driven by lower overdraft fees in the current year as a result of the effects of the pandemic and related stimulus programs.
 
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Table of Contents
Noninterest income for the nine month period ended September 30, 2020 was $104.23 million, compared to $81.08 million in the same period in 2019. Mortgage related income increased in the first nine months of 2020 to $32.76 million when compared to $13.93 million in the same period a year ago due to a significant increase in the volume of loans originated driven by the lower rate environment and a strong housing market in Texas. The Company’s mortgage loan pipeline increased to $235.63 million as of September 30, 2020 when compared to $62.79 million at September 30, 2019. ATM, interchange and credit card fees increased to $24.09 million compared with $21.92 million in the same period last year driven by continued growth in the number of debit cards issued as well as our TB&T acquisition. Also included in noninterest income during the first nine months of 2020 was a gain on sale of securities of $3.61 million compared to $728 thousand from the first nine months of 2019. Trust fees increased slightly to $21.86 million in the first nine months of 2020 compared with $21.06 million in the same period in 2019. The fair value of Trust assets managed increased to $6.95 billion from $6.36 billion a year ago, but our revenue from oil and gas management decreased by $715 thousand due to decreased volumes in oil and gas production. Offsetting these increases was a $1.19 million decrease in interest on loan recoveries to $621 thousand for the first nine months of 2020 compared to $1.82 million in the same period in 2019 due to the collection of a larger loan during the first nine months of 2019 that had previously been on nonaccrual. In addition, service charges on deposits decreased to $15.24 million compared with $16.18 million in the same period a year ago as a result of the effects of the pandemic and related stimulus programs.
ATM and interchange fees are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. ATM and interchange fees consist of income from debit card usage, point of sale income for debit card transactions and ATM service fees. Federal Reserve rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is limited to the sum of 21 cents per transaction plus 5 basis points multiplied by the value of the transaction. Management has estimated the impact of this reduction in ATM and interchange fees to approximate $14.00 million annually
(pre-tax)
once the Company reaches $10 billion. Federal Reserve requirements stipulate that these rules would go into effect on July 1
st
following the
year-end
in which a financial institution’s total assets exceeded $10 billion at December 31
st
. At September 30, 2020, the Company’s total assets exceeded the $10 billion threshold, due primarily to the effect of the Company’s participation in the PPP loan program and growth in deposits from related activities. Management continues to monitor the Company’s balance sheet levels and may utilize strategies to reduce the Company’s asset levels below $10 billion to mitigate the loss of debit card income.
 
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Table of Contents
Table 3 - Noninterest Income (in thousands):
 
    
Three-Months Ended

September 30,
     
Nine-Months Ended

September 30,
  
    
2020
    
Increase
(Decrease)
    
2019
     
2020
     
Increase
(Decrease)
    
2019
  
Trust fees
    $ 7,461     $ 410     $ 7,051      $ 21,859      $ 802     $ 21,057  
Service charges on deposit accounts
      5,009       (620 )      5,629        15,242        (937 )      16,179  
ATM, interchange and credit card fees
      8,644       916       7,728        24,093        2,173       21,920  
Gain on sale and fees on mortgage loans
      15,228       9,495       5,733        32,756        18,828       13,928  
Net gain on sale of
available-for-sale
securities
      36       (16 )      52        3,610        2,882       728  
Net gain on sale of foreclosed assets
      19       (52 )      71        72        (121 )      193  
Net gain (loss) on sale of assets
      (2 )      (237 )      235        90        (151 )      241  
Interest on loan recoveries
      202       (373 )      575        621        (1,194 )      1,815  
Other:
               
Check printing fees
      55       —         55        177        34       143  
Safe deposit rental fees
      185       70       115        555        126       429  
Credit life fees
      130       (54 )      184        696        (102 )      798  
Brokerage commissions
      301       (105 )      406        1,020        (149 )      1,169  
Miscellaneous income
      1,307       472       835        3,435        954       2,481  
  
 
 
    
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
Total other
      1,978       383       1,595        5,883        863       5,020  
  
 
 
    
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
Total Noninterest Income
    $ 38,575     $ 9,906     $ 28,669      $ 104,226      $ 23,145     $ 81,081  
  
 
 
    
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
Noninterest Expense
. Total noninterest expense for the third quarter of 2020 was $55.59 million, compared to $48.91 million in the same period of 2019. An important measure in determining whether a financial institution effectively manages noninterest expense is the efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a
tax-equivalent
basis and noninterest income. Lower ratios indicate better efficiency since more income is generated with a lower noninterest expense total. Our efficiency ratio for the third quarter of 2020 was 42.45% compared to 47.54% for the same quarter in 2019.
Salaries, commissions and employee benefits for the third quarter of 2020 totaled $33.65 million, compared to $28.55 million the same period in 2019. The increase over the prior year was primarily driven by (i) the TB&T acquisition, (ii) annual merit-based pay increases that were effective March 1, 2020 and (iii) higher mortgage related commission. All other categories of noninterest expense for the third quarter of 2020 totaled $21.94 million, up from $20.36 million in the same quarter a year ago.
Total noninterest expense for the first nine months of 2020 was $164.23 million, compared to $144.58 million in the same period in 2019. Our efficiency ratio for the first nine months of 2020 was 44.21%, compared to 48.21% from the same period in 2019. Management notes 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.
Salaries, commissions and employee benefits for the first nine months of 2020 totaled $94.11 million, compared to $83.37 million the same period in 2019. The increase was primarily driven by (i) the TB&T acquisition, (ii) annual pay increases that were effective March 1, 2020 and (iii) higher mortgage related commission and incentives offset by the deferral of $3.62 million in PPP loan origination costs. All other categories of noninterest expense for the first nine months of 2020 totaled $70.13 million, compared to $61.22 million for the same period in 2019. Included in other noninterest expenses in the first nine months of 2020 were technology contract termination and conversion related costs totaling $4.40 million related to the TB&T acquisition.

 
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Table of Contents
Table 4 - Noninterest Expense (in thousands):
 
    
Three-Months Ended September 30,
     
Nine-Months Ended September 30,
  
    
2020
     
Increase
(Decrease)
    
2019
     
2020
     
Increase
(Decrease)
    
2019
  
Salaries and commissions
    $ 26,470      $ 4,273     $ 22,197      $ 72,443      $ 10,003     $ 62,440  
Medical
      2,461        360       2,101        7,442        558       6,884  
Profit sharing
      1,545        25       1,520        4,495        (400 )      4,895  
Pension
      —          (31 )      31        —          (73 )      73  
401(k) match expense
      840        172       668        2,576        482       2,094  
Payroll taxes
      1,570        216       1,354        5,100        735       4,365  
Stock option and stock grant expense
      763        84       679        2,049        332       1,717  
  
 
 
     
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
Total salaries and employee benefits
      33,649        5,099       28,550        94,105        11,637       82,468  
Loss from partial settlement of pension plan
      —          —         —          —          (900 )      900  
Net occupancy expense
      3,193        363       2,830        9,321        949       8,372  
Equipment expense
      2,157        (68 )      2,225        6,242        (767 )      7,009  
FDIC assessment fees
      587        572       15        1,095        4       1,091  
ATM, interchange and credit card expense
      2,829        202       2,627        8,424        987       7,437  
Professional and service fees
      2,237        335       1,902        7,327        1,606       5,721  
Printing, stationery and supplies
      615        135       480        1,714        366       1,348  
Operational and other losses
      621        114       507        1,925        672       1,253  
Software amortization and expense
      2,265        498       1,767        6,299        1,152       5,147  
Amortization of intangible assets
      490        244       246        1,507        729       778  
Other:
                
Data processing fees
      367        (39 )      406        1,234        60       1,174  
Postage
      377        (30 )      407        1,062        (186 )      1,248  
Advertising
      248        (659 )      907        1,053        (1,616 )      2,669  
Correspondent bank service charges
      235        64       171        666        148       518  
Telephone
      912        (6 )      918        2,788        (53 )      2,841  
Public relations and business development
      548        (290 )      838        1,949        (404 )      2,353  
Directors’ fees
      547        23       524        1,783        314       1,469  
Audit and accounting fees
      565        208       357        1,779        497       1,282  
Legal fees
      339        (17 )      356        1,037        99       938  
Regulatory exam fees
      276        (22 )      298        829        (52 )      881  
Travel
      220        (144 )      364        732        (507 )      1,239  
Courier expense
      217        (4 )      221        634        23       611  
Other real estate owned
      18        (19 )      37        89        (20 )      109  
Other
      2,081        124       1,957        10,639        4,912       5,727  
  
 
 
     
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
Total other
      6,950        (811 )      7,761        26,274        3,215       23,059  
  
 
 
     
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
Total Noninterest Expense
    $ 55,593      $ 6,683     $ 48,910      $ 164,233      $ 19,650     $ 144,583  
  
 
 
     
 
 
    
 
 
     
 
 
     
 
 
    
 
 
  
 
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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 for
1-4
family residences and commercial real estate. The structure of loans in the real estate mortgage area generally provides
re-pricing
intervals to minimize the interest rate risk inherent in long-term fixed rate loans. As of September 30, 2020, total loans
held-for-investment
were $5.29 billion, an increase of $1.10 billion, as compared to December 31, 2019 balances. This increase is due primarily from our participation in the PPP loan program and our TB&T acquisition. As compared to December 31, 2019, commercial loans increased $632.02 million, agricultural loans decreased $9.67 million, real estate loans increased $464.23 million and consumer loans increased $12.13 million. Loans averaged $5.33 billion during the third quarter of 2020, an increase of $1.24 billion from the prior year third quarter average balances. Loans averaged $5.08 billion during the first nine months of 2020, an increase of $1.05 billion from the prior year nine month period average balances.
Table 5 - Composition of Loans (in thousands):
 
    
September 30,
     
December 31,

2019
  
    
2020
     
2019
  
Commercial
    $ 1,488,345      $ 836,644      $ 856,326  
Agricultural
      93,972        102,054        103,640  
Real estate
      3,287,605        2,749,552        2,823,372  
Consumer
      423,757        412,066        411,631  
  
 
 
     
 
 
     
 
 
  
Total loans
held-for-investment
    $ 5,293,679      $ 4,100,316      $ 4,194,969  
  
 
 
     
 
 
     
 
 
  
At September 30, 2020, our real estate loans represented approximately 62.10% of our loan portfolio and were comprised of (i)
1-4
family residence loans of 38.94%, (ii) commercial real estate loans of 29.54%, (iii) other loans, which includes ranches, hospitals and universities, of 14.76%, (iv) residential development and construction loans of 9.21%, which includes our custom and speculative home construction loans and (v) commercial development and construction loans of 7.55%.
Loans
held-for-sale,
consisting of secondary market mortgage loans, totaled $101.06 million, $40.50 million, and $28.23 million at September 30, 2020 and 2019, and December 31, 2019, respectively. At September 30, 2020 and 2019 and December 31, 2019, $6.39 million, $764 thousand and $5.15 million, respectively, are valued using the lower of cost or fair value method and the remaining amounts are valued under the fair value option method.
Asset Quality
. Our loan portfolio is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by the Office of the Comptroller of the Currency (“OCC”). Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were $43.05 million at September 30, 2020, as compared to $27.21 million at September 30, 2019 and $25.77 million at December 31, 2019. As a percent of loans
held-for-investment
and foreclosed assets, these assets were 0.81% at September 30, 2020, as compared to 0.66% at September 30, 2019 and 0.61% at December 31, 2019. As a percent of total assets, these assets were 0.41% at September 30, 2020, as compared to 0.34% at September 30, 2019 and 0.31% at December 31, 2019. We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming at September 30, 2020.
 
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Table of Contents
Supplemental Oil and Gas Information
. As of September 30, 2020, the Company’s exposure to the oil and gas industry totaled 2.58% of total loans
held-for-investment,
excluding PPP loans, or $118.57 million, down $1.22 million from December 31, 2019
year-end
levels, and consisted (based on collateral supporting the loan) of (i) development and production loans of 10.36%, (ii) oil and gas field servicing loans of 7.82%, (iii) real estate loans of 43.10%, (iv) accounts receivable and inventory of 1.48%, (v) automobile of 7.80% and (vi) other of 29.44%. The following oil and gas information is as of and for the quarters ended September 30, 2020 and 2019, and December 31, 2019 (in thousands, except percentages):
 
    
September 30,
    
December 31,

2019
  
    
2020
    
2019
  
Oil and gas related loans, excluding PPP loans
    $ 118,567     $ 122,908     $ 119,789  
Oil and gas related loans as a % of total loans
held-for-investment,
excluding PPP loans
      2.58 %      3.00 %      2.86 % 
Classified oil and gas related loans
    $ 26,823     $ 7,953     $ 7,041  
Nonaccrual
oil and gas related loans
      6,800       519       481  
Net charge-offs for oil and gas related
loans for quarter/year then ended
      —         —         —    
Allowance for oil and gas related loans as a % of oil and gas loans
      8.01 %      2.87 %      2.54 % 
Supplemental
COVID-19
Industry Exposure.
In addition, at September 30, 2020, loan balances in the retail/restaurant/hospitality industries totaled $359.02 million or 7.82% of the Company’s total loans
held-for-investment,
excluding PPP loans. Classified and nonperforming loans for these industries combined at September 30, 2020, totaled $28.17 million and $5.69 million, respectively. Net charge-offs related to this portfolio totaled
 
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$26 thousand and $334 thousand for the three and nine-months ended September 30, 2020, respectively. Additional information related to the Company’s retail/restaurant/hospitality industries follows below (in thousands, except percentages):
 
    
September 30,
    
June 30,
  
    
2020
    
2020
  
Retail loans
    $ 229,386     $ 216,244  
Restaurant loans
      39,523       46,418  
Hotel loans
      63,273       51,957  
Other hospitality loans
      26,041       23,230  
Travel loans
      801       908  
  
 
 
    
 
 
  
Total Retail/Restaurant/Hospitality loans, excluding PPP loans
    $ 359,024     $ 338,757  
  
 
 
    
 
 
  
Retail/Restaurant/Hospitality loans as a % of total loans
 held-for-investment
, excluding PPP loans
      7.82 %      7.45 % 
Classified Retail/Restaurant/Hospitality loans
    $ 28,171     $ 15,837  
Nonaccrual Retail/Restaurant/Hospitality loans
      5,689       5,752  
Net Charge-Offs for Retail/Restaurant/Hospitality loans
      26       178  
Table 6 –
Non-accrual,
Past Due 90 Days or More and Still Accruing, Restructured Loans and Foreclosed Assets (in thousands, except percentages):
 
    
September 30,
    
December 31,

2019
  
    
2020
    
2019
  
Nonaccrual
loans*
    $ 42,673     $ 25,717     $ 24,582  
Loans still accruing and past due 90 days or more
      23       104       153  
Troubled debt restructured loans**
      25       27       26  
  
 
 
    
 
 
    
 
 
  
Nonperforming loans
      42,721       25,848       24,761  
Foreclosed assets
      331       1,364       1,009  
  
 
 
    
 
 
    
 
 
  
Total nonperforming assets
    $ 43,052     $ 27,212     $ 25,770  
  
 
 
    
 
 
    
 
 
  
As a % of loans
held-for-investment
and foreclosed assets
      0.81 %      0.66 %      0.61 % 
As a % of total assets
      0.41       0.34       0.31  
 
*
Includes $5.98 million, $342 thousand and $251 thousand of purchased credit impaired loans as of September 30, 2020 and 2019, and December 31, 2019, respectively.
**
Other troubled debt restructured loans of $4.48 million, $3.98 million and $4.79 million, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in
non-accrual
loans at September 30, 2020 and 2019, and December 31, 2019, respectively.
 
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We record interest payments received on
non-accrual
loans as reductions of principal. Prior to the loans being placed on
non-accrual,
we recognized interest income on impaired loans of approximately $151 thousand for the year ended December 31, 2019. If interest on these impaired loans had been recognized on a full accrual basis during the year ended December 31, 2019, such income would have approximated $2.39 million. Such amounts for the 2020 and 2019 interim periods were not significant.
Provision and Allowance for Loan Losses
. The allowance for loan losses is the amount we determine as of a specific date to be appropriate to absorb probable losses on existing loans in which full collectability is unlikely based on our review and evaluation of the loan portfolio. For a discussion of our methodology, see note 1 to our notes to the consolidated financial statements (unaudited). The provision for credit losses was $9.00 million, including $1.50 million in provision for unfunded commitments for the third quarter of 2020, as compared to $450 thousand for the third quarter of 2019. The provision for credit losses was $27.55 million for the nine month period ended September 30, 2020 as compared to $2.02 million for the same period in 2019. The provision for loan losses in 2020 reflects primarily the stress on our loan portfolio from the increase in unemployment and economic effects of the
COVID-19
pandemic and the volatility of oil and gas prices. As a percent of average loans, net loan charge-offs were 0.03% for the third quarter of 2020, as compared to 0.04% for the third quarter of 2019. As a percentage of average loans, net loan charge-offs were 0.07% for the first nine months of 2020, as compared to 0.04% for the first nine months of 2019. The allowance for loan losses as a percent of loans
held-for-investment
was 1.44% as of September 30, 2020, as compared to 1.27% as of September 30, 2019 and 1.25% as of December 31, 2019. In addition, management notes the acquisition of $455.18 million in loans in the TB&T Bancshares, Inc. acquisition that were recorded at fair value, including credit considerations, with no corresponding allowance for loan losses being recorded. The Company recorded a $7.65 million discount on the acquired loan portfolio at acquisition date and such amounts totaled $5.04 million at September 30, 2020.
Table 7 - Loan Loss Experience and Allowance for Loan Losses (in thousands, except percentages):
 
    
Three-Months Ended

September 30,
    
Nine-Months Ended
September 30,
  
    
2020
    
2019
    
2020
    
2019
  
Allowance for loan losses at
period-end
    $ 76,038     $ 51,889     $ 76,038     $ 51,889  
Loans
held-for-investment
at
period-end
      5,293,679       4,100,316       5,293,679       4,100,316  
Average loans for period
      5,334,174       4,094,235       5,084,136       4,037,243  
Net charge-offs/average loans (annualized)
      0.03 %      0.04 %      0.07 %      0.04 % 
Allowance for loan
losses/period-end
loans
held-for-investment
      1.44 %      1.27 %      1.44 %      1.27 % 
Allowance for loan
losses/non-accrual
loans, past due 90 days still accruing and restructured loans
      177.99 %      200.75 %      177.99 %      200.75 % 
Interest-Bearing Demand Deposits in Banks.
At September 30, 2020, our interest-bearing deposits in banks were $58.93 million compared to $31.41 million at September 30, 2019 and $47.92 million at December 31, 2019, respectively. At September 30, 2020, interest-bearing deposits in banks included $58.56 million maintained at the Federal Reserve Bank of Dallas and $369 thousand on deposit with the FHLB.
 
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Table of Contents
Available-for-Sale
Securities
. At September 30, 2020, securities with a fair value of $4.43 billion were classified as securities
available-for-sale.
As compared to December 31, 2019, the
available-for-sale
portfolio at September 30, 2020
reflected (i) a decrease in U.S. Treasury securities of $10.02 million, (ii) an increase of $1.08 billion in obligations of states and political subdivisions, (iii) a decrease of $139 thousand in corporate bonds and other, and (iv) a decrease of $50.39 million in mortgage-backed securities. The shift to mortgage-backed securities from obligations of state and political subdivisions was due to the change in the federal income tax rate of 21% from 35% effective January 1, 2018, although we have seen an increase in our purchases of state and political subdivisions bonds in the first nine months of 2020 due to favorable shifts in tax equivalent yields. Our mortgage related securities are backed by GNMA, FNMA or FHLMC or are collateralized by securities backed by these agencies.
See note 2 to the consolidated financial statements (unaudited) for additional disclosures relating to the investment portfolio at September 30, 2020 and 2019, and December 31, 2019.
Table 8 - Maturities and Yields of
Available-for-Sale
Securities Held at September 30, 2020 (in thousands, except percentages):
 
    
Maturing 
 by Contractual Maturity
  
    
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
    $ 115,637        4.80 %    $ 669,407        4.03 %    $  1,536,734        2.90 %    $  45,711        2.24 %    $  2,367,489        3.30 % 
Mortgage-backed securities
      174,409        2.19       1,693,861        2.36       190,952        1.98       —          —         2,059,222        2.31  
Other securities
      4,569        1.96       —          —         —          —         —          —         4,569        1.96  
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
Total
    $  294,615        3.21 %    $  2,363,268        2.83 %    $ 1,727,686        2.80 %    $ 45,711        2.24 %    $ 4,431,280        2.84 % 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
All yields are computed on a
tax-equivalent
basis assuming a marginal tax rate of 21%. Yields on
available-for-sale
securities are based on amortized cost. Maturities of mortgage-backed securities are based on contractual maturities and could differ due to prepayments of underlying mortgages. Maturities of other securities are reported at the earlier of maturity date or call date.
As of September 30, 2020, the investment portfolio had an overall tax equivalent yield of 2.84%, a weighted average life of 4.62 years and modified duration of 4.10 years.
Deposits
. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were $8.29 billion as of September 30, 2020, as compared to $6.40 billion as of September 30, 2019 and $6.60 billion as of December 31, 2019. Table 9 provides a breakdown of average deposits and rates paid for the three and nine-month periods ended September 30, 2020 and 2019, respectively.
 
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Table 9 - Composition of Average Deposits (in thousands, except percentages):
 
    
Three-Months Ended September 30,
  
    
2020
    
2019
  
    
Average
Balance
     
Average
Rate
    
Average
Balance
     
Average
Rate
  
Noninterest-bearing deposits
    $ 3,016,700        —   %    $ 2,180,200        —   % 
Interest-bearing deposits:
           
Interest-bearing checking
      2,498,641        0.10       2,046,792        0.69  
Savings and money market accounts
      2,301,920        0.12       1,679,684        0.58  
Time deposits under $100,000
      193,991        0.35       184,843        0.79  
Time deposits of $100,000 or more
      276,048        0.81       245,531        1.15  
  
 
 
     
 
 
    
 
 
     
 
 
  
Total interest-bearing deposits
      5,270,600        0.16 %      4,156,850        0.68 % 
  
 
 
     
 
 
    
 
 
     
 
 
  
Total average deposits
    $ 8,287,300        $ 6,337,050     
  
 
 
       
 
 
     
Total cost of deposits
         0.10 %         0.45 % 
     
 
 
       
 
 
  
 
    
Nine-Months Ended September 30,
  
    
2020
    
2019
  
    
Average
Balance
     
Average
Rate
    
Average
Balance
     
Average
Rate
  
Noninterest-bearing deposits
    $ 2,714,173        —   %    $ 2,133,418        —   % 
Interest-bearing deposits:
           
Interest-bearing checking
      2,477,034        0.26       2,052,943        0.73  
Savings and money market accounts
      2,156,907        0.24       1,677,181        0.57  
Time deposits under $100,000
      196,627        0.49       188,210        0.68  
Time deposits of $100,000 or more
      273,528        0.96       247,401        1.01  
  
 
 
     
 
 
    
 
 
     
 
 
  
Total interest-bearing deposits
      5,104,096        0.30 %      4,165,735        0.68 % 
  
 
 
     
 
 
    
 
 
     
 
 
  
Total average deposits
    $ 7,818,269        $ 6,299,153     
  
 
 
       
 
 
     
Total cost of deposits
         0.19 %         0.45 % 
     
 
 
       
 
 
  
 
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Table of Contents
Borrowings.
Included in borrowings were federal funds purchased, securities sold under repurchase agreements and advances from the FHLB of $503.16 million, $400.16 million and $381.36 million at September 30, 2020 and 2019 and December 31, 2019, respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the borrowings. The average balance of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were $482.56 million and $388.24 million in the third quarters of 2020 and 2019, respectively. The weighted average interest rates paid on these borrowings were 0.08% and 0.85% for the third quarters of 2020 and 2019, respectively. The average balances of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB was $606.29 million and $391.68 million for the nine-month periods ended September 30, 2020 and 2019, respectively. The weighted average interest rate on these short-term borrowings was 0.23% and 0.76% for the first nine months of 2020 and 2019, respectively.
Capital Resources
We evaluate capital resources by our ability to maintain adequate regulatory capital ratios to do business in the banking industry. Issues related to capital resources arise primarily when we are growing at an accelerated rate but not retaining a significant amount of our profits or when we experience significant asset quality deterioration.
Total shareholders’ equity was $1.62 billion, or 15.33% of total assets at September 30, 2020, as compared to $1.21 billion, or 14.85% of total assets at September 30, 2019, and $1.23 billion, or 14.85% of total assets at December 31, 2019. Included in shareholders’ equity at September 30, 2020 and 2019 and December 31, 2019 were $152.06 million, $73.52 million and $67.51 million, respectively, in unrealized gains on investment securities
available-for-sale,
net of related income taxes. For the third quarter of 2020, total shareholders’ equity averaged $1.60 billion, or 15.27% of average assets, as compared to $1.18 billion, or 14.84% of average assets, during the same period in 2019. For the nine-months ended September 30, 2020, total shareholders’ equity averaged $1.54 billion, or 15.32%, as compared to $1.12 billion, or 14.31% of total assets during the same period in 2019.
Banking regulators measure capital adequacy by means of the risk-based capital ratios and the leverage ratio under the Basel III regulatory capital framework and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and
off-balance-sheet
commitments and contingencies according to prescribed risk categories. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders’ equity less intangible assets by
quarter-to-date
average assets less intangible assets.
Beginning in January 2015, under the Basel III regulatory capital framework, the implementation of the capital conservation buffer was effective for the Company starting at the 0.625% level and increasing 0.625% each year thereafter, until it reached 2.50% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers.
As of September 30, 2020 and 2019, and December 31, 2019, we had a total capital to risk-weighted assets ratio of 21.82%, 21.14% and 21.13%, a Tier 1 capital to risk-weighted assets ratio of 20.56%, 20.05% and 20.06%; a common equity Tier 1 to risk-weighted assets ratio of 20.56%, 20.05% and 20.06% and a leverage ratio of 11.65%, 12.58% and 12.60%, respectively. The regulatory capital ratios as of September 30, 2020 and 2019, and December 31, 2019 were calculated under Basel III rules.
 
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Table of Contents
The regulatory capital ratios of the Company and Bank under the Basel III regulatory capital framework are as follows:
 
    
Actual
    
Minimum Capital
Required-Basel III
Fully
Phased-In*
    
Required to be
Considered Well-
Capitalized
  
As of September 30, 2020:
   
Amount
     
Ratio
    
Amount
     
Ratio
    
Amount
     
Ratio
  
Total Capital to Risk-Weighted Assets:
                
Consolidated
    $ 1,231,395        21.82 %    $ 592,680        10.50 %    $ 564,457        10.00 % 
First Financial Bank, N.A
    $ 1,102,365        19.57 %    $ 591,382        10.50 %    $ 563,221        10.00 % 
Tier 1 Capital to Risk-Weighted Assets:
                
Consolidated
    $ 1,160,742        20.56 %    $ 479,788        8.50 %    $ 338,674        6.00 % 
First Financial Bank, N.A
    $ 1,031,864        18.32 %    $ 478,738        8.50 %    $ 450,577        8.00 % 
Common Equity Tier 1 Capital to Risk-Weighted Assets:
                
Consolidated
    $ 1,160,742        20.56 %    $ 395,120        7.00 %      —          N/A  
First Financial Bank, N.A
    $ 1,031,864        18.32 %    $ 394,255        7.00 %    $ 366,094        6.50 % 
Leverage Ratio:
                
Consolidated
    $ 1,160,742        11.65 %    $ 398,660        4.00 %      —          N/A  
First Financial Bank, N.A
    $ 1,031,864        10.39 %    $ 397,410        4.00 %    $ 496,763        5.00 % 
 
*
At September 30, 2020, the capital conservation buffer under Basel III has been fully
phased-in.
 
    
Actual
    
Minimum Capital
Required-Basel III
Fully
Phased-In*
    
Required to be
Considered Well-
Capitalized
  
As of September 30, 2019:
   
Amount
     
Ratio
    
Amount
     
Ratio
    
Amount
     
Ratio
  
Total Capital to Risk-Weighted Assets:
                
Consolidated
    $ 1,023,229        21.14 %    $ 508,149        10.50 %    $ 483,951        10.00 % 
First Financial Bank, N.A
    $ 905,495        18.75 %    $ 506,957        10.50 %    $ 482,816        10.00 % 
Tier 1 Capital to Risk-Weighted Assets:
                
Consolidated
    $ 970,532        20.05 %    $ 411,359        8.50 %    $ 290,371        6.00 % 
First Financial Bank, N.A
    $ 852,798        17.66 %    $ 410,394        8.50 %    $ 386,253        8.00 % 
Common Equity Tier 1 Capital to Risk-Weighted Assets:
                
Consolidated
    $ 970,532        20.05 %    $ 338,766        7.00 %      —          N/A  
First Financial Bank, N.A
    $ 852,798        17.66 %    $ 337,971        7.00 %    $ 313,830        6.50 % 
Leverage Ratio:
                
Consolidated
    $ 970,532        12.58 %    $ 308,675        4.00 %      —          N/A  
First Financial Bank, N.A
    $ 852,798        11.10 %    $ 307,442        4.00 %    $ 384,302        5.00 % 
 
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Table of Contents
    
Actual
    
Minimum Capital
Required Under
Basel III
Phase-In
    
Required to be
Considered Well-
Capitalized
  
As of December 31, 2019:
   
Amount
     
Ratio
    
Amount
     
Ratio
    
Amount
     
Ratio
  
Total Capital to Risk-Weighted Assets:
                
Consolidated
    $ 1,051,029        21.13 %    $ 522,275        10.50 %    $ 497,405        10.00 % 
First Financial Bank, N.A
    $ 908,778        18.31 %    $ 521,081        10.50 %    $ 496,268        10.00 % 
Tier 1 Capital to Risk-Weighted Assets:
                
Consolidated
    $ 997,721        20.06 %    $ 422,794        8.50 %    $ 298,443        6.00 % 
First Financial Bank, N.A
    $ 855,470        17.24 %    $ 421,828        8.50 %    $ 397,014        8.00 % 
Common Equity Tier 1 Capital to Risk-Weighted Assets:
                
Consolidated
    $ 997,721        20.06 %    $ 348,184        7.00 %      —          N/A  
First Financial Bank, N.A
    $ 855,470        17.24 %    $ 347,388        7.00 %    $ 322,574        6.50 % 
Leverage Ratio:
                
Consolidated
    $ 997,721        12.60 %    $ 316,850        4.00 %      —          N/A  
First Financial Bank, N.A
    $ 855,470        10.84 %    $ 315,570        4.00 %    $ 394,463        5.00 % 
In connection with the adoption of the Basel III regulatory capital framework, our subsidiary bank made the election to continue to exclude accumulated other comprehensive income from
available-for-sale
securities (“AOCI”) from capital in connection with its quarterly financial filing and, in effect, to retain the AOCI treatment under the prior capital rules.
Interest Rate Risk
Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. Our exposure to interest rate risk is managed primarily through our strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities that generate favorable earnings while limiting the potential negative effects of changes in market interest rates. We use no
off-balance
sheet financial instruments to manage interest rate risk.
Our subsidiary bank has an asset liability management committee that monitors interest rate risk and compliance with investment policies. The subsidiary bank utilizes an earnings simulation model as the 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 September 30, 2020, the model simulations projected that 100 and 200 basis point increases in interest rates would result in positive variances in net interest income of 3.93% and 7.81%, respectively, relative to the current financial statement structure over the next twelve months, while a decrease in interest rates of 100 and 200 basis points would result in a negative variance in net interest income of 4.23% and 6.21%, respectively, relative to the current financial statement structure over the next twelve months. Our model simulation as of September 30, 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-month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics on specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. We believe these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities
re-price
in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material.
Should we be unable to maintain a reasonable balance of maturities and repricing of our interest-earning assets and our interest-bearing liabilities, we could be required to dispose of our assets in an unfavorable manner or pay a higher than market rate to fund our activities. Our asset liability committee oversees and monitors this risk.
Liquidity
Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. The potential need for liquidity arising from these types of financial instruments is represented by the contractual notional amount of the instrument. Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. Liquid assets include cash, federal funds sold, and short-term investments in time deposits in banks. Liquidity is also provided by access to funding sources, which include core depositors and correspondent banks that maintain accounts with and sell federal funds to our subsidiary bank. Other sources of funds include our ability to borrow from short-term sources, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and advances from the FHLB (see below) and an unfunded $25.00 million revolving line of credit established with Frost Bank, a nonaffiliated bank, which matures in June 2021 (see next paragraph).
Our subsidiary bank also has federal funds purchased lines of credit with two
non-affiliated
banks totaling $130.00 million. At September 30, 2020, no amounts were drawn on these federal funds lines of credit. Our subsidiary bank also has (i) an available line of credit with the FHLB totaling $1.77 billion at September 30, 2020, secured by portions of our loan portfolio and certain investment securities and (ii) access to the Federal Reserve Bank of Dallas lending program. At September 30, 2020, the Company had $30.00 million in outstanding advances from the FHLB.
 
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Table of Contents
The Company renewed its loan agreement, effective June 30, 2019, with Frost Bank. Under the loan agreement, as renewed and amended, we are permitted to draw up to $25.00 million on a revolving line of credit. Prior to June 30, 2021, interest is paid quarterly at
The Wall Street Journal
Prime Rate and the line of credit matures June 30, 2021. If a balance exists at June 30, 2021, the principal balance converts to a term facility payable quarterly over five years and interest is paid quarterly at
The Wall Street Journal
Prime Rate. The line of credit is unsecured. Among other provisions in the credit agreement, we must satisfy certain financial covenants during the term of the loan agreement, including, without limitation, covenants that require us to maintain certain capital, tangible net worth, loan loss reserve,
non-performing
asset and cash flow coverage ratios. In addition, the credit agreement contains certain operational covenants, which among others, restricts the payment of dividends above 55% of consolidated net income, limits the incurrence of debt (excluding any amounts acquired in an acquisition) and prohibits the disposal of assets except in the ordinary course of business. Since 1995, we have historically declared dividends as a percentage of our consolidated net income in a range of 37% (low) in 1995 to 53% (high) in 2003 and 2006. The Company was in compliance with the financial and operational covenants at September 30, 2020. There was no outstanding balance under the line of credit as of September 30, 2020 and 2019, or December 31, 2019.
In addition, we anticipate that future acquisitions of financial institutions, expansion of branch locations or offerings of new products could also place a demand on our cash resources. Available cash and cash equivalents at our parent company which totaled $113.72 million at September 30, 2020, investment securities which totaled $3.60 million at September 30, 2020 and mature over 9 to 10 years, available dividends from our subsidiaries which totaled $270.17 million at September 30, 2020, utilization of available lines of credit, and future debt or equity offerings are expected to be the source of funding for these potential acquisitions or expansions.
Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed potentially problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As of September 30, 2020, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. We are monitoring closely the economic impact of the coronavirus on our customers and the communities we serve. Given the strong core deposit base and relatively low loan to deposit ratios maintained at our subsidiary bank, we consider our current liquidity position to be adequate to meet our short-term and long-term liquidity needs. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.
Off-Balance
Sheet Arrangements.
We are a party to financial instruments with
off-balance
sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheets. 
At September 30, 2020, the Company’s reserve for unfunded commitments totaled $2.30 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.
 
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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.
Table 10 – Commitments as of September 30, 2020 (in thousands):
 
    
Total Notional
Amounts
Committed
  
Unfunded lines of credit
    $ 814,963  
Unfunded commitments to extend credit
      719,677  
Standby letters of credit
      36,992  
  
 
 
  
Total commercial commitments
    $ 1,571,632  
  
 
 
  
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.
Parent Company Funding
. Our ability to fund various operating expenses, dividends, and cash acquisitions is generally dependent on our own earnings (without giving effect to our subsidiaries), cash reserves and funds derived from our subsidiaries. These funds historically have been produced by intercompany dividends and management fees that are limited to reimbursement of actual expenses. We anticipate that our recurring cash sources will continue to include dividends and management fees from our subsidiaries. At September 30, 2020, $270.17 million was available for the payment of intercompany dividends by our subsidiaries without the prior approval of regulatory agencies. Our subsidiaries paid aggregate dividends of $46.00 million and $44.50 million for the nine-month periods ended September 30, 2020 and 2019, respectively.
Dividends
. Our long-term dividend policy is to pay cash dividends to our shareholders of approximately 40% of annual net earnings while maintaining adequate capital to support growth. We are also restricted by a loan covenant within our line of credit agreement with Frost Bank to dividend no greater than 55% of net income, as defined in such loan agreement. The cash dividend payout ratios have amounted to 37.62% and 37.94% of net earnings for the first nine months of 2020 and 2019, respectively. Given our current capital position and projected earnings and asset growth rates, we do not anticipate any significant change in our current dividend policy. 
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.
 
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To pay dividends, we and our subsidiary bank must maintain adequate capital above regulatory guidelines. In addition, if the applicable regulatory authority believes that a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the authority may require, after notice and hearing, that such bank cease and desist from the unsafe practice. The Federal Reserve, the FDIC and the OCC have each indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve, the OCC and the FDIC have issued policy statements that recommend that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management considers interest rate risk to be a significant market risk for the Company. See “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources—Interest Rate Risk” for disclosure regarding this market risk.
Item 4. Controls and Procedures
As of September 30, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule
13a-15(e)
or
15d-15(e)
of the Securities Exchange Act of 1934). Our management, which includes our principal executive officer and our principal financial officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Our principal executive officer and principal financial officer have concluded, based on our evaluation of our disclosure controls and procedures, that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2020.
Subsequent to our evaluation, there were no significant changes in internal controls over financial reporting or other factors that have materially affected, or are reasonably likely to materially affect, these internal controls.
 
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we and our subsidiaries are parties to lawsuits arising in the ordinary course of our banking business. However, there are no material pending legal proceedings to which we, our subsidiaries, or any of their properties, are currently subject. Other than regular, routine examinations by state and federal banking authorities, there are no proceedings pending or known to be contemplated by any governmental authorities.
Item 1A. Risk Factors
There has been no material change in the risk factors previously disclosed under Part I, Item 1A of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019 and Part II, Item 1A of the Company’s Quarterly Reports on Form
10-Q
for the quarters ended March 31, 2020 and June 30, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchase of Common Stock
On March 12, 2020, the Company’s Board of Directors authorized the repurchase of up to 4,000,000 common shares through September 30, 2021. The stock repurchase plan authorizes management to repurchase
 and retire 
the
stock at such time as repurchases are considered beneficial to the Company and stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Through September 30, 2020, 324,802 shares were repurchased totaling $8,008,000 under this repurchase plan.
The following table presents shares that have been repurchased under the Company’s repurchase program:
 
Period
   
(a)
Total number
of shares
purchased
     
(b)
Average
price paid
per share
     
(c)
Total number of shares
purchased as part of

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