UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-K

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

For the fiscal year ended

December 31, ~~2017~~

2019

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

For the transition period from
to

Commission file number

0-7674

First Financial Bankshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Texas		75-0944023
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

400 Pine Street , Abilene , Texas		79601
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: ~~(325)~~(
325
)

627-7155

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


Title of ~~Class~~ each class	Trading Symbol(s)	Name of ~~Exchange~~ exchange on ~~Which Registered~~ which registered
Common Stock, par value $0.01 per share	FFIN	The Nasdaq ~~Global Select~~Stock Market LLC

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes

☒

☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes

☐

☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

☒

☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation

S-T

during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such

files).

Yes

☒

☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated file”, “smaller reporting company” and “emerging growth company” in Rule

12b-2

of the Exchange Act.


Large accelerated filer	☒	~~Accelerated filer~~	☐

~~Non-accelerated filer~~	☐	~~Smaller reporting company~~	☐

		☒	Accelerated filer	☐

Non-accelerated filer		☐	Smaller reporting company	☐

Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Act). Yes

☐

☒

As of June 30, ~~2017,~~2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s voting and

non-voting

common stock held by

non-affiliates

was ~~$2.78~~$

3.97

billion.

As of February ~~16, 2018,~~1

, 2020, there were ~~67,574,990~~

142,218,922

shares of common stock outstanding.

Through our subsidiaries, we conduct a full-service commercial banking business. Our banking centers are located primarily in Central, North Central, Southeast and West Texas. As of ~~December 31, 2017,~~January 1, 2020, we had 6978 financial centers across Texas, with eleven locations in Abilene, three locations in ~~San Angelo~~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, all in Texas. On January 1, 2018, we completed our acquisition of Commercial Bancshares, Inc. and its wholly owned bank subsidiary, Commercial State Bank and, as a result, added branch locations in Kingwood, Fulshear, El Campo and Palacios.

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

In the past, we have chosen to keep our Company focused on the State of Texas, one of the nation’s largest, fastest-growing and most economically diverse states. With approximately ~~27.9~~29.0 million residents, Texas has more people than any other state except California. The population of Texas grew ~~19.3%~~20.7% from ~~2006-2016~~2008-2018 according to the U.S. Census Bureau. Many of the communities in which we operate are also experiencing positive growth as shown below:

Population Growth 2006-2016*

Bridgeport and Wise County
   13.5%    Weatherford, Willow Park, Aledo and Parker County    23.6%
Fort Worth and Tarrant County
   21.5%    Stephenville and Erath County    18.0%
Cleburne and Johnson County
   11.7%    Conroe and Montgomery County    41.3%
Granbury and Hood County
   31.1%    *Source: U. S. Census Bureau

2008-2018*


Bridgeport and Wise County	21.4	%
Fort Worth and Tarrant County	18.2	%
Cleburne and Johnson County	15.2	%
Granbury and Hood County	16.8	%
Weatherford, Willow Park, Aledo and Parker County	34.1	%


Stephenville and Erath County	15.6	%
Conroe and Montgomery County	43.3	%
Bryan/College Station	27.4	%

*	Source: U. S. Census Bureau

These economies include dynamic centers of higher education, agriculture, wind energy and natural resources, retail, military, 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 thirteen bank acquisitions and have increased our total assets from $1.57 billion to ~~$7.25~~$8.26 billion as of December 31, ~~2017.~~2019. We ~~have~~ also ~~established~~have a trust and asset management company and a technology services company. First Financial Trust and Asset Management Company, National

Association operates as a subsidiary of First Financial Bankshares, Inc. and First Technology Services, Inc. operates as a subsidiary of First Financial Bank, National Association, Abilene, Texas. 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 newest branch in Spring, Texas which opened in January 2019, so we can provide more convenient service to our ~~customers, and we~~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 $300 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.

our bank regions provides general commercial banking services, which include accepting and holding checking, savings and time deposits, making loans, automated teller machines,

drive-in

and night deposit services, safe deposit facilities, remote deposit capture, internet banking, mobile banking, payroll cards, transmitting funds, and performing other customary commercial banking services. We also conduct ~~full service~~full-service trust and wealth management activities through First Financial Trust & Asset Management Company, National Association, our trust company. Our trust company has ~~seven~~nine locations which are located in Abilene, 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 arrangements with an unrelated third party in our Abilene, ~~Cleburne,~~ San Angelo and Weatherford banking regions.

Competition

Commercial banking in Texas is highly competitive, and because we hold less than 1% of the state’s deposits, we represent only a minor segment of the industry. 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. 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.”

Employees

Including all of our subsidiaries, we employed ~~approximately 1,300~~1,345 full-time equivalent employees at December 31, ~~2017.~~2019. Our management believes that our employee relations have been and will continue to be good.

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

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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.

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Banks

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

~~National Banking Associations~~.

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

First Financial Bank, National Association, Abilene, Texas;

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

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

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

requires each national banking association to maintain reserves against deposits;

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

restricts investments and other activities.

Deposit Insurance Coverage and Assessments

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

Our subsidiary bank must pay assessments to the FDIC under a risk-based assessment system for this federal deposit insurance protection. FDIC-insured depository institutions ~~that are members of the Bank Insurance Fund~~ pay insurance premiums at rates based on their risk classification. Institutions assigned to higher risk classifications (i.e., institutions that pose a greater risk of loss to the DIF) pay assessments at higher rates than institutions assigned to lower risk classifications. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to bank regulators. Through ~~June 30, 2017,~~December 31, 2019, the assessment rate for our subsidiary bank was at the lowest risk-based premium available, which was 3.00% of the assessment base per annum. In addition, the FDIC can impose special assessments to cover shortages in the DIF and has imposed special assessments in the past.

In October 2010, the FDIC adopted a new Restoration Plan for the DIF to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. On April 26, 2016, the FDIC adopted a rule amending pricing for deposit insurance for institutions with less than $10 billion in assets effective the quarter after the fund reserve ratio reached 1.15%. AsThe fund reserve ratio reached 1.15% effective as of June 30, ~~2016, the FDIC announced that the fund reserve ratio had reached 1.15%.~~2016. As a result, ~~the Company’s~~our subsidiary bank’s assessment rate was decreased to the rate stated ~~above.~~above effective July 1, 2016. The Dodd-Frank Act also eliminated the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.

The Dodd-Frank Act ~~requires~~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, such as the ~~Company.~~

our subsidiary bank. 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 assessment invoice and then again to the December 31, 2019 assessment invoice. Our subsidiary’s bank’s assessment credit totaled $1.84 million of which $522 thousand and $525 thousand, respectively, were used to zero out the September 30, 2019 and December 31, 2019 assessment invoices. As of December 31, 2019, $791 thousand remains in available credits, which our subsidiary bank expects to be applied to the March 31, 2020 and June 30, 2020 assessment invoices.

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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 bank 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 ~~$30.8~~$84.50 million in ~~2017~~2019 and ~~$48.8~~$74.10 million in ~~2016.~~2018. Under the dividend restrictions discussed above, as of December 31, ~~2017,~~2019, our subsidiaries could have declared in the aggregate additional dividends of approximately ~~$205.75~~$261.42 million from retained net profits, without obtaining regulatory approvals.

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Federal Income Tax

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law with sweeping modifications to the Internal Revenue Code. The primary change for the Company was to lower the corporate income tax rate to 21% from 35%. The Company’s deferred tax assets and liabilities were

re-measured

based on the income tax rates at which they are expected to reverse in the future, which is generally 21%. However, the Company continues to analyze certain aspects of the Act resulting in refinement of the calculation which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the

re-measurement

of the Company’s deferred tax balance was $7.65 million, a reduction of income tax expense for the year ended December 31, 2017.

At December 31, 2018, final regulations for the Tax Cuts and Jobs Act were still pending; 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 year ended December 31, 2019, and the Company does not anticipate significant revision will be necessary.

Affiliate Transactions

The Federal Reserve Act, the Federal Deposit Insurance Act (“FDIA”) and the rules adopted under these statutes restrict the extent to which we can borrow or otherwise obtain credit from, or engage in certain other transactions with, our subsidiaries. These laws regulate “covered transactions” between insured depository institutions and their subsidiaries, on the one hand, and their ~~nondepository~~

non-depository

affiliates, on the other hand. The Dodd-Frank Act expanded the definition of affiliate to make any investment fund, including a mutual fund, for which a depository institution or its affiliates serve as 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:

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

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

the loans must not involve a greater than normal risk of

non-payment

or include other features not favorable to our subsidiary bank.

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Furthermore, our subsidiary bank must periodically report all loans made to directors and other insiders to the bank regulators, and these loans are closely scrutinized by the regulators for compliance with Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O. Each loan to directors or other insiders must be

pre-approved

by the bank’s board of directors with the interested director abstaining from voting.

Capital

We and our bank subsidiary are each required to comply with applicable capital adequacy standards established by the Federal Reserve Board and the OCC, respectively. The current risk-based capital standards applicable to us and our bank subsidiary, parts of which are currently in the process of being

phased-in,

are based on the December 2010 final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision (the “Basel Committee”).

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

phase-in

period for certain provisions).

The Basel III Rules established three components of regulatory capital: (1) common equity tier 1 capital (“CET1”), (2) additional tier 1 capital, and (3) tier 2 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. Under the Basel III Rules, for most banking organizations, the most common form of additional tier 1 capital is

non-cumulative

perpetual preferred stock and the most common form of tier 2 capital is subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the Basel III Rules’ specific requirements. As of December 31, ~~2017,~~2019, we do not have any

non-cumulative

perpetual preferred stock or subordinated notes. CET1, tier 1 capital, and total capital serve as the numerators for three prescribed regulatory capital ratios. Risk-weighted assets, calculated using the standardized approach in the Basel III ~~Capital~~ Rules for us and our subsidiary bank, provide the denominator for such ratios. There is also a leverage 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 a

one-time,

permanent election to continue to exclude AOCI from capital in its filing with the Federal Reserve Board 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~~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:

4.5% CET1 to risk-weighted assets;

6.0% ~~Tier~~tier 1 capital to risk-weighted assets;

8.0% ~~Total~~total capital to risk-weighted assets; and

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

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

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The Basel III Rules ~~prescribe~~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 ~~revise~~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, ~~2017,~~2019, we had a total risk-based capital ratio of ~~19.85%~~21.13%, a ~~Tier~~tier 1 capital to risk-weighted asset ratio of ~~18.66%~~20.06%, a ~~common equity Tier 1~~CET1 to risk-weighted assets ratio of ~~18.66%~~20.06% and a ~~Tier 1~~ leverage ratio of ~~11.09%~~12.60%. These regulatory capital ratios were calculated under the Basel III ~~rules.~~

Rules.

In November 2019, the federal banking regulators published final rules implementing a simplified measure of capital adequacy for certain banking organizations that have less than $10 billion in total consolidated assets. Under the final rules, which went into effect on January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%,
off-balance-sheet
exposures of 25% or less of total consolidated assets and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community banking organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III Rules and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed below. The final rules include a
two-quarter
grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater-
than-9%
leverage capital ratio requirement, is generally still deemed “well capitalized” so long as the banking organization maintains a leverage capital ratio greater than 8%. A banking organization that fails to maintain a leverage capital ratio greater than 8% is not permitted to use the grace period and must comply with the generally applicable requirements under the Basel III Rules and file the appropriate regulatory reports. The Company and our subsidiary bank do not have any immediate plans to elect to use the community bank leverage ratio framework but may make such an election in the future.

Prompt Corrective Action.

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

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

2019.

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

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and to other indebtedness of our subsidiaries. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and be subject to a priority of payment.

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

Safe and Sound Banking Practices.

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

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

Interstate Banking and Branching

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

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

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

out-of-state

banks that branch or make acquisitions in our primary markets in Texas.

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

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community and assigns a rating. These ratings are “Outstanding,” “Satisfactory,” “Needs Improvement” and “Substantial

Non-Compliance.”

Institutions with ratings lower than “Satisfactory” may be restricted from engaging in the aforementioned activities. We believe our subsidiary bank has taken and takes significant actions to comply with the CRA, and our subsidiary bank received a ~~“satisfactory”~~“Satisfactory” rating in its most recent review by federal regulators with respect to its compliance with the CRA.

Monitoring and Reporting Suspicious Activity

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

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

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

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

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

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

the development of internal policies, procedures, and controls;

the designation of a compliance officer;

an ongoing employee training program; and

an independent audit function to test the programs.

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

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,

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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, SEC and Federal Reserve Board) to adopt requirements or guidelines prohibiting excessive compensation. In ~~April and May~~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$1.0 billion and less than $50 billion. The proposed rules would establish general qualitative requirements applicable to all covered entities, which would include (i) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (ii) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (iii) establishing requirements for performance measures to appropriately balance risk and reward; (iv) requiring board of director oversight of incentive arrangements; and (v) mandating appropriate recordkeeping. Under the proposed rule, larger financial institutions with total consolidated assets of at least $50 billion would also be subject to additional requirements applicable to such institutions’ “senior executive officers” and “significant risk-takers.” These additional requirements would not be applicable to us because we currently have less than $50 billion in total consolidated assets. Comments on the proposed rule were due by July 22, 2016. As of the date of this document, the final rule has not yet been published by these regulators.

In addition, the Dodd-Frank Act requires publicly traded companies to give stockholders a

non-binding

vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on

so-called ~~“golden~~

“golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. The ~~new~~ legislation also authorizes the Securities and Exchange Commission (“SEC”) to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded or not. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

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Consumer Laws and Regulations

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

Consumer Financial Protection Bureau

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

enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits the state attorney general to enforce compliance with both the state and federal laws and regulations.

The CFPB has finalized rules relating to, among other things, remittance transfers under the Electronic Fund Transfer Act, which requires companies to provide consumers with certain disclosures before the consumer pays for a remittance transfer. These rules became effective in October 2013. The CFPB has also amended certain rules under Regulation C relating to home mortgage disclosure to reflect a change in the

asset-size

exemption threshold for depository institutions based on the annual percentage change in the Consumer Price Index for Urban Wage Earners and Clerical Workers. In addition, on January 10, 2013, the CFPB released its final

“Ability-to-Repay/Qualified

Mortgage” rules, which amended the Truth in Lending Act (Regulation Z). Regulation Z prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer’s ability to repay the loan. The final amended rule implemented sections 1411 and 1412 of the Dodd-Frank Act, which generally require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an

open-end

credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified mortgages.” The final rule also implemented section 1414 of the Dodd-Frank Act, which limits prepayment penalties. Finally, the final rule requires creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated. This rule became effective January 10, 2014.

Technology Risk Management and Consumer Privacy

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

Under Section 501 of the Gramm-Leach-Bliley Act, the federal banking agencies have established appropriate standards for financial institutions regarding the implementation of safeguards to ensure the security and

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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, including the FDIC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and

non-farm

residential properties and loans for construction, land development, and other land represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices that address the following key elements: including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending.

UDAP and UDAAP

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

Monetary Policy

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

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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. While the restrictions on interchange fees do not apply to banks that, together with their affiliates, have assets of less than $10 billion, the rule could affect the competitiveness of debit cards issued by smaller banks; 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 had until July 15, 2015 to fully conform to the Volcker Rules restrictions.

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

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Available Information

We file annual, quarterly and current reports, proxy statements and other information with the SEC. ~~You may read~~The SEC maintains a website that contains reports, proxy and ~~copy any document we~~information statements, and other information regarding issuers that file ~~at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call~~electronically with the SEC at~~1-800-SEC-0330~~ ~~for further information~~

www.sec.gov

. You may obtain copies of our filings on the ~~public reference room.~~SEC website. Our ~~SEC filings are also available to the public at the SEC’s web site at http://www.sec.gov. Our web site~~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 ~~web site.~~website. These documents are posted to our web site after we have filed them with the SEC. Our corporate governance guidelines, including our code of conduct applicable to all our employees, officers and directors, as well as the charters of our audit and nominating committees, are available at

www.ffin.com

. The foregoing information is also available in print to any shareholder who requests it. Except as explicitly provided, information on any web site is not incorporated into this Form

10-K

or our other securities filings and is not a part of them.

ITEM 1A. ~~RISK~~

RISK FACTORS

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

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.

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

Our network of bank regions is concentrated in Texas, primarily in the Central, North Central, Southeast and Western regions of the state. Most of our customers and revenue are derived from ~~this area.~~these 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 ~~significant decline and~~ volatility in oil and gas prices ~~has resulted~~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 ~~1.72%~~2.84% of total loans as of December 31, ~~2017,~~2019, should the price of oil and gas decline further and/or remain at ~~the current~~ low ~~price~~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.

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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.

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 loan 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 and liquidity.~~

condition.

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

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

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

~~Our loan portfolio includes many real estate secured loans, demand for which may decrease during economic downturns as a result~~

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

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

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

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

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

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

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

We depend on the accuracy and completeness of information about customers and counterparties.

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

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

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

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

We do business through the purchase and sale of 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.

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,

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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.

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.

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

~~On July 2, 2013, the~~

The Federal Reserve Board ~~and on July 9, 2013, the FDIC and OCC,~~ adopted a final rule that ~~implements~~implemented the Basel III changes to the international regulatory capital framework and ~~revises~~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 ~~(150%)~~ to ~~exposures~~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

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“available-for-sale”

securities holdings to be included for purposes of calculating regulatory capital requirements unless a~~one-timeopt-out~~

one-time

opt-out

is exercised. We exercised this

opt-out

right in our March 31, 2015 quarterly financial filing. The final rule also included changes in what constitutes regulatory ~~capital, some of which are subject to atwo-year~~ ~~transition period. These changes included thephasing-out~~ ~~of certain instruments as qualifying~~ capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock are required to be deducted from ~~capital, subject to atwo-year~~ ~~transition period.~~

capital. The final rule became effective for us on January 1, 2015. As of December 31, ~~2017,~~2019, 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 ~~will~~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.

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;

~~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 13% 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.

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

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

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

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

Our business is subject to significant government regulation.

We operate in a highly-regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Texas Department of Banking, the Federal Reserve Board, the OCC, and the FDIC. 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 greater than $10 billion, concern exists that ~~the~~these regulations will also impact our ~~Company. Beginning in~~Company and we continue approach the ~~third quarter of 2010, we were~~$10 billion asset level each year. We are also prohibited from charging customers fees for paying overdrafts on automated teller machine and debit card transactions, unless the consumer opts in. We continue to monitor the impact of these new regulations and other developments on our service charge revenue.

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

On December 22, 2017, the President of the United States signed ~~into law H.R. 1, originally known as~~ the “Tax Cuts and Jobs Act.” The ~~Company is still in the process of analyzing the~~ Tax Cuts and Jobs Act ~~and its possible effects on the Company. The Tax Cuts and Jobs Act includes~~included a number of provisions, including the lowering of the U.S. corporate tax rate from ~~35 percent~~ 35%

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to ~~21 percent,~~21%, effective January 1, 2018. There ~~are~~were also provisions that may partially offset the benefit of such rate reduction. ~~Financial statement impacts include adjustments for, among other things, there-measurement~~ ~~of deferred tax assets and liabilities. While there are benefits, there is also substantial uncertainty regarding the details of U.S. Tax Reform.~~ The intended and unintended consequences of Tax Cuts and Jobs Act on our business and on holders of our common shares is uncertain and could be adverse. ~~The Company anticipates that~~Changes in the ~~impact~~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 may be material to our business, financial condition and results of operations.~~

~~A new~~Act.

New accounting standard, effective January 1, 2020, will result in a significant change in how we recognize credit losses and may have a material impact on our financial condition or results of operations

~~In June 2016,~~

Effective January 1, 2020, the ~~Financial~~ Company implemented the provision of

Accounting Standards ~~Board (“FASB”) issued an accounting standard update,~~Update (ASU) 2016-13, “Financial ~~Instruments-Credit~~Instruments – Credit Losses (Topic 326),: Measurement of Credit Losses on Financial ~~Instruments,~~Instruments.” ~~which replaces~~

ASU

2016-13

represents a comprehensive change in estimating the allowance for loan losses from the current “incurred loss” model ~~for recognizing credit~~of losses ~~with an~~inherent in the loan portfolio to a current “expected loss” model, referred to as the Current Expected Credit Loss (“CECL”) model. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and~~held-to-maturity~~ ~~debt securities, at the net amount~~which encompasses losses expected to be ~~collected.~~ incurred over the life of the portfolio.

We are completing our implementation plan with our cross-functional working group, under the direction of our Chief Credit Officer along with our Chief Accounting Officer, Chief Lending Officer and Chief Financial Officer. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. Our implementation plan included assessment and documentation of processes, internal controls and data sources; model development, documentation and validation; and system configuration among other things. We contracted with a third-party vendor to assist us in the application of ASU

2016-13.

The measurement of expected credit losses ~~is to~~under ASU

2016-13

will be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current generally accepted accounting principles, ~~(“GAAP”),~~ which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of ~~the CECL model will~~ASU

2016-13

could materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, ~~the CECL model~~ ASU

2016-13

may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

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

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

We have historically paid the lowest premium rate available due to our sound financial ~~position.~~position and in 2019 and carrying over into 2020 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. These increased premiums would have an adverse effect on our net income and results of operations.

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

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

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We are subject to interest rate risk.

Our profitability is dependent to a large extent on our net interest income, which is the difference between interest income we earn as a result of interest paid to us on loans and investments and interest we pay to third parties such as our depositors and those from whom we borrow funds. Like most financial institutions, we are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, and (iii) the average duration of ~~the Company’s~~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 Board began raising interest rates in late 2015 and continued to increase through 2018. Beginning in August 2019, the Federal Reserve Board decreased rates a total of 75 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. In addition, any substantial and prolonged increase in market interest rates could reduce our customers’ desire to borrow money from us or adversely affect their ability to repay their outstanding loans by increasing their credit costs since most of our loans have adjustable interest rates that reset periodically. Any of these events could adversely affect our results of operations, financial condition and liquidity.

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 a material adverse effect on our financial condition or results of operations.

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

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liquidity needs of its depositors. In particular, a substantial majority of the Company’s liabilities are demand, savings, interest checking and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or sold in the same time frame. The Company may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of its depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on the Company’s business, financial condition and result of operations.

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

Our investment portfolio securities include obligations of, and mortgage-backed securities guaranteed by, government sponsored enterprises such as the Federal National Mortgage Association, ~~referred to as Fannie Mae,~~ the Government National Mortgage Association, ~~referred to as Ginnie Mae,~~ the Federal Home Loan Mortgage Corporation, ~~referred to as Freddie Mac,~~ and the Federal Home Loan Bank or otherwise backed by Federal Housing Administration or Veteran’s Administration guaranteed loans; however, volatility or illiquidity in financial markets may cause investment securities held within our investment portfolio to fall in value or become less liquid. ~~The FRB’s actions to increase~~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.

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 (if we had balances outstanding). Various federal and/or state laws and regulations limit the amount of dividends that our bank and trust subsidiaries may pay to First Financial Bankshares, Inc. In the event our subsidiaries are unable to pay dividends to First Financial Bankshares, Inc., First Financial Bankshares, Inc. may not be able to service debt, if any, or pay dividends on the Company’s common stock. The inability to receive dividends from our subsidiaries could have a material adverse effect on the Company’s business, financial condition, results of operations and liquidity.

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 examination results and the effect of the proposed transaction on the financial stability of the institutions involved and the market as a whole.

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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.

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.

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

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

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

As of December 31, ~~2017,~~2019, we had ~~$141.14~~$173.67 million of goodwill and other intangible ~~assets and will add approximately $31.24 million of goodwill with our acquisition of Commercial Bancshares, Inc. effective January 1, 2018.~~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.

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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.

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.~~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.

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.

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.

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

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

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

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

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.

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

We rely on technology companies to provide information technology products and services necessary to support our

day-to-day

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

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

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

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

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our principal office is located in the First Financial Bank Building at 400 Pine Street in downtown Abilene, Texas. We lease ~~four~~two spaces in buildings owned by First Financial Bank, National Association, Abilene, Texas totaling approximately ~~9,000~~10,155 square feet. As of December 31, ~~2017,~~2019, our subsidiaries collectively own 6370 banking facilities, some of which are detached

drive-ins,

and also lease 1511 banking facilities and 1613 ATM locations. Our management considers all our existing locations to be well-suited for conducting the business of banking. We believe our existing facilities are adequate to meet our requirements and our subsidiaries’ requirements for the foreseeable future.

ITEM 3.

LEGAL PROCEEDINGS

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

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

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

Market Information

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

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ITEM

SELECTED FINANCIAL

DATA

The selected financial data presented below as of and for the years ended December 31, 2019, 2018, 2017, 2016, ~~2015, 2014,~~ and ~~2013,~~2015, have been derived from our audited consolidated financial statements. The selected financial data should be read in conjunction with “Item ~~7 —~~ 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and accompanying notes presented elsewhere in this Form

10-K.

The results of operations presented below are not necessarily indicative of the results of operations that may be achieved in the future. Management’s Discussion and Analysis of Financial Condition and Results of Operations incorporates information required to be disclosed by the SEC’s Industry Guide 3, “Statistical Disclosure by Bank Holding Companies.”

   Year Ended December 31,
   2017 2016 2015 2014 2013
   (dollars in thousands, except per share data)
Summary Income Statement Information:

Interest income
   $ 245,975 $ 232,288 $ 221,623 $ 198,539 $ 176,369
Interest expense
   9,288 5,451 4,088 4,181 4,088


Net interest income
   236,687 226,837 217,535 194,358 172,281
Provision for loan losses
   6,530 10,212 9,685 4,465 3,753
Noninterest income
   91,017 85,132 73,432 66,624 62,052
Noninterest expense
   173,986 165,830 149,464 137,925 126,012


Earnings before income taxes
   147,188 135,927 131,818 118,592 104,568
Income tax expense
   26,817 31,153 31,437 29,033 25,700


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


Per Share Data:

Earnings per share, basic
   $ 1.82 $ 1.59 $ 1.55 $ 1.40 $ 1.24
Earnings per share, assuming dilution
   1.81 1.59 1.54 1.39 1.24
Cash dividends declared
   0.75 0.70 0.62 0.55 0.52
Book value atperiod-end
   13.93 12.68 12.20 10.63 9.18
Earnings performance ratios:

Return on average assets
   1.72 % 1.59 % 1.61 % 1.65 % 1.64 %
Return on average equity
   13.63 12.36 13.60 14.00 13.75
Summary Balance Sheet Data(Period-end):

Securities
   $ 3,087,473 $ 2,860,958 $ 2,734,177 $ 2,416,297 $ 2,058,407
Loans
   3,500,699 3,384,205 3,350,593 2,937,991 2,689,448
Total assets
   7,254,715 6,809,931 6,665,070 5,848,202 5,222,208
Deposits
   5,962,961 5,478,539 5,190,169 4,750,255 4,135,075
Total liabilities
   6,331,947 5,972,046 5,860,084 5,166,665 4,634,561
Total shareholders’ equity
   922,768 837,885 804,986 681,537 587,647
Asset quality ratios:

Allowance for loanlosses/period-end loans
   1.38 % 1.35 % 1.25 % 1.25 % 1.26 %
Nonperformingassets/period-end loans plus foreclosed assets
   0.57 0.86 0.89 0.74 1.16
Net charge offs/average loans
   0.12 0.19 0.15 0.06 0.15
Capital ratios:

Average shareholders’ equity/average assets
   12.65 % 12.85 % 11.86 % 11.78 % 11.95 %
Leverage ratio (1)
   11.09 10.71 9.96 9.89 9.84
Tier 1 risk-based capital (2)
   18.66 17.30 15.90 16.05 15.82
Common equity tier 1 capital (3)
   18.66 17.30 15.90 —   —
Total risk-based capital (4)
   19.85 18.45 16.97 17.16 16.92
Dividend payout ratio
   41.24 44.14 40.20 39.34 41.62


	Year Ended December 31,
	2019			2018			2017			2016			2015
	(dollars in thousands, except per share data)
Summary Income Statement Information:
Interest income	$	319,192		$	291,690		$	245,975		$	232,288		$	221,623
Interest expense		30,102			18,930			9,288			5,451			4,088

Net interest income		289,090			272,760			236,687			226,837			217,535
Provision for loan losses		2,965			5,665			6,530			10,212			9,685
Noninterest income		108,428			101,764			91,017			85,132			73,432
Noninterest expense		196,521			190,684			173,986			165,830			149,464

Earnings before income taxes		198,032			178,175			147,188			135,927			131,818
Income tax expense		33,220			27,537			26,817			31,153			31,437

Net earnings	$	164,812		$	150,638		$	120,371		$	104,774		$	100,381

Per Share Data:
Earnings per share, basic	$	1.22		$	1.11		$	0.91		$	0.80		$	0.78
Earnings per share, assuming dilution		1.21			1.11			0.91			0.80			0.77
Cash dividends declared		0.47			0.41			0.38			0.35			0.31
Book value at period-end		9.03			7.77			6.97			6.34			6.10
Earnings performance ratios:
Return on average assets		2.08	%		1.98	%		1.72	%		1.59	%		1.61	%
Return on average equity		14.37			15.37			13.63			12.36			13.60
Summary Balance Sheet Data (Period-end):
Securities	$	3,413,317		$	3,158,777		$	3,087,473		$	2,860,958		$	2,734,177
Loans		4,223,197			3,975,308			3,500,699			3,384,205			3,350,593
Total assets		8,262,227			7,731,854			7,254,715			6,809,931			6,665,070
Deposits		6,603,806			6,180,389			5,962,961			5,478,539			5,190,169
Total liabilities		7,035,030			6,678,559			6,331,947			5,972,046			5,860,084
Total shareholders’ equity		1,227,197			1,053,295			922,768			837,885			804,986
Asset quality ratios:
Allowance for loan losses/period-end loans		1.24	%		1.29	%		1.38	%		1.35	%		1.25	%
Nonperforming assets/period-end loans plus foreclosed assets		0.61			0.75			0.57			0.86			0.89
Net charge offs/average loans		0.04			0.07			0.12			0.19			0.15
Capital ratios:
Average shareholders’ equity/average assets		14.44	%		12.89	%		12.65	%		12.85	%		11.86	%
Leverage ratio (1)		12.60			11.85			11.09			10.71			9.96
Tier 1 risk-based capital (2)		20.06			19.47			18.66			17.30			15.90
Common equity tier 1 capital (3)		20.06			19.47			18.66			17.30			15.90
Total risk-based capital (4)		21.13			20.61			19.85			18.45			16.97
Dividend payout ratio		38.31			36.84			41.24			44.14			40.20

(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 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, and service charges. Our primary source of funding for our loans and investments are deposits held by our bank subsidiary, First Financial Bank, National Association, Abilene, Texas. Our largest expenses are salaries and related employee benefits. We measure our performance by calculating our return on average assets, return on average equity, our regulatory leverage and risk based capital ratios and our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income.

The following discussion and analysis of the major elements of our consolidated balance sheets as of December 31, ~~2017~~2019 and ~~2016,~~2018, and consolidated statements of earnings for the years ~~2015~~2017 through ~~2017~~2019 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 loan losses and our provision for loan losses and (2) our valuation of securities. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period. A discussion of (1) our allowance for loan losses and our provision for loan losses and (2) our valuation of securities is included in Note 1 to our Consolidated Financial Statements beginning on page~~F-7.~~

~~Hurricane Harvey~~

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

F-8.

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

Acquisitions ~~and Asset Purchase~~

On October 12, 2017, we entered into an agreement and plan of reorganization to acquire Commercial Bancshares, Inc. and its wholly owned bank subsidiary, Commercial State Bank, Kingwood, Texas. On January 1, 2018, the transaction closed. Pursuant to the agreement, we issued ~~1,289,371~~1.29 million shares of the Company’s common stock in exchange for all of the outstanding shares of Commercial Bancshares, Inc. In addition, in accordance with the plan of reorganization, Commercial Bancshares, Inc. paid a special dividend totaling $22.08 million to its shareholders prior to the closing of this transaction. At the closing, Kingwood Merger Sub., Inc., a ~~wholly-owned~~wholly owned subsidiary of the Company, merged into Commercial Bancshares Inc., with Commercial Bancshares, Inc. surviving as a ~~wholly-owned~~wholly owned subsidiary of the Company. Immediately following such merger, Commercial Bancshares, Inc. was merged into the Company and Commercial State Bank, Kingwood, Texas was merged into First Financial Bank, National Association, Abilene, Texas, a wholly owned subsidiary of the Company. The total purchase price exceeded the estimated fair value net of assets acquired by approximately ~~$31.24~~$31.59 million and the Company recorded such excess as goodwill. The balance sheet and results of operations of Commercial Bancshares, Inc. ~~will be~~are included in the financial statements of the Company effective January 1, 2018.

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On ~~April 1, 2015,~~September 19, 2019, we entered into an agreement and plan of reorganization to acquire ~~FBC~~TB&T Bancshares, Inc. and its wholly owned bank subsidiary, ~~First~~The Bank ~~N.A., Conroe, Texas.~~& Trust of Bryan/College Station. On ~~July 31, 2015,~~January 1, 2020, the transaction ~~was completed, which we refer to herein as the “Conroe acquisition.”~~closed. Pursuant to the agreement, we issued ~~1,755,374~~6.28 million shares of the Company’s common stock in exchange for all of the outstanding shares of ~~FBC~~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, ~~FBC~~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 ~~First~~The Bank ~~N.A., Conroe,~~& Trust of Bryan/College Station, Texas was merged into First Financial Bank, National Association, Abilene, Texas, a wholly owned subsidiary of the Company. The total purchase price exceeded the estimated fair value net of assets acquired by approximately ~~$43.92~~$143.2 million and the Company recorded such excess as goodwill.

The balance sheet and results of operations of TB&T Bancshares, Inc. will be included in the financial statements of the Company effective January 1, 2020. At December 31, 2019, The Bank & Trust of Bryan/College Station had gross loans totaling $455.40 million, total deposits of $551.90 million and total assets of $631.10 million.

Stock Split and Increase in Authorized Shares

On April ~~8, 2015,~~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 ~~announced~~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 the annual report on Form 10-K 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.

Implementation of New Accounting Standard for Accounting for Allowance for Loan Losses

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 loan losses from the current “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. For publicly traded companies, ASU

2016-13

was effective January 1, 2020 and will be effective for the quarter ending March 31, 2020.

We are completing our implementation plan with our cross-functional working group, under the direction of our Chief Credit Officer along with our Chief Accounting Officer, Chief Lending Officer and Chief Financial Officer. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. Our implementation plan included assessment and documentation of processes, internal controls and data sources; model development, documentation and validation; and system configuration, among other things. We contracted with a third-party vendor to assist us in the application of ASU

2016-13.

While we continue to analyze and modify our calculations, we currently expect the adoption of ASU

2016-13

will result in an allowance for loan losses amount at January 1, 2020 in the range of $45.0 million to $51.0 million. At December 31, 2019, our allowance for loan losses totaled $52.5 million. In addition, ASU

2016-13

will necessitate that ~~it had entered into~~we establish an ~~asset purchase agreement~~allowance for expected credit losses for certain debt securities and other financial assets; however, we do not expect these allowances to be significant. Additionally, the adoption of ASU

2016-13

is not expected to have a significant impact on our regulatory capital ratios. The ultimate final impact of adoption of

ASU-2016-13

could be significantly different than our current expectation as our modeling process is further refined.

Other New Accounting Standards Issued but Not Yet Effective

ASU 2017-04, “Intangibles – Goodwill and Other

.” ASU

2017-04

will amend and simplify current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with ~~4Trust Mortgage, Inc.~~its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the quantitative assessment for a ~~cash purchase price~~reporting unit to determine if a quantitative impairment test is necessary. ASU

2017-04

will be effective for the Company on January 1, 2020 and is not expected to have a significant impact on the Company’s financial statements.

Table of ~~$1.90 million. The asset purchase was finalized~~Contents

ASU 2018-13, “Fair Value Measurement (Topic 820). – Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.”

ASU

2018-13

modifies the disclosure requirements on ~~June 1, 2015, which we refer to herein as the “4Trust asset purchase.”The total asset purchase price exceeded the estimated~~ fair value ~~net~~measurements in Topic 820. The amendments in ASU

2018-13

remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of ~~assets purchased by approximately $1.75 million~~certain disclosures, and add disclosure requirements identified as relevant. ASU

2018-13

became effective on January 1, 2020 and is not expected to have a significant impact on the ~~Company recorded such excess as goodwill.~~

Company’s financial statements.

Results of Operations

Performance Summary

. Net earnings for 2019 were $164.81 million, an increase of $14.17 million, or 9.41%, over net earnings for 2018 of $150.64 million. Net earnings for 2017 were $120.37 ~~million, an~~million. The increase of $15.60 million over net earnings for 2016 of $104.77 million. Of the $15.60 million increase in net income during 2017 when compared to 2016, $7.65 million resulted from the recent enactment of tax legislation that reduced the corporate income tax rate from 35 percent to 21 percent. This amount represents the net effect of the Company’s revaluation of its deferred tax assets and liabilities using the new tax rate. Net earnings for 2015 were $100.38 million. Disregarding the increase that resulted from the change in tax rates, the increases in net earnings for ~~2017~~2019 over ~~2016 and 2016 over 2015~~2018 were primarily attributable to the growth in net interest income and noninterest ~~income.~~

income and the increase in net earnings for 2018 over 2017 was primarily attributable to the change in income tax rates.

On a basic net earnings per share basis, net earnings were ~~$1.82~~$1.22 for ~~2017,~~2019, as compared to ~~$1.59~~$1.11 for ~~2016~~2018 and ~~$1.55~~$0.91 for ~~2015.~~2017. The return on average assets was ~~1.72%~~2.08% for ~~2017,~~2019, as compared to ~~1.59%~~1.98% for ~~2016~~2018 and ~~1.61%~~1.72% for ~~2015.~~2017. The return on average equity was ~~13.63%~~14.37% for ~~2017,~~2019, as compared to ~~12.36%~~15.37% for ~~2016~~2018 and ~~13.60%~~to 13.63% for 2015. Excluding the $7.65 million tax adjustment mentioned above, the Company’s basic earnings per share would have been $1.70, its return on average assets would have been 1.61% and its return on average equity would have been 12.77% for 2017.

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 $295.88 million in 2019, as compared to $281.75 million in 2018, and $262.18 million in ~~2017,~~2017. Average earning assets were $7.44 billion in 2019, as compared to ~~$251.78~~$7.12 billion in 2018 and $6.54 billion in 2017. The increase in

tax-equivalent

net interest income in 2019 compared to 2018 was largely attributable to increases in interest earning assets. The increase of $326.97 million in ~~2016 and $240.48 million~~average earning assets in ~~2015. The~~2019 when compared to 2018 was primarily a result of increases in ~~2017~~loans of $246.63 million and taxable securities of $156.33 million when compared to ~~2016 were~~2018. The increase in

tax-equivalent

net interest income in 2018 compared to 2017 was largely attributable to increases in the volume of interest earning assets offset by rate increases on our ~~interest bearing~~interest-bearing liabilities. ~~Average~~The increase of $570.96 million in average earning assets in 2018 when compared to 2017 was primarily a result of increases in loans of $392.59 million and taxable securities of $454.46 million. These increases were ~~$6.54~~offset by a decline of $222.01 million in

tax-exempt

securities. Average interest-bearing liabilities were $4.61 billion in ~~2017,~~2019, as compared to ~~$6.17~~$4.47 billion in ~~2016~~2018 and $5.84 billion in 2015. Average earning assets increased $373.50 million in 2017, when compared to 2016, due primarily from increases in loans and taxable securities. Average earning assets increased $333.39 million in 2016, when compared to 2015, due primarily from increases in loans and tax exempt securities. Average interest bearing liabilities were $4.21 billion in ~~2017, as compared to $4.02 billion in 2016 and $3.80 billion in 2015.~~2017. The yield on earning assets ~~decreased two~~increased fifteen basis points in ~~2017 due~~2019 when compared to ~~the mix of earnings assets, whereas~~2018 while the rate paid on interest-bearing liabilities increased ~~eight~~twenty-three basis ~~points when compared to 2016.~~points. The yield on earning assets ~~decreased two~~increased eight basis points in ~~2016, whereas~~2018 when compared to 2017 while the rate paid on interest-bearing liabilities increased ~~three~~twenty basis ~~points when compared to 2015.~~

points.

Table of Contents

Table 1 allocates the change in

tax-equivalent

net interest income between the amount of change attributable to volume and to rate.

Table 1 — Changes in Interest Income and Interest Expense (in thousands):

   2017 Compared to 2016    2016 Compared to 2015
   Change Attributable to    Total
Change    Change Attributable to Total
Change
   Volume Rate       Volume Rate
Short-term investments
   $ 443 $ 899    $ 1,342    $ 23 $ 111 $ 134
Taxable investment securities
   3,464 1,735    5,199    (1,218 ) (829 ) (2,047 )
Tax-exempt investment securities (1)
   1,173 677    1,850    6,548 (1,687 ) 4,861
Loans (1) (2)
   4,998 851    5,849    12,037 (2,320 ) 9,717






Interest income
   10,078 4,162    14,240    17,390 (4,725 ) 12,665
Interest-bearing deposits
   409 3,300    3,709    219 643 862
Short-term borrowings
   (223 ) 351    128    24 477 501






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






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


	2019 Compared to 2018									2018 Compared to 2017
	Change Attributable to						Total Change			Change Attributable to						Total Change
	Volume			Rate			Total Change			Volume			Rate			Total Change
Short-term investments	$	(106	)	$	367		$	261		$	(636	)	$	583		$	(53	)
Taxable investment securities		4,045			1,573			5,618			10,082			7,145			17,227

Tax-exempt investment securities (1)		(2,634	)		(2,203	)		(4,837	)		(10,184	)		(10,433	)		(20,617	)
Loans (1) (2)		12,983			11,276			24,259			19,293			13,362			32,655

Interest income		14,288			11,013			25,301			18,555			10,657			29,212

Interest-bearing deposits		654			9,523			10,177			583			8,149			8,732
Short-term borrowings		(99	)		1,095			996			(8	)		917			909

Interest expense		555			10,618			11,173			575			9,066			9,641

Net interest income	$	13,733		$	395		$	14,128		$	17,980		$	1,591		$	19,571

(1)	Computed on tax-equivalent basis assuming marginal tax rate of 21% for 2019 and 2018 and 35%. for 2017.

(2)	Non-accrual loans are included in loans.

The net interest margin in ~~2017~~2019 was ~~4.01%~~3.98%, ~~a decrease~~an increase of ~~seven~~two basis points from ~~2016~~2018 which ~~also~~ decreased ~~an additional four~~five basis points from ~~2015. The~~2017. We continued ~~decrease in~~to experience downward pressures on our net interest margin in ~~2017 was largely~~2019 and 2018 primarily due to (i) the ~~result of~~change in the income tax rate from 35% to 21% from the Tax Cuts and Jobs Act and its effect on our tax free municipal bonds and tax free loans, (ii) extended period of fluctuating historically low levels of short-term interest ~~rates.~~rates, and (iii) flat to inverted yield curve currently being experienced in the bond market. We have been able to somewhat mitigate the impact of ~~low~~these lower short-term interest rates and the flat/inverted yield curve by establishing minimum interest rates on certain of our loans, improving the pricing for loan risk, and minimizing rates paid on interest bearing liabilities. As rates fluctuate, we adjust loan rates as appropriate, upon maturities, and convert to variable rates when we are able. The Federal Reserve increased rates 100 basis points in 2018, 75 basis points in 2017 and 25 basis points in ~~both~~ 2016 and 2015, ~~and continues to issue forward guidance plans to increase~~but decreased rates ~~further in 2018. Although increasing, we expect interest rates to remain at lower levels, which will continue the downward pressure on our net interest margin.~~

by 75 basis points during 2019.

Table of Contents

The net interest margin, which measures

tax-equivalent

net interest income as a percentage of average earning assets, is illustrated in Table 2 for the years ~~2015~~2017 through ~~2017.~~

2019.

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

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

Short-term investments (1)
   $ 144,464 $ 1,684    1.17 % $ 63,882 $ 342    0.54 % $ 57,500 $ 208    0.36 %
Taxable investment securities (2)
   1,479,698 32,825    2.22 1,314,820 27,626    2.10 1,371,110 29,673    2.16
Tax-exempt investment securities (2)(3)
   1,484,952 68,118    4.59 1,459,121 66,268    4.54 1,318,531 61,407    4.66
Loans (3)(4)
   3,435,447 168,843    4.91 3,333,241 162,994    4.89 3,090,538 153,277    4.96








Total earning assets
   6,544,561 $ 271,470    4.15 % 6,171,064 $ 257,230    4.17 % 5,837,679 $ 244,565    4.19 %
Cash and due from banks
   162,255    152,648    148,369
Bank premises and equipment, net
   123,595    120,538    109,725
Other assets
   56,007    55,694    49,647
Goodwill and other intangible assets, net
   142,473    143,986    117,491
Allowance for loan losses
   (47,380 )    (44,811 )    (39,107 )







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







Liabilities and Shareholders’ Equity

Interest-bearing deposits
   $ 3,783,960 $ 8,213    0.22 % $ 3,469,005 $ 4,504    0.13 % $ 3,272,150 $ 3,642    0.11 %
Short-term borrowings
   422,285 1,075    0.25 552,041 947    0.17 524,365 446    0.08








Total interest-bearing liabilities
   4,206,245 $ 9,288    0.22 % 4,021,046 $ 5,451    0.14 % 3,796,515 $ 4,088    0.11 %
Noninterest-bearing deposits
   1,843,973    1,666,598    1,634,669
Other liabilities
   48,480    63,609    54,331







Total liabilities
   6,098,698    5,751,253    5,485,515
Shareholders’ equity
   882,813    847,866    738,289







Total liabilities and shareholders’ equity
   $ 6,981,511    $ 6,599,119    $ 6,223,804







Net interest income
   $ 262,182    $ 251,779    $ 240,477







Rate Analysis:

Interest income/earning assets
      4.15 %    4.17 %    4.19 %
Interest expense/earning assets
      0.14    0.09    0.07






Net yield on earning assets
      4.01 %    4.08 %    4.12 %


	2019								2018								2017
	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
Assets
Short-term investments (1)	$	84,430		$	1,892		2.24	%	$	90,374		$	1,631		1.80	%	$	144,464		$	1,684		1.17	%
Taxable investment securities (2)		2,090,490			55,670		2.66			1,934,160			50,052		2.59			1,479,698			32,825		2.22
Tax-exempt investment securities (2)(3)		1,192,908			42,664		3.58			1,262,947			47,501		3.76			1,484,952			68,118		4.59
Loans (3)(4)		4,074,667			225,757		5.54			3,828,040			201,498		5.26			3,435,447			168,843		4.91

Total earning assets		7,442,495		$	325,983		4.38	%		7,115,521		$	300,682		4.23	%		6,544,561		$	271,470		4.15	%
Cash and due from banks		175,417								176,799								162,255
Bank premises and equipment, net		133,239								129,715								123,595
Other assets		66,003								62,595								56,007
Goodwill and other intangible assets, net		174,138								172,425								142,473
Allowance for loan losses		(52,170	)							(50,323	)							(47,380	)

Total assets	$	7,939,122							$	7,606,732							$	6,981,511
																		��
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	4,208,666		$	27,122		0.64	%	$	4,052,614		$	16,945		0.42	%	$	3,783,960		$	8,213		0.22	%
Short-term borrowings		398,142			2,980		0.75			418,977			1,984		0.47			422,285			1,075		0.25

Total interest-bearing liabilities		4,606,808		$	30,102		0.65	%		4,471,591		$	18,929		0.42	%		4,206,245		$	9,288		0.22	%
Noninterest-bearing deposits		2,137,089								2,124,004								1,843,973
Other liabilities		48,658								30,931								48,480

Total liabilities		6,792,555								6,626,526								6,098,698
Shareholders’ equity		1,146,567								980,206								882,813

Total liabilities and shareholders’ equity	$	7,939,122							$	7,606,732							$	6,981,511

Net interest income				$	295,881							$	281,753							$	262,182

Rate Analysis:
Interest income/earning assets							4.38	%							4.23	%							4.15	%
Interest expense/earning assets							0.40								0.27								0.14

Net yield on earning assets							3.98	%							3.96	%							4.01	%

(1)	Short-term investments are comprised of Fed 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% for 2019 and 2018 and 35%. for 2017.

(4)	Nonaccrual loans are included in loans.

Noninterest Income

. Noninterest income for ~~2017~~2019 was ~~$91.02~~$108.43 million, an increase of ~~$5.89~~$6.66 million, or ~~6.91%~~6.55%, as compared to ~~2016.~~2018. Increases in certain categories of noninterest income included (~~1) trust fees~~ (1) real estate mortgage operations income of ~~$4.06~~$2.99 million, (2) ATM, interchange and credit card fees of ~~$1.78~~$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. 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.

Noninterest income for 2018 was $101.76 million, an increase of $10.75 million, or 11.81%, as compared to 2017. Increases in certain categories of noninterest income included (1) trust fees of $4.49 million, (2) ATM, interchange and credit card fees of $2.85 million, and (3) service charges on deposit accounts of ~~$1.03~~$2.25 million when compared to ~~2016.~~2017. The increase in trust fees resulted from an increase in assets under management over the prior year and ~~higher~~an increase in oil and gas ~~prices~~production and lease fees for the majority of 2018 that increased related to trust fees by ~~$364 thousand~~$2.61 million over ~~2016.~~2017. The fair value of our trust assets managed, which are not reflected in our consolidated balance

Table of Contents

sheets, totaled $5.60 billion at December 31, 2018, as compared to $5.13 billion at December 31, ~~2017, as compared to $4.37 billion at December 31, 2016.~~2017. The ~~increases~~increase in ATM, interchange and credit card fees was due to continued growth in the number of debit cards issued and ~~service~~the Kingwood acquisition. Service charges on deposit accounts ~~are~~increased primarily ~~a result of increases~~due to continued growth in ~~the number of~~ net new accounts, product and ~~debit cards.~~pricing changes made to better align the Company’s account offerings and the Kingwood acquisition. Offsetting these increases were decreases in interest on net recoveries of ~~$984~~$190 thousand and ~~real estate mortgage fees~~gains on sale of ~~$977~~

available-for-sale

securities of $474 thousand.

Noninterest income for 2016 was $85.13 million, an increase of $11.70 million, or 15.93%, as compared to 2015. Increases in certain categories of noninterest income included(1) real estate mortgage fees of $5.68 million, (2) ATM, interchange and credit card fees of $2.05 million, (3) service charges on deposit accounts of $1.22 million and (4) trust fees of $384 thousand when compared to 2015. The increase in real estate mortgage fees primarily resulted from a stronger mortgage market and the 4Trust asset purchase on June 1, 2015. The increases in ATM, interchange and credit card fees and service charges are primarily a result of increases in the number of net new accounts and debit cards boosted by the Conroe acquisition on July 31, 2015. The increase in trust fees resulted from an increase in assets under management over the prior year offsetting the effect of the decline in oil and gas prices that reduced related trust fees by $296 thousand in 2016 compared to 2015. The fair value of our trust assets managed, which are not reflected in our consolidated balance sheets, totaled $4.37 billion at December 31, 2016 as compared to $3.87 billion at December 31, 2015.

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 Board rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction inis the sum of 21 cents per transaction and five basis points multiplied by the value of the transaction. While we currently have assets under $10 billion, we are monitoring the effect of this reduction in per transaction fee income as we approach the $10 billion asset level.

Table 3 — Noninterest Income (in thousands):

   2017 Increase
(Decrease) 2016    Increase
(Decrease) 2015
Trust fees
   $ 23,694 $ 4,058 $ 19,636    $ 384 $ 19,252
Service charges on deposit accounts
   19,416 1,030 18,386    1,215 17,171
ATM, interchange and credit card fees
   25,686 1,776 23,910    2,050 21,860
Real estate mortgage operations
   15,109 (977 ) 16,086    5,677 10,409
Net gain on sale ofavailable-for-sale securities
   1,828 558 1,270    838 432
Net gain (loss) on sale of foreclosed assets
   (50 ) (506 ) 456    (82 ) 538
Net gain (loss) on sale of assets
   (396 ) (564 ) 168    988 (820 )
Interest on loan recoveries
   1,128 (984 ) 2,112    1,062 1,050
Other:

Check printing fees
   173 (17 ) 190    (40 ) 230
Safe deposit rental fees
   529 (2 ) 531    7 524
Credit life and debt protection fees
   617 (2 ) 619    (44 ) 663
Brokerage commissions
   1,290 717 573    (190 ) 763
Miscellaneous income
   1,993 798 1,195    (165 ) 1,360




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




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

2019

Increase
(Decrease)

2018

Increase
(Decrease)

2017

Trust fees
$
28,401
$
220
$
28,181
$
4,487
$
23,694

Service charges on deposit accounts

22,039

376

21,663

2,247

19,416

ATM, interchange and credit card fees

29,863

1,331

28,532

2,846

25,686

Real estate mortgage operations

18,144

2,987

15,157

48

15,109

Net gain on sale of
available-for-sale
securities

733

(621
)
1,354

(474
)
1,828

Net gain (loss) on sale of foreclosed assets

274

158

116

166

(50
)
Net gain (loss) on sale of assets

319

466

(147
)
249

(396
)
Interest on loan recoveries

2,092

1,154

938

(190
)
1,128

Other:

Wire transfer fees

1,012

110

902

390

512

Check printing fees

211

(5
)
216

43

173

Safe deposit rental fees

535

(9
)
544

15

529

Credit life and debt protection fees

978

237

741

124

617

Brokerage commissions

1,581

(126
)
1,707

417

1,290

Miscellaneous income

2,246

386

1,860

379

1,481

Total other

6,563

593

5,970

1,368

4,602

Total Noninterest Income
$
108,428
$
6,664
$
101,764
$
10,747
$
91,017

Noninterest Expense

. Total noninterest expense for ~~2017~~2019 was ~~$173.99~~$196.52 million, an increase of ~~$8.16~~$5.84 million, or ~~4.92%~~3.06%, as compared to ~~2016.~~2018. Noninterest expense for ~~2016~~2018 amounted to ~~$165.83~~$190.68 million, an increase of ~~$16.37~~$16.70 million, or ~~10.95%~~9.60%, as compared to ~~2015.~~2017. 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 ~~2017~~2019 was ~~49.26%~~48.61%, as compared to ~~49.22%~~49.72% for ~~2016~~2018 and ~~47.61%~~49.26% for ~~2015.~~

2017.

Salaries and employee benefits for ~~2017~~2019 totaled ~~$95.29~~$112.34 million, an increase of ~~$4.55~~$7.15 million, or ~~5.01%~~6.79%, as compared to ~~2016.~~2018. The increase was primarily driven by (i) annual ~~merit~~merit-based pay increases that were effective March 1, ~~2017~~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 of Contents

Salaries and employee benefits for 2018 totaled $105.19 million, an increase of $9.90 million, or 10.39%, as compared to 2017. The increase was primarily driven by (i) annual merit-based pay increases that were effective March 1, 2018, (ii) an increase in our profit sharing expenses, and (iii) ~~an increase~~increases in ~~stock option and stock grant expense of due to~~all categories from the ~~stock option grant in June 2017 and restricted stock grant in October 2017.~~

Kingwood acquisition.

All other categories of noninterest expense for ~~2017~~2018 totaled ~~$78.70~~$85.50 million, an increase of ~~$3.61~~$6.80 million, or ~~4.80%~~8.64%, as compared to ~~2016. The increase~~2017. Included in noninterest expense in 2018 was ~~largely attributable to increases in software amortization and expense of $1.29~~$1.55 million, ~~from thewrite-off~~ of internally developed software, operational and other losses of $1.02 million due to fraud and weather related losses and professional and service fees of $1.19 million. Offsetting these increases in 2017 were a decrease of $463 thousand in FDIC insurance due to the lower rate charged by the FDIC beginning in the third quarter of 2016.

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

All other categories of noninterest expense for 2016 totaled $75.09 million, an increase of $6.63 million, or 9.68%, as compared to 2015. The increase in noninterest expense was largely attributable to increases in equipment expense of $1.26 million, largelytax, resulting from the Company’s ~~acquisition~~partial settlement of ~~Conroe. Telephone~~its frozen defined benefit pension plan. Other notable increases in noninterest expense included a $1.83 million increase in ATM, interchange and credit card expenses ~~increased $1.05 million due to costs to improve our technology infrastructure~~ and ~~professional and service fees increased $2.05 million due primarily to outsourcing~~a $652 thousand increase in net occupancy expense. In addition, included in other miscellaneous expenses for ~~certain~~2018 were technology ~~providers, which offset salary costs. Offsetting these increases in 2016 were a decrease of $473 thousand in FDIC insurance due~~contract termination and conversion related costs totaling $1.75 million related to the ~~lower rate charged by the FDIC beginning in the third quarter of 2016.~~

Kingwood acquisition.

Table 4 — Noninterest Expense (in thousands):

   2017    Increase
(Decrease) 2016    Increase
(Decrease) 2015
Salaries
   $ 72,132    $ 2,135 $ 69,997    $ 7,294 $ 62,703
Medical
   8,585    (174 ) 8,759    3,066 5,693
Profit sharing
   4,735    1,514 3,221    (2,234 ) 5,455
Pension
   127    (232 ) 359    342 17
401(k) match expense
   2,392    61 2,331    288 2,043
Payroll taxes
   5,009    200 4,809    427 4,382
Stock option expense
   1,745    863 882    238 644
Restricted stock expense
   562    181 381    319 62






Total salaries and employee benefits
   95,287    4,548 90,739    9,740 80,999
Loss from partial settlement of pension plan
   —      (267 ) 267    267 —
Net occupancy expense
   10,521    101 10,420    106 10,314
Equipment expense
   13,765    286 13,479    1,257 12,222
FDIC insurance premiums
   2,217    (463 ) 2,680    (473 ) 3,153
ATM, interchange and credit card expenses
   7,452    221 7,231    847 6,384
Professional and service fees
   8,063    1,186 6,877    2,046 4,831
Printing, stationery and supplies
   1,989    (104 ) 2,093    (185 ) 2,278
Amortization of intangible assets
   613    (125 ) 738    177 561
Other:

Data processing fees
   1,119    656 463    63 400
Postage
   1,663    (1 ) 1,664    (41 ) 1,705
Advertising
   3,515    (21 ) 3,536    353 3,183
Correspondent bank service charges
   868    (96 ) 964    39 925
Telephone
   3,108    (145 ) 3,253    1,053 2,200
Public relations and business development
   2,819    71 2,748    48 2,700
Directors’ fees
   1,553    233 1,320    218 1,102
Audit and accounting fees
   1,629    (83 ) 1,712    55 1,657
Legal fees
   1,780    (316 ) 2,096    95 2,001
Regulatory exam fees
   1,177    46 1,131    43 1,088
Travel
   1,210    (32 ) 1,242    28 1,214
Courier expense
   879    31 848    39 809
Operational and other losses
   3,192    1,022 2,170    281 1,889
Other real estate
   188    6 182    58 124
Software amortization and expense
   3,294    1,288 2,006    (116 ) 2,122
Other miscellaneous expense
   6,085    114 5,971    368 5,603






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






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

2019

Increase
(Decrease)

2018

Increase
(Decrease)

2017

Salaries
$
84,281
$
4,807
$
79,474
$
7,342
$
72,132

Medical

9,125

426

8,699

114

8,585

Profit sharing

7,661

612

7,049

2,314

4,735

Pension

351

529

(178
)
(305
)
127

401(k) match expense

2,759

171

2,588

196

2,392

Payroll taxes

5,675

306

5,369

360

5,009

Stock option expense

1,489

(19
)
1,508

(237
)
1,745

Restricted stock expense

995

315

680

118

562

Total salaries and employee benefits

112,336

7,147

105,189

9,902

95,287

Cost related to termination of pension plan

2,673

1,127

1,546

1,546

—

Net occupancy expense

11,156

(17
)
11,173

652

10,521

Equipment expense

9,052

(1,066
)
10,118

(2
)
10,120

FDIC insurance premiums

1,091

(1,242
)
2,333

116

2,217

ATM, interchange and credit card expenses

9,856

574

9,282

1,830

7,452

Professional and service fees

7,853

(1,041
)
8,894

831

8,063

Printing, stationery and supplies

1,812

(185
)
1,997

8

1,989

Amortization of intangible assets

1,016

(256
)
1,272

659

613

Other:

Data processing fees

1,550

88

1,462

343

1,119

Postage

1,547

(202
)
1,749

86

1,663

Advertising

3,607

4

3,603

88

3,515

Correspondent bank service charges

707

(65
)
772

(96
)
868

Telephone

3,678

116

3,562

454

3,108

Public relations and business development

3,206

145

3,061

242

2,819

Directors’ fees

1,972

227

1,745

192

1,553

Audit and accounting fees

1,460

(165
)
1,625

(4
)
1,629

Legal fees

1,214

66

1,148

(632
)
1,780

Regulatory exam fees

1,179

(96
)
1,275

98

1,177

Travel

1,641

176

1,465

255

1,210

Courier expense

858

28

830

(49
)
879

Operational and other losses

1,879

(309
)
2,188

(1,004
)
3,192

Other real estate

202

73

129

(59
)
188

Software amortization and expense

7,305

1,285

6,020

(920
)
6,940

Other miscellaneous expense

7,671

(575
)
8,246

2,162

6,084

Total other

39,676

796

38,880

1,156

37,724

Total Noninterest Expense
$
196,521
$
5,837
$
190,684
$
16,698
$
173,986

41

Table of Contents

Income Taxes

. Income tax expense was $33.22 million for 2019, as compared to $27.54 million for 2018 and $26.82 million for ~~2017, as compared to $31.15 million for 2016 and $31.44 million for 2015.~~2017. Our effective tax rates on pretax income were ~~18.22%~~16.78%, ~~22.92%~~15.46% and ~~23.85%~~18.22%, respectively, for the years ~~2017, 2016~~2019, 2018 and ~~2015.~~2017. The effective tax rates differ from the statutory federal tax rate of 21.0% in 2019 and 2018 and 35.0% in 2017 largely due to tax exempt interest income earned on certain investment securities and loans, the deductibility of dividends paid to our employee stock ownership plan and income tax deductions from the partial donation of two of our branch buildings to municipalities.

re-measured

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.

Balance Sheet Review

Loans

. Our portfolio is comprised of loans made to businesses, professionals, individuals, and farm and ranch operations located in the primary trade areas served by our subsidiary bank. Real estate loans represent loans primarily for

1-4

family residences and commercial real ~~estate, which are primarily owner-occupied.~~estate. The structure of loans in the real estate mortgage area generally provides

re-pricing

intervals to minimize the interest rate risk inherent in long-term fixed rate loans. As of December 31, ~~2017,~~2019, total loans held for investment were ~~$3.49~~$4.19 billion, an increase of ~~$128.26~~$241.33 million, as compared to December 31, ~~2016.~~2018. As compared to

year-end ~~2016,~~

2018, real estate loans increased ~~$113.15~~$184.03 million, commercial loans increased ~~$9.69~~$11.37 million, agricultural loans increased ~~$10.52~~$6.96 million and consumer loans ~~decreased $5.10~~increased $38.97 million. Loans averaged ~~$3.44~~$4.07 billion during ~~2017,~~2019, an increase of ~~$102.21~~$246.63 million over the ~~2016~~2018 average balances.

Table 5 — Composition of Loans (in thousands):

   December 31,
   2017    2016    2015    2014    2013
Commercial
   $ 684,099    $ 674,410    $ 696,163    $ 639,954    $ 596,730
Agricultural
   94,543    84,021    102,351    105,694    75,928
Real estate
   2,302,998    2,189,844    2,136,233    1,822,854    1,678,514
Consumer
   403,929    409,032    382,303    360,686    333,113










Total loansheld-for-investment
   $ 3,485,569    $ 3,357,307    $ 3,317,050    $ 2,929,188    $ 2,684,285


	December 31,
	2019		2018		2017		2016		2015
Commercial	$	856,326	$	844,953	$	684,099	$	674,410	$	696,163
Agricultural		103,640		96,677		94,543		84,021		102,351
Real estate		2,823,372		2,639,346		2,302,998		2,189,844		2,136,233
Consumer		411,631		372,660		403,929		409,032		382,303

Total loans held-for-investment	$	4,194,969	$	3,953,636	$	3,485,569	$	3,357,307	$	3,317,050

As of December 31, ~~2017,~~2019, our real estate loans represent approximately ~~66.07%~~67.30% of our loan portfolio and are comprised of (i) commercial real estate loans of ~~24.84%~~29.72%, generally owner occupied, (ii)

1-4

family residence loans of ~~45.80%~~40.79%, (iii) residential development and construction loans of ~~8.28%~~9.73%, which includes our custom and speculation home construction loans, (iv) commercial development and construction loans of ~~6.21%~~6.80%, and (v) other loans, which includes ranches, hospitals and universities of ~~14.87%~~12.96%.

Loans

held-for-sale,

consisting of secondary market mortgage loans, totaled ~~$15.13~~$28.23 million and ~~$26.90~~$21.67 million at December 31, ~~2017~~2019 and ~~2016, respectively, which~~2018, respectively. At December 31, 2019 and 2018, $5.15 million and $2.49 million are valued ~~using~~at the lower of cost or ~~market method.~~

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

Table of Contents

The Company has certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies and procedures on an annual basis and makes changes as appropriate. 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, ~~2017~~2019 (in thousands):

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

   One Year
or less    After One
Year
Through
Five Years    After Five
Years    Total
Commercial and agricultural
   $ 348,129    $ 222,342    $ 208,171    $ 778,642
Real estate — construction
   133,621    64,896    210,911    409,428

   Maturities
After One
Year
Loans with fixed interest rates
   $ 414,091
Loans with floating or adjustable interest rates
   292,229

2019:

One Year
or less

After One
Year
Through
Five Years

After Five
Years

Total

Commercial and agricultural
$
390,668
$
320,303
$
248,995
$
959,966

Real estate - construction

241,748

60,565

143,743

446,056

Maturities
After One Year

Loans with fixed interest rates
$
407,307

Loans with floating or adjustable interest rates

366,299

43

Table of Contents

Asset Quality

. Our loan portfolio is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by bank regulatory agencies. Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were $25.77 million at December 31, 2019, as compared to $29.63 million at December 31, 2018 and $20.12 million at December 31, ~~2017, as compared to $29.00 million at December 31, 2016 and $29.77 million at December 31, 2015.~~2017. As a percent of loans and foreclosed assets, these assets were 0.61% at December 31, 2019, as compared to 0.75% at December 31, 2018 and 0.57% at December 31, ~~2017, as compared to 0.86% at December 31, 2016 and 0.89% at December 31, 2015.~~2017. As a percent of total assets, these assets were 0.31% at December 31, 2019, as compared to 0.38% at December 31, 2018 and 0.28% at December 31, ~~2017, as compared to 0.43% at December 31, 2016 and 0.45% at December 31, 2015.~~2017. We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming at December 31, ~~2017.~~

2019.

Supplemental Oil and Gas Information.

At December 31, ~~2017,~~2019, the Company’s exposure to the oil and gas industry was ~~1.72%~~2.84% of gross loans, or ~~$60.16~~$119.79 million, ~~down 23.34% from~~compared to 2.86% of gross loans, or $113.54 million at December 31, ~~2016year-end~~ ~~levels,~~2018. These oil and gas loans consisted (based on collateral supporting the loan) of (i) development and production loans of ~~2.72%~~11.26%, (ii) oil and gas field servicing loans of ~~7.51%~~15.10%, (iii) real estate loans of ~~47.28%~~39.37%, (iv) accounts receivable and inventory of ~~24.47%~~3.74%, (v) automobile of 23.53% and ~~(v)~~(vi) other of ~~18.02%~~7.00%. These loans have ~~experienced increased stress due to lower~~warranted additional scrutiny because of fluctuating oil and gas ~~prices although such prices improved in 2017.~~prices. The Company instituted additional monitoring procedures for these loans and has classified and downgraded ~~andcharged-off~~ loans as appropriate. The following oil and gas information is as of and for the years ended December 31, ~~2017~~2019 and ~~2016:~~

   December 31,
   2017 2016
Oil and gas related loans
   $ 60,164 $ 78,483
Oil and gas related loans as a % of total loans
   1.72 % 2.32 %
Classified oil and gas related loans
   $ 20,346 $ 32,518
Nonaccrual oil and gas related loans
   1,414 4,092
Net charge-offs for oil and gas related loans
   50 1,145
Allowance for oil and gas related loans as a % of oil and gas loans
   7.90 % 6.28 %

2018:


	December 31,
	2019			2018
Oil and gas related loans	$	119,789		$	113,536
Oil and gas related loans as a % of total loans		2.84	%		2.86	%
Classified oil and gas related loans	$	7,041		$	3,894
Nonaccrual oil and gas related loans	$	481		$	1,048
Net charge-offs for oil and gas related loans		—			—
Allowance for oil and gas related loans as a % of oil and gas loans		2.54	%		3.23	%

Table 7 — Nonaccrual, Past Due 90 Days or More and Still Accruing, Restructured Loans and Foreclosed Assets (in thousands, except percentages):

   At December 31,
   2017 2016 2015 2014 2013
Nonaccrual loans*
   $ 17,670 $ 27,371 $ 28,601 $ 20,194 $ 27,926
Loans still accruing and past due 90 days or more
   288 284 341 261 133
Troubled debt restructured loans**
   627 701 199 226 —


Nonperforming loans
   18,585 28,356 29,141 20,681 28,059
Foreclosed assets
   1,532 644 627 1,035 3,069


Total nonperforming assets
   $ 20,117 $ 29,000 $ 29,768 $ 21,716 $ 31,128


As a % of loans and foreclosed assets
   0.57 % 0.86 % 0.89 % 0.74 % 1.16 %
As a % of total assets
   0.28 0.43 0.45 0.37 0.60


	At December 31,
	2019			2018			2017			2016			2015
Nonaccrual loans*	$	24,582		$	27,534		$	17,670		$	27,371		$	28,601
Loans still accruing and past due 90 days or more		153			1,008			288			284			341
Troubled debt restructured loans**		26			513			627			701			199

Nonperforming loans		24,761			29,055			18,585			28,356			29,141
Foreclosed assets		1,009			577			1,532			644			627

Total nonperforming assets	$	25,770		$	29,632		$	20,117		$	29,000		$	29,768

As a % of loans and foreclosed assets		0.61	%		0.75	%		0.57	%		0.86	%		0.89	%
As a % of total assets		0.31			0.38			0.28			0.43			0.45

	*
*		Includes $251 thousand, $827 thousand, $618 thousand, $1.26 million ~~$2.18 million, $2.15 million~~ and ~~$2.71~~$2.18 million, respectively, of purchased credit impaired loans as of December 31, 2019, 2018, 2017, 2016 ~~2015, 2014~~ and ~~2013.~~2015.

Troubled debt restructured loans of $4.79 million, $3.84 million, $4.63 million, $6.86 million ~~$6.11 million, $9.07 million~~ and ~~$13.30~~$6.11 million, respectively, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in

non-accrual

loans as of December 31, 2019, 2018, 2017, 2016 ~~2015, 2014~~ and ~~2013.~~2015.

Table of Contents

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

   2017 2016 2015 2014 2013
Balance at January 1,
   $ 45,779 $ 41,877 $ 36,824 $ 33,900 $ 34,839
Charge-offs:

Commercial
   3,018 6,990 3,734 583 1,283
Agricultural
   71 219 164 2 100
Real estate
   1,215 682 441 1,075 1,970
Consumer
   1,517 1,925 1,700 1,222 1,268


Total charge-offs
   5,821 9,816 6,039 2,882 4,621


Recoveries:

Commercial
   942 952 344 346 402
Agricultural
   33 25 55 18 39
Real estate
   192 2,021 558 505 239
Consumer
   501 508 450 472 337


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


Net charge-offs
   4,153 6,310 4,632 1,541 3,604
Transfer ofoff-balance sheet exposure to other liabilities
   —   —   —   —   (1,088 )
Provision for loan losses
   6,530 10,212 9,685 4,465 3,753


Balance at December 31,
   $ 48,156 $ 45,779 $ 41,877 $ 36,824 $ 33,900


Loans atyear-end
   $ 3,500,699 $ 3,384,205 $ 3,350,593 $ 2,937,991 $ 2,689,448
Average loans
   3,435,447 3,333,241 3,090,538 2,786,011 2,431,872
Net charge-offs/average loans
   0.12 % 0.19 % 0.15 % 0.06 % 0.15 %
Allowance for loanlosses/year-end loans*
   1.38 1.35 1.25 1.25 1.26
Allowance for loan losses/nonaccrual, past due 90 days still accruing and restructured loans
   259.11 161.44 143.70 178.06 120.82


	2019			2018			2017			2016			2015
Balance at January 1,	$	51,202		$	48,156		$	45,779		$	41,877		$	36,824

Charge-offs:
Commercial		1,545			1,418			3,018			6,990			3,734
Agricultural		319			—			71			219			164
Real estate		1,335			1,479			1,215			682			441
Consumer		927			1,550			1,517			1,925			1,700

Total charge-offs		4,126			4,447			5,821			9,816			6,039

Recoveries:
Commercial		1,364			839			942			952			344
Agricultural		158			15			33			25			55
Real estate		404			462			192			2,021			558
Consumer		532			512			501			508			450

Total recoveries		2,458			1,828			1,668			3,506			1,407

Net charge-offs		1,668			2,619			4,153			6,310			4,632

Provision for loan losses		2,965			5,665			6,530			10,212			9,685

Balance at December 31,	$	52,499		$	51,202		$	48,156		$	45,779		$	41,877

Loans at year-end	$	4,223,197		$	3,975,308		$	3,500,699		$	3,384,205		$	3,350,593
Average loans		4,074,667			3,828,040			3,435,447			3,333,241			3,090,538

Net charge-offs/average loans		0.04	%		0.07	%		0.12	%		0.19	%		0.15	%
Allowance for loan losses/year-end loans*		1.24			1.29			1.38			1.35			1.25
Allowance for loan losses/nonaccrual, past due 90 days still accruing and restructured loans		212.02			176.22			259.11			161.44			143.70

Reflects the impact of loans acquired in the ~~Orange acquisition in 2013 and the~~ Conroe acquisition in 2015 and the Kingwood acquisition in 2018, which were initially recorded at fair value with no allocated allowance for loan losses.

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

   2017    2016    2015    2014    2013
   Allocation
Amount    Allocation
Amount    Allocation
Amount    Allocation
Amount    Allocation
Amount
Commercial
   $ 10,865    $ 11,707    $ 12,644    $ 7,990    $ 6,440
Agricultural
   1,305    1,101    1,191    527    383
Real estate
   29,896    26,864    24,375    26,657    24,940
Consumer
   6,090    6,107    3,667    1,650    2,137










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


	At December 31,
	2019		2018		2017		2016		2015
	Allocation Amount		Allocation Amount		Allocation Amount		Allocation Amount		Allocation Amount
Commercial	$	12,122	$	11,948	$	10,865	$	11,707	$	12,644
Agricultural		1,206		1,446		1,305		1,101		1,191
Real estate		33,974		32,342		29,896		26,864		24,375
Consumer		5,197		5,466		6,090		6,107		3,667

Total	$	52,499	$	51,202	$	48,156	$	45,779	$	41,877

Percent of Loans in Each Category of Total Loans:

       2017         2016         2015         2014         2013
Commercial
   19.63 % 20.09 % 20.99 % 21.84 % 22.23 %
Agricultural
   2.71 2.50 3.09 3.61 2.83
Real estate
   66.07 65.23 64.40 62.23 62.53
Consumer
   11.59 12.18 11.52 12.32 12.41


	2019			2018			2017			2016			2015
Commercial		23.09	%		23.34	%		19.63	%		20.09	%		20.99	%
Agricultural		2.30			2.82			2.71			2.50			3.09
Real estate		64.71			63.17			66.07			65.23			64.40
Consumer		9.90			10.67			11.59			12.18			11.52

Included in our loan portfolio are certain other loans not included in Table 7 that are deemed to be potential problem loans. Potential problem loans are those loans that are currently performing, but for which known information about trends, uncertainties or possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present repayment terms, possibly resulting in the transfer of such loans to nonperforming status. These potential problem loans totaled ~~$4.37~~$6.50 million as of December 31, ~~2017.~~

2019.

Table of Contents

Interest-Bearing Deposits in Banks.

The Company had interest-bearing deposits in banks of ~~$164.22 million and $50.28~~$47.92 million at December 31, ~~2017~~2019 and ~~2016,~~$42.27 million at December 31, 2018, respectively. At December 31, ~~2017,~~2019, our interest-bearing deposits in banks included ~~$162.09~~$47.69 million maintained at the Federal Reserve Bank of Dallas ~~$1.46 million invested in FDIC-insured certificates of deposit~~ and ~~$677~~$232 thousand on deposit with the Federal Home Loan Bank of Dallas (FHLB). The average balance of interest-bearing deposits in banks was $80.81 million, $87.03 million and $141.37 million ~~$58.25 million~~in 2019, 2018 and ~~$49.69 million in~~ 2017, ~~2016 and 2015,~~ respectively. The average yield on interest-bearing deposits in banks was ~~1.17%~~2.22%, ~~0.55%~~1.79% and ~~0.36%~~1.17% in 2019, 2018 and 2017, ~~2016~~respectively.

Available-for-Sale and ~~2015, respectively.~~

~~Available-for-Sale~~ ~~and~~Held-to-Maturity Securities

. At December 31, ~~2017,~~2019, securities with a fair value of ~~$3.09~~$3.41 billion were classified as securities

available-for-sale.

There were no securities classified as

held-to-maturity

at December 31, ~~2017.~~2019. As compared to December 31, ~~2016,~~2018, the

available-for-sale

portfolio at December 31, ~~2017,~~2019, reflected (1) an increase of $57 thousand in U.S. Treasury securities; (2) a decrease of ~~$10.67~~$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. As compared to December 31, 2017, the

available-for-sale

portfolio at December 31, 2018, reflected (1) an increase of $9.96 million in U.S. Treasury securities; (2) a decrease of ~~$53.37~~$60.03 million in obligations of U.S. government sponsored enterprises and agencies; (3) a decrease of ~~$143.43~~$162.98 million in obligations of states and political subdivisions; (4) a decrease of ~~$40.93~~$6.66 million in corporate bonds and other; and (5) an increase of ~~$475.04~~$291.01 million in mortgage-backed securities. ~~As compared to December 31, 2015, theavailable-for-sale~~ portfolio at December 31, 2016, reflected (1) a decrease of $127 thousand in U.S. Treasury securities; (2) a decrease of $34.85 million in obligations of U.S. government sponsored enterprises and agencies; (3) an increase of $113.15 million in obligations of states and political subdivisions; (4) a decrease of $35.56 million in corporate bonds and other; and (5) an increase of $84.33 million in mortgage-backed securities.

Securities-available-for-sale

included fair value adjustments of ~~$44.86~~$84.51 million, ~~$33.07~~$5.21 million and ~~$79.01~~$44.86 million at December 31, ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, respectively. We did not hold any collateralized mortgage obligations or structured notes as of December 31, ~~2017~~2019 that we consider to be high risk. Our mortgage related securities are backed by GNMA, FNMA or FHLMC or are collateralized by securities backed by these agencies.

See Table 10 and Note 2 to the Consolidated Financial Statements for additional disclosures relating to the maturities and fair values of the investment portfolio at December 31, ~~2017~~2019 and ~~2016.~~

2018.

Table 10 — Maturities and Yields of
Available-for-Sale
Held at December 31, ~~2017~~2019 (in thousands, except percentages):

   Maturing
   One Year
or Less After One Year
Through
Five Years After Five Years
Through
Ten Years After
Ten Years Total
Available-for-Sale:
   Amount    Yield Amount    Yield Amount    Yield Amount    Yield Amount    Yield
Obligations of U.S. government sponsored enterprises and agencies
   $ 34,981    1.30 % $ 25,349    1.51 % $ —      —   % $ —      —   % $ 60,330    1.39 %
Obligations of states and political subdivisions
   139,568    5.03 628,506    5.13 650,699    4.74 2,077    6.68 1,420,850    4.94
Corporate bonds and other securities
   10,998    2.96 237    1.15 224    2.64 —      —   11,459    2.92
Mortgage-backed securities
   55,430    1.66 1,027,515    2.31 459,286    2.69 52,603    2.93 1,594,834    2.42












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

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


	Maturing
	One Year or Less					After One Year Through Five Years					After Five Years Through Ten Years					After Ten Years					Total
Available-for-Sale:	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
U. S. Treasury securities	$	10,019		2.52	%	$	—		—	%	$	—		—	%	$	—		—	%	$	10,019		2.52	%
Obligations of states and political subdivisions		137,948		4.92			510,553		4.23			638,239		3.61			2,243		5.66			1,288,983		4.00
Corporate bonds and other securities		4,478		2.40			230		2.65			—		—			—		—			4,708		2.41
Mortgage-backed securities		46,651		2.03			1,678,066		2.67			321,287		2.77			63,603		2.72			2,109,607		2.67

Total	$	199,096		4.06	%	$	2,188,849		3.03	%	$	959,526		3.33	%	$	65,846		2.82	%	$	3,413,317		3.17	%

All yields are computed on a

tax-equivalent

basis assuming a marginal tax rate of ~~35%~~21%. Yields on

available-for-sale

securities are based on amortized cost. Maturities of mortgage-backed securities are based on contractual maturities and could differ due to prepayments of underlying mortgages. Maturities of

other

securities are reported at the earlier of maturity date or call date.

As of December 31, ~~2017,~~2019, the investment portfolio had an overall tax equivalent yield of ~~3.56%~~3.17%, a weighted average life of ~~4.29~~4.18 years and modified duration of ~~3.82~~3.74 years.

Deposits

. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were ~~$5.96~~$6.60 billion as of December 31, ~~2017,~~2019, as compared to ~~$5.48~~$6.18 billion as of December 31, ~~2016~~2018 and ~~$5.19~~$5.96 billion as of

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December 31, ~~2015.~~2017. Table 11 provides a breakdown of average deposits and rates paid over the past three years and the remaining maturity of time deposits of $100,000 or more:

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

   2017 2016 2015
   Average
Balance    Average
Rate Average
Balance    Average
Rate Average
Balance    Average
Rate
Noninterest-bearing deposits
   $ 1,843,973    —   $ 1,666,598    —   $ 1,634,669    —
Interest-bearing deposits

Interest-bearing checking
   1,902,699    0.27 % 1,713,498    0.12 % 1,622,331    0.09 %
Savings and money market accounts
   1,401,804    0.13 1,195,671    0.09 1,021,222    0.05
Time deposits under $100,000
   267,754    0.13 237,419    0.18 261,255    0.20
Time deposits of $100,000 or more
   211,703    0.40 322,417    0.31 367,342    0.31








Total interest-bearing deposits
   3,783,960    0.22 % 3,469,005    0.13 % 3,272,150    0.11 %








Total average deposits
   $ 5,627,933    $ 5,135,603    $ 4,906,819

   As of December 31,
2017
Three months or less
   $ 81,918
Over three through six months
   64,396
Over six through twelve months
   70,470
Over twelve months
   33,670


Total time deposits of $100,000 or more
   $ 250,454

2019

2018

2017

Average
Balance

Average
Rate

Average
Balance

Average
Rate

Average
Balance

Average
Rate

Noninterest-bearing deposits
$
2,137,089

—
$
2,124,005

—
$
1,843,973

—

Interest-bearing deposits

Interest-bearing checking

2,097,109

0.68
%
2,025,810

0.53
%
1,902,699

0.27
%
Savings and money market accounts

1,679,168

0.54
%
1,558,889

0.28

1,401,804

0.13

Time deposits under $100,000

186,709

0.70
%
204,929

0.25

267,754

0.13

Time deposits of $100,000 or more

245,680

1.04
%
262,986

0.48

211,703

0.40

Total interest-bearing deposits

4,208,666

0.64
%
4,052,614

0.42
%
3,783,960

0.22
%

Total average deposits
$
6,345,755
$
6,176,619
$
5,627,933

As of December 31,
2019

Three months or less
$
88,562

Over three through six months

51,351

Over six through twelve months

64,700

Over twelve months

33,672

Total time deposits of $100,000 or more
$
238,285

Borrowings.

Included in borrowings were federal funds purchased, securities sold under repurchase agreements and advances from the FHLB of ~~$331.00~~$381.36 million, ~~$445.77~~$468.71 million and ~~$615.68~~$331.00 million at December 31, ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, 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 $398.14 million, $418.98 million, and $422.29 million ~~$552.04 million~~in 2019, 2018 and ~~$524.37 million in~~ 2017, ~~2016 and 2015,~~ respectively. The average rates paid on federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were ~~0.25%~~0.75%, ~~0.17%~~0.47% and ~~0.08%~~0.25% for the years ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, respectively. The weighted average interest rate on federal funds purchased, securities sold under repurchase agreements and advances from the FHLB was ~~0.10%~~0.48%, ~~0.12%~~0.78% and ~~0.17%~~0.10% at December 31, ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, respectively. The highest amount of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB at any month end during 2019, 2018 and 2017 ~~2016~~was $423.67 million, $529.64 million and ~~2015 was~~ $611.30 million, ~~$598.77 million and $647.72 million,~~ respectively.

Capital Resources

We evaluate capital resources by our ability to maintain adequate regulatory capital ratios to do business in the banking industry. Issues related to capital resources arise primarily when we are growing at an accelerated rate but not retaining a significant amount of our profits or when we experience significant asset quality deterioration.

Total shareholders’ equity was ~~$922.77 million,~~$1.23 billion, or ~~12.72%~~14.85% of total assets at December 31, ~~2017,~~2019, as compared to ~~$837.89 million,~~$1.05 billion, or ~~12.30%~~13.62% of total assets at December 31, ~~2016.~~2018. During ~~2017,~~2019, total shareholders’ equity averaged ~~$882.81 million,~~$1.15 billion, or ~~12.65%~~14.44% of average assets, as compared to ~~$847.87~~$980.21 million, or ~~12.85%~~12.89% of average assets during ~~2016.~~

2018.

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.

Table of Contents

Beginning in January 2016, 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 reaches 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, ~~2017~~2019 and ~~2016,~~2018, we had a total risk-based capital ratio of ~~19.85%~~21.13% and ~~18.45%~~20.61%, a Tier 1 capital to risk-weighted assets ratio of ~~18.66%~~20.06% and ~~17.30%~~19.47%, a common equity Tier 1 capital to risk-weighted ratio of ~~18.66%~~20.06% and ~~17.30%~~19.47% and a Tier 1 leverage ratio of ~~11.09%~~12.60% and ~~10.71%~~11.85%, respectively. The regulatory capital ratios as of December 31, ~~2017~~2019 and ~~2016~~2018 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies.

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

Our subsidiary bank made the election to continue to exclude most ~~AOCI~~accumulated other comprehensive income from capital in connection with its March 31, 2015 quarterly financial filing and, in effect, to retain the ~~AOCI~~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, ~~2017,~~2019, the model simulations projected that 100 and 200 basis point increases in interest rates would result in variances in net interest income of positive ~~0.58%~~2.29% and positive ~~0.50%~~4.00%, respectively, relative to the current financial statement structure over the next twelve months, while a decrease in interest rates of 100 basis points would result in a variance in a net interest income of negative ~~3.84%~~2.77% relative to the current financial statement structure over the next twelve months

We consider the likelihood of a decrease in interest rates beyond 100 basis points after December 31, ~~2017~~2019 remote given current interest rate levels. 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~~twelve-month measurement period and that changes in market interest rates are

instantaneous and sustained across the yield curve regardless of duration of pricing characteristics on specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. We believe these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities

re-price

in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material.

Should we be unable to maintain a reasonable balance of maturities and repricing of our interest-earning assets and our interest-bearing liabilities, we could be required to dispose of our assets in an unfavorable manner or pay a higher than market rate to fund our activities. Our asset liability committee oversees and monitors this risk.

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Liquidity

Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. The potential need for liquidity arising from these types of financial instruments is represented by the contractual notional amount of the instrument, as detailed in Tables 12 and 13. Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. Liquid assets include cash, federal funds sold, and short-term investments in time deposits in banks. Liquidity is also provided by access to funding sources, which include core depositors and correspondent banks that maintain accounts with and sell federal funds to our subsidiary bank. Other sources of funds include our ability to borrow from short-term sources, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and advances from the FHLB, which amounted to ~~$331.00~~$381.36 million at December 31, ~~2017,~~2019, and an unfunded $25.00 million revolving line of credit established with Frost Bank, a nonaffiliated bank, which matures on June ~~2019~~30, 2021 (see next paragraph)~~.Our~~.

Our subsidiary bank also has federal funds purchased lines of credit with two

non-affiliated

banks totaling $130.00 million. At December 31, ~~2017,~~2019, there were no amounts drawn on these lines of credit. Our subsidiary bank also has available a line of credit with the FHLB totaling ~~$1.22~~$1.35 billion at December 31, ~~2017,~~2019, secured by portions of our loan portfolio and certain investment securities. At December 31, ~~2017, no amounts were~~2019, the Company did not have any balances outstanding under this line of credit.

The Company renewed its loan agreement, effective June 30, ~~2017,~~2019, with Frost Bank. Under the loan agreement, as renewed and amended, we are permitted to draw up to $25.00 million on a revolving line of credit. Prior to June 30, ~~2019,~~2021, interest is paid quarterly at

The Wall Street Journal

Prime Rate and the line of credit matures June 30, ~~2019.~~2021. If a balance exists at June 30, ~~2019,~~2021, the principal balance converts to a term facility payable quarterly over five years and interest is paid quarterly at ~~our election at~~

The Wall Street

Journal

Prime ~~Rate plus 50 basis points or LIBOR plus 250 basis points.~~Rate. The line of credit is unsecured. Among other provisions in the credit agreement, we must satisfy certain financial covenants during the term of the loan agreement, including, without limitation, covenants that require us to maintain certain capital, tangible net worth, loan loss reserve,

non-performing

asset and cash flow coverage ratios. In addition, the credit agreement contains certain operational covenants, which among others, restricts the payment of dividends above 55% of consolidated net income, limits the incurrence of debt (excluding any amounts acquired in an acquisition) and prohibits the disposal of assets except in the ordinary course of business. Since 1995, we have historically declared dividends as a percentage of our consolidated net income in a range of 37% (low) in 1995 to 53% (high) in 2003 and 2006. The Company was in compliance with the financial and operational covenants at December 31, ~~2017.~~2019. There was no outstanding balance under the line of credit as of December 31, ~~2017~~2019 or ~~2016.~~

2018.

In addition, we anticipate that any future acquisition of financial institutions, expansion of branch locations or offering of new products could also place a demand on our cash resources. Available cash and cash equivalents at ~~our parent company,~~the Company, which totaled ~~$78.47~~$125.08 million at December 31, ~~2017,~~2019, investment securities which totaled ~~$8.52~~$6.30 million at December 31, ~~2017 which matures~~2019 with maturities over 69 to 1311 years, available dividends from our subsidiaries which totaled ~~$205.75~~$261.42 million at December 31, ~~2017,~~2019, 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 of Contents

Table 12 — Contractual Obligations as of December 31, ~~2017~~2019 (in thousands):

   Payment Due by Period
   Total Amounts    Less than 1
year    More than 1
year but less
than 3 years    More than 3
year but less
than 5 years    Over 5
years
Deposits with stated maturity dates
   $ 451,255    $ 384,668    $ 52,638    $ 13,949    $ —
Pension obligation
   10,567    1,064    2,054    2,140    5,309
Operating leases
   909    385    476    48    —
Outsourcing service contracts
   3,610    2,077    1,533    —      —










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


	Payment Due by Period
	Total Amounts		Less than 1 year		More than 1 year but less than 3 years		More than 3 years but less than 5 years		Over 5 years
Deposits with stated maturity dates	$	420,013	$	351,818	$	53,196	$	14,999	$	—
Operating leases		1,101		557		487		57		—
Outsourcing service contracts		14,782		6,039		6,097		2,646		—

Total Contractual Obligations	$	435,896	$	358,414	$	59,780	$	17,702	$	—

Amounts above for deposits do not include related accrued interest.

Off-Balance Sheet Arrangements.

We are a party to financial instruments with

off-balance-sheet

risk in the normal course of business to meet the financing needs of our customers. These financial instruments include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

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

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, ~~2017~~2019 (in thousands):

   Total Notional
Amounts
Committed    Less than 1
year    More than 1
year but less
than 3 years    More than 3
year but less
than 5 years    Over 5
years
Unfunded lines of credit
   $ 534,468    $ 492,138    $ 24,394    $ 13,327    $ 4,609
Unfunded commitments to extend credit
   244,658    147,735    18,401    11,781    66,741
Standby letters of credit
   28,858    22,245    6,613    —      —










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


	Total Notional Amounts Committed		Less than 1 year		More than 1 year but less than 3 years		More than 3 years but less than 5 years		Over 5 years
Unfunded lines of credit	$	743,595	$	258,655	$	399,740	$	20,981	$	64,219
Unfunded commitments to extend credit		374,158		177,064		33,311		10,408		153,375
Standby letters of credit		38,364		32,240		5,614		480		30

Total Commercial Commitments	$	1,156,117	$	467,959	$	438,665	$	31,869	$	217,624

We believe we have no other

off-balance

sheet arrangements or transactions with unconsolidated, special purpose entities that would expose us to liability that is not reflected on the face of the financial statements.

Table of Contents

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 ~~2017~~2019 and ~~2016.~~2018. This information is derived from unaudited consolidated financial statements that include, in our opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation when read in conjunction with our consolidated financial statements and notes thereto included elsewhere in thisForm

10-K.

   2017
   4^th    3^rd    2^nd    1^st
   (dollars in thousands, except per share amounts)
Summary Income Statement Information:

Interest income
   $ 63,456    $ 62,554    $ 61,182    $ 58,783
Interest expense
   2,562    2,866    2,097    1,763








Net interest income
   60,894    59,688    59,085    57,020
Provision for loan losses
   1,440    1,415    1,725    1,950








Net interest income after provision for loan losses
   59,454    58,273    57,360    55,070
Noninterest income
   22,298    23,185    22,423    21,283
Net gain on securities transactions
   3    1,075    747    3
Noninterest expense
   44,095    43,964    43,775    42,152








Earnings before income taxes
   37,660    38,569    36,755    34,204
Income tax expense
   1,517    9,195    8,500    7,605








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








Per Share Data:

Earnings per share, basic
   $ 0.55    $ 0.44    $ 0.43    $ 0.40
Earnings per share, assuming dilution
   0.54    0.44    0.43    0.40
Cash dividends declared
   0.19    0.19    0.19    0.18
Book value atperiod-end
   13.93    13.69    13.41    12.99
Common stock sales price:

High
   $ 48.85    $ 46.00    $ 44.80    $ 46.45
Low
   43.05    37.31    36.85    37.55
Close
   45.05    45.20    44.20    40.10


	2019
	4 th		3 rd		2 nd		1 st
	(dollars in thousands, except per share amounts)
Summary Income Statement Information:
Interest income	$	82,123	$	80,591	$	79,576	$	76,901
Interest expense		6,801		7,953		7,961		7,387

Net interest income		75,322		72,638		71,615		69,514
Provision for loan losses		950		450		600		965

Net interest income after provision for loan losses		74,372		72,188		71,015		68,549
Noninterest income		27,342		28,617		27,300		24,437
Net gain on securities transactions		5		52		676		—
Noninterest expense		51,938		48,910		48,304		47,367

Earnings before income taxes		49,781		51,947		50,687		45,619

Income tax expense		8,393		8,867		8,594		7,367

Net earnings	$	41,388	$	43,080	$	42,093	$	38,252

Per Share Data:
Earnings per share, basic	$	0.30	$	0.32	$	0.31	$	0.28
Earnings per share, assuming dilution		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

   2016
   4^th    3^rd    2^nd    1^st
   (dollars in thousands, except per share amounts)
Summary Income Statement Information:

Interest income
   $ 57,979    $ 58,093    $ 57,881    $ 58,335
Interest expense
   1,443    1,366    1,330    1,312








Net interest income
   56,536    56,727    56,551    57,023
Provision for loan losses
   1,993    3,833    2,058    2,328








Net interest income after provision for loan losses
   54,543    52,894    54,493    54,695
Noninterest income
   21,604    21,913    20,526    19,819
Net gain (loss) on securities transactions
   117    239    912    2
Noninterest expense
   41,990    42,003    40,756    41,081








Earnings before income taxes
   34,274    33,043    35,175    33,435
Income tax expense
   7,608    7,440    8,366    7,739








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








Per Share Data:

Earnings per share, basic
   $ 0.40    $ 0.39    $ 0.41    $ 0.39
Earnings per share, assuming dilution
   0.40    0.39    0.41    0.39
Cash dividends declared
   0.18    0.18    0.18    0.16
Book value atperiod-end
   12.68    13.14    13.11    12.70
Common stock sales price:

High
   $ 46.70    $ 37.06    $ 34.50    $ 30.75
Low
   35.05    30.95    27.72    24.12
Close
   45.20    36.44    32.79    29.58

Table of Contents

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

As of December 31, ~~2017,~~2019, 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)

15d-15(e)

of the Securities Exchange Act of 1934). Our management, which includes our principal executive officer and our principal financial officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements

due to error or fraud may occur and not be detected. Our principal executive officer and principal financial officer have concluded, based on our evaluation of our disclosure controls and procedures, that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, ~~2017.~~

2019.

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

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

First Financial Bankshares, Inc. and subsidiaries’ management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2017.~~2019. In making this assessment, it used the criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (COSO) in

Internal Control —– Integrated

Framework

. Based on our assessment we believe that, as of December 31, ~~2017,~~2019, the Company’s internal control over financial reporting, as such term is defined inRule

13a-15(f)

of the Securities Exchange Act of 1934, is effective based on those criteria.

First Financial Bankshares, Inc. and subsidiaries’ independent auditors have issued an audit report, dated February ~~16, 2018,~~14, 2020, on the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2017.~~

~~REPORT OF INDEPENDENT PUBLIC ACCOUNTING FIRM~~

2019.

Table of Contents

Definition and Limitations of Internal Control ~~over~~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 ~~16, 2018~~

14, 2020

ITEM 9B.

OTHER INFORMATION

~~None.~~

None.

Table of Contents

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 is hereby incorporated by reference from our proxy statement for our ~~2018~~2020 annual meeting of shareholders which will be filed with the SEC not later than 120 days after December 31, ~~2017.~~

2019.

ITEM 11.

EXECUTIVE COMPENSATION

The information required by Item 11 is hereby incorporated by reference from our proxy statement for our ~~2018~~2020 annual meeting of shareholders which will be filed with the SEC not later than 120 days after December 31, ~~2017.~~

2019.

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 ~~2018~~2020 annual meeting of shareholders. The following chart gives aggregate information under our equity compensation plans as of December 31, ~~2017.~~

   Number of Securities
To be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights    Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights    Number of Securities
Remaining Available
For Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in
Far Left Column)
Equity compensation plans approved by security holders
   1,325,965    $ 33.01    2,267,193
Equity compensation plans not approved by security holders
   —      —      —






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

2019.


	Number of Securities To be Issued Upon Exercise of Outstanding Options, Warrants and Rights		Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Far Left Column)
Equity compensation plans approved by security holders		2,138,196	$	20.12		4,220,767
Equity compensation plans not approved by security holders		—		—		—

Total		2,138,196	$	20.12		4,220,767

The remainder of the information required by Item 12 is incorporated by reference from our proxy statement for our ~~2018~~2020 annual meeting of shareholders.

ITEM 13.

CERTAIN RELATIONSHIPS

AND

RELATED TRANSACTIONS,

AND

DIRECTOR

INDEPENDENCE

The information required by Item 13 is hereby incorporated by reference from our proxy statement for our ~~2018~~2020 annual meeting of shareholders which will be filed with the SEC not later than 120 days after December 31, ~~2017.~~

2019.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is hereby incorporated by reference from our proxy statement for our ~~2018~~2020 annual meeting of shareholders which will be filed with the SEC not later than 120 days after December 31, ~~2017.~~

2019.

Table of Contents

PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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

(1)

Financial Statements:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, ~~2017~~2019 and ~~2016~~

2018

Consolidated Statements of Earnings for the years ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

Consolidated Statements of Comprehensive Earnings for the years ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

Consolidated Statements of Shareholders’ Equity for the years ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

Consolidated Statements of Cash Flows for the years ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

Notes to ~~the~~ Consolidated Financial Statements

(2)

Financial Statement Schedules:

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

(3)

Exhibits:

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

~~Exhibits Index~~

The following exhibits are ~~filed as part~~included or incorporated by reference in this Annual Report on Form

10-K:

Table of ~~this report:~~

Contents



~~2.1~~		—
	2.1		—	Agreement and Plan of Reorganization, dated October 12, 2017, by and among First Financial Bankshares, Inc., Kingwood Merger Sub, Inc., and Commercial Bancshares, Inc. (schedules have been omitted pursuant to Item 601(b)(2) of RegulationS-K) (incorporated by reference from Exhibit 2.1 to Registrant’s Form8-K filed October 12, 2017).

~~3.1~~		—
	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~~8-K~~ 10-Q filed ~~April~~July 30, ~~2015)~~2019).

~~3.2~~		—
	3.2		—	Amended and Restated Bylaws of the Registrant (incorporated by reference from Exhibit ~~99.1~~3.2 of the Registrant’s Form8-K filed January 24, 2012).

~~4.1~~		—
	3.3		—	Amendment to Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed January 30, 2020).

	4.1		—	Specimen certificate of First Financial Common Stock (incorporated by reference from Exhibit 3 of the Registrant’s Amendment No. 1 to Form8-A filed on Form8-A/A No. 1 on January 7, 1994).

~~10.1~~		—
	4.2		—	Description of Registrant’s Securities*

	10.1		—	2002 Incentive Stock Option Plan (incorporated by reference from Exhibit 10.3 of the Registrant’s Form10-Q filed May 4, 2010).++

~~10.2~~		—
	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~~		—
	10.3		—	Loan Agreement, dated June 30, 2013, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form8-K filed July 1, 2013).

~~10.4~~		—
	10.4		—	First Amendment to Loan Agreement, dated June 30, 2015, between First Financial Bankshares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form8-K filed June 30, 2015).

~~10.5~~		—
	10.5		—	Second Amendment to Loan Agreement, dated June 30, 2017, between First Financial Bankhares, Inc. and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form8-K filed June 30, 2017).

~~10.6~~		—
	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 (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 2, 2015).++

~~10.7~~		—
	10.8		—	Form of Executive Recognition Agreement (incorporated by reference from Exhibit 10.1 of the Registrant’s Form8-K filed ~~August 26, 2016)~~June 29, 2018).++

~~21.1~~		—
	21.1		—	Subsidiaries of Registrant.*

~~23.1~~		—
	23.1		—	Consent of Ernst & Young LLP.*

~~24.1~~		—
	24.1		—	Power of Attorney (included on signature page of this Form10-K).*

~~31.1~~		—
	31.1		—	Rule13a-14(a) /15(d)-14(a) Certification of Chief Executive Officer of First Financial Bankshares, Inc.*

~~31.2~~		—
	31.2		—	Rule13a-14(a) /15(d)-14(a) Certification of Chief Financial Officer of First Financial Bankshares, Inc.*

~~32.1~~		—
	32.1		—	Section 1350 Certification of Chief Executive Officer of First Financial Bankshares, Inc.+

~~32.2~~		—
	32.2		—	Section 1350 Certification of Chief Financial Officer of First Financial Bankshares, Inc.+

~~101.INS~~		—
	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~~		—
	101.SCH		—	XBRL Taxonomy Extension Schema Document.*

~~101.CAL~~		—
	101.CAL		—	XBRL Taxonomy Extension Calculation Linkbase Document.*

~~101.DEF~~		—
	101.DEF		—	XBRL Taxonomy Extension Definition Linkbase Document.*

~~101.LAB~~		—
	101.LAB		—	XBRL Taxonomy Extension Label Linkbase Document.*

~~101.PRE~~		—
	101.PRE		—	XBRL Taxonomy Extension Presentation Linkbase Document.*

*	Filed herewith.

Table of Contents

+
+		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.

ITEM 16.

FORM

10-K

SUMMARY

The Registrant has not selected the option to provide the summary information in this Item 16.

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	FIRST FINANCIAL BANKSHARES, INC.

Date: February ~~16, 2018~~14, 2020	By:	/s/ F. ~~SCOTT DUESER~~Scott Dueser
		F. SCOTT DUESER
		Chairman of the Board, Director, President and Chief Executive Officer
		(Principal Executive Officer)

The undersigned directors and officers of First Financial Bankshares, Inc. hereby constitute and appoint J. Bruce Hildebrand, with full power to act and with full power of substitution and resubstitution, our true and lawful

attorney-in-fact

with full power to execute in our name and behalf in the capacities indicated below any and all amendments to this report and to file the same, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission and hereby ratify and confirm all that such

attorney-in-fact

or his substitute shall lawfully do or cause to be done by virtue hereof.

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


~~Name~~	~~Title~~	~~Date~~
Name	Title	Date

/s/ F. ~~SCOTT DUESER~~ Scott Dueser F. Scott Dueser	Chairman of the Board, Director, President, and Chief Executive Officer (Principal Executive Officer)	February ~~16, 2018~~14, 2020

/s/ J. ~~BRUCE HILDEBRAND~~ Bruce Hildebrand J. Bruce Hildebrand	Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	February ~~16, 2018~~14, 2020

/s/ ~~APRIL K. ANTHONY~~ April K. Anthony April K. Anthony	Director	February ~~16, 2018~~14, 2020

~~/s/ STEVEN L. BEAL~~ ~~Steven L. Beal~~	~~Director~~	~~February 16, 2018~~
/s/ Vianei Lopez Braun Vianei Lopez Braun	Director	February 14, 2020

/s/ ~~TUCKER S. BRIDWELL~~ Tucker S. Bridwell Tucker S. Bridwell	Director	February ~~16, 2018~~14, 2020

~~/s/ DAVID COPELAND~~ ~~David Copeland~~	~~Director~~	~~February 16, 2018~~


~~Name~~ /s/ David Copeland David Copeland		~~Title~~ Director		~~Date~~ February 14, 2020

Table of Contents


~~/s/ MURRAY EDWARDS~~ ~~Murray Edwards~~	~~Director~~	~~February 16, 2018~~

~~/s/ RON GIDDIENS~~ ~~Ron Giddiens~~ Name	~~Director~~ Title	~~February 16, 2018~~ Date

~~/s/ TIM LANCASTER~~ ~~Tim Lancaster~~	~~Director~~	~~February 16, 2018~~
/s/ Mike Denny Mike Denny	Director	February 14, 2020

/s/ ~~KADE L. MATTHEWS~~ Murray Edwards Murray Edwards	Director	February 14, 2020

/s/ Ron Giddiens Ron Giddiens	Director	February 14, 2020

/s/ Tim Lancaster Tim Lancaster	Director	February 14, 2020

/s/ Kade L. Matthews Kade L. Matthews	Director	February ~~16, 2018~~14, 2020

/s/ ~~ROSS H. SMITH, JR.~~ Robert Nickles Robert Nickles	Director	February 14, 2020

/s/ Ross H. Smith, Jr. Ross H. Smith, Jr.	Director	February ~~16, 2018~~14, 2020

~~/s/ JOHNNY TROTTER~~ ~~Johnny Trotter~~	~~Director~~
/s/ Johnny Trotter Johnny Trotter	Director	February ~~16, 2018~~14, 2020

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of First Financial Bankshares, Inc.

and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of First Financial Bankshares, Inc. ~~(a Texas corporation)~~ and subsidiaries (the Company) as of December 31, ~~2017~~2019 and ~~2016, and~~2018, 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, ~~2017~~2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the ~~consolidated~~ financial position of the Company at December 31, ~~2017~~2019 and ~~2016,~~2018, and the ~~consolidated~~ results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2017,~~2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, ~~2017,~~2019, based on criteria established in Internal ~~Control —~~ Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February ~~16, 2018~~14, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

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

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

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.


		Allowance for Loan Losses

Description of the Matter		The Company’s loan portfolio totaled $4.2 billion as of December 31, 2019, and the allowance for loan losses (ALL) was $52.5 million. As discussed in Note 1 and Note 3 to the consolidated financial statements, the ALL is an amount which represents management’s best estimate of probable losses that are inherent in the Company’s loan portfolio as of the balance sheet date. The ALL is comprised of specific reserves determined based on probable losses on specific classified loans, a historical valuation reserve component that considers historical loss rates and estimated loss emergence periods, and qualitative reserves. Management applies judgment in estimating the ALL and, in particular, in identifying and quantifying qualitative reserves included within the ALL. The qualitative reserves represent additional losses inherent in the loan portfolio that are not reflected in the historical loss rates and are based upon general economic conditions and other qualitative risk factors both internal and external to the Company, such as changes in trends in volume and terms of loans and changes in credit concentrations. Auditing management’s estimate of the allowance for loan losses involved a high degree of subjectivity due to the qualitative reserves included in the ALL. Management’s identification and measurement of the qualitative reserves is highly judgmental and could have a significant effect on the ALL.

F-1

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. ~~AND~~ SUBSIDIARIES

Consolidated Balance Sheets

December 31, ~~2017~~2019 and ~~2016~~

2018

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

ASSETS    2017 2016
CASH AND DUE FROM BANKS
   $ 209,583 $ 204,782
FEDERAL FUNDS SOLD
   —   3,130
INTEREST-BEARING DEPOSITS IN BANKS
   162,764 48,574


Total cash and cash equivalents
   372,347 256,486
INTEREST-BEARING TIME DEPOSITS IN BANKS
   1,458 1,707
SECURITIESAVAILABLE-FOR-SALE, at fair value
   3,087,473 2,860,837
SECURITIESHELD-TO-MATURITY (fair value of $- and $124 at December 31, 2017 and 2016, respectively)
   —   121
LOANS:

Held for investment
   3,485,569 3,357,307
Less — allowance for loan losses
   (48,156 ) (45,779 )


Net loans held for investment
   3,437,413 3,311,528
Held for sale
   15,130 26,898


Net loans
   3,452,543 3,338,426
BANK PREMISES AND EQUIPMENT, net
   124,026 122,685
INTANGIBLE ASSETS
   141,143 143,603
OTHER ASSETS
   75,725 86,066


Total assets
   $ 7,254,715 $ 6,809,931


LIABILITIES AND SHAREHOLDERS’ EQUITY

NONINTEREST-BEARING DEPOSITS
   $ 2,041,650 $ 1,717,722
INTEREST-BEARING DEPOSITS
   3,921,311 3,760,817


Total deposits
   5,962,961 5,478,539
DIVIDENDS PAYABLE
   12,589 11,897
BORROWINGS
   331,000 445,770
OTHER LIABILITIES
   25,397 35,840


Total liabilities
   6,331,947 5,972,046


COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY:

Common stock — $0.01 par value; authorized 120,000,000 shares; 66,260,444 and 66,094,695 shares issued at December 31, 2017 and 2016, respectively
   663 661
Capital surplus
   378,062 372,245
Retained earnings
   517,257 446,534
Treasury stock (shares at cost: 495,964 and 507,409 at December 31, 2017 and 2016, respectively)
   (7,148 ) (6,671 )
Deferred Compensation
   7,148 6,671
Accumulated other comprehensive earnings
   26,786 18,445


Total shareholders’ equity
   922,768 837,885


Total liabilities and shareholders’ equity
   $ 7,254,715 $ 6,809,931


	2019			2018
ASSETS

CASH AND DUE FROM BANKS	$	231,534		$	207,835

FEDERAL FUNDS SOLD		3,150			—

INTEREST-BEARING DEPOSITS IN BANKS		47,920			40,812


Total cash and cash equivalents		282,604			248,647

INTEREST-BEARING TIME DEPOSITS IN BANKS		—			1,458

SECURITIES AVAILABLE-FOR-SALE, at fair value		3,413,317			3,158,777

LOANS:
Held-for-investment		4,194,969			3,953,636
Less – allowance for loan losses		(52,499	)		(51,202	)

Net loans held for investment		4,142,470			3,902,434

Held-for-sale ($23,076 and $19,185 at fair value option at December 31, 2019 and December 31, 2018)		28,228			21,672

Net loans		4,170,698			3,924,106

BANK PREMISES AND EQUIPMENT, net		131,022			133,421

INTANGIBLE ASSETS		173,667			174,683

OTHER ASSETS		90,919			90,762

Total assets	$	8,262,227		$	7,731,854

LIABILITIES AND SHAREHOLDERS’ EQUITY

NONINTEREST-BEARING DEPOSITS	$	2,065,128		$	2,116,107

INTEREST-BEARING DEPOSITS		4,538,678			4,064,282

Total deposits		6,603,806			6,180,389

DIVIDENDS PAYABLE		16,306			14,227

BORROWINGS		381,356			468,706

OTHER LIABILITIES		33,562			15,237

Total liabilities		7,035,030			6,678,559

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY:
Common stock - $0.01 par value; authorized 200,000,000 shares; 135,891,755 and 67,753,133 shares issued at December 31, 2019 and 2018, respectively		1,359			678
Capital surplus		450,676			443,114
Retained earnings		707,656			606,658
Treasury stock (shares at cost: 927,408 and 467,811 at December 31, 2019 and 2018, respectively)		(8,222	)		(7,507	)
Deferred Compensation		8,222			7,507
Accumulated other comprehensive earnings		67,506			2,845

Total shareholders’ equity		1,227,197			1,053,295

Total liabilities and shareholders’ equity	$	8,262,227		$	7,731,854

The accompanying notes are an integral part of these consolidated financial statements.

~~F-2~~

F-3

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. ~~AND~~ SUBSIDIARIES

Consolidated Statement of Earnings

December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

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

   2017 2016    2015
INTEREST INCOME:

Interest and fees on loans
   $ 166,807 $ 161,018    $ 151,662
Interest on investment securities:

Taxable
   32,825 27,626    29,673
Exempt from federal income tax
   44,659 43,302    40,080
Interest on federal funds sold and interest-bearing deposits in banks
   1,684 342    208




Total interest income
   245,975 232,288    221,623




INTEREST EXPENSE:

Interest on deposits
   8,213 4,503    3,642
Other
   1,075 948    446




Total interest expense
   9,288 5,451    4,088




Net interest income
   236,687 226,837    217,535
PROVISION FOR LOAN LOSSES
   6,530 10,212    9,685




Net interest income after provision for loan losses
   230,157 216,625    207,850




NONINTEREST INCOME:

Trust fees
   23,694 19,636    19,252
Service charges on deposit accounts
   19,416 18,386    17,171
ATM, interchange and credit card fees
   25,686 23,910    21,860
Real estate mortgage operations
   15,109 16,086    10,409
Net gain on sale ofavailable-for-sale securities (includes $1,828, $1,270 and $432 for the years ended December 31, 2017, 2016 and 2015, respectively, related to accumulated comprehensive earnings reclassifications)
   1,828 1,270    432
Net gain (loss) on sale of foreclosed assets
   (50 ) 456    538
Net gain (loss) on sale of assets
   (396 ) 168    (820 )
Interest on loan recoveries
   1,128 2,112    1,050
Other
   4,602 3,108    3,540




Total noninterest income
   91,017 85,132    73,432




NONINTEREST EXPENSE:

Salaries and employee benefits
   95,287 90,739    80,999
Loss from partial settlement of pension plan
   —   267    —
Net occupancy expense
   10,521 10,420    10,314
Equipment expense
   13,765 13,479    12,222
FDIC insurance premiums
   2,217 2,680    3,153
ATM, interchange and credit card expenses
   7,452 7,231    6,384
Professional and service fees
   8,063 6,877    4,831
Printing, stationery and supplies
   1,989 2,093    2,278
Operational and other losses
   3,192 2,170    1,889
Amortization of intangible assets
   613 738    561
Other
   30,887 29,136    26,833




Total noninterest expense
   173,986 165,830    149,464




EARNINGS BEFORE INCOME TAXES
   147,188 135,927    131,818
INCOME TAX EXPENSE (includes $640, $445 and $151 for the years ended December 31, 2017, 2016 and 2015, respectively, related to income tax expense from reclassification items)
   26,817 31,153    31,437




NET EARNINGS
   $ 120,371 $ 104,774    $ 100,381




NET EARNINGS PER SHARE, BASIC
   $ 1.82 $ 1.59    $ 1.55




NET EARNINGS PER SHARE, ASSUMING DILUTION
   $ 1.81 $ 1.59    $ 1.54


	2019		2018			2017
INTEREST INCOME:
Interest and fees on loans	$	224,556	$	200,347		$	166,807
Interest on investment securities:
Taxable		55,670		50,052			32,825
Exempt from federal income tax		37,075		39,661			44,659
Interest on federal funds sold and interest-bearing deposits in banks		1,891		1,630			1,684

Total interest income		319,192		291,690			245,975

INTEREST EXPENSE:
Interest on deposits		27,122		16,946			8,213
Other		2,980		1,984			1,075

Total interest expense		30,102		18,930			9,288

Net interest income		289,090		272,760			236,687
PROVISION FOR LOAN LOSSES		2,965		5,665			6,530

Net interest income after provision for loan losses		286,125		267,095			230,157

NONINTEREST INCOME:
Trust fees		28,401		28,181			23,694
Service charges on deposit accounts		22,039		21,663			19,416
ATM, interchange and credit card fees		29,863		28,532			25,686
Real estate mortgage operations		18,144		15,157			15,109
Net gain on sale of available-for-sale securities (includes $733, $1,354 and $1,828 for the years ended December 31, 2019, 2018 and 2017, respectively, related to accumulated comprehensive earnings reclassifications)		733		1,354			1,828
Net gain (loss) on sale of foreclosed assets		274		116			(50	)
Net gain (loss) on sale of assets		319		(147	)		(396	)
Interest on loan recoveries		2,092		938			1,128
Other		6,563		5,970			4,602

Total noninterest income		108,428		101,764			91,017

NONINTEREST EXPENSE:
Salaries and employee benefits		112,336		105,189			95,287
Cost related to termination of pension plan		2,673		1,546			—
Net occupancy expense		11,156		11,173			10,521
Equipment expense		9,052		10,118			10,120
FDIC insurance premiums		1,091		2,333			2,217
ATM, interchange and credit card expenses		9,856		9,282			7,452
Professional and service fees		7,853		8,894			8,063
Printing, stationery and supplies		1,812		1,997			1,989
Operational and other losses		1,879		2,188			3,192
Software amortization and expense		7,305		6,020			6,940
Amortization of intangible assets		1,016		1,272			613
Other		30,492		30,672			27,592

Total noninterest expense		196,521		190,684			173,986

EARNINGS BEFORE INCOME TAXES		198,032		178,175			147,188
INCOME TAX EXPENSE (includes $154, $284 and $640 for the years ended December 31, 2019, 2018 and 2017, related to income tax expense from reclassification items)		33,220		27,537			26,817

NET EARNINGS	$	164,812	$	150,638		$	120,371

NET EARNINGS PER SHARE, BASIC	$	1.22	$	1.11		$	0.91

NET EARNINGS PER SHARE, ASSUMING DILUTION	$	1.21	$	1.11		$	0.91

The accompanying notes are an integral part of these consolidated financial statements.

~~F-3~~

F-4

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

Years Ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

(Dollars in thousands)

Common Stock
   Capital
Surplus    Retained
Earnings

Treasury Stock
Deferred
Compensation    Accumulated
Other
Comprehensive
Earnings
(Losses) Total
Shareholders’
Equity
   Shares    Amount       Shares Amounts
BALANCE, December 31, 2014
   64,089,921    $ 641    $ 305,429    $ 327,978 (529,563 ) $ (5,878 ) $ 5,878    $ 47,489 $ 681,537
Net earnings
   —      —      —      100,381 —   —   —      —   100,381
Stock issued in acquisition of FBC Bancshares, Inc.
   1,755,374    18    59,630    —   —   —   —      —   59,648
Stock option exercises
   105,121    1    1,544    —   —   —   —      —   1,545
Restricted Stock grant
   39,818    —      1,350    —   —   —   —      —   1,350
Cash dividends declared, $0.62 per share
   —      —      —      (40,353 ) —   —   —      —   (40,353 )
Minimum liability pension adjustment, net of related income taxes
   —      —      —      —   —   —   —      (1,291 ) (1,291 )
Change in unrealized gain (loss) in investment securitiesavailable-for-sale, net of related income taxes
   —      —      —      —   —   —   —      1,197 1,197
Additional tax benefit related to directors’ deferred compensation plan
   —      —      328    —   —   —   —      —   328
Shares purchased in connection with directors’ deferred compensation plan, net
   —      —      —      —   8,912 (418 ) 418    —   —
Stock option expense
   —      —      644    —   —   —   —      —   644










BALANCE, December 31, 2015
   65,990,234    $ 660    $ 368,925    $ 388,006 (520,651 ) $ (6,296 ) $ 6,296    $ 47,395 $ 804,986










Net earnings
   —      —      —      104,774 —   —   —      —   104,774
Stock option exercises
   82,871    1    1,259    —   —   —   —      —   1,260
Restricted Stock grant
   21,590    —      809    —   —   —   —      —   809
Cash dividends declared, $0.70 per share
   —      —      —      (46,246 ) —   —   —      —   (46,246 )
Minimum liability pension adjustment, net of related income taxes
   —      —      —      —   —   —   —      917 917
Change in unrealized gain (loss) in investment securitiesavailable-for-sale, net of related income taxes
   —      —      —      —   —   —   —      (29,867 ) (29,867 )
Additional tax benefit related to directors’ deferred compensation plan
   —      —      370    —   —   —   —      —   370
Shares purchased in connection with directors’ deferred compensation plan, net
   —      —      —      —   13,242 (375 ) 375    —   —
Stock option expense
   —      —      882    —   —   —   —      —   882










BALANCE, December 31, 2016
   66,094,695    $ 661    $ 372,245    $ 446,534 (507,409 ) $ (6,671 ) $ 6,671    $ 18,445 $ 837,885










Net earnings
   —      —      —      120,371 —   —   —      —   120,371
Stock option exercises
   140,250    2    2,933    —   —   —      —   2,935
Restricted Stock grant
   25,499    —      1,139    —   —   —      —   1,139
Cash dividends declared, $0.75 per share
   —      —      —      (49,648 ) —   —   —      —   (49,648 )
Minimum liability pension adjustment, net of related income taxes
   —      —      —      —   —   —   —      677 677
Change in unrealized gain (loss) in investment securitiesavailable-for-sale, net of related income taxes
   —      —      —      —   —   —   —      7,664 7,664
Shares purchased (redeemed) in connection with directors’ deferred compensation plan, net
   —      —      —      —   11,445 (477 ) 477    —   —
Stock option expense
   —      —      1,745    —   —   —   —      —   1,745










BALANCE, December 31, 2017
   66,260,444    $ 663    $ 378,062    $ 517,257 (495,964 ) $ (7,148 ) $ 7,148    $ 26,786 $ 922,768


																		Accumulated Other Total Comprehensive
	Common Stock				Capital		Retained			Treasury Stock						Deferred		Earnings			Shareholders’
	Shares		Amount		Surplus		Earnings			Shares			Amounts			Compensation		(Losses)			Equity
BALANCE, December 31, 2016		66,094,695	$	661	$	372,245	$	446,534			(507,409	)	$	(6,671	)	$	6,671	$	18,445		$	837,885
Net earnings		—		—		—		120,371			—			—			—		—			120,371
Stock option exercises		140,250		2		2,933								—			—		—			2,935
Restricted Stock grant		25,499		—		1,139					—			—			—		—			1,139
Cash dividends declared, $0.38 per share		—		—		—		(49,648	)		—			—			—		—			(49,648	)
Minimum liability pension adjustment, net of related income taxes		—		—		—		—			—			—			—		677			677
Change in unrealized gain (loss) in investment securities available-for-sale, net of related income taxes		—		—		—		—			—			—			—		7,664			7,664
Shares purchased (redeemed) in connection with directors’ deferred compensation plan, net		—		—		—		—			11,445			(477	)		477		—			—
Stock option expense		—		—		1,745		—			—			—			—		—			1,745

BALANCE, December 31, 2017		66,260,444	$	663	$	378,062	$	517,257			(495,964	)	$	(7,148	)	$	7,148	$	26,786		$	922,768

Net earnings		—		—		—		150,638			—			—			—		—			150,638
Stock option exercises		173,822		2		3,861		—			—			—			—		—			3,863
Restricted stock grant, net		29,496		—		1,609		—			—			—			—		—			1,609
Cash dividends declared, $0.41 per share		—		—		—		(55,499	)		—			—			—		—			(55,499	)
Stock issued in acquisition of Commercial Bancshares, Inc.		1,289,371		13		58,074		—			—			—			—		—			58,087
Minimum liability pension adjustment, net of related income taxes		—		—		—		—			—			—			—		1,556			1,556
Change in unrealized gain (loss) in investment securities available-for-sale, net of related income taxes		—		—		—		—			—			—			—		(31,235	)		(31,235	)
Shares purchased (redeemed) in connection with directors’ deferred compensation plan, net		—		—		—		—			28,153			(359	)		359		—			—
Stock option expense		—		—		1,508		—			—			—			—		—			1,508
Reclassification of certain income tax effects related to the change in the U.S. statutory federal income tax rate under the Tax Cuts and Jobs Acts to retained earnings		—		—		—		(5,759	)		—			—			—		5,759			—
Reclassification of unrealized gain in equity securities at December 31, 2017 from accumulated other comprehensive earnings to retained earnings		—		—		—		21			—			—			—		(21	)		—

BALANCE, December 31, 2018		67,753,133	$	678	$	443,114	$	606,658			(467,811	)	$	(7,507	)	$	7,507	$	2,845		$	1,053,295

(continued)

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. ~~AND~~ SUBSIDIARIES

Consolidated Statements of Cash Flows

Years Ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

(Dollars in thousands)

   2017 2016 2015
CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings
   $ 120,371 $ 104,774 $ 100,381
Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization
   12,916 11,573 11,145
Provision for loan losses
   6,530 10,212 9,685
Securities premium amortization, net
   30,310 29,005 27,705
Gain on sale of assets, net
   (1,167 ) (1,894 ) (150 )
Deferred federal income tax expense (benefit)
   (53 ) 673 320
Change in loans held for sale
   11,769 6,645 (24,739 )
Change in other assets
   9,313 2,397 (16,919 )
Change in other liabilities
   285 (2,643 ) 1,664


Total adjustments
   69,903 55,968 8,711


Net cash provided by operating activities
   190,274 160,742 109,092


CASH FLOWS FROM INVESTING ACTIVITIES:

Cash paid for asset acquisition of 4Trust Mortgage, Inc., net
   —   —   (1,931 )
Cash received in acquisition of FBC Bancshares, Inc., net
   —   —   65,197
Net decrease in interest-bearing time deposits in banks
   249 1,788 13,507
Activity inavailable-for-sale securities:

Sales
   120,576 40,510 35,580
Maturities
   4,392,131 3,509,113 2,717,724
Purchases
   (4,768,420 ) (3,737,865 ) (3,055,117 )
Activity inheld-to-maturity securities — maturities
   124 157 163
Net increase in loans
   (134,627 ) (48,836 ) (144,320 )
Purchases of bank premises and equipment and other assets
   (14,162 ) (20,399 ) (17,433 )
Proceeds from sale of bank premises and equipment and other assets
   6,085 3,572 2,405


Net cash used in investing activities
   (398,044 ) (251,960 ) (384,225 )


CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase (decrease) in noninterest-bearing deposits
   323,928 (28,230 ) 23,473
Net increase in interest-bearing deposits
   160,494 316,600 72,857
Net increase (decrease) in borrowings
   (114,770 ) (169,905 ) 235,440
Common stock transactions:

Proceeds from stock issuances
   2,934 1,260 1,545
Dividends paid
   (48,955 ) (44,907 ) (38,767 )


Net cash provided by financing activities
   323,631 74,818 294,548


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   115,861 (16,400 ) 19,415
CASH AND CASH EQUIVALENTS, beginning of year
   256,486 272,886 253,471


CASH AND CASH EQUIVALENTS, end of year
   $ 372,347 $ 256,486 $ 272,886


	2019			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	164,812		$	150,638		$	120,371
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		11,665			12,549			12,916
Provision for loan losses		2,965			5,665			6,530
Securities premium amortization, net		25,788			27,467			30,310
Gain on sale of assets, net		(1,477	)		(1,216	)		(1,167	)
Deferred federal income tax expense (benefit)		(29	)		(250	)		(53	)
Change in loans held for sale		(5,830	)		(5,791	)		11,769
Change in other assets		1,851			(1,697	)		9,313
Change in other liabilities		4,374			1,621			285

Total adjustments		39,307			38,348			69,903

Net cash provided by operating activities		204,119			188,986			190,274

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in acquisition of Commercial Bancshares, Inc., net		—			18,653			—
Net decrease in interest-bearing time deposits in banks		1,458			—			249
Activity in available-for-sale securities:
Sales		67,414			220,259			120,576
Maturities		4,460,703			3,439,028			4,392,131
Purchases		(4,727,430	)		(3,731,821	)		(4,768,420	)
Activity in held-to-maturity securities – maturities		—			—			124
Net increase in loans		(245,190	)		(205,238	)		(134,627	)
Purchases of bank premises and equipment and other assets		(8,671	)		(17,646	)		(14,162	)
Proceeds from sale of bank premises and equipment and other assets		2,249			844			6,085

Net cash used in investing activities		(449,467	)		(275,921	)		(398,044	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits		(50,979	)		(87,583	)		323,928
Net increase (decrease) in interest-bearing deposits		474,396			(36,891	)		160,494
Net increase (decrease) in borrowings		(87,350	)		137,706			(114,770	)
Common stock transactions:
Proceeds from stock issuances		4,294			3,864			2,934
Dividends paid		(61,056	)		(53,861	)		(48,955	)

Net cash provided by (used in) financing activities		279,305			(36,765	)		323,631

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		33,957			(123,700	)		115,861
CASH AND CASH EQUIVALENTS, beginning of year		248,647			372,347			256,486

CASH AND CASH EQUIVALENTS, end of year	$	282,604		$	248,647		$	372,347

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial ~~Statements~~

Statement

Years Ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Nature of Operations

First Financial Bankshares, Inc. (a Texas corporation) (“Bankshares”, “Company”, “we” or “us”) is a financial holding company which owns all of the capital stock of one bank with 6973 locations located in Texas as of December 31, ~~2017.~~2019. The subsidiary bank is First Financial Bank, National Association, ~~Abilene.~~Abilene, Texas. The bank’s primary source of revenue is providing loans and banking services to consumers and commercial customers in the market area in which the subsidiary is located. In addition, the Company also owns First Financial Trust & Asset Management Company, National Association, First Financial Insurance Agency, Inc., and First Technology Services, Inc.

A summary of significant accounting policies of Bankshares and its subsidiaries applied in the preparation of the accompanying consolidated financial statements follows. The accounting principles followed by the Company and the methods of applying them are in conformity with both U.S. GAAP and prevailing practices of the banking industry.

The Company evaluated subsequent events for potential recognition through the date the consolidated financial statements were issued.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates include its allowance for loan losses and its valuation of financial instruments.

Consolidation

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

Stock 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 on June 3, 2019. In addition, the shareholders of the Company approved an amendment to the Amended and Restated Certificate of Formation to increase the number of authorized shares to 200,000,000.

All per share amounts in the annual report on Form 10-K 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 June 25, 2017, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 common shares through

September 30, ~~2020.~~2020

. Previously, the Board of Directors had authorized the repurchase of up to 1,500,000 common shares through September 30, 2017. The stock buyback plan authorizes management to repurchase the stock at such time as repurchases are considered beneficial to stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no0 minimum number of shares that the Company is required to repurchase. For the years ended December 31, 2019, 2018 and 2017, ~~2016 and 2015, no~~ 0

shares were repurchased under this repurchase plan or the prior authorization that expired September 30, 2017.

~~Acquisitions and Asset Purchase~~

Acquisition

On ~~July 31, 2015,~~January 1, 2018, the Company acquired 100% of the outstanding capital stock of ~~FBC~~Commercial Bancshares, Inc. through the merger of a wholly-owned subsidiary with and into ~~FBC~~Commercial Bancshares, Inc. Following such

F-9

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

merger, ~~FBC~~Commercial Bancshares, Inc. and its wholly-owned subsidiary, ~~First~~Commercial State Bank, ~~N.A.~~Kingwood, Texas were merged into the Company and First Financial Bank, National Association, respectively. The results of operations of ~~FBC~~Commercial Bancshares, Inc. subsequent to the acquisition date, are ~~included~~include in the consolidated earnings of the Company. See Note 1820 for additional information.

On June 1, 2015, the Company completed the asset purchase of 4Trust Mortgage, Inc. The results of operation of 4Trust Mortgage Inc. subsequent to the asset purchase date, are included in the consolidated earnings of the Company. See Note 18 for additional information.

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

~~Increase in Authorized Shares~~

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

Investment Securities

Management classifies debt and equity securities as

held-to-maturity,

available-for-sale,

or trading based on its intent. Debt securities that management has the positive intent and ability to hold to maturity are classified as

held-to-maturity

and recorded at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using the interest method. ~~Securities~~Debt securities not classified as

held-to-maturity

or trading are classified as

available-for-sale

and recorded at fair value, with all unrealized gains and unrealized losses judged to be temporary, net of deferred income taxes, excluded from earnings and reported in the consolidated statements of comprehensive earnings.

Available-for-sale

debt securities that have unrealized gains and losses are excluded from earnings and reported net of tax in accumulated other comprehensive income until realized. Declines in the fair value of

available-for-sale

debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as a realized loss if there is no ability or intent to hold to recovery. If the Company does not intend to sell and will not be required to sell prior to recovery of its amortized cost basis, only the credit component of the impairment is reflected in earnings as a realized loss with the noncredit portion recognized in other comprehensive income. In estimating other-than-temporary impairment losses, we consider (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Effective January 1, 2018, in accordance with ASU

2016-01

(see below), increases or decreases in the fair value of equity securities are recorded in earnings. Prior to January 1, 2018, such increases or decreases were recorded similar to increases or

decreases in

available-for-sale

debt securities.

The Company records its

available-for-sale

debt

and ~~trading~~equity securities portfolio at fair value. Fair values of these securities are determined based on methodologies in accordance with current authoritative accounting guidance. Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, credit ratings and yield curves. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market specific to the type of security.

When the fair value of a debt security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exists.

Available-for-sale

and

held-to-maturity

debt securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) whether we have the intent to sell debt our securities prior to recovery and/or maturity, (ii) whether it is more likely than not that we will have to sell our debt securities prior to recovery and/or maturity, (iii) the length of time and extent to which the fair value has been less than amortized cost, and (iv) the financial condition of the issuer. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the debt security may be different than previously estimated, which could have a material effect on the Company’s results of operations and financial condition.

The Company’s investment portfolio consists of U.S. Treasury securities, obligations of U.S. government sponsored enterprises and agencies, obligations of state and political subdivisions, mortgage pass-through securities, corporate bonds and general obligation or revenue based municipal bonds. Pricing for such securities is generally readily available and transparent in the market. The Company utilizes independent third

party pricing services to value its investment securities, which the Company reviews as well as the underlying pricing methodologies for reasonableness and to ensure such prices are aligned with pricing matrices. The Company validates ~~quarterly, on a sample basis,~~ prices supplied by the independent pricing services by comparison to prices obtained from other third

party ~~sources.~~

sources on a quarterly basis.

F-10

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

Loans

Held-for-Investment

and Allowance for Loan Losses

Loans held for investment are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

the principal amounts outstanding. The Company defers and amortizes net loan origination fees and costs as an adjustment to yield. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectability of the principal is unlikely.

The allowance for loan losses is an amount which represents management’s best estimate of probable losses that are inherent in the Company’s loan portfolio as of the balance sheet date. The allowance for loan losses is comprised of three elements: (i) specific reserves determined based on probable losses on specific classified loans; (ii) a historical valuation reserve component that considers historical loss rates and estimated loss emergence periods; and (iii) qualitative reserves based upon general economic conditions and other qualitative risk factors both internal and external to the Company. The allowance for loan losses is increased by charges to income and decreased by

charge-offs ~~(net~~

(net of recoveries). Management’s periodic evaluation of the appropriateness of the allowance is based on general economic conditions, the financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio. For purposes of determining our historical valuation reserve, the loan portfolio, less cash secured loans, government guaranteed loans and classified loans, is multiplied by the Company’s historical loss ~~rate.~~rate adjusted for the estimated loss emergence period. Specific allocations are increased or decreased in accordance with deterioration or improvement in credit quality and a corresponding increase or decrease in risk of loss on a particular loan. In addition, we adjust our allowance for qualitative factors such as current local economic conditions and trends, including, without limitations, unemployment, oil and gas prices, drought conditions, changes in lending staff, policies and procedures, changes in credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans. This qualitative reserve serves to estimate for additional areas of losses inherent in our portfolio that are not reflected in our historic loss factors.

Although we believe we use the best information available to make loan loss allowance determinations, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making our initial determinations. A decline in the economy ~~and employment~~ could result in increased levels of

non-performing

assets and charge-offs, increased loan provisions and reductions in income. Additionally, bank regulatory agencies periodically review our allowance for loan losses and methodology and could require, in accordance with U.S. GAAP, additional provisions to the allowance for loan losses based on their judgment of information available to them at the time of their examination as well as changes to our methodology.

Accrual of interest is discontinued on a loan and payments are applied to principal when management believes, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. Except consumer loans, generally all loans past due greater than 90 days, based on contractual terms, are placed on

non-accrual.

Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Consumer loans are generally

charged-off

when a loan becomes past due 90 days. For other loans in the portfolio, facts and circumstances are evaluated in making

charge-off

decisions.

Loans are considered impaired when, based on current information and events, management determines that it is probable we will be unable to collect all amounts due in accordance with the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectable.

The Company’s policy requires measurement of the allowance for an impaired, collateral dependent loan based on the fair value of the collateral less cost to sell. Other loan impairments for

non-collateral

dependent loans are measured based on the present value of expected future cash flows or the loan’s observable market price. At December 31, ~~2017~~2019 and ~~2016,~~2018, all significant impaired loans have been determined to be collateral dependent and the allowance for loss has been measured utilizing the estimated fair value of the collateral less cost to sell.

F-11

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

From time to time, the Company modifies its loan agreement with a borrower. A modified loan is considered a troubled debt restructuring when two conditions are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

longer term to maturity. For all impaired loans, including the Company’s troubled debt restructurings, the Company performs a periodic, well-documented credit evaluation of the borrower’s financial condition and prospects for repayment to assess the likelihood that all principal and interest payments required under the terms of the agreement will be collected in full. When doubt exists about the ultimate collectability of principal and interest, the troubled debt restructuring remains on

non-accrual

status and payments received are applied to reduce principal to the extent necessary to eliminate such doubt. This determination of accrual status is judgmental and is based on facts and circumstances related to each troubled debt restructuring. Each of these loans is individually evaluated for impairment and a specific reserve is recorded based on probable losses, taking into consideration the related collateral, modified loan terms and cash flow. As of December 31, ~~2017~~2019 and ~~2016,~~2018, substantially all of the Company’s troubled debt restructured loans are included in the

non-accrual

totals.

The Company originates certain mortgage loans for sale in the secondary market. Accordingly, these loans are classified as

held-for-sale

and are carried at the lower of cost or fair value on an aggregate basis. The mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first three to six months, or if documentation is determined not to be in compliance with regulations. The Company’s historic losses as a result of these indemnities have been insignificant.

Loans acquired, including loans acquired in a business combination, are initially recorded at fair value with no valuation allowance. Acquired loans are segregated between those considered to be credit impaired and those deemed performing. To make this determination, management considers such factors as past due status,

non-accrual

status and credit risk ratings. The fair value of acquired performing loans is determined by discounting expected cash flows, both principal and interest, at prevailing market interest rates. The difference between the fair value and principal balances at acquisition date, the fair value discount, is accreted into interest income over the estimated life of the acquired portfolio.

Purchased credit impaired loans are those loans that showed evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all amounts contractually owed. Their acquisition fair value, which includes a credit component at the acquisition date, was based on the estimate of cash flows, both principal and interest, expected to be collected or estimated collateral values if cash flows are not estimable, discounted at prevailing market rates of interest. The difference between the discounted cash flows expected at acquisition and the investment in the loan is recognized as interest income on a level-yield method over the life of the loan, unless management was unable to reasonably forecast cash flows in which case the loans were placed on nonaccrual. Subsequent to the acquisition date, increases in expected cash flows will generally result in a recovery of any previously recorded allowance for loan loss, to the extent applicable, and/or a reclassification from the ~~nonaccretable~~

non-accretable

difference to accretable yield, which will be recognized prospectively. Decreases in expected cash flows subsequent to acquisition are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition. The carrying amount of purchased credit impaired loans at December 31, ~~2017~~2019 and ~~2016~~2018 were ~~$618,000~~$251,000 and ~~$1,256,000,~~$827,000, respectively, compared to a contractual balance of ~~$755,000~~$345,000 and ~~$1,865,000,~~$1,157,000, respectively. Other purchased credit impaired loan disclosures were omitted due to immateriality.

Other Real Estate

Other real estate owned is foreclosed property held pending disposition and is initially recorded at fair value, less estimated costs to sell. At foreclosure, if the fair value of the real estate, less estimated costs to sell, is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Any subsequent reduction in value is recognized by a charge to income. Operating and holding expenses of such properties, net of related income, and gains and losses on their disposition are included in net gain (loss) on sale of foreclosed assets as incurred.

F-12

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the respective lease or the estimated useful lives of the improvements, whichever is shorter.

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

Business Combinations, Goodwill and Other Intangible Assets

The Company accounts for all business combinations under the purchase method of accounting. Tangible and intangible assets and liabilities of the acquired entity are recorded at fair value. Intangible assets with finite useful lives represent the future benefit associated with the acquisition of the core deposits and are amortized over seven years, utilizing a method that approximates the expected attrition of the deposits. Goodwill with an indefinite life is not amortized, but rather tested annually for impairment as of June 30 each year and totaled ~~$139,971,000~~$

171,565,000

, at ~~both~~ December 31, ~~2017~~2019 and ~~2016.~~2018. There was no0 impairment recorded for the years ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015.~~

2017.

The carrying amount of goodwill arising from acquisitions that qualify as an asset purchase for federal income tax purposes was ~~$74,376,000 both~~$18,680,000 and $22,526,000 at December 31, ~~2017~~2019 and ~~2016,~~2018, respectively, and is deductible for federal income tax purposes.

~~Also included in other intangible assets are~~

For the year ended December 31, 2017, the Company sold its mortgage servicing rights totaling $1,795,000 ~~at December 31, 2016. These servicing rights were sold~~ to an unrelated third party ~~in 2017~~ resulting in a loss on sale of approximately $215,000.

Securities Sold Under Agreements To Repurchase

Securities sold under agreements to repurchase, which are classified as borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of the cash received in connection with the transaction. The Company may be required to provide additional collateral based on the estimated fair value of the underlying securities.

Segment Reporting

The Company has determined that its banking regions meet the aggregation criteria of the current authoritative accounting guidance since each of its banking regions offer similar products and services, operate in a similar manner, have similar customers and report to the same regulatory authority, and therefore operate one line of business (community banking) located in a single geographic area (Texas).

Statements of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks, including interest-bearing deposits in banks with original maturity of 90 days or less, and federal funds sold.

Accumulated Other Comprehensive Income (Loss)

Unrealized net gains on the Company’s

available-for-sale

securities (after applicable income tax expense) totaling ~~$29,156,000~~$67,506,000 and ~~$21,492,000~~$4,169,000 at December 31, ~~2017~~2019 and ~~2016,~~2018, respectively, and the minimum pension liability (after applicable income tax benefit) totaling ~~$2,370,000 and $3,047,000~~($1,324,000) at December 31, ~~2017 and 2016, respectively,~~2018, are included in accumulated other comprehensive income.

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

F-13

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

Income Taxes

The Company’s provision for income taxes is based on income before income taxes adjusted for permanent differences between financial reporting and taxable income. Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

Stock Based Compensation

The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the grant date. The Company recorded stock option expense totaling ~~$1,745,000, $882,000,~~$1,489,000, $1,508,000 and ~~$644,000~~$1,745,000 for the years ended December 31, 2019, 2018 and 2017, ~~2016 and 2015,~~ respectively.

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

The Company also grants restricted stock for a fixed number of shares. The Company recorded expenses associated with its director and officer restricted stock grants totaling $620,000, $560,000 and $483,000 and $995,000,

680,000 and $562,000, respectively, for the ~~year~~years ended December 31, 2019, 2018 and 2017, ~~$278,000 and $381,000, respectively, for the year ended December 31, 2016, and $139,000 and $62,000, respectively, for the year ended December 31, 2015.~~

respectively.

See Note 1517 for further information.

Advertising Costs

Advertising costs are expensed as incurred.

Per Share Data

Net earnings per share (“EPS”) are computed by dividing net earnings by the weighted average number of common stock shares outstanding during the period. The Company calculates dilutive EPS assuming all outstanding stock options to purchase common stock have been exercised at the beginning of the year (or the time of issuance, if later.) The dilutive effect of the outstanding options and restricted stock is reflected by application of the treasury stock method, whereby the proceeds from the exercised options and restricted stock are assumed to be used to purchase common stock at the average market price during the respective year. ~~For the year ended December 31, 2015, 442,368 weighted average outstanding stock options were anti-dilutive and have been~~

Anti-dilutive shares are excluded from the computation of EPS ~~calculations.~~

There were no such anti-dilutive stock options for the years ended December 31, ~~2017~~2019, 2018 and ~~2016.~~2017. The following table reconciles the computation of basic EPS to dilutive EPS:

   Net Earnings
(in thousands)    Weighted
Average
Shares    Per Share
Amount
For the year ended December 31, 2017:

Net earnings per share, basic
   $ 120,371    66,126,863    $ 1.82
Effect of stock options and stock grants
   —      197,467    (0.01 )






Net earnings per share, assuming dilution
   $ 120,371    66,324,330    $ 1.81






For the year ended December 31, 2016:

Net earnings per share, basic
   $ 104,774    66,013,004    $ 1.59
Effect of stock options and stock grants
   —      89,882    —






Net earnings per share, assuming dilution
   $ 104,774    66,102,886    $ 1.59






For the year ended December 31, 2015:

Net earnings per share, basic
   $ 100,381    64,892,934    $ 1.55
Effect of stock options and stock grants
   —      175,096    (0.01 )






Net earnings per share, assuming dilution
   $ 100,381    65,068,030    $ 1.54


	Net Earnings (in thousands)		Weighted Average Shares		Per Share Amount
For the year ended December 31, 2019:
Net earnings per share, basic	$	164,812		135,647,354	$	1.22
Effect of stock options and stock grants		—		698,665		(0.01	)

Net earnings per share, assuming dilution	$	164,812		136,346,019	$	1.21

For the year ended December 31, 2018:
Net earnings per share, basic	$	150,638		135,218,734	$	1.11
Effect of stock options and stock grants		—		747,294		—

Net earnings per share, assuming dilution	$	150,638		135,966,028	$	1.11

For the year ended December 31, 2017:
Net earnings per share, basic	$	120,371		132,253,726	$	0.91
Effect of stock options and stock grants		—		394,934		—

Net earnings per share, assuming dilution	$	120,371		132,648,660	$	0.91

F-14

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

Recently Issued and Effective Authoritative Accounting Guidance

Accounting Standards Update (“ASU”)2014-09, “Revenue from Contracts with ~~Customers.~~Customers

.”ASU

2014-09 ~~implements~~

implemented a comprehensive new revenue recognition standard that ~~will supersede~~superseded substantially all existing revenue recognition guidance. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity ~~should apply~~applies the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU~~2015-4~~ ~~“Revenue~~

2015-04

“Revenue from Contracts with Customers – Deferral of the Effective Date” deferred the effective date of ASU

2014-09

by one year and as a result, the new standard ~~will be~~became effective in the first quarter of 2018. The Company’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU

2014-09,

and

non-interest

income. ~~Based on the Company’s analysis of the effect~~The adoption of the new standard ~~on its recurring revenue streams, the Company did not expect and did not experience an impact on the Company’s financial statements upon adoption~~ in the first quarter of ~~2018. No adjustments to opening retained earnings was recorded on January 1, 2018.~~

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

~~ASU2014-15,~~ ~~“Presentation of Financial Statements — Going Concern.”~~~~ASU2014-15~~ requires management to evaluate an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management must evaluate whether conditions and events raise substantial doubt about an entity’s ability to continue as a going concern and then whether its plans alleviate that doubt. ASU~~2014-15~~ was effective in 2016 and management has performed and continues to perform such required evaluation and has concluded there were no such conditions or events that raised substantial doubt about the Company’s ability to continue as a going concern.

~~ASU2015-01,~~ ~~“Income Statement — Extraordinary and Unusual Items.”~~ ~~ASU2015-01~~ eliminated from U.S. GAAP the concept of extraordinary items, which, among other things, required an entity to show the item separately in the income statement, net of tax, after income from continuing operations. The new guidance became effective for the Company beginning January 1, 2016, and2018 did not have a significant impact on the Company’s financial ~~statements.~~

~~ASU2015-05,~~ ~~“Intangibles — Goodwill~~statements and ~~Other —Internal-Use~~ ~~Software — Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.”~~~~ASU2015-05~~ addresses accounting for fees paid by a customer in cloud computing arrangements such as (i) software as a service, (ii) platform as a service, (iii) infrastructure as a service and (iv) other similar hosting arrangements. ASU~~2015-05~~ provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU~~2015-05~~ ~~became effective on January 1, 2016 and did not have a significant impact on the Company’s financial statements.~~

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

opening retained earnings was recorded.

ASU~~2016-1,~~ 2016-01, ASU 2016-01 “Financial Instruments —– Overall: Recognition and Measurement of Financial Assets and Financial ~~Liabilities.~~Liabilities

.”ASU~~2016-1,~~

2016-01,

among other things, (i) ~~requires~~required equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) ~~simplifies~~simplified the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) ~~eliminates~~eliminated the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) ~~requires~~required public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) ~~requires~~required an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) ~~requires~~required separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) ~~clarifies~~clarified that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to

available-for-sale

securities. ASU

2016-1

became effective for the Company on January 1, 2018 and did not have a significant impact on the Company’s financial statements.

ASU2016-02, ~~“Leases.~~ “Leases

.”ASU

2016-02 ~~will amend~~

amended current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a

right-of-use

asset, which is an asset that represents the lessee’s right to use, or control the use of, a

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

specified asset for the lease term. ASU

2016-02 ~~does~~

did not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. The amended guidance ~~will be~~was effective in the first quarter of 2019 and ~~will require~~required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company ~~continues to evaluate~~evaluated the provision of the new lease standard ~~but,~~and, due to the small dollar amounts and number of lease agreements, ~~presently in~~all considered operating leases, the effect for the Company ~~does~~on January 1, 2019 was not ~~expect the new guidance will have a significant impact on the Company’s financial statements.~~

significant.

ASU2016-09, “Compensation —– Stock Compensation: Improvements to Employee Share-Based Payment ~~Accounting.~~Accounting

.”ASU

2016-09 ~~will amend~~

amended current guidance such that all excess tax benefits and tax deficiencies related to share-based payment awards ~~will be~~are recognized as income tax expense or benefit in the

F-15

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

income statement during the period in which they occur. Previously, such amounts were recorded in capital surplus. Additionally, excess tax benefits ~~will be~~are classified along with other income tax cash flows as an operating activity rather than a financing ~~activity.~~activity, as was previously the case. ASU

2016-09

also ~~provides~~provided that any entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, which is the current requirement, or account for forfeitures when they occur. ASU

2016-09

became effective January 1, 2017 and did not have a significant impact on the Company’s financial statements.

ASU~~2016-13,~~ ~~“Financial Instruments — Credit Losses.~~
2016-15,

“Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments.”

ASU~~2016-13~~ ~~implements a comprehensive change~~

2016-15

provides guidance related to certain cash flow issues in ~~estimating the allowances for loan losses from~~order to reduce the current ~~model of losses inherent~~and potential future diversity in the loan portfolio to a current expected credit loss model that generally is expected to result in earlier recognition of allowances for losses. Additionally, purchase accounting rules have been modified as well as credit losses on~~held-to-maturity~~ ~~debt securities.~~practice. ASU~~2016-13~~ ~~will be effective in the first quarter of 2020. While the Company generally expects that the implementation of ASU2016-13~~ ~~will increase their allowance for loan losses balance, the Company is continuing to evaluate the potential impact on the Company’s financial statements.~~

~~ASU2017-04,~~ ~~“Intangibles — Goodwill and Other.”~~~~ASU2017-04~~ will amend and simplify current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the quantitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. ASU~~2017-04~~ ~~will be~~

2016-15

became effective for ~~the Company~~us on January 1, ~~2020~~2018 and isdid not ~~expected to~~ have a significant impact on the Company’s financial statements.

ASU~~2017-07,~~ ~~“Compensation — Retirement Benefits, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost.”~~ ~~ASU2017-17~~ will require employers that sponsor defined benefit pension plans to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost will be presented separately from the service cost component. ASU~~2017-17~~ became effective in 2018 and, as the Company froze its defined benefit pension plan in 2004, there is no service cost component of its net periodic benefit cost and therefore the new standard had no impact on the Company’s financial statements.

~~ASU~~2017-08, “Receivables —– Nonrefundable Fees and Other ~~Cost:~~Costs: Premium Amortization on Purchased Callable Debt Securities.”

ASU

2017-08 ~~addresses~~

addressed the amortization method for all callable bonds purchased at a premium to par. Under the revised guidance, entities ~~will be~~are required to amortize premiums on callable bonds to the earliest call date. ASU

2017-08 is

was effective in 2019 although early adoption iswas permitted. The Company elected to early adopt ASU

2017-08

in the first quarter of 2017. The adoption of this guidance did not have a material impact on the Company’s financial statements.

ASU
2017-09,
“
Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting
,” ASU
2017-09
clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under ASU
2017-09,
an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the award’s fair value, (ii) the award’s vesting conditions and (iii) the award’s classification as an equity or liability instrument. ASU
2017-09
became effective on January 1, 2018 and did not have a significant impact on the Company’s financial statements.

ASU 2018-02, “Income Statement —– Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”

ASU

2018-02

was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017 that changed the Company’s income tax rate from 35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. ~~The~~ ASU is

2018-02

was effective for periods beginning after December 15, 2018 although early adoption iswas permitted. The Company ~~determined it will~~ early ~~adopt~~adopted ASU

2018-02

in the first quarter of 2018 and ~~will reclassify~~reclassified its stranded tax debit of ~~$5,761,000~~$5,759,000 within accumulated other comprehensive ~~income~~earnings to retained ~~earnings at March 31, 2018.~~

earnings.

F-16

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

INTEREST-BEARING TIME DEPOSITS IN BANKS AND SECURITIES:

Interest-bearing time deposits in banks totaled $1,458,000 ~~and $1,707,000~~ at December 31, ~~2017 and 2016, respectively, and have original maturities generally ranging from one to three years.~~

2018. There were 0

such balances at December 31, 2019.

A summary of the Company’s

available-for-sale

securities as of December 31, ~~2017~~2019 and ~~2016~~2018 are as follows ~~(in~~(dollars in thousands):

   December 31, 2017
   Amortized
Cost Basis    Gross
Unrealized
Holding
Gains    Gross
Unrealized
Holding
Losses    Estimated
Fair Value
Securitiesavailable-for-sale:

Obligations of U.S. government sponsored enterprises and agencies
   $ 60,516    $ —      $ (186 )    $ 60,330
Obligations of state and political subdivisions
   1,369,295    52,491    (936 )    1,420,850
Corporate bonds and other
   11,421    43    (5 )    11,459
Residential mortgage-backed securities
   1,223,452    4,561    (8,916 )    1,219,097
Commercial mortgage-backed securities
   377,934    263    (2,460 )    375,737








Total securitiesavailable-for-sale
   $ 3,042,618    $ 57,358    $ (12,503 )    $ 3,087,473








   December 31, 2016
   Amortized
Cost Basis    Gross
Unrealized
Holding
Gains    Gross
Unrealized
Holding
Losses    Estimated
Fair Value
Securitiesavailable-for-sale:

U.S. Treasury securities
   $ 10,649    $ 19    $ —      $ 10,668
Obligations of U.S. government sponsored enterprises and agencies
   113,450    253    —      113,703
Obligations of state and political subdivisions
   1,534,095    40,194    (10,013 )    1,564,276
Corporate bonds and other
   51,920    476    (3 )    52,393
Residential mortgage-backed securities
   848,614    8,260    (5,513 )    851,361
Commercial mortgage-backed securities
   269,044    622    (1,230 )    268,436








Total securitiesavailable-for-sale
   $ 2,827,772    $ 49,824    $ (16,759 )    $ 2,860,837

~~Disclosures related to the Company’sheld-to-maturity~~ ~~securities, which totaled $121,000 at December 31, 2016, have not been presented due to insignificance. There were noheld-to-maturity~~ ~~securities owned by the Company at December 31, 2017.~~


	December 31, 2019
	Amortized Cost Basis		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
Securities available-for-sale:
U.S. Treasury securities	$	9,997	$	22	$	—		$	10,019
Obligations of state and political subdivisions		1,231,619		57,764		(400	)		1,288,983
Corporate bonds and other		4,643		65		—			4,708
Residential mortgage-backed securities		1,586,872		23,139		(1,148	)		1,608,863
Commercial mortgage-backed securities		494,674		6,356		(286	)		500,744

Total securities available-for-sale	$	3,327,805	$	87,346	$	(1,834	)	$	3,413,317


	December 31, 201 8
	Gross Amortized Cost Basis		Gross Unrealized Holding Gains		Unrealized Holding Losses			Estimated Fair Value
Securities available-for-sale:
U.S. Treasury securities	$	9,970	$	—	$	(8	)	$	9,962
Obligations of U.S. government sponsored enterprises and agencies		301		—		—			301
Obligations of state and political subdivisions		1,229,828		30,013		(1,970	)		1,257,871
Corporate bonds and other		4,875		—		(77	)		4,798
Residential mortgage-backed securities		1,472,228		3,928		(21,611	)		1,454,545
Commercial mortgage-backed securities		436,366		670		(5,736	)		431,300

Total securities available-for-sale	$	3,153,568	$	34,611	$	(29,402	)	$	3,158,777

F-1

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

The Company invests in mortgage-backed securities that have expected maturities that differ from their contractual maturities. These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty. These securities include collateralized mortgage obligations (CMOs) and other asset backed securities. The expected maturities of these securities at December 31, ~~2017,~~2019, were computed by using scheduled amortization of balances and historical prepayment rates. At December 31, ~~2017~~2019 and ~~2016,~~2018, the Company did not hold any CMOs that entail higher risks than standard mortgage-backed securities.

The amortized cost and estimated fair value of

available-for-sale

securities at December 31, ~~2017,~~2019, by contractual and expected maturity, are shown below (in thousands):

   Amortized
Cost Basis    Estimated
Fair Value
Due within one year
   $ 184,538    $ 185,547
Due after one year through five years
   631,376    654,092
Due after five years through ten years
   623,628    650,923
Due after ten years
   1,690    2,077
Mortgage-backed securities
   1,601,386    1,594,834




Total
   $ 3,042,618    $ 3,087,473


	Amortized Cost Basis		Estimated Fair Value
Due within one year	$	150,912	$	152,445
Due after one year through five years		485,838		510,783
Due after five years through ten years		607,770		638,239
Due after ten years		1,739		2,243
Mortgage-backed securities		2,081,546		2,109,607

Total	$	3,327,805	$	3,413,317

The following tables disclose, as of December 31, ~~2017~~2019 and ~~2016,~~2018, the Company’s investment securities that have been in a continuous

unrealized-loss

position for less than 12 months and for 12 or more months (in thousands):

   Less than 12 Months    12 Months or Longer    Total
December 31, 2017
   Fair Value    Unrealized
Loss    Fair Value    Unrealized
Loss    Fair Value    Unrealized
Loss
Obligations of U.S. government sponsored enterprises and agencies
   $ 60,329    $ 186    $ —      $ —      $ 60,329    $ 186
Obligations of state and political subdivisions
   66,361    219    44,938    717    111,299    936
Corporate bonds and other
   224    2    237    3    461    5
Residential mortgage-backed securities
   701,252    3,988    239,641    4,928    940,893    8,916
Commercial mortgage-backed securities
   239,548    1,500    92,549    960    332,097    2,460












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

   Less than 12 Months    12 Months or Longer    Total
December 31, 2016
   Fair Value    Unrealized
Loss    Fair Value    Unrealized
Loss    Fair Value    Unrealized
Loss
Obligations of state and political subdivisions
   $ 446,052    $ 9,997    $ 1,209    $ 16    $ 447,261    $ 10,013
Corporate bonds and other
   244    3    —      —      244    3
Residential mortgage-backed securities
   372,331    4,532    33,227    981    405,558    5,513
Commercial mortgage-backed securities
   193,495    1,180    13,263    50    206,758    1,230












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




	Less than 12 Months				12 Months or Longer				Total
December 31, 2019	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Obligations of state and political subdivisions	$	65,787	$	400	$	326	$	—	$	66,113	$	400
Residential mortgage-backed securities		100,004		306		103,983		842		203,987		1,148
Commercial mortgage-backed securities		74,560		178		35,178		108		109,738		286

Total	$	240,351	$	884	$	139,487	$	950	$	379,838	$	1,834





	Less than 12 Months				12 Months or Longer				Total
December 31, 2018	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Treasury securities	$	9,962	$	8	$	—	$	—	$	9,962	$	8
Obligations of U.S. government sponsored enterprises and agencies		—		—		301		—		301		—
Obligations of state and political subdivisions		27,489		107		114,461		1,863		141,950		1,970
Corporate bonds and other		4,348		68		450		9		4,798		77
Residential mortgage-backed securities		119,584		483		922,289		21,128		1,041,873		21,611
Commercial mortgage-backed securities		1,994		5		343,015		5,731		345,009		5,736

Total	$	163,377	$	671	$	1,380,516	$	28,731	$	1,543,893	$	29,402

F-1

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

The number of investments in an unrealized loss position totaled ~~338~~93 at December 31, ~~2017.~~2019. We do not believe these unrealized losses are “other-than-temporary”. In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer. Additionally management does not (i) have the intent to sell our securities prior to recovery and/or maturity and, (ii) it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity and (iii) that the length of time and extent that fair value has been

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

less than cost is not indicative of recoverability. The unrealized losses noted are interest rate related due to the level of interest rates at December 31, ~~2017~~2019 compared to the time of purchase. We have reviewed the ratings of the issuers and have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities. Our mortgage related securities are backed by GNMA, FNMA and FHLMC or are collateralized by securities backed by these agencies. At December 31, ~~2017, 82.98%~~ 2019

and 2018

, 86.34%

and 84.70%

respectively

of our

available-for-sale

securities that are obligations of states and political subdivisions were issued within the State of Texas, of which ~~31.21% are~~41.35%

and 32.65%, resp

ectively, were

guaranteed by the Texas Permanent School Fund.

Securities, carried at approximately ~~$2,018,420,000~~$2,329,784,000 and ~~$1,940,460,000 at~~$1,988,579,000 December 31, ~~2017~~2019 and ~~2016,~~2018, respectively, were pledged as collateral for public or trust fund deposits, repurchase agreements and for other purposes required or permitted by law.

During ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, sales of investment securities that were classified as

available-for-sale

totaled ~~$120,576,000, $40,510,000~~$67,414,000, $220,259,000 and ~~$35,580,000.~~$120,576,000. Gross realized gains from ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, securities sales were ~~$2,643,000, $1,579,000~~$752,000, $1,847,000 and ~~$443,000,~~$2,643,000, respectively. Gross realized losses from ~~2017, 2016~~2019, 2018 and ~~2015~~2017 securities sales were ~~$815,000, $309,000~~$19,000, $493,000 and ~~$11,000,~~$815,000, respectively. The specific identification method was used to determine cost in order to compute the realized gains and losses.

LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR LOAN LOSSES:

Loans

held-for-investment

by class of financing receivables are as follows ~~(in~~(dollars in thousands):

   December 31,
   2017    2016
Commercial
   $ 684,099    $ 674,410
Agricultural
   94,543    84,021
Real estate
   2,302,998    2,189,844
Consumer
   403,929    409,032




Total loansheld-for-investment
   $ 3,485,569    $ 3,357,307

~~Loansheld-for-sale~~ ~~totaled $15,130,000 and $26,898,000 at December 31, 2017 and 2016, respectively, which are valued using the lower of cost or fair value.~~


	December 31,
	2019		2018
Commercial	$	856,326	$	844,953
Agricultural		103,640		96,677
Real estate		2,823,372		2,639,346
Consumer		411,631		372,660

Total loans held-for-investment	$	4,194,969	$	3,953,636

The Company’s

non-accrual

loans, loan still accruing and past due 90 days or more and restructured loans are as follows ~~(in~~(dollars in thousands):

   December 31,
   2017    2016
Non-accrual loans*
   $ 17,670    $ 27,371
Loans still accruing and past due 90 days or more
   288    284
Troubled debt restructured loans**
   627    701




Total
   $ 18,585    $ 28,356


	December 31,
	2019		2018
Non-accrual loans*	$	24,582	$	27,534
Loans still accruing and past due 90 days or more		153		1,008
Troubled debt restructured loans**		26		513

Total	$	24,761	$	29,055

Includes ~~$618,000~~$251,000 and ~~$1,256,000,~~$827,000, respectively, of purchased credit impaired loans as of December 31, ~~2017~~2019 and ~~2016.~~2018.

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

Our troubled debt restructured loans of ~~$4,629,000~~$4,791,000 and ~~$6,863,000,~~$3,840,000, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in

non-accrual

loans as of December 31, ~~2017~~2019 and ~~2016,~~2018, respectively.

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

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

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


December 31, 2019				December 31, 2018
Recorded Investment		Valuation Allowance		Recorded Investment		Valuation Allowance
$	24,582	$	3,228	$	27,534	$	4,069

The Company had ~~$20,117,000~~$25,770,000 and ~~$29,000,000~~$29,632,000 in

non-accrual,

past due 90 days or more and still accruing, restructured loans and foreclosed assets at December 31, ~~2017~~2019 and ~~2016,~~2018, respectively.Non-accrual loans totaled ~~$17,670,000~~$24,582,000 and ~~$27,371,000~~$27,534,000 at December 31, ~~2017~~2019 and ~~2016,~~2018, respectively, and consisted of the following amounts by type ~~(in~~(dollars in thousands):

   December 31,
   2017    2016
Commercial
   $ 3,612    $ 7,284
Agricultural
   134    99
Real Estate
   12,838    18,754
Consumer
   1,086    1,234




Total
   $ 17,670    $ 27,371


	December 31,
	2019		2018
Commercial	$	3,093	$	9,334
Agricultural		1,376		759
Real Estate		19,787		16,714
Consumer		326		727

Total	$	24,582	$	27,534

NaN significant additional funds are committed to be advanced in connection with impaired loans as of December 31, ~~2017.~~

2019.

The Company’s impaired loans and related allowance as of December 31, ~~2017~~2019 and ~~2016~~2018 are summarized in the following tables by class of financing receivables (in thousands). NoNaN interest income was recognized on impaired loans subsequent to their classification as impaired.

December 31, 2017
   Unpaid
Contractual
Principal
Balance    Recorded
Investment
With No
Allowance*    Recorded
Investment
With
Allowance    Total
Recorded
Investment    Related
Allowance    12 Month
Average
Recorded
Investment
Commercial
   $ 5,597    $ 518    $ 3,094    $ 3,612    $ 1,194    $ 4,849
Agricultural
   147    —      134    134    31    120
Real Estate
   16,823    2,348    10,490    12,838    2,316    13,835
Consumer
   1,284    143    943    1,086    455    1,258












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


December 31, 2019	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance*		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		12 Month Average Recorded Investment
Commercial	$	4,511	$	630	$	2,463	$	3,093	$	1,042	$	3,488
Agricultural		1,603		658		718		1,376		235		1,644
Real Estate		27,366		7,081		12,706		19,787		1,950		21,726
Consumer		469		—		326		326		1		449

Total	$	33,949	$	8,369	$	16,213	$	24,582	$	3,228	$	27,307

*	Includes ~~$618,000~~$251,000 of purchased credit impaired loans.

December 31, 2016
   Unpaid
Contractual
Principal
Balance    Recorded
Investment
With No
Allowance*    Recorded
Investment
With
Allowance    Total
Recorded
Investment    Related
Allowance    12 Month
Average
Recorded
Investment
Commercial
   $ 13,389    $ 1,148    $ 6,136    $ 7,284    $ 2,128    $ 4,921
Agricultural
   103    —      99    99    25    50
Real Estate
   23,466    6,229    12,525    18,754    2,428    16,170
Consumer
   1,421    280    954    1,234    431    914












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


December 31, 2018	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance*		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		12 Month Average Recorded Investment
Commercial	$	10,808	$	6,728	$	2,606	$	9,334	$	1,133	$	7,986
Agricultural		799		213		546		759		170		842
Real Estate		24,072		6,699		10,015		16,714		2,409		16,042
Consumer		935		101		626		727		357		914

Total	$	36,614	$	13,741	$	13,793	$	27,534	$	4,069	$	25,784

*	Includes ~~$1,256,000~~$827,000 of purchased credit impaired loans.

F-2

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

The Company recognized interest income on impaired loans prior to being recognized as impaired of approximately ~~$624,000, $829,000~~$750,000, $948,000 and ~~$922,000~~$624,000 during the years ended December 31, 2019, 2018 and 2017, ~~2016 and 2015,~~ respectively.

From a credit risk standpoint, the Company rates its loans in one of four categories: (i) pass, (ii) special mention, (iii) substandard or (iv) doubtful. Loans rated as loss are

charged-off.

The ratings of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on our credits as part of our

on-going

monitoring of the credit quality of our loan portfolio. Ratings are adjusted to reflect the degree of risk and loss that are felt to be inherent in each credit as of each reporting period. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness, however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on

non-accrual.

The following summarizes the Company’s internal ratings of its loans

held-for-investment

by class of financing receivables and portfolio segments, which classes are the same, at December 31, ~~2017~~2019 and ~~2016~~2018 (in thousands):

December 31, 2017
   Pass    Special
Mention    Substandard    Doubtful    Total
Commercial
   $ 649,166    $ 6,282    $ 28,651    $ —      $ 684,099
Agricultural
   90,457    1,527    2,559    —      94,543
Real Estate
   2,227,302    29,089    46,607    —      2,302,998
Consumer
   401,434    181    2,314    —      403,929










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

December 31, 2016
   Pass    Special
Mention    Substandard    Doubtful    Total
Commercial
   $ 629,756    $ 5,769    $ 38,885    $ —      $ 674,410
Agricultural
   81,620    715    1,686    —      84,021
Real Estate
   2,111,947    18,091    59,806    —      2,189,844
Consumer
   406,182    212    2,638    —      409,032










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


December 31, 201 9	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	825,775	$	20,971	$	9,580	$	—	$	856,326
Agricultural		101,614		64		1,962		—		103,640
Real Estate		2,717,227		42,036		64,109		—		2,823,372
Consumer		409,698		300		1,633		—		411,631

Total	$	4,054,314	$	63,371	$	77,284	$	—	$	4,194,969


December 31, 2018	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	804,584	$	23,392	$	16,977	$	—	$	844,953
Agricultural		92,864		46		3,767		—		96,677
Real Estate		2,559,379		26,626		53,341		—		2,639,346
Consumer		370,510		315		1,835		—		372,660

Total	$	3,827,337	$	50,379	$	75,920	$	—	$	3,953,636

F-2

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

At December 31, ~~2017~~2019 and ~~2016,~~2018, the Company’s past due loans are as follows ~~(in~~(dollars in thousands):

December 31, 2017
   15-59
Days
Past
Due*    60-89
Days
Past
Due    Greater
Than
90
Days    Total
Past Due    Total
Current    Total Loans    Total 90
Days
Past Due
Still
Accruing
Commercial
   $ 2,039    $ 1,104    $ 1,081    $ 4,224    $ 679,875    $ 684,099    $ 7
Agricultural
   640    —      —      640    93,903    94,543    —
Real Estate
   12,308    511    1,198    14,017    2,288,981    2,302,998    216
Consumer
   1,360    361    135    1,856    402,073    403,929    65














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

December 31, 2016
   15-59
Days
Past
Due*    60-89
Days
Past
Due    Greater
Than
90
Days    Total
Past Due    Total
Current    Total Loans    Total 90
Days
Past Due
Still
Accruing
Commercial
   $ 3,908    $ 1,122    $ 2,220    $ 7,250    $ 667,160    $ 674,410    $ 10
Agricultural
   185    —      —      185    83,836    84,021    —
Real Estate
   13,172    1,301    5,268    19,741    2,170,103    2,189,844    272
Consumer
   1,845    368    122    2,335    406,697    409,032    2














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




December 31, 2019	15-59 Days Past Due*		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Total Current		Total Loans		Total 90 Days Past Due Still Accruing
Commercial	$	3,257	$	557	$	722	$	4,536	$	851,790	$	856,326	$	112
Agricultural		183		44		400		627		103,013		103,640		—
Real Estate		12,890		288		195		13,373		2,809,999		2,823,372		—
Consumer		572		151		45		768		410,863		411,631		41

Total	$	16,902	$	1,040	$	1,362	$	19,304	$	4,175,665	$	4,194,969	$	153


December 31, 2018	15-59 Days Past Due*		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Total Current		Total Loans		Total 90 Days Past Due Still Accruing
Commercial	$	3,546	$	682	$	677	$	4,905	$	840,048	$	844,953	$	—
Agricultural		791		19		26		836		95,841		96,677		—
Real Estate		13,185		881		2,020		16,086		2,623,260		2,639,346		960
Consumer		782		263		54		1,099		371,561		372,660		48

Total	$	18,304	$	1,845	$	2,777	$	22,926	$	3,930,710	$	3,953,636	$	1,008

*	The Company monitors commercial, agricultural and real estate loans after such loans are 15 days past due. Consumer loans are monitored after such loans are 30 days past due.

The following table details the allowance for loan losses at December 31, ~~2017~~2019 and ~~2016~~2018 by portfolio segment (in thousands). There were no0 allowances for purchased credit impaired loans at December 31, ~~2017~~2019 or ~~2016.~~2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

December 31, 2017
   Commercial    Agricultural    Real
Estate    Consumer    Total
Loans individually evaluated for impairment
   $ 1,194    $ 31    $ 2,316    $ 455    $ 3,996
Loan collectively evaluated for impairment
   9,671    1,274    27,580    5,635    44,160










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

December 31, 2016
   Commercial    Agricultural    Real
Estate    Consumer    Total
Loans individually evaluated for impairment
   $ 2,128    $ 25    $ 2,428    $ 431    $ 5,012
Loan collectively evaluated for impairment
   9,579    1,076    24,436    5,676    40,767










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


December 31, 2019	Commercial		Agricultural		Real Estate		Consumer		Total
Loans individually evaluated for impairment	$	1,042	$	235	$	1,950	$	1	$	3,228
Loan collectively evaluated for impairment		11,080		971		32,024		5,196		49,271

Total	$	12,122	$	1,206	$	33,974	$	5,197	$	52,499


December 31, 2018	Commercial		Agricultural		Real Estate		Consumer		Total
Loans individually evaluated for impairment	$	1,133	$	170	$	2,409	$	357	$	4,069
Loan collectively evaluated for impairment		10,815		1,276		29,933		5,109		47,133

Total	$	11,948	$	1,446	$	32,342	$	5,466	$	51,202

F-2

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

Changes in the allowance for loan losses for the years ended December 31, ~~2017~~2019 and ~~2016~~2018 are summarized as follows (in thousands):

December 31, 2017
   Commercial Agricultural Real
Estate Consumer Total
Beginning balance
   $ 11,707 $ 1,101 $ 26,864 $ 6,107 $ 45,779
Provision for loan losses
   1,233 243 4,055 999 6,530
Recoveries
   943 32 192 501 1,668
Charge-offs
   (3,018 ) (71 ) (1,215 ) (1,517 ) (5,821 )


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




December 31, 2019	Commercial			Agricultural			Real Estate			Consumer			Total
Beginning balance	$	11,948		$	1,446		$	32,342		$	5,466		$	51,202
Provision for loan losses		398			(79	)		2,520			126			2,965
Recoveries		1,364			158			404			532			2,458
Charge-offs		(1,588	)		(319	)		(1,292	)		(927	)		(4,126	)

Ending balance	$	12,122		$	1,206		$	33,974		$	5,197		$	52,499


December 31, 2018	Commercial			Agricultural			Real Estate			Consumer			Total
Beginning balance	$	10,865		$	1,305		$	29,896		$	6,090		$	48,156
Provision for loan losses		1,662			126			3,463			414			5,665
Recoveries		839			15			462			512			1,828
Charge-offs		(1,418	)		—			(1,479	)		(1,550	)		(4,447	)

Ending balance	$	11,948		$	1,446		$	32,342		$	5,466		$	51,202

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

December 31, 2016
   Commercial Agricultural Real
Estate Consumer Total
Beginning balance
   $ 12,644 $ 1,191 $ 24,375 $ 3,667 $ 41,877
Provision for loan losses
   5,101 104 1,150 3,857 10,212
Recoveries
   952 25 2,021 508 3,506
Charge-offs
   (6,990 ) (219 ) (682 ) (1,925 ) (9,816 )


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

The Company’s recorded investment in loans as of December 31, ~~2017~~2019 and ~~2016~~2018 related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology was as follows (in thousands). Purchased credit impaired loans of ~~$618,000~~$251,000 and ~~$1,256,000,~~$827,000, respectively, at December 31, ~~2017~~2019 and ~~2016~~2018 are included in loans individually evaluated for impairment.

December 31, 2017
   Commercial    Agricultural    Real Estate    Consumer    Total
Loans individually evaluated for impairment
   $ 3,612    $ 134    $ 12,838    $ 1,086    $ 17,670
Loan collectively evaluated for impairment
   680,487    94,409    2,290,160    402,843    3,467,899










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

December 31, 2016
   Commercial    Agricultural    Real Estate    Consumer    Total
Loans individually evaluated for impairment
   $ 7,284    $ 99    $ 18,754    $ 1,234    $ 27,371
Loan collectively evaluated for impairment
   667,126    83,922    2,171,090    407,798    3,329,936










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




December 31, 2019	Commercial		Agricultural		Real Estate		Consumer		Total
Loans individually evaluated for impairment	$	3,093	$	1,376	$	19,787	$	326	$	24,582
Loan collectively evaluated for impairment		853,233		102,264		2,803,585		411,305		4,170,387

Total	$	856,326	$	103,640	$	2,823,372	$	411,631	$	4,194,969


December 31, 2018	Commercial		Agricultural		Real Estate		Consumer		Total
Loans individually evaluated for impairment	$	9,334	$	759	$	16,714	$	727	$	27,534
Loan collectively evaluated for impairment		835,619		95,918		2,622,632		371,933		3,926,102

Total	$	844,953	$	96,677	$	2,639,346	$	372,660	$	3,953,636

The Company’s loans that were modified in the years ended December 31, ~~2017~~2019 and ~~2016,~~2018, and considered troubled debt restructurings are as follows ~~(in~~(dollars in thousands):

   Year Ended December 31, 2017    Year Ended December 31, 2016
   Number    Pre-Modification
Recorded
Investment    Post-
Modification
Recorded
Investment    Number    Pre-Modification
Recorded
Investment    Post-
Modification
Recorded
Investment
Commercial
   11    $ 895    $ 895    15    $ 3,208    $ 3,208
Agricultural
   —      —      —      —      —      —
Real Estate
   5    625    625    6    1,460    1,460
Consumer
   1    25    25    7    189    189












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


	Year Ended December 31, 2019						Year Ended December 31, 2018
	Number		Pre-Modification Recorded Investment		Post- Modification Recorded Investment		Number		Pre-Modification Recorded Investment		Post- Modification Recorded Investment
Commercial		7	$	551	$	551		4	$	864	$	864
Agricultural		11		812		812		1		4		4
Real Estate		7		1,397		1,397		5		643		643
Consumer		—		—		—		8		209		209

Total		25	$	2,760	$	2,760		18	$	1,720	$	1,720

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Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

The balances below provide information as to how the loans were modified as troubled debt restructured loans during the years ended December 31, ~~2017~~2019 and ~~2016 (in~~2018 (dollars in thousands):

   Year Ended December 31, 2017    Year Ended December 31, 2016
   Adjusted
Interest
Rate    Extended
Maturity    Combined
Rate and
Maturity    Adjusted
Interest
Rate    Extended
Maturity    Combined
Rate and
Maturity
Commercial
   $ —      $ 195    $ 700    $ —      $ 2,560    $ 648
Agricultural
   —      —      —      —      —      —
Real Estate
   —      312    313    —      298    1,162
Consumer
   —      25    —      —      70    119












Total
   $ —      $ 532    $ 1,013    $ —      $ 2,928    $ 1,929


	Year Ended December 31, 2019						Year Ended December 31, 2018
	Adjusted Interest Rate		Extended Maturity		Combined Rate and Maturity		Adjusted Interest Rate		Extended Maturity		Combined Rate and Maturity
Commercial	$	—	$	389	$	162	$	—	$	529	$	335
Agricultural		—		354		458		—		—		4
Real Estate		—		494		903		—		280		363
Consumer		—		—		—		—		—		209

Total	$	—	$	1,237	$	1,523	$	—	$	809	$	911

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

During the years ended December 31, ~~2017~~2019 and ~~2016,~~2018, certain loans were modified as a troubled debt restructured loans within the previous 12 months and for which there was a payment default. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past or more due or results in the foreclosure and repossession of the applicable collateral. The loans with payment default are as follows (dollars in thousands):

   Year Ended
December 31, 2017    Year Ended
December 31, 2016
   Number    Balance    Number    Balance
Commercial
   2    $ 88    4    $ 1,690
Agriculture
   —      —      —      —
Real Estate
   —      —      3    921
Consumer
   —      —      —      —








Total
   2    $ 88    7    $ 2,611


	Year Ended December 31, 2019				Year Ended December 31, 2018
	Number		Balance		Number		Balance
Commercial		—	$	—		1	$	491
Agriculture		7		267		—		—
Real Estate		—		—		—		—
Consumer		—		—		—		—

Total		7	$	267		1	$	491

As of December 31, ~~2017,~~2019, the Company has no0 commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

An analysis of the changes in loans to officers, directors, principal shareholders, or associates of such persons for the year ended December 31, ~~2017~~2019 (determined as of each respective

year-end)

follows ~~(in~~(dollars in thousands):

   Beginning
Balance    Additional
Loans    Payments    Ending
Balance
Year ended December 31, 2017
   $44,429    $58,420    $46,945    $55,904


	Beginning Balance		Additional Loans		Payments		Ending Balance
Year ended December 31, 2019	$	67,394	$	92,031	$	74,061	$	85,364

In the opinion of management, those loans are on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unaffiliated persons.

Our subsidiary bank has established a line of credit with the Federal Home Loan Bank of Dallas (FHLB) to provide liquidity and meet pledging requirements for those customers eligible to have securities pledged to secure certain uninsured deposits. At December 31, ~~2017, $2,163,425,000~~2019, $2,663,321,000 in loans held by our bank subsidiary were subject to blanket liens as security for this line of credit. At December 31, ~~2017,~~2019, there ~~was no balance~~were 0 amounts outstanding under this line of credit.

Note 4 - Loans

Held-for-Sale

The Company originates certain mortgage loans for sale in the secondary market. The mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first three to nine months, or if documentation is determined not to be in compliance with regulations. The Company’s historic losses as a result of these indemnities have been insignificant.

F-2

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017


December 31, 2018:	Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
IRLCs	$	37,088	$	765	$	—
Forward mortgage-backed securities trades		45,500		—		403

BANK PREMISES AND EQUIPMENT

The following is a summary of bank premises and equipment (in thousands):

Useful Life
   December 31,
      2017    2016
Land
   —      $ 29,508    $ 28,266
Buildings
   20 to 40 years    119,728    115,566
Furniture and equipment
   3 to 10 years    58,672    58,145
Leasehold improvements
   Lesser of lease term or 5 to 15 years    4,118    4,783




      212,026    206,760
Less-accumulated depreciation and amortization
   (88,000 )    (84,075 )




Total Bank Premises and Equipment
   $ 124,026    $ 122,685


	Useful Life	December 31,
		2019			2018
Land	—	$	30,800		$	31,190
Buildings	20 to 40 years		138,110			135,335
Furniture and equipment	3 to 10 years		60,200			58,969
Leasehold improvements	Lesser of lease term or 5 to 15 years		3,364			3,557

			232,474			229,051
Less- accumulated depreciation and amortization			(101,452	)		(95,630	)

Total Bank Premises and Equipment		$	131,022		$	133,421

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

Depreciation expense for the years ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~2017 amounted to ~~$9,810,000, $9,390,000,~~$9,801,000, $10,130,000 and ~~$9,125,000,~~$9,810,000, respectively, and is included in the captions net occupancy expense and equipment expense in the accompanying consolidated statements of earnings.

The Company is lessor for portions of its banking premises. Total rental income for all leases included in net occupancy expense is approximately ~~$2,367,000, $2,139,000~~$2,831,000, $2,682,000 and ~~$1,949,000,~~$2,367,000, for the years ended December 31, 2019, 2018 and 2017, ~~2016 and 2015,~~ respectively.

During the years ended December 31, 2017, 2016 and 2015, the Company recorded gains (losses) on sale of the bank premises and equipment totaling ($396,000), $168,000 and ($820,000). In 2017, the Company sold its San Angelo main region branch building for $1,586,000 and recorded a gain of $210,000 and cancelled its San Angelo grocery store branch lease and recorded a write off of leasehold improvements of $360,000. In 2016, the Company sold its Weatherford and Orange main region branch building for $1,385,000 and $2,000,000 and recorded a gain of $560,000 and a loss of $31,000, respectively. The Company recorded a write down of $1,000,000 in 2015 in anticipation of the Orange branch building sale.

DEPOSITS AND BORROWINGS:

Time deposits of $250,000 or more totaled approximately ~~$115,203,000~~$117,716,000 and ~~$130,385,000~~$118,590,000 at December 31, ~~2017~~2019 and ~~2016,~~2018, respectively.

At December 31, ~~2017,~~2019, the scheduled maturities of time deposits (in thousands) were, as follows:

Year ending December 31,

2018
   $ 384,668
2019
   38,031
2020
   14,607
2021
   6,645
2022
   7,304
Thereafter
   —


   $ 451,255


Year ending December 31,
2020		351,818
2021		42,445
2022		10,751
2023		7,058
2024		7,941
Thereafter		—

	$	420,013

Deposits received from related parties at December 31, ~~2017~~2019 and ~~2016~~2018 totaled ~~$74,270,000~~$87,027,000 and ~~$114,513,000,~~$103,413,000, respectively.

F-2

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

Borrowings at December 31, ~~2017~~2019 and ~~2016~~2018 consisted of the following (dollars in thousands):

   December 31,
   2017    2016
Securities sold under agreements with customers to repurchase
   $ 320,450    $ 360,820
Federal funds purchased
   10,550    9,950
Advances from Federal Home Loan Bank of Dallas
   —      75,000




Total
   $ 331,000    $ 445,770


	December 31,
	2019		2018
Securities sold under agreements with customers to repurchase.	$	375,106	$	409,631
Federal funds purchased		6,250		4,075
Advances from Federal Home Loan Bank of Dallas		—		55,000

Total	$	381,356	$	468,706

Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which the Company pledges certain securities that have a fair value equal to at least the amount of the borrowings. The agreements mature daily and therefore the risk arising from a decline in the fair value of the collateral pledged is minimal. The securities pledged are mortgage-backed securities. These agreements do not include “right of

set-off”

provisions and therefore the Company does not offset such agreements for financial reporting purposes.

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

At December 31, ~~2016,~~2018, the Company had advances from the Federal Home Loan Bank of Dallas of ~~$75,000,000~~$55,000,000 that were repaid in ~~2017. The interest rate on this advance was 0.46% at December 31, 2016.~~2019. There were no

such advances outstanding at December 31, ~~2017.~~

6.2019.

LINE OF CREDIT:

The Company renewed its loan agreement, effective June 30, ~~2017,~~2019, with Frost Bank. Under the loan agreement, as renewed and amended, we ~~are~~

re permitted to draw up to $25,000,000 on a revolving line of credit. Prior to June 30, ~~2019,~~20

1, interest is

will be

paid quarterly at

The Wall Street Journal

Prime Rate and the line of credit ~~matures~~mature

June 30, ~~2019.~~2021. If a balance ~~exists~~exist

at ~~June 30, 2019,~~Ju

ly 1

, 20

1, the principal balance converts to a term facility payable quarterly over

five years and interest is

s paid quarterly at ~~our election at~~

The Wall Street

Journal

Prime ~~Rate plus 50 basis points or LIBOR plus 250 basis points.~~ Rate.

The line of credit is unsecured. Among other provisions in the credit agreement, we must satisfy certain financial covenants during the term of the loan agreement, including, without limitation, covenants that require us to maintain certain capital, tangible net worth, loan loss reserve,

non-performing

outstanding balance under the line of credit as of December 31, ~~2017~~2019 or ~~2016.~~

7.2018.

INCOME TAXES:

% from ~~35%~~

%. The Company’s deferred tax assets and liabilities were

re-measured

based on the income tax rates at which they are expected to reverse in the future, which is generally 21%. However, the Company continues to analyze certain aspects of the Act resulting in refinement of the calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the

re-measurement

of the Company’s deferred tax balance was ~~$7,650,000,~~$

7,650,000

, a reduction of income tax expense for the year ended December 31, 2017.

664,000

NaN

additional adjustment amounts were recorded for the year ended December 31, 2019, and the Company does not anticipate significant revision will be necessary

the

ure

F-2

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

The Company files a consolidated federal income tax return. Income tax expense is comprised of the following (dollars in thousands):

   Year Ended December 31,
   2017    2016    2015
Current federal income tax
   $ 34,421    $ 30,381    $ 31,014
Current state income tax
   99    99    103
Deferred federal income tax expense (benefit)
   (53 )    673    320
Restatement of net deferred tax liability due to change in income tax rate
   (7,650 )    —      —






Income tax expense
   $ 26,817    $ 31,153    $ 31,437


	Year Ended December 31,
	2019			2018			2017
Current federal income tax	$	33,099		$	28,359		$	34,421
Current state income tax		150			92			99
Deferred federal income tax expense (benefit)		(29	)		(250	)		(53	)
Restatement of net deferred tax liability due to change in income tax rate		—			(664	)		(7,650	)

Income tax expense	$	33,220		$	27,537		$	26,817

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

Income tax expense, as a percentage of pretax earnings, differs from the statutory federal income tax rate as follows:

   As a Percent of Pretax
Earnings
   2017 2016 2015
Statutory federal income tax rate
   35.0 % 35.0 % 35.0 %
Restatement of net deferred tax liability due to change in income tax rate
   (5.3 ) —   —
Reductions in tax rate resulting from interest income exempt from federal income tax
   (11.5 ) (12.1 ) (11.4 )
Effect of state income tax
   0.1 0.1 0.1
ESOP tax deduction
   (0.2 ) (0.2 ) (0.2 )
Other
   0.1 0.1 0.3


Effective income tax rate
   18.2 % 22.9 % 23.8 %


	As a Percent of Pretax Earnings
	2019			2018			2017
Statutory federal income tax rate		21.0	%		21.0	%		35.0	%
Restatement of net deferred tax liability due to change in income tax rate		—			(0.4	)		(5.3	)
Reductions in tax rate resulting from interest income exempt from federal income tax		(4.5	)		(5.2	)		(11.5	)
Effect of state income tax		0.1			0.1			0.1
ESOP tax deduction		(0.1	)		(0.1	)		(0.2	)
Other		0.3			0.1			0.1

Effective income tax rate		16.8	%		15.5	%		18.2	%

The approximate effects of each type of difference that gave rise to the Company’s deferred tax assets and liabilities at December 31, ~~2017~~2019 and ~~2016~~2018 are as follows (dollars in thousands):

   2017    2016
Deferred tax assets:

Tax basis of loans in excess of financial statement basis
   $ 10,550    $ 17,006
Minimum liability in defined benefit plan
   766    1,641
Recognized for financial reporting purposes but not yet for tax purposes:

Deferred compensation
   1,818    2,807
Write-downs and adjustments to other real estate owned and repossessed assets
   11    9
Other deferred tax assets
   79    226




Total deferred tax assets
   $ 13,224    $ 21,689




Deferred tax liabilities:

Financial statement basis of fixed assets in excess of tax basis
   $ 3,343    5,870
Intangible asset amortization deductible for tax purposes, but not for financial reporting purposes
   9,926    15,191
Recognized for financial reporting purposes but not yet for tax purposes:

Accretion on investment securities
   1,039    1,788
Pension plan contributions
   1,086    1,799
Net unrealized gain on investment securitiesavailable-for-sale
   9,420    11,573
Other deferred tax liabilities
   31    83




Total deferred tax liabilities
   $ 24,845    $ 36,304




Net deferred tax asset (liability)
   $ (11,621 )    $ (14,615 )


	2019			2018
Deferred tax assets:
Tax basis of loans in excess of financial statement basis	$	12,245		$	12,010
Minimum liability in defined benefit plan		—			352
Recognized for financial reporting purposes but not yet for tax purposes:
Deferred compensation		2,254			2,056
Write-downs and adjustments to other real estate owned and repossessed assets		48			49
Other deferred tax assets		157			208

Total deferred tax assets	$	14,704		$	14,675

Deferred tax liabilities:
Financial statement basis of fixed assets in excess of tax basis	$	4,651		$	4,182
Intangible asset amortization deductible for tax purposes, but not for financial reporting purposes		11,935			11,263
Recognized for financial reporting purposes but not yet for tax purposes:
Accretion on investment securities		755			745
Pension plan contributions		—			816
Net unrealized gain on investment securities available-for-sale		17,945			1,111
Other deferred tax liabilities		51			34

Total deferred tax liabilities	$	35,337		$	18,151

Net deferred tax asset (liability)	$	(20,633	)	$	(3,476	)

F-2

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

At December 31, ~~2017~~2019 and ~~2016,~~2018, management believes that it is more likely than not that all of the deferred tax amounts shown above will be realized and therefore no

valuation allowance was recorded.

Current authoritative accounting guidance prescribes ~~arecognition~~a

recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the~~more-likely-than-not~~ more-likely-

than-not

recognition threshold is measured at the largest amount of cumulative benefit that is greater than ~~fifty~~

percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the

more-likely-than-not

recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

recognized tax positions that no longer meet the

more-likely-than-not

recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Current authoritative accounting guidance also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The Company concluded the tax benefits of positions taken and expected to be taken on its tax returns should be recognized in the financial statements under this guidance. The Company files income tax returns in the U.S. federal jurisdiction and ~~several U.S.~~ state ~~jurisdictions.~~margin tax returns in the state of Texas. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before ~~2014~~201

or Texas state tax examinations by tax authorities for years before ~~2013.~~201

. As of December 31, ~~2017~~2019 and ~~2016,~~2018, the Company believes that there are no

uncertain tax positions.

10.

FAIR VALUE DISCLOSURES:

The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

The authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs —– Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs —– Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

Level 3 Inputs —– Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities classified as

available-for-sale

and trading are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market spreads, cash flows, the United States Treasury yield curve, live trading levels, trade execution data, dealer quotes, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other items.

See notes 4 and 5 related to the determination of fair value for loans

held-for-sale,

IRLCs and forward mortgage-backed securities traded.

There were no

transfers between Level 2 and Level 3 during the ~~year~~years ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015.~~

2017.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, ~~2017~~2019 and ~~2016~~2018 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

December 31, 2017
   Level 1
Inputs    Level 2
Inputs    Level 3
Inputs    Total Fair
Value
Available-for-sale investment securities:

Obligations of U.S. government sponsored enterprises and agencies
   $ —      $ 60,330    $ —      $ 60,330
Obligations of state and political subdivisions
   —      1,420,850    —      1,420,850
Corporate bonds
   —      7,031    —      7,031
Residential mortgage-backed securities
   —      1,219,097    —      1,219,097
Commercial mortgage-backed securities
   —      375,737    —      375,737
Other securities
   4,428    —      —      4,428








Total
   $ 4,428    $ 3,083,045    $ —      $ 3,087,473

December 31, 2016
   Level 1
Inputs    Level 2
Inputs    Level 3
Inputs    Total Fair
Value
Available-for-sale investment securities:

U.S. Treasury securities
   $ 10,668    $ —      $ —      $ 10,668
Obligations of U.S. government sponsored enterprises and agencies
   —      113,703    —      113,703
Obligations of state and political subdivisions
   —      1,564,276    —      1,564,276
Corporate bonds
   —      47,965    —      47,965
Residential mortgage-backed securities
   —      851,361    —      851,361
Commercial mortgage-backed securities
   —      268,436    —      268,436
Other securities
   4,428    —      —      4,428








Total
   $ 15,096    $ 2,845,741    $ —      $ 2,860,837


December 31, 2019	Level 1 Inputs		Level 2 Inputs			Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S Treasury securities	$	10,019	$	—		$	—	$	10,019
Obligations of state and political subdivisions		—		1,288,983			—		1,288,983
Corporate bonds		—		230			—		230
Residential mortgage-backed securities		—		1,608,863			—		1,608,863
Commercial mortgage-backed securities		—		500,744			—		500,744
Other securities		4,478		—			—		4,478

Total	$	14,497	$	3,398,820		$	—	$	3,413,317

Loans held-for-sale	$	—	$	23,076		$	—	$	23,076
IRLCs	$	—	$	886		$	—	$	886
Forward mortgage-backed securities traded	$	—	$	(152	)	$	—	$	(152	)

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Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

The following table presents other real estate owned that were

re-measured

subsequent to their initial transfer to other real estate owned (dollars in thousands):

   Year Ended
December 31,
   2017    2016
Carrying value of other real estate owned prior tore-measurement
   $ 1,067    $ —
Write-downs included in gain (loss) on sale of other real estate owned
   (306 )    —




Fair value
   $ 761    $ —


	Year Ended December 31,
	2019		2018
Carrying value of other real estate owned prior to re-measurement	$	—	$	1,046
Write-downs included in gain (loss) on sale of other real estate owned		—		(236	)

Fair value	$	—	$	810

At December 31, ~~2017~~2019 and ~~2016,~~2018, other real estate owned totaled ~~$1,347,000~~$982,000 and ~~$413,000,~~$448,000, respectively.

The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instrument assets and liabilities including those subject to the requirements discussed above. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

Cash and due from banks, federal funds sold, interest-bearing deposits and time deposits in banks and accrued interest receivable and payable are liquid in nature and considered Levels 1 or 2 of the fair value hierarchy.

Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities and are considered Levels 2 and 3 of the fair value hierarchy. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the carrying value and are considered Level 1 of the fair value hierarchy.

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

The carrying value and the estimated fair value of the Company’s contractual

off-balance-sheet

unfunded lines of credit, loan commitments and letters of credit, which are generally priced at market at the time of funding, are not material.

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Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

The estimated fair values and carrying values of all financial instruments under current authoritative guidance at December 31, ~~2017~~2019 and ~~2016,~~2018, were as follows (dollars in thousands):

   2017    2016    Fair Value
Hierarchy
   Carrying
Value    Estimated
Fair Value    Carrying
Value    Estimated
Fair Value
Cash and due from banks
   $ 209,583    $ 209,583    $ 204,782    $ 204,782    Level 1
Federal funds sold
   —      —      3,130    3,130    Level 1
Interest-bearing deposits in banks
   162,764    162,764    48,574    48,574    Level 1
Interest-bearing time deposits in banks
   1,458    1,458    1,707    1,709    Level 2
Available-for-sale securities
   3,087,473    3,087,473    2,860,837    2,860,837    Levels 1 and 2
Held-to-maturity securities
   —      —      121    124    Level 2
Loans
   3,452,543    3,470,133    3,338,426    3,361,735    Level 3
Accrued interest receivable
   36,081    36,081    36,469    36,469    Level 2
Deposits with stated maturities
   451,255    452,000    508,996    510,304    Level 2
Deposits with no stated maturities
   5,511,706    5,511,706    4,969,543    4,969,543    Level 1
Borrowings
   331,000    331,000    445,770    445,770    Level 2
Accrued interest payable
   197    197    225    225    Level 2


	2019				2018
	Carrying		Estimated		Carrying		Estimated		Fair Value
	Value		Fair Value		Value		Fair Value		Hierarchy
Cash and due from banks	$	231,534	$	231,534	$	207,835	$	207,835		Level 1
Federal Funds Sold		3,150		3,150		—		—		Level 1
Interest-bearing deposits in banks		47,920		47,920		40,812		40,812		Level 1
Interest-bearing time deposits in banks		—		—		1,458		1,458		Level 2
Available-for-sale securities		3,413,317		3,413,317		3,158,777		3,158,777		Levels 1 and 2
Loans held-for-investment		4,194,969		4,209,826		3,902,434		3,947,391		Level 3
Loans held-for-sale		28,228		28,343		21,672		21,779		Level 2
Accrued interest receivable		36,894		36,894		36,765		36,765		Level 2
Deposits with stated maturities		420,013		421,397		442,161		441,727		Level 2
Deposits with no stated maturities		6,183,793		6,183,793		5,738,228		5,738,228		Level 1
Borrowings		381,356		381,356		468,706		468,706		Level 2
Accrued interest payable		628		628		408		408		Level 2
IRLCs		886		886		765		765		Level 2
Forward mortgage-backed securities traded		152		152		403		403		Level 2

11.

COMMITMENTS AND CONTINGENCIES:

The Company is engaged in legal actions arising from the normal course of business. In management’s opinion, the Company has adequate legal defenses with respect to these actions, and as of December 31, ~~2017~~2019 the resolution of these matters is not expected to have material adverse effects upon the results of operations or financial condition of the Company.

The Company leases a portion of its bank premises and equipment under operating leases. At December 31, ~~2017,~~2019, future minimum lease commitments were: ~~2018 — $385,000, 2019 — $303,000,~~ 2020 ~~— $173,000,~~- $557,000, 2021 ~~— $41,000~~- $342,000, 2022 - $145,000 and ~~2022 — $7,000.~~

~~10.~~2023 and thereafter - $57,000.

12.

FINANCIAL INSTRUMENTS WITHOFF-BALANCE-SHEET RISK:

We are a party to financial instruments with

off-balance-sheet

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Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

   Total Notional
Amounts Committed
December 31, 2017
(in thousands)
Financial instruments whose contract amounts represent credit risk:

Unfunded lines of credit
   $ 534,468
Unfunded commitments to extend credit
   244,658
Standby letters of credit
   28,858


Total commercial commitments
   $ 807,984


	December 31, 2019 (in thousands)
Financial instruments whose contract amounts represent credit risk:
Unfunded lines of credit	$	743,595
Unfunded commitments to extend credit		374,158
Standby letters of credit		38,364

Total commercial commitments	$	1,156,117

case-by-case

We believe we have no other

off-balance

sheet arrangements or transactions with unconsolidated, special purpose entities that would expose us to liability that is not reflected on the face of the financial statements.

~~11.~~

13.

CONCENTRATION OF CREDIT RISK:

The Company grants commercial, retail, agriculture and residential real estate loans to customers primarily in North Central, Southeastern and West Texas. Although the Company has a diversified loan portfolio, a substantial portion of its borrowers’ ability to honor their commitments is dependent upon each local economic sector. In addition, the Company holds mortgage related securities which are guaranteed by GNMA, FNMA or FHLMC or are collateralized by loans backed by these agencies.

~~12.~~

14.

PENSION AND PROFIT SHARING PLANS:

The ~~Company’s~~Company had a defined benefit pension plan that was frozen effective January 1, 2004, whereby no new participants ~~will be~~were added to the Plan and no additional years of service ~~will accrue~~accrued to ~~participants, unless the pension plan is reinstated at a future date.~~participants. The pension plan covered substantially all of the Company’s employees at the time. The benefits for each employee were based on years of service and a percentage of the employee’s qualifying compensation during the final years of employment. The Company’s funding policy was ~~and is~~ to contribute annually the amount necessary to satisfy the Internal Revenue Service’s funding standards. Contributions to the pension plan, prior to freezing the plan, were intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. ~~As a result~~The Company made

contribution to the plan in 2019, 2018 or 2017.

In December 2018, due to the rising interest rate environment, the Company determined it was in the best interest of its shareholders to work toward terminating its pension obligation. The Company annuitized approximately

% of the ~~Pension Protection Act of 2006 (the “Protection Act”),~~pension benefit obligation at that time and recorded a loss on settlement totaling $

1,546,000

for the year ended

December 31, 2018. In 2019, the Company ~~will be required~~continued to ~~contribute amounts in future years~~take steps to ~~fund any shortfalls. The Company has evaluated the provisions~~completely settle and terminate its remaining

F-3

Table of the Protection Act as well as the Internal Revenue Service’s funding standards to develop a plan for funding in future years. As a result, the Company made no contribution in 2017 and made a contribution totaling $500,000 in 2016, and is continuing to evaluate future funding amounts.

Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

pension obligation and recorded loss associated with the final termination of $2,673,000. The loss incurred included unrealized loss previously recorded in other comprehensive income and refunding to remaining participants for funding balance overages offset by a gain on hedging instrument entered into to minimize interest rate movement during the termination period. At December 31, 2019, all balances in the pension plan are zero and the Company’s obligation has been extinguished.

Using an actuarial measurement date of December 31, ~~2017~~2019 and ~~2016,~~2018, benefit obligation activity and fair value of plan assets for the years ended December 31, ~~2017~~2019 and ~~2016,~~2018, and a statement of the funded status as of December 31, ~~2017~~2019 and ~~2016,~~2018, are as follows (dollars in thousands):

   2017    2016
Reconciliation of benefit obligations:

Benefit obligation at January 1
   $ 15,453    $ 16,002
Interest cost on projected benefit obligation
   635    665
Actuarial loss
   486    139
Benefits paid, including partial settlement of certain participant balances
   (1,043 )    (1,353 )




Benefit obligation at December 31
   $ 15,531    $ 15,453




Reconciliation of fair value of plan assets:

Fair value of plan assets at January 1
   $ 15,787    $ 14,820
Actual return on plan assets
   2,302    1,820
Employer contributions
   —      500
Benefits paid, including partial settlement of certain participant balances
   (1,043 )    (1,353 )




Fair value of plan assets at December 31
   17,046    15,787




Funded status
   $ 1,515    $ 334


	2019			2018
Reconciliation of benefit obligations:
Benefit obligation at January 1	$	6,613		$	15,531
Transfer liability from multiple employer plan		2,929			—
Interest cost on projected benefit obligation		393			523
Actuarial (gain) loss, including settlement of all participants balances		1,257			(811	)
Benefits paid, including settlement of participant balances		(11,192	)		(8,630	)

Benefit obligation at December 31	$	—		$	6,613

Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1	$	8,781		$	17,046
Transfer of assets from multiple employer plan		1,829			—
Actual return on plan assets		582			365
Employer contributions		—			—
Benefits paid, including settlement of certain participant balances		(11,192	)		(8,630	)

Fair value of plan assets at December 31		—			8,781

Funded status	$	—		$	2,168

Amounts recognized as a component of accumulated other comprehensive earnings as of

year-end

that have not been recognized as a component of the net period benefit cost of the Company’s defined benefit pension plan are as follows ~~(in~~(dollars in thousands):

   2017    2016
Net actuarial loss
   $ (3,597 )    $ (4,688 )
Deferred tax benefit
   1,227    1,641




Amounts included in accumulated other comprehensive earnings, net of tax
   $ (2,370 )    $ (3,047 )


	2019		2018
Net actuarial loss	$	—	$	(1,717	)
Deferred tax benefit		—		393

Amounts included in accumulated other comprehensive earnings, net of tax	$	—	$	(1,324	)

Net periodic benefit cost for the years ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, are as follows (dollars in thousands):

   Year Ended December 31,
   2017    2016    2015
Service cost — benefits earned during the period
   $ —      $ —      $ —
Interest cost on projected benefit obligation
   635    665    622
Expected return on plan assets
   (974 )    (912 )    (948 )
Amortization of unrecognized net loss
   249    375    222
Recognized loss on partial settlement of certain participant balances
   —      267    —






Net periodic pension benefit expense (benefit)
   $ (90 )    $ 395    $ (104 )


	Year Ended December 31,
	2019			2018			2017
Service cost - benefits earned during the period	$	—		$	—		$	—
Interest cost on projected benefit obligation		393			523			635
Expected return on plan assets		(227	)		(1,028	)		(974	)
Amortization of unrecognized net loss		185			186			249
Recognized loss on partial settlement of certain participant balances		2,673			1,546			—

Net pension expense (benefit)	$	3,024		$	1,227		$	(90	)

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Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

The following table sets forth the rates used in the actuarial calculations of the present value of benefit obligations and net periodic pension cost and the rate of return on plan assets:

   2017 2016 2015
Weighted average discount rate
   3.50 % 4.25 % 4.25 %
Expected long-term rate of return on assets
   6.25 % 6.25 % 6.25 %


	2019			2018			2017
Weighted average discount rate		4.25	%		4.25	%		3.50	%

Expected long-term rate of return on assets		2.20	%		6.25	%		6.25	%

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

The weighted average discount rate iswas estimated based on setting a discount rate to establish an obligation for pension benefits equivalent to an amount that, if invested in high quality fixed income securities, would produce a return that ~~matches~~matched the expected benefit payment stream. The expected long-term rate of return on plan assets iswas based on historical returns and expectations of future returns based on asset mix, after consultation with our investment advisors and actuaries.

~~The major type of plan assets in the pension plan and the targeted allocation percentage as of December 31, 2017 and 2016 is as follows:~~

   December 31,
2017
Allocation December 31,
2016
Allocation Targeted
Allocation
Equity securities
   75 % 77 % 75 %
Debt securities
   24 % 22 % 25 %
Cash and equivalents
   1 % 1 % —

The range and weighted average final maturities of debt securities held in the pension plan as of December 31, 2017 are 1.52 to 19.76 years and approximately 5.64 years, respectively. Assets held in the pension plan are considered either Level 1 consisting of the money market funds, publicly traded common stocks and publicly traded mutual funds or Level 2 consisting of obligations of state and political subdivisions, corporate bonds and mortgage-backed securities. There were no Level 3 securities. See note 8 for a discussion of the fair value hierarchy. The breakdown by level is as follows (dollars in thousands):

   Level 1
Inputs    Level 2
Inputs    Level 3
Inputs    Total Fair
Value
Money market fund
   $ 274    $ —      $ —      $ 274
U.S. Treasury notes
   —      149    —      149
Obligations of state and political subdivisions
   —      634    —      634
Corporate bonds
   —      868    —      868
Mortgage-backed securities
   —      1,130    —      1,130
Corporate stocks and mutual funds
   13,991    —      —      13,991








Total
   $ 14,265    $ 2,781    —      $ 17,046

First Financial Trust & Asset Management Company, National Association, a wholly owned subsidiary of the Company, ~~manages~~managed the pension plan assets as well as the profit sharing plan assets (see below). The investment strategy and targeted allocations ~~are~~were based on similar strategies First Financial Trust & Asset Management Company, National Association ~~employs~~employed for most of its managed accounts whereby appropriate diversification is achieved. First Financial Trust & Asset Management Company, National Association iswas prohibited from holding investments deemed to be high risk by the Office of the Comptroller of the Currency.

~~An estimate of the undiscounted projected future payments to eligible participants for the next five years and the following five years in the aggregate is as follows (in thousands):~~

Year Ending December 31,

2018
   $ 1,064
2019
   $ 1,018
2020
   $ 1,036
2021
   $ 1,077
2022
   $ 1,063
2023 forward
   $ 5,309

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

As of December 31, ~~2017 and 2016,~~2018, the pension plan’s total assets included First Financial Bankshares, Inc. common stock valued at approximately ~~$2,776,000 and $2,786,000, respectively.~~

$3,373,000.

The Company also provides a profit sharing plan, which covers substantially all full-time employees. The profit sharing plan is a defined contribution plan and allows employees to contribute a percentage of their base annual salary. Employees are fully vested to the extent of their contributions and become fully vested in the Company’s contributions over a~~six-year~~six-year vesting period. Costs related to the Company’s defined contribution plan totaled approximately $7,661,000, $7,049,000 and $4,735,000 ~~$3,221,000~~in 2019, 2018 and ~~$5,455,000 in~~ 2017, ~~2016 and 2015,~~ respectively, and are included in salaries and employee benefits in the accompanying consolidated statements of earnings. As of December 31, ~~2017~~2019 and ~~2016,~~2018, the profit sharing plan’s assets included First Financial Bankshares, Inc. common stock valued at approximately ~~$55,796,000~~$83,014,000 and ~~$60,270,000,~~$68,855,000, respectively.

In 2004, after freezing our pension plan, we added a safe harbor match to the 401(k) plan. We match a maximum of 4% on employee deferrals of 5% of their employee compensation. Total expense for this matching in 2019, 2018 and 2017 ~~2016~~was $2,759,000, $2,588,000 and ~~2015 was~~ $2,392,000, ~~$2,331,000 and $2,043,000,~~ respectively, and is included in salaries and employee benefits in the statements of earnings.

The Company has a directors’ deferred compensation plan whereby the directors may elect to defer up to 100% of their directors’ fees. All deferred compensation is invested in the Company’s common stock held in a rabbi trust. The stock is held in nominee name of the trustee, and the principal and earnings of the trust are held separate and apart from other funds of the Company, and are used exclusively for the uses and purposes of the deferred compensation agreement. The accounts of the trust have been consolidated in the financial statements of the Company.

~~13.~~

15.

DIVIDENDS FROM SUBSIDIARIES:

At December 31, ~~2017,~~2019, approximately ~~$205,751,000~~ $

261,416,000

was available for the declaration of dividends by the Company’s subsidiaries without the prior approval of regulatory agencies.

~~14.~~

16.

REGULATORY MATTERS:

Banking regulators measure capital adequacy by means of the risk-based capital ratios and the leverage ratio under the Basel III regulatory capital framework and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and

off-balance-sheet

quarter-to-date

average assets less intangible assets.

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

Beginning in January 2016, 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~~increased 0.625% each year thereafter, until it reaches 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 dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers.

As of December 31, ~~2017~~2019 and ~~2016,~~2018, we had a total risk-based capital ratio of ~~19.85%~~21.13% and ~~18.45%~~20.61%, a Tier 1 capital to risk-weighted assets ratio of ~~18.66%~~20.06% and ~~17.30%~~19.47%; a common equity Tier 1 capital to risk-weighted assets ratio of ~~18.66%~~20.06% and ~~17.30%~~19.47%, and a Tier 1 leverage ratio of ~~11.09% and 10.71%~~12.60% and11.85%, respectively. The regulatory capital ratios as of December 31, ~~2017~~2019 and ~~2016~~2018 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies.

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

As of December 31, ~~2017~~2019 and ~~2016,~~2018, the regulatory capital ratios of the Company and Bank under the Basel III regulatory capital framework are as follows:

   Actual Minimum Capital
Required Under
Basel IIIPhase-In Minimum Capital
Required-Basel III
FullyPhased-In Required to be
Considered Well-
Capitalized
As of December 31, 2017:
   Amount    Ratio Amount    Ratio Amount    Ratio Amount    Ratio
Total Capital to Risk-Weighted Assets:
Consolidated
   $ 814,634    19.85 % $ 379,578    9.250 % $ 430,872    10.50 % —      N/A
First Financial Bank, N.A
   $ 723,563    17.68 % $ 378,614    9.250 % $ 429,777    10.50 % $ 409,312    10.00 %
Tier 1 Capital to Risk-Weighted Assets:
Consolidated
   $ 765,882    18.66 % $ 297,507    7.250 % $ 348,801    8.50 % —      N/A
First Financial Bank, N.A
   $ 674,811    16.49 % $ 296,751    7.250 % $ 347,915    8.50 % $ 327,450    8.00 %
Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated
   $ 765,882    18.66 % $ 235,954    5.750 % $ 287,248    7.00 % —      N/A
First Financial Bank, N.A
   $ 674,811    16.49 % $ 235,354    5.750 % $ 286,518    7.00 % $ 266,053    6.50 %
Leverage Ratio:
Consolidated
   $ 765,882    11.09 % $ 276,296    4.000 % $ 276,296    4.00 % —      N/A
First Financial Bank, N.A
   $ 674,811    9.80 % $ 275,320    4.000 % $ 275,320    4.00 % $ 344,151    5.00 %

   Actual Minimum Capital
Required Under
Basel IIIPhase-In Minimum Capital
Required-Basel III
FullyPhased-In Required to be
Considered Well-
Capitalized
As of December 31, 2016:
   Amount    Ratio Amount    Ratio Amount    Ratio Amount    Ratio
Total Capital to Risk-Weighted Assets:
Consolidated
   $ 739,959    18.45 % $ 345,827    8.625 % $ 421,007    10.50 % —      N/A
First Financial Bank, N.A
   $ 633,403    15.84 % $ 344,930    8.625 % $ 419,915    10.50 % $ 399,919    10.00 %
Tier 1 Capital to Risk-Weighted Assets:
Consolidated
   $ 693,584    17.30 % $ 265,635    6.625 % $ 340,815    8.50 % —      N/A
First Financial Bank, N.A
   $ 587,028    14.68 % $ 264,946    6.625 % $ 339,931    8.50 % $ 319,935    8.00 %
Common Equity Tier 1 Capital
to Risk-Weighted Assets:

Consolidated
   $ 693,584    17.30 % $ 205,491    5.125 % $ 280,671    7.00 % —      N/A
First Financial Bank, N.A
   $ 587,028    14.68 % $ 204,959    5.125 % $ 279,943    7.00 % $ 259,947    6.50 %
Leverage Ratio:
Consolidated
   $ 693,584    10.71 % $ 258,978    4.00 % $ 258,978    4.00 % —      N/A
First Financial Bank, N.A
   $ 587,028    9.10 % $ 257,941    4.00 % $ 257,941    4.00 % $ 322,426    5.00 %

~~We have performed a preliminary assessment using the regulatory capital estimation tool made available by the OCC and believe the Company and Bank are prepared~~


	Actual					Minimum Capital Required-Basel III Fully Phased-In*					Required to be Considered Well- Capitalized
As of December 31, 2019:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital to Risk-Weighted Assets:
Consolidated	$	1,051,029		21.13	%	$	522,275		10.50	%		—		N/A
First Financial Bank, N.A	$	908,778		18.31	%	$	521,081		10.50	%	$	496,268		10.00	%

Tier 1 Capital to Risk-Weighted Assets:
Consolidated	$	997,721		20.06	%	$	422,794		8.50	%		—		N/A
First Financial Bank, N.A	$	855,470		17.24	%	$	421,828		8.50	%	$	397,014		8.00	%

Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated	$	997,721		20.06	%	$	348,184		7.00	%		—		N/A
First Financial Bank, N.A	$	855,470		17.24	%	$	347,388		7.00	%	$	322,574		6.50	%

Leverage Ratio:
Consolidated	$	997,721		12.60	%	$	316,850		4.00	%		—		N/A
First Financial Bank, N.A	$	855,470		10.84	%	$	315,570		4.00	%	$	394,463		5.00	%

*	At December 31, 2019 the Capital Conservative Buffer Basel III has been fully phased-in.

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to ~~meet the new requirements upon full adoption of Basel III that will be effective~~Consolidated Financial Statements

Years Ended December 31, ~~2019.~~

2019, 2018 and 2017


	Actual					Minimum Capital Required Under Basel III Phase-In					Minimum Capital Required-Basel III Fully Phased-In					Required to be Considered Well- Capitalized
As of December 31, 2018:	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital to Risk-Weighted Assets:
Consolidated	$	940,026		20.61	%	$	450,459		9.875	%	$	478,969		10.50	%		—		N/A
First Financial Bank, N.A	$	824,428		18.12	%	$	449,350		9.875	%	$	477,790		10.50	%	$	455,038		10.00	%

Tier 1 Capital to Risk-Weighted Assets:
Consolidated	$	888,015		19.47	%	$	359,226		7.875	%	$	387,737		8.50	%		—		N/A
First Financial Bank, N.A	$	772,417		16.97	%	$	358,342		7.875	%	$	386,782		8.50	%	$	364,030		8.00	%

Common Equity Tier 1 Capital to Risk-Weighted Assets:
Consolidated	$	888,015		19.47	%	$	290,802		6.375	%	$	319,312		7.00	%		—		N/A
First Financial Bank, N.A	$	772,417		16.97	%	$	290,087		6.375	%	$	318,526		7.00	%	$	295,775		6.50	%

Leverage Ratio:
Consolidated	$	888,015		11.85	%	$	299,682		4.00	%	$	299,682		4.00	%		—		N/A
First Financial Bank, N.A	$	772,417		10.35	%	$	298,576		4.00	%	$	298,576		4.00	%	$	373,220		5.00	%

In connection with the adoption of the Basel III regulatory capital framework, our subsidiary bank made the election to continue to exclude most accumulated other comprehensive income (“AOCI”) from capital in connection with its March 31, 2015 quarterly financial filing and, in effect, to retain the AOCI treatment under the prior capital rules.

In connection with the First Financial Trust & Asset Management Company, National Association’s (the “Trust Company”) application to obtain our trust charter, the Trust Company is required to maintain tangible net assets of $2,000,000 at all times. As of December 31, ~~2017,~~2019, our Trust Company had tangible net assets totaling ~~$16,602,000.~~

$28,550,000.

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

Our subsidiary bank may be required at times to maintain reserve balances with the Federal Reserve Bank. At December 31, ~~2017~~2019 and ~~2016,~~2018, the subsidiary bank’s reserve balances were ~~$11,504,000~~$17,274,000 and ~~$4,340,000,~~$11,372,000, respectively.

~~15.~~

17.

STOCK OPTION PLAN AND RESTRICTED STOCK PLAN:

The Company has an incentive stock plan to provide for the granting of options to employees of the Company at prices not less than market at the date of grant. At December 31, ~~2017,~~2019, the Company had allocated ~~3,180,000~~

5,673,000

shares of stock for issuance under the plan. The plan provides that options granted are exercisable after two years from date of grant at a rate of ~~20%~~

% each year cumulatively during the~~10-year~~

-year

term of the option. Shares are issued under the stock option plan from available authorized shares. An analysis of stock option activity for the year ended December 31, ~~2017~~2019 is presented in the table and narrative below:

   Shares    Weighted-
Average
Ex. Price    Weighted-
Average
Remaining
Contractual
Term
(Years)    Aggregate
Intrinsic
Value
($000)
Outstanding, beginning of year
   1,094,035    $ 27.40
Granted
   452,450    42.35
Exercised
   (140,250 )    20.92
Cancelled
   (80,270 )    30.33





Outstanding, end of year
   1,325,965    33.01    7.12    $ 15,966








Exercisable at end of year
   458,715    $ 23.94    4.66    $ 9,684


	Shares			Weighted- Average Ex. Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value ($000)
Outstanding, beginning of year		2,171,086		$	17.27
Granted		398,850			29.70
Exercised		(328,802	)		13.06
Cancelled		(102,938	)		19.84

Outstanding, end of year		2,138,196			20.12		6.39	$	32,040

Exercisable at end of year		885,206		$	16.08		4.88	$	16,836

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

The options outstanding at December 31, ~~2017~~2019 had exercise prices ranging between ~~$16.78~~$7.87 and ~~$42.35.~~$29.70. Stock options have been adjusted retroactively for the effects of stock dividends and splits.

The following table summarizes information concerning outstanding and vested stock options as of December 31, ~~2017:~~

Exercise Price    Number Outstanding    Remaining Contracted
Life (Years)    Number Vested
$16.78    87,640    1.4    87,640
  15.73    142,620    3.8    142,620
  30.85    270,505    5.8    156,225
  33.89    382,750    7.8    72,230
$42.35    442,450    9.5    —

2019:


Exercise Price		Number Outstanding		Remaining Contracted Life (Years)		Number Vested
$	7.87		97,456		1.8		97,456
$	15.43		336,500		3.8		336,500
$	16.95		564,440		5.8		303,160
$	21.18		747,450		7.5		148,090
$	29.70		392,350		9.5		—

The fair value of the options granted during ~~2017~~2019 and ~~2015~~2017 were estimated using the

Black-Scholes options pricing model

with the following weighted-average assumptions: risk-free interest ~~rates~~rate of ~~1.89% and 1.89%;~~

1.83

1.89

%, respectively; expected dividend ~~yields~~yield of ~~1.79%~~

1.62

% and ~~1.89%;~~

1.79

%, respectively; expected ~~lives~~life of ~~6.24~~

6.64

years and ~~5.78 years;~~

6.24

years, respectively; and expected ~~volatilities~~volatility of ~~26.51%~~

26.69

and ~~23.36%~~

26.51

%, respectively.

The weighted-average grant-date fair value of options granted during 2019 and 2017 was $7.31 and ~~2015 was $9.90 and $6.72,~~$4.95, respectively. There were no grants during ~~2016.~~2018. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017, ~~2016~~was $5,742,000, $5,476,000 and ~~2015, was~~ $3,082,000, ~~$1,226,000 and $1,539,000,~~ respectively.

As of December 31, ~~2017,~~2019, there was ~~$5,031,000~~$4,943,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of ~~2.21~~2.28 years. The total fair value of shares vested during the years ended December 31, 2019, 2018 and 2017 ~~2016~~was $1,693,000, $888,000 and ~~2015 was $1,246,000, $592,000 and $810,000.~~

$1,246,000.

The aggregate intrinsic value of vested stock options at December 31, ~~2017~~2019 totaled ~~$10,981,000.~~

$14,234,000.

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

On April 28, 2015, shareholders of the Company approved a restricted stock plan for selected employees, officers,

non-employee

directors and consultants. At December 31, ~~2017,~~2019, the Company had allocated ~~413,000~~686,000 shares of stock for issuance under the plan.

~~On July 21, 2015, 7,070 shares were granted to the tennon-employee~~ directors. Total value of these shares totaled $250,000 and was expensed over the period from grant date to April 26, 2016, the next scheduled annual shareholders’ meeting at which the directors’ current term expired.

On April 26, 2016, upon

re-election

of existing directors, 7,660 shares with a total value of $250,000 were granted to the

ten

non-employee

directors and was expensed over the period from grant day to April 25, 2017, the next scheduled annual shareholders’ meeting at which the directors’ current term expired. On April 25, 2017, upon

re-election

of existing directors, 14,650 restricted shares with a total value of $600,000 were granted to the

ten

non-employee

directors and ~~is being~~was expensed over the period from grant day to April 24, 2018, the Company’s next shareholders’ meeting at which the directors’ term expires. On April 24, 2018, upon

re-election

nine

of the existing directors, 10,710 restricted shares with a total value of $540,000 were granted to the

nine

non-employee

directors and is being expensed over the period from grant day to April 23, 2019, the Company’s next shareholders’ meeting at which the directors’ term expires. The Company recorded director expense related to these restricted stock grants of ~~$483,000, $278,000~~$620,000, $560,000 and ~~$139,000~~$483,000 for the year ended December 31, 2019, 2018, and 2017, ~~2016,~~respectively. On April 23, 2019, upon election of eleven directors, 21,714 restricted shares with a total value of $660,000 were granted to the eleven

non-employee

directors, and ~~2015, respectively.~~

is being expensed over the period from grant day to April 28, 2020, the Company’s next shareholders’ meeting at which directors’ term expires.

On October 27, 2015, the Company granted 31,273 shares with a total value of $1,060,000 to certain officers that is being expensed over the vesting period of three years. On October 25, 2016, the Company granted 15,405 shares with a total value of $560,000 to certain officers that is being expensed over the vesting period of three years. On October 24, 2017, the Company granted 14,191 restricted shares with a total value of $655,000 to certain officers that is being expensed over the vesting period of one to

three years.

On October 23, 2018, the Company granted 26,021 restricted shares with a total value of $1,440,000 to certain officers that will be expensed over a three ~~years.~~-year vesting period. On June 26, 2019, the Company granted 23,428 restricted shares with a total value of

695,000 to

certain officers that will be expensed over a three-year vesting period. On October 22, 2019, the Company granted

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Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

22,188 restricted shares with a total value of $

785,000

to certain officers that will be expensed over a three-year vesting period. The Company recorded restricted stock expense for officers of ~~$562,000, $381,000~~ $

995,000

, $

680,000

and ~~$62,000,~~$

562,000

, respectively, for the year ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015.~~

~~16.~~2017.

18.

CONDENSED FINANCIAL ~~INFORMATION—~~INFORMATION - PARENT COMPANY:

Condensed Balance Sheets-December 31, ~~2017~~2019 and ~~2016~~

   2017    2016
ASSETS
Cash in subsidiary bank
   $ 14,272    $ 15,070
Cash in unaffiliated banks
   2    2
Interest-bearing deposits in subsidiary bank
   64,195    78,179




Total cash and cash equivalents
   78,469    93,251
Securitiesavailable-for-sale, at fair value
   8,515    11,593
Investment in and advances to subsidiaries, at equity
   847,445    744,971
Intangible assets
   723    723
Other assets
   2,654    2,668




Total assets
   $ 937,806    $ 853,206




LIABILITIES AND SHAREHOLDERS’ EQUITY
Total liabilities
   $ 15,038    $ 15,321
Shareholders’ equity:

Common stock
   663    661
Capital surplus
   378,062    372,245
Retained earnings
   517,257    446,534
Treasury stock
   (7,148 )    (6,671 )
Deferred compensation
   7,148    6,671
Accumulated other comprehensive earnings
   26,786    18,445




Total shareholders’ equity
   922,768    837,885




Total liabilities and shareholders’ equity
   $ 937,806    $ 853,206

2018


	2019			2018
ASSETS

Cash in subsidiary bank	$	44,422		$	16,981
Cash in unaffiliated banks		2			2
Interest-bearing deposits in subsidiary bank		80,652			84,279

Total cash and cash equivalents		125,076			101,262
Securities available-for-sale, at fair value		6,297			6,276
Investment in and advances to subsidiaries, at equity		1,111,955			959,352
Intangible assets		723			723
Other assets		2,701			2,647

Total assets	$	1,246,752		$	1,070,260

LIABILITIES AND SHAREHOLDERS’ EQUITY

Total liabilities	$	19,555		$	16,965
Shareholders’ equity:
Common stock		1,359			678
Capital surplus		450,676			443,114
Retained earnings		707,656			606,658
Treasury stock		(8,222	)		(7,507	)
Deferred compensation		8,222			7,507
Accumulated other comprehensive earnings		67,506			2,845

Total shareholders’ equity		1,227,197			1,053,295

Total liabilities and shareholders’ equity	$	1,246,752		$	1,070,260

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

Condensed Statements of Earnings-

For the Years Ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

   2017    2016    2015
Income:

Cash dividends from subsidiaries
   $ 30,800    $ 48,800    $ 51,200
Excess of earnings over dividends of subsidiaries
   92,929    58,809    52,911
Other
   6,590    4,184    4,185






Total Income
   130,319    111,793    108,296






Expenses:

Salaries and employee benefits
   8,606    5,655    6,067
Other operating expenses
   3,871    3,531    4,439






Total Expense
   12,477    9,186    10,506






Earnings before income taxes
   117,842    102,607    97,790
Income tax benefit
   2,529    2,167    2,591






Net earnings
   $ 120,371    $ 104,774    $ 100,381

2017


	2019		2018		2017
Income:
Cash dividends from subsidiaries	$	84,500	$	74,100	$	30,800
Excess of earnings over dividends of subsidiaries		86,956		82,323		92,929

Other		7,937		7,269		6,590

Total income		179,393		163,692		130,319

Expenses:
Salaries and employee benefits		11,963		9,966		8,606

Other operating expenses		4,756		4,781		3,871

Total expense		16,719		14,747		12,477

Earnings before income taxes		162,674		148,945		117,842
Income tax benefit		2,138		1,693		2,529

Net earnings	$	164,812	$	150,638	$	120,371

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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

2017

Condensed Statements of Cash Flows-

For the Years Ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

   2017    2016    2015
Cash flows from operating activities:

Net earnings
   $ 120,371    $ 104,774    $ 100,381
Adjustments to reconcile net earnings to net cash provided by operating activities:

Excess of earnings over dividends of subsidiary bank
   (92,929 )    (58,809 )    (52,911 )
Depreciation and amortization, net
   207    208    197
Decrease (increase) in other assets
   438    1,702    507
Increase (decrease) in other liabilities
   183    (1,374 )    3,743
Other
   2    8    —






Net cash provided by operating activities
   28,272    46,509    51,917






Cash flows from investing activities:

Cash received in connection with acquisition of banks
   —      —      13,125
Maturity ofavailable-for-sale security
   2,997    —      —
Purchases of bank premises and equipment
   (30 )    (94 )    (107 )
Repayment from investment in and advances to subsidiaries, net
   —      —      5,800
Other
   —      10    —






Net cash used in (provided by) investing activities
   2,967    (84 )    18,818






Cash flows from financing activities:

Repayment of subordinated debt
   —      —      (13,125 )
Proceeds of stock issuances
   2,934    1,260    1,545
Cash dividends paid
   (48,955 )    (44,907 )    (38,767 )






Net cash used in financing activities
   (46,021 )    (43,647 )    (50,347 )






Net increase (decrease) in cash and cash equivalents
   (14,782 )    2,778    20,388
Cash and cash equivalents, beginning of year
   93,251    90,473    70,085






Cash and cash equivalents, end of year
   $ 78,469    $ 93,251    $ 90,473

2017


	2019			2018			2017
Cash flows from operating activities:
Net earnings	$	164,812		$	150,638		$	120,371
Adjustments to reconcile net earnings to net cash provided by operating activities:
Excess of earnings over dividends of subsidiary bank		(86,956	)		(82,323	)		(92,929	)
Depreciation and amortization, net		246			331			207
Decrease (increase) in other assets		1,508			560			438
Increase (decrease) in other liabilities		990			1,932			183
Other		—			(2	)		2

Net cash provided by operating activities		80,600			71,136			28,272

Cash flows from investing activities:
Cash received in connection with acquisition of banks		—			—			—
Maturity of available-for-sale security		—			2,000			2,997
Purchases of bank premises and equipment and software		(24	)		(346	)		(30	)

Net cash provided by (used in) investing activities		(24	)		1,654			2,967

Cash flows from financing activities:
Proceeds of stock issuances		4,294			3,864			2,934
Cash dividends paid		(61,056	)		(53,861	)		(48,955	)

Net cash used in financing activities		(56,762	)		(49,997	)		(46,021	)

Net increase (decrease) in cash and cash equivalents		23,814			22,793			(14,782	)
Cash and cash equivalents, beginning of year		101,262			78,469			93,251

Cash and cash equivalents, end of year	$	125,076		$	101,262		$	78,469

F-4

Table of Contents

FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~

~~17.~~2017

19.

CASH FLOW

INFORMATION:

Supplemental information on cash flows and noncash transactions is as follows (dollars in thousands):

   Year Ended December 31,
   2017    2016    2015
Supplemental cash flow information:

Interest paid
   $ 9,316    $ 5,465    $ 4,085
Federal income taxes paid
   29,695    28,348    29,674
Schedule of noncash investing and financing activities:

Assets acquired through foreclosure
   2,211    2,269    203
Investment securities purchased but not settled
   —      12,381    —
Restricted stock grant to officers and directors
   1,139    810    1,310

~~18.ACQUISITIONS AND ASSET PURCHASE:~~


	Year Ended December 31,
	2019		2018		2017
Supplemental cash flow information:
Interest paid	$	29,882	$	18,709	$	9,316
Federal income taxes paid		30,726		26,578		29,695

Schedule of noncash investing and financing activities:
Assets acquired through foreclosure		1,463		126		2,211
Investment securities purchased but not settled		—		—		—
Restricted stock grant to officers and directors		1,781		1,609		1,139

20.

ACQUISITION

On ~~April 1, 2015,~~

October 12, 2017

, we entered into an agreement and plan of reorganization to acquire ~~FBC~~Commercial Bancshares, Inc. and its wholly owned bank subsidiary, ~~First~~Commercial State Bank, ~~N.A., Conroe,~~Kingwood, Texas. On ~~July 31, 2015,~~January 1, 2018, the transaction was completed. Pursuant to the agreement, we issued ~~1,755,374~~1,289,371 shares of the Company’s common stock in exchange for all of the outstanding shares of FBC Bancshares, Inc. At closing, FBC Bancshares, Inc. was merged into the Company and First Bank, N.A., Conroe, Texas, was merged into First Financial Bank, National Association, Abilene, Texas, a wholly owned subsidiary of the Company. The primary purpose of the acquisition was to expand the Company’s market share along Interstate Highway 45 in southern Texas, north of Houston. Factors that contributed to a purchase price resulting in goodwill include First Bank, N.A.’s historic record of earnings, strong local economic environment and opportunity for growth. The results of operations from this acquisition are included in the consolidated earnings of the Company commencing August 1, 2015.

The assets acquired and liabilities assumed were recorded on the consolidated balance sheet at estimated fair value on the acquisition date. The acquisition was not considered to be a significant business combination. The following table presents the amounts recorded on the consolidated balance sheet on the acquisition date (dollars in thousands):

Fair value of consideration paid:

Common stock issued (1,755,374 shares)
   $ 59,648


Fair value of identifiable assets acquired:

Cash and cash equivalents
   65,197
Securitiesavailable-for-sale
   42,903
Loans
   248,380
Identifiable intangible assets
   2,343
Other assets
   15,262


Total identifiable assets acquired
   374,085


Fair value of liabilities assumed:

Deposits
   343,583
Subordinated debt
   13,125
Other liabilities
   1,651


Total liabilities assumed
   358,359


Fair value of net identifiable assets acquired
   15,726


Goodwill resulting from acquisition
   $ 43,922

Goodwill recorded in the acquisition was accounted for in accordance with the authoritative business combination guidance. Accordingly, goodwill will not be amortized, but will be tested for impairment annually. The goodwill recorded is not deductible for federal income tax purposes.

~~FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2017, 2016 and 2015~~

~~The subordinated debt of $13,125,000 was paid off August 3, 2015, subsequent to closing.~~

The fair value of total loans acquired was $248,380,000 at acquisition compared to contractual amounts of $252,458,000. The fair value of purchased credit impaired loans at acquisition was $1,398,000 compared to contractual amounts of $1,704,000. Additional purchased credit impaired loan disclosures were omitted due to immateriality. All other acquired loans were considered performing loans.

First Bank, N.A. had branches in Conroe, Magnolia, Tomball, Willis, Cut and Shoot and Huntsville, all located north of Houston, Texas. In February 2016, the Company closed First Bank’s Huntsville location and consolidated the branch with the Company’s existing Huntsville location.

On April 8, 2015, the Company announced that it had entered into an asset purchase agreement with 4Trust Mortgage, Inc. for a cash purchase price of $1,900,000. The asset purchase was finalized on June 1, 2015. The total asset purchase price exceeded the estimated fair value of assets purchased by approximately $1,750,000 and the Company recorded such excess as goodwill.

~~19.SUBSEQUENT EVENT~~

~~On January 1, 2018, the Company acquired 100% of the outstanding capital stock of~~ Commercial Bancshares, Inc. through the merger of a wholly owned subsidiary with and into Commercial Bancshares, Inc. Following such merger, Commercial Bancshares, Inc. and its wholly owned subsidiary, Commercial State Bank, Kingwood, Texas, were merged into the Company and First Financial Bank, National Association, respectively. Considerations paid to the shareholders of Commercial Bancshares, Inc. totaled 1,289,371 shares of the company’s common stock with an aggregate value of $59,400,000 at January 1, 2018.

In addition, Commercial Bancshares, Inc. made a $22,075,000 special dividend to its shareholders prior to closing of the transaction, which was increased for the amount by which Commercial Bancshares, Inc.’s consolidated shareholders’ equity as of January 1, 2018 exceeded $42,402,000, after certain adjustments per the merger agreement.

At ~~December 31, 2017,~~closing, Commercial Bancshares, Inc. was merged into the Company and Commercial State Bank, Kingwood, Texas, was merged into First Financial Bank, National Association, Abilene, Texas, a wholly owned subsidiary of the Company. The primary purpose of the acquisition was to expand the Company’s market share around Houston. Factors that contributed to a purchase price resulting in goodwill include Commercial State Bank’s record of earnings, strong management and board of directors, strong local economic environment and opportunity for growth. The results of operations from this acquisition are included in the consolidated earnings of the Company commencing January 1, 2018.

F-4


			Page
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS				1

PART I
ITEM 1.	Business			2
ITEM 1A.	Risk Factors			18
ITEM 1B.	Unresolved Staff Comments			30 31
ITEM 2.	Properties			30 31
ITEM 3.	Legal Proceedings			30 31
ITEM 4.	Mine Safety Disclosures			30 31

PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		31
ITEM 6.	Selected Financial Data			30 34
ITEM 6. 7.	~~Selected Financial Data~~			33
~~ITEM 7.~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations				34 35
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk			49 52
ITEM 8.	Financial Statements and Supplementary Data			49 52
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		55
ITEM 9A.	Controls and Procedures			51 55
ITEM ~~9A.~~ 9B.	~~Controls and Procedures~~Other Information			51 57
~~ITEM 9B.~~	~~Other Information~~			53

PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance			54 58
ITEM 11.	Executive Compensation			54 58
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters				54 58
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence			54 58
ITEM 14.	Principal Accounting Fees and Services			54 58

PART IV
ITEM 15.	Exhibits, Financial Statement Schedules			55 59
ITEM 16.
~~EXHIBITS INDEX~~Form 10-K Summary		56 61
~~SIGNATURES~~				57
SIGNATURES				62


	Period Ending
*Index*	12/31/12		12/31/13		12/31/14		12/31/15		12/31/16		12/31/17
First Financial Bankshares, Inc.		100.00		172.67		158.94		163.76		250.31		253.94
Russell 3000		100.00		133.55		150.32		151.04		170.28		206.26
SNL Bank$5B-$10B Index		100.00		154.28		158.92		181.04		259.37		258.40


	Period Ending
Index	12/31/14		12/31/15		12/31/16		12/31/17		12/31/18		12/31/19
First Financial Bankshares, Inc.		100.00		103.03		157.49		159.77		207.64		256.36
Russell 3000		100.00		100.48		113.27		137.21		130.02		170.35
SNL Bank $5B-$10B Index		100.00		113.92		163.20		162.59		147.15		182.34


	2018
	4 th		3 rd		2 nd		1 st
	(dollars in thousands, except per share amounts)
Summary Income Statement Information:
Interest income	$	76,481	$	74,049	$	72,078	$	69,082
Interest expense		6,207		4,623		4,467		3,633

Net interest income		70,274		69,426		67,611		65,449
Provision for loan losses		1,800		1,450		1,105		1,310

Net interest income after provision for loan losses		68,474		67,976		66,506		64,139
Noninterest income		24,789		26,997		25,421		23,202
Net gain on securities transactions		8		58		67		1,221
Noninterest expense		48,235		47,506		47,144		47,798

Earnings before income taxes		45,036		47,525		44,850		40,764
Income tax expense		6,599		7,475		7,217		6,245

Net earnings	$	38,437	$	40,050	$	37,633	$	34,519

Per Share Data:
Earnings per share, basic	$	0.28	$	0.30	$	0.28	$	0.26
Earnings per share, assuming dilution		0.28		0.29		0.28		0.25
Cash dividends declared		0.11		0.11		0.11		0.10
Book value at period-end		7.77		7.35		7.28		7.17

Common stock sales price:
High	$	33.42	$	30.93	$	28.18	$	24.80
Low		26.73		25.28		27.53		22.03
Close		28.85		29.55		25.45		23.15


Bridgeport and Wise County	13.5%	Weatherford, Willow Park, Aledo and Parker County	23.6%
Fort Worth and Tarrant County	21.5%	Stephenville and Erath County	18.0%
Cleburne and Johnson County	11.7%	Conroe and Montgomery County	41.3%
Granbury and Hood County	31.1%	*Source: U. S. Census Bureau


	2017 Compared to 2016							2016 Compared to 2015
	Change Attributable to					Total Change		Change Attributable to						Total Change
	Volume			Rate		Total Change		Volume			Rate			Total Change
Short-term investments	$	443		$	899	$	1,342	$	23		$	111		$	134
Taxable investment securities		3,464			1,735		5,199		(1,218	)		(829	)		(2,047	)
Tax-exempt investment securities (1)		1,173			677		1,850		6,548			(1,687	)		4,861
Loans (1) (2)		4,998			851		5,849		12,037			(2,320	)		9,717

Interest income		10,078			4,162		14,240		17,390			(4,725	)		12,665
Interest-bearing deposits		409			3,300		3,709		219			643			862
Short-term borrowings		(223	)		351		128		24			477			501

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

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


	2017			Increase (Decrease)			2016		Increase (Decrease)			2015
Trust fees	$	23,694		$	4,058		$	19,636	$	384		$	19,252
Service charges on deposit accounts		19,416			1,030			18,386		1,215			17,171
ATM, interchange and credit card fees		25,686			1,776			23,910		2,050			21,860
Real estate mortgage operations		15,109			(977	)		16,086		5,677			10,409
Net gain on sale ofavailable-for-sale securities		1,828			558			1,270		838			432
Net gain (loss) on sale of foreclosed assets		(50	)		(506	)		456		(82	)		538
Net gain (loss) on sale of assets		(396	)		(564	)		168		988			(820	)
Interest on loan recoveries		1,128			(984	)		2,112		1,062			1,050
Other:
Check printing fees		173			(17	)		190		(40	)		230
Safe deposit rental fees		529			(2	)		531		7			524
Credit life and debt protection fees		617			(2	)		619		(44	)		663
Brokerage commissions		1,290			717			573		(190	)		763
Miscellaneous income		1,993			798			1,195		(165	)		1,360

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

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


	One Year or less		After One Year Through Five Years		After Five Years		Total
Commercial and agricultural	$	348,129	$	222,342	$	208,171	$	778,642
Real estate — construction		133,621		64,896		210,911		409,428


	Maturities After One Year
Loans with fixed interest rates	$	414,091
Loans with floating or adjustable interest rates		292,229


	Maturities After One Year
Loans with fixed interest rates	$	407,307
Loans with floating or adjustable interest rates		366,299


	Maturing
	One Year or Less					After One Year Through Five Years					After Five Years Through Ten Years					After Ten Years					Total
Available-for-Sale:	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Obligations of U.S. government sponsored enterprises and agencies	$	34,981		1.30	%	$	25,349		1.51	%	$	—		—	%	$	—		—	%	$	60,330		1.39	%
Obligations of states and political subdivisions		139,568		5.03			628,506		5.13			650,699		4.74			2,077		6.68			1,420,850		4.94
Corporate bonds and other securities		10,998		2.96			237		1.15			224		2.64			—		—			11,459		2.92
Mortgage-backed securities		55,430		1.66			1,027,515		2.31			459,286		2.69			52,603		2.93			1,594,834		2.42

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


	As of December 31, 2017
Three months or less	$	81,918
Over three through six months		64,396
Over six through twelve months		70,470
Over twelve months		33,670

Total time deposits of $100,000 or more	$	250,454


	As of December 31, 2019
Three months or less	$	88,562
Over three through six months		51,351
Over six through twelve months		64,700
Over twelve months		33,672

Total time deposits of $100,000 or more	$	238,285


	Payment Due by Period
	Total Amounts		Less than 1 year		More than 1 year but less than 3 years		More than 3 year but less than 5 years		Over 5 years
Deposits with stated maturity dates	$	451,255	$	384,668	$	52,638	$	13,949	$	—
Pension obligation		10,567		1,064		2,054		2,140		5,309
Operating leases		909		385		476		48		—
Outsourcing service contracts		3,610		2,077		1,533		—		—

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


	2017
	4^th		3^rd		2^nd		1^st
	(dollars in thousands, except per share amounts)
Summary Income Statement Information:
Interest income	$	63,456	$	62,554	$	61,182	$	58,783
Interest expense		2,562		2,866		2,097		1,763

Net interest income		60,894		59,688		59,085		57,020
Provision for loan losses		1,440		1,415		1,725		1,950

Net interest income after provision for loan losses		59,454		58,273		57,360		55,070
Noninterest income		22,298		23,185		22,423		21,283
Net gain on securities transactions		3		1,075		747		3
Noninterest expense		44,095		43,964		43,775		42,152

Earnings before income taxes		37,660		38,569		36,755		34,204
Income tax expense		1,517		9,195		8,500		7,605

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


Per Share Data:
Earnings per share, basic	$	0.55	$	0.44	$	0.43	$	0.40
Earnings per share, assuming dilution		0.54		0.44		0.43		0.40
Cash dividends declared		0.19		0.19		0.19		0.18
Book value atperiod-end		13.93		13.69		13.41		12.99

Common stock sales price:
High	$	48.85	$	46.00	$	44.80	$	46.45
Low		43.05		37.31		36.85		37.55
Close		45.05		45.20		44.20		40.10


How We Addressed the Matter in Our Audit		We obtained an understanding of the Company’s process for establishing the allowance for loan losses, including the qualitative reserves included in the ALL. We evaluated the design and tested the operating effectiveness of the controls and governance over the appropriateness of the qualitative reserve methodology, including the identification and the assessment for the need for qualitative reserves, the reliability and accuracy of data used to estimate the various components of the qualitative reserves, and management’s review and approval of the qualitative reserves. To test the qualitative reserves, we evaluated the identification and measurement of the qualitative reserves, including the basis for concluding the qualitative reserves were warranted when considering historical loss rates utilized in the historical valuation reserve, tested the completeness and accuracy of data used by the Company to estimate the qualitative reserves, recalculated the analyses used by management to determine the qualitative reserves, and analyzed the changes in assumptions and components of the qualitative reserves relative to changes in the Company’s loan portfolio. For example, we evaluated the data and information utilized by management to estimate the qualitative reserves by independently obtaining and comparing such data and information to historical loan data and third-party macroeconomic data to assess the appropriateness of the information and to consider whether new or contradictory information existed. Additionally, we evaluated the Company’s analysis of the overall ALL amount, inclusive of the qualitative reserves, giving consideration to the Company’s loan portfolio, economic trends, and historical loss factors.


	Common Stock				Capital Surplus		Retained Earnings			Treasury Stock						Deferred Compensation		Accumulated Other Comprehensive Earnings (Losses)			Total Shareholders’ Equity
	Shares		Amount		Capital Surplus		Retained Earnings			Shares			Amounts			Deferred Compensation		Accumulated Other Comprehensive Earnings (Losses)			Total Shareholders’ Equity
BALANCE, December 31, 2014		64,089,921	$	641	$	305,429	$	327,978			(529,563	)	$	(5,878	)	$	5,878	$	47,489		$	681,537
Net earnings		—		—		—		100,381			—			—			—		—			100,381
Stock issued in acquisition of FBC Bancshares, Inc.		1,755,374		18		59,630		—			—			—			—		—			59,648
Stock option exercises		105,121		1		1,544		—			—			—			—		—			1,545
Restricted Stock grant		39,818		—		1,350		—			—			—			—		—			1,350
Cash dividends declared, $0.62 per share		—		—		—		(40,353	)		—			—			—		—			(40,353	)
Minimum liability pension adjustment, net of related income taxes		—		—		—		—			—			—			—		(1,291	)		(1,291	)
Change in unrealized gain (loss) in investment securitiesavailable-for-sale, net of related income taxes		—		—		—		—			—			—			—		1,197			1,197
Additional tax benefit related to directors’ deferred compensation plan		—		—		328		—			—			—			—		—			328
Shares purchased in connection with directors’ deferred compensation plan, net		—		—		—		—			8,912			(418	)		418		—			—
Stock option expense		—		—		644		—			—			—			—		—			644

BALANCE, December 31, 2015		65,990,234	$	660	$	368,925	$	388,006			(520,651	)	$	(6,296	)	$	6,296	$	47,395		$	804,986

Net earnings		—		—		—		104,774			—			—			—		—			104,774
Stock option exercises		82,871		1		1,259		—			—			—			—		—			1,260
Restricted Stock grant		21,590		—		809		—			—			—			—		—			809
Cash dividends declared, $0.70 per share		—		—		—		(46,246	)		—			—			—		—			(46,246	)
Minimum liability pension adjustment, net of related income taxes		—		—		—		—			—			—			—		917			917
Change in unrealized gain (loss) in investment securitiesavailable-for-sale, net of related income taxes		—		—		—		—			—			—			—		(29,867	)		(29,867	)
Additional tax benefit related to directors’ deferred compensation plan		—		—		370		—			—			—			—		—			370
Shares purchased in connection with directors’ deferred compensation plan, net		—		—		—		—			13,242			(375	)		375		—			—
Stock option expense		—		—		882		—			—			—			—		—			882

BALANCE, December 31, 2016		66,094,695	$	661	$	372,245	$	446,534			(507,409	)	$	(6,671	)	$	6,671	$	18,445		$	837,885

Net earnings		—		—		—		120,371			—			—			—		—			120,371
Stock option exercises		140,250		2		2,933					—			—			—		—			2,935
Restricted Stock grant		25,499		—		1,139					—			—			—		—			1,139
Cash dividends declared, $0.75 per share		—		—		—		(49,648	)		—			—			—		—			(49,648	)
Minimum liability pension adjustment, net of related income taxes		—		—		—		—			—			—			—		677			677
Change in unrealized gain (loss) in investment securitiesavailable-for-sale, net of related income taxes		—		—		—		—			—			—			—		7,664			7,664
Shares purchased (redeemed) in connection with directors’ deferred compensation plan, net		—		—		—		—			11,445			(477	)		477		—			—
Stock option expense		—		—		1,745		—			—			—			—		—			1,745

BALANCE, December 31, 2017		66,260,444	$	663	$	378,062	$	517,257			(495,964	)	$	(7,148	)	$	7,148	$	26,786		$	922,768


	Net Earnings (in thousands)		Weighted Average Shares		Per Share Amount
For the year ended December 31, 2017:
Net earnings per share, basic	$	120,371		66,126,863	$	1.82
Effect of stock options and stock grants		—		197,467		(0.01	)

Net earnings per share, assuming dilution	$	120,371		66,324,330	$	1.81

For the year ended December 31, 2016:
Net earnings per share, basic	$	104,774		66,013,004	$	1.59
Effect of stock options and stock grants		—		89,882		—

Net earnings per share, assuming dilution	$	104,774		66,102,886	$	1.59

For the year ended December 31, 2015:
Net earnings per share, basic	$	100,381		64,892,934	$	1.55
Effect of stock options and stock grants		—		175,096		(0.01	)

Net earnings per share, assuming dilution	$	100,381		65,068,030	$	1.54


	December 31, 2017
	Amortized Cost Basis		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
Securitiesavailable-for-sale:
Obligations of U.S. government sponsored enterprises and agencies	$	60,516	$	—	$	(186	)	$	60,330
Obligations of state and political subdivisions		1,369,295		52,491		(936	)		1,420,850
Corporate bonds and other		11,421		43		(5	)		11,459
Residential mortgage-backed securities		1,223,452		4,561		(8,916	)		1,219,097
Commercial mortgage-backed securities		377,934		263		(2,460	)		375,737

Total securitiesavailable-for-sale	$	3,042,618	$	57,358	$	(12,503	)	$	3,087,473


	December 31, 2016
	Amortized Cost Basis		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
Securitiesavailable-for-sale:
U.S. Treasury securities	$	10,649	$	19	$	—		$	10,668
Obligations of U.S. government sponsored enterprises and agencies		113,450		253		—			113,703
Obligations of state and political subdivisions		1,534,095		40,194		(10,013	)		1,564,276
Corporate bonds and other		51,920		476		(3	)		52,393
Residential mortgage-backed securities		848,614		8,260		(5,513	)		851,361
Commercial mortgage-backed securities		269,044		622		(1,230	)		268,436

Total securitiesavailable-for-sale	$	2,827,772	$	49,824	$	(16,759	)	$	2,860,837


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


December 31, 2017	15-59 Days Past Due*		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Total Current		Total Loans		Total 90 Days Past Due Still Accruing
Commercial	$	2,039	$	1,104	$	1,081	$	4,224	$	679,875	$	684,099	$	7
Agricultural		640		—		—		640		93,903		94,543		—
Real Estate		12,308		511		1,198		14,017		2,288,981		2,302,998		216
Consumer		1,360		361		135		1,856		402,073		403,929		65

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


	Year Ended December 31, 2017						Year Ended December 31, 2016
	Number		Pre-Modification Recorded Investment		Post- Modification Recorded Investment		Number		Pre-Modification Recorded Investment		Post- Modification Recorded Investment
Commercial		11	$	895	$	895		15	$	3,208	$	3,208
Agricultural		—		—		—		—		—		—
Real Estate		5		625		625		6		1,460		1,460
Consumer		1		25		25		7		189		189

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


	Year Ended December 31, 2017				Year Ended December 31, 2016
	Number		Balance		Number		Balance
Commercial		2	$	88		4	$	1,690
Agriculture		—		—		—		—
Real Estate		—		—		3		921
Consumer		—		—		—		—

Total		2	$	88		7	$	2,611


December 31, 2019:	Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
IRLCs	$	47,415	$	886	$	—
Forward mortgage-backed securities trades		78,500		—		152


	As a Percent of Pretax Earnings
	2017			2016			2015
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
Restatement of net deferred tax liability due to change in income tax rate		(5.3	)		—			—
Reductions in tax rate resulting from interest income exempt from federal income tax		(11.5	)		(12.1	)		(11.4	)
Effect of state income tax		0.1			0.1			0.1
ESOP tax deduction		(0.2	)		(0.2	)		(0.2	)
Other		0.1			0.1			0.3

Effective income tax rate		18.2	%		22.9	%		23.8	%


	2017				2016				Fair Value Hierarchy
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Fair Value Hierarchy
Cash and due from banks	$	209,583	$	209,583	$	204,782	$	204,782	Level 1
Federal funds sold		—		—		3,130		3,130	Level 1
Interest-bearing deposits in banks		162,764		162,764		48,574		48,574	Level 1
Interest-bearing time deposits in banks		1,458		1,458		1,707		1,709	Level 2
Available-for-sale securities		3,087,473		3,087,473		2,860,837		2,860,837	Levels 1 and 2
Held-to-maturity securities		—		—		121		124	Level 2
Loans		3,452,543		3,470,133		3,338,426		3,361,735	Level 3
Accrued interest receivable		36,081		36,081		36,469		36,469	Level 2
Deposits with stated maturities		451,255		452,000		508,996		510,304	Level 2
Deposits with no stated maturities		5,511,706		5,511,706		4,969,543		4,969,543	Level 1
Borrowings		331,000		331,000		445,770		445,770	Level 2
Accrued interest payable		197		197		225		225	Level 2


	December 31, 2017 Allocation			December 31, 2016 Allocation			Targeted Allocation
Equity securities		75	%		77	%		75	%
Debt securities		24	%		22	%		25	%
Cash and equivalents		1	%		1	%		—


	Shares			Weighted- Average Ex. Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value ($000)
Outstanding, beginning of year		1,094,035		$	27.40
Granted		452,450			42.35
Exercised		(140,250	)		20.92
Cancelled		(80,270	)		30.33

Outstanding, end of year		1,325,965			33.01		7.12	$	15,966

Exercisable at end of year		458,715		$	23.94		4.66	$	9,684


Exercise Price	Number Outstanding		Remaining Contracted Life (Years)	Number Vested
$16.78		87,640	1.4		87,640
15.73		142,620	3.8		142,620
30.85		270,505	5.8		156,225
33.89		382,750	7.8		72,230
$42.35		442,450	9.5		—


Fair value of consideration paid:
Common stock issued (1,755,374 shares)	$	59,648

Fair value of identifiable assets acquired:
Cash and cash equivalents		65,197
Securitiesavailable-for-sale		42,903
Loans		248,380
Identifiable intangible assets		2,343
Other assets		15,262

Total identifiable assets acquired		374,085

Fair value of liabilities assumed:
Deposits		343,583
Subordinated debt		13,125
Other liabilities		1,651

Total liabilities assumed		358,359

Fair value of net identifiable assets acquired		15,726

Goodwill resulting from acquisition	$	43,922


Fair value of consideration paid:
Common stock issued ( 1,289,371 shares)	$	58,087


Fair value of identifiable assets acquired:
Cash and cash equivalents		18,653
Securities available-for-sale		64,501
Loans		266,327
Identifiable intangible assets		3,167
Other assets		15,375

Total identifiable assets acquired		368,023

Fair value of liabilities assumed:
Deposits		341,902
Other liabilities		(373	)

Total liabilities assumed		341,529

Fair value of net identifiable assets acquired		26,494

Goodwill resulting from acquisition	$	31,593