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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
Commission file number
0-7674
 
 
FIRST FINANCIAL BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Texas
 
75-0944023
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
400 Pine Street, Abilene, Texas
 
79601
(Address of principal executive offices)
 
(Zip Code)
(325)
627-7155
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock, $0.01 par value
 
FFIN
 
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
Non-accelerated
filer
     Smaller reporting company  
     Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act).    Yes  ☐    No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class
 
Outstanding at November 4, 2020
Common Stock, $0.01 par value per share
 
142,113,899
 
 
 

Table of Contents
TABLE OF
CONTENTS
 
 
 
      
Page
 
1.
  Consolidated Financial Statements - Unaudited      3  
      Consolidated Balance Sheets – Unaudited      4  
      Consolidated Statements of Earnings – Unaudited      5  
      Consolidated Statements of Comprehensive Earnings – Unaudited      6  
      Consolidated Statements of Shareholders’ Equity – Unaudited      7  
      Consolidated Statements of Cash Flows – Unaudited      9  
      Notes to Consolidated Financial Statements – Unaudited      10  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations      39  
  Quantitative and Qualitative Disclosures About Market Risk      63  
  Controls and Procedures      63  
 
 
1.
  Legal Proceedings      64  
1A.
  Risk Factors      64  
2.
  Unregistered Sales of Equity Securities and Use of Proceeds      64  
3.
  Defaults Upon Senior Securities      65  
4.
  Mine Safety Disclosures      65  
5.
  Other Information      65  
6.
  Exhibits      66  
  Signatures      68  
 
2

Table of Contents
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The consolidated balance sheets of First Financial Bankshares, Inc. and Subsidiaries (the “Company” or “we”) at September 30, 2020 and 2019 (unaudited) and December 31, 2019, and the consolidated statements of earnings, comprehensive earnings and shareholders’ equity for the three and nine-months ended September 30, 2020 and 2019 (unaudited), and the consolidated statements of cash flows for the nine-months ended September 30, 2020 and 2019 (unaudited) and notes to consolidated financial statements (unaudited), follow on pages 4 through 38.
 
3

Table of Contents
 
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
 
  
September 30,
 
 
December 31,
 
 
  
2020
 
 
2019
 
 
2019
 
 
  
(Unaudited)
 
 
 
 
ASSETS
  
     
 
     
CASH AND DUE FROM BANKS
   $ 175,088     $ 198,855     $ 231,534  
FEDERAL FUNDS SOLD
                       3,150  
INTEREST-BEARING DEMAND DEPOSITS IN BANKS
     58,933       31,410       47,920  
  
 
 
   
 
 
   
 
 
 
Total cash and cash equivalents
     234,021       230,265       282,604  
SECURITIES
AVAILABLE-FOR-SALE,
at fair value
     4,431,280       3,397,156       3,413,317  
LOANS:
      
Held-for-investment
     5,293,679       4,100,316       4,194,969  
Less - allowance for loan losses
     (76,038     (51,889     (52,499
  
 
 
   
 
 
   
 
 
 
Net loans
held-for-investment
     5,217,641       4,048,427       4,142,470  
Held-for-sale ($94,666, $39,735 and $23,076 at fair value at September 30, 2020 and 2019 and
 
 
 
December 31, 2019, respectively)
     101,055       40,499       28,228  
  
 
 
   
 
 
   
 
 
 
Net loans
     5,318,696       4,088,926       4,170,698  
BANK PREMISES AND EQUIPMENT, net
     141,002       132,367       131,022  
GOODWILL AND INTANGIBLE ASSETS, net
     318,875       173,905       173,667  
OTHER ASSETS
     123,778       91,220       90,919  
  
 
 
   
 
 
   
 
 
 
Total assets
   $ 10,567,652     $ 8,113,839     $ 8,262,227  
  
 
 
   
 
 
   
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
      
NONINTEREST-BEARING DEPOSITS
   $ 2,950,407     $ 2,210,997     $ 2,065,128  
INTEREST-BEARING DEPOSITS
     5,344,481       4,186,686       4,538,678  
  
 
 
   
 
 
   
 
 
 
Total deposits
     8,294,888       6,397,683       6,603,806  
DIVIDENDS PAYABLE
     18,476       16,299       16,306  
BORROWINGS
     503,163       400,155       381,356  
OTHER LIABILITIES
     131,624       94,604       33,562  
  
 
 
   
 
 
   
 
 
 
Total liabilities
     8,948,151       6,908,741       7,035,030  
  
 
 
   
 
 
   
 
 
 
COMMITMENTS AND CONTINGENCIES
      
SHAREHOLDERS’ EQUITY:
      
Common stock - ($0.01 par value, authorized 200,000,000 shares; 142,121,595, 135,822,456 and
 135,891,755 shares issued at September 30, 2020 and 2019 and December 31, 2019, respectively)
     1,421       1,358       1,359  
Capital surplus
     668,815       448,968       450,676  
Retained earnings
     797,202       682,575       707,656  
Treasury stock (shares at cost: 934,859, 928,287 and 927,408 at September 30, 2020 and 2019 and
 
 
 
 
December 31, 2019, respectively)
     (8,780     (8,042     (8,222
Deferred compensation
     8,780       8,042       8,222  
Accumulated other comprehensive earnings, net of income taxes
     152,063       72,197       67,506  
  
 
 
   
 
 
   
 
 
 
Total shareholders’ equity
     1,619,501       1,205,098       1,227,197  
  
 
 
   
 
 
   
 
 
 
Total liabilities and shareholders’ equity
   $ 10,567,652     $ 8,113,839     $ 8,262,227  
  
 
 
   
 
 
   
 
 
 
See notes to consolidated financial statements.
 
4

Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)
(Dollars in thousands, except per share amounts)
 
     Three
-
Months Ended
 
September 30,
    
Nine
-
Months
Ended
 
September 30,
 
     2020     2019      2020      2019  
INTEREST INCOME:
          
Interest and fees on loans
   $ 66,372     $ 57,123      $ 195,299      $ 166,095  
Interest on investment securities:
          
Taxable
     12,063       14,292        40,748        41,505  
Exempt from federal income tax
     12,877       8,795        34,721        27,801  
Interest on federal funds sold and interest-bearing
demand
deposits in banks
     61       381        903        1,668  
  
 
 
   
 
 
    
 
 
    
 
 
 
Total interest income
     91,373       80,591        271,671        237,069  
INTEREST EXPENSE:
          
Interest on deposits
     2,063       7,123        11,293        21,070  
Other
     100       830        1,030        2,231  
  
 
 
   
 
 
    
 
 
    
 
 
 
Total interest expense
     2,163       7,953        12,323        23,301  
  
 
 
   
 
 
    
 
 
    
 
 
 
Net interest income
     89,210       72,638        259,348        213,768  
PROVISION FOR
CREDIT
 LOSSES
     9,000       450        27,550        2,015  
  
 
 
   
 
 
    
 
 
    
 
 
 
Net interest income after provision
s
 for
c
redit
 losses
     80,210       72,188        231,798        211,753  
  
 
 
   
 
 
    
 
 
    
 
 
 
NONINTEREST INCOME:
          
Trust fees
     7,461       7,051        21,859        21,057  
Service charges on deposit accounts
     5,009       5,629        15,242        16,179  
ATM, interchange and credit card fees
     8,644       7,728        24,093        21,920  
Gain on sale and fees on mortgage loans
     15,228       5,733        32,756        13,928  
Net gain on sale of
available-for-sale
securities (includes $36 and $52 for the three
-
months ended September 30, 2020 and 2019, respectively, and $3,610 and $728 for the nine
-
months ended September 30, 2020 and 2019, respectively, related to accumulated other comprehensive earnings reclassifications)
     36       52        3,610        728  
Net gain on sale of foreclosed assets
     19       71        72        193  
Net gain (loss) on sale of assets
     (2     235        90        241  
Interest on loan recoveries
     202       575        621        1,815  
Other
     1,978       1,595        5,883        5,020  
  
 
 
   
 
 
    
 
 
    
 
 
 
Total noninterest income
     38,575       28,669        104,226        81,081  
NONINTEREST EXPENSE:
          
Salaries, commissions and employee benefits
     33,649       28,550        94,105        82,468  
Loss from partial settlement of pension plan
                         900  
Net occupancy expense
     3,193       2,830        9,321        8,372  
Equipment expense
     2,157       2,225        6,242        7,009  
FDIC insurance premiums
     587       15        1,095        1,091  
ATM, interchange and credit card expenses
     2,829       2,627        8,424        7,437  
Professional and service fees
     2,237       1,902        7,327        5,721  
Printing, stationery and supplies
     615       480        1,714        1,348  
Operational and other losses
     621       507        1,925        1,253  
Software amortization and expense
     2,265       1,767        6,299        5,147  
Amortization of intangible assets
     490       246        1,507        778  
Other
     6,950       7,761        26,274        23,059  
  
 
 
   
 
 
    
 
 
    
 
 
 
Total noninterest expense
     55,593       48,910        164,233        144,583  
  
 
 
   
 
 
    
 
 
    
 
 
 
EARNINGS BEFORE INCOME TAXES
     63,192       51,947        171,791        148,251  
INCOME TAX EXPENSE
(includes $8 and $11 for the three
-months
ended September 30, 2020 and 2019, respectively, and $758 and $153 for the nine
-months
ended September 30, 2020 and 2019, respectively, related to income tax expense from reclassification items)
     10,335       8,867        28,233        24,827  
  
 
 
   
 
 
    
 
 
    
 
 
 
NET EARNINGS
   $ 52,857     $ 43,080      $ 143,558      $ 123,424  
  
 
 
   
 
 
    
 
 
    
 
 
 
EARNINGS PER SHARE, BASIC
   $ 0.37     $ 0.32      $ 1.01      $ 0.91  
  
 
 
   
 
 
    
 
 
    
 
 
 
EARNINGS PER SHARE, DILUTED
   $ 0.37     $ 0.32      $ 1.01      $ 0.91  
  
 
 
   
 
 
    
 
 
    
 
 
 
DIVIDENDS PER SHARE
   $ 0.13     $ 0.12      $ 0.38      $ 0.35  
  
 
 
   
 
 
    
 
 
    
 
 
 
See notes to consolidated financial statements.
 
5

Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED)
(Dollars in thousands)
 
     Three
-
Month
s
 
Ended
September 30,
    Nine
-
Months Ended
September 30,
 
     2020     2019     2020     2019  
NET EARNINGS
   $ 52,857     $ 43,080     $ 143,558     $ 123,424  
OTHER ITEMS OF COMPREHENSIVE EARNINGS:
        
Change in unrealized gain on investment securities
available-for-sale,
before income taxes
     1,083       16,446       110,644       88,517  
Reclassification adjustment for realized gains on investment securities included in net earnings,
 
 
 
before income tax
     (36     (52     (3,610     (728
  
 
 
   
 
 
   
 
 
   
 
 
 
Total other items of comprehensive earnings
     1,047       16,394       107,034       87,789  
Income tax expense related to other items of comprehensive earnings
     (220     (3,444     (22,477     (18,437
  
 
 
   
 
 
   
 
 
   
 
 
 
COMPREHENSIVE EARNINGS
   $ 53,684     $ 56,030     $ 228,115     $ 192,776  
  
 
 
   
 
 
   
 
 
   
 
 
 
See notes to consolidated financial statements.
 
6

Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
Accumulated
 
  
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
Other
 
  
Total
 
 
  
Common Stock
 
  
Capital
Surplus
 
  
Retained
Earnings
 
 
Treasury Stock
 
 
Deferred
Compensation
 
  
Comprehensive
Earnings
 
  
Shareholders’
Equity
 
 
  
Shares
 
  
Amount
 
 
Shares
 
 
Amounts
 
Balances at June 30, 2019 (unaudited)
    135,809,224     $ 1,358     $ 448,349     $ 655,794       (929,441   $ (7,823   $ 7,823     $ 59,247     $ 1,164,748  
Net earnings (unaudited)
    —         —         —         43,080       —         —         —         —         43,080  
Stock option exercises (unaudited)
    13,232       —         188       —         —         —         —         —         188  
Cash dividends declared, $0.12 per share (unaudited)
    —         —         —         (16,299     —         —         —         —         (16,299
Change in unrealized gain in investment securities
available-for-sale,
net of related income taxes (unaudited)
    —         —         —         —         —         —         —         12,950       12,950  
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)
    —         —         —         —         1,154       (219     219       —         —    
Stock option expense (unaudited)
    —         —         431       —         —         —         —         —         431  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balances at September 30, 2019 (unaudited)
    135,822,456     $ 1,358     $ 448,968     $ 682,575       (928,287   $ (8,042   $ 8,042     $ 72,197     $ 1,205,098  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balances at June 30, 2020 (unaudited)
    142,035,396     $ 1,420     $ 666,963     $ 762,830       (932,018   $ (8,697   $ 8,697     $ 151,236     $ 1,582,449  
Net earnings (unaudited)
    —         —         —         52,857       —         —         —         —         52,857  
Stock option exercises (unaudited)
    86,199       1       1,508       —         —         —         —         —         1,509  
Cash dividends declared, $0.13 per share (unaudited)
    —         —         —         (18,485     —         —         —         —         (18,485
Change in unrealized gain in investment securities
available-for-sale,
net of related income taxes (unaudited)
    —         —         —         —         —         —         —         827       827  
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)
    —         —         —         —         (2,841     (83     83       —         —    
Stock option expense (unaudited)
    —         —         344       —         —         —         —         —         344  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balances at September 30, 2020 (unaudited)
    142,121,595     $ 1,421     $ 668,815     $ 797,202       (934,859   $ (8,780   $ 8,780     $ 152,063     $ 1,619,501  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
(continued)
 
7

Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
 
     Common Stock     Capital     Retained     Treasury Stock     Deferred      Accumulated
Other
Comprehensive
     Total
Shareholders’
 
     Shares     Amount     Surplus     Earnings     Shares     Amounts     Compensation      Earnings      Equity  
Balances at December 31, 2018
     67,753,133     $ 678     $ 443,114     $ 606,658       (467,811   $ (7,507   $ 7,507      $ 2,845      $ 1,053,295  
Net earnings (unaudited)
     —         —         —         123,424       —         —         —          —          123,424  
Stock option exercises (unaudited)
     185,779       2       3,491       —         —         —         —          —          3,493  
Restricted stock grant (unaudited)
     43,334       —         1,307       —         —         —         —          —          1,307  
Cash dividends declared, $0.35 per share (unaudited)
     —         —         —         (46,829     —         —         —          —          (46,829
Change in unrealized gain in investment securities
available-for-sale,
net of related income taxes (unaudited)
     —         —         —         —         —         —         —          69,352        69,352  
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)
     —         —         —         —         3,863       (535     535        —          —    
Stock option expense (unaudited)
     —         —         1,056       —         —         —         —          —          1,056  
Two-for-one
stock split in the form of a 100% stock
 
dividend
(unaudited)
     67,840,210       678       —         (678     (464,339     —         —          —          —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
Balances at September 30, 2019 (unaudited)
     135,822,456     $ 1,358     $ 448,968     $ 682,575       (928,287   $ (8,042   $ 8,042      $ 72,197      $ 1,205,098  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
Balances at December 31, 2019
     135,891,755     $ 1,359     $ 450,676     $ 707,656       (927,408   $ (8,222   $ 8,222      $ 67,506      $ 1,227,197  
Stock issued in acquisition of TB&T Bancshares, Inc. (unaudited)
     6,275,574       63       220,210       —         —         —         —          —          220,273  
Net earnings (unaudited)
     —         —         —         143,558       —         —         —          —          143,558  
Stock option exercises (unaudited)
     246,919       2       3,988       —         —         —         —          —          3,990  
Restricted stock grant (unaudited)
     32,149       —         913       —         —         —         —          —          913  
Cash dividends declared, $0.38 per share (unaudited)
     —         —         —         (54,012     —         —         —          —          (54,012
Change in unrealized gain in investment securities
available-for-sale,
net of related income taxes (unaudited)
     —         —         —         —         —         —         —          84,557        84,557  
Shares purchased in connection with directors’ deferred compensation plan, net (unaudited)
     —         —         —         —         (7,451     (558     558        —          —    
Stock option expense (unaudited)
     —         —         1,033       —         —         —         —          —          1,033  
Shares repurchased under stock repurchase authorization (unaudited)
     (324,802     (3     (8,005     —         —         —         —          —          (8,008
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
Balances at September 30, 2020 (unaudited)
     142,121,595     $ 1,421     $ 668,815     $ 797,202       (934,859   $ (8,780   $ 8,780      $ 152,063      $ 1,619,501  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
See notes to consolidated financial statements.
 
8

Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(Dollars in thousands)
 
 
  
Nine-Months Ended
September 30,
 
 
  
2020
 
 
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES:
    
Net earnings
   $ 143,558     $ 123,424  
Adjustments to reconcile net earnings to net cash provided by operating activities:
    
Depreciation and amortization
     9,493       8,730  
Provision for credit losses
     27,550       2,015  
Securities premium amortization, net
     28,586       18,690  
Discount accret
ion on purchased loans
 
 
 
(3,209
)
 
 
 
(1,282
)
 
Gain on sale of assets, net
     (3,882     (1,312
Deferred federal income tax (expense) benefit
     7,080       1,720  
Change in loans
held-for-sale
     (69,987     (18,491
Change in other assets
     (13,064     1,789  
Change in other liabilities
     8,780       9,097  
  
 
 
   
 
 
 
Total adjustments
     (8,653     20,956  
  
 
 
   
 
 
 
Net cash provided by operating activities
     134,905       144,380  
  
 
 
   
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
    
Cash received in acquisition of TB&T Bancshares, Inc.
     61,028           
Net decrease in interest-bearing time deposits in banks
              1,458  
Activity in
available-for-sale
securities:
    
Sales
     263,042       67,404  
Maturities
     5,851,760       4,342,074  
Purchases
     (6,902,770     (4,526,709
Net increase in loans
 held
-for-investment
     (653,105     (148,271
Purchases of bank premises and equipment
     (12,539     (7,541
Proceeds from sale of bank premises and equipment and other assets
     1,192       1,344  
  
 
 
   
 
 
 
Net cash used in investing activities
     (1,391,392     (270,241
  
 
 
   
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
    
Net increase in noninterest-bearing deposits
     647,454       94,890  
Net increase in interest-bearing deposits
     494,503       122,404  
Net increase (decrease) in borrowings
     121,807       (68,551
Common stock transactions:
    
Proceeds from stock 
option exercises
     3,990       3,493  
Dividends paid
     (51,842     (44,757
Repurchase of stock
     (8,008         
  
 
 
   
 
 
 
Net cash provided by financing activities
     1,207,904       107,479  
  
 
 
   
 
 
 
NET
DE
CREASE
 IN CASH AND CASH EQUIVALENTS
     (48,583     (18,382
CASH AND CASH EQUIVALENTS, beginning of period
     282,604       248,647  
  
 
 
   
 
 
 
CASH AND CASH EQUIVALENTS, end of period
   $ 234,021     $ 230,265  
  
 
 
   
 
 
 
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS:
 
 
Interest paid
   $ 12,466     $ 22,963  
Federal income taxes paid
     33,534       22,141  
Transfer of loans and bank premises to other real estate
     45       1,208  
Investment securities purchased but not settled
     53,730       51,181  
Restricted stock grant to officers and directors
     913       1,307  
Stock issued in acquisition of TB&T Bancshares, Inc.
     220,273           
See notes to consolidated financial statements.
 
9

Table of Contents
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
First Financial Bankshares, Inc. (a Texas corporation) (“Company,” “we” or “us”) is a financial holding company which owns all of the capital stock of one bank with 78 locations located in Texas as of September 30, 2020. The Company’s subsidiary bank is First Financial Bank, N. A. The Company’s primary source of revenue is providing loans and banking services to consumers and commercial customers in the market area in which First Financial Bank, N.A., is located. In addition, the Company also owns First Financial Trust & Asset Management Company, National Association, First Financial Insurance Agency, Inc., and First Technology Services, Inc.
A summary of significant accounting policies of the Company and its subsidiaries applied in the preparation of the accompanying consolidated financial statements follows. The accounting principles followed by the Company and the methods of applying them are in conformity with both United States generally accepted accounting principles (“GAAP”) and prevailing practices of the banking industry.
The Company evaluated subsequent events for potential recognition through the date the consolidated financial statements were issued.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates include its allowance for loan losses and its valuation of financial instruments.
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated.
Stock Split and Increase in Authorized Shares
On April 23, 2019, the Company’s Board of Directors declared a two-for-one stock split of the Company’s outstanding common shares in the form of a 100% stock dividend effective on June 3, 2019. In addition, the shareholders of the Company approved an amendment to the Amended and Restated Certificate of Formation to increase the number of authorized shares to 200,000,000. All per share amounts in this report have been restated to reflect this stock split. An amount equal to the par value of the additional common shares issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock in the consolidated financial statements as of and for the
nine-months
ended September 30, 2019.
 
10

Table of Contents
Stock Repurchase
On March 12, 2020, the Company’s Board of Directors authorized the repurchase of up to 4,000,000 common shares through September 30, 2021. Previously, the Board of Directors had authorized the repurchase of up to 2,000,000 common shares through September 30, 2020. The stock repurchase plan authorizes management to repurchase
and ret
ire
the stock at such time as repurchases
 a
nd
retirem
ents
 are considered beneficial to the Company and stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Through September 30, 2020, 324,802 shares were repurchased totaling $8,008,000 under this repurchase plan. Subsequent to September 30, 2020 and through
November 4
,
 
2020
,
no additional shares were repurchased.
Acquisition
On January 1, 2020, the Company acquired 100% of the outstanding capital stock of TB&T Bancshares, Inc. through the merger of a wholly-owned subsidiary with and into TB&T Bancshares, Inc. Following such merger, TB&T Bancshares, Inc. and its wholly-owned subsidiary, The Bank & Trust of Bryan/College Station, Texas were merged into the Company and First Financial Bank,
N.A
.
,
respectively. The results of operations of TB&T Bancshares, Inc. subsequent to the acquisition date, are included in the consolidated earnings of the Company. See note 11 for additional information.
Status of New Accounting Standard for Accounting for Allowance for Credit Losses
On January 1, 2020, ASU
2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, became effective for the Company which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. CECL also applies to
off-balance
sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, ASU
2016-13
made changes to the accounting for
available-for-sale
debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on
available-for-sale
debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States that included an option for entities to delay the implementation of ASU
2016-13
until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. The Company elected to delay its implementation of ASU
2016-13
and has calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASU
2016-13
for the three and nine-months ended September 30, 2020.
Prior to the CARES Act being signed and our election to delay the implementation of CECL, we were completing our CECL implementation plan with our cross-functional working group, under the direction of our Chief Credit Officer along with our Chief Accounting Officer, Chief Lending Officer and Chief Financial Officer. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. Our implementation plan included assessment and documentation of processes, internal controls and data sources; model development, documentation and validation; and system configuration, among other things. We contracted with a third-party vendor to assist us in the implementation of CECL.
Currently we expect to adopt CECL during the fourth quarter of 2020 with retroactive application to January 1, 2020 which may require adjustments to the amounts for provision for credit losses for the three and nine-months ended September 30, 2020.
 
11

Table of Contents
Other Recently Issued and Effective Authoritative Accounting Guidance
ASU
2016-02,
“Leases.”
ASU
2016-02
amended current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a
right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU
2016-02
did not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. The amended guidance was effective in the first quarter of 2019 and required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company evaluated the provision of the new lease standard and, due to the small dollar amounts and number of lease agreements, all considered operating leases, the effect for the Company on January 1, 2019 was not significant.
ASU
2017-08,
“Receivables – Nonrefundable Fees and Other Costs
:
Premium Amortization on Purchased Callable Debt Securities.”
ASU
2017-08
addressed the amortization method for all callable bonds purchased at a premium to par. Under the revised guidance, entities are required to amortize premiums on callable bonds to the earliest call date. ASU
2017-08
was effective in 2019 although early adoption was permitted. The Company elected to early adopt ASU
2017-08
in the first quarter of 2017. The adoption of this guidance did not have a material impact on the Company’s financial statements.
ASU
2017-04,
“Intangibles – Goodwill and Other.”
ASU
2017-04
amended and simplified current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. ASU
2017-04
became effective for the Company on January 1, 2020 and did not have a significant impact on the Company’s financial statements.
ASU
2018-13,
“Fair Value Measurement (Topic 820). – Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.”
ASU
2018-13
modified the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU
2018-13
remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU
2018-13
became effective on January 1, 2020 and did not have a significant impact on the Company’s financial statements.
ASU
2019-12,
“Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.”
ASU
2019-12,
simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a
step-up
in the tax basis of goodwill. ASU
2019-12
is effective for the Company for annual reporting periods after December 15, 2020, and interim periods within. Adoption of ASU
2019-12
is not expected to have a material impact on the Company’s financial statements.
 
12

Table of Contents
Investment Securities
Management classifies debt and equity securities as
held-to-maturity,
available-for-sale,
or trading based on its intent. Debt securities that management has the positive intent and ability to hold to maturity are classified as
held-to-maturity
and recorded at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using the interest method. Debt securities not classified as
held-to-maturity
or trading are classified as
available-for-sale
and recorded at fair value, with all unrealized gains and unrealized losses judged to be temporary, net of deferred income taxes, excluded from earnings and reported in the consolidated statements of comprehensive earnings.
Available-for-sale
debt securities that have unrealized gains and losses are excluded from earnings and reported net of tax in accumulated other comprehensive income until realized. Declines in the fair value of
available-for-sale
debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as a realized loss if there is no ability or intent to hold to recovery. If the Company does not intend to sell and will not be required to sell prior to recovery of its amortized cost basis, only the credit component of the impairment is reflected in earnings as a realized loss with the noncredit portion recognized in other comprehensive income. In estimating other-than-temporary impairment losses, we consider (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Increases or decreases in the fair value of equity securities are recorded in earnings.
The Company records its
available-for-sale
debt and equity securities portfolio at fair value. Fair values of these securities are determined based on methodologies in accordance with current authoritative accounting guidance. Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, credit ratings and yield curves. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market specific to the type of security.
When the fair value of a debt security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exists.
Available-for-sale
and
held-to-maturity
debt securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) whether we have the intent to sell our debt securities prior to recovery and/or maturity, (ii) whether it is more likely than not that we will have to sell our debt securities prior to recovery and/or maturity, (iii) the length of time and extent to which the fair value has been less than amortized cost, and (iv) the financial condition of the issuer. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the debt security may be different than previously estimated, which could have a material effect on the Company’s results of operations and financial condition.
The Company’s investment portfolio
currently
 
consists
of obligations of state and political subdivisions, mortgage pass-through securities, corporate bonds and general obligation or revenue based municipal bonds. Pricing for such securities is generally readily available and transparent in the market. The Company utilizes independent third-party pricing services to value its investment securities, which the Company reviews as well as the underlying pricing methodologies for reasonableness and to ensure such prices are aligned with pricing matrices. The Company validates prices supplied by the independent pricing services by comparison to prices obtained from other third-party sources on a quarterly basis.
 
13

Table of Contents
Loans
Held-for-Investment
and Allowance for Loan Losses
Loans
held-for-investment
are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amounts outstanding. The Company defers and amortizes net loan origination fees and costs as an adjustment to yield. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectability of the principal is unlikely.
The allowance for loan losses is an amount which represents management’s best estimate of probable losses that are inherent in the Company’s loan portfolio as of the balance sheet date. The allowance for loan losses is comprised of three elements: (i) specific reserves determined based on probable losses on specific classified loans; (ii) a historical valuation reserve component that considers historical loss rates and estimated loss emergence periods; and (iii) qualitative reserves based upon general economic conditions and other qualitative risk factors both internal and external to the Company. The allowance for loan losses is increased by charges to income and decreased by
charge-offs
(net of recoveries). Management’s periodic evaluation of the appropriateness of the allowance is based on general economic conditions, the financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio. For purposes of determining our historical valuation reserve, the loan portfolio, less cash secured loans, government guaranteed loans and classified loans, is multiplied by the Company’s historical loss rate adjusted for the estimated loss emergence period. Specific allocations are increased or decreased in accordance with deterioration or improvement in credit quality and a corresponding increase or decrease in risk of loss on a particular loan. In addition, we adjust our allowance
for loan
losses