FIRST FINANCIAL BANKSHARES INC 10-Q

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 for qualitative factors such as current local economic conditions and trends, including, without limitations, unemployment, oil and gas prices, drought conditions, changes in lending staff, policies and procedures, changes in credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans. This qualitative reserve serves to estimate for additional areas of losses inherent in our portfolio that are not reflected in our historic loss factors. Although we believe we use the best information available to make loan loss allowance determinations, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making our initial determinations. A decline in the economy could result in increased levels of non-performing assets and charge-offs, increased loan provisions and reductions in income. Additionally, bank regulatory agencies periodically review our allowance for loan losses and methodology and could require, in accordance with U.S. GAAP, additional provisions to the allowance for loan losses based on their judgment of information available to them at the time of their examination as well as changes to our methodology. Accrual of interest is discontinued on a loan and payments are applied to principal when management believes, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. Except consumer loans, generally all loans past due greater than 90 days, based on contractual terms, are placed on nonaccrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Consumer loans are generally charged-off when a loan becomes past due 90 days. For other loans in the portfolio, facts and circumstances are evaluated in making charge-off decisions. Loans are considered impaired when, based on current information and events, management determines that it is probable we will be unable to collect all amounts due in accordance with the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectable. 14 Table of Contents The Company’s policy requires measurement of the allowance for an impaired, collateral dependent loan based on the fair value of the collateral less cost to sell. Other loan impairments for non-collateral dependent loans are measured based on the present value of expected future cash flows or the loan’s observable market price. At September 30, 2020 and 2019 and December 31, 2019, all significant impaired loans have been determined to be collateral dependent and the allowance for loss has been measured utilizing the estimated fair value of the collateral less cost to sell. From time to time, the Company modifies its loan agreement with a borrower. A modified loan is considered a troubled debt restructuring when two conditions are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity. For all impaired loans, including the Company’s troubled debt restructurings, the Company performs a periodic, well-documented credit evaluation of the borrower’s financial condition and prospects for repayment to assess the likelihood that all principal and interest payments required under the terms of the agreement will be collected in full. When doubt exists about the ultimate collectability of principal and interest, the troubled debt restructuring remains on non-accrual status and payments received are applied to reduce principal to the extent necessary to eliminate such doubt. This determination of accrual status is judgmental and is based on facts and circumstances related to each troubled debt restructuring. Each of these loans is individually evaluated for impairment and a specific reserve is recorded based on probable losses, taking into consideration the related collateral, modified loan terms and cash flow. As of September 30, 2020 and 2019, and December 31, 2019, substantially all of the Company’s troubled debt restructured loans were on non-accrual. The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. Loans acquired, including loans acquired in a business combination, are initially recorded at fair value with no valuation allowance. Acquired loans are segregated between those considered to be credit impaired and those deemed performing. To make this determination, management considers such factors as past due status, non-accrual status and credit risk ratings. The fair value of acquired performing loans is determined by discounting expected cash flows, both principal and interest, at prevailing market interest rates. The difference between the fair value and principal balances at acquisition date, the fair value discount, is accreted into interest income over the estimated life of the acquired portfolio. 15 Table of Contents Purchased credit impaired loans are those loans that showed evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all amounts contractually owed. Their acquisition fair value, which includes a credit component at the acquisition date, was based on the estimate of cash flows, both principal and interest, expected to be collected or estimated collateral values if cash flows are not estimable, discounted at prevailing market rates of interest. The difference between the discounted cash flows expected at acquisition and the investment in the loan is recognized as interest income on a level-yield method over the life of the loan, unless management was unable to reasonably forecast cash flows in which case the loans were placed on nonaccrual. Subsequent to the acquisition date, increases in expected cash flows will generally result in a recovery of any previously recorded allowance for loan loss, to the extent applicable, and/or a reclassification from the non-accretable difference to accretable yield, which will be recognized prospectively. Decreases in expected cash flows subsequent to acquisition are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition. The carrying amount of purchased credit impaired loans at September 30, 2020 and 2019 and December 31, 2019 were $ 5,978,000 , $ 342,000 and $ 251,000 , respectively, compared to a contractual balance of $ 8,469,000 , $ 605,000 and $ 345,000 , respectively. Other purchased credit impaired loan disclosures have been omitted due to immateriality. Other Real Estate Other real estate owned is foreclosed property held pending disposition and is initially recorded at fair value, less estimated costs to sell. At foreclosure, if the fair value of the real estate, less estimated costs to sell, is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Any subsequent reduction in value is recognized by a charge to income. Operating and holding expenses of such properties, net of related income, and gains and losses on their disposition are included in net gain (loss) on sale of foreclosed assets as incurred. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the respective lease or the estimated useful lives of the improvements, whichever is shorter. Business Combinations, Goodwill and Other Intangible Assets The Company accounts for all business combinations under the purchase method of accounting. Tangible and intangible assets and liabilities of the acquired entity are recorded at fair value. Intangible assets with finite useful lives represent the future benefit associated with the acquisition of the core deposits and are amortized over seven years , utilizing a method that approximates the expected attrition of the deposits. Goodwill with an indefinite life is not amortized, but rather tested annually for impairment as of June 30 each year. There was no impairment recorded for the three and nine-months ended September 30, 2020 or 2019, respectively. Securities Sold Under Agreements To Repurchase Securities sold under agreements to repurchase, which are classified as borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of the cash received in connection with the transaction. The Company may be required to provide additional collateral based on the estimated fair value of the underlying securities. 16 Table of Contents Segment Reporting The Company has determined that its banking regions meet the aggregation criteria of the current authoritative accounting guidance since each of its banking regions offer similar products and services, operate in a similar manner, have similar customers and report to the same regulatory authority, and therefore operate one line of business (community banking) located in a single geographic area (Texas). Statements of Cash Flows For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks, including interest-bearing deposits in banks with original maturity of 90 days or less , and federal funds sold. Accumulated Other Comprehensive Earnings (Loss) Unrealized net gains on the Company’s available-for-sale securities (after applicable income tax e s ) totaling $ 152,063,000 , $ 73,521,000 and $ 67,506,000 a t September 30, 2020 and 2019 and December 31, 2019 , respectively, and the minimum pension liability (after applicable income tax benefit) totaling ($ 1,324,000 ) at September 30, 2019, are included in accumulated other comprehensive earnings . There were no amounts under the minimum pension liability at September 30, 2020 or December 31, 2019 (see note 9). Income Taxes The Company’s provision for income taxes is based on income before income taxes adjusted for permanent differences between financial reporting and taxable income. Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Stock Based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the grant date. The Company recorded stock option expense totaling $ 344,000 and $ 431,000 for the three-months ended September 30, 2020 and 2019, respectively. The Company recorded stock option expense totaling $ 1,033,000 and $ 1,056,000 for the nine-months ended September 30, 2020 and 2019, respectively. The Company also grants restricted stock for a fixed number of shares. The Company recorded expenses associated with its director and officer restricted stock grants totaling $ 569,000 and $ 433,000 , for the three-months ended September 30, 2020 and 2019, respectively. The Company recorded expenses associated with its director and officer restricted stock grants totaling $ 1,501,000 and $ 1,116,000 for the nine-months ended September 30, 2020 and 2019, respectively. See note 8 for further information. Advertising Costs Advertising costs are expensed as incurred. 17 Table of Contents Per Share Data Net earnings per share (“EPS”) are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. The Company calculates dilutive EPS assuming all outstanding stock options to purchase common shares and unvested restricted stock shares have been exercised and/or vested at the beginning of the year (or the time of issuance, if later.) The dilutive effect of the outstanding options and restricted stock is reflected by application of the treasury stock method, whereby the proceeds from the exercised options and unearned compensation for restricted stock are assumed to be used to purchase common shares at the average market price during the respective period. Anti-dilutive shares for the three and nine-months ended September 30, 2020 were approximately 400,000 and 15,000 respectively, and were excluded from the computation of EPS. For the three and nine-months ended September 30, 2019, there were no anti-dilutive shares . The following table reconciles the computation of basic EPS to dilutive EPS: Net Weighted Earnings Average Per Share (in thousands) Shares Amount For the three-months ended September 30, 2020: Net earnings per share, basic $ 52,857 141,980,707 $ 0.37 Effect of stock options and stock grants — 548,535 — Net earnings per share, diluted $ 52,857 142,529,242 $ 0.37 Net Weighted Earnings Average Per Share (in thousands) Shares Amount Fo r the nine-month s ended September 30, 2020 : Net earnings per share, basic $ 143,558 142,023,930 $ 1.01 Effect of stock options and stock grants — 495,518 — Net earnings per share, diluted $ 143,558 142,519,448 $ 1.01 Net Weighted Earnings Average Per Share (in thousands) Shares Amount For the three-months ended September 30, 2019 : Net earnings per share, basic $ 43,080 135,693,901 $ 0.32 Effect of stock options and stock grants — 675,427 — Net earnings per share, diluted $ 43,080 136,369,328 $ 0.32 Net Weighted Earnings Average Per Share (in thousands) Shares Amount For the nine-months ended Septe mber 30, 2019: Net earnings per share, basic $ 123,424 135,613,646 $ 0.91 Effect of stock options and stock grants — 660,696 — Net earnings per share, diluted $ 123,424 136,274,342 $ 0.91 18 Table of Contents Note 2 - Securities A summary of the Company’s available-for-sale securities follows (in thousands): September 30, 2020 Gross Gross Amortized Unrealized Unrealized Estimated Cost Basis Holding Gains Holding Losses Fair Value Obligations of states and political subdivisions $ 2,252,412 $ 119,952 $ ( 4,875 ) $ 2,367,489 Residential mortgage-backed securities 1,454,422 54,744 ( 112 ) 1,509,054 Commercial mortgage-backed securities 527,392 22,776 — 550,168 Corporate bonds and other 4,398 171 — 4,569 Total securities available-for-sale $ 4,238,624 $ 197,643 $ ( 4,987 ) $ 4,431,280 September 30, 2019 Gross Gross Amortized Unrealized Unrealized Estimated Cost Basis Holding Gains Holding Losses Fair Value U.S. Treasury securities $ 9,990 $ 31 $ — $ 10,021 Obligations of states and political subdivisions 1,182,549 59,734 ( 86 ) 1,242,197 Corporate bonds and other 4,643 87 — 4,730 Residential mortgage-backed securities 1,597,807 27,001 ( 1,428 ) 1,623,380 Commercial mortgage-backed securities 509,019 8,069 ( 260 ) 516,828 Total securities available-for-sale $ 3,304,008 $ 94,922 $ ( 1,774 ) $ 3,397,156 December 31, 2019 Gross Gross Amortized Unrealized Unrealized Estimated Cost Basis Holding Gains Holding Losses Fair Value U.S. Treasury securities $ 9,997 $ 22 $ — $ 10,019 Obligations of states and political subdivisions 1,231,619 57,764 ( 400 ) 1,288,983 Corporate bonds and other 4,643 65 — 4,708 Residential mortgage-backed securities 1,586,872 23,139 ( 1,148 ) 1,608,863 Commercial mortgage-backed securities 494,674 6,356 ( 286 ) 500,744 Total securities available-for-sale $ 3,327,805 $ 87,346 $ ( 1,834 ) $ 3,413,317 The Company invests in mortgage-backed securities that have expected maturities that differ from their contractual maturities. These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty. These securities include collateralized mortgage obligations (CMOs) and other asset backed securities. The expected maturities of these securities at September 30, 2020 were computed by using scheduled amortization of balances and historical prepayment rates. 19 Table of Contents The amortized cost and estimated fair value of available-for-sale securities at September 30, 2020 by contractual and expected maturity, are shown below (in thousands): Amortized Estimated Cost Basis Fair Value Due within one year $ 118,519 $ 120,206 Due after one year through five years 623,518 669,407 Due after five years through ten years 1,468,748 1,536,734 Due after ten years 46,025 45,711 Mortgage-backed securities 1,981,814 2,059,222 Total $ 4,238,624 $ 4,431,280 The following tables disclose the Company’s investment securities that have been in a continuous unrealized-loss position for less than 12 months and for 12 or more months (in thousands): Less than 12 Months 12 Months or Longer Total September 30, 2020 Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Obligations of states and political subdivisions $ 395,729 $ 4,875 $ — $ — $ 395,729 $ 4,875 Residential mortgage-backed securities 49,559 76 4,916 36 54,475 112 Total $ 445,288 $ 4,951 $ 4,916 $ 36 $ 450,204 $ 4,987 Less than 12 Months 12 Months or Longer Total September 30, 2019 Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Obligations of states and political subdivisions $ 11,140 $ 86 $ 828 $ — $ 11,968 $ 86 Residential mortgage-backed securities 91,850 75 146,449 1,353 238,299 1,428 Commercial mortgage-backed securities 42,310 115 74,873 145 117,183 260 Total $ 145,300 $ 276 $ 222,150 $ 1,498 $ 367,450 $ 1,774 Less than 12 Months 12 Months or Longer Total December 31, 2019 Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Obligations of state and political subdivisions $ 65,787 $ 400 $ 326 $ — $ 66,113 $ 400 Residential mortgage-backed securities 100,004 306 103,983 842 203,987 1,148 Commercial mortgage-backed securities 74,560 178 35,178 108 109,738 286 Total $ 240,351 $ 884 $ 139,487 $ 950 $ 379,838 $ 1,834 20 Table of Contents The number of investments in an unrealized loss position totaled 80 at September 30, 2020. We do not believe these unrealized losses are “other-than-temporary” as (i) we do not have the intent to sell our securities prior to recovery and/or maturity and (ii) it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity. In making this determination, we also consider the length of time and extent to which fair value has been less than cost and the financial condition of the issuer. The unrealized losses noted are interest rate related due to the level of interest rates at September 30, 2020 compared to the time of purchase. We have reviewed the ratings of the issuers and have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities. Our mortgage related securities are backed by GNMA, FNMA and FHLMC or are collateralized by securities backed by these agencies. At September 30, 2020, 80.94 % of our available-for-sale securities that are obligations of states and political subdivisions were issued within the State of Texas, of which 52.04 % are guaranteed by the Texas Permanent School Fund. At September 30, 2020, $ 2,884,337 ,000 of the Company’s securities were pledged as collateral for public or trust fund deposits, repurchase agreements, a borrowing line with the Federal Reserve Bank of Dallas and for other purposes required or permitted by law. During the three - months ended September 30, 2020 and 2019, sales of investment securities that were classified as available-for-sale totaled $ 10,084 ,000 and $ 1,352 ,000, respectively. Gross realized gains from security sales during the third quarter of 2020 and 2019 totaled $ 36,000 and $ 54,000 , respectively. Gross realized losses from security sales during the three-month period ended September 30, 2019 totaled $ 2,000 . There were no gross realized losses from security sales during the three-month period ended September 30, 2020. During the nine - months ended September 30, 2020 and 2019, sales of investment securities classified as available-for-sale totaled $ 263,042 ,000 and $ 67,404 ,000, respectively. Gross realized gains from security sales during the nine-month periods ended September 30, 2020 and 2019 totaled $ 3,614,000 and $ 747,000 , respectively. Gross realized losses from security sales during the nine-month periods ended September 30, 2020 and 2019 totaled $ 4,000 and $ 19,000 , respectively. The specific identification method was used to determine cost in order to compute the realized gains and losses. Note 3 – Loans Held-for-Investment and Allowance for Loan Losses Loans held-for-investment by class of financing receivables are as follows (in thousands): September 30, December 31, 2020 2019 2019 Commercial $ 1,488,345 $ 836,644 $ 856,326 Agricultural 93,972 102,054 103,640 Real estate 3,287,605 2,749,552 2,823,372 Consumer 423,757 412,066 411,631 Total loans held-for-investment $ 5,293,679 $ 4,100,316 $ 4,194,969 Our subsidiary bank has established a line of credit with the Federal Home Loan Bank of Dallas (FHLB) to provide liquidity and meet pledging requirements for those customers eligible to have securities pledged to secure certain uninsured deposits. At September 30, 2020, $ 3,150,534,000 in loans held by our bank subsidiary were subje c t to blanket liens as security for this line of credit. At September 30, 2020, there was $ 30,000,000 outstanding under this line of credit. The Company’s non-accrual loans, loans still accruing and past due 90 days or more and restructured loans are as follows (in thousands): September 30, December 31, 202 0 2019 2019 Non-accrual loans* $ 42,673 $ 25,717 $ 24,582 Loans still accruing and past due 90 days or more 23 104 153 Troubled debt restructured loans still accruing** 25 27 26 Total $ 42,721 $ 25,848 $ 24,761 21 Table of Contents * Includes $ 5,978,000 , $ 342,000 and $ 251,000 of purchased credit impaired loans as of September 30, 2020 and 2019, and December 31, 2019, respectively. ** Troubled debt restructured loans of $ 4,478,000 , $ 3,983,000 and $ 4,791,000 , whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in non-accrual loans at September 30, 2020 and 2019, and December 31, 2019, respectively. The Company’s recorded investment in impaired loans and the related valuation allowance are as follows (in thousands): September 30, December 31, 2020 2019 2019 Recorded Investment $ 42,673 $ 25,717 $ 24,582 Valuation Allowance 3,241 4,194 3,228 The Company had $ 43,052,000 , $ 27,212,000 and $ 25,770,000 in non-accrual, past due 90 days or more and still accruing, restructured loans and foreclosed assets at September 30, 2020 and 2019, and December 31, 2019, respectively. Non-accrual loans at September 30, 2020 and 2019, and December 31, 2019, consisted of the following by class of financing receivables (in thousands): September 30, December 31, 2020 2019 2019 Commercial $ 6,915 $ 8,802 $ 3,093 Agricultural 967 1,502 1,376 Real estate 34,318 15,095 19,787 Consumer 473 318 326 Total $ 42,673 $ 25,717 $ 24,582 No significant additional funds are committed to be advanced in connection with impaired loans as of September 30, 2020. The Company’s impaired loans and related allowance are summarized in the following tables by class of financing receivables (in thousands). No interest income was recognized on impaired loans subsequent to their classification as impaired. September 30, 2020 Unpaid Contractual Principal Balance Recorded Investment With No Allowance* Recorded Investment With Allowance Total Recorded Investment Related Allowance Year –to- date Average Recorded Investment Three- Month Average Recorded Investment Commercial $ 8,226 $ 967 $ 5,948 $ 6,915 $ 1,234 $ 8,403 $ 7,293 Agricultural 1,195 378 589 967 100 1,114 1,026 Real Estate 46,973 20,739 13,579 34,318 1,905 37,216 38,128 Consumer 603 6 467 473 2 547 514 Total $ 56,997 $ 22,090 $ 20,583 $ 42,673 $ 3,241 $ 47,280 $ 46,961 * Includes $ 5,978,000 of purchased credit impaired loans. 22 Table of Contents September 30, 2019 Unpaid Contractual Principal Balance Recorded Investment With No Allowance* Recorded Investment With Allowance Total Recorded Investment Related Allowance Year- to-date Average Recorded Investment Three- Month Average Recorded Investment Commercial $ 10,250 $ 5,885 $ 2,917 $ 8,802 $ 1,448 $ 9,586 $ 9,263 Agricultural 1,701 406 1,096 1,502 247 1,707 1,609 Real Estate 22,535 4,143 10,952 15,095 2,314 16,739 15,577 Consumer 444 9 309 318 185 416 346 Total $ 34,930 $ 10,443 $ 15,274 $ 25,717 $ 4,194 $ 28,448 $ 26,795 * Includes $ 342,000 of purchased credit impaired loans. December 31, 2019 Unpaid Contractual Principal Balance Recorded Investment With No Allowance* Recorded Investment With Allowance Total Recorded Investment Related Allowance Year-to-date Average Recorded Investment Commercial $ 4,511 $ 630 $ 2,463 $ 3,093 $ 1,042 $ 3,488 Agricultural 1,603 658 718 1,376 235 1,644 Real Estate 27,366 7,081 12,706 19,787 1,950 21,726 Consumer 469 — 326 326 1 449 Total $ 33,949 $ 8,369 $ 16,213 $ 24,582 $ 3,228 $ 27,307 * Includes $ 251,000 of purchased credit impaired loans. The Company recognized interest income on impaired loans prior to being recognized as impaired of approximately $ 750,000 during the year ended December 31, 2019. Such amounts for the three-month and nine-month periods ended September 30, 2020 and 2019 were not significant. From a credit risk standpoint, the Company rates its loans in one of five categories: (i) pass, (ii) special mention, (iii) substandard, (iv) doubtful or (v) loss (which are charged-off). The ratings of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on our credits as part of our on-going monitoring of the credit quality of our loan portfolio. Ratings are adjusted to reflect the degree of risk and loss that are felt to be inherent in each credit as of each reporting period. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss). Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness, however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly. Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed. 23 Table of Contents Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on non-accrual. The following summarizes the Company’s internal ratings of its loans held-for-investment by class of financing receivables and portfolio segments, which are the same (in thousands): September 30, 2020 Pass Special Mention Substandard Doubtful Total Commercial $ 1,440,272 $ 15,952 $ 32,121 $ — $ 1,488,345 Agricultural 87,136 4,970 1,866 — 93,972 Real Estate 3,142,479 44,919 100,207 — 3,287,605 Consumer 421,749 193 1,815 — 423,757 Total $ 5,091,636 $ 66,034 $ 136,009 $ — $ 5,293,679 September 30, 2019 Pass Special Mention Substandard Doubtful Total Commercial $ 797,444 $ 24,836 $ 14,364 $ — $ 836,644 Agricultural 99,586 61 2,407 — 102,054 Real Estate 2,673,591 21,171 54,790 — 2,749,552 Consumer 410,491 232 1,343 — 412,066 Total $ 3,981,112 $ 46,300 $ 72,904 $ — $ 4,100,316 December 31, 2019 Pass Special Mention Substandard Doubtful Total Commercial $ 825,775 $ 20,971 $ 9,580 $ — $ 856,326 Agricultural 101,614 64 1,962 — 103,640 Real Estate 2,717,227 42,036 64,109 — 2,823,372 Consumer 409,698 300 1,633 — 411,631 Total $ 4,054,314 $ 63,371 $ 77,284 $ — $ 4,194,969 The Company’s past due loans are as follows (in thousands): September 30, 2020 15-59 Days Past Due* 60-89 Days Past Due Greater Than 90 Days Total Past Due Current Total Loans 90 Days Past Due Still Accruing Commercial $ 5,165 $ 476 $ 116 $ 5,757 $ 1,482,588 $ 1,488,345 $ — Agricultural 103 50 6 159 93,813 93,972 — Real Estate 10,905 — 306 11,211 3,276,394 3,287,605 1 Consumer 541 80 31 652 423,105 423,757 22 Total $ 16,714 $ 606 $ 459 $ 17,779 $ 5,275,900 $ 5,293,679 $ 23 September 30, 2019 15-59 Days Past Due* 60-89 Days Past Due Greater Than 90 Days Total Past Due Current Total Loans 90 Days Past Due Still Accruing Commercial $ 2,740 $ 815 $ 619 $ 4,174 $ 832,470 $ 836,644 $ — Agricultura l 605 232 202 1,039 101,015 102,054 — Real Estate 14,216 1,563 239 16,018 2,733,534 2,749,552 69 Consumer 595 164 40 799 411,267 412,066 35 Total $ 18,156 $ 2,774 $ 1,100 $ 22,030 $ 4,078,286 $ 4,100,316 $ 104 24 Table of Content s December 31, 2019 15-59 Days Past Due* 60-89 Days Past Due Greater Than 90 Days Total Past Due Current Total Loans 90 Days Past Due Still Accruing Commercial $ 3,257 $ 557 $ 722 $ 4,536 $ 851,790 $ 856,326 $ 112 Agricultural 183 44 400 627 103,013 103,640 — Real Estate 12,890 288 195 13,373 2,809,999 2,823,372 — Consumer 572 151 45 768 410,863 411,631 41 Total $ 16,902 $ 1,040 $ 1,362 $ 19,304 $ 4,175,665 $ 4,194,969 $ 153 * The Company monitors commercial, agricultural and real estate loans after such loans are 15 days past due. Consumer loans are monitored after such loans are 30 days past due. The following table details the allowance for loan losses by portfolio segment (in thousands). There were no allowances for purchased credit impaired loans at September 30, 2020 and 2019, and December 31, 2019. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. September 30, 2020 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 1,234 $ 100 $ 1,905 $ 2 $ 3,241 Loans collectively evaluated for impairment 18,957 2,231 45,220 6,389 72,797 Total $ 20,191 $ 2,331 $ 47,125 $ 6,391 $ 76,038 September 30, 2019 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 1,448 $ 247 $ 2,314 $ 185 $ 4,194 Loans collectively evaluated for impairment 11,018 1,000 30,022 5,655 47,695 Total $ 12,466 $ 1,247 $ 32,336 $ 5,840 $ 51,889 December 31, 2019 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 1,042 $ 235 $ 1,950 $ 1 $ 3,228 Loans collectively evaluated for impairment 11,080 971 32,024 5,196 49,271 Total $ 12,122 $ 1,206 $ 33,974 $ 5,197 $ 52,499 Changes in the allowance for loan losses are summarized as follows by portfolio segment (in thousands): Three - months ended September 30, 2020 Commercial Agricultural Real Estate Consumer Total Beginning balance $ 18,572 $ 2,544 $ 42,623 $ 5,208 $ 68,947 Provision for loan losses 1,955 ( 214 ) 4,416 1,343 7,500 Recoveries 200 1 138 105 444 Charge-offs ( 536 ) — ( 52 ) ( 265 ) ( 853 ) Ending balance $ 20,191 $ 2,331 $ 47,125 $ 6,391 $ 76,038 25 Table of Contents Three - months ended September 30, 2019 Commercial Agricultural Real Estate Consumer Total Beginning balance $ 13,899 $ 1,360 $ 30,799 $ 5,762 $ 51,820 Provision for loan losses ( 1,174 ) ( 32 ) 1,531 125 450 Recoveries 90 85 100 111 386 Charge-offs ( 349 ) ( 166 ) ( 94 ) ( 158 ) ( 767 ) Ending balance $ 12,466 $ 1,247 $ 32,336 $ 5,840 $ 51,889 Nine - months ended September 30, 2020 Commercial Agricultural Real Estate Consumer Total Beginning balance $ 12,122 $ 1,206 $ 33,974 $ 5,197 $ 52,499 Provision for loan losses 9,571 1,096 13,806 1,577 26,050 Recoveries 890 31 272 271 1,464 Charge-offs ( 2,392 ) ( 2 ) ( 927 ) ( 654 ) ( 3,975 ) Ending balance $ 20,191 $ 2,331 $ 47,125 $ 6,391 $ 76,038 Nine - months ended September 30, 2019 Commercial Agricultural Real Estate Consumer Total Beginning balance $ 11,948 $ 1,446 $ 32,342 $ 5,466 $ 51,202 Provision for loan losses 439 10 998 568 2,015 Recoveries 1,163 92 250 459 1,964 Charge-offs ( 1,084 ) ( 301 ) ( 1,254 ) ( 653 ) ( 3,292 ) Ending balance $ 12,466 $ 1,247 $ 32,336 $ 5,840 $ 51,889 Additionally , the Company records a reserve for unfunded commitments in other liabilities which totaled $ 2,300,000 at September 30, 2020 and $ 800,000 at September 30, 2019 and December 31, 2019. The increase is the result of a $ 1,500,000 provision for unfunded commitments during the three-months ended September 30, 2020. The provision for loan losses above is combined with the provision for unfunded commitments and reported as provision for credit losses in the statement of earnings. The Company’s recorded investment in loans related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology is as follows (in thousands). Purchased credit impaired loans of $ 5,978,000 , $ 342,000 and $ 251,000 at September 30, 2020 and 2019, and December 31, 2019, respectively, are included in loans individually evaluated for impairment . September 30, 2020 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 6,915 $ 967 $ 34,318 $ 473 $ 42,673 Loans collectively evaluated for impairment 1,481,430 93,005 3,253,287 423,284 5,251,006 Total $ 1,488,345 $ 93,972 $ 3,287,605 $ 423,757 $ 5,293,679 September 30, 2019 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 8,802 $ 1,502 $ 15,095 $ 318 $ 25,717 Loans collectively evaluated for impairment 827,842 100,552 2,734,457 411,748 4,074,599 Total $ 836,644 $ 102,054 $ 2,749,552 $ 412,066 $ 4,100,316 December 31, 2019 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 3,093 $ 1,376 $ 19,787 $ 326 $ 24,582 Loans collectively evaluated for impairment 853,233 102,264 2,803,585 411,305 4,170,387 Total $ 856,326 $ 103,640 $ 2,823,372 $ 411,631 $ 4,194,969 26 Table of Contents The Company’s loans that were modified and considered troubled debt restructurings are as follows (in thousands): Three - Months Ended September 30, 2020 Nine - Months Ended September 30, 2020 Pre- Modification Post- Modification Pre- Modification Post- Modification Recorded Recorded Recorded Recorded Number Investment Investment Number Investment Investment Commercial 2 $ 667 $ 667 11 $ 1,151 $ 1,151 Agricultural — — — 1 134 134 Real Estate 2 112 112 3 236 236 Consumer — — — 1 14 14 Total 4 $ 779 $ 779 16 $ 1,535 $ 1,535 Three - Months Ended September 30, 2019 Nine - Months Ended September 30, 2019 Pre- Modification Post- Modification Pre- Modification Post- Modification Recorded Recorded Recorded Recorded Number Investment Investment Number Investment Investment Commercial 2 $ 100 $ 100 5 $ 379 $ 379 Agricultural — — — 10 619 619 Real Estate 1 42 42 5 692 692 Consumer — — — — — — Total 3 $ 142 $ 142 20 $ 1,690 $ 1,690 The balances below provide information as to how the loans were modified as troubled debt restructured loans (in thousands): Three - Months Ended September 30, 2020 Nine - Months Ended September 30, 2020 Adjusted Interest Rate Extended Maturity Combined Rate and Maturity Adjusted Interest Rate Extended Maturity Combined Rate and Maturity Commercial $ — $ 658 $ 9 $ — $ 918 $ 233 Agricultural — — — — 134 — Real Estate — — 112 — — 236 Consumer — — — — 14 — Total $ — $ 658 $ 121 $ — $ 1,066 $ 469 Three - Months Ended September 30, 2019 Nine - Months Ended September 30, 2019 Adjusted Interest Rate Extended Maturity Combined Rate and Maturity Adjusted Interest Rate Extended Maturity Combined Rate and Maturity Commercial $ — $ — $ 100 $ — $ 279 $ 100 Agricultural — — — — 354 265 Real Estate — — 42 — 202 490 Consumer — — — — — — Total $ — $ — $ 142 $ — $ 835 $ 855 27 Table of Contents During the three and nine - months ended September 30, 2020, no loans were modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default. During the three and nine-months ended September 30, 2019, two loans totaling $ 28,000 were modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or more or results in the foreclosure and repossession of the applicable collateral. As of September 30, 2020, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings. As discussed in note 1 to these financial statements, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 as troubled debt restructurings as long as the borrowers were not more than 30 days past due as of December 31, 2019. The above disclosed troubled debt restructurings were not related to COVID-19 modifications. Beginning in mid-March of 2020, the Company began offering deferral and modification of principle and/or interest payments, for varying periods but typically no more than 90 days, to selected borrowers on a case-by-case basis. At September 30, 2020, the Company had approximately 122 loans totaling $ 18,650,000 in outstanding loans subject to deferral and modification agreements, representing 0.41 % of outstanding loans held-for-investment, excluding PPP loans. Note 4 - Loans Held-for-Sale Loans held-for-sale totaled $ 101,055 ,000, $ 40,499 ,000 and $ 28,228 ,000 at September 30, 2020 and 2019, and December 31, 2019, respectively. At September 30, 2020 and 2019, and December 31, 2019, $ 6,389,000 , $ 764,000 and $ 5,152,000 are valued at the lower of cost or fair value, and the remaining amounts are valued under the fair value option. The change to the fair value option for loans held-for-sale was effective at June 30, 2018 and was done in conjunction with the Company’s move to mandatory delivery in the secondary market and the purchase of forward mortgage-backed securities to manage the changes in fair value (see note 5 for additional information). These loans, which are sold on a servicing released basis, are valued using a market approach by utilizing either: (i) the fair value of the securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures (see note 10). Interest income on mortgage loans held for sale is recognized based on the contractual rates and reflected in interest income on loans in the consolidated statements of earnings. The Company has no continuing ownership in any residential mortgage loans sold . The Company originates certain mortgage loans for sale in the secondary market. The mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first three to six months, or if documentation is determined not to be in compliance with regulations. The Company’s historic losses as a result of these indemnities have been insignificant. 28 Table of Contents Note 5 - Derivative Financial Instruments The Company enters into interest rate lock commitments (“IRLCs”) with customers to originate residential mortgage loans at a specific interest rate that are ultimately sold in the secondary market. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company. The Company purchases forward mortgage-backed securities contracts to manage the changes in fair value associated with changes in interest rates related to a portion of the IRLCs. These instruments are typically entered into at the time the IRLC is made in the aggregate. These financial instruments are not designated as hedging instruments and are used for asset and liability management needs. All derivatives are carried at fair value in either other assets or other liabilities, through earnings in the statement of earnings. The fair values of IRLCs are based on current secondary market prices for underlying loans and estimated servicing value with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability (pull-through rate) net of estimated costs to originate the loan. The fair value of IRLCs is subject to change primarily due to changes in interest rates and the estimated pull-through rate. These commitments are classified as Level 2 in the fair value disclosures (see note 10), as the valuations are based on observable market inputs. Forward mortgage-backed securities contracts are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract and these instruments are therefore classified as Level 1 in the fair value disclosures (see note 10). The estimated fair values are subject to change primarily due to changes in interest rates. The impact of these forward contracts is included in gain on sale and fees on mortgage loans in the statement of earnings. The following table provides the outstanding notional balances and fair values of outstanding derivative positions (dollars in thousands): September 30, 2020: Outstanding Notional Balance Asset Derivative Fair Value Liability Derivative Fair Value IRLCs $ 247,751 $ 5,967 $ — Forward mortgage-backed securities trades 232,000 — 872 September 30, 2019: Outstanding Notional Balance Asset Derivative Fair Value Liability Derivative Fair Value IRLCs $ 82,330 $ 1,320 $ — Forward mortgage-backed securities trades 126,500 — 41 December 31, 2019: Outstanding Notional Balance Asset Derivative Fair Value Liability Derivative Fair Value IRLCs $ 47,415 $ 886 $ — Forward mortgage-backed securities trades 78,500 — 152 29 Table of Contents Note 6 - Borrowings Borrowings consisted of the following (dollars in thousands): September 30, December 31, 2020 2019 2019 Securities sold under agreements with customers to repurchase $ 468,913 $ 358,155 $ 375,106 Federal funds purchased 4,250 7,000 6,250 Advances from Federal Home Loan Bank of Dallas 30,000 35,000 — Total $ 503,163 $ 400,155 $ 381,356 Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which the Company pledges certain securities that have a fair value equal to at least the amount of the borrowings. The agreements mature daily and therefore the risk arising from a decline in the fair value of the collateral pledged is minimal. The securities pledged are mortgage-backed securities. These agreements do not include “right of set-off” provisions and therefore the Company does not offset such agreements for financial reporting purposes. Note 7 - Income Taxes Income tax expense was $ 10,335 ,000 for the third quarter of 2020 as compared to $ 8,867 ,000 for the same period in 2019. The Company’s effective tax rates on pretax income were 16.35 % and 17.07 % for the third quarters of 2020 and 2019, respectively. Income tax expense was $ 28,233 ,000 for the nine - months ended September 30, 2020 as compared to $ 24,827 ,000 for the same period in 2019. The Company’s effective tax rates on pretax income were 16.43 % and 16.75 % for the nine - months ended September 30, 2020 and 2019, respectively. The effective tax rates differ from the statutory federal tax rate of 21 % primarily due to tax exempt interest income earned on certain investment securities and loans, the deductibility of dividends paid to our employee stock ownership plan and excess tax benefits related to our directors’ deferred compensation plan. Note 8 - Stock Option Plan and Restricted Stock Plan The Company grants incentive stock options for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant to employees. On June 26, 2019, the Company granted 398,850 incentive stock options with an exercise price of $ 29.70 per share. The fair value of the options was $ 7.31 per option and was estimated using the Black-Scholes options pricing model with the following weighted average assumptions: risk free interest rate of 1.83 %; expected dividend yield of 1.62 %; expected life of 6.64 years; and expected volatility of 26.69 %. On January 28, 2020, the Company granted 11,250 incentive stock options with an exercise price of $ 34.55 per share. Other stock option disclosures for this grant have not been provided due to insignificance. The Company recorded stock option expense totaling $ 344,000 and $ 431,000 for the three-month periods ended September 30, 2020 and 2019, respectively. The Company recorded stock option expense totaling $ 1,033,000 and $ 1,056,000 for the nine - months ended September 30, 2020 and 2019, respectively. The additional disclosure requirements under authoritative accounting guidance have been omitted due to the amounts being insignificant. 30 Table of Contents On April 24, 2018, upon re-election of nine of the existing directors, 21,420 restricted shares with a total value of $ 540,000 were granted to these non-employee directors and were expensed over the period from grant date to April 23, 2019, the date of the next annual shareholders’ meeting at which the directors’ term expired. On April 23, 2019, upon re-election of nine of the existing directors and two new directors, 21,714 restricted shares with a total value of $ 660,000 were granted to these non-employee directors and was expensed over the period from the grant date to April 28, 2020, the date of the next annual shareholders’ meeting at which the directors’ term expired. On January 28, 2020, upon the election of a new director, 434 restricted shares with a total value of $ 15,000 were granted to this non-employee director and was expensed over the period from the grant date to April 28, 2020, the date of the next annual shareholders’ meeting at which the director term expired. On April 28, 2020, upon the re-election of ten of the existing directors, 21,560 restricted shares with a total value of $ 600,000 were granted to these non-employee directors and will be expensed over the period from the grant date to April 27, 2021, the Company’s next annual shareholders’ meeting at which the directors’ term expires. The Company recorded director expense related to these restricted share grants of $ 150,000 and $ 185,000 for the three-month periods ended September 30, 2020 and 2019, respectively. The Company recorded director expense related to these restricted stock grants of $ 485,000 and $ 455,000 for the nine - months ended September 30, 2020 and 2019, respectively. On October 24, 2017, the Company granted 28,382 restricted shares with a total value of $ 655,000 to certain officers that are being expensed over the vesting period of one to three years . On October 23, 2018, the Company granted 52,042 restricted shares with a total value of $ 1,440,000 to certain officers that are being expensed over a three-year vesting period. On June 26, 2019, the Company granted 23,428 restricted shares with a total value of $ 695,000 to certain officers that are being expensed over the vesting period of three years . On October 22, 2019, the Company granted 22,188 restricted shares with a total value of $ 785,000 to certain officers that will be expensed over a three-year vesting period. On January 28, 2020, the Company granted 2,979 restricted shares with a total value of $ 103,000 to certain officers that will be expensed over a three-year vesting period. On May 18, 2020, the Company granted 7,176 restricted shares with a total value of $ 200,000 to an officer that will be expensed over a three-year vesting period. The Company recorded restricted stock expense for officers of $ 419,000 and $ 248,000 for the three-month periods ended September 30, 2020 and 2019, respectively. The Company recorded restricted stock expense for officers of $ 1,016,000 and $ 661,000 for the nine-month periods ended September 30, 2020 and 2019, respectively. Note 9 - Pension Plan The Company had a defined benefit pension plan that was frozen effective January 1, 2004, whereby no new participants were added to the Plan and no additional years of service accrued to participants. The pension plan covered substantially all of the Company’s employees at the time. In December 2018, the Company determined it was in the best interest of its shareholders to work toward terminating its pension obligation. The Company annuitized approximately 53 % of the pension benefit obligation at that time and recorded a loss on settlement totaling $ 1,546,000 for the year ended December 31, 2018. In 2019, the Company continued to take steps to completely settle and terminate its remaining pension obligation and recorded loss associated with the final termination of $ 2,673,000 . The loss incurred included unrealized loss previously recorded in other comprehensive income and refunding to remaining participants for funding balance overages offset by a gain on hedging instrument entered into to minimize interest rate movement during the termination period. At December 31, 2019, all balances in the pension plan were zero and the Company’s obligation has been extinguished. For the three and nine-month periods ended September 30, 2019, the Company recorded pension related expense totaling $ 31,000 and $ 973,000 , respectively. 31 Table of Contents Note 10 - Fair Value Disclosures The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: • Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. • Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means. • Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities. A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. 32 Table of Contents Securities classified as available-for-sale and trading are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market spreads, cash flows, the United States Treasury yield curve, live trading levels, trade execution data, dealer quotes, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other items. See notes 4 and 5 related to the determination of fair value for loans held-for-sale, IRLCs and forward mortgage-backed securities trades. There were no transfers between Level 1 and Level 2 or Level 2 and Level 3 during the three and nine-months ended September 30, 2020 and 2019, and the year ended December 31, 2019. The following table summarizes the Company’s available-for-sale securities, loans held-for-sale, and derivatives which are measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands): September 30, 2020 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value Available-for-sale investment securities: Obligations of states and political subdivisions $ — $ 2,367,489 $ — $ 2,367,489 Residential mortgage-backed securities — 1,509,054 — 1,509,054 Commercial mortgage-backed securities — 550,168 — 550,168 Other securities 4,569 — — 4,569 Total $ 4,569 $ 4,426,711 $ — $ 4,431,280 Loans held-for-sale $ — $ 94,666 $ — $ 94,666 IRLCs $ — $ 5,967 $ — $ 5,967 Forward mortgage-backed securities trades $ ( 872 ) $ — $ — $ ( 872 ) 33 Table of Contents September 30, 2019 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value Available-for-sale investment securities: U.S. Treasury securities $ 10,021 $ — $ — $ 10,021 Obligations of states and political subdivisions — 1,242,197 — 1,242,197 Corporate bonds — 229 — 229 Residential mortgage-backed securities — 1,623,380 — 1,623,380 Commercial mortgage-backed securities — 516,828 — 516,828 Other securities 4,501 — — 4,501 Total $ 14,522 $ 3,382,634 $ — $ 3,397,156 Loans held-for-sale $ — $ 39,735 $ — $ 39,735 IRLCs $ — $ 1,320 $ — $ 1,320 Forward mortgage-backed securities trades $ ( 41 ) $ — $ — $ ( 41 ) December 31, 2019 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value Available-for-sale investment securities: U.S. Treasury securities $ 10,019 $ — $ — $ 10,019 Obligations of states and political subdivisions — 1,288,983 1,288,983 Corporate bonds — 230 — 230 Residential mortgage-backed securities — 1,608,863 — 1,608,863 Commercial mortgage -backed securities — 500,744 — 500,744 Other securities 4,478 — — 4,478 Total $ 14,497 $ 3,398,820 $ — $ 3,413,317 Loans held-for-sale $ — $ 23,076 $ — $ 23,076 IRLCs $ — $ 886 $ — $ 886 Forward mortgage-backed securities trades $ ( 152 ) $ — $ — $ ( 152 ) The following table summarize s the Company’s loans held-for-sale at fair value and the net unrealized gains as of the balance sheet dates show n below (in thousands): September 30, December 31, 2020 2019 2019 Unpaid principal balance on loans held-for-sale $ 91,091 $ 38,647 $ 22,340 Net unrealized gains on loans held-for-sale 3,575 1,088 736 Loans held-for-sale at fair value $ 94,666 $ 39,735 $ 23,076 34 Table of Contents The following table summarize the Company’s gains on sale and fees of mortgage loans for the three and nine - months ended September 30, 2020 and 2019 (in thousand): Three-Months ended September 30, Nine-Months ended September 30, 2020 2019 2020 2019 Realized gain on sale and fees on mortgage loans* $ 13,494 $ 5,336 $ 25,676 $ 12,789 Change in fair value on loans held-for-sale and IRLCs 1,508 184 7,800 776 Change in forward mortgage-backed securities trades 226 213 ( 720 ) 363 Total gain on sale of mortgage loans $ 15,228 $ 5,733 $ 32,756 $ 13,928 * This includes gains on loans held-for-sale carried under the fair value method and lower of cost or market. No residential mortgage loans held-for-sale were 90 days or more past due or considered impaired as of September 30, 2020 or 2019, or December 31, 2019. No significant credit losses were recognized on residential mortgage loans held-for-sale for the three and nine month periods ended September 30, 2020 and 2019. Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Impaired loans are reported at the fair value of the underlying collateral less selling costs if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data. At September 30, 2020, impaired loans with a carrying value of $ 20,583,000 were reduced by specific valuation reserves totaling $ 3,241,000 resulting in a net fair value of $ 17,342,000 . Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include other real estate owned, goodwill and other intangible assets and other non-financial long-lived assets. Non-financial assets measured at fair value on a non-recurring basis during the three and nine-months ended September 30, 2020 and 2019 include other real estate owned which, subsequent to their initial transfer to other real estate owned from loans, were re-measured at fair value through a write-down included in gain (loss) on sale of foreclosed assets. During the reported periods, all fair value measurements for foreclosed assets utilized Level 2 inputs based on observable market data, generally third-party appraisals, or Level 3 inputs based on customized discounting criteria. These appraisals are evaluated individually and discounted as necessary due to the age of the appraisal, lack of comparable sales, expected holding periods of property or special use type of the property. Such discounts vary by appraisal based on the above factors but generally range from 5 % to 25 % of the appraised value. Re-evaluation of other real estate owned is performed at least annually as required by regulatory guidelines or more often if particular circumstances arise. There were no other real estate owned properties that were re-measured subsequent to their initial transfer to other real estate owned during the three and nine-months ended September 30, 2020 and 2019. At September 30, 2020 and 2019, and December 31, 2019, other real estate owned totaled $ 157,000 , $ 1,329,000 and $ 982,000 , respectively. The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instrument assets and liabilities including those subject to the requirements discussed above. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. 35 Table of Contents In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Cash and due from banks, federal funds sold, interest-bearing deposits and time deposits in banks and accrued interest receivable and payable are liquid in nature and considered Levels 1 or 2 of the fair value hierarchy. Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities and are considered Levels 2 and 3 of the fair value hierarchy. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the carrying value and are considered Level 1 of the fair value hierarchy. The carrying value and the estimated fair value of the Company’s contractual off-balance-sheet unfunded lines of credit, loan commitments and letters of credit, which are generally priced at market at the time of funding, are not material. 36 Table of Contents The estimated fair values and carrying values of all financial instruments under current authoritative guidance were as follows (in thousands). September 30, December 31, 2020 2019 2019 Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value Fair Value Hierarchy Cash and due from banks $ 175,088 $ 175,088 $ 198,855 $ 198,855 $ 231,534 $ 231,534 Level 1 Federal funds sold — — — — 3,150 3,150 Level 1 Interest-bearing demand deposits in banks 58,933 58,933 31,410 31,410 47,920 47,920 Level 1 Available-for-sale securities 4,431,280 4,431,280 3,397,156 3,397,156 3,413,317 3,413,317 Levels 1 and 2 Loans held-for-investment, net of allowance for loan losses 5,217,641 5,212,972 4,048,427 4,068,755 4,142,470 4,209,826 Level 3 Loans held - for - sale 101,055 101,480 40,499 40,542 28,228 28,343 Level 2 Accrued interest receivable 39,804 39,804 29,606 29,606 36,894 36,894 Level 2 Deposits with stated maturities 469,978 472,193 428,192 429,522 420,013 421,397 Level 2 Deposits with no stated maturities 7,824,910 7,824,910 5,969,491 5,969,491 6,183,793 6,183,793 Level 1 Borrowings 503,163 503,163 400,155 400,155 381,356 381,356 Level 2 Accrued interest payable 485 485 746 746 628 628 Level 2 IRLCs 5,967 5,967 1,320 1,320 886 886 Level 2 Forward mortgage-backed securities trades ( 872 ) ( 872 ) ( 41 ) ( 41 ) ( 152 ) ( 152 ) Level 1 37 Table of Contents Note 11 - Acquisition On September 19, 2019 , we entered into an agreement and plan of reorganization to acquire TB&T Bancshares, Inc. and its wholly-owned bank subsidiary, The Bank & Trust of Bryan/College Station, Texas. On January 1, 2020, the transaction was completed. Pursuant to the agreement, we issued 6,275,574 shares of the Company’s common stock in exchange for all of the outstanding shares of TB&T Bancshares, Inc. In addition, TBT Bancshares, Inc. made a $ 1,920,000 special dividend to its shareholders prior to closing of the transaction. At closing, a wholly-owned subsidiary of the Company merged into TB&T Bancshares, Inc. and immediately thereafter TB&T Bancshares, Inc. was merged into the Company and The Bank & Trust of Bryan/College Station, Texas, was merged into First Financial Bank, N.A., a wholly-owned subsidiary of the Company. The primary purpose of the acquisition was to expand the Company’s market share near the Houston market. Factors that contributed to a purchase price resulting in goodwill include their record of earnings, strong management and board of directors, strong local economic environment and opportunity for growth. The results of operations from this acquisition are included in the consolidated earnings of the Company commencing January 1, 2020. The following table presents the preliminary amounts recorded on the consolidated balance sheet on the acquisition date (dollars in thousands): Fair value of consideration paid: Common stock issued ( 6,275,574 shares) $ 220,273 Fair value of identifiable assets acquired: Cash and cash equivalents $ 61,028 Securities available-for-sale 93,967 Loans 447,702 Identifiable intangible assets 4,798 Other assets 25,377 Total identifiable assets acquired $ 632,872 Fair value of liabilities assumed: Deposits $ 549,125 Other liabilities 5,397 Total liabilities assumed $ 554,522 Fair value of net identifiable assets acquired 78,350 Goodwill resulting from acquisition $ 141,923 Goodwill recorded in the acquisition was accounted for in accordance with the authoritative business combination guidance. Accordingly, goodwill will not be amortized but will be tested for impairment annually. The goodwill recorded is not deductible for federal income tax purposes. The fair value of total loans acquired was $ 447,702 ,000 at acquisition compared to contractual amounts of $ 455,181,000 . The fair value of purchased credit impaired loans at acquisition was $ 7,517,000 compared to contractual amounts of $ 10,061,000 . Additional purchased credit impaired loan disclosures were omitted due to immateriality. All other acquired loans were considered performing loans. 38 Table of Contents