What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2021-02-22 compared with 2020-02-14 · 837 added, 686 removed, 898 unchanged (63% of the section changed)

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

and Subsidiaries

Opinion on Internal Control over Financial Reporting

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The following chart gives aggregate information under our equity compensation plans as of December 31, 2020.

Number of Securities

Additional information regarding stock-based compensation plans is presented in Note 18 – Stock Option Plan and Restricted Stock Plan in the notes to consolidated financial statements.

Number of Shares

To be Issued Upon

Outstanding Options,

Warrants and Rights

Weighted Average

Exercise Price of

Outstanding Options,

Warrants and Rights

Number of Securities

Number of Shares

Remaining Available

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Equity compensation plans not approved by security holders

Includes 1,833,057 shares related to the Company’s stock option plan and 95,888 shares related to the Company’s restricted stock plan.

Excludes outstanding restricted stock which are granted for no consideration.

The remainder of the information required by Item 12 is incorporated by reference from our proxy statement for our 2021 Annual Meeting of Shareholders.

CERTAIN RELATIONSHIPS

AND RELATED TRANSACTIONS,

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

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

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

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

EXHIBIT AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:

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— Amended and Restated Certificate of Formation (incorporated by reference from Exhibit 3.1 of the Registrant’s Form 10-Q filed July 30, 2019).

Amended and Restated Bylaws of the Registrant (incorporated by reference from Exhibit 3.2 of the Registrant’s Form 8-K filed January 24, 2012).

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

— Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed April 3, 2020).

— Specimen certificate of First Financial Common Stock (incorporated by reference from Exhibit 3 of the Registrant’s Amendment No.

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and Frost Bank (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed July 1, 2019).

2015 Restricted Stock Plan (incorporated by reference from Appendix A of the Registrant’s Definitive Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 filed March 2, 2015).++

— 2015 Restricted Stock Plan as Amended and Restated April 28, 2020 (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed May 1, 2020).++

— Form of Executive Recognition Agreement (incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K filed June 30, 2020).++

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February 22, 2021

Chairman of the Board, Director, President and Chief Executive Officer

Chairman of the Board, Director, President and

Chief Executive Officer

(Principal Executive Officer)

The undersigned directors and officers of First Financial Bankshares, Inc.

hereby constitute and appoint J.

Bruce Hildebrand, with full power to act and with full power of substitution and resubstitution, our true and lawful attorney-in-fact

hereby constitute and appoint James R.

Gordon, with full power to act and with full power of substitution and resubstitution, our true and lawful attorney-in-fact

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

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

Chairman of the Board, Director,

President, and Chief Executive Officer

(Principal Executive Officer)

Chairman of the Board, Director, President, and Chief Executive Officer (Principal Executive Officer)

February 22, 2021

Bruce Hildebrand

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

Executive Vice President and Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)

February 22, 2021

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February 22, 2021

/s/ David Copeland

David Copeland

February 22, 2021

/s/ Mike Denny

February 14, 2020

/s/ Murray Edwards

Murray Edwards

/s/ Michael B.

February 22, 2021

/s/ Ron Giddiens

/s/ Murray H.

February 22, 2021

/s/ Tim Lancaster

Tim Lancaster

February 14, 2020

Tim Lancaster

February 22, 2021

/s/ Robert Nickles

Robert Nickles

/s/ Kade Matthews

Kade Matthews

February 22, 2021

/s/ Robert C.

February 22, 2021

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

and Subsidiaries

Opinion on the Financial Statements

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2021 expressed an unqualified opinion thereon.

Adoption of ASU No.

As discussed in Note 1 of the consolidated financial statements, the Company changed its method of accounting for allowance for loan losses.

As explained below, auditing the Company’s allowance for loan losses was a critical audit matter.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

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We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

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Description of the Matter

The Company’s loan portfolio totaled $4.2 billion as of December 31, 2019, and the allowance for loan losses (ALL) was $52.5 million.

As discussed in Note 1 and Note 3 to the consolidated financial statements, the ALL is an amount which represents management’s best estimate of probable losses that are inherent in the Company’s loan portfolio as of the balance sheet date.

The ALL is comprised of specific reserves determined based on probable losses on specific classified loans, a historical valuation reserve component that considers historical loss rates and estimated loss emergence periods, and qualitative reserves.

Management applies judgment in estimating the ALL and, in particular, in identifying and quantifying qualitative reserves included within the ALL.

The qualitative reserves represent additional losses inherent in the loan portfolio that are not reflected in the historical loss rates and are based upon general economic conditions and other qualitative risk factors both internal and external to the Company, such as changes in trends in volume and terms of loans and changes in credit concentrations.

Auditing management’s estimate of the allowance for loan losses involved a high degree of subjectivity due to the qualitative reserves included in the ALL.

Management’s identification and measurement of the qualitative reserves is highly judgmental and could have a significant effect on the ALL.

As of December 31, 2020, the Company’s loan portfolio totaled $5.2 billion and the related allowance for loan losses (ALL) was $66.5 million.

As noted above and in Note 1, as of January 1, 2020, the Company adopted ASU 2016-13,

Financial Instruments – Credit Losses, which introduces a forward-looking expected loss model (the “Current Expected Credit Losses (CECL)” model) to estimate credit losses over the remaining expected life of the Company’s loan portfolio.

As discussed in Notes 1 and 3 of the consolidated financial statements, the ALL is an amount which represents management’s best estimate of expected credit losses over the contractual life of the Company’s loan portfolio as of the balance sheet date.

The ALL includes credit loss estimates for loans evaluated using common risk characteristics such as financial asset type, collateral type and industry of the borrower.

Historical losses are correlated to economic variables that are determined to be the most relevant indicators of expected losses.

Those economic variables are forecasted over the reasonable and supportable forecast period to determine the current expected credit losses.

Qualitative adjustments are then made to account for factors that management does not believe are captured in the CECL quantitative models.

Management applies judgment in estimating the ALL and, in particular, in identifying and quantifying qualitative adjustments included within the ALL.

Auditing management’s estimate of the allowance for loan losses involved a high degree of subjectivity due to the complexity of the models and the qualitative adjustments included in the estimate.

Management’s identification and measurement of the qualitative adjustments is highly judgmental and could have a significant impact on the allowance for loan losses.

How We Addressed the Matter in Our Audit

We obtained an understanding of the Company’s process for establishing the allowance for loan losses, including the qualitative reserves included in the ALL.

We evaluated the design and tested the operating effectiveness of the controls and governance over the appropriateness of the qualitative reserve methodology, including the identification and the assessment for the need for qualitative reserves, the reliability and accuracy of data used to estimate the various components of the qualitative reserves, and management’s review and approval of the qualitative reserves.

To test the qualitative reserves, we evaluated the identification and measurement of the qualitative reserves, including the basis for concluding the qualitative reserves were warranted when considering historical loss rates utilized in the historical valuation reserve, tested the completeness and accuracy of data used by the Company to estimate the qualitative reserves, recalculated the analyses used by management to determine the qualitative reserves, and analyzed the changes in assumptions and components of the qualitative reserves relative to changes in the Company’s loan portfolio.

For example, we evaluated the data and information utilized by management to estimate the qualitative reserves by independently obtaining and comparing such data and information to historical loan data and third-party macroeconomic data to assess the appropriateness of the information and to consider whether new or contradictory information existed.

Additionally, we evaluated the Company’s analysis of the overall ALL amount, inclusive of the qualitative reserves, giving consideration to the Company’s loan portfolio, economic trends, and historical loss factors.

We obtained an understanding of the Company’s process for establishing the allowance for loan losses, including the models used and the qualitative adjustments made to the ALL.

We evaluated the design and tested the operating effectiveness of the controls and governance over the model methodology and qualitative adjustment methodology, including the validation and monitoring procedures performed over the models, the identification and the assessment of the need for qualitative adjustments, the reliability and accuracy of data used to estimate the various components of the qualitative adjustments, and management’s review and approval of the qualitative adjustments.

To test the models, with the support of specialists, we evaluated the model methodology and design, including the Company’s selection of economic variables that were deemed to be the most relevant indicators of expected credit losses, as well as performed procedures over the Company’s correlation of those economic variables to historical losses.

On a sample basis, we independently tested and agreed the key inputs used in the models to internal and external sources.

Additionally, on a sample basis, we performed an independent recalculation of the models’ output.

To test the qualitative adjustments, we evaluated the identification and measurement of the adjustments, including the basis for concluding the adjustments were warranted when considering the model methodology and the historical data used in the adjustments.

We tested the completeness and accuracy of data used by the Company to estimate the qualitative adjustments by agreeing underlying data to internal sources and recalculated the analyses used by the Company to measure the adjustments.

We also reviewed peer-bank allowance coverage ratios and subsequent event information and considered whether it corroborated or contradicted the Company’s overall estimate of the ALL.

/s/ Ernst & Young LLP

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FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Consolidated Balance Sheets

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FEDERAL FUNDS SOLD

INTEREST-BEARING DEPOSITS IN BANKS

INTEREST-BEARING DEMAND DEPOSITS IN BANKS

Total cash and cash equivalents

INTEREST-BEARING TIME DEPOSITS IN BANKS

SECURITIES AVAILABLE-FOR-SALE,

at fair value

at fair value (amortized cost of these securities was

$ 4,177,179 and

$ 3,327,805 as of December 31, 2020 and 2019, respectively)

Held-for-investment

Less – allowance for loan losses

Net loans held for investment

Net loans held -

Held-for-sale

($ 23,076 and $ 19,185 at fair value option at December 31, 2019 and December 31, 2018)

($ 79,585 and $ 23,076 under fair value option as of December 31, 2020 and 2019 ,

respectively)

BANK PREMISES AND EQUIPMENT, net

INTANGIBLE ASSETS

INTANGIBLE ASSETS , net

LIABILITIES AND SHAREHOLDERS’ EQUITY

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Treasury stock (shares at cost:

927,408 and 467,811 at December 31, 2019 and 2018, respectively)

Deferred Compensation

938,591 and 927,408 at

December 31, 2020 and 2019, respectively)

Accumulated other comprehensive earnings

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FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Consolidated Statement of Earnings

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Net interest income

PROVISION FOR LOAN LOSSES

Net interest income after provision for loan losses

PROVISION FOR CREDIT LOSSES

Net interest income after provisions for credit losses

NONINTEREST INCOME:

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ATM, interchange and credit card fees

Real estate mortgage operations

Gain on sale and fees on mortgage loans

Net gain on sale of available-for-sale

securities (includes $ 733 , $ 1,354 and $ 1,828 for the years ended December 31, 2019, 2018 and 2017, respectively, related to accumulated comprehensive earnings reclassifications)

Net gain (loss) on sale of foreclosed assets

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EARNINGS BEFORE INCOME TAXES

INCOME TAX EXPENSE (includes $ 154 , $ 284 and $ 640 for the years ended December 31, 2019, 2018 and 2017, related to income tax expense from reclassification items)

INCOME TAX EXPENSE

NET EARNINGS PER SHARE, BASIC

NET EARNINGS PER SHARE, ASSUMING DILUTION

NET EARNINGS PER SHARE, DILUTED

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

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Earnings

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before income tax

Reclassification adjustment for realized losses (gains) on investment securities included in net earnings, before income tax

Reclassification adjustment for realized gains on investment securities included in net earnings, before income tax

Minimum liability pension adjustment, before income tax

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Investment securities

Reclassification adjustment for realized gains on investment securities included in net earnings

Minimum liability pension adjustment

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(Dollars in thousands)

Comprehensive

Treasury Stock

Comprehensive

Shareholders’

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Stock option exercises

Restricted Stock grant

Cash dividends declared, $ 0.38 per share

Restricted stock grant, net

Cash dividends declared, $ 0.41

Stock issued in acquisition of

Bancshares, Inc.

Minimum liability pension adjustment, net of related income taxes

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net of related income taxes

Shares purchased (redeemed) in connection with directors’ deferred compensation plan, net

Shares purchased in connection with directors’ deferred compensation plan, net

Stock option expense

Reclassification of certain income tax effects related to the U.S.

statutory federal income tax rate under the Tax Cuts and Jobs Acts to retained earnings

Reclassification of unrealized gain in equity securities At December 31, 2017 from accumulated other Comprehensive earnings to retained earnings

BALANCE, December 31, 2018

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Restricted stock grant, net

Cash dividends declared, $ 0.41 per share

Stock issued in acquisition of Commercial Bancshares, Inc.

Cash dividends declared, $ 0.47

Minimum liability pension adjustment, net of related income taxes

Change in unrealized gain (loss) in investment securities available-for-sale,

Change in unrealized gain in investment securities available-for-sale,

net of related income taxes

Shares purchased (redeemed) in connection with directors’ deferred compensation plan, net

Shares purchased in connection with directors’ deferred compensation plan, net

Stock option expense

Reclassification of certain income tax effects related to the change in the U.S.

statutory federal income tax rate under the Tax Cuts and Jobs Acts to retained earnings

Reclassification of unrealized gain in equity securities at December 31, 2017 from accumulated other comprehensive earnings to retained earnings

stock split in the form of 100 % stock dividend

BALANCE, December 31, 2019

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

FIRST FINANCIAL BANKSHARES, INC.

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(Dollars in thousands)

Cumulative effect of adopting ASC 326

on January 1, 2020, net of related income taxes

Total shareholders’ equity at beginning of period, as adjusted

Stock issued in acquisition of TB&T Bancshares, Inc.

Stock option exercises

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Cash dividends declared, $ 0.51

Minimum liability pension adjustment,

Change in unrealized gain in investment securities available-for-sale,

net of related income taxes

Change in unrealized gain (loss) in investment securities

available-for-sale,

net of related

Shares purchased (redeemed) in connection with directors’ deferred compensation plan, net

Shares purchased in connection with directors’ deferred compensation plan, net

Stock option expense

stock split in the form of 100

% stock dividend

Shares repurchased and retired under stock repurchase authorization

BALANCE, December 31, 2020

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FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

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Depreciation and amortization

Provision for loan losses

Provision for credit losses

Securities premium amortization, net

Discount accretion on purchased loans

Gain on sale of assets, net

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CASH FLOWS FROM INVESTING ACTIVITIES:

Cash received in acquisition of TB&T Bancshares, Inc., net

Cash received in acquisition of Commercial Bancshares, Inc., net

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Activity in available-for-sale

Activity in held-to-maturity

securities – maturities

Net increase in loans

Purchases of bank premises and equipment and other assets

Net increase in loans held-for-investment

Purchases of bank premises and equipment

Proceeds from sale of bank premises and equipment and other assets

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Common stock transactions:

Proceeds from stock issuances

Proceeds from stock option exercises

Dividends paid

Repurchase of stock

Net cash provided by (used in) financing activities

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AND SUBSIDIARIES

Notes to Consolidated Financial Statement s

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

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(a Texas corporation) (“Bankshares”, “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 December 31, 2020.

The subsidiary bank is First Financial Bank, National Association, Abilene, Texas.

The bank’s primary source of revenue is providing loans and banking services to consumers and commercial customers in the market area in which the subsidiary is located.

In addition, the Company also owns First Financial Trust & Asset Management Company, National Association, First Financial Insurance Agency, Inc., and First Technology Services, Inc.

A summary of significant accounting policies of Bankshares and its subsidiaries applied in the preparation of the accompanying consolidated financial statements follows.

The accounting principles followed by the Company and the methods of applying them are in conformity with both U.S.

GAAP and prevailing practices of the banking industry.

The Company’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, N.A., First Financial Insurance Agency, Inc.,

First Technology Services, Inc.

and First Financial Investments, Inc.

Basis of Presentation

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 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.

Use of Estimates

The preparation of financial statements in conformity with 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.

The Company’s significant estimates include its allowance for credit losses and its valuation of financial instruments.

Consolidation

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Stock Split and Increase in Authorized Shares

On April 23, 2019, the Company’s Board of Directors declared a two-for-one stock split of the Company’s outstanding common shares effective on June 3, 2019.

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 the annual report on Form 10-K have been restated to reflect this stock split.

An amount equal to the par value of the additional common shares to be issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock in the consolidated financial statements as of and for the year ended December 31, 2019.

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 year ended December 31, 2019.

Stock Repurchase

On June 25, 2017, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 common shares through September 30, 2020

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 buyback plan authorizes management to repurchase the stock at such time as repurchases are considered beneficial to stockholders.

The stock repurchase plan authorizes management to repurchase and retire the stock at such time as repurchases and retirements are considered beneficial to the Company and its stockholders.

Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations.

Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase.

For the years ended December 31, 2019, 2018 and 2017, no

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

On January 1, 2018, the Company acquired 100 % of the outstanding capital stock of Commercial Bancshares, Inc.

through the merger of a wholly-owned subsidiary with and into Commercial Bancshares, Inc.

Following such

Through December 31, 2020, 324,802 shares were repurchased and retired (all during the months of March and April of 2020) totaling $ 8,008,000 under this repurchase plan.

Subsequent to December 31, 2020 and through February 22

, 2021, no additional shares were repurchased.

For the years ended December 31, 2019 and 2018, no shares were repurchased under this repurchase plan or the prior authorization that expired September 30, 2020.

FIRST FINANCIAL BANKSHARES, INC.

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Years Ended December 31, 2020, 2019 and 2018

merger, Commercial Bancshares, Inc.

On January 1, 2018, the Company acquired 100 % of the outstanding capital stock of Commercial Bancshares, Inc.

through the merger of a wholly-owned subsidiary with and into Commercial Bancshares, Inc.

Following such merger, Commercial Bancshares, Inc.

and its wholly-owned subsidiary, Commercial State Bank, Kingwood, Texas were merged into the Company and First Financial Bank, National Association, respectively.

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See Note 20 for additional information.

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 21 for additional information.

Adoption of New Accounting Standards

On January 1, 2020, Accounting Standards Update (“ASU”) 2016-13,

Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments

, became effective for the Company.

Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) replaced the previous “incurred loss” model for measuring credit losses with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity

debt securities.

It also applies to OBS credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments).

In addition, ASC 326 made changes to the accounting for available-for-sale

debt securities.

One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale

debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

On March 27, 2020, the CARES Act was signed by the President of the United States that included an option for entities to delay the implementation of ASC 326 until the earlier of the termination date of the national emergency declaration by the President, or December 31, 2020.

Under this option, the Company elected to delay implementation of CECL and calculated and recorded the provision for credit losses through the nine-months ended September 30, 2020 under the incurred loss model.

At December 31, 2020, the Company elected to adopt ASC 326, effective as of January 1, 2020, through a transition charge to retained earnings of $ 589 ,000 ($ 466 ,000 net of applicable income taxes).

This transition adjustment was comprised of a decrease of $ 619,000 in allowance for credit losses and an increase of $ 1,208,000 in the reserve for unfunded commitments.

With the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections which are described below.

Prior to January 1, 2020, allowance for credit losses were based on the incurred loss methodology in accordance with accounting policies disclosed in Note 1 of the Consolidated Financial Statements included in the Company’s 2019 Form 10-K.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost, net investment in leases and OBS credit exposures.

The Company adopted ASC 326 using the prospective transition approach for securities for which other-than-temporary impairment had been recognized prior to January 1, 2020.

As a result, the amortized cost basis remains the same before and after the effective date of ASC 326.

The effective interest rate on these debt securities was not changed.

We did not have any securities for which OTTI had been recognized as of December 31, 2019.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30.

In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption.

For the periods ended December 31, 2020 and 2019, amounts related to the Company’s PCD and PCI loans were insignificant and disclosures related to these balances have been omitted.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

Investment Securities

Management classifies debt and equity securities as held-to-maturity,

Management classifies debt 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

Securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity

and recorded at amortized cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using the interest method.

Securities not classified as held-to-maturity

or trading are classified as available-for-sale

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

Available-for-sale

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

Declines in the fair value of available-for-sale

debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as a realized loss if there is no ability or intent to hold to recovery.

If the Company does not intend to sell and will not be required to sell prior to recovery of its amortized cost basis, only the credit component of the impairment is reflected in earnings as a realized loss with the noncredit portion recognized in other comprehensive income.

In estimating other-than-temporary impairment losses, we consider (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Effective January 1, 2018, in accordance with ASU 2016-01

(see below), increases or decreases in the fair value of equity securities are recorded in earnings.

Prior to January 1, 2018, such increases or decreases were recorded similar to increases or decreases in available-for-sale

debt securities.

and recorded at fair value, with unrealized holding gains and losses (those for which no allowance for credit losses are recorded) reported as a component of other comprehensive income, net of tax.

Management determines the appropriate classification of securities at the time of purchase.

Interest income includes amortization of purchase premiums and discounts over the period to maturity using a level-yield method, except for premiums on callable securities, which are amortized to their earliest call date.

Realized gains and losses are recorded on the sale of securities in noninterest income.

The Company has made a policy election to exclude accrued interest from the amortized cost basis of securities and report accrued interest separately in other assets on the consolidated balance sheets.

A security is placed on nonaccrual status at the time any principal or interest payments become more than

90 days delinquent or if full collection of interest or principal becomes uncertain.

Accrued interest for a security placed on nonaccrual is reversed against interest income.

There was no accrued interest related to securities reversed against interest income for the year ended December 31, 2020.

The Company records its available-for-sale

and equity securities portfolio at fair value.

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.

Fair values for securities are based on quoted market prices, where available.

If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market specific to the type of security.

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

Available-for-sale

and held-to-maturity

debt securities are analyzed quarterly for possible other-than-temporary impairment.

The analysis considers (i) whether we have the intent to sell debt our securities prior to recovery and/or maturity, (ii) whether it is more likely than not that we will have to sell our debt securities prior to recovery and/or maturity, (iii) the length of time and extent to which the fair value has been less than amortized cost, and (iv) the financial condition of the issuer.

Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment.

If actual information or conditions are different than estimated, the extent of the impairment of the debt security may be different than previously estimated, which could have a material effect on the Company’s results of operations and financial condition.

The Company’s investment portfolio consists of U.S.

Treasury securities, obligations of U.S.

government sponsored enterprises and agencies, obligations of state and political subdivisions, mortgage pass-through securities, corporate bonds and general obligation or revenue based municipal bonds.

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.

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.

Allowance for Credit Losses – Available-for-Sale

For available-for-sale

securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, any previously recognized allowances are charged-off

and the security’s amortized cost basis is written down to fair value through income as a provision for credit losses.

For available-for-sale

securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale

securities from the estimate of credit losses.

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit losses.

Available-for-sale

securities are charged-off

against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

Prior to the adoption of ASC 326, declines in the fair value of securities below their cost that were deemed to be other-than-temporary were reflected in earnings as realized losses.

In estimating other-than-temporary impairment losses prior to January 1, 2020, management considered, among other things, the length of time and the extent to which the fair value had been less than cost, the financial condition and near-term prospects of the issuer and the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Allowance for Credit Losses – Held-to-Maturity

The allowance for credit losses on held-to-maturity

securities is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of held-to-maturity

securities to present management’s best estimate of the net amount expected to be collected.

Held-to-maturity

securities are charged-off

against the allowance when deemed uncollectible by management.

Adjustments to the allowance are reported in our income statement as a component of credit loss expense.

Management measures expected credit losses on held-to-maturity

securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity

securities from the estimate of credit losses.

At December 31, 2020 and 2019, the Company held no securities that were classified as held-to-maturity.

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.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, net of the allowance for credit losses.

Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, fair value hedge accounting adjustments, deferred loan fees and costs.

The Company has made a policy election to exclude accrued interest from the amortized cost basis of loans and report accrued interest separately from the related loan balance in other assets on the condensed consolidated balance sheets.

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 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 non-accrual.

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

Consumer loans are generally charged-off

when a loan becomes past due 90 days.

For other loans in the portfolio, facts and circumstances are evaluated in making charge-off

Loans are considered impaired when, based on current information and events, management determines that it is probable we will be unable to collect all amounts due in accordance with the loan agreement, including scheduled principal and interest payments.

If a loan is impaired, a specific valuation allowance is allocated, if necessary.

Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis.

Impaired loans, or portions thereof, are charged off when deemed uncollectable.

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

Other loan impairments for non-collateral

dependent loans are measured based on the present value of expected future cash flows or the loan’s observable market price.

At December 31, 2019 and 2018, all significant impaired loans have been determined to be collateral dependent and the allowance for loss has been measured utilizing the estimated fair value of the collateral less cost to sell.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.

Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.

In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to our collateral position.

Regulatory provisions would typically require the placement of a loan on nonaccrual status if principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or full payment of principal and interest is not expected.

Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.

When interest accrual is discontinued, all unpaid accrued interest is reversed.

Interest income on nonaccrual loans is recognized only to the extent that cash payments are received in excess of principal due.

A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured.

Prior to the adoption of ASC 326 on January 1, 2020, loans were reported as impaired when, based on then current information and events, it was probable we would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments.

Impairment was evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans.

If a loan was impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral.

Interest payments on impaired loans were typically applied to principal unless collectibility of the principal amount was reasonably assured, in which case interest was recognized on a cash basis.

Impaired loans, or portions thereof, were charged off when deemed uncollectible.

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

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 December 31, 2019 and 2018, substantially all of the Company’s troubled debt restructured loans are included in the non-accrual

The Company originates certain mortgage loans for sale in the secondary market.

Accordingly, these loans are classified as held-for-sale

and are carried at the lower of cost or fair value on an aggregate basis.

The mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first three to six months, or if documentation is determined not to be in compliance with regulations.

The Company’s historic losses as a result of these indemnities have been insignificant.

Loans acquired, including loans acquired in a business combination, are initially recorded at fair value with no valuation allowance.

Acquired loans are segregated between those considered to be credit impaired and those deemed performing.

To make this determination, management considers such factors as past due status, non-accrual

status and credit risk ratings.

The fair value of acquired performing loans is determined by discounting expected cash flows, both principal and interest, at prevailing market interest rates.

The difference between the fair value and principal balances at acquisition date, the fair value discount, is accreted into interest income over the estimated life of the acquired portfolio.

Purchased credit impaired loans are those loans that showed evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all amounts contractually owed.

Their acquisition fair value, which includes a credit component at the acquisition date, was based on the estimate of cash flows, both principal and interest, expected to be collected or estimated collateral values if cash flows are not estimable, discounted at prevailing market rates of interest.

The difference between the discounted cash flows expected at acquisition and the investment in the loan is recognized as interest income on a level-yield method over the life of the loan, unless management was unable to reasonably forecast cash flows in which case the loans were placed on nonaccrual.

Subsequent to the acquisition date, increases in expected cash flows will generally result in a recovery of any previously recorded allowance for loan loss, to the extent applicable, and/or a reclassification from the non-accretable

difference to accretable yield, which will be recognized prospectively.

Decreases in expected cash flows subsequent to acquisition are recognized as impairment.

Valuation allowances on these impaired loans reflect only losses incurred after the acquisition.

The carrying amount of purchased credit impaired loans at December 31, 2019 and 2018 were $ 251,000 and $ 827,000 , respectively, compared to a contractual balance of $ 345,000 and $ 1,157,000 , respectively.

Other purchased credit impaired loan disclosures were omitted due to immateriality.

Other Real Estate

Other real estate owned is foreclosed property held pending disposition and is initially recorded at fair value, less estimated costs to sell.

At foreclosure, if the fair value of the real estate, less estimated costs to sell, is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses.

Any subsequent reduction in value is recognized by a charge to income.

Operating and holding expenses of such properties, net of related income, and gains and losses on their disposition are included in net gain (loss) on sale of foreclosed assets as incurred.

Further information regarding our accounting policies related to past due loans, nonaccrual loans and troubled-debt restructurings is presented in Note 3.

Acquired Loans

Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value.

The allowance for credit losses related to the acquired loan portfolio is not carried over.

Acquired loans are classified into two categories based on the credit risk characteristics of the underlying borrowers as either purchased credit deteriorated (“PCD”) loans, or loans with no evidence of credit deterioration (“non-PCD”).

PCD loans are defined as a loan or pool of loans that have experienced more-than-insignificant credit deterioration since the origination date.

The Company uses a combination of individual and pooled review approaches to determine if acquired loans are PCD.

At acquisition, the Company considers a number of factors to determine if an acquired loan or pool of loans has experienced more-than-insignificant credit deterioration.

The initial allowance related to PCD loans that share similar risk characteristics is established using a pooled approach.

The Company uses either a discounted cash flow or weighted average remaining life method to determine the required level of the allowance.

PCD loans that were classified as nonaccrual as of the acquisition date and are collateral dependent are assessed for allowance on an individual basis.

For PCD loans, an initial allowance is established on the acquisition date and combined with the fair value of the loan to arrive at acquisition date amortized cost.

Accordingly, no allowance for credit losses is recognized on PCD loans at the acquisition date.

Subsequent to the acquisition date, the initial allowance for credit losses on PCD loans will increase or decrease based on future evaluations, with changes recognized in the provision for credit losses.

loans are pooled into segments together with originated loans that share similar risk characteristics and have an allowance established on the acquisition date, which is recognized in the current period provision for credit losses.

Determining the fair value of the acquired loans involves estimating the principal and interest payment cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life, interest rate profile, market interest rate environment, payment schedules, risk ratings, probability of default and loss given default, and estimated prepayment rates.

For PCD loans, the non-credit

discount or premium is allocated to individual loans as determined by the difference between the loan’s unpaid principal balance and amortized cost basis.

The non-credit

premium or discount is recognized into interest income on a level yield basis over the remaining expected life of the loan.

loans, the fair value discount or premium is allocated to individual loans and recognized into interest income on a level yield basis over the remaining expected life of the loan.

Prior to January 1, 2020, loans acquired in a business combination that had evidence of credit impairment and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable were considered PCI.

PCI loans were accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit grade, loan type, and date of origination.

Allowance for Credit Losses—Loans

The allowance for credit losses (“allowance” or “ACL”) is a contra-asset valuation account, calculated in accordance with

ASC 326, that is deducted from the amortized cost basis of loans.

The ACL represents an amount which, in management’s judgement, is adequate to absorb the lifetime expected credit losses that may be experienced on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience.

The allowance for credit losses is measured and recorded upon the initial recognition of a

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

financial asset.

Determination of the adequacy of the allowance is inherently complex and requires the use of significant and highly subjective estimates.

Loans are charged-off

against the allowance when deemed uncollectible by management.

Expected recoveries do not exceed the aggregate of amounts previously charged-off

and expected to be charged-off.

Adjustments to the allowance are reported in our income statement as a component of the provision for credit losses.

Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses.

The Company’s methodology for estimating the allowance includes:

(1) a collective quantified reserve that reflects the Company’s historical default and loss experience adjusted for expected economic conditions throughout a reasonable and supportable period and the Company’s prepayment and curtailment rates;

(2) collective qualitative factors that consider concentrations of the loan portfolio, expected changes to the economic forecasts, large relationships, early delinquencies, and factors related to credit administrations, including, among others, loan-to-value

ratios, borrowers’ risk rating and credit score migrations;

and (3) individual allowances on loans where borrowers are experiencing financial difficulty or when the Company determines that the foreclosure is probable.

In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk profiles.

Common characteristics and risk profiles include the type/purpose of loan, underlying collateral, geographical similarity and historical/expected credit loss patterns.

In developing these loan pools for the purposes of modeling expected credit losses, we also analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors.

For modeling purposes, our loan portfolio segments include C&I, Municipal, Agricultural, Construction and Development, Farm, Non-Owner Occupied and Owner Occupied CRE, Residential, Consumer Auto and Consumer Non-Auto.

We periodically reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary.

Refer to Note 3 for more details on the Company’s portfolio segments.

The Company applies two methodologies to estimate the allowance on its pooled portfolio segments;

discounted cash flows method and weighted average remaining life method.

Allowance estimates on the following portfolio segments are calculated using the discounted cash flows method:

C&I, Municipal, Construction and Development, Farm, Non-Owner Occupied and Owner Occupied CRE and Residential.

Allowance estimates on the following portfolio segments are calculated using the remaining life method:

Agriculture, Consumer Auto and Consumer Non-Auto.

The models related to these methodologies utilize the Company’s historical default and loss experience adjusted for future economic forecasts.

The reasonable and supportable forecast period represents a one-year economic outlook for the applicable economic variables.

Following the end of the reasonable and supportable forecast period expected losses revert back to the historical mean over the next two years on a straight-line basis.

Economic variables that have the most significant impact on the allowance include;

Texas unemployment rate, Texas house price index and Texas retail sales index.

Contractual loan level cash flows within the discounted cash flows methodology are adjusted for the Company’s historical prepayment and curtailment rate experience.

In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within our loan pools.

In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation.

Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk rating of the loan and economic conditions affecting the borrower’s industry, among other things.

A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale of the collateral.

In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral.

We reevaluate the fair value of collateral supporting collateral dependent loans on an ongoing basis.

Management qualitatively adjusts model results for risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools.

These qualitative factor (“Q-Factor”)

adjustments may increase or decrease management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk.

The various risks that may be considered in making Q-Factor

adjustments include, among other things, the impact of (i) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (ii) actual and expected

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

changes in national, regional, and local economic and business conditions and developments that affect the collectability of the loan pools, (iii) changes in the nature, volume and size of a loan or the loan pools and in the terms of the underlying loans, (iv) changes in the experience, ability, and depth of our lending management and staff, (v) changes in volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets, (vi) changes in the quality of our credit review function, (vii) changes in the value of the underlying collateral for loans that are non-collateral

dependent, (viii) the existence, growth, and effect of any concentrations of credit and (ix) other factors such as the regulatory, legal and technological environments;

and events such as natural disasters or health pandemics.

Management believes it uses relevant information available to make determinations about the allowance and that it has established the existing allowance in accordance with GAAP.

However, the determination of the allowance requires significant judgment, and estimates of expected lifetime losses in the loan portfolio can vary significantly from the amounts actually observed.

While management uses available information to recognize expected losses, future additions to the allowance may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.

The adoption of the CECL standard did not result in a significant change to any other credit risk management and monitoring processes, including identification of past due or delinquent borrowers, nonaccrual practices, assessment of troubled debt restructurings or charge-off policies.

Allowance for Credit Losses—Off-Balance-Sheet/Reserve for Unfunded Commitments

The allowance for credit losses on off-balance-sheet

credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit.

These obligations include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit.

No allowance is recognized if we have the unconditional right to cancel the obligation.

The allowance is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets.

Adjustments to the allowance are reported in our income statement as a component of the provision for credit losses.

At December 31, 2020, the Company’s reserve for unfunded commitments totaled $ 5,486,000 .

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.

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

6 unchanged sentences

Intangible assets with finite useful lives represent the future benefit associated with the acquisition of the core deposits and are amortized over seven years , utilizing a method that approximates the expected attrition of the deposits.

Goodwill with an indefinite life is not amortized, but rather tested annually for impairment as of June 30 each year and totaled $ 171,565,000

, at December 31, 2019 and 2018.

Goodwill with an indefinite life is not amortized, but rather tested annually for impairment as of June 30 each year and totaled $ 313,481 ,000 and $ 171,565 ,000, at December 31, 2020 and 2019, respectively.

There was no impairment recorded for the years ended December 31, 2020, 2019 and 2018.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

The carrying amount of goodwill arising from acquisitions that qualify as an asset purchase for federal income tax purposes was $ 16,048 ,000 and $ 18,680 ,000 at December 31, 2020 and 2019, respectively, and is deductible for federal income tax purposes.

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

Securities Sold Under Agreements To Repurchase

8 unchanged sentences

Unrealized net gains on the Company’s available-for-sale

securities (after applicable income tax expense) totaling $ 67,506,000 and $ 4,169,000 at December 31, 2019 and 2018, respectively, and the minimum pension liability (after applicable income tax benefit) totaling ($ 1,324 ,000) at December 31, 2018, are included in accumulated other comprehensive income.

There were no amounts under the minimum pension liability at December 31, 2019 (see note 14).

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

securities (after applicable income tax expense) totaling $ 170,395 ,000 and $ 67,506 ,000 at December 31, 2020 and 2019, respectively, are included in accumulated other comprehensive income.

There were no amounts under the minimum pension liability at December 31, 2020 or 2019 (see Note 14).

The Company’s provision for income taxes is based on income before income taxes adjusted for permanent differences between financial reporting and taxable income.

3 unchanged sentences

The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the grant date.

The Company recorded stock option expense totaling $ 1,489,000 , $ 1,508,000 and $ 1,745,000 for the years ended December 31, 2019, 2018 and 2017, 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 $ 620,000 , $ 560,000 and $ 483,000 and $ 995,000 , $

680,000 and $ 562,000 , respectively, for the years ended December 31, 2019, 2018 and 2017, respectively.

The grant date fair value is amortized over the vesting period which generally is six years.

The Company also grants restricted stock for a fixed number of shares which generally vests over periods of one to three years.

See Note 18 for further information.

1 unchanged sentence

Advertising costs are expensed as incurred.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

Per Share Data

Net earnings per share (“EPS”) are computed by dividing net earnings by the weighted average number of common stock shares outstanding during the period.

The Company calculates dilutive EPS assuming all outstanding stock options to purchase common stock have been exercised at the beginning of the year (or the time of issuance, if later.) The dilutive effect of the outstanding options and restricted stock is reflected by application of the treasury stock method, whereby the proceeds from the exercised options and restricted stock are assumed to be used to purchase common stock at the average market price during the respective year.

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

The Company calculates diluted 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 determined 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 year.

Anti-dilutive shares for the years ended December 31, 2020 were

399,300 and were excluded from the computation of EPS.

There were no such anti-dilutive stock options for the years ended December 31, 2019 and 2018.

The following table reconciles the computation of basic EPS to dilutive EPS:

(in thousands)

The following table reconciles the computation of basic EPS to diluted EPS:

For the year ended December 31, 2020:

(in thousands)

Net earnings per share, basic

Effect of stock options and stock grants

Net earnings per share, assuming dilution

Net earnings per share, diluted

For the year ended December 31, 2019:

1 unchanged sentence

Effect of stock options and stock grants

Net earnings per share, assuming dilution

Net earnings per share, diluted

For the year ended December 31, 2018:

1 unchanged sentence

Effect of stock options and stock grants

Net earnings per share, assuming dilution

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

Net earnings per share, diluted

Recently Issued and Effective Authoritative Accounting Guidance

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

.” ASU 2014-09

implemented a comprehensive new revenue recognition standard that superseded substantially all existing revenue recognition guidance.

The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

To achieve that core principle, an entity applies the following steps:

(i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

“Revenue from Contracts with Customers – Deferral of the Effective Date” deferred the effective date of ASU 2014-09

by one year and as a result, the new standard became effective in the first quarter of 2018.

The Company’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09,

and non-interest

The adoption of the new standard in the first quarter of 2018 did not have a significant impact on the Company’s financial statements and no adjustment to opening retained earnings was recorded.

ASU 2016-01, ASU 2016-01 “Financial Instruments – Overall:

Recognition and Measurement of Financial Assets and Financial Liabilities

.” ASU 2016-01,

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

“Intangibles – Goodwill and Other.”

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.

became effective for the Company on January 1, 2020 and did not have a significant impact on the Company’s financial statements.

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.

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 2016-09, “Compensation – Stock Compensation:

Improvements to Employee Share-Based Payment Accounting

.” ASU 2016-09

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

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

income statement during the period in which they occur.

Previously, such amounts were recorded in capital surplus.

Additionally, excess tax benefits are classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case.

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

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

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

provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice.

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

ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs:

Premium Amortization on Purchased Callable Debt Securities.”

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.

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.

“ Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting

,” ASU 2017-09

clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications.

Under ASU 2017-09,

an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change:

(i) the award’s fair value, (ii) the award’s vesting conditions and (iii) the award’s classification as an equity or liability instrument.

“Fair Value Measurement (Topic 820).

– Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.”

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.

became effective on January 1, 2020 and did not have a significant impact on the Company’s financial statements.

ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”

was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income.

This issue came about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017 that changed the Company’s income tax rate from 35% to 21%.

The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings.

was effective for periods beginning after December 15, 2018 although early adoption was permitted.

The Company early adopted ASU 2018-02

in the first quarter of 2018 and reclassified its stranded tax debit of $ 5,759,000 within accumulated other comprehensive earnings to retained earnings.

FIRST FINANCIAL BANKSHARES, INC.

“Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.”

simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intra-period 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.

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 and related disclosures.

FIRST FINANCIAL BANKSHARES

AND SUBSIDIARIES

1 unchanged sentence

Years Ended December 31, 2020, 2019 and 2018

INTEREST-BEARING TIME DEPOSITS IN BANKS AND SECURITIES:

Interest-bearing time deposits in banks totaled $ 1,458 ,000 at December 31, 2018.

There were no

such balances at December 31, 2019.

A summary of the Company’s available-for-sale

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

Debt securities have been classified in the condensed consolidated balance sheets according to management’s intent.

The amortized cost, related gross unrealized gains and losses, allowance for credit losses and the fair value of available-for-sale

securities are as follows (dollars in thousands):

December 31, 2020

Holding Gains

Holding Losses

Securities available-for-sale:

Treasury securities

Obligations of state and political subdivisions

Corporate bonds and other

Residential mortgage-backed

Residential mortgage-backed securities

Commercial mortgage-backed securities

Corporate bonds and other

Total securities available-for-sale

4 unchanged sentences

Treasury securities

Obligations of U.S.

government sponsored enterprises and agencies

Obligations of state and political subdivisions

Obligations of state and

political subdivisions

Corporate bonds and other

2 unchanged sentences

Total securities available-for-sale

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

The Company did no t hold any securities classified as held-to-maturity

for the years ended December 31, 2020 and 2019.

The Company invests in mortgage-backed securities that have expected maturities that differ from their contractual maturities.

2 unchanged sentences

The expected maturities of these securities at December 31, 2020, were computed by using scheduled amortization of balances and historical prepayment rates.

At December 31, 2019 and 2018, the Company did not hold any CMOs that entail higher risks than standard mortgage-backed securities.

The amortized cost and estimated fair value of available-for-sale

4 unchanged sentences

Due after ten years

Mortgage-backed securities

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

The following tables disclose, as of December 31, 2020 and 2019, the Company’s investment securities that have been in a continuous unrealized-loss

9 unchanged sentences

December 31, 2019

Treasury securities

Obligations of U.S.

government sponsored enterprises and agencies

Obligations of state and political subdivisions

Corporate bonds and other

Obligations of state and

political subdivisions

Residential mortgage-backed securities

Commercial mortgage-backed securities

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

The number of investments in an unrealized loss position totaled 24 at December 31, 2020.

We do not believe these unrealized losses are “other-than-temporary”.

In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer.

Additionally management does not (i) have the intent to sell our securities prior to recovery and/or maturity and, (ii) it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity and (iii) that the length of time and extent that fair value has been less than cost is not indicative of recoverability.

The unrealized losses noted are interest rate related due to the level of interest rates at December 31, 2019 compared to the time of purchase.

We have reviewed the ratings of the issuers and have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

Any unrealized losses in the U.S.

treasuries and government agencies, state and municipal, mortgage-backed and asset-backed investment securities at December 31, 2020 are due to changes in interest rates and not credit-related events.

As such, no allowance for credit losses is required at December 31, 2020.

Unrealized losses on investment securities are expected to recover over time as these securities approach maturity.

Our mortgage related securities are backed by GNMA, FNMA and FHLMC or are collateralized by securities backed by these agencies.

At December 31, 2019 and 2018

, 86.34 % and 84.70 % , respectively ,

of our available-for-sale

securities that are obligations of states and political subdivisions were issued within the State of Texas, of which 41.35 % and 32.65 %, resp ectively, were

guaranteed by the Texas Permanent School Fund.

At December 31, 2020 and 2019, 80.87 % and 86.34 %, respectively, of our available-for-sale

securities that are obligations of states and political subdivisions were issued within the State of Texas, of which 51.57 % and 41.35 %, respectively, were guaranteed by the Texas Permanent School Fund.

Securities, carried at approximately $ 3,005,084,000 and $ 2,329,784,000 December 31, 2020 and 2019, respectively, were pledged as collateral for public or trust fund deposits, repurchase agreements and for other purposes required or permitted by law.

4 unchanged sentences

The specific identification method was used to determine cost in order to compute the realized gains and losses.

LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR LOAN LOSSES:

LOANS AND ALLOWANCE FOR CREDIT LOSSES:

In conjunction with the adoption of ASC 326, the Company expanded its four loan portfolios into ten portfolio segments.

For the year ended December 31, 2020, the tables to follow outline the Company’s loan portfolio by the ten portfolio segments where applicable.

For all prior periods, management has elected to maintain its previously disclosed loan segments.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

Loans held-for-investment

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

Total loans held-for-investment

The Company’s non-accrual

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

by portfolio segment are as follows (dollars in thousands):

Total Commercial

Construction & Development

Owner Occupied CRE

Total Real Estate

Total Consumer

Allowance for credit losses

Outstanding loan balances at December 31, 2020 and 2019, are net of unearned income, including net deferred loan fees.

Our subsidiary bank has established a line of credit with the Federal Home Loan Bank of Dallas (“FHLB”) to provide liquidity and meet pledging requirements for those customers eligible to have securities pledged to secure certain uninsured deposits.

At December 31, 2020, $ 3,239,207,000 in loans held by our bank subsidiary were subject to blanket liens as security for this line of credit.

At December 31, 2020, there was no balance outstanding under this line of credit.

The Company completed the implementation of the CECL standard effective January 1, 2020.

The new guidance requires additional disclosures and introduces certain changes to definitions previously used under allowance for loan losses guidance.

Accordingly, the following sections present separate disclosures compliant with the new and the legacy disclosure requirements.

The Company’s nonaccrual loans, loans still accruing and past due 90 days or more and restructured loans are as follows (dollars in thousands):

Nonaccrual loans

Loans still accruing and past due 90 days or more

Troubled debt restructured loans*

Includes $ 251,000 and $ 827,000 , respectively, of purchased credit impaired loans as of December 31, 2019 and 2018.

Our troubled debt restructured loans of $ 4,791,000 and $ 3,840,000 , whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in non-accrual

loans as of December 31, 2019 and 2018, respectively.

Troubled debt restructured loans of $ 7,407,000 and $ 4,791,000 , for which interest collection is doubtful, are included in nonaccrual loans as of December 31, 2020 and 2019, respectively.

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

The Company’s recorded investment in impaired loans and the related valuation allowance are as follows (dollars in thousands):

42,898,000 and $

in nonaccrual

past due 90 days or more and still accruing, restructured loans and foreclosed assets at December 31, 2020 and 2019, respectively.

loans totaled $ 42,619 ,000 and $ 24,582 ,000 at December 31, 2020 and 2019, respectively, and consisted of the following (in thousands):

Total Commercial

Construction & Development

Owner Occupied CRE

Total Real Estate

Total Consumer

The Company recognized interest income on nonaccrual

loans prior to being recognized as nonaccrual

of approximately $ 1,006,000 , $ 750,000 and $ 948,000 during the years ended De c

ember 31, 2020, 2019 and 2018, respectively.

No significant additional funds are committed to be advanced in connection with nonaccrual

loans as of December 31, 2020.

Summary information on the allowance for credit losses for the year ended December 31, 2020, in line with the new CECL disclosure requirements, is outlined by portfolio segment in the following tables (in thousands):

December 31, 2020

Construction &

Beginning balance, prior to adoption of ASC 326

Impact of adopting ASC 326

Initial allowance on acquired TB&T PCD loans

Provision for loan losses

Ending balance

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 3

1, 2020, 2019 and 2018

December 31, 2020 (continued)

Beginning balance, prior to adoption of ASC 326

Impact of adopting ASC 326

Initial allowance on acquired TB&T PCD loans

Provision for loan losses

Ending balance

Summary information on the allowance for loan losses for the year ended December 31, 2019, in line with the legacy disclosure requirements, is outlined by portfolio segment in the following tables (in thousands):

December 31, 2019

The Company had $ 25,770,000 and $ 29,632,000 in non-accrual,

past due 90 days or more and still accruing, restructured loans and foreclosed assets at December 31, 2019 and 2018, respectively.

Non-accrual loans totaled $ 24,582 ,000 and $ 27,534 ,000 at December 31, 2019 and 2018, respectively, and consisted of the following amounts by type (dollars in thousands):

No significant additional funds are committed to be advanced in connection with impaired loans as of December 31, 2019.

The Company’s impaired loans and related allowance as of December 31, 2019 and 2018 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.

Includes $ 251,000 of purchased credit impaired loans.

Includes $ 827,000 of purchased credit impaired loans.

Beginning balance

Provision for loan losses

Ending balance

Additionally, the Company records a reserve for unfunded commitments in other liabilities which totaled $ 5,486,000 and $ 809,000 at December 31, 2020 and 2019, respectively.

The provision for loan losses above of $ 16,048,000 is combined with the provision for unfunded commitments of $ 3,469,000 and reported in the aggregate under the provision for credit losses in the statement of earnings for the year ended December 31, 2020.

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

The Company recognized interest income on impaired loans prior to being recognized as impaired of approximately $ 750,000 , $ 948,000 and $ 624,000 during the years ended December 31, 2019, 2018 and 2017, respectively.

From a credit risk standpoint, the Company rates its loans in one of four categories:

(i) pass, (ii) special mention, (iii) substandard or (iv) doubtful.

Loans rated as loss are charged-off.

The Company’s loans that are individually evaluated for credit losses (both collateral and non-collateral

dependent) and their related allowances as of December 31, 2020, are summarized in the following table by loan segment in accordance with the new CECL disclosure requirements (in thousands):

December 31, 2020

Dependent Loans

Evaluated for

Credit Losses

Dependent Loans

Evaluated for

Credit Losses

Non-Collateral

Evaluated for

Credit Losses

on Collateral

Allowance for

Credit Losses

Evaluated for

Credit Losses

Total Commercial

Construction & Development

Owner Occupied CRE

Total Real Estate

Total Consumer

The following table presents the recorded investment with respect to impaired loans, the associated allowance by the applicable portfolio segment and the unpaid contractual principal balance of the impaired loans at December 31, 2019, in accordance with the legacy disclosure requirements (in thousands):

December 31, 2019

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

The Company’s allowance for loans that are individually evaluated for credit losses and collectively evaluated for credit losses as of December 31, 2020, are summarized in the following table by loan segment in accordance with the new CECL disclosure requirements (in thousands).

Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

December 31, 2020

Loans individually evaluated for credit losses

Loans collectively evaluated for credit losses

December 31, 2020 (continued)

Loans individually evaluated for credit losses

Loans collectively evaluated for credit losses

The Company’s allowance for loans that are individually evaluated for credit losses and collectively evaluated for credit losses as of December 31, 2019, are summarized in the following table by loan segment in accordance with the legacy disclosure requirements (in thousands).

December 31, 2019

Loans individually evaluated for impairment

Loan collectively evaluated for impairment

The Company’s recorded investment in loans as of December 31, 2020, related to the balance in the allowance for credit losses on the basis of the Company’s evaluation methodology in accordance with the new CECL disclosure requirements follows below (in thousands).

December 31, 2020

Loans individually evaluated for credit losses

Loans collectively evaluated for credit losses

December 31, 2020 (continued)

Loans individually evaluated for credit losses

Loans collectively evaluated for credit losses

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

The Company’s recorded investment in loans as of December 31, 2019, related to the balance in the allowance for loan losses on the basis of the Company’s legacy impairment methodology follows below (in thousands).

December 31, 2019

Loans individually evaluated for impairment

Loan collectively evaluated for impairment

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.

11 unchanged sentences

Based upon available information, positive action by the Company is required to avert or minimize loss.

Credits rated doubtful are generally also placed on non-accrual.

The following summarizes the Company’s internal ratings of its loans held-for-investment

by class of financing receivables and portfolio segments, which classes are the same, at December 31, 2019 and 2018 (in thousands):

Credits rated doubtful are generally also placed on nonaccrual.

The following tables summarize the Company’s internal ratings of its loans held-for-investment,

including the year of origination, by portfolio segments, at December 31, 2020 under the new CECL disclosure requirements (in millions):

Special mention

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

At December 31, 2019 and 2018, the Company’s past due loans are as follows (dollars in thousands):

Company monitors commercial, agricultural and real estate loans after such loans are 15 days past due.

Consumer loans are monitored after such loans are 30 days past due.

The following table details the allowance for loan losses at December 31, 2019 and 2018 by portfolio segment (in thousands).

There were no allowances for purchased credit impaired loans at December 31, 2019 or 2018.

Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

December 31, 2019

Loans individually evaluated for impairment

Loan collectively evaluated for impairment

December 31, 2018

Loans individually evaluated for impairment

Loan collectively evaluated for impairment

Special mention

Construction & Development

Special mention

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

Changes in the allowance for loan losses for the years ended December 31, 2019 and 2018 are summarized as follows (in thousands):

December 31, 2019

Beginning balance

Provision for loan losses

Ending balance

Special mention

Owner Occupied CRE

Special mention

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

Special mention

The following tables summarize the Company’s internal ratings of its loans held-for-investment,

at December 31, 2019 under the legacy disclosure requirements (in million):

December 31, 2019

Beginning balance

Provision for loan losses

Ending balance

The Company’s recorded investment in loans as of December 31, 2019 and 2018 related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology was as follows (in thousands).

Purchased credit impaired loans of $ 251,000 and $ 827,000 , respectively, at December 31, 2019 and 2018 are included in loans individually evaluated for impairment.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

At December 31, 2020 and 2019, the Company’s past due loans are as follows (in thousands):

December 31, 2020

Loans individually evaluated for impairment

Loan collectively evaluated for impairment

Total Commercial

Construction & Development

Owner Occupied CRE

Total Real Estate

Total Consumer

December 31, 2019

Loans individually evaluated for impairment

Loan collectively evaluated for impairment

The Company’s loans that were modified in the years ended December 31, 2019 and 2018, and considered troubled debt restructurings are as follows (dollars in thousands):

Year Ended December 31, 2019

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.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

The restructuring of a loan is considered a “troubled debt restructuring” if both the borrower is experiencing financial difficulties and the creditor has granted a concession.

Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules, reductions in collateral and other actions intended to minimize potential losses.

The Company’s loans that were modified in the years ended December 31, 2020 and 2019, and considered troubled debt restructurings are as follows (in thousands):

Year Ended December 31, 2020

Pre-Modification

Total Commercial

Construction & Development

Owner Occupied CRE

Total Real Estate

Total Consumer

Year Ended December 31, 2019

Pre-Modification

3 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

The balances below provide information as to how the loans were modified as troubled debt restructured loans during the years ended December 31, 2019 and 2018 (dollars in thousands):

The balances below provide information as to how the loans were modified as troubled deb t

restructured loans during the years ended December 31, 2020 and 2019 (in thousands):

Year Ended December 31, 2020

Total Commercial

Construction & Development

Total Real Estate

Total Consumer

Year Ended December 31, 2019

During the years ended December 31, 2019 and 2018, certain loans were modified as a troubled debt restructured loans within the previous 12 months and for which there was a payment default.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

During the year ended December 31, 2020 no loans were modified as troubled debt restructured loans within the previous 12 months and for which there was a payment default.

During the year ended December 31, 2019, certain loans were modified as a troubled debt restructured loans within the previous 12 months and for which there was a payment default.

A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past or more due or results in the foreclosure and repossession of the applicable collateral.

The loans with payment default are as follows (dollars in thousands):

Year Ended December 31, 2019

The loans with payment default are as follows (in thousands):

Year Ended December 31, 2019

As of December 31, 2019, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

December 31, 2020, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

Beginning in mid-March

of 2020, the Company began offering deferral 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

At December 31, 2020, the Company had approximately 59 loans totaling

$ 2,691,000 in outstanding loans subject to deferral and modification agreements.

The CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID 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 did not include balances related to COVID modifications.

An analysis of the changes in loans to officers, directors, principal shareholders, or associates of such persons for the year ended December 31, 2020 (determined as of each respective year-end)

follows (dollars in thousands):

follows (in thousands):

Year ended December 31, 2020

In the opinion of management, those loans are on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unaffiliated persons.

Our subsidiary bank has established a line of credit with the Federal Home Loan Bank of Dallas (FHLB) to provide liquidity and meet pledging requirements for those customers eligible to have securities pledged to secure certain uninsured deposits.

At December 31, 2019, $ 2,663,321,000 in loans held by our bank subsidiary were subject to blanket liens as security for this line of credit.

At December 31, 2019, there were no amounts outstanding under this line of credit.

Note 4 - Loans Held-for-Sale

The Company originates certain mortgage loans for sale in the secondary market.

The mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first three to nine months, or if documentation is determined not to be in compliance with regulations.

The Company’s historic losses as a result of these indemnities have been insignificant.

LOANS HELD-FOR-SALE:

Loans held for sale totaled $ 83,969 ,000 and $ 28,228 ,000 at December 31, 2020 and 2019, respectively.

At December 31, 2020 and 2019, $ 4,384,000 and $ 5,152,000 , respectively, are valued at the lower of cost or fair value, and the remaining amount 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

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

Loans held for sale totaled $ 28,228 ,000 and $ 21,672 ,000 at December 31, 2019 and 2018, respectively.

At December 31, 2019 and 2018, $

and $ 2,487,000 , respectively, are valued at the lower of cost or fair value, and the remaining amount is 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 for substantially all loans sold 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:

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.

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 of these residential mortgage loans sold.

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.

The Company originates certain mortgage loans for sale in the secondary market.

The Company’s historic losses as a result of these indemnities have been insignificant.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company enters into 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.

Beginning in the second quarter of 2018, the Company purchased 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.

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.

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).

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 for accounting purposes 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 value of IRLCs is subject to change primarily due to changes in interest rates and the estimated pull-through rate.

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The estimated fair values are subject to change primarily due to changes in interest rates.

The following table provides the outstanding notional balances and fair values of outstanding derivative positions (dollars in thousands):

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 (in thousands):

December 31, 2020:

Forward mortgage-backed securities trades

December 31, 2019:

Forward mortgage-backed securities trades

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

December 31, 2018:

Forward mortgage-backed securities trades

BANK PREMISES AND EQUIPMENT

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Leasehold improvements

Lesser of lease term or 5 to 15 years

Less- accumulated depreciation and amortization

Lesser of lease

or 5 to 15 years

accumulated depreciation and amortization

Total Bank Premises and Equipment

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The Company is lessor for portions of its banking premises.

Total rental income for all leases included in net occupancy expense is approximately $ 2,831,000 , $ 2,682,000 and $ 2,367,000 , for the years ended December 31, 2019, 2018 and 2017, respectively.

Total rental income for all leases included in net occupancy expense is approximately $ 2,789,000 , $ 2,831,000 and $ 2,682,000 , for the years ended December 31, 2020, 2019 and 2018, respectivel y

DEPOSITS AND BORROWINGS:

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Deposits received from related parties at December 31, 2020 and 2019 totaled $ 98,413,000 and $ 87,027,000 , respectively.

Borrowings at December 31, 2020 and 2019 consisted of the following (in thousands):

Securities sold under agreements

with customers to repurchase.

Federal funds purchased

Advances from Federal Home

Loan Bank of Dallas

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

Borrowings at December 31, 2019 and 2018 consisted of the following (dollars in thousands):

Securities sold under agreements with customers to repurchase.

Federal funds purchased

Advances from Federal Home Loan Bank of Dallas

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.

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provisions and therefore the Company does not offset such agreements for financial reporting purposes.

At December 31, 2018, the Company had advances from the Federal Home Loan Bank of Dallas of $ 55,000 ,000 that were repaid in 2019.

There were no

such advances outstanding at December 31, 2019.

LINE OF CREDIT:

The Company renewed its loan agreement, effective June 30, 2019, with Frost Bank.

Under the loan agreement, as renewed and amended, we a

re permitted to draw up to $ 25,000,000 on a revolving line of credit.

Prior to June 30, 20 2

1, interest will be

paid quarterly at The Wall Street Journal

Prime Rate and the line of credit mature s

June 30, 2021 .

If a balance exist s

1, the principal balance converts to a term facility payable quarterly over five years and interest i

s paid quarterly at The Wall Street

Under the loan agreement, as renewed and amended, we are permitted to draw up to $ 25,000,000 on a revolving line of credit.

Prior to June 30, 2021, interest will be paid quarterly at The Wall Street Journal

Prime Rate and the line of credit matures June 30, 2021 .

If a balance exists at June 30, 2021, the principal balance converts to a term facility payable quarterly over five years and interest is paid quarterly at The Wall Street

The line of credit is unsecured.

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The Company was in compliance with the financial and operational covenants at December 31, 2020.

outstanding balance under the line of credit as of December 31, 2019 or 2018.

There was no outstanding balance under the line of credit as of December 31, 2020 or 2019.

INCOME TAXES:

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law with sweeping modifications to the Internal Revenue Code.

The primary change for the Company was to lower the corporate income tax rate to 21

The primary change for the Company was to lower the corporate income tax rate to 21 % from 35 %.

The Company’s deferred tax assets and liabilities were re-measured

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The provisional amount recorded related to the re-measurement

of the Company’s deferred tax balance was $ 7,650,000

, a reduction of income tax expense for the year ended December 31, 2017.

At December 31, 2018, final regulations for the Tax Cuts and Jobs Act were still pending;

however, the Company updated its estimate of the impact to our deferred tax balances based on the proposed regulations issued to date and recorded an additional reduction of income tax expense for the year ended December 31, 2018 of $ 664,000

additional adjustment amounts were recorded for the year ended December 31, 2019, and the Company does not anticipate significant revision will be necessary in the

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

of the Company’s deferred tax balance was $ 7,650,000 , a reduction of income tax expense for the year ended December 31, 2017.

Additionally,

the Company updated its estimate of the impact to our deferred tax balances based on the proposed regulations issued to date and recorded an additional reduction of income tax expense for the year ended December 31, 2018 of $ 664,000 .

No additional adjustment amounts were recorded for the years ended December 31, 2020 and 2019.

The Company files a consolidated federal income tax return.

Income tax expense is comprised of the following (dollars in thousands):

Income tax expense is comprised of the following (in thousands):

Year Ended December 31,

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Income tax expense

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

Income tax expense, as a percentage of pretax earnings, differs from the statutory federal income tax rate as follows:

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Effective income tax rate

The approximate effects of each type of difference that gave rise to the Company’s deferred tax assets and liabilities at December 31, 2019 and 2018 are as follows (dollars in thousands):

The approximate effects of each type of difference that gave rise to the Company’s deferred tax assets and liabilities at December 31, 2020 and 2019 are as follows (in thousands):

Deferred tax assets:

Tax basis of loans in excess of financial statement basis

Minimum liability in defined benefit plan

Recognized for financial reporting purposes but not yet for tax purposes:

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Accretion on investment securities

Pension plan contributions

Net unrealized gain on investment securities available-for-sale

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Net deferred tax asset (liability)

At December 31, 2020 and 2019, management believes that it is more likely than not that all of the deferred tax assets shown above will be realized and therefore no valuation allowance was recorded.

Current authoritative accounting guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information.

A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of cumulative benefit that is greater than fifty percent likely of being realized upon ultimate settlement.

Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met.

Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

Current authoritative accounting guidance also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

The Company concluded the tax

FIRST FINANCIAL BANKSHARES, INC.

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Years Ended December 31, 2020, 2019 and 2018

At December 31, 2019 and 2018, management believes that it is more likely than not that all of the deferred tax amounts shown above will be realized and therefore no

valuation allowance was recorded.

Current authoritative accounting guidance prescribes a

recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

A tax position that meets the more-likely- than-not

recognition threshold is measured at the largest amount of cumulative benefit that is greater than fifty

percent likely of being realized upon ultimate settlement.

Tax positions that previously failed to meet the more-likely-than-not

recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met.

Previously recognized tax positions that no longer meet the more-likely-than-not

recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

Current authoritative accounting guidance also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

The Company concluded the tax benefits of positions taken and expected to be taken on its tax returns should be recognized in the financial statements under this guidance.

benefits of positions taken and expected to be taken on its tax returns should be recognized in the financial statements under this guidance.

The Company files income tax returns in the U.S.

1 unchanged sentence

We are no longer subject to U.S.

federal income tax examinations by tax authorities for years before 201 6

or Texas state tax examinations by tax authorities for years before 201 7

As of December 31, 2019 and 2018, the Company believes that there are no

uncertain tax positions.

federal income tax examinations by tax authorities for years before 2016 or Texas state tax examinations by tax authorities for years before 2017.

As of December 31, 2020 and 2019, the Company believes that there are no uncertain tax positions.

FAIR VALUE DISCLOSURES:

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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:

The fair value hierarchy is as follow s

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.

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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.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

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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.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

Securities classified as available-for-sale

3 unchanged sentences

See Notes 4 and 5 related to the determination of fair value for loans held-for-sale,

IRLCs and forward mortgage-backed securities traded.

There were no

transfers between Level 2 and Level 3 during the years ended December 31, 2019, 2018 and 2017.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

IRLCs and forward mortgage-backed securities trades.

There were no transfers between Level 2 and Level 3 during the years ended December 31, 2020, 2019 and 2018.

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 as of December 31, 2020 and 2019 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

December 31, 2020

1 unchanged sentence

investment securities:

U.S Treasury securities

Obligations of state and political subdivisions

Corporate bonds

Residential mortgage-backed securities

3 unchanged sentences

Forward mortgage-backed securities traded

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

December 31, 2019

2 unchanged sentences

U.S Treasury securities

Obligations of U.

government sponsored enterprises and agencies

Obligations of state and political subdivisions

5 unchanged sentences

Forward mortgage-backed securities traded

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 December 31, 2019, impaired loans with a carrying value of $ 16,213 ,000 were reduced by specific valuation reserves totaling $ 3,228 ,000 resulting in a net fair value of $ 12,985,000 .

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

The following table summarizes the Company’s loans held-for-sale

at fair value and the net unrealized gains as of the balance sheet dates shown below (in thousands):

Unpaid principal balance on loans held-for-sale

Net unrealized gains on loans held-for-sale

Loans held-for-sale

at fair value

The following table summarizes the Company’s gains on sale and fees of mortgage loans for the years ended December 31, 2020, 2019 and 2018 (in thousands):

Years ended December 31,

Realized gain on sale and fees on mortgage loans*

Change in fair value on loans held-for-sale

Change in forward mortgage-backed securities trades

Total gain on sale of mortgage loans

* This includes gain 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 nonaccrual as of December

31, 2020 or 2019.

No significant credit losses were recognized on mortgage loans held-for-sale

for the years ended December 31, 2020, 2019 and 2018.

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

liabilities measured at fair value on a nonrecurring 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 year ended December 31, 2019 and 2018 include other real estate owned which, subsequent to their initial transfer to other real estate owned from loans, were re-measured

assets measured at fair value on a nonrecurring basis during the years ended December 31, 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.

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Such discounts vary by appraisal based on the above factors but generally range from 5 % to 25 % of the appraised value.

Reevaluation of other real estate owned is performed at least annually as required by regulatory guidelines or more often if particular circumstances arise.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

The following table presents other real estate owned that were re-measured

subsequent to their initial transfer to other real estate owned (dollars in thousands):

Carrying value of other real estate owned prior to re-measurement

Write-downs included in gain (loss) on sale of other real estate owned

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 years ended December 31, 2020 and 2019.

At December 31, 2020 and 2019, other real estate owned totaled $ 119,000 and $ 982,000 , respectively.

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The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

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.

Cash and due from banks, federal funds sold, interest-bearing 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.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

The estimated fair values and carrying values of all financial instruments under current authoritative guidance at December 31, 2019 and 2018, were as follows (dollars in thousands):

The estimated fair values and carrying values of all financial instruments under current authoritative guidance at December 31, 2020 and 2019, were as follows (in thousands):

Cash and due from banks

Federal funds sold

Interest-bearing deposits in banks

Interest-bearing time deposits in banks

Interest-bearing demand deposits in banks

Available-for-sale

Levels 1 and 2

Loans held-for-investment,

net of allowance for credit losses

Loans held-for-sale

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Accrued interest payable

Forward mortgage-backed securities traded

Forward mortgage-backed securities trades

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

COMMITMENTS AND CONTINGENCIES:

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2021 - $ 1,049,000 , 2022 - $ 494,000 , 2023 - $ 376,000 , 2024 $ 317,000 and 2025 $ 218,000 and thereafter - $ 78,000 .

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET

We are a party to financial instruments with off-balance-sheet

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Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

At December 31, 2020, the Company’s reserve for unfunded commitments totaled $ 5,486,000 which is recorded in other liabilities.

Our exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments.

We generally use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments.

We generally use the same credit policies in making commitments and conditional obligations as we do for on-balance

sheet instruments.

December 31, 2020

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Total commercial commitments

The above table also does not include balances related to the Company’s IRLCs and forward mortgage-backed security trades.

Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

13 unchanged sentences

In addition, the Company holds mortgage related securities which are guaranteed by GNMA, FNMA or FHLMC or are collateralized by loans backed by these agencies.

PENSION AND PROFIT SHARING PLANS:

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.

The benefits for each employee were based on years of service and a percentage of the employee’s qualifying compensation during the final years of employment.

The Company’s funding policy was to contribute annually the amount necessary to satisfy the Internal Revenue Service’s funding standards.

Contributions to the pension plan, prior to freezing the plan, were intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.

The Company made no

contribution to the plan in 2019, 2018 or 2017.

In December 2018, due to the rising interest rate environment, the Company determined it was in the best interest of its shareholders to work toward terminating its pension obligation.

The Company annuitized approximately 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

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

pension obligation and recorded loss associated with the final termination of $ 2,673,000 .

PENSION PLAN:

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 are zero and the Company’s obligation has been extinguished.

Using an actuarial measurement date of December 31, 2019 and 2018, benefit obligation activity and fair value of plan assets for the years ended December 31, 2019 and 2018, and a statement of the funded status as of December 31, 2019 and 2018, are as follows (dollars in thousands):

Reconciliation of benefit obligations:

Benefit obligation at January 1

Transfer liability from multiple employer plan

Interest cost on projected benefit obligation

Actuarial (gain) loss, including settlement of all participants balances

Benefits paid, including settlement of participant balances

Benefit obligation at December 31

Reconciliation of fair value of plan assets:

Fair value of plan assets at January 1

Transfer of assets from multiple employer plan

Actual return on plan assets

Employer contributions

Benefits paid, including settlement of certain participant balances

Fair value of plan assets at December 31

Funded status

Amounts recognized as a component of accumulated other comprehensive earnings as of year-end

that have not been recognized as a component of the net period benefit cost of the Company’s defined benefit pension plan are as follows (dollars in thousands):

Net actuarial loss

Deferred tax benefit

Amounts included in accumulated other comprehensive earnings, net of tax

Net periodic benefit cost for the years ended December 31, 2019, 2018 and 2017, are as follows (dollars in thousands):

Year Ended December 31,

Service cost - benefits earned during the period

Interest cost on projected benefit obligation

Expected return on plan assets

Amortization of unrecognized net loss

Recognized loss on partial settlement of certain participant balances

Net pension expense (benefit)

At December 31, 2019, all balances in the pension plan were zero and the Company’s obligation has been extinguished.

EMPLOYEE BENEFIT PLANS:

The Company also provides a 401(k) plan and profit sharing plan which covers substantially all full-time employees.

The 401(k) plan allows employees to contribute a percentage of their base annual salary with a corresponding employer match.

The profit sharing plan is a defined contribution plan and includes an employee stock ownership feature (“ESOP”).

Employees are fully vested to the extent of their contributions and become fully vested in the Company’s contributions over a six-year

vesting period.

In 2004, after freezing our pension plan, we added a safe harbor match to the 401(k) plan.

We match a maximum of 4 % on employee deferrals of 5 % of their employee compensation.

Total expense for this matching in 2020, 2019 and 2018 was $ 3,374,000 , $ 2,759,000 and $ 2,588,000 , respectively, and is included in salaries and employee benefits in the statements of earnings.

Costs related to the Company’s profit sharing plan totaled approximately $ 10,740,000 , $ 7,661,000 and $ 7,049,000 in 2020, 2019 and 2018, respectively, and are included in salaries and employee benefits in the accompanying consolidated statements of earnings.

As of December 31, 2020 and 2019, the profit sharing plan’s assets included First Financial Bankshares, Inc.

common stock valued at approximately $ 81,605,000 and $ 83,014,000 , respectively.

The Company has a non-qualified

“excess benefit” plan whereunder executives, whose Company contributions to the profit sharing plan and employer match under the 401(k) feature are curtailed due to Internal Revenue Service limitations, received contributions from the Company equal to the amount under qualified plans as if there had been no Internal Revenue Service limitations.

This plan used the same contribution formula and vesting requirements as the 401(k) plan.

Make Whole Plan "

was frozen to new participants and contributions effective December 31, 2018.

As of December 31, 2020 and 2019, the Make Whole Plan held 115,614 and 137,861 shares, respectively, in trust for the Company’s executives.

The Company made contributions totaling $ 349,000 during the year ended December 31, 2018.

There were no contributions to this plan during the years ended December 31, 20 20

The Company adopted a Supplemental Executive Retirement

Plan (“SERP”), effective January 1, 2019.

The SERP benefits certain key senior executives of the Company who are selected by the Board to participate.

The SERP is intended to provide a benefit from the Company upon retirement, death, disability or voluntary or involuntary termination of services (other than “for cause”).

Under the SERP, the Company may, but is not required to, make discretionary contributions to the executive’s accounts from time to time.

The contributions may be fully vested or subject to vesting conditions imposed by the Board of Directors with respect to the contributions;

provided, however, that all unvested amounts credited to an executive’s account will become fully vested upon the executive’s death or disability or upon the occurrence of a change of control (as defined in the SERP).

Company contributions to the SERP on behalf of an executive are credited with earnings and losses based on the executive’s investment elections.

The investment options under the SERP are currently the same as those offered under the Company’s profit sharing plan, except that Company stock is not an available investment option under the SERP.

An executive’s vested account is payable to the participant following hi s

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

The following table sets forth the rates used in the actuarial calculations of the present value of benefit obligations and net periodic pension cost and the rate of return on plan assets:

Weighted average discount rate

Expected long-term rate of return on assets

The weighted average discount rate was estimated based on setting a discount rate to establish an obligation for pension benefits equivalent to an amount that, if invested in high quality fixed income securities, would produce a return that matched the expected benefit payment stream.

The expected long-term rate of return on plan assets was based on historical returns and expectations of future returns based on asset mix, after consultation with our investment advisors and actuaries.

First Financial Trust & Asset Management Company, National Association, a wholly owned subsidiary of the Company, managed the pension plan assets as well as the profit sharing plan assets (see below).

The investment strategy and targeted allocations were based on similar strategies First Financial Trust & Asset Management Company, National Association employed for most of its managed accounts whereby appropriate diversification is achieved.

First Financial Trust & Asset Management Company, National Association was prohibited from holding investments deemed to be high risk by the Office of the Comptroller of the Currency.

As of December 31, 2018, the pension plan’s total assets included First Financial Bankshares, Inc.

common stock valued at approximately $ 3,373,000 .

The Company also provides a profit sharing plan, which covers substantially all full-time employees.

The profit sharing plan is a defined contribution plan and allows employees to contribute a percentage of their base annual salary.

Employees are fully vested to the extent of their contributions and become fully vested in the Company’s contributions over a six -year vesting period.

Costs related to the Company’s defined contribution plan totaled approximately $ 7,661,000 , $ 7,049,000 and $ 4,735,000 in 2019, 2018 and 2017, respectively, and are included in salaries and employee benefits in the accompanying consolidated statements of earnings.

As of December 31, 2019 and 2018, the profit sharing plan’s assets included First Financial Bankshares, Inc.

common stock valued at approximately $ 83,014,000 and $ 68,855,000 , respectively.

In 2004, after freezing our pension plan, we added a safe harbor match to the 401(k) plan.

We match a maximum of 4 % on employee deferrals of 5 % of their employee compensation.

Total expense for this matching in 2019, 2018 and 2017 was $ 2,759,000 , $ 2,588,000 and $ 2,392,000 , respectively, and is included in salaries and employee benefits in the statements of earnings.

or her termination in a single lump sum or installments, as elected by the participant.

At December 31, 2020, securities available-for-sale

and other assets on the consolidated balance sheet include $ 522,000 of SERP balances.

The Company made

contributions totaling $ 719,000 and $ 477,000 to the SERP for the years ended December 31, 2020 and 2019 ,

subsequent to the respective year ends, for certain

executive officers.

There were no contributions to this plan during the year ended December 31, 2018.

The Company has a directors’ deferred compensation plan whereby the directors may elect to defer up to 100 % of their directors’ fees.

All deferred compensation is invested in the Company’s common stock held in a rabbi trust.

All deferred compensation is invested in the Company’s common stock held in a rabbi trust wherein the funds are used to purchase Company common shares on the open market.

The stock is held in nominee name of the trustee, and the principal and earnings of the trust are held separate and apart from other funds of the Company and are used exclusively for the uses and purposes of the deferred compensation agreement.

The accounts of the trust have been consolidated in the financial statements of the Company.

As of December 31, 2020 and 2019, the rabbi trust held 938,591 and 927,408 shares, respectively, in trust for the Company’s directors

and are reflected as treasury shares on the consolidated financial statements.

The Company has acquired life insurance policies on certain current and former executives and directors of acquired entities.

At December 31, 2020 and 2019, other assets on the consolidated balance sheet include $ 31,584,000 and $ 15,299,000 and reported cash value income (net of related insurance premium expenses) of $ 822,000 , $ 359,000 and $ 396,000 in 2020, 2019 and 2018, respectively.

DIVIDENDS FROM SUBSIDIARIES:

At December 31, 2019, approximately $ 261,416,000

was available for the declaration of dividends by the Company’s subsidiaries without the prior approval of regulatory agencies.

At December 31, 2020, $ 289,684,000 was available for the declaration of dividends by the Company’s subsidiaries without the prior approval of regulatory agencies.

REGULATORY MATTERS:

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average assets less intangible assets.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

Beginning in January 2016, under the Basel III regulatory capital framework, the implementation of the capital conservation buffer was effective for the Company starting at the 0.625 % level and increased 0.625 % each year thereafter, until it reaches 2.5 % on January 1, 2019.

Beginning in January 2015, under the Basel III regulatory capital framework, the implementation of the capital conservation buffer was effective for the Company starting at the 0.625 % level and increased 0.625 % each year thereafter, until it reached 2.50 % on January 1, 2019.

The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments.

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The regulatory capital ratios as of December 31, 2020 and 2019 were calculated under Basel III rules.

There is no threshold for well-capitalized status for bank holding companies.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

As of December 31, 2020 and 2019, the regulatory capital ratios of the Company and Bank under the Basel III regulatory capital framework are as follows:

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First Financial Bank, N.A

Common Equity Tier 1 Capital to Risk-Weighted Assets:

Common Equity Tier 1 Capital

to Risk-Weighted Assets:

First Financial Bank, N.A

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First Financial Bank, N.A

At December 31, 2019 the Capital Conservative Buffer Basel III has been fully phased-in.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

Minimum Capital

Required Under

Basel III Phase-In

December 31, 2020 the Capital Conservative Buffer Basel III has been fully phased-in.

Minimum Capital

8 unchanged sentences

First Financial Bank, N.A

Common Equity Tier 1 Capital to Risk-Weighted Assets:

Common Equity Tier 1 Capital

to Risk-Weighted Assets:

First Financial Bank, N.A

1 unchanged sentence

First Financial Bank, N.A

In connection with the adoption of the Basel III regulatory capital framework, our subsidiary bank made the election to continue to exclude most accumulated other comprehensive income (“AOCI”) from capital in connection with its March 31, 2015 quarterly financial filing and, in effect, to retain the AOCI treatment under the prior capital rules.

In connection with the First Financial Trust & Asset Management Company, National Association’s (the “Trust Company”) application to obtain our trust charter, the Trust Company is required to maintain tangible net assets of $ 2,000,000 at all times.

In connection with the adoption of the Basel III regulatory capital framework, our subsidiary bank made the election to continue to exclude accumulated other comprehensive income from available-for-sale

securities (“AOCI”) from capital in connection with its quarterly financial filing and, in effect, to retain the AOCI treatment under the prior capital rules.

In connection with the First Financial Trust & Asset Management Company, N.A.’s (the “Trust Company”)

application to obtain our trust charter, the Trust Company is required to maintain tangible net assets of $ 2,000,000 at all times.

As of December 31, 2020, our Trust Company had tangible net assets totaling $ 33,513,000 .

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

Our subsidiary bank may be required at times to maintain reserve balances with the Federal Reserve Bank.

At December 31, 2019 and 2018, the subsidiary bank’s reserve balances were $ 17,274,000 and $ 11,372,000 , respectively.

At December 31, 2020 there was no subsidiary bank’s reserve balance required and at December 31, 2019, the subsidiary bank’s reserve balance required was

$ 17,274,000 .

STOCK OPTION PLAN AND RESTRICTED STOCK PLAN:

The Company has an incentive stock plan to provide for the granting of options to employees of the Company at prices not less than market at the date of grant.

At December 31, 2019, the Company had allocated 5,673,000

The Company has two incentive stock plans previously approved by the Company’s shareholders to provide for the granting of options to employees of the Company at prices not less than market at the date of grant.

At December 31, 2020, the Company had reserved

5,378,359 shares of stock for issuance under the plan.

The plan provides that options granted are exercisable after two years from date of grant at a rate of 20

% each year cumulatively during the 10

term of the option.

The plan provides that options granted are exercisable after

two years from date of grant at a rate of

20 % each year cumulatively during the 10 -year term of the option.

Shares are issued under the stock option plan from available authorized shares.

An analysis of stock option activity for the year ended December 31, 2020 is presented in the table and narrative below:

Aggregate Intrinsic

Outstanding, beginning of year

1 unchanged sentence

Exercisable at end of year

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

The options outstanding at December 31, 2020 had exercise prices ranging between $ 7.87 and $ 34.55 .

Stock options have been adjusted retroactively for the effects of stock dividends and splits.

Stock options have been adjusted retroactively for the effects of stock dividends and split s

The following table summarizes information concerning outstanding and vested stock options as of December 31, 2020:

Exercise Price

Number Vested

The fair value of the options granted during 2019 and 2017 were estimated using the

Black-Scholes options pricing model

with the following weighted-average assumptions:

The fair value of the options granted during 2020 and 2019 were

estimated using the Black-Scholes options pricing model with the following weighted-average assumptions:

risk-free interest rate of 1.83 %;

1.89 %, respectively;

expected dividend yield of 1.62 %;

1.79 %, respectively;

expected life of 6.64 ;

6.64 years and

6.24 years, respectively;

and expected volatility of 26.69 %.

26.51 %, respectively.

The weighted-average grant-date fair value of options granted during 2019 and 2017 was $ 7.31 and $ 4.95 , respectively.

The weighted-average grant-date fair value of options granted during 2020 and 2019 was $ 7.31 , respectively.

There were no grants during 2018.

The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017, was $ 5,742,000 , $ 5,476,000 and $ 3,082,000 , respectively.

The total intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018, was $ 4,052,000 , $ 5,742,000 and $ 5,476,000 ,

respectively.

The Company recorded stock option expense totaling $ 1,377,000 , $ 1,489,000 and $ 1,508,000 for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020, there was $ 4,977,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan.

1 unchanged sentence

The total fair value of shares vested during the years ended December 31, 2020, 2019 and 2018 was $ 1,293,000 , $ 1,693,000 and $ 888,000 .

The aggregate intrinsic value of vested stock options at December 31, 2019 totaled $ 14,234,000 .

On April 28, 2015, shareholders of the Company approved a restricted stock plan for selected employees, officers, non-employee

directors and consultants.

At December 31, 2019, the Company had allocated 686,000 shares of stock for issuance under the plan.

On April 26, 2016, upon re-election

of existing directors, 7,660 shares with a total value of $ 250,000 were granted to the ten

directors and was expensed over the period from grant day to April 25, 2017, the next scheduled annual shareholders’ meeting at which the directors’ current term expired.

On April 25, 2017, upon re-election

of existing directors, 14,650 restricted shares with a total value of $ 600,000 were granted to the ten

directors and was expensed over the period from grant day to April 24, 2018, the Company’s next shareholders’ meeting at which the directors’ term expires.

On April 24, 2018, upon re-election

of the existing directors, 10,710 restricted shares with a total value of $ 540,000 were granted to the nine

directors and is being expensed over the period from grant day to April 23, 2019, the Company’s next shareholders’ meeting at which the directors’ term expires.

The Company recorded director expense related to these restricted stock grants of $ 620,000 , $ 560,000 and $ 483,000 for the year ended December 31, 2019, 2018, and 2017, respectively.

On April 23, 2019, upon election of eleven directors, 21,714 restricted shares with a total value of $ 660,000 were granted to the eleven non-employee

directors, and is being expensed over the period from grant day to April 28, 2020, the Company’s next shareholders’ meeting at which directors’ term expires.

On October 27, 2015, the Company granted 31,273 shares with a total value of $ 1,060,000 to certain officers that is being expensed over the vesting period of three years .

On October 25, 2016, the Company granted 15,405 shares with a total value of $ 560,000 to certain officers that is being expensed over the vesting period of three years .

On October 24, 2017, the Company granted 14,191 restricted shares with a total value of $ 655,000 to certain officers that is being expensed over the vesting period of one to three years .

On October 23, 2018, the Company granted 26,021 restricted shares with a total value of $ 1,440,000 to certain officers that will be expensed over a three -year vesting period.

On June 26, 2019, the Company granted 23,428 restricted shares with a total value of

certain officers that will be expensed over a three -year vesting period.

On October 22, 2019, the Company granted

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

Years Ended December 31, 2020, 2019 and 2018

22,188 restricted shares with a total value of $ 785,000

to certain officers that will be expensed over a three -year vesting period.

The Company recorded restricted stock expense for officers of $ 995,000

and $ 562,000

, respectively, for the year ended December 31, 2019, 2018 and 2017.

On April 28, 2015, shareholders of the Company approved a restricted stock plan for selected employees, officers, non-employee

directors and consultants.

At December 31, 2020, the Company had allocated 633,524 shares of stock for issuance under the plan.

The following table summarized information about vested and unvested restricted stock outstanding at December 31, 2020, 2019 and 2018, respectively.

For the year ended

Balance at beginning of period

Forfeited/expired

Balance at end of period

The total fair value of restricted stock vested was $ 1,924,000 , $ 1,597,000 and $ 1,385,000 for the years ended December 31, 2020, 2019 and 2018, respectively.

The Company recorded restricted stock expense for officers of $ 1,301,000 , $ 995,000 and $ 680,000 , respectively, for the years ended December 31, 2020, 2019 and 2018.

The Company recorded director expense related to these restricted stock grants of $ 635,000 , $ 620,000 and $ 560,000 for the years ended December 31, 2020, 2019, and 2018, respectively.

As of December 31, 2020 and 2019, there were $ 2,157,000 and $ 2,456,000 , respectively, of total unrecognized compensation cost related to unvested restricted stock which is expected to be recognized over a weighted-average period of 1.69 years and 1.67 years, respectively.

At December 31, 2020 and 2019, there was $ 49,000 and $ 46,000 , respectively, accrued in other liabilities related to dividends declared to be paid upon vesting.

CONDENSED FINANCIAL INFORMATION—PARENT COMPANY:

8 unchanged sentences

Intangible assets

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

LIABILITIES AND SHAREHOLDERS’ EQUITY

8 unchanged sentences

Total liabilities and shareholders’ equity

Eliminates in consolidation.

Condensed Statements of Earnings-

7 unchanged sentences

Income tax benefit

Eliminates in consolidation.

FIRST FINANCIAL BANKSHARES, INC.

8 unchanged sentences

Depreciation and amortization, net

Gain on sale of assets, net

Decrease (increase) in other assets

2 unchanged sentences

Cash flows from investing activities:

Cash received in connection with acquisition of banks

Maturity of available-for-sale

4 unchanged sentences

Cash dividends paid

Repurchase of stock

Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents, beginning of year

13 unchanged sentences

Investment securities purchased but not settled

Restricted stock grant to officers and directors

On October 12, 2017

, we entered into an agreement and plan of reorganization to acquire Commercial Bancshares, Inc.

Restricted stock granted to officers and directors

Stock issued in acquisition of TB&T Bancshares, Inc.

Stock issued in acquisition of Commercial Bancshares, Inc.

Commercial Bancshares, Inc.

On October 12, 2017 , we entered into an agreement and plan of reorganization to acquire Commercial Bancshares, Inc.

and its wholly owned bank subsidiary, Commercial State Bank, Kingwood, Texas.

14 unchanged sentences

Fair value of consideration paid:

Common stock issued ( 1,289,371

Common stock issued ( 1,289,371 shares)

Fair value of identifiable assets acquired:

16 unchanged sentences

Commercial State Bank had branches in Kingwood, Fulshear, El Campo and Palacios, all located around Houston, Texas.

SUBSEQUENT EVENT

On January 1, 2020, the Com

pany 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, National Association, respectively.

Considerations paid to the shareholders of TB&T

Bancshares , Inc.

totaled approximately

6,276,000 shares of the Company’s common stock with an aggregate value of $

220,300,000 at January 1, 2020.

In addition, TB&T Bancshares, Inc.

TB&T Bancshares, Inc.

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 December 31, 2019, The Bank & Trust of Bryan/College Station, Texas had gross loans totaling $ 455,400,000 , total deposits of $ 551,900,000 and total assets of $ 631,100,000 .

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.

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020, 2019 and 2018

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)

Fair value of identifiable assets acquired:

Cash and cash equivalents

Securities available-for-sale

Identifiable intangible assets

Total identifiable assets acquired

Fair value of liabilities assumed:

Other liabilities

Total liabilities assumed

Fair value of net identifiable assets acquired

Goodwill resulting from acquisition

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 .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures