EDGAR 10-K Filing

Company CIK: 36029
Filing Year: 2021
Filename: 36029_10-K_2021_0001193125-21-050937.json

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ITEM 1. BUSINESS
ITEM 1.
BUSINESS
General
First Financial Bankshares, Inc., a Texas corporation (the “Company”), is a financial holding company registered under the Bank Holding Company Act of 1956, as amended, or BHCA. As such, we are supervised by the Federal Reserve Board, as well as several other bank regulators. We were formed as a bank holding company in 1956 under the original name F & M Operating Company, but our banking operations date back to 1890, when Farmers and Merchants National Bank opened for business in Abilene, Texas. As of December 31, 2020, our wholly-owned subsidiaries were:
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First Financial Bank, N.A., Abilene, Texas;
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First Technology Services, Inc., Abilene, Texas, a wholly-owned subsidiary of First Financial Bank, N.A., Abilene, Texas;
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First Financial Trust & Asset Management Company, N.A., Abilene, Texas;
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First Financial Insurance Agency, Inc., Abilene, Texas; and
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First Financial Investments, Inc., Abilene, Texas.
On January 1, 2020, we acquired TB&T Bancshares, Inc. and its wholly-owned subsidiary, The Bank & Trust of Bryan/College Station, Texas and merged these entities with and into the Company and our subsidiary bank, respectively.
Through our subsidiaries, we conduct a full-service commercial banking business. Our banking centers are located primarily in Central, North Central, Southeast and West Texas. As of December 31, 2020, we had 78 financial centers across Texas, with eleven locations in Abilene, three locations in Bryan and Weatherford, two locations in Cleburne, College Station, Conroe, San Angelo, Stephenville, and Granbury, and one location each in Acton, Albany, Aledo, Alvarado, Beaumont, Boyd, Bridgeport, Brock, Burleson, Cisco, Clyde, Cut and Shoot, Decatur, Eastland, El Campo, Fort Worth, Fulshear, Glen Rose, Grapevine, Hereford, Huntsville, Keller, Kingwood, Magnolia, Mauriceville, Merkel, Midlothian, Mineral Wells, Montgomery, Moran, New Waverly, Newton, Odessa, Orange, Palacios, Port Arthur, Ranger, Rising Star, Roby, Southlake, Spring, Sweetwater, Tomball, Trent, Trophy Club, Vidor, Waxahachie, Willis and Willow Park.
Even though we operate in a growing number of Texas markets, we continue to believe that decisions are best made at the local level. Although we consolidated our bank charters into one charter in 2012, we continue to regionally manage our operations with local advisory boards of directors, local regional presidents and local decision-making processes. We have consolidated substantially all of the backroom operations, such as investment securities, accounting, check processing, credit administration, risk management, marketing, call center, technology and human resources, which improved our efficiency and freed management of our bank regions to concentrate on serving the banking needs of their local communities.
We have chosen to keep our Company focused on the State of Texas, one of the nation’s largest, fastest-growing and most economically diverse states. With approximately 29.0 million residents as of December 31, 2019, Texas has more people than any other state except California. The population of Texas grew 17.1% from 2009-2019 according to the U.S. Census Bureau. Many of the communities in which we operate are also experiencing positive growth as shown below:
Population Growth 2009-2019 by City and County*
Bridgeport and Wise County
16.8 %
Bryan/College Station and Brazos County
26.7 %
Cleburne and Johnson County
11.9 %
Conroe and Montgomery County
36.1 %
*Source: U. S. Census Bureau
Fort Worth and Tarrant County
16.8 %
Granbury and Hood County
19.1 %
Stephenville and Erath County
17.7 %
Weatherford, Willow Park, Aledo and Parker County
23.8 %
These economies include dynamic centers of higher education, agriculture, wind energy and natural resources, retail, military, technology, healthcare, tourism, retirement living, manufacturing and distribution.
We believe our community approach to doing business works best for us in small and mid-size
markets, where we can play a prominent role in the economic, civic and cultural life of the community. Our goal is to serve these communities well and to experience growth as these markets continue to expand. In many instances, banking competition is less intense in smaller markets, making it easier for us to operate rationally and attract and retain high-caliber employees who prefer not only our community-banker concept but the high quality of life in smaller cities.
Over the years, we have grown in three ways: by growing organically, by opening new branch locations and by acquiring other banks. Since 1997, we have completed fourteen bank acquisitions and have increased our total assets from $1.57 billion to $10.90 billion as of December 31, 2020. We also have a trust and asset management company and a technology services company. First Financial Trust & Asset Management Company, N.A. operates as a subsidiary of First Financial Bankshares, Inc. and First Technology Services, Inc. operates as a subsidiary of First Financial Bank, N.A. Looking ahead, we intend to continue to grow organically by better serving the needs of our customers and putting them first in all of our decisions. We continually look for new branch locations, such as our latest branch opened in Spring, Texas which opened in January 2019, so we can provide more convenient service to our customers. We are actively pursuing acquisition opportunities by calling on banks that we are interested in possibly acquiring.
When targeting a bank for acquisition, the subject bank generally needs to be well managed and profitable, while being located in the type of community that fits our profile. We seek to enter growing communities with good amenities - schools, infrastructure, commerce and lifestyle. We prefer non-metropolitan
markets, either around Dallas/Fort Worth, Houston, San Antonio or Austin or along the Interstate 35, 45, 10 and 20 corridors in Texas. We might also consider the acquisition of banks in East Texas, the Texas Hill Country area or in states contiguous to Texas. Banks between $500 million and $1.0 billion in asset size fit our “sweet spot” for acquisition, but we would consider banks that are larger or smaller, or that are in other areas of Texas if we believe they would be a good fit for our Company.
Information on our financial condition and operating results appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7 hereof.
First Financial Bankshares, Inc.
We provide management, technical resources and policy direction to our subsidiaries, which enable them to improve or expand their services while continuing their local activity and identity. Each of our subsidiaries operates under the day-to-day
management of its own board of directors and officers, including advisory boards of directors for our bank regions. We provide resources and policy direction in, among other things, the following areas:
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asset and liability management;
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investments;
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accounting;
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budgeting and forecasting;
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training;
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marketing;
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planning;
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capital expenditures;
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risk management;
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loan review;
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loan analysis;
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human resources;
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insurance;
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capitalization;
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regulatory compliance; and
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internal and external audit.
In particular, we assist our subsidiaries with, among other things, decisions concerning major capital expenditures, employee benefits, including retirement plans and group medical coverage, dividend policies, and appointment of officers and directors, including advisory directors, and their compensation. We also perform, through corporate staff groups or by outsourcing to third parties, internal audits, compliance oversight and loan reviews of our subsidiaries. We provide advice and specialized services for our bank regions related to lending, investing, purchasing, advertising, public relations, and technology services.
We evaluate various potential financial institution acquisition opportunities and approve potential locations for new branch offices. We anticipate that funding for any acquisitions or expansions would be provided from our existing cash balances, available dividends from our subsidiaries, utilization of available lines of credit, issuance of common stock to the acquired company’s shareholders and future debt or equity offerings.
Services Offered by Our Subsidiaries
Our subsidiary bank, First Financial Bank, N.A. is a separate legal entity that operates under the day-to-day
management of its board of directors and officers. Our multiple banking regions, which operate under our subsidiary bank, each have separate regional advisory boards that make recommendations and provide assistance to regional management of the bank regarding the operations of their respective region. Each of our bank regions provides general commercial banking services, which include accepting and holding checking, savings and time deposits, making loans, offering automated teller machines (“ATMs”), drive-in
and night deposit services, safe deposit facilities, remote deposit capture, internet banking, mobile banking, payroll cards, transmitting funds, and performing other customary commercial banking services.
We also provide full-service trust and wealth management activities through First Financial Trust & Asset Management Company, N.A., our trust company. Our trust company has ten locations which are located in Abilene, Bryan/College Station, Fort Worth, Houston, Odessa, Beaumont, San Angelo, San Antonio, Stephenville and Sweetwater, all in Texas. Through our trust company, we offer personal trust services, which include wealth management, the administration of estates, testamentary trusts, revocable and irrevocable trusts and agency accounts. We also administer all types of retirement and employee benefit accounts, which include 401(k) profit sharing plans and IRAs. The Company has been providing trust services since 1927. In addition, we provide securities brokerage services through an arrangement with an unrelated third-party in our Abilene and San Angelo regions.
Competition
Commercial banking in Texas is highly competitive, and because we hold less than 1% of the state’s deposits, we represent a smaller segment of the market share in Texas. To succeed in this industry, we believe that we must have the capability to compete effectively in the areas of (1) interest rates paid or charged; (2) scope of services offered; and (3) prices charged for such services; as well as personalized customer service. Our bank regions compete in their respective service areas against highly competitive banks, thrifts, savings and loan associations, small loan companies, credit unions, mortgage companies, insurance companies, and brokerage firms, all of which are engaged in providing financial products and services and some of which are larger than us in terms of capital, resources and personnel.
Our business does not depend on any single customer or any few customers, and the loss of any one would not have a materially adverse effect upon our business. Although we have a broad base of customers that are not related to us, our customers also occasionally include our officers and directors, as well as other entities with which we are affiliated. Through our bank regions we may make loans to our officers and directors, and entities with which we
are affiliated, in the ordinary course of business. We make these loans on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. Loans to our directors, officers and their affiliates are also subject to numerous restrictions under federal and state banking laws, which we describe in greater detail below, under the heading “Supervision and Regulation - Loans to Directors, Executive Officers and Principal Shareholders.”
Overview of the Impact from the COVID Pandemic
During March 2020, the outbreak of the novel Coronavirus Disease 2019 was recognized as a pandemic by the World Health Organization and a national emergency by the President of the United States. The spread of COVID has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve across the State of Texas. National, state and local governmental responses to the pandemic have included orders to close or limit businesses activity not deemed essential and directing individuals to limit their movements and travel, observe social distancing, and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in overall temporary decreases in commercial and consumer activity. These responses and restrictions have led to a loss of revenues for certain industries and a sudden increase in unemployment, volatility in oil and gas prices and in business valuations, market downturns and volatility, changes in consumer behaviors, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.
Effective March 16, 2020, in an emergency response to stem the economic impact of COVID, the Federal Reserve lowered the federal funds target rate to a range of between zero to 0.25%. This action followed a prior reduction of the federal funds target rate to a range of 1.0% to 1.25% effective on March 4, 2020. Our earnings and related cash flows are largely dependent upon our net interest income representing the difference between interest income received on interest-earning assets, primarily loans and investment securities, and the interest expense paid on interest-bearing liabilities, primarily customer deposits and borrowed funds. As our balance sheet is more asset sensitive, our earnings are more adversely affected by decreases in market interest rates as the interest rates received on loans and other investments fall more quickly and to a larger degree than the interest rates paid on deposits and other borrowings. The decline in interest rates has already led to low yields across all maturity periods. The Federal Reserve has indicated that it expects to maintain the targeted federal funds rate at current levels until such time that labor market conditions have reached levels consistent with the Federal Open Market Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. However, should the Federal Reserve decrease the targeted federal funds rates even further in response to the economic effects of COVID, overall interest rates will decline further, which will likely negatively impact our net interest income and further compress our net interest margin.
Other actions taken by the Federal Reserve to provide monetary stimulus to counteract the economic disruption caused by COVID include:
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Expanded reverse repo operations, adding liquidity to the banking system.
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Restarted quantitative easing.
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Lowered the interest rate on the discount window by 150 basis points to 25 basis points.
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Reduced reserve requirement ratios to zero percent.
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Encouraged banks to use their capital and liquidity buffers to lend.
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Participated in the Main Street Loan Program.
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Introduced and expanded several new programs that will operate on a temporary basis to help preserve market liquidity.
Our financial position and results of operations are particularly susceptible to the ability of our loan customers to meet loan obligations, the availability of our workforce, the availability of our vendors and the decline in the value of assets held by us. While its effects continue to materialize, the COVID pandemic has resulted in a decrease in commercial activity throughout the State of Texas as well as nationally. This decrease in commercial activity has caused and may continue to cause our customers (including affected businesses and individuals), vendors and counterparties to be unable to meet existing payment or other obligations to us. The resulting economic pressure on consumers and uncertainty regarding the sustainability of any economic improvements has impacted the creditworthiness of potential and current borrowers. Borrower loan defaults that adversely affect our earnings correlate with deteriorating economic conditions (such as the unemployment rate), which, in turn, are likely to impact our borrowers’ creditworthiness. See further information related to the risk exposure of our loan portfolio, including industries impacted by COVID and existence of loan deferral programs to assist our borrowers under the sections captioned “Loans” and “Allowance for Credit Losses” included in Note 3.
Although financial markets have rebounded from significant declines, many of the effects which emerged after the onset of the COVID pandemic have persisted through the end of the year. These changes have had and are likely to continue to impact our markets and the resulting demand for our products and services. See “Risk Factors-Other Risks” beginning on page 22.
The U.S. government has also enacted certain fiscal stimulus measures in several phases to counteract the economic disruption caused by COVID. The initial legislation, the Coronavirus Preparedness and Response Supplemental Appropriations Act, was enacted on March 6, 2020 and, among other things, authorized funding for research and development of vaccines and allocated money to state and local governments to aid containment and response measures. The next phase of legislation, the Families First Coronavirus Response Act, was enacted on March 18, 2020 and provides for paid sick/medical leave, establishes no-cost
coverage for coronavirus testing, expands unemployment benefits, expands food assistance, and provides additional funding to states for the ongoing economic consequences of the pandemic, among other provisions. The following phase of legislation, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), was enacted on March 27, 2020. Among other provisions, the CARES Act (i) authorized the Secretary of the Treasury to make loans, loan guarantees and other investments, up to $500 billion, for assistance to eligible businesses, states and municipalities with limited, targeted relief for passenger air carriers, cargo air carriers, and businesses critical to maintaining national security, (ii) created a $349 billion loan program called the Paycheck Protection Program (the “PPP”) for loans to small businesses guaranteed by the Small Business Administration (“SBA”) for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments, (iii) provided certain credits against the 2020 personal income tax for eligible individuals and their dependents, (iv) expanded eligibility for unemployment insurance and provided eligible recipients with an additional $600 per week on top of the unemployment amount determined by each State and (v) expanded tele-health services in Medicare. This legislation was amended by the Paycheck Protection Program and Healthcare Enhancement Act of 2020 (the “PPPHE Act”), which was enacted on April 24, 2020. Among other things, the PPPHE Act provided an additional $310 billion of funding for the PPP of which, $30 billion is specifically allocated for use by banks and other insured depository institutions that have assets between $10 billion and $50 billion. On July 4, 2020, Congress enacted a new law that extended the deadline for applying for a PPP loan to August 8, 2020.
In December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal, included as a component of appropriations legislation, was enacted to provide economic stimulus to individuals and businesses in further response to the economic distress caused by the COVID pandemic. Among other things, the legislation includes (i) payments of $600 for individuals making up to $75,000 per year, (ii) extension of the Federal Pandemic Unemployment Compensation program to include a $300 weekly enhancement in unemployment benefits beginning after December 26, 2020 up to March 14, 2021, (iii) a temporary and targeted rental assistance program, and extends the eviction moratorium through January 31, 2021, (iv) targeted funding related to transportation, education, agriculture, nutrition and other public health measures and (v) approximately $325 billion for small business relief, including approximately $284 billion for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less.
We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S. government. The Federal Reserve created various additional lending facilities and expanded existing facilities to help provide financing in response to the financial disruptions caused by COVID. The programs include,
among others, the Paycheck Protection Program Liquidity Facility (the “PPP Facility”), which is intended to extend loans to banks making PPP loans. The Federal Reserve announced extensions through March 31, 2021 for several of its lending facilities, including the PPP Facility, that were generally scheduled to expire on or around December 31, 2020.
Through December 31, 2020, we had funded approximately 6,500 PPP loans totaling $703.73 million. At December 31, 2020, the Company’s PPP loans have an outstanding balance of $483.66 million following repayments and forgiveness by the SBA. We did not participate in the PPP Facility program during 2020. Currently, the Company is assisting borrowers in the round 2 of the PPP under the December 2020 Relief Deal.
Among other things, our Company has taken significant actions to address the impact of COVID on our employees and customers with the stated goal of protecting all parties during the pandemic:
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Established daily, at first, then weekly meetings of our management team to monitor and address COVID developments on our business and the impact to our customers and associates.
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Implemented an internal communications plan to ensure our employees, customers and critical vendors are kept abreast of developments affecting our operations.
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Restricted all non-essential
travel and large external gatherings and instituted mandatory quarantine period for anyone that has known exposure to COVID.
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We kept our branch locations open following the onset of COVID, except where the employees of the branch had direct COVID exposure. Each branch was deep cleaned daily and following potential exposure at a branch, the facility was sprayed to disinfect for the virus.
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Expanded remote-access availability so that nearly all our workforce has the capability to work from home or other remote locations, if needed. All remotes access was provided in accordance with our compliance and information security policies designed to ensure customer data and other information is properly safeguarded. Much of our remote workforce has returned to the office.
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Instituted mandatory social distancing policies for those employees not working remotely. Members of certain operations teams were split into separate buildings or locations to create redundancy for key functions across the organization.
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The Company provided testing, free of charge, to all employees and we required testing of any employees with direct COVID exposure. Employees exposed were placed on quarantine based on the applicable CDC Guidelines.
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We required employees and customers to wear masks, prior to the state mandates and publicly assisted in communicating that message to the public to increase awareness of the benefits of wearing masks.
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We provided a vitamin and supplement package for employees to help build their immune systems as well as recover from the virus.
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We are encouraging our employees to take the COVID vaccinations when available.
We also implemented a short-term loan modification process in late March 2020 to provide temporary payment relief to borrowers who meet certain qualifications. This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on the impact of the COVID pandemic to our financial statements and results of operations, as well as our business operations.
Notwithstanding the foregoing actions, the COVID outbreak could still, among other things, greatly affect our routine and essential operations due to staff absenteeism, particularly among key personnel, further limit access to or result in further closures of our branch facilities and other physical offices, exacerbate operational, technical or security-related risks arising from a remote workforce, and result in adverse government or regulatory agency orders. The business and operations of our third-party service providers, many of whom perform critical services for our business, could also be significantly impacted, which in turn could impact us. As a result, we are currently unable to fully assess or predict the extent of the effects of COVID on our operations as the ultimate impact will depend on factors that are currently unknown and/or beyond our control.
Human Capital
We operate as a community bank offering a wide range of commercial banking services to consumers, small businesses, corporations, non-profits,
governmental entities and others. A cornerstone of our operating model is based on personal relationships with our customers. Therefore, our model is heavily dependent on our personnel to execute our strategy within each region supported by our line of business and operational areas of the Company. Our executive leadership is critical to the success of our Company as each executive participates in developing our corporate strategy, policy setting, and oversight of each of their respective operating areas. The executive officers have significant banking experience and/or tenure with the Company, including our Chairman, CEO and President who will have forty-five years with the Company later this year. Our regional operating philosophy is heavily dependent on our Regional CEOs/Presidents who drive the daily execution of our strategy, customer service, and local decision-making, across our twelve regions. On average, our seventeen Regional CEOs/Presidents have approximately twenty-five years of banking experience and twelve years of service with the Company.
At December 31, 2020, the Company employed approximately 1,400 full-time and 100 part-time employees all located in the state of Texas. Our management believes that our employee relations have been and will continue to be good. None of our employees are represented by collective bargaining agreements.
We seek to attract the best bankers in the markets we serve as well as key managers and associates to serve and build relationships with our customers. On a day-to-day
basis, these associates execute on our “Excellence in Customer Service” culture, including our 21 Non-Negotiables
of Customer Service. Initially, each new associate attends New Employee Orientation to gain an understanding of our culture, including our customer service approach, our organization, and our operating and other policies. From there, associates also receive specific training for their applicable area of service.
We then provide a number of internally developed training programs and encourage associates to attend selected external programs. We require certain areas (lending, trust, risk, operations) to obtain certifications for their current and future roles in the organization (for example, lenders are required to obtain the Credit Risk Certification from the Risk Management Association). The Company also provides educational assistance for employees to further their professional development. In fact, seven of our Regional CEO/Presidents started their careers with the Company and progressed to their current levels over time.
We embrace and promote a culture of diversity, equity, and inclusion to attract, recruit, retain, develop, and promote employees who represent the diverse communities we serve. Our employees bring their own unique backgrounds, beliefs, cultures, and experiences to our organization. We celebrate our diverse and inclusive workplace as it brings new ideas, perspectives, and ways to enhance our overall customer and employee experience. Of our seventeen Regional CEO/Presidents, four are women (three of whom were promoted to these positions during their last eighteen months) and one is Hispanic.
The Company provides, in addition to competitive salaries, either at the Company’s expense or through employee deductions, benefits to its associates to help protect their health and well-being, including medical, dental, vision, employee assistance, short and long-term disability, life insurance, and vacation. Additionally, through our 401(k) retirement benefits, and profit-sharing contributions (which also contains an employee stock ownership plan or ESOP feature), the Company facilitates its associate’s future financial well-being. These benefits when combined with incentive compensation programs, both cash and equity based, serve as rewards for performance but also as retention vehicles for our employee base. The Company has strong relationships with its employee base leading to an average tenure of approximately six years with the Company (including its predecessor banks). During 2020 and 2019, the Company incurred expenses totaling approximately $27.20 million and $22.38 million, respectively, for these benefits.
Understanding and supporting our communities has been a critical part of our Company’s success. Annually, we perform a Company-wide day of service to help improve the communities we live in and serve. In 2020, this amounted to over approximately 5,000 hours of community service across our footprint.
Overall, the attraction, development and retention of our executives, regional presidents and associates are integral to the performance of our Company which ultimately drives value to our shareholders in the form of dividends and price appreciation of our common stock. Accordingly, our Board of Directors participates in the oversight of our employment practices and policies, through the Compensation Committee. Our board sets the overall “tone at the top” and holds executive management accountable for embodying, maintaining and communicating our culture to employees.
Supervision and Regulation
Both federal and state laws extensively regulate bank holding companies, financial holding companies and banks. These laws (and the regulations promulgated thereunder) are primarily intended to protect depositors and the deposit insurance fund (the “DIF”) of the Federal Deposit Insurance Corporation, or the FDIC. The following information describes particular laws and regulatory provisions relating to financial holding companies and banks. This discussion is qualified in its entirety by reference to the particular laws and regulatory provisions. A change in any of these laws or regulations may have a material effect on our business and the business of our subsidiaries. Recent political developments, including the change in administration of the United States federal government, have added additional uncertainty in the implementation, scope and timing of regulatory reforms.
Bank Holding Companies and Financial Holding Companies
Historically, the activities of bank holding companies were limited to the business of banking and activities closely related or incidental to banking. Bank holding companies were generally prohibited from acquiring control of any company that was not a bank and from engaging in any business other than the business of banking or managing and controlling banks. The Gramm-Leach-Bliley Act, which took effect on March 12, 2000, dismantled many Depression-era
restrictions against affiliations between banking, securities and insurance firms by permitting bank holding companies to engage in a broader range of financial activities, so long as certain safeguards are observed. Specifically, bank holding companies may elect to become “financial holding companies” that may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental to a financial activity. Thus, with the enactment of the Gramm-Leach-Bliley Act, banks, security firms and insurance companies find it easier to acquire or affiliate with each other and cross-sell financial products. The Gramm-Leach-Bliley Act permits a single financial services organization to offer a more complete array of financial products and services than historically was permitted.
A financial holding company is essentially a bank holding company with significantly expanded powers. Under the Gramm-Leach-Bliley Act, in addition to traditional lending activities, the following activities are among those that are deemed “financial in nature” for financial holding companies: securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, activities which the Federal Reserve Board determines to be closely related to banking, and certain merchant banking activities.
We elected to become a financial holding company in September 2001. As a financial holding company, we have very broad discretion to affiliate with securities firms and insurance companies, provide merchant banking services, and engage in other activities that the Federal Reserve Board has deemed financial in nature. In order to continue as a financial holding company, we must continue to be well-capitalized, well-managed and maintain compliance with the Community Reinvestment Act. Depending on the types of financial activities that we may elect to engage in, under the Gramm-Leach-Bliley Act’s functional regulation principles, we may become subject to supervision by additional government agencies. The election to be treated as a financial holding company increases our ability to offer financial products and services that historically we were either unable to provide or were only able to provide on a limited basis. As a result, we will face increased competition in the markets for any new financial products and services that we may offer. Likewise, an increased amount of consolidation among banks and securities firms or banks and insurance firms could result in a growing number of large financial institutions that could compete aggressively with us.
Mergers and Acquisitions
We generally must obtain approval from the banking regulators before we can acquire other financial institutions. We may not engage in certain acquisitions if we are undercapitalized. Furthermore, the BHCA provides that the Federal Reserve Board cannot approve any acquisition, merger or consolidation that may substantially lessen competition in the banking industry, create a monopoly in any section of the country, or be a restraint of trade. However, the Federal Reserve Board may approve such a transaction if the convenience and needs of the community clearly outweigh any anti-competitive effects. Specifically, the Federal Reserve Board would consider, among other factors, the expected benefits to the public (greater convenience, increased competition, greater efficiency, etc.) against the risks of possible adverse effects (undue concentration of resources, decreased or unfair competition, conflicts of interest, unsound banking practices, etc.).
Under the BHCA, the Company must obtain the prior approval of the Federal Reserve Board, or acting under delegated authority, the Federal Reserve Bank of Dallas before (1) acquiring direct or indirect ownership or control of any class of voting securities of any bank or bank holding company if, after the acquisition, the Company would directly or indirectly own or control 5% or more of the class, (2) acquiring all or substantially all of the assets of another bank or bank holding company, or (3) merging or consolidating with another bank holding company.
The Change in Bank Control Act of 1978, as amended, or the CIBCA, and the related regulations of the Federal Reserve Board require any person or groups of persons acting in concert (except for companies required to make application under the BHCA), to file a written notice with the Federal Reserve Board before the person or group acquires control of the Company. The CIBCA defines “control” as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank. A rebuttable presumption of control arises under the CIBCA where a person or group controls 10% or more, but less than 25%, of a class of the voting stock of a company or insured bank which is a reporting company under the Securities Exchange Act of 1934, as amended, such as the Company, or such ownership interest is greater than the ownership interest held by any other person or group.
Banks
Federal and state laws and regulations that govern banks have the effect of, among other things, regulating the scope of business, investments, cash reserves, the purpose and nature of loans, the maximum interest rate chargeable on loans, the amount of dividends declared, and required capitalization ratios.
Banks organized as national banking associations under the National Bank Act are subject to regulation and examination by the Office of the Comptroller of the Currency, or OCC. Effective December 30, 2012, we consolidated our then eleven bank charters into one, that being our Abilene charter. As a result, the OCC now supervises, regulates and regularly examines the following subsidiaries:
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First Financial Bank, N.A.;
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First Financial Trust & Asset Management Company, N.A.; and
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First Technology Services, Inc. (a wholly-owned subsidiary of First Financial Bank, N.A.)
The OCC’s supervision and regulation of banks is primarily intended to protect the interests of depositors. The National Bank Act:
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requires each national banking association to maintain reserves against deposits;
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restricts the nature and amount of loans that may be made and the interest that may be charged; and
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restricts investments and other activities.
Deposit Insurance Coverage and Assessments
Our subsidiary bank is a member of the FDIC. Through the DIF, the FDIC provides deposit insurance protection that covers all deposit accounts in FDIC-insured depository institutions up to applicable limits (currently, $250 thousand per depositor).
Our subsidiary bank must pay assessments to the FDIC under a risk-based assessment system for this federal deposit insurance protection. FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. Institutions assigned to higher risk classifications (i.e., institutions that pose a greater risk of loss to the DIF) pay assessments at higher rates than institutions assigned to lower risk classifications. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to bank regulators. In addition, the FDIC can impose special assessments to cover shortages in the DIF and has imposed special assessments in the past.
In October 2010, the FDIC adopted a new Restoration Plan for the DIF to ensure that the fund reserve ratio reached 1.35% by September 30, 2020, as required by the Dodd-Frank Act. On April 26, 2016, the FDIC adopted a rule amending pricing for deposit insurance for institutions with less than $10 billion in assets effective the quarter after the fund reserve ratio reached 1.15%. The fund reserve ratio reached 1.15% effective as of June 30, 2016. As a result, our subsidiary bank’s assessment rate was decreased to the rate stated above effective July 1, 2016. The Dodd-Frank Act also eliminated the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.
The Dodd-Frank Act required the FDIC to offset the effect of increasing the reserve ratio on insured depository institutions with total consolidated assets of less than $10 billion. In September 2018, the reserve ratio reached 1.36% at which time banks with assets of less than $10 billion were awarded assessment credits for their portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%. When the reserve ratio reached 1.40% in June 2019, the FDIC applied these credits to the September 30, 2019, December 31, 2019, March 31, 2020 and June 30, 2020 assessment invoices. Our subsidiary bank’s assessment credit totaled $1.85 million of which $522 thousand, $525 thousand, $541 thousand and $264 thousand, respectively, were used to fully offset the September 30, 2019, December 31, 2019 and March 31, 2020 assessment invoices while the June 30, 2020 assessment invoice was significantly reduced by the remaining credits. As a result of our subsidiary bank exceeding $10 billion in assets as of December 31, 2020, our subsidiary bank is no longer eligible to utilize credits to offset its FDIC assessment.
As required by the Dodd-Frank Act, the FDIC also revised the deposit insurance assessment system, effective April 1, 2011, to base assessments on the average total consolidated assets of insured depository institutions during the assessment period, less the average tangible equity of the institution during the assessment period, as opposed to solely considering deposits at an institution. This base assessment change necessitated that the FDIC adjust the assessment rates to ensure that the revenue collected under the new assessment system will approximately equal that under the existing assessment system.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, or FIRREA, an FDIC-insured depository institution can be held liable for any losses incurred by the FDIC in connection with (1) the “default” of one of its FDIC-insured subsidiaries or (2) any assistance provided by the FDIC to one of its FDIC-receivers, and “in danger of default” is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance.
The FDIC is also empowered to regulate interest rates paid by insured banks. Approval of the FDIC is also required before an insured bank retires any part of its common or preferred stock, or any capital notes or debentures.
Payment of Dividends
We are a legal entity separate and distinct from our banking and other subsidiaries. We receive most of our revenue from dividends paid to us by our bank and trust company subsidiaries. Described below are some of the laws and regulations that apply when either we or our subsidiaries pay or paid dividends.
The Federal Reserve Board, the OCC and the FDIC have issued policy statements that recommend that bank holding companies and insured banks should generally only pay dividends to the extent net income is sufficient to cover both cash dividends and a rate of earnings retention consistent with capital needs, asset quality and overall financial condition. Further, the Federal Reserve Board’s policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries. In addition, the Federal Reserve Board has indicated that each bank holding company should carefully review its dividend policy, and has discouraged payment ratios that are at maximum allowable levels, which is the maximum dividend amount that may be issued and allow the company to still maintain its target Tier 1 capital ratio, unless both asset quality and capital are very strong.
To pay dividends, our subsidiaries must maintain adequate capital above regulatory guidelines. Under federal law, our subsidiary bank cannot pay a dividend if, after paying the dividend, the bank would be “undercapitalized.” In addition, if the FDIC believes that a bank under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the FDIC may require, after notice and hearing, that such bank cease and desist from the unsafe practice. The FDIC and the OCC have each indicated paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice.
National banks are required by federal law to obtain the prior approval of the OCC in order to declare and pay dividends if the total of all dividends declared in any calendar year would exceed the total of (1) such bank’s net profits (as defined and interpreted by regulation) for that year plus (2) its retained net profits (as defined and interpreted by regulation) for the preceding two calendar years, less any required transfers to surplus. In addition, these banks may only pay dividends to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation).
Our subsidiaries paid aggregate dividends to us of $87.50 million in 2020 and $84.50 million in 2019. Under the dividend restrictions discussed above, as of December 31, 2020, our subsidiaries could have declared in the aggregate additional dividends of $289.68 million from retained net profits, without obtaining regulatory approvals.
Federal Income Tax
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law with sweeping modifications to the Internal Revenue Code. The primary change for the Company was to lower the corporate income tax rate to 21% from 35%. The Company’s deferred tax assets and liabilities were re-measured
based on the income tax rates at which they are expected to reverse in the future, which is generally 21%. The provisional amount recorded related to the re-measurement
of the Company’s deferred tax liability balance was $7.65 million, a reduction of income tax expense for the year ended December 31, 2017. The Company subsequently updated its estimate of the impact to our deferred tax balances based on the proposed regulations issued to date and recorded an additional reduction of income tax expense for the year ended December 31, 2018 of $664 thousand. No additional adjustment amounts were recorded for the years ended December 31, 2019 and 2020.
Affiliate Transactions
The Federal Reserve Act, the Federal Deposit Insurance Act (“FDIA”) and the rules adopted under these statutes restrict the extent to which we can borrow or otherwise obtain credit from, or engage in certain other transactions with, our subsidiaries. These laws regulate “covered transactions” between insured depository institutions and their subsidiaries, on the one hand, and their non-depository
affiliates, on the other hand. The Dodd-Frank Act expanded the definition of affiliate to make any investment fund, including a mutual fund, for which a depository institution or its affiliates serve as an investment advisor an affiliate of the depository institution. “Covered transactions” include a loan or extension of credit to a non-depository
affiliate, a purchase of securities issued by such an affiliate, a purchase of assets from such an affiliate (unless otherwise exempted by the Federal Reserve Board), an acceptance of securities issued by such an affiliate as collateral for a loan, and an issuance of a guarantee, acceptance, or letter of credit for the benefit of such an affiliate. The Dodd-Frank Act extended the limitations to derivative transactions, repurchase agreements and securities lending and borrowing transactions that create credit exposure to an affiliate or an insider. The “covered transactions” that an insured depository institution and its subsidiaries are permitted to engage in with their non-depository
affiliates are limited to the following
amounts: (1) in the case of any one such affiliate, the aggregate amount of “covered transactions” cannot exceed ten percent of the capital stock and the surplus of the insured depository institution; and (2) in the case of all affiliates, the aggregate amount of “covered transactions” cannot exceed twenty percent of the capital stock and surplus of the insured depository institution. In addition, extensions of credit that constitute “covered transactions” must be collateralized in prescribed amounts. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Finally, when we and our subsidiaries conduct transactions internally among us, we are required to do so at arm’s length.
Loans to Directors, Executive Officers and Principal Shareholders
The authority of our subsidiary bank to extend credit to our directors, executive officers and principal shareholders, including their immediate family members, corporations and other entities that they control, is subject to substantial restrictions and requirements under Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder, as well as the Sarbanes-Oxley Act of 2002. These statutes and regulations impose specific limits on the amount of loans our subsidiary bank may make to directors and other insiders, and specified approval procedures must be followed in making loans that exceed certain amounts. In addition, all loans our subsidiary bank makes to directors and other insiders must satisfy the following requirements:
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the loans must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not affiliated with us or our subsidiary bank;
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the subsidiary bank must follow credit underwriting procedures at least as stringent as those applicable to comparable transactions with persons who are not affiliated with us or our subsidiary bank; and
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the loans must not involve a greater than normal risk of non-payment
or include other features not favorable to our subsidiary bank.
Furthermore, our subsidiary bank must periodically report all loans made to directors and other insiders to the bank regulators, and these loans are closely scrutinized by the regulators for compliance with Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O. Each loan to directors or other insiders must be pre-approved
by the bank’s board of directors with the interested director abstaining from voting.
Capital
We and our bank subsidiary are each required to comply with applicable capital adequacy standards established by the Federal Reserve Board and the OCC, respectively. The current risk-based capital standards applicable to us and our bank subsidiary, parts of which are currently in the process of being phased-in,
are based on the December 2010 final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision (the “Basel Committee”).
In July 2013, the federal bank regulators approved final rules (the “Basel III Rules”) implementing the Basel III framework as well as certain provisions of the Dodd-Frank Act. The Basel III Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries. The Basel III Rules became effective for us and our subsidiary bank on January 1, 2015 (subject to a phase-in
period for certain provisions).
The Basel III Rules established three components of regulatory capital: (1) common equity tier 1 capital (“CET1”), (2) additional tier 1 capital, and (3) total capital. Tier 1 capital is the sum of CET1 and additional tier 1 capital instruments meeting certain revised requirements. Total capital is the sum of tier 1 capital and tier 2 capital elements. Under the Basel III Rules, for most banking organizations, the most common form of additional tier 1 capital is non-cumulative
perpetual preferred stock and the most common form of tier 2 capital is subordinated notes and a portion of the allocation for credit losses, in each case, subject to the Basel III Rules’ specific requirements. As of December 31, 2020, we do not have any non-cumulative
perpetual preferred stock or subordinated notes. CET1, tier 1 capital, and total capital serve as the numerators for three prescribed regulatory capital ratios. Risk-weighted assets, calculated using the standardized approach in the Basel III Rules for us and our subsidiary bank, provide the denominator for such ratios. There is also a leverage capital ratio that compares tier 1 capital to average total assets.
Pursuant to the Basel III Rules, the effects of certain accumulated other comprehensive income or loss (“AOCI”) items are not excluded; however, “non-advanced
approaches banking organizations,” including us and our subsidiary bank, could make a one-time
permanent election to continue to exclude these items. The Company made its one-time,
permanent election to continue to exclude AOCI from capital in its filing with the Federal Reserve Board and OCC for the quarter ended March 31, 2015. If the Company would not have made this election, unrealized gains and losses would have been included in the calculation of its regulatory capital. The Basel III Rules also preclude certain hybrid securities, such as trust preferred securities issued prior to May 19, 2010, from inclusion in our tier 1 capital, subject to grandfathering in the case of companies, such as us, that had less than $15 billion in total consolidated assets as of December 31, 2009.
Under the Basel III Rules, the minimum capital ratios effective as of January 1, 2015 are:
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4.5% CET1 to risk-weighted assets;
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6.0% tier 1 capital to risk-weighted assets;
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8.0% total capital to risk-weighted assets; and
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4.0% tier 1 capital to average consolidated assets (known as the “leverage ratio”).
The Basel III Rules established a “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital requirements. The conservation buffer, when added to the capital requirements, resulted in the following minimum ratios: (i) a CET1 risk-based capital ratio of 7.0%, (ii) a tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The new capital conservation buffer requirement began being phased in beginning in January 2016 at 0.625% of risk-weighted assets and increased by that amount each year until fully implemented in January 2019. At December 31, 2020, the required capital conservation buffer was 2.5%. An institution is subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffer amount.
The Basel III Rules prescribed a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.
With respect to our bank subsidiary, the Basel III Rules also revised the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.”
As of December 31, 2020, we had a total risk-based capital ratio of 22.03%, a tier 1 capital to risk-weighted asset ratio of 20.79%, a CET1 to risk-weighted assets ratio of 20.79% and a leverage ratio of 11.86%. These regulatory capital ratios were calculated under the Basel III Rules.
Prompt Corrective Action.
A banking organization’s capital plays an important role in connection with regulatory enforcement as well. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.
Under current regulations, our subsidiary bank was “well capitalized” as of December 31, 2020.
Our Support of Our Subsidiaries
Under Federal Reserve Board policy, we are expected to commit resources to act as a source of strength to support each of our subsidiaries. The Dodd-Frank Act codified this policy as a statutory requirement. This support may be required at times when, absent such Federal Reserve Board policy, we would not otherwise be required to provide it. In addition, any loans we make to our subsidiaries would be subordinate in right of payment to deposits and to other indebtedness of our subsidiaries. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and be subject to a priority of payment.
Under the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC (either as a result of the default of a banking subsidiary or related to FDIC assistance provided to a subsidiary in danger of default) our other subsidiaries may be assessed for the FDIC’s loss.
Safe and Sound Banking Practices.
Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve Board’s Regulation Y, for example, generally requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the bank holding company’s consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1.0 million for each day the activity continues.
Interstate Banking and Branching
Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 amended the Federal Deposit Insurance Act and certain other statutes to permit state and national banks with different home states to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a participating bank had passed legislation prior to May 31, 1997 expressly prohibiting interstate mergers. Under the Riegle-Neal Act amendments, once a state or national bank has established branches in a state, that bank may establish and acquire additional branches at any location in the state at which any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. If a state opted out of interstate branching within the specified time period, no bank in any other state may establish a branch in the state which has opted out, whether through an acquisition or de novo.
However, under the Dodd-Frank Act, the national branching requirements have been relaxed and national banks and state banks are able to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state.
The Federal Deposit Insurance Act, or FDIA, requires that the FDIC review (1) any merger or consolidation by or with an insured bank, or (2) any establishment of branches by an insured bank. Additionally, the Texas Department of Banking accepts applications for interstate merger and branching transactions, subject to certain limitations on ages of the banks to be acquired and the total amount of deposits within the state a bank or financial holding company may control. Since our primary service area is Texas, we do not expect that the ability to operate in other states will have any material impact on our growth strategy. We may, however, face increased competition from out-of-state
banks that branch or make acquisitions in our primary markets in Texas.
Community Reinvestment Act of 1977
The Community Reinvestment Act of 1977, or CRA, subjects a bank to regulatory assessment to determine if the institution meets the credit needs of its entire community, including low-
and moderate-income neighborhoods served by the bank, and to take that determination into account in its evaluation of any application made by such bank for, among other things, approval of the acquisition or establishment of a branch or other depository facility, an office relocation, a merger, or the acquisition of shares of capital stock of another financial institution. The regulatory authority prepares a written evaluation of an institution’s record of meeting the credit needs of its entire community and assigns a rating. These ratings are “Outstanding,” “Satisfactory,” “Needs Improvement” and “Substantial Non-Compliance.”
Institutions with ratings lower than “Satisfactory” may be restricted from engaging in the aforementioned activities. We believe our subsidiary bank meets the credit needs of the communities in which it operates. Our subsidiary bank received a “Satisfactory” rating in its most recent assessment of its performance under the CRA by federal regulators.
Monitoring and Reporting Suspicious Activity
Under the Bank Secrecy Act, or BSA, we are required to monitor and report unusual or suspicious account activity that might signify money laundering, tax evasion or other criminal activities, as well as transactions involving the transfer or withdrawal of amounts in excess of prescribed limits. The BSA is sometimes referred to as an “anti-money laundering” law (“AML”). Several AML acts, including provisions in Title III of the USA PATRIOT Act of 2001, have been enacted up to the present to amend the BSA. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures and controls generally require financial institutions to take reasonable steps:
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to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;
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to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;
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to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and
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to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.
Under the USA PATRIOT Act, financial institutions are also required to establish anti-money laundering programs. The USA PATRIOT Act sets forth minimum standards for these programs, including:
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the development of internal policies, procedures, and controls;
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the designation of a compliance officer;
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an ongoing employee training program; and
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an independent audit function to test the programs.
In addition, under the USA PATRIOT Act, the Secretary of the U.S. Department of the Treasury, or Treasury, has adopted rules addressing a number of related issues, including increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institution complying with these rules will not be deemed to violate the privacy provisions of the Gramm-Leach-Bliley Act that are discussed below. Finally, under the regulations of the Office of Foreign Asset Control, or OFAC, we are required to monitor and block transactions with certain “specially designated nationals” who OFAC has determined pose a risk to U.S. national security.
Incentive Compensation
In June 2010, the Federal Reserve Board, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
The Federal Reserve Board will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
In addition, Section 956 of the Dodd-Frank Act required certain regulators (including the FDIC, Securities and Exchanges Commission (“SEC”) and Federal Reserve Board) to adopt requirements or guidelines prohibiting excessive compensation. In June 2016, the Federal Reserve, jointly with five other federal regulators, published a proposed rule in response to Section 956 of the Dodd-Frank Act, which requires implementation of regulations or guidelines to: (1) prohibit incentive-based payment arrangements that encourage inappropriate risks by certain financial institutions by providing excessive compensation or that could lead to material financial loss, and (2) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator.
The proposed rule identifies three categories of institutions that would be covered by these regulations based on average total consolidated assets, applying less prescriptive incentive-based compensation program requirements to the smallest covered institutions (Level 3) and progressively more rigorous requirements to the larger covered institutions (Level 1). Under the proposed rule, we would fall into the smallest category (Level 3), which applies to financial institutions with average total consolidated assets greater than $1.0 billion and less than $50 billion. The proposed rules would establish general qualitative requirements applicable to all covered entities, which would include (i) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (ii) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (iii) establishing requirements for performance measures to appropriately balance risk and reward; (iv) requiring board of director oversight of incentive arrangements; and (v) mandating appropriate recordkeeping. Under the proposed rule, larger financial institutions with total consolidated assets of at least $50 billion would also be subject to additional requirements applicable to such institutions’ “senior executive officers” and “significant risk-takers.” These additional requirements would not be applicable to us because we currently have less than $50 billion in total consolidated assets. Comments on the proposed rule were due by July 22, 2016. As of the date of this document, the final rule has not yet been published by these regulators.
In addition, the Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding
vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called
“golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. The legislation also authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded or not. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.
Consumer Laws and Regulations
We are also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the following list is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, The Fair and Accurate Credit Transactions Act, The Real Estate Settlement Procedures Act and the Fair Housing Act, among others. These laws and regulations, among other things, prohibit discrimination on the basis of race, gender or other designated characteristics and mandate various disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. These and other laws also limit finance charges or other fees or charges earned in our activities. We must comply with the applicable provisions of these consumer protection laws and regulations as part of our ongoing customer relations.
Consumer Financial Protection Bureau
The Dodd-Frank Act created a new, independent federal agency called the Consumer Financial Protection Bureau (“CFPB”), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. Given the Bank has exceeded $10 billion in assets for each of the last three quarterly periods and expects to exceed $10 billion for the quarterly period ended March 31, 2021, the Bank will be subject to regulation by the CFPB going forward. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits the state attorney general to enforce compliance with both the state and federal laws and regulations.
Technology Risk Management and Consumer Privacy
State and federal banking regulators have issued various policy statements emphasizing the importance of technology risk management and supervision in evaluating the safety and soundness of depository institutions with respect to banks that contract with outside vendors to provide data processing and core banking functions. The use of technology-related products, services, delivery channels and processes exposes a bank to various risks, particularly operational, privacy, security, strategic, reputation and compliance risk. Banks are generally expected to prudently manage technology-related risks as part of their comprehensive risk management policies by identifying, measuring, monitoring and controlling risks associated with the use of technology.
Under Section 501 of the Gramm-Leach-Bliley Act, the federal banking agencies have established appropriate standards for financial institutions regarding the implementation of safeguards to ensure the security and confidentiality of customer records and information, protection against any anticipated threats or hazards to the security or integrity of such records and protection against unauthorized access to or use of such records or information in a way that could result in substantial harm or inconvenience to a customer. Among other matters, the rules require each bank to implement a comprehensive written information security program that includes administrative, technical and physical safeguards relating to customer information.
Under the Gramm-Leach-Bliley Act, a financial institution must also provide its customers with a notice of privacy policies and practices. Section 502 prohibits a financial institution from disclosing nonpublic personal information about a customer to nonaffiliated third parties unless the institution satisfies various notice and opt-out
requirements and the customer has not elected to opt out of the disclosure. Under Section 504, the agencies are
authorized to issue regulations as necessary to implement notice requirements and restrictions on a financial institution’s ability to disclose nonpublic personal information about customers to nonaffiliated third parties. Under the final rule the regulators adopted, all banks must develop initial and annual privacy notices which describe in general terms the bank’s information sharing practices. Banks that share nonpublic personal information about customers with nonaffiliated third parties must also provide customers with an opt-out
notice and a reasonable period of time for the customer to opt out of any such disclosure (with certain exceptions). Limitations are placed on the extent to which a bank can disclose an account number or access code for credit card, deposit or transaction accounts to any nonaffiliated third party for use in marketing.
Concentrated Commercial Real Estate Lending Regulations
The federal banking agencies have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and non-farm
residential properties and loans for construction, land development, and other land represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices that address the following key elements: including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending.
UDAP and UDAAP
Banking regulatory agencies have increasingly used a general consumer protection statute to address “unethical” or otherwise “bad” business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act, referred to as the FTC Act, which is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce. “Unjustified consumer injury” is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with UDAP laws and regulations. However, UDAP laws and regulations have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices,” referred to as UDAAP, which have been delegated to the CFPB for supervision. The CFPB has published its first Supervision and Examination Manual that addresses compliance with and the examination of UDAAP.
Monetary Policy
Banks are affected by the credit policies of monetary authorities, including the Federal Reserve Board, that affect the national supply of credit. The Federal Reserve Board regulates the supply of credit in order to influence general economic conditions, primarily through open market operations in United States government obligations, varying the discount rate on financial institution borrowings, varying reserve requirements against financial institution deposits, and restricting certain borrowings by financial institutions and their subsidiaries. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future.
Enforcement Powers of Federal Banking Agencies
The Federal Reserve Board and other state and federal banking agencies and regulators have broad enforcement powers, including the power to terminate deposit insurance, issue cease-and-desist
orders, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Our failure to comply with applicable laws, regulations and other regulatory pronouncements could subject us, as well as our officers and directors, to administrative sanctions and potentially substantial civil penalties.
Regulatory Reform and Legislation
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the Company or our subsidiaries could have a material effect on the Company’s business, financial condition and results of operations.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act, which was enacted in July 2010, effected a fundamental restructuring of federal banking regulation. In addition to those provisions discussed above, among the Dodd-Frank Act provisions that have affected us are the following:
•
creation of a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms;
•
elimination of the federal statutory prohibition against the payment of interest on business checking accounts;
•
prohibition on state-chartered banks engaging in derivatives transactions unless the loans to one borrower of the state in which the bank is chartered takes into consideration credit exposure to derivative transactions. For this purpose, derivative transactions include any contract, agreement, swap, warrant, note or option that is based in whole or in part on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodity securities, currencies, interest or other rates, indices or other assets;
•
requirement that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. On June 29, 2011, the Federal Reserve Board set the interchange rate cap at $0.21 per transaction and 5 basis points multiplied by the value of the transaction. The restrictions on interchange fees apply to banks that, together with their affiliates, have assets of $10 billion or more; however, on November 20, 2020, the federal bank regulatory agencies announced an interim final rule that provides temporary relief for certain community banking organizations that have crossed the threshold as of December 31, 2020 if they had less than $10 billion in assets as of December 31, 2019. Under the interim final rule, these banks will generally have until 2022 to either reduce their size to below $10 billion in assets, or to prepare for the regulatory and reporting standards under the Dodd Frank Act; and
•
restrictions under the Volcker Rule of the Company’s ability to engage in proprietary trading and to invest in, sponsor and engage in certain types of transactions with certain private funds. The Company initially had until July 15, 2015 to fully conform to the Volcker Rules restrictions. In 2018, banks smaller than $10 billion in assets were provided with an exception to the Volcker Rule. However, the Company is now subject to the Volcker Rule now that it has exceeded $10 billion in assets.
Many of the Dodd-Frank Act’s provisions are still subject to the final rulemaking by federal banking agencies, and the implication of the Dodd-Frank Act for the Company’s business will depend to a large extent on how such rules are adopted and implemented. The Company’s management continues to review actively the provisions of the Dodd-Frank Act and assess its probable impact on its business, financial condition, and results of operations.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov
. You may obtain copies of our filings on the SEC website. Our website is http://www.ffin.com
. You may also obtain copies of our annual, quarterly and special reports, proxy statements and certain other information filed with the SEC, as well as amendments thereto, free of charge from our website. These documents are posted to our web site after we have filed them with the SEC. Our corporate governance guidelines, including our code of conduct applicable to all our employees, officers and directors, as well as the charters of our audit and nominating committees, are available at www.ffin.com
. The foregoing information is also available in print to any shareholder who requests it. Except as explicitly provided, information on any web site is not incorporated into this Form 10-K
or our other securities filings and is not a part of them.

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ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS
Our business, financial condition, operating results and cash flows can be impacted by a number of factors, including but not limited to those set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results and other forward-looking statements that we make from time to time in our news releases, annual reports and other written communications, as well as oral forward-looking statements, and other statements made from time to time by our representatives.
Risks Related to Our Business
Interest Rate Risks
We are subject to interest rate risk.
Our profitability is dependent to a large extent on our net interest income, which is the difference between interest income we earn as a result of interest paid to us on loans and investments and interest we pay to third parties such as our depositors and those from whom we borrow funds. Like most financial institutions, we are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, and (iii) the average duration of our securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and investments, our net interest income, and earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and investments fall more quickly than the interest rates paid on deposits and other borrowings.
The Federal Reserve increased rates 100 basis points in 2018 but then decreased rates 75 basis points during the third and fourth quarters of 2019 and then an additional 150 basis points in the first quarter of 2020, resulting in a current target rate range of zero to 25 basis points. Today, there is substantial uncertainty regarding future interest rates. Increases in interest rates can have negative impacts on our business, including reducing our customers’ desire to borrow money from us or adversely affecting their ability to repay their outstanding loans by increasing their debt obligations through the periodic reset of adjustable interest rate loans. If our borrowers’ ability to pay their loans is impaired by increasing interest payment obligations, our level of non-performing
assets would increase, producing an adverse effect on operating results. Asset values, especially commercial real estate as collateral, securities or other fixed rate earning assets, can decline significantly with relatively minor changes in interest rates. Conversely, decreases in interest rates can effect the amount of interest we earn on our loans and investment securities, which could have a material adverse effect on the Company’s financial condition and results of operations. Although we have implemented strategies which we believe reduce the potential effects of adverse changes in interest rates on our results of operations, these strategies may not always be successful. Any of these events could adversely affect our results of operations, financial condition and liquidity.
Uncertainty relating to the London interbank offered rate (“LIBOR”) calculation process and potential phasing out of LIBOR may adversely affect us.
On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, debentures, or other securities or financial arrangements, given LIBOR’s role in determining market interest rates globally. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments and borrowings. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have an effect on our financial condition or results of operations.
Credit and Lending Risks
In our business, we must effectively manage our credit risk.
As a lender, we are exposed to the risk that our loan customers may not repay their loans according to the terms of these loans and the collateral securing the payment of these loans may be inadequately documented or may be insufficient to fully compensate us for the outstanding balance of the loan plus the costs to dispose of the collateral. We may experience significant loan losses, which could have a material adverse effect on our operating results and financial condition. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the diversification by industry of our commercial loan portfolio, the amount of nonperforming loans and related collateral, the volume, growth and composition of our loan portfolio, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers and the evaluation of our loan portfolio through our internal loan review process and other relevant factors.
We maintain an allowance for credit losses, which is an allowance established through a provision for credit losses charged to expense that represents management’s best estimate of probable losses inherent in our loan portfolio. Additional credit losses will likely occur in the future and may occur at a rate greater than we have experienced to date. In determining the amount of the allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to the allowance could materially decrease our net income.
In addition, banking regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize further charge-offs, based on judgments different than those of our management. Any increase in our allowance for credit losses or charge-offs as required by these regulatory agencies could have a material negative effect on our operating results and financial condition.
New accounting standard, effective January
1, 2020, significantly changes how we recognize credit losses and may have a material impact on our financial condition or results of operations
.
Effective January 1, 2020, the Company implemented the provision of Accounting Standards Update (“ASU”) 2016-13,
“Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”
ASU 2016-13
represents a comprehensive change in estimating the allowance for credit losses from the previous “incurred loss” model of losses inherent in the loan portfolio to a current “expected loss” model, which encompasses losses expected to be incurred over the life of the portfolio.
The measurement of expected credit losses under ASU 2016-13
is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model previously required under generally accepted accounting principles, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of ASU 2016-13
could materially affect how we determine our allowance for credit losses and may require us to significantly increase our allowance. Moreover, ASU 2016-13
may create more volatility in the level of our allowance for credit losses. If we are required to materially increase our level of allowance for credit losses for any reason, such increase could adversely affect our business, financial condition and results of operations.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Environmental reviews of real property before initiating foreclosure actions may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, financial condition and results of operations.
The value of real estate collateral may fluctuate significantly resulting in an under-collateralized loan portfolio.
The market value of real estate, particularly real estate held-for-investment
(“HFI”), can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for our loan portfolio were to decline materially, a significant part of our loan portfolio could become under-collateralized. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then, in the event of foreclosure, we may not be able to realize the amount of collateral that we anticipated at the time of originating the loan. This could have a material adverse effect on our provision for credit losses and our operating results and financial condition.
Liquidity Risk
We are subject to liquidity risk.
The Company requires liquidity to meet our deposit and other obligations as they come due. The Company’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry or the general economy. Factors that could reduce its access to liquidity sources include a downturn in the Texas market, difficult credit markets or adverse regulatory actions against the Company. The Company’s access to deposits may also be affected by the liquidity needs of its depositors. In particular, a substantial majority of the Company’s liabilities are demand, savings, interest checking and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or sold in the same time frame. The Company may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of its depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on the Company’s business, financial condition and result of operations.
Operational Risks
Our accounting estimates and risk management processes rely on analytical and forecasting models.
The processes we use to estimate our allowance for credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates depends upon the use of analytical and forecasting models. In addition, these models are used to calculate fair value of our assets and liabilities when we acquire other financial institutions. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models we use for determining our current expected credit losses are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If the models we use to measure the fair value of financial instruments is inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations.
The value of our goodwill and other intangible assets may decline in the future.
As of December 31, 2020, we had $318.39 million of goodwill and other intangible assets. A significant decline in our financial condition, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of our common stock may necessitate taking charges in the future related to the impairment of our goodwill and other intangible assets. If we were to conclude that a future write-down of goodwill and other intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our financial condition and results of operations.
Breakdowns in our internal controls and procedures could have an adverse effect on us.
We believe our internal control system as currently documented and functioning is adequate to provide reasonable assurance over our internal controls. Nevertheless, because of the inherent limitation in administering a cost effective control system, misstatements due to error or fraud may occur and not be detected. Breakdowns in our internal controls and procedures could occur in the future, and any such breakdowns could have an adverse effect on us. See “Item 9A - Controls and Procedures” for additional information.
New lines of business or new products and services may subject the Company to additional risks.
From time to time, the Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or products and services, the Company may invest significant time and resources. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. If we are unable to successfully manage these risks in the development and implementation of new lines of business or new products or services, it could have a material adverse effect on the Company’s business, financial condition and result of operations.
Our reputation and business could be damaged by negative publicity.
Reputation risk, or the risk to our earnings and capital by negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, perception of our environmental, social and governance practices and disclosures, regulatory compliance, mergers and acquisitions, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct. Negative public opinion could also result from adverse news or publicity that impairs the reputation of the financial services industry. In addition, adverse publicity or negative information posted on social media, whether or not factually correct, may adversely impact our business prospects or financial results.
First Financial Bankshares, Inc. relies on dividends from its subsidiaries for most of its revenue.
First Financial Bankshares,
Inc. is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenue from dividends paid by its subsidiaries. These dividends are the principal source of funds to pay dividends on the Company’s common stock to shareholders and interest and principal on First Financial Bankshares, Inc. debt (to the extent we have balances outstanding). Various federal and/or state laws and regulations limit the amount of dividends that our bank and trust subsidiaries may pay to First Financial Bankshares, Inc. In the event our subsidiaries are unable to pay dividends to First Financial Bankshares, Inc., First Financial Bankshares, Inc. may not be able to service debt, if any, or pay dividends on the Company’s common stock. The inability to receive dividends from our subsidiaries could have a material adverse effect on the Company’s business, financial condition, results of operations and liquidity.
System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses.
The computer systems and network infrastructure we use could be vulnerable to unforeseen hardware and cybersecurity issues, including “hacking” and “identity theft.” Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our Internet banking activities, against damage from physical break-ins,
cybersecurity breaches and other disruptive problems caused by the Internet or other users. Such computer break-ins
and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us, damage our reputation and inhibit current and potential customers from our Internet banking services. Each year, we add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches including firewalls and penetration testing. We continue to investigate cost effective measures as well as insurance protection.
Furthermore, our customers could incorrectly blame the Company and terminate their accounts with the Company for a cyber-incident which occurred on their own system or with that of an unrelated third party. In addition, a security breach could also subject us to additional regulatory scrutiny and expose us to civil litigation and possible financial liability.
Our business may be adversely affected by security breaches at third parties.
Our customers interact with their own and other third-party systems, which pose operational risks to us. We may be adversely affected by data breaches at retailers and other third parties who maintain data relating to our customers that involve the theft of customers data, including the theft of customers’ debit card, merchant credit card, wire transfer and other identifying and/or access information used to make purchases or payments at retailers and other third parties.
In the event of a data breach at one or more retailers of considerable magnitude, the Company’s business, financial condition and results of operations may be adversely affected.
We are subject to claims and litigation pertaining to intellectual property.
We rely on technology companies to provide information technology products and services necessary to support our day-to-day
operations. Technology companies frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of our vendors, or other individuals or companies, have from time to time claimed to hold intellectual property sold to us by its vendors. Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions frequently seek injunctions and substantial damages.
Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, we may have to engage in litigation that could be expensive, time-consuming, disruptive to our operations, and distracting to management. If we are found to infringe one or more patents or other intellectual property rights, we may be required to pay substantial damages or royalties to a third-party. In certain cases, we may consider entering into licensing agreements for disputed intellectual property, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase our operating expenses. If legal matters related to intellectual property claims were resolved against us or settled, we could be required to make payments in amounts that could have a material adverse effect on our business, financial condition and results of operations.
We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions, we must rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. We also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business, financial condition and results of operations.
We do business with other financial institutions that could experience financial difficulty.
We do business through the purchase and sale of federal funds, check clearing and through the purchase and sale of loan participations with other financial institutions. Because these financial institutions have many risks, as do we, we could be adversely affected should one of these financial institutions experience significant financial difficulties or fail to comply with our agreements with them.
We are subject to possible claims and litigation pertaining to fiduciary responsibility.
From time to time, customers could make claims and take legal actions pertaining to our performance of our fiduciary responsibilities. Whether customer claims and legal actions related to our performance of our fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability and/or adversely affect our market perception of our products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
Our operations rely on certain external vendors.
We rely on certain external vendors to provide products and services necessary to maintain our day-to-day
operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted agreements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendor’s organizational structure, financial condition, support for existing products or services or strategic focus or for any other reason, could be disruptive to our operations, which could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
Certain of our investment advisory and wealth management contracts are subject to termination on short notice, and termination of a significant number of investment advisory contracts could have a material adverse impact on our revenue.
Certain of our investment advisory and wealth management clients can terminate, with little or no notice, their relationships with us, reduce their aggregate assets under management, or shift their funds to other types of accounts with different rate structures for any number of reasons, including investment performance, changes in prevailing
interest rates, inflation, changes in investment preferences of clients, changes in our reputation in the marketplace, change in management or control of clients, loss of key investment management personnel and financial market performance. We cannot be certain that our trust company subsidiary will be able to retain all of its clients. If its clients terminate their investment advisory and wealth management contracts, our trust company subsidiary, and consequently we, could lose a substantial portion of our revenues.
The trust wealth management fees we receive may decrease as a result of poor investment performance, in either relative or absolute terms, which could decrease our revenues and net earnings.
Our trust company subsidiary derives its revenues primarily from investment management fees based on assets under management. Our ability to maintain or increase assets under management is subject to a number of factors, including investors’ perception of our past performance, in either relative or absolute terms, market and economic conditions, including changes in oil and gas prices, and competition from investment management companies. Financial markets are affected by many factors, all of which are beyond our control, including general economic conditions, including changes in oil and gas prices; securities market conditions; the level and volatility of interest rates and equity prices; competitive conditions; liquidity of global markets; international and regional political conditions; regulatory and legislative developments; monetary and fiscal policy; investor sentiment; availability and cost of capital; technological changes and events; outcome of legal proceedings; changes in currency values; inflation; credit ratings; and the size, volume and timing of transactions. A decline in the fair value of the assets under management, caused by a decline in general economic conditions, would decrease our wealth management fee income.
Investment performance is one of the most important factors in retaining existing clients and competing for new wealth management clients. Poor investment performance could reduce our revenues and impair our growth in the following ways:
•
existing clients may withdraw funds from our wealth management business in favor of better performing products;
•
asset-based management fees could decline from a decrease in assets under management;
•
our ability to attract funds from existing and new clients might diminish; and
•
our wealth managers and investment advisors may depart to join a competitor or otherwise.
Even when market conditions are generally favorable, our investment performance may be adversely affected by the investment style of our wealth management and investment advisors and the particular investments that they make. To the extent our future investment performance is perceived to be poor in either relative or absolute terms, the revenues and profitability of our wealth management business will likely be reduced and our ability to attract new clients will likely be impaired. As such, fluctuations in the equity and debt markets can have a direct impact upon our net earnings. In addition, as approximately 10% of trust fees comes from management of oil and gas properties, a decline in the prices of oil and gas could lead to a loss of material amounts of our trust income.
External and Market Related Risks
Our business is concentrated in Texas and a downturn in the economy of Texas may adversely affect our business.
Our network of bank regions is concentrated in Texas, primarily in the Central, North Central, Southeast and Western regions of the state. Most of our customers and revenue are derived from these areas. These economies include dynamic centers of higher education, agriculture, energy and natural resources, retail, military, healthcare, tourism, retirement living, manufacturing and distribution. Because we generally do not derive revenue or customers from other parts of the state or nation, our business and operations are dependent on economic conditions in our Texas markets. Any significant decline in one or more segments of the local economies could adversely affect our business, revenue, operations and properties.
The volatility in oil and gas prices results in uncertainty about the Texas economy. While we consider our exposure to credits related to the oil and gas industry to not be significant, at approximately 2.27% of total loans as of December 31, 2020, should the price of oil and gas decline further and/or remain at low prices for an extended period, the general economic conditions in our Texas markets could be negatively affected, which could have a material adverse affect on our business, financial condition and results of operations.
Our Company lends primarily to small to medium-sized
businesses that may have fewer resources to weather a downturn in the economy, which could adversely impact the Company’s operating results.
The Company makes loans to privately-owned businesses, many of which are considered to be small to medium-sized
businesses. Small to medium-sized
businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need additional capital to expand or compete and may experience more volatility in operating results. Any one or more of these factors may impair the borrower’s ability to repay a loan. In addition, the success of a small to medium-sized
businesses often depends on the management talents and efforts of a small group of persons, and the death, disability or resignation of one or more of these persons could have adverse impact on the business and its ability to repay our loans. Economic downturns, a sustained decline in commodity prices and other events that could negatively impact the businesses could cause the Company to incur credit losses that could negatively affect the Company’s results of operations and financial condition.
If we are unable to continue to originate residential real estate loans and sell them into the secondary market for a profit, our earnings could decrease.
We derive a portion of our noninterest income from the origination of residential real estate loans and the subsequent sale of such loans into the secondary market. If we are unable to continue to originate and sell residential real estate loans at historical or greater levels, our residential real estate loan volume would decrease, which could decrease our earnings. A rising interest rate environment, general economic conditions or other factors beyond our control could adversely affect our ability to originate residential real estate loans. We also are experiencing an increase in regulations and compliance requirements related to mortgage loan originations necessitating technology upgrades and other changes. If new regulations continue to increase and we are unable to make technology upgrades, our ability to originate mortgage loans will be reduced or eliminated. Additionally, we sell a large portion of our residential real estate loans to third party investors, and rising interest rates could negatively affect our ability to generate suitable profits on the sale of such loans. If interest rates increase after we originate the loans, our ability to market those loans is impaired as the profitability on the loans decreases. These fluctuations can have an adverse effect on the revenue we generate from residential real estate loans and in certain instances, could result in a loss on the sale of the loans.
Further, for the mortgage loans we sell in the secondary market, the mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first sixty to ninety days, or if documentation is determined not to be in compliance with regulations. While the Company’s historic losses as a result of these indemnities have been insignificant, we could be required to repurchase the mortgage loans or reimburse the purchaser of our loans for losses incurred. Both of these situations could have an adverse effect on the profitability of our mortgage loan activities and negatively impact our net income.
Difficult or changes in market conditions could adversely affect the financial services industry.
The financial markets have experienced volatility over the past several years. In some cases, the financial markets have produced downward pressure on stock prices and credit availability for certain companies without regard to those companies’ underlying financial strength. If financial market volatility worsens, or there are disruptions in these financial markets, including disruptions to the United States banking systems, there can be no assurance that we will not experience an adverse effect on our ability to access capital and our business, financial condition and result of operations could be adversely impacted.
The value of certain securities in our investment portfolio may be negatively affected by changes or disruptions in the market for these securities.
Our investment portfolio securities include obligations of state and political subdivisions, corporate bonds, general obligation or revenue based municipal bonds and mortgage-backed securities guaranteed by government sponsored enterprises such as the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal Home Loan Bank or otherwise backed by Federal Housing Administration or Veteran’s Administration guaranteed loans; however, volatility or illiquidity in financial markets may cause investment securities held within our investment portfolio to fall in value or become less liquid. Increases in interest rates may cause a decline in the value of securities held by the Company. Uncertainty surrounding the credit risk associated with mortgage collateral or guarantors may cause material discrepancies in valuation estimates obtained from third parties. Volatile market conditions may reduce valuations due to the perception of heightened credit and liquidity risks in addition to interest rate risk typically associated with these securities. There can be no assurance that declines in market value associated with these disruptions will not result in impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our results of operations, equity and capital ratios.
We may need to raise additional capital and such funds may not be available when needed
.
We may need to raise additional capital in the future to provide us with sufficient capital resources to meet our commitments and business needs, particularly if our asset quality or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital and financial markets at that time, which are outside of our control, and our financial performance. Economic conditions and the loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital, other financial institution borrowings and borrowings from the discount window of the Federal Reserve. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of other financial institutions, or counterparties participating in the capital markets, may adversely affect our costs and our ability to raise capital. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our financial condition and results of operations.
Compliance and Regulatory Risks
We may be subject to more stringent capital and liquidity requirements which would adversely affect our net income and future growth.
The Federal Reserve Board adopted a final rule that implemented the Basel III changes to the international regulatory capital framework and revised the U.S. risk-based and leverage capital requirements for U.S. banking organizations to strengthen identified areas of weakness in capital rules and to address relevant provisions of the Dodd-Frank Act.
The final rule established a stricter regulatory capital framework that requires banking organizations to hold more and higher-quality capital to act as a financial cushion to absorb losses and help banking organizations better withstand periods of financial stress. The final rule increased capital ratios for all banking organizations and introduced a “capital conservation buffer” which is in addition to each capital ratio. If a banking organization dips into its capital conservation buffer, it may be restricted in its ability to pay dividends and discretionary bonus payments to its executive officers. The final rule assigned a higher risk weight to loans that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also required unrealized gains and losses on certain “available-for-sale”
securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time
opt-out
is exercised. We exercised this opt-out
right in our March 31, 2015 quarterly financial filing. The final rule also included changes in what constitutes regulatory capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock are required to be deducted from capital. The final rule became effective for us on January 1, 2015. As of December 31, 2020, we met all of these new requirements, including the full capital conservation buffer.
Although we currently cannot predict the specific impact and long-term effects that Basel III will have on our Company and the banking industry more generally, the Company may be required to maintain higher regulatory capital levels which could impact our operations, net income and ability to grow. Furthermore, the Company’s failure to comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us which could restrict our future growth or operations.
Our business is subject to significant government regulation.
We operate in a highly-regulated environment and are subject to supervision or regulation by a number of governmental regulatory agencies, including the Federal Reserve Board, the OCC, the FDIC and the CFPB. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels and other aspects of our operations. The bank regulatory agencies possess broad authority to prevent or remedy unsafe or unsound practices or violations of law.
The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Other changes to statues, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to reduced revenues, additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks
to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. Additionally, the banking regulations could prohibit and significantly delay the Company’s acquisition of other financial institutions.
Included in the Dodd-Frank Act are, for example, changes related to interchange fees and overdraft services. While the changes for interchange fees that can be charged for electronic debit transactions by payment card issuers relate only to banks with assets of $10 billion or more, the federal bank regulatory agencies on November 20, 2020 announced an interim final rule that provides temporary relief for certain community banking organizations that have crossed this threshold as of December 31, 2020 if they had less than $10 billion in assets as of December 31, 2019. Under this interim final rule, these banks will generally have until 2022 to either reduce their size to under $10 billion in assets or prepare for reduced interchange fees. We are also prohibited from charging customers fees for paying overdrafts on automated teller machine and debit card transactions, unless the consumer opts in. We continue to monitor the impact of these new regulations and other developments on our service charge revenue.
Federal income tax reform could have unforeseen effects on our financial condition and results of operations.
On December 22, 2017, the President of the United States signed the “Tax Cuts and Jobs Act.” The Tax Cuts and Jobs Act included a number of provisions, including the lowering of the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. There were also provisions that may partially offset the benefit of such rate reduction. The intended and unintended consequences of Tax Cuts and Jobs Act on our business and on holders of our common shares is uncertain and could be adverse. The recent changes in the political makeup of the Senate and House of Representatives in the U.S. Congress could result also in the reversal of some or all of the effects of the Tax Cuts and Jobs Act, which may have an adverse effect on our business, financial conditions and results of operations.
Our FDIC insurance assessments could increase substantially resulting in higher operating costs.
We have historically paid the lowest premium rate available due to our sound financial position and in 2019 and 2020, we have received certain credits that further reduced the FDIC insurance premium paid. Should the number of bank failures increase or the FDIC insurance fund become depleted in others ways, FDIC premiums could increase or additional special assessments could be imposed. In addition, we are no longer eligible to utilize credits to reduce our FDIC insurance premiums as a result of our exceeding $10 billion in assets. These increased premiums would have an adverse effect on our net income and results of operations.
Risks Related to Acquisition Activities
To continue our growth, we are affected by our ability to identify and acquire other financial institutions.
We intend to continue our current growth strategy. This strategy includes opening new branches and acquiring other banks that serve customers or markets we find desirable. The market for acquisitions remains highly competitive, and we may be unable to find satisfactory acquisition candidates in the future that fit our acquisition and growth strategy. To the extent that we are unable to find suitable acquisition candidates, an important component of our growth strategy may be lost. Additionally, our completed acquisitions, or any future acquisitions, may not produce the revenue, earnings or synergies that we anticipated.
We may not be able to complete future acquisitions, may not be successful in realizing the benefits of any acquisitions that are completed, or may choose not to pursue acquisition opportunities we might find beneficial.
A substantial part of our historical growth has been a result of acquisitions of other financial institutions, and we may, from time to time, evaluate and engage in the acquisition of other financial institutions. We must generally satisfy a number of conditions prior to completing any such transaction, including certain bank regulatory approvals. Bank regulators consider a number of factors with regard to all institutions involved in the transaction when determining whether to approve a proposed transaction, including, among others, the ratings and compliance history, anti-money laundering and Bank Secrecy Act compliance history, CRA evaluation results and the effect of the proposed transaction on the financial stability of the institutions involved and the market as a whole.
The process for obtaining required regulatory approvals has become substantially more difficult, time-consuming and unpredictable as a result of the financial crisis. We may fail to pursue, evaluate or complete strategic and competitively significant business opportunities as a result of our inability, or our perceived inability, to obtain required regulatory approvals in a timely manner or at all.
Assuming we are able to successfully complete one or more transactions, we may not be able to successfully integrate and realize the expected synergies from any completed transaction in a timely manner or at all. In particular, we may be charged by federal and state regulators with regulatory and compliance failures at an acquired business prior to the date of the acquisition, and these failures by the acquired company may have negative consequences for us, including the imposition of formal or informal enforcement actions. Completion and integration of any transaction may also divert management’s attention from other matters, result in additional costs and expenses, or adversely affect our relationships with our customers and employees, any of which may adversely affect our business or results of operations. As a result, our financial condition may be affected, and we may become more susceptible to general economic conditions and competitive pressures.
Use of our common stock for future acquisitions or to raise capital may be dilutive to existing stockholders.
When we determine that appropriate strategic opportunities exist, we may acquire other financial institutions and related businesses, subject to applicable regulatory requirements. We may use our common stock for such acquisitions. We may also seek to raise capital through selling additional common stock, although we have not historically done so. It is possible that the issuance of additional common stock in such acquisition or capital transactions may be dilutive to the interests of our existing shareholders.
Risks Associated with our Common Stock
The trading volume in our common stock is less than other larger financial institutions.
Although the Company’s common stock is listed for trading on the Nasdaq Global Select Market, the trading volume in our common stock is less than that of other, larger financial services companies although such volume has increased in recent years. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Company’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the lower trading volume of the Company’s common stock, significant sales of the Company’s common stock, or the expectation of these sales, could cause the Company’s stock price to fall.
Our stock ownership has shifted to larger institutional shareholders
.
Our ownership base has shifted over the past several years resulting in a greater percentage of ownership by institutional investors and indexed funds as compared to shareholders located in our footprint. These institutional shareholders could decide to sell their holdings in our common stock and as such could result in lower market prices of our stock.
Certain banking laws may have an anti-takeover effect.
Provisions of federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. These provisions effectively inhibit a non-negotiated
merger or other business combination, which, in turn, could adversely affect the market price of our common stock.
We may not continue to pay dividends on our common stock in the future.
Holders of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividends in the future. This could adversely affect the market price of our common stock. Also, we are a bank holding company, and our ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve Board regarding capital adequacy and dividends.
The Company’s stock price can be volatile.
Stock price volatility may make it more difficult for our shareholders to resell their common stock when they want and at prices they find attractive. The Company’s stock price can fluctuate significantly in response to a variety of factors including, among other things:
•
actual or anticipated variations in quarterly results of operations;
•
recommendations by securities analysts;
•
operating and stock price performance of other companies that investors deem comparable to the Company;
•
new reports relating to trends, concerns and other issues in the financial services industry or Texas economy, including oil and gas and cattle prices;
•
perceptions in the marketplace regarding the Company and/or its competitors;
•
new technology used, or services offered, by competitors;
•
significant acquisitions or business combinations involving the Company or its competitors; and
•
changes in government regulations, including tax laws.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends could also cause the Company’s stock price to decrease regardless of operational results.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this Report. As a result, if you acquire our common stock, you may lose some or all of your investment.
Risks Related to the COVID Pandemic
The COVID pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID and to mitigate its effects, including quarantines, travel bans, shelter-in-place
orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K
could be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance, as described previously.
General Risk Factors
Our business faces unpredictable economic conditions, which could have an adverse effect on us.
General economic conditions impact the banking industry. The credit quality of our loan portfolio necessarily reflects, among other things, the general economic conditions in the areas in which we conduct our business. Our continued financial success depends somewhat on factors beyond our control, including:
•
general economic conditions, including national and local real estate markets and the price of oil and gas, wind farm subsidies from the federal government and other commodity prices;
•
the supply of and demand for investable funds;
•
demand for loans and access to credit;
•
interest rates; and
•
federal, state and local laws affecting these matters.
Any substantial deterioration in any of the foregoing conditions could have a material adverse effect on our financial condition, results of operations and liquidity, which would likely adversely affect the market price of our common stock.
Hurricanes, extended drought conditions, severe weather and natural disasters could significantly impact the Company’s business.
Hurricanes, extended drought conditions, severe weather and natural disasters and other adverse external events could have a significant impact on the Company’s ability to conduct business. Such events affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of the collateral securing our loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on the Company’s business, which in turn, could have a material adverse effect on the Company’s business, financial condition and result of operations.
We compete with many larger financial institutions which have substantially greater financial resources than we have.
Competition among financial institutions in Texas is intense. We compete with other bank holding companies, state and national commercial banks, savings and loan associations, consumer financial companies, credit unions, securities brokers, insurance companies, mortgage banking companies, money market mutual funds, asset-based non-bank
lenders and other financial institutions. Many of these competitors have substantially greater financial resources, larger lending limits, larger branch networks, enhanced technology and less regulatory oversight than we do, and are able to offer a broader range of products and services than we can. Failure to compete effectively for deposit, loan and other banking customers in our markets could cause us to lose market share, slow our growth rate and may have an adverse effect on our financial condition, results of operations and liquidity.
We compete in an industry that continually experiences technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services and new fintech companies. In addition to improving the ability to serve customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for conveniences, as well as to create additional efficiencies in our operations. Many of our larger competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.
If we are unable to continue our historical levels of growth, we may not be able to maintain our historical earnings trends.
To achieve our past levels of growth, we have focused on both internal growth and acquisitions. We may not be able to sustain our historical rate of growth or may not be able to grow at all. Additionally, we may not be able to obtain the financing necessary to fund additional growth and may not be able to find suitable acquisition candidates. Various factors, such as economic conditions, competition and heightened regulatory scrutiny, may impede or prohibit the opening of new banking centers and the completion of acquisitions. Further, we may be unable to attract and retain experienced bankers, which could adversely affect our internal growth. If we are not able to continue our historical levels of growth, we may not be able to maintain our historical earnings trends.
We rely heavily on our management team, and the unexpected loss of key management or inability to recruit qualified personnel in the future may adversely affect our operations.
Our success to date has been strongly influenced by our ability to attract and to retain senior management experienced in banking in the markets we serve. Our ability to retain executive officers and the current management teams will continue to be important to the successful implementation of our strategies. We do not have employment agreements with these key employees other than executive agreements in the event of a change of control and a confidential information, non-solicitation
and non-competition
agreements related to our stock options and restricted stock. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results. In addition, the scope and content of U.S. banking regulators’ policies on incentive compensation, could adversely affect our ability to hire, retain and motivate our key employees.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2.
PROPERTIES
Our principal office is located in the First Financial Bank Building at 400 Pine Street in downtown Abilene, Texas. We lease two spaces in buildings owned by First Financial Bank, N.A. totaling approximately 10,155 square feet. As of December 31, 2020, our subsidiaries collectively own 73 banking facilities, some of which are detached drive-ins,
and also lease 14 banking facilities and 15 ATM locations. Our management considers all our existing locations to be well-suited for conducting the business of banking. We believe our existing facilities are adequate to meet our requirements and our subsidiaries’ requirements for the foreseeable future.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we and our subsidiaries are parties to lawsuits arising in the ordinary course of our banking business. However, there are no material pending legal proceedings to which we, our subsidiaries or our other direct and indirect subsidiaries, or any of their properties, are currently subject. Other than regular, routine examinations by state and federal banking authorities, there are no proceedings pending or known to be contemplated by any governmental authorities.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock, par value $0.01 per share, is traded on the Nasdaq Global Select Market under the trading symbol FFIN. See “Item 8 - Financial Statements and Supplementary Data-Quarterly Financial Data” for the high, low and closing sales prices as reported by the Nasdaq Global Select Market for our common stock for the periods indicated.
Record Holders
As of February 1, 2021, we had 1,015 registered shareholders of record with our stock transfer agent.
Dividends
See “Item 8 - Financial Statements and Supplementary Data-Quarterly Results of Operations” for the frequency and amount of cash dividends paid by us. Also, see “Item 1 - Business - Supervision and Regulation - Payment of Dividends” and “Item 7 - Management’s Discussion and Analysis of the Financial Condition and Results of Operations - Liquidity - Dividends” for restrictions on our present or future ability to pay dividends, particularly those restrictions arising under federal and state banking laws.
Equity Compensation Plans
See “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.
PERFORMANCE GRAPH
The following performance graph compares cumulative total shareholder returns for our common stock, the Russell 3000 Index, and the SNL Bank Index, which is a banking index prepared by SNL Financial LC and is comprised of banks with $5 billion to $10 billion in total assets, for a five-year period (December 31, 2015 to December 31, 2020). The performance graph assumes $100 invested in our common stock at its closing price on December 31, 2015, and in each of the Russell 3000 Index and the SNL Bank Index on the same date. The performance graph also assumes the reinvestment of all dividends. The dates on the performance graph represent the last trading day of each year indicated. The amounts noted on the performance graph have been adjusted to give effect to all stock splits and stock dividends.
First Financial Bankshares, Inc
.
Period Ending
Index
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
First Financial Bankshares, Inc.
100.00
152.85
155.07
201.53
248.81
260.80
Russell 3000 Index
100.00
112.74
136.56
129.40
169.54
204.95
SNL Bank $5B-$10B
Index
100.00
143.27
142.73
129.17
160.06
145.37
Source: S&P Global Market Intelligence
© 2021

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
SELECTED FINANCIAL DATA
The selected financial data presented below as of and for the years ended December 31, 2020, 2019, 2018, 2017, and 2016, have been derived from our audited consolidated financial statements. The data set forth below may not be fully comparable from period to period due to acquisitions in 2020 and 2018 and changes in accounting, including the allowance for credit losses in 2020 (see Notes 1, 3 and 21 to the Notes to Consolidated Financial Statements for further information). The selected financial data should be read in conjunction with “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and accompanying notes presented elsewhere in this Form 10-K.
The results of operations presented below are not necessarily indicative of the results of operations that may be achieved in the future. Management’s Discussion and Analysis of Financial Condition and Results of Operations incorporates information required to be disclosed by the SEC’s Industry Guide 3, “Statistical Disclosure by Bank Holding Companies.”
Year Ended December 31,
(dollars in thousands, except per share data)
Summary Income Statement Information:
Interest income
$ 364,128
$ 319,192
$ 291,690
$ 245,975
$ 232,288
Interest expense
14,243
30,102
18,930
9,288
5,451
Net interest income
349,885
289,090
272,760
236,687
226,837
Provision for credit losses
19,517
2,965
5,665
6,530
10,212
Noninterest income
139,935
108,428
101,764
91,017
85,132
Noninterest expense
227,938
196,521
190,684
173,986
165,830
Earnings before income taxes
242,365
198,032
178,175
147,188
135,927
Income tax expense
40,331
33,220
27,537
26,817
31,153
Net earnings
$ 202,034
$ 164,812
$ 150,638
$ 120,371
$ 104,774
Per Share Data:
Earnings per share, basic
$ 1.42
$ 1.22
$ 1.11
$ 0.91
$ 0.80
Earnings per share, diluted
1.42
1.21
1.11
0.91
0.80
Cash dividends declared
0.51
0.47
0.41
0.38
0.35
Book value at period-end
11.80
9.03
7.77
6.97
6.34
Earnings performance ratios:
Return on average assets
1.98 %
2.08 %
1.98 %
1.72 %
1.59 %
Return on average equity
12.93
14.37
15.37
13.63
12.36
Dividend payout ratio
35.88
38.31
36.84
41.24
44.14
Summary Balance Sheet Data (Period-end):
Securities
$ 4,393,029
$ 3,413,317
$ 3,158,777
$ 3,087,473
$ 2,860,958
Loans, held-for-investment
5,171,033
4,194,969
3,953,636
3,485,569
3,357,307
Total assets
10,904,500
8,262,227
7,731,854
7,254,715
6,809,931
Deposits
8,675,817
6,603,806
6,180,389
5,962,961
5,478,539
Total liabilities
9,226,310
7,035,030
6,678,559
6,331,947
5,972,046
Total shareholders’ equity
1,678,190
1,227,197
1,053,295
922,768
837,885
Asset quality ratios:
Allowance for credit losses/period-end
loans held-for-investment
1.29 %
1.25 %
1.30 %
1.38 %
1.36 %
Nonperforming assets/period-end
loans held-for-investment
plus foreclosed assets
0.83
0.61
0.75
0.58
0.86
Net charge offs/average loans
0.06
0.04
0.07
0.12
0.19
Capital ratios:
Average shareholders’ equity/average assets
15.32 %
14.44 %
12.89 %
12.65 %
12.85 %
Leverage ratio (1)
11.86
12.60
11.85
11.09
10.71
Tier 1 risk-based capital (2)
20.79
20.06
19.47
18.66
17.30
Common equity tier 1 capital (3)
20.79
20.06
19.47
18.66
17.30
Total risk-based capital (4)
22.03
21.13
20.61
19.85
18.45
(1) Calculated by dividing at period-end,
shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets by fourth quarter average assets less intangible assets.
(2) Calculated by dividing at period-end,
shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets by risk-adjusted assets.
(3) Calculated by dividing at period-end,
shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets by risk-adjusted assets.
(4) Calculated by dividing at period-end,
shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets plus allowance for loan losses to the extent allowed under regulatory guidelines by risk-adjusted assets.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited to those listed in “Item 1A - Risk Factors” and in the “Cautionary Statement Regarding Forward-Looking Statements” notice on page 1.
Introduction
As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, gain on sale of mortgage loans and service charges. Our primary source of funding for our loans and investments are deposits held by our bank subsidiary, First Financial Bank, N.A. Our largest expenses are salaries and related employee benefits. We measure our performance by calculating our return on average assets, return on average equity, regulatory capital ratios, net interest margin and efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income.
The following discussion and analysis of the major elements of our consolidated balance sheets as of December 31, 2020 and 2019, and consolidated statements of earnings for the years 2018 through 2020 should be read in conjunction with our consolidated financial statements, accompanying notes, and selected financial data presented elsewhere in this Form 10-K.
Critical Accounting Policies
We prepare consolidated financial statements based on generally accepted accounting principles (“GAAP”) and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions.
We deem a policy critical if (1) the accounting estimate required us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (2) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements.
We deem our most critical accounting policies to be (1) our allowance for credit losses and our provision for credit losses and (2) our valuation of financial instruments. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period. A discussion of (1) our allowance for credit losses and our provision for credit losses and (2) our valuation of financial instruments is included in Notes 1 and 10 to our Consolidated Financial Statements beginning on page.
Acquisitions
On September 19, 2019, we entered into an agreement and plan of reorganization to acquire TB&T Bancshares, Inc. and its wholly-owned bank subsidiary, The Bank & Trust of Bryan/College Station, Texas. On January 1, 2020, the transaction was completed. Pursuant to the agreement, we issued 6.28 million shares of the Company’s common shares in exchange for all of the outstanding shares of TB&T Bancshares, Inc. In addition, in accordance with the plan of reorganization, TB&T Bancshares, Inc. paid a special dividend totaling $1.92 million to its shareholders prior to the closing of this transaction. At the closing, Brazos Merger Sub, Inc., a wholly-owned subsidiary of the Company, merged into TB&T Bancshares Inc., with TB&T Bancshares, Inc. surviving as a wholly-owned
subsidiary of the Company. Immediately following such merger, TB&T Bancshares, Inc. was merged into the Company and The Bank & Trust of Bryan/College Station, Texas was merged into First Financial Bank, N.A., a wholly-owned subsidiary of the Company. The total purchase price of $220.27 million exceeded the estimated fair value of the net assets acquired by 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.
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 effective June 3, 2019. In addition, the shareholders of the Company approved an amendment to the Amended and Restated Certificate of Formation to increase the number of authorized shares to 200,000,000. All per share amounts in this report have been restated to reflect this stock split. An amount equal to the par value of the additional common shares to be issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock in the consolidated financial statements as of and for the year ended December 31, 2019.
Stock Repurchase
On March 12, 2020, the Company’s Board of Directors authorized the repurchase of up to 4,000,000 common shares through September 30, 2021. Previously, the Board of Directors had authorized the repurchase of up to 2,000,000 common shares through September 30, 2020. The stock repurchase plan authorizes management to repurchase and retire the stock at such time as repurchases are considered beneficial to the Company and its stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Through December 31, 2020, 324,802 shares were repurchased and retired (all during the months of March and April of 2020) totaling $8,008,000 under this repurchase plan. Subsequent to December 31, 2020 and through February 22, 2021, no additional shares were repurchased. For the years ended December 31, 2019 and 2018, no shares were repurchased under this repurchase plan or the prior authorization that expired September 30, 2020.
Implementation of New Accounting Standard for Accounting for Allowance for Credit Losses
On January 1, 2020, Accounting Standards Update (“ASU”) 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, became effective for the Company. Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) replaced the previous “incurred loss” model for measuring credit losses with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity
debt securities. It also applies to off-balance-sheet
(“OBS”, “reserve for unfunded commitments”) credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, ASC 326 made changes to the accounting for available-for-sale
debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale
debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
On March 27, 2020, the CARES Act was signed by the President of the United States that included an option for entities to delay the implementation of ASC 326 until the earlier of the termination date of the national emergency declaration by the President, or December 31, 2020. Under this option, the Company elected to delay implementation of CECL and calculated and recorded the provision for credit losses through the nine-months ended September 30, 2020 under the incurred loss model. At December 31, 2020, the Company elected to adopt ASC 326, effective as of January 1, 2020, through a transition charge to retained earnings of $589 thousand ($466 thousand net of applicable income taxes). This transition adjustment was comprised of a decrease of $619 thousand in allowance for credit losses and an increase of $1.21 million in the reserve for unfunded commitments.
The Company completed its CECL implementation plan by forming a cross-functional working group, under the direction of our Chief Credit Officer along with our Chief Accounting Officer, Chief Lending Officer and Chief Financial Officer. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. The implementation plan included assessment and documentation of processes, internal controls and data sources, model development, documentation and validation, and system configuration, among other things. The Company contracted with a third-party vendor to assist in the implementation of CECL.
Other New Accounting Standards Issued but Not Yet Effective
Accounting Standards Update (“ASU”) 2019-12,
“Simplifying the Accounting for Income Taxes.”
In December 2019, FASB released ASU 2019-12
- Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing multiple exceptions to the general principals in Topic 740. The standard is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020. The Company does not expect the adoption of this standard to have a material impact on the Company’s Consolidated Financial Statements.
Accounting Standards Update (“ASU”) 2020-04,
“Reference Rate Reform.”
In March 2020, FASB released ASU 2020-04
- Reference Rate Reform (Topic 848), which provides optional guidance to ease the accounting burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of LIBOR likely being discontinued as an available benchmark rate. The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update are effective for all entities between March 12, 2020 and December 31, 2022. The Company has established a cross-functional working group to guide the Company’s transition from LIBOR and has begun efforts to transition to alternative rates consistent with industry timelines. The Company has identified its products that utilize LIBOR and has implemented enhanced fallback language to facilitate the transition to alternative reference rates. The Company is evaluating existing platforms and systems and preparing to offer new rates.
Results of Operations
Performance Summary
. Net earnings for 2020 were $202.03 million, an increase of $37.22 million, or 22.58%, over net earnings for 2019 of $164.81 million. Net earnings for 2018 were $150.64 million. The increase in net earnings for 2020 over 2019 and 2019 over 2018 was primarily attributable to the overall growth in net interest income and noninterest income. Net earnings in 2020 also include a provision for credit losses of $19.52 million compared to $2.97 million in 2019 and $5.67 million in 2018. The provision for credit losses in 2020 reflects primarily the stress on our loan portfolio from the increase in unemployment and economic effects of the COVID pandemic.
On a diluted net earnings per share basis, net earnings were $1.42 for 2020, as compared to $1.21 for 2019 and $1.11 for 2018. The return on average assets was 1.98% for 2020, as compared to 2.08% for 2019 and 1.98% for 2018. The return on average equity was 12.93% for 2020, as compared to 14.37% for 2019 and to 15.37% for 2018. The return on average tangible equity was 16.25% for 2020, as compared to 16.95% for 2019 and to 18.65% for 2018.
Net Interest Income
. Net interest income is the difference between interest income on earning assets and interest expense on liabilities incurred to fund those assets. Our earning assets consist primarily of loans and investment securities. Our liabilities to fund those assets consist primarily of noninterest-bearing and interest-bearing deposits.
Tax-equivalent
net interest income was $361.15 million in 2020, as compared to $295.88 million in 2019, and $281.75 million in 2018. Average earning assets were $9.52 billion in 2020, as compared to $7.44 billion in 2019 and $7.12 billion in 2018. The increase in tax-equivalent
net interest income in 2020 compared to 2019 was largely attributable to increases in interest earning assets. The increase of $2.08 billion in average earning assets in 2020 when compared to 2019 was primarily a result of increases in loans of $1.08 billion and tax-exempt
securities of $689.80 million when compared to 2019. The increase in tax-equivalent
net interest income in 2019 compared to 2018 was also largely attributable to increases in interest earning assets. The increase of $326.97 million in average earning assets in 2019 when compared to 2018 was primarily a result of increases in loans of $246.63 million and
taxable securities of $156.33 million. Average interest-bearing liabilities were $5.76 billion in 2020, as compared to $4.61 billion in 2019 and $4.47 billion in 2018. The yield on earning assets decreased forty-four basis points in 2020 when compared to 2019 while the rate paid on interest-bearing liabilities decreased forty basis points. The yield on earning assets increased fifteen basis points in 2019 when compared to 2018 while the rate paid on interest-bearing liabilities increased twenty-three basis points.
Table 1 allocates the change in tax-equivalent
net interest income between the amount of change attributable to volume and to rate.
Table 1 - Changes in Interest Income and Interest Expense (in thousands):
2020 Compared to 2019
2019 Compared to 2018
Change Attributable to
Total
Change
Change Attributable to
Total
Change
Volume
Rate
Volume
Rate
Short-term investments
$ 3,689
$ (4,628 )
$ (939 )
$ (106 )
$
$
Taxable investment securities
3,812
(8,026 )
(4,214 )
4,045
1,573
5,618
Tax-exempt
investment securities (1)
24,671
(8,932 )
15,739
(2,634 )
(2,203 )
(4,837 )
Loans (1) (2)
59,719
(20,900 )
38,819
12,983
11,276
24,259
Interest income
91,891
(42,486 )
49,405
14,288
11,013
25,301
Interest-bearing deposits
6,379
(20,382 )
(14,003 )
9,523
10,177
Short-term borrowings
1,223
(3,079 )
(1,856 )
(99 )
1,095
Interest expense
7,602
(23,461 )
(15,859 )
10,618
11,173
Net interest income
$ 84,289
$ (19,025 )
$ 65,264
$ 13,733
$
$ 14,128
(1) Computed on a tax-equivalent
basis assuming a marginal tax rate of 21%.
(2) Nonaccrual loans are included in loans.
The net interest margin in 2020 was 3.79%, a decrease of nineteen basis points from 2019. The net interest margin for 2019 was 3.98% which was an increase of two basis points from 2018. which increased two basis points from 2018. We continued to experience downward pressures on our net interest margin in 2020 primarily due to (i) the extended period of fluctuating historically low levels of short-term interest rates and (ii) the flat to inverted yield curve currently being experienced in the bond market. 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 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 net interest margin, which measures tax-equivalent
net interest income as a percentage of average earning assets, is illustrated in Table 2 for the years 2018 through 2020.
Table 2 - Average Balances and Average Yields and Rates (in thousands, except percentages):
Average
Balance
Income/
Expense
Yield/
Rate
Average
Balance
Income/
Expense
Yield/
Rate
Average
Balance
Income/
Expense
Yield/
Rate
Assets
Short-term investments (1)
$ 251,086
$
0.38 %
$ 84,430
$ 1,892
2.24 %
$ 90,374
$ 1,631
1.80 %
Taxable investment securities (2)
2,233,634
51,456
2.30
2,090,490
55,670
2.66
1,934,160
50,052
2.59
Tax-exempt
investment securities (2)(3)
1,882,711
58,403
3.10
1,192,908
42,664
3.58
1,262,947
47,501
3.76
Loans (3)(4)
5,152,531
264,576
5.13
4,074,667
225,757
5.54
3,828,040
201,498
5.26
Total earning assets
9,519,962
$ 375,388
3.94 %
7,442,495
$ 325,983
4.38 %
7,115,521
$ 300,682
4.23 %
Cash and due from banks
189,849
175,417
176,799
Bank premises and equipment, net
139,880
133,239
129,715
Other assets
92,612
66,003
62,595
Goodwill and other intangible assets, net
318,818
174,138
172,425
Allowance for credit losses
(67,606 )
(52,170 )
(50,323 )
Total assets
$ 10,193,515
$ 7,939,122
$ 7,606,732
Liabilities and Shareholders’ Equity
Interest-bearing deposits
$ 5,198,554
$ 13,119
0.25 %
$ 4,208,666
$ 27,122
0.64 %
$ 4,052,614
$ 16,945
0.42 %
Short-term borrowings
561,505
1,124
0.20
398,142
2,980
0.75
418,977
1,984
0.47
Total interest-bearing liabilities
5,760,059
$ 14,243
0.25 %
4,606,808
$ 30,102
0.65 %
4,471,591
$ 18,929
0.42 %
Noninterest-bearing deposits
2,782,896
2,137,089
2,124,004
Other liabilities
88,550
48,658
30,931
Total liabilities
8,631,505
6,792,555
6,626,526
Shareholders’ equity
1,562,010
1,146,567
980,206
Total liabilities and shareholders’ equity
$ 10,193,515
$ 7,939,122
$ 7,606,732
Net interest income
$ 361,145
$ 295,881
$ 281,753
Rate Analysis:
Interest income/earning assets
3.94 %
4.38 %
4.23 %
Interest expense/earning assets
0.15
0.40
0.27
Net interest margin
3.79 %
3.98 %
3.96 %
(1) Short-term investments are comprised of 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) Nonaccrual loans are included in loans.
Noninterest Income
. Noninterest income for 2020 was $139.94 million, an increase of $31.51 million, or 29.06%, as compared to 2019. Increases in certain categories of noninterest income included (1) real estate mortgage operations income of $25.73 million, (2) gain on sale of available-for-sale
securities of $2.90 million, (3) ATM, interchange and credit card fees of $2.61 million, (4) miscellaneous income of $2.12 million which includes $1.40 million in Main Street Lending Program fees and (5) trust fees of $1.13 million when compared to 2019. The mortgage related income increase was mainly due to a significant increase in the volume of loans originated to $1.21 billion in 2020 up from $551.77 million in 2019 driven by the lower rate environment and a strong housing market in Texas. The increase in ATM, interchange and credit card fees was driven by continued growth in the number of debit cards issued as well as our TB&T acquisition. The increase in trust fees resulted from an increase in assets under management over the prior year. The fair value of our trust assets managed, which are not reflected in our consolidated balance sheets, totaled $7.51 billion at December 31, 2020, as compared to $6.75 billion at December 31, 2019. Offsetting these increases was a decline in service charge revenue in 2020 when compared with 2019 of $1.47 million that was primarily driven by lower overdraft fees in the current year as a result of the effects of the pandemic and related stimulus programs.
Noninterest income for 2019 was $108.43 million, an increase of $6.66 million, or 6.55%, as compared to 2018. Increases in certain categories of noninterest income included (1) real estate mortgage operations income of $2.99 million, (2) ATM, interchange and credit card fees of $1.33 million, (3) interest on loan recoveries of $1.15 million, (4) service charges on deposit accounts of $376 thousand, and (5) trust fees of $220 thousand when compared to 2018. The increase in real estate mortgage fees was a result of an increase in the volume of loans originated and the Company’s decision to move to mandatory delivery from best efforts. The increase in ATM, interchange and credit
card fees was primarily due to the continued growth in the number of debit cards issued. Interest on loan recoveries increased as a result of several larger loan recoveries in 2019. The increase in service charges on deposit accounts was primarily due to the continued growth in net new accounts. The increase in trust fees resulted from an increase in assets under management over the prior year; however, this was mostly offset by a decrease in income derived from oil and gas production activity when compared to 2018. The fair value of our trust assets managed, which are not reflected in our consolidated balance sheets, totaled $6.75 billion at December 31, 2019, as compared to $5.60 billion at December 31, 2018. Offsetting these increases was a decrease in net gains on sales of available-for-sale
securities of $621 thousand.
ATM and interchange fees are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. ATM and interchange fees consist of income from debit card usage, point of sale income for debit card transactions and ATM service fees. Federal Reserve rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction 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 Federal Reserve rules apply to the Company. Federal Reserve requirements stipulate that these rules would go into effect on July 1st following the year-end
in which a financial institution’s total assets exceeded $10 billion at December 31st. At December 31, 2020, the Company’s total assets exceeded the $10 billion threshold, due primarily to the effect of the Company’s participation in the PPP loan program and growth in deposits from related activities. However, on November 20, 2020, the federal bank regulatory agencies announced an interim final rule that provides temporary relief for certain community banking organizations that have crossed this threshold as of December 31, 2020 if they had less than $10 billion in assets as of December 31, 2019. Under the interim final rule, these banks, which includes us, will generally have until 2022 to either reduce their size, or to prepare for the regulatory and reporting standards under the Dodd-Frank Act. Management will continue to monitor the Company’s balance sheet levels and prepare for the effects of this future loss of debit card income.
Table 3 - Noninterest Income (in thousands):
Increase
(Decrease)
Increase
(Decrease)
Trust fees
$ 29,531
$ 1,130
$ 28,401
$
$ 28,181
Service charges on deposit accounts
20,572
(1,467 )
22,039
21,663
ATM, interchange and credit card fees
32,469
2,606
29,863
1,331
28,532
Gain on sale and fees of mortgage loans
43,872
25,728
18,144
2,987
15,157
Net gain on sale of available-for-sale
securities
3,633
2,900
(621 )
1,354
Net gain (loss) on sale of foreclosed assets
(115 )
Net gain (loss) on sale of assets
(207 )
(147 )
Interest on loan recoveries
(1,236 )
2,092
1,154
Other:
Wire transfer fees
1,153
1,012
Check printing fees
(5 )
Safe deposit rental fees
(9 )
Credit life and debt protection fees
(102 )
Brokerage commissions
1,310
(271 )
1,581
(126 )
1,707
Miscellaneous income
4,367
2,121
2,246
1,860
Total other
8,731
2,168
6,563
5,970
Total Noninterest Income
$ 139,935
$ 31,507
$ 108,428
$ 6,664
$ 101,764
Noninterest Expense
. Total noninterest expense for 2020 was $227.94 million, an increase of $31.42 million, or 15.99%, as compared to 2019. Noninterest expense for 2019 amounted to $196.52 million, an increase of $5.84 million, or 3.06%, as compared to 2018. An important measure in determining whether a financial institution effectively manages noninterest expenses is the efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax-equivalent
basis and noninterest income. Lower ratios indicate better efficiency since more income is generated with a lower noninterest expense total. Our efficiency ratio for 2020 was 45.49%, as compared to 48.61% for 2019 and 49.72% for 2018. The reduction in the Company’s efficiency ratio during 2020 primarily resulted from the growth in the Company’s balance sheet and interest-earning assets as a result of the Company’s participation in the PPP loan program and the deferral of $3.62 million in noninterest expenses related to PPP loan origination costs during the second quarter of 2020.
Salaries and employee benefits for 2020 totaled $135.12 million, an increase of $22.79 million, or 20.28%, as compared to 2019. The increase was primarily driven by (i) the TB&T acquisition, (ii) annual merit-based pay increases that were effective March 1, 2020, (iii) an increase in our profit sharing and other incentive expenses, and (iv) higher mortgage related commissions. Also, in 2019 the Company incurred $2.67 million in expenses related to the termination of its pension plan when compared to $1.55 million in 2018.
All other categories of noninterest expense for 2020 totaled $92.82 million, an increase of $8.63 million, or 10.25%, as compared to 2019. Included in noninterest expense in 2020 were technology contract termination and conversion related expenses totaling $4.88 million related to the TB&T acquisition. Also included in noninterest expense during 2020 were increases in net occupancy expenses, professional and service fees and ATM, interchange and credit card expenses when compared to 2019 primarily due to the TB&T acquisition.
Salaries and employee benefits for 2019 totaled $112.34 million, an increase of $7.15 million, or 6.79%, as compared to 2018. The increase was primarily driven by (i) annual merit-based pay increases that were effective March 1, 2019, (ii) an increase in our profit sharing expenses, (iii) an increase in our pension plan expenses, and (iv) an increase in medical insurance costs.
All other categories of noninterest expense for 2019 totaled $84.19 million, a decrease of $1.31 million, or 1.53%, as compared to 2018. Included in noninterest expense in 2019 was $2.67 million, before income tax, in pension settlement expense resulting from the Company’s settlement and termination of the remaining portion of its defined benefit pension plan obligation. During 2018, the Company recorded $1.55 million, before income tax, in pension settlement expense for a partial settlement of this defined benefit pension obligation. Also included in noninterest expense during 2019 was an increase of $574 thousand in ATM, interchange and credit card expenses when compared to 2018. Offsetting these increases in noninterest expense for 2019 when compared to 2018 was a decrease in FDIC insurance premiums of $1.24 million due to the FDIC assessment credit previously discussed.
Table 4 - Noninterest Expense (in thousands):
Increase
(Decrease)
Increase
(Decrease)
Salaries
$ 101,360
$ 17,079
$ 84,281
$ 4,807
$ 79,474
Medical
10,406
1,281
9,125
8,699
Profit sharing
10,740
3,079
7,661
7,049
Pension
-
(351 )
(178 )
401(k) match expense
3,374
2,759
2,588
Payroll taxes
6,565
5,675
5,369
Stock option expense
1,377
(112 )
1,489
(19 )
1,508
Restricted stock expense
1,301
Total salaries and employee benefits
135,123
22,787
112,336
7,147
105,189
Cost related to termination of pension plan
-
(2,673 )
2,673
1,127
1,546
Net occupancy expense
12,388
1,232
11,156
(17 )
11,173
Equipment expense
8,396
(656 )
9,052
(1,066 )
10,118
FDIC insurance premiums
1,758
1,091
(1,242 )
2,333
ATM, interchange and credit card expenses
11,235
1,379
9,856
9,282
Professional and service fees
9,346
1,493
7,853
(1,041 )
8,894
Printing, stationery and supplies
2,163
1,812
(185 )
1,997
Amortization of intangible assets
1,990
1,016
(256 )
1,272
Other:
Data processing fees
1,619
1,550
1,462
Postage
1,446
(101 )
1,547
(202 )
1,749
Advertising
1,952
(1,655 )
3,607
3,603
Correspondent bank service charges
(65 )
Telephone
3,819
3,678
3,562
Public relations and business development
2,650
(556 )
3,206
3,061
Directors’ fees
2,363
1,972
1,745
Audit and accounting fees
2,232
1,460
(165 )
1,625
Legal fees
1,276
1,214
1,148
Regulatory exam fees
1,105
(74 )
1,179
(96 )
1,275
Travel
(674 )
1,641
1,465
Courier expense
(3 )
Operational and other losses
2,462
1,879
(309 )
2,188
Other real estate
(119 )
Software amortization and expense
8,862
1,557
7,305
1,285
6,020
Other miscellaneous expense
12,940
5,269
7,671
(575 )
8,246
Total other
45,539
5,863
39,676
38,880
Total Noninterest Expense
$ 227,938
$ 31,417
$ 196,521
$ 5,837
$ 190,684
Income Taxes
. Income tax expense was $40.33 million for 2020, as compared to $33.22 million for 2019 and $27.54 million for 2018. Our effective tax rates on pretax income were 16.64%, 16.78% and 15.46%, respectively, for the years 2020, 2019 and 2018. The effective tax rates differ from the statutory federal tax rate of 21.0% largely due to tax exempt interest income earned on certain investment securities and loans and the deductibility of dividends paid to our employee stock ownership plan.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law with sweeping modifications to the Internal Revenue Code. The primary change for the Company was to lower the corporate income tax rate to 21% from 35%. The Company’s deferred tax assets and liabilities were re-measured
based on the income tax rates at which they are expected to reverse in the future, which is generally 21%. The provisional amount recorded related to the re-measurement
of the Company’s deferred tax balance was $7.65 million, a reduction of income tax expense for the year ended December 31, 2017. However, the Company updated its estimate of the impact to our deferred tax balances based on the proposed regulations issued to date and recorded an additional reduction of income tax expense for the year ended December 31, 2018 of $664 thousand. No additional adjustment amounts were recorded for the years ended December 31, 2019 and 2020.
Balance Sheet Review
Loans
. Our portfolio is comprised of loans made to businesses, professionals, individuals, and farm and ranch operations located in the primary trade areas served by our subsidiary bank. As of December 31, 2020, total loans held-for-investment
were $5.17 billion, an increase of $976.06 million, as compared to December 31, 2019. The increase in the Company’s total loans held-for-investment
in 2020 was primarily driven by the TB&T acquisition and the Company’s participation in the PPP loan program. On January 1, 2020, TB&T had $447.70 million in loan balances. During 2020, the Company originated $703.73 million in PPP loans of which $220.34 were forgiven during the year resulting in a balance of $479.43 million at December 31, 2020, which are included in the Company’s commercial loan totals. The average balance of PPP loans was $479.43 million for the year ended December 31, 2020. At December 31, 2020, $11.27 million of deferred loan fees related to PPP loans continues to be amortized over the shorter of the repayment period or the contractual life of 24 months.
As compared to year-end
2019 balances, total real estate loans increased $495.89 million, total commercial loans increased $456.38 million, agricultural loans decreased $8.78 million and total consumer loans increased $32.57 million. Loans averaged $5.15 billion during 2020, an increase of $1.08 billion over 2019 average balances.
In conjunction with the adoption of ASC 326, the Company expanded its four loan portfolio segments used under the legacy disclosure requirements into the following ten portfolio segments. For modeling purposes, our loan portfolio segments include Commercial and Industrial (“C&I”), Municipal, Agricultural, Construction and Development, Farm, Non-Owner
Occupied and Owner Occupied Commercial Real Estate (“CRE”), Residential, Consumer Auto and Consumer Non-Auto.
This additional segmentation allows for a more precise pooling of loans with similar credit risk characteristics and credit monitor procedures for the Company’s calculation of its allowance for credit losses.
Table 5 outlines the composition of the Company’s held-for-investment
loans. by portfolio segment. at December 31, 2020. For all periods prior to December 31, 2020, management has elected to maintain its previously disclosed loan portfolio segments.
Table 5 - Composition of Loans Held-For-Investment
(in thousands):
December 31,
Commercial:
C&I
$ 1,131,382
$ N/A
$ N/A
$ N/A
$ N/A
Municipal
181,325
N/A
N/A
N/A
N/A
Total Commercial
1,312,707
856,326
844,953
684,099
674,410
Agricultural
94,864
103,640
96,677
94,543
84,021
Real Estate:
Construction & Development
553,959
N/A
N/A
N/A
N/A
Farm
152,237
N/A
N/A
N/A
N/A
Non-Owner
Occupied CRE
617,686
N/A
N/A
N/A
N/A
Owner Occupied CRE
746,974
N/A
N/A
N/A
N/A
Residential
1,248,409
N/A
N/A
N/A
N/A
Total Real Estate
3,319,265
2,823,372
2,639,346
2,302,998
2,189,844
Consumer:
Auto
353,595
N/A
N/A
N/A
N/A
Non-Auto
90,602
N/A
N/A
N/A
N/A
Total Consumer
444,197
411,631
372,660
403,929
409,032
Total
$ 5,171,033
$ 4,194,969
$ 3,953,636
$ 3,485,569
$ 3,357,307
Loans held-for-sale, consisting of secondary market mortgage loans, totaled $83.97 million and $28.23 million at December 31, 2020 and 2019, respectively. At December 31, 2020 and 2019, $4.38 million and $5.15 million are valued at the lower of cost or fair value, and the remaining amount is valued under the fair value option.
The Company has certain lending policies and procedures in place that are designed to maximize loan growth with an acceptable level of risk. Management reviews and approves these policies and procedures on an annual basis and makes changes as appropriate with input from our Board of Directors. Management receives and reviews monthly reports related to loan originations, quality, concentrations, delinquencies, nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geographic location.
Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and include personal guarantees.
Agricultural loans are subject to underwriting standards and processes similar to commercial loans. These agricultural loans are based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most agricultural loans are secured by the agriculture related assets being financed, such as farm land, cattle or equipment, and include personal guarantees.
Real estate loans are also subject to underwriting standards and processes similar to commercial and agricultural loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s real estate portfolio are generally diverse in terms of type and geographic location within Texas. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry. Generally, real estate loans are owner-occupied which further reduces the Company’s risk.
Consumer loan underwriting utilizes methodical credit standards and analysis to supplement the Company’s underwriting policies and procedures. The Company’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimize the Company’s risk.
Table 6 - Maturity Distribution and Interest Sensitivity of Loans at December 31, 2020 (in thousands):
The following tables summarize maturity and repricing information for the commercial and agricultural and the real estate-construction and development portion of our loan portfolio as of December 31, 2020:
One Year
or less
After One
Year
Through
Five Years
After Five
Years
Total
Commercial and agricultural
$ 362,416
$ 803,779
$ 241,376
$ 1,407,571
Real estate - construction and development
255,960
91,816
206,183
553,959
Maturities
After One
Year
Loans with fixed interest rates
$ 892,141
Loans with floating or adjustable interest rates
451,013
Asset Quality
. Our loan portfolio is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by bank regulatory agencies. Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were $42.90 million at December 31, 2020, as compared to $25.77 million at December 31, 2019 and $29.63 million at December 31, 2018. As a percent of loans held-for-investment
and foreclosed assets, these assets were 0.83% at December 31, 2020, as compared to 0.61% at December 31, 2019 and 0.75% at December 31, 2018. As a percent of total assets, these assets were 0.39% at December 31, 2020, as compared to 0.31% at December 31, 2019 and 0.38% at December 31, 2018. We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming at December 31, 2020.
Supplemental Oil and Gas Information.
At December 31, 2020, the Company’s exposure to the oil and gas industry was 2.27% of loans held-for-investment,
excluding PPP loans, or $106.24 million, compared to 2.86% of loans held-for-investment,
or $119.79 million at December 31, 2019. These oil and gas loans consisted (based on collateral supporting the loan) of (i) development and production loans of 11.99%, (ii) oil and gas field servicing loans of 6.62%, (iii) real estate loans of 57.40%, (iv) accounts receivable and inventory of 4.04%, (v) automobile of 12.09% and (vi) other of 7.86%. These loans have warranted additional scrutiny because of fluctuating oil and gas prices and the COVID pandemic. The Company instituted additional monitoring procedures for these loans and has classified and downgraded loans as appropriate. The following oil and gas information is as of and for the years ended December 31, 2020 and 2019:
December 31,
Oil and gas related loans, excluding PPP loans
$ 106,237
$ 119,789
Oil and gas related loans as a % of total loans held-for-investment,
excluding PPP loans
2.27 %
2.86 %
Classified oil and gas related loans
$ 13,298
$ 7,041
Nonaccrual oil and gas related loans
$ 4,774
$
Net charge-offs for oil and gas related loans for year then ended
$
$ -
Supplemental COVID Industry Exposure.
In addition, at December 31, 2020, loan balances in the retail/restaurant/hospitality industries totaled $359.33 million or 7.67% of the Company’s total loans held-for-investment,
excluding PPP loans. Classified and nonperforming loans for these industries combined at December 31, 2020, totaled $31.19 million and $5.98 million, respectively. Net charge-offs related to this portfolio totaled $895 thousand for the year ended December 31, 2020. Additional information related to the Company’s retail/restaurant/hospitality industries follows below (in thousands, except percentages):
December 31,
Retail loans
$ 216,244
Restaurant loans
48,618
Hotel loans
71,716
Other hospitality loans
21,970
Travel loans
Total Retail/Restaurant/Hospitality loans, excluding PPP loans
$ 359,328
Retail/Restaurant/Hospitality loans as a % of total loans held-for-investment,
excluding PPP loans
7.67 %
Classified Retail/Restaurant/Hospitality loans
$ 31,192
Nonaccrual Retail/Restaurant/Hospitality loans
5,975
Net Charge-Offs for Retail/Restaurant/Hospitality loans
Table 7 - Nonaccrual, Past Due 90 Days or More and Still Accruing, Restructured Loans and Foreclosed Assets (in thousands, except percentages):
At December 31,
Nonaccrual loans
$ 42,619
$ 24,582
$ 27,534
$ 17,670
$ 27,371
Loans still accruing and past due 90 days or more
1,008
Troubled debt restructured loans*
Nonperforming loans
42,756
24,761
29,055
18,585
28,356
Foreclosed assets
1,009
1,532
Total nonperforming assets
$ 42,898
$ 25,770
$ 29,632
$ 20,117
$ 29,000
As a % of loans held-for-investment
and foreclosed assets
0.83 %
0.61 %
0.75 %
0.58 %
0.86 %
As a % of total assets
0.39
0.31
0.38
0.28
0.43
* Troubled debt restructured loans of $7.41 million, $4.79 million, $3.84 million, $4.63 million and $6.86 million, respectively, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in nonaccrual loans as of December 31, 2020, 2019, 2018, 2017 and 2016.
We record interest payments received on nonaccrual loans as reductions of principal. Prior to the loans being placed on nonaccrual, we recognized interest income on these loans as of December 31, 2020 of approximately $255 thousand during the year ended December 31, 2020. If interest on these loans had been recognized on a full accrual basis during the year ended December 31, 2020, such income would have approximated $4.46 million.
Included in our loan portfolio are certain other loans not included in Table 7 that are deemed to be potential problem loans. Potential problem loans are those loans that are currently performing, but for which known information about trends, uncertainties or possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present repayment terms, possibly resulting in the transfer of such loans to nonperforming status. These potential problem loans totaled $10.76 million as of December 31, 2020.
See Note 3 to the Consolidated Financial Statements beginning on page
for more information on these assets.
Allowance for Credit Losses
. The allowance for credit losses is the amount we determine as of a specific date to be appropriate to absorb current expected credit losses on existing loans in which full collectability is unlikely based on our review and evaluation of the loan portfolio. For a discussion of our methodology, see our accounting policies in Note 1 to the Consolidated Financial Statements beginning on page.
The provision for credit losses was $19.52 million in 2020, as compared to $2.97 million in 2019 and $5.67 million in 2018. The provision for credit losses in 2020 reflects primarily the stress on our loan portfolio from the increase in unemployment and economic effects of the COVID pandemic. As a percent of average loans, net loan charge-offs were 0.06% during 2020, 0.04% during 2019 and 0.07% during 2018. The allowance for credit losses as a percent of loans held-for-investment
was 1.29% as of December 31, 2020, as compared to 1.25% as of December 31, 2019 and 1.30% as of December 31, 2018. The allowance for credit losses as a percent of loans held-for-investment,
excluding PPP loans, was 1.42% as of December 31, 2020, as compared to 1.25% as of December 31, 2019 and 1.30% as of December 31, 2018. Included in Tables 8 and 9 are further analysis of our allowance for credit losses.
Although we believe we use the best information available to make credit loss allowance determinations, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making our initial determinations. A downturn in the economy or lower employment could result in increased levels of nonaccrual, past due 90 days or more and still accruing, restructured loans, foreclosed assets, charge-offs, increased provision for credit losses and reductions in income. Additionally, as an integral part of their examination process, bank regulatory agencies periodically review the adequacy of our allowance for credit losses. The banking agencies could require additions to our allowance for credit losses based on their judgment of information available to them at the time of their examinations of our bank subsidiary.
Table 8 - Loan Loss Experience and Allowance for Credit Losses (in thousands, except percentages):
Balance at January 1,
$ 52,499
$ 51,202
$ 48,156
$ 45,779
$ 41,877
Impact of adopting ASC 326
(619 )
-
-
-
-
Initial allowance on acquired TB&T PCD loans
1,678
-
-
-
-
Charge-offs:
Commercial:
C&I
2,516
N/A
N/A
N/A
N/A
Municipal
-
N/A
N/A
N/A
N/A
Total Commercial
2,516
1,545
1,418
3,018
6,990
Agricultural
-
Real estate:
Construction & Development
-
N/A
N/A
N/A
N/A
Farm
-
N/A
N/A
N/A
N/A
Non-Owner
Occupied CRE
N/A
N/A
N/A
N/A
Owner Occupied CRE
N/A
N/A
N/A
N/A
Residential real estate
N/A
N/A
N/A
N/A
Total real estate
1,503
1,335
1,479
1,215
Consumer:
Auto
N/A
N/A
N/A
N/A
Non-Auto
N/A
N/A
N/A
N/A
Total Consumer
1,550
1,517
1,925
Total charge-offs
5,314
4,126
4,447
5,821
9,816
Recoveries:
Commercial:
C&I
1,315
N/A
N/A
N/A
N/A
Municipal
-
N/A
N/A
N/A
N/A
Total Commercial
1,315
1,364
Agricultural
Real estate:
Construction & Development
-
N/A
N/A
N/A
N/A
Farm
N/A
N/A
N/A
N/A
Non-Owner
Occupied CRE
N/A
N/A
N/A
N/A
Owner Occupied CRE
N/A
N/A
N/A
N/A
Residential real estate
N/A
N/A
N/A
N/A
Total Real Estate
2,021
Consumer:
Auto
N/A
N/A
N/A
N/A
Non-Auto
N/A
N/A
N/A
N/A
Total Consumer
Total recoveries
2,242
2,458
1,828
1,668
3,506
Net charge-offs
3,072
1,668
2,619
4,153
6,310
Provision for credit losses (excluding provision for unfunded commitment)
16,048
2,965
5,665
6,530
10,212
Balance at December 31,
$ 66,534
$ 52,499
$ 51,202
$ 48,156
$ 45,779
Loans, held-for-investment
at year-end
$ 5,171,033
$ 4,194,969
$ 3,953,636
$ 3,485,569
$ 3,357,307
Average loans
5,152,531
4,074,667
3,828,040
3,435,447
3,333,241
Net charge-offs/average loans
0.06 %
0.04 %
0.07 %
0.12 %
0.19 %
Allowance for credit losses/year-end
loans held-for-
investment
1.29 %
1.25 %
1.30 %
1.38 %
1.36 %
Allowance for credit losses/nonaccrual, past due 90 days still accruing and restructured loans
155.61
212.02
176.22
259.11
161.44
Table 9 - Allocation of Allowance for Credit Losses (in thousands):
At December 31,
Allocation
Amount
Allocation
Amount
Allocation
Amount
Allocation
Amount
Allocation
Amount
Commercial:
C&I
$ 13,609
$ N/A
$ N/A
$ N/A
$ N/A
Municipal
1,552
N/A
N/A
N/A
N/A
Total Commercial
15,161
12,122
11,948
10,865
11,707
Agricultural
1,255
1,206
1,446
1,305
1,101
Real estate:
Construction & Development
13,512
N/A
N/A
N/A
N/A
Farm
1,876
N/A
N/A
N/A
N/A
Non-Owner
Occupied CRE
8,391
N/A
N/A
N/A
N/A
Owner Occupied CRE
12,347
N/A
N/A
N/A
N/A
Residential real estate
12,601
N/A
N/A
N/A
N/A
Total Real Estate
48,727
33,974
32,342
29,896
26,864
Consumer:
Auto
1,020
N/A
N/A
N/A
N/A
Non-Auto
N/A
N/A
N/A
N/A
Total Consumer
1,391
5,197
5,466
6,090
6,107
Total
$ 66,534
$ 52,499
$ 51,202
$ 48,156
$ 45,779
Percent of Loans in Each Category of Total Loans:
Commercial:
C&I
21.78 %
N/A
N/A
N/A
N/A
Municipal
3.51 %
N/A
N/A
N/A
N/A
Total Commercial
25.29 %
20.41 %
21.37 %
19.63 %
20.09 %
Agricultural
1.83 %
2.47 %
2.45 %
2.71 %
2.50 %
Real estate:
Construction & Development
10.72 %
N/A
N/A
N/A
N/A
Farm
2.94 %
N/A
N/A
N/A
N/A
Non-Owner
Occupied CRE
10.55 %
N/A
N/A
N/A
N/A
Owner Occupied CRE
14.45 %
N/A
N/A
N/A
N/A
Residential real estate
25.59 %
N/A
N/A
N/A
N/A
Total Real Estate
64.25 %
67.31 %
66.75 %
66.07 %
65.23 %
Consumer:
Auto
6.89 %
N/A
N/A
N/A
N/A
Non-Auto
1.74 %
N/A
N/A
N/A
N/A
Total Consumer
8.63 %
9.81 %
9.43 %
11.59 %
12.18 %
Total
100.00 %
100.00 %
100.00 %
100.00 %
100.00 %
Interest-Bearing Demand Deposits in Banks.
The Company had interest-bearing demand deposits in banks of $517.97 million at December 31, 2020 and $47.92 million at December 31, 2019, respectively. At December 31, 2020, our interest-bearing deposits in banks included $517.57 million maintained at the Federal Reserve Bank of Dallas and $403 thousand on deposit with the Federal Home Loan Bank of Dallas (FHLB). The average balance of interest-bearing deposits in banks was $249.70 million, $80.81 million and $87.03 million in 2020, 2019 and 2018, respectively. The average yield on interest-bearing deposits in banks was 0.38%, 2.22% and 1.79% in 2020, 2019 and 2018, respectively.
Available-for-Sale
Securities
. At December 31, 2020, securities with a fair value of $4.39 billion were classified as securities available-for-sale.
There were no securities classified as held-to-maturity
at December 31, 2020 and 2019. As compared to December 31, 2019, the available-for-sale
portfolio at December 31, 2020, reflected (1) a decrease of $10.02 million in U.S. Treasury securities; (2) an increase of $1.14 billion in obligations of states and political subdivisions; (3) a decrease of $151 thousand in corporate bonds and other; and (4) a decrease of $148.01 million in mortgage-backed securities. As compared to December 31, 2018, the available-for-sale
portfolio at December 31, 2019, reflected (1) an increase of $57 thousand in U.S. Treasury securities; (2) a decrease of $301 thousand in obligations of U.S. government sponsored enterprises and agencies; (3) an increase of $31.11 million in obligations of states and political subdivisions; (4) a decrease of $90 thousand in corporate bonds and other; and (5) an increase of $223.76 million in mortgage-backed securities. Securities-available-for-sale
included fair value adjustments of $215.85 million, $84.51 million and $5.21 million at December 31, 2020, 2019 and 2018, respectively. Our mortgage related securities are backed by GNMA, FNMA or FHLMC or are collateralized by securities backed by these agencies.
See Table 10 and Note 2 to the Consolidated Financial Statements for additional disclosures relating to the maturities and fair values of the investment portfolio at December 31, 2020 and 2019.
Table 10 - Maturities and Yields of Available-for-Sale
Held at December 31, 2020 (in thousands, except percentages):
Maturing
One Year
or Less
After One Year
Through
Five Years
After Five Years
Through
Ten Years
After
Ten Years
Total
Available-for-Sale:
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Obligations of states and political subdivisions
$ 98,345
4.71 %
$ 673,036
4.01 %
$ 1,647,476
2.85 %
$ 8,019
2.39 %
$ 2,426,876
3.25 %
Corporate bonds and other securities
4,557
1.86
-
-
-
-
-
-
4,557
1.86
Mortgage-backed securities
186,698
2.02
1,514,743
2.27
260,155
1.68
-
-
1,961,596
2.17
Total
$ 289,600
2.93 %
$ 2,187,779
2.81 %
$ 1,907,631
2.69 %
$ 8,019
2.39 %
$ 4,393,029
2.76 %
All yields are computed on a tax-equivalent
basis assuming a marginal tax rate of 21%. Yields on available-for-sale
securities are based on amortized cost. Maturities of mortgage-backed securities are based on contractual maturities and could differ due to prepayments of underlying mortgages. Maturities of other securities are reported at the earlier of maturity date or call date.
As of December 31, 2020, the investment portfolio had an overall tax equivalent yield of 2.76%, a weighted average life of 4.66 years and modified duration of 4.14 years compared to December 31, 2019, the investment portfolio had an overall tax equivalent yield of 3.17%, a weighted average life of 4.18 years and modified duration of 3.74 years.
Deposits
. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were $8.68 billion as of December 31, 2020, as compared to $6.60 billion as of December 31, 2019 and $6.18 billion as of December 31, 2018. Table 11 provides a breakdown of average deposits and rates paid over the past three years and the remaining maturity of time deposits of $100,000 or more:
Table 11 - Composition of Average Deposits and Remaining Maturity of Time Deposits of $100,000 or More (in thousands, except percentages):
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Noninterest-bearing deposits
$ 2,782,896
- %
$ 2,137,089
- %
$ 2,124,005
- %
Interest-bearing deposits
Interest-bearing checking
2,513,627
0.21
2,097,109
0.68
2,025,810
0.53
Savings and money market accounts
2,214,569
0.20
1,679,168
0.54
1,558,889
0.28
Time deposits under $100,000
195,425
0.43
186,709
0.70
204,929
0.25
Time deposits of $100,000 or more
274,933
0.88
245,680
1.04
262,986
0.48
Total interest-bearing deposits
5,198,554
0.25 %
4,208,666
0.64 %
4,052,614
0.42 %
Total average deposits
$ 7,981,450
$ 6,345,755
$ 6,176,619
Total cost of deposits
0.16 %
0.42 %
0.27 %
As of December 31,
Three months or less
$ 109,096
Over three through six months
54,915
Over six through twelve months
79,159
Over twelve months
43,142
Total time deposits of $100,000 or more
$ 286,312
Borrowings.
Included in borrowings were federal funds purchased, securities sold under repurchase agreements and advances from the FHLB of $430.09 million, $381.36 million and $468.71 million at December 31, 2020, 2019 and 2018, respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the short-term borrowing. The average balances of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were $561.51 million, $398.14 million,
and $418.98 million in 2020, 2019 and 2018, respectively. The average rates paid on federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were 0.20%, 0.75% and 0.47% for the years ended December 31, 2020, 2019 and 2018, respectively. The weighted average interest rate on federal funds purchased, securities sold under repurchase agreements and advances from the FHLB was 0.08%, 0.48% and 0.78% at December 31, 2020, 2019 and 2018, respectively. The highest amount of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB at any month-end
during 2020, 2019 and 2018 was $925.42 million, $423.67 million and $529.64 million, respectively.
Capital Resources
We evaluate capital resources by our ability to maintain adequate regulatory capital ratios to do business in the banking industry. Issues related to capital resources arise primarily when we are growing at an accelerated rate but not retaining a significant amount of our profits or when we experience significant asset quality deterioration.
Total shareholders’ equity was $1.68 billion, or 15.39% of total assets at December 31, 2020, as compared to $1.23 billion, or 14.85% of total assets at December 31, 2019. Included in shareholders’ equity at December 31, 2020 and 2019 were $170.40 million and $67.51 million, respectively, in unrealized gains on investment securities available-for-sale,
net of related income taxes. During 2020, total shareholders’ equity averaged $1.56 billion, or 15.32% of average assets, as compared to $1.15 billion, or 14.44% of average assets during 2019.
Banking regulators measure capital adequacy by means of the risk-based capital ratios and leverage ratio under the Basel III regulatory capital framework and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and off-balance-sheet
commitments and contingencies according to prescribed risk categories. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders’ equity less intangible assets by quarter-to-date
average assets less intangible assets.
Beginning in January 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 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including divided payments and stock repurchase, and to pay discretionary bonuses to executive officers.
As of December 31, 2020 and 2019, we had a total risk-based capital ratio of 22.03% and 21.13%, a Tier 1 capital to risk-weighted assets ratio of 20.79% and 20.06%, a common equity Tier 1 capital to risk-weighted ratio of 20.79% and 20.06% and a Tier 1 leverage ratio of 11.86% and 12.60%, respectively. The regulatory capital ratios as of December 31, 2020 and 2019 were calculated under Basel III rules.
Our subsidiary bank made the election to continue to exclude accumulated other comprehensive income from capital in connection with its March 31, 2015 quarterly financial filing and, in effect, to retain the accumulated other comprehensive income treatment under the prior capital rules.
Interest Rate Risk
. Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. Our exposure to interest rate risk is managed primarily through our strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities that generate favorable earnings while limiting the potential negative effects of changes in market interest rates. We use no off-balance-sheet
financial instruments to manage interest rate risk.
Our subsidiary bank has an asset liability management committee that monitors interest rate risk and compliance with investment policies. The subsidiary bank utilizes an earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next twelve months. The model measures the impact on net interest income relative to a base case scenario of hypothetical fluctuations in interest rates over the next twelve months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the re-pricing
and maturity characteristics of the existing and projected balance sheet.
As of December 31, 2020, the model simulations projected that 100 and 200 basis point increases in interest rates would result in positive variances in net interest income of 4.75% and 9.51%, respectively, relative to the current financial statement structure over the next twelve months, while a decrease in interest rates of 100 and 200 basis points would result in negative variances in net interest income of 3.46% and 5.44% relative to the current financial statement structure over the next twelve months.
Our model simulation as of December 31, 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 reprice in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material.
Should we be unable to maintain a reasonable balance of maturities and repricing of our interest-earning assets and our interest-bearing liabilities, we could be required to dispose of our assets in an unfavorable manner or pay a higher than market rate to fund our activities. Our asset liability committee oversees and monitors this risk.
Liquidity
Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. The potential need for liquidity arising from these types of financial instruments is represented by the contractual notional amount of the instrument, as detailed in Tables 12 and 13. Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. Liquid assets include cash, federal funds sold, and short-term investments in time deposits in banks. Liquidity is also provided by access to funding sources, which include core depositors and correspondent banks that maintain accounts with and sell federal funds to our subsidiary bank. Other sources of funds include our ability to borrow from short-term sources, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and advances from the FHLB, which amounted to $430.09 million at December 31, 2020, and an unfunded $25.00 million revolving line of credit established with Frost Bank, a nonaffiliated bank, which matures on June 30, 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 December 31, 2020, there were no amounts drawn on these lines of credit. Our subsidiary bank also has (i) an available line of credit with the FHLB totaling $1.53 billion at December 31, 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 December 31, 2020, the Company did not have any balances outstanding under this line of credit.
The Company renewed its loan agreement, effective June 30, 2019, with Frost Bank. Under the loan agreement, as renewed and amended, we are permitted to draw up to $25.00 million on a revolving line of 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 December 31, 2020. There was no outstanding balance under the line of credit as of December 31, 2020 or 2019.
In addition, we anticipate that any future acquisition of financial institutions, expansion of branch locations or offering of new products could also place a demand on our cash resources. Available cash and cash equivalents at the Company, which totaled $136.67 million at December 31, 2020, investment securities which totaled $2.61 million at December 31, 2020 with maturities over 9 to 10 years, available dividends from our subsidiaries which totaled $289.68 million at December 31, 2020, utilization of available lines of credit, and future debt or equity offerings are expected to be the source of funding for these potential acquisitions or expansions.
Given the strong core deposit base and relatively low loan to deposit ratios maintained at our subsidiary bank, we consider our current liquidity position to be adequate to meet our short-term and long-term liquidity needs.
Table 12 - Contractual Obligations as of December 31, 2020 (in thousands):
Payment Due by Period
Total Amounts
Less than 1
year
More than 1
year but less
than 3 years
More than 3
years but less
than 5 years
Over 5
years
Deposits with stated maturity dates
$ 475,425
$ 391,638
$ 64,495
$ 19,267
$
Operating leases
2,577
1,094
Outsourcing service contracts
15,278
7,469
6,002
1,807
-
Total Contractual Obligations
$ 493,280
$ 400,201
$ 71,367
$ 21,609
$
Amounts above for deposits do not include related accrued interest. The above table also does not include balances related to the Company’s interest rate locks commitments (“IRLCs”) and forward mortgage-backed security trades.
Off-Balance
Sheet/Reserve for Unfunded Commitments.
We are a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of our customers. These financial instruments include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. At December 31, 2020, the Company’s reserve for unfunded commitments totaled $5.49 million which is recorded in other liabilities.
Our exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. We generally use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet
instruments.
Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case
basis. The amount of collateral obtained, as we deem necessary upon extension of credit, is based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments we issue to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The average collateral value held on letters of credit usually exceeds the contract amount.
Table 13 - Commitments as of December 31, 2020 (in thousands):
Total Notional
Amounts
Committed
Less than 1
year
More than 1
year but less
than 3 years
More than 3
years but less
than 5 years
Over 5
years
Unfunded lines of credit
$ 871,960
$ 608,972
$ 152,592
$ 20,846
$ 89,550
Unfunded commitments to extend credit
742,538
426,108
42,010
51,757
222,663
Standby letters of credit
40,050
36,849
3,166
Total Commercial Commitments
$ 1,654,548
$ 1,071,929
$ 197,768
$ 72,608
$ 312,243
We believe we have no other OBS arrangements or transactions with unconsolidated, special purpose entities that would expose us to liability that is not reflected on the face of the financial statements. The above table also does not include balances related to the Company’s IRLCs and forward mortgage-backed security trades.
Parent Company Funding
. Our ability to fund various operating expenses, dividends, and cash acquisitions is generally dependent on our own earnings (without giving effect to our subsidiaries), cash reserves and funds derived from our subsidiaries. These funds historically have been produced by intercompany dividends and management fees that are limited to reimbursement of actual expenses. We anticipate that our recurring cash sources will continue to include dividends and management fees from our subsidiaries. At December 31, 2020, $289.68 million was available for the payment of intercompany dividends by our subsidiaries without the prior approval of regulatory agencies. Our subsidiaries paid aggregate dividends to us of $87.50 million in 2020 and $84.50 million in 2019.
Dividends
. Our long-term dividend policy is to pay cash dividends to our shareholders of approximately 35% to 40% of annual net earnings while maintaining adequate capital to support growth. We are also restricted by a loan covenant within our line of credit agreement with Frost Bank to dividend no greater than 55% of net income, as defined in such loan agreement. The cash dividend payout ratios have amounted to 35.88%, 38.31% and 36.84% of net earnings, respectively, in 2020, 2019 and 2018. Given our current capital position, projected earnings and asset growth rates, we do not anticipate any significant change in our current dividend policy.
Our bank subsidiary, which is a national banking association and a member of the Federal Reserve System, is required by federal law to obtain the prior approval of the OCC to declare and pay dividends if the total of all dividends declared in any calendar year would exceed the total of (1) such bank’s net profits (as defined and interpreted by regulation) for that year plus (2) its retained net profits (as defined and interpreted by regulation) for the preceding two calendar years, less any required transfers to surplus.
To pay dividends, we and our subsidiary bank must maintain adequate capital above regulatory guidelines. In addition, if the applicable regulatory authority believes that a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the authority may require, after notice and hearing, that such bank cease and desist from the unsafe practice. The Federal Reserve Board, the FDIC and the OCC have each indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve, the OCC and the FDIC have issued policy statements that recommend that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management considers interest rate risk to be a significant market risk for the Company. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations-Capital Resources-Interest Rate Risk” for disclosure regarding this market risk.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and the report of our independent registered public accounting firm begin on page.
Quarterly Results of Operations (in thousands, except per share and common stock data):
The following tables set forth certain unaudited historical quarterly financial data for each of the eight consecutive quarters in the fiscal years of 2020 and 2019. This information is derived from unaudited consolidated financial statements that include, in our opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation when read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Form 10-K.
4th
3rd
2nd
1st
(dollars in thousands, except per share amounts)
Summary Income Statement Information:
Interest income
$ 92,457
$ 91,373
$ 92,197
$ 88,100
Interest expense
1,920
2,163
2,962
7,198
Net interest income
90,537
89,210
89,235
80,902
Provision for credit losses
(8,033 )
9,000
8,700
9,850
Net interest income after provision for credit losses
98,570
80,210
80,535
71,052
Noninterest income
35,686
38,539
35,407
26,670
Net gain on securities transactions
1,512
2,062
Noninterest expense
63,705
55,593
53,321
55,318
Earnings before income taxes
70,574
63,192
64,133
44,466
Income tax expense
12,099
10,335
10,663
7,234
Net earnings
$ 58,475
$ 52,857
$ 53,470
$ 37,232
Per Share Data:
Earnings per share, basic
$ 0.41
$ 0.37
$ 0.38
$ 0.26
Earnings per share, diluted
0.41
0.37
0.38
0.26
Cash dividends declared
0.13
0.13
0.13
0.12
Book value at period-end
11.80
11.40
11.14
9.03
Common stock sales price:
High
$ 36.43
$ 32.80
$ 33.81
$ 35.94
Low
27.49
26.71
23.44
20.70
Close
36.17
27.91
28.89
26.84
4th
3rd
2nd
1st
(dollars in thousands, except per share amounts)
Summary Income Statement Information:
Interest income
$ 82,123
$ 80,591
$ 79,576
$ 76,901
Interest expense
6,801
7,953
7,961
7,387
Net interest income
75,322
72,638
71,615
69,514
Provision for loan losses
Net interest income after provision for loan losses
74,372
72,188
71,015
68,549
Noninterest income
27,342
28,617
27,300
24,437
Net gain on securities transactions
-
Noninterest expense
51,938
48,910
48,304
47,367
Earnings before income taxes
49,781
51,947
50,687
45,619
Income tax expense
8,393
8,867
8,594
7,367
Net earnings
$ 41,388
$ 43,080
$ 42,093
$ 38,252
Per Share Data:
Earnings per share, basic
$ 0.30
$ 0.32
$ 0.31
$ 0.28
Earnings per share, diluted
0.30
0.32
0.31
0.28
Cash dividends declared
0.12
0.12
0.12
0.11
Book value at period-end
9.03
8.87
8.58
8.16
Common stock sales price:
High
$ 36.45
$ 33.97
$ 31.54
$ 32.65
Low
32.01
29.50
28.00
27.13
Close
35.10
33.33
30.79
28.89

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.
CONTROLS AND PROCEDURES
As of December 31, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)
or 15d-15(e)
of the Securities Exchange Act of 1934). Our management, which includes our principal executive officer and our principal financial officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Our principal executive officer and principal financial officer have concluded, based on our evaluation of our disclosure controls and procedures, that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2020.
Subsequent to our evaluation, there were no significant changes in our internal control over financial reporting or other factors that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of First Financial Bankshares, Inc. and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting. First Financial Bankshares, Inc. and subsidiaries’ internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
First Financial Bankshares, Inc. and subsidiaries’ management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (COSO) in Internal Control - Integrated
Framework
. Based on our assessment we believe that, as of December 31, 2020, the Company’s internal control over financial reporting, as such term is defined in Rule 13a-15(f)
of the Securities Exchange Act of 1934, is effective based on those criteria.
First Financial Bankshares, Inc. and subsidiaries’ independent auditors have issued an audit report, dated February 22, 2021, on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of First Financial Bankshares, Inc.
Opinion on Internal Control over Financial Reporting
We have audited First Financial Bankshares, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, First Financial Bankshares, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of earnings, comprehensive earnings, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020 and the related notes and our report dated February 22, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Dallas, Texas
February 22, 2021

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ITEM 9B. OTHER INFORMATION
ITEM 9B.
OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is hereby incorporated by reference from our proxy statement for our 2021 Annual Meeting of Shareholders which will be filed with the SEC not later than 120 days after December 31, 2020.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference from our proxy statement for our 2021 Annual Meeting of Shareholders which will be filed with the SEC not later than 120 days after December 31, 2020.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 related to security ownership of certain beneficial owners and management is hereby incorporated by reference from our proxy statement for our 2021 annual meeting of shareholders. The following chart gives aggregate information under our equity compensation plans as of December 31, 2020. Additional information regarding stock-based compensation plans is presented in Note 18 - Stock Option Plan and Restricted Stock Plan in the notes to consolidated financial statements.
Number of Shares
To be Issued Upon
Exercise of
Outstanding
Awards
Weighted
Average
Exercise
Price of
Outstanding
Awards
Number of Shares
Remaining Available
For Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in
Far Left Column)
Equity compensation plans approved by security holders
1,928,945 (1)
$ 20.85 (2)
4,177,826
Equity compensation plans not approved by security holders
-
-
-
Total
1,928,945
$ 20.85
4,177,826
(1) Includes 1,833,057 shares related to the Company’s stock option plan and 95,888 shares related to the Company’s restricted stock plan.
(2) Excludes outstanding restricted stock which are granted for no consideration.
The remainder of the information required by Item 12 is incorporated by reference from our proxy statement for our 2021 Annual Meeting of Shareholders.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is hereby incorporated by reference from our proxy statement for our 2021 Annual Meeting of Shareholders which will be filed with the SEC not later than 120 days after December 31, 2020.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is hereby incorporated by reference from our proxy statement for our 2021 Annual Meeting of Shareholders which will be filed with the SEC not later than 120 days after December 31, 2020.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.
EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Earnings for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
These schedules have been omitted because they are not required, are not applicable or have been included in our consolidated financial statements.
(3) Exhibits:
The following exhibits are included or incorporated by reference in this Annual Report on Form 10-K:
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 3.1 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*
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 Bankhares, 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).++
21.1
-  Subsidiaries of Registrant.*
23.1
-  Consent of Ernst & Young LLP.*
24.1
-  Power of Attorney (included on signature page of this Form 10-K).*
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 with the Inline XBRL Document.*
101.SCH
-  XBRL Taxonomy Extension Schema Document.*
101.CAL
-  XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF
-  XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB
-  XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE
-  XBRL Taxonomy Extension Presentation Linkbase Document.*
* Filed herewith.
+ Furnished herewith. This Exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section, and shall not be deemed to be incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
++ Management contract or compensatory plan on arrangement.