What changed in this filing

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Item 1. Financial Statements

2021-05-05 compared with 2020-11-04 · 550 added, 533 removed, 468 unchanged (70% of the section changed)

1 unchanged sentence

The consolidated balance sheets of First Financial Bankshares, Inc.

and Subsidiaries (the “Company” or “we”) at September 30, 2020 and 2019 (unaudited) and December 31, 2019, and the consolidated statements of earnings, comprehensive earnings and shareholders’ equity for the three and nine-months ended September 30, 2020 and 2019 (unaudited), and the consolidated statements of cash flows for the nine-months ended September 30, 2020 and 2019 (unaudited) and notes to consolidated financial statements (unaudited), follow on pages 4 through 38.

and Subsidiaries (the “Company” or “we”) at March 31, 2021 and 2020 (unaudited) and December 31, 2020, and the consolidated statements of earnings, comprehensive earnings, shareholders’ equity and cash flow for the three-months ended March 31, 2021 and 2020 (unaudited) and notes to consolidated financial statements (unaudited), follow on pages 4 through 45.

FIRST FINANCIAL BANKSHARES, INC.

2 unchanged sentences

(Dollars in thousands, except per share amounts)

September 30,

CASH AND DUE FROM BANKS

FEDERAL FUNDS SOLD

INTEREST-BEARING DEMAND DEPOSITS IN BANKS

1 unchanged sentence

SECURITIES AVAILABLE-FOR-SALE,

at fair value

at fair value (amortized cost of these securities was $ 4,961,438 , $ 3,950,510 and $ 4,177,179 as of March 31, 2021 and 2020 and December 31, 2020, respectively)

Held-for-investment

Less - allowance for loan losses

Less - allowance for credit losses

Net loans held-for-investment

Held-for-sale ($ 94,666 , $ 39,735 and $ 23,076 at fair value at September 30, 2020 and 2019 and

December 31, 2019, respectively)

Held-for-sale

($ 61,511 , $ 39,659 and $ 79,585 at fair value at March 31, 2021 and 2020 and December 31, 2020, respectively)

BANK PREMISES AND EQUIPMENT, net

GOODWILL AND INTANGIBLE ASSETS, net

INTANGIBLE ASSETS, net

LIABILITIES AND SHAREHOLDERS’ EQUITY

8 unchanged sentences

Common stock - ($ 0.01 par value, authorized 200,000,000 shares;

142,121,595 , 135,822,456 and

135,891,755 shares issued at September 30, 2020 and 2019 and December 31, 2019, respectively)

142,285,611 , 142,314,930 and 142,161,834 shares issued at March 31, 2021 and 2020 and December 31, 2020, respectively)

Capital surplus

1 unchanged sentence

Treasury stock (shares at cost:

934,859 , 928,287 and 927,408 at September 30, 2020 and 2019 and

December 31, 2019, respectively)

938,004 , 928,417 and 938,591 at March 31, 2021 and 2020 and December 31, 2020, respectively)

Deferred compensation

Accumulated other comprehensive earnings, net of income taxes

Accumulated other comprehensive earnings, net

Total shareholders’ equity

5 unchanged sentences

(Dollars in thousands, except per share amounts)

September 30,

Three-Months Ended March 31,

INTEREST INCOME:

2 unchanged sentences

Exempt from federal income tax

Interest on federal funds sold and interest-bearing demand

deposits in banks

Interest on federal funds sold and interest-bearing demand deposits in banks

Total interest income

3 unchanged sentences

Net interest income

PROVISION FOR CREDIT

Net interest income after provision s

PROVISION FOR CREDIT LOSSES

Net interest income after provisions for credit losses

NONINTEREST INCOME:

3 unchanged sentences

Net gain on sale of available-for-sale

securities (includes $ 36 and $ 52 for the three -

months ended September 30, 2020 and 2019, respectively, and $ 3,610 and $ 728 for the nine -

months ended September 30, 2020 and 2019, respectively, related to accumulated other comprehensive earnings reclassifications)

Net gain on sale of foreclosed assets

Net gain (loss) on sale of assets

Net gain on sale of assets

Interest on loan recoveries

2 unchanged sentences

Salaries, commissions and employee benefits

Loss from partial settlement of pension plan

Net occupancy expense

10 unchanged sentences

INCOME TAX EXPENSE

(includes $ 8 and $ 11 for the three -months

ended September 30, 2020 and 2019, respectively, and $ 758 and $ 153 for the nine -months

ended September 30, 2020 and 2019, respectively, related to income tax expense from reclassification items)

EARNINGS PER SHARE, BASIC

EARNINGS PER SHARE, DILUTED

NET EARNINGS PER SHARE, BASIC

NET EARNINGS PER SHARE, DILUTED

DIVIDENDS PER SHARE

4 unchanged sentences

(Dollars in thousands)

September 30,

Three-Months Ended March 31,

OTHER ITEMS OF COMPREHENSIVE EARNINGS:

1 unchanged sentence

before income taxes

Reclassification adjustment for realized 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 taxes

Total other items of comprehensive earnings

Income tax expense related to other items of comprehensive earnings

Income tax benefit (expense) related to:

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

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

Total income tax benefit (expense)

COMPREHENSIVE EARNINGS

7 unchanged sentences

Shareholders’

Balances at June 30, 2019 (unaudited)

Net earnings (unaudited)

Stock option exercises (unaudited)

Cash dividends declared, $ 0.12 per share (unaudited)

Change in unrealized gain in investment securities

available-for-sale,

net of related income taxes (unaudited)

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

Stock option expense (unaudited)

Balances at September 30, 2019 (unaudited)

Balances at June 30, 2020 (unaudited)

Net earnings (unaudited)

Stock option exercises (unaudited)

Cash dividends declared, $ 0.13 per share (unaudited)

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

net of related income taxes (unaudited)

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

Stock option expense (unaudited)

Balances at September 30, 2020 (unaudited)

FIRST FINANCIAL BANKSHARES, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars in thousands, except per share amounts)

Treasury Stock

Comprehensive

Shareholders’

Balances at December 31, 2019

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

Net earnings (unaudited)

2 unchanged sentences

Cash dividends declared, $ 0.12 per share (unaudited)

Change in unrealized gain in investment securities

available-for-sale,

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

net of related income taxes (unaudited)

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

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

Stock option expense (unaudited)

stock split in the form of a 100 % stock

Balances at September 30, 2019 (unaudited)

Balances at March 31, 2020 (unaudited)

Balances at December 31, 2020

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

Net earnings (unaudited)

Stock option exercises (unaudited)

Restricted stock grant (unaudited)

Restricted stock grant/fortfeiture, net (unaudited)

Cash dividends declared, $ 0.13 per share (unaudited)

3 unchanged sentences

Stock option expense (unaudited)

Shares repurchased under stock repurchase authorization (unaudited)

Balances at September 30, 2020 (unaudited)

Balances at March 31, 2021 (unaudited)

See notes to consolidated financial statements.

3 unchanged sentences

(Dollars in thousands)

Nine-Months Ended

September 30,

Three-Months Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

3 unchanged sentences

Securities premium amortization, net

Discount accret ion on purchased loans

Discount accretion on purchased loans

Gain on sale of assets, net

Deferred federal income tax (expense) benefit

Change in loans held-for-sale

5 unchanged sentences

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

Net decrease in interest-bearing time deposits in banks

Activity in available-for-sale

Net increase in loans held -for-investment

Net (increase) decrease in loans held-for-investment

Purchases of bank premises and equipment

2 unchanged sentences

CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in noninterest-bearing deposits

Net increase (decrease) in noninterest-bearing deposits

Net increase in interest-bearing deposits

Net increase (decrease) in borrowings

Net increase in borrowings

Common stock transactions:

Proceeds from stock

option exercises

Proceeds from stock option exercises

Dividends paid

Repurchase of stock

Net cash provided by financing activities

NET DE CREASE

IN CASH AND CASH EQUIVALENTS

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, beginning of period

2 unchanged sentences

Interest paid

Federal income taxes paid

Transfer of loans and bank premises to other real estate

Investment securities purchased but not settled

Restricted stock grant to officers and directors

Investment securities sold but not yet settled

Restricted stock grant (forfeiture)

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

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Note 1 – Summary of Significant Accounting Policies

Nature of Operations

First Financial Bankshares, Inc.

(a Texas corporation) (“Company,” “we” or “us”) is a financial holding company which owns all of the capital stock of one bank with 78 locations located in Texas as of September 30, 2020.

The Company’s subsidiary bank is First Financial Bank, N.

The Company’s primary source of revenue is providing loans and banking services to consumers and commercial customers in the market area in which First Financial Bank, N.A., is located.

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

(a 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 March 31, 2021.

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.

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.

2 unchanged sentences

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles (U.S.

GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.

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

1 unchanged sentence

All significant intercompany accounts and transactions have been eliminated.

Stock Split and Increase in Authorized Shares

On April 23, 2019, the Company’s Board of Directors declared a two-for-one stock split of the Company’s outstanding common shares in the form of a 100% stock dividend effective on June 3, 2019.

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

All per share amounts in this report have been restated to reflect this stock split.

An amount equal to the par value of the additional common shares issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock in the consolidated financial statements as of and for the nine-months

ended September 30, 2019.

Stock Repurchase

1 unchanged sentence

Previously, the Board of Directors had authorized the repurchase of up to 2,000,000 common shares through September 30, 2020.

The stock repurchase plan authorizes management to repurchase and ret

the stock at such time as repurchases a nd

are considered beneficial to the Company and 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 stockholders.

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

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

Through September 30, 2020, 324,802 shares were repurchased totaling $ 8,008,000 under this repurchase plan.

Subsequent to September 30, 2020 and through November 4

no additional shares were repurchased.

Through March 31, 2021, 324,802 shares were repurchased and retired (all during the months of March and April 2020) totaling $ 8,008,000 under this repurchase plan.

On January 1, 2020, the Company acquired 100 % of the outstanding capital stock of TB&T Bancshares, Inc.

1 unchanged sentence

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.

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.

1 unchanged sentence

See Note 10 for additional information.

Status of New Accounting Standard for Accounting for Allowance for Credit Losses

Adoption of New Accounting Standards

On January 1, 2020, ASU 2016-13,

1 unchanged sentence

Measurement of Credit Losses on Financial Instruments

, became effective for the Company which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology.

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

CECL also applies to off-balance

sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments).

In addition, ASU 2016-13

made changes to the accounting for available-for-sale

, 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 unexpected 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.

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

It also applies to off-balance-sheet

(“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 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.

until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020.

The Company elected to delay its implementation of ASU 2016-13

and has calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASU 2016-13

for the three and nine-months ended September 30, 2020.

Prior to the CARES Act being signed and our election to delay the implementation of CECL, we were completing our CECL implementation plan with our cross-functional working group, under the direction of our Chief Credit Officer along with our Chief Accounting Officer, Chief Lending Officer and Chief Financial Officer.

The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others.

Our implementation plan included assessment and documentation of processes, internal controls and data sources;

model development, documentation and validation;

and system configuration, among other things.

We contracted with a third-party vendor to assist us in the implementation of CECL.

Currently we expect to adopt CECL during the fourth quarter of 2020 with retroactive application to January 1, 2020 which may require adjustments to the amounts for provision for credit losses for the three and nine-months ended September 30, 2020.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States that included an option for entities to delay the implementation of 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 its implementation of CECL and calculated and recorded the provision for credit losses through the nine-months ended September 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.

For the 2020 interim reporting periods, the 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.

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 March 31, 2021 and 2020, and December 31, 2020, amounts related to the Company’s PCD and PCI loans were insignificant and disclosures related to these balances have been omitted.

Other Recently Issued and Effective Authoritative Accounting Guidance

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.

“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.

“Intangibles – Goodwill and Other.”

11 unchanged sentences

Simplifying the Accounting for Income Taxes.”

simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up

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.

1 unchanged sentence

Adoption of ASU 2019-12

is not expected to have a material impact on the Company’s financial statements.

did not have a significant impact on the Company’s financial statements and related disclosures.

“Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.”

provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met.

applies only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.

was effective upon issuance and generally can be applied through December 31, 2022.

The adoption of ASU 2020-04

did not have a significant impact on our financial statements.

“Reference Rate Reform (Topic 848):

clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

was effective upon issuance and generally can be applied through December 31, 2022.

The adoption of ASU 2021-01

did not have a significant impact on our financial statements.

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.

Increases or decreases in the fair value of equity securities are recorded in earnings.

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 three-months ended March 31, 2021 and 2020.

The Company records its available-for-sale

debt 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.

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

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

Available-for-sale

and held-to-maturity

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

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

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

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

The Company’s investment portfolio

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

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 marketplace as a result of the illiquid market specific to the type of security.

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.

1 unchanged sentence

The Company validates prices supplied by the independent pricing services by comparison to prices obtained from other third-party sources on a quarterly basis.

Loans Held-for-Investment

and Allowance for Loan Losses

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.

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 the adoption, 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 March 31, 2021, 2020 and December 31, 2020, the Company held no securities that were classified as held-to-maturity.

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

qualitative factors such as current local economic conditions and trends, including, without limitations, unemployment, oil and gas prices, drought conditions, changes in lending staff, policies and procedures, changes in credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans.

This qualitative reserve serves to estimate for additional areas of losses inherent in our portfolio that are not reflected in our historic loss factors.

Although we believe we use the best information available to make loan loss allowance determinations, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making our initial determinations.

A decline in the economy could result in increased levels of non-performing

assets and charge-offs, increased loan provisions and reductions in income.

Additionally, bank regulatory agencies periodically review our allowance for loan losses and methodology and could require, in accordance with U.S.

GAAP, additional provisions to the allowance for loan losses based on their judgment of information available to them at the time of their examination as well as changes to our methodology.

Accrual of interest is discontinued on a loan and payments are applied to principal when management believes, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful.

Except consumer loans, generally all loans past due greater than 90 days, based on contractual terms, are placed on nonaccrual.

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

Consumer loans are generally charged-off

when a loan becomes past due 90 days.

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

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 September 30, 2020 and 2019 and December 31, 2019, all significant impaired loans have been determined to be collateral dependent and the allowance for loss has been measured utilizing the estimated fair value of the collateral less cost to sell.

From time to time, the Company modifies its loan agreement with a borrower.

A modified loan is considered a troubled debt restructuring when two conditions are met:

(i) the borrower is experiencing financial difficulty and (ii) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit risk characteristics.

Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity.

For all impaired loans, including the Company’s troubled debt restructurings, the Company performs a periodic, well-documented credit evaluation of the borrower’s financial condition and prospects for repayment to assess the likelihood that all principal and interest payments required under the terms of the agreement will be collected in full.

When doubt exists about the ultimate collectability of principal and interest, the troubled debt restructuring remains on non-accrual

status and payments received are applied to reduce principal to the extent necessary to eliminate such doubt.

This determination of accrual status is judgmental and is based on facts and circumstances related to each troubled debt restructuring.

Each of these loans is individually evaluated for impairment and a specific reserve is recorded based on probable losses, taking into consideration the related collateral, modified loan terms and cash flow.

As of September 30, 2020 and 2019, and December 31, 2019, substantially all of the Company’s troubled debt restructured loans were on non-accrual.

The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19

made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19

national emergency.

The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019.

The Company elected to adopt these provisions of the CARES Act.

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

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

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

status and credit risk ratings.

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

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

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

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

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

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

difference to accretable yield, which will be recognized prospectively.

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

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

The carrying amount of purchased credit impaired loans at September 30, 2020 and 2019 and December 31, 2019 were $ 5,978,000 , $ 342,000 and $ 251,000 , respectively, compared to a contractual balance of $ 8,469,000 , $ 605,000 and $ 345,000 , respectively.

Other purchased credit impaired loan disclosures have been omitted due to immateriality.

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, 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 collectability 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.

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.

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 the adoption of ASC 326, 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 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 forecast period, including the Company’s expected 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 Commercial and Industrial (“C&I”), Municipal, Agricultural, Construction and Development, Farm, Non-Owner

Occupied and Owner Occupied Commercial Real Estate (“CRE”), Residential, Consumer Auto and Consumer Non-Auto.

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 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

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 March 31, 2021, 2020 and December 31, 2020, the Company’s reserve for unfunded commitments totaled $ 6,918,000 , $ 809,000 and $ 5,486,000 , respectively.

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.

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Goodwill with an indefinite life is not amortized, but rather tested annually for impairment as of June 30 each year.

There was no impairment recorded for the three and nine-months

ended September 30, 2020 or 2019, respectively.

There was no impairment recorded for the three-months ended March 31, 2021 or 2020, respectively.

Securities Sold Under Agreements To Repurchase

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Statements of Cash Flows

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

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

Accumulated Other Comprehensive Earnings (Loss)

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

securities (after applicable income tax e

) totaling $ 152,063,000 ,

$ 73,521,000 and

September 30, 2020 and 2019 and December 31, 2019 ,

respectively, and the minimum pension liability (after applicable income tax benefit) totaling ($ 1,324,000 ) at September 30, 2019, are included in accumulated other comprehensive earnings

There were no amounts under the minimum pension liability at September 30, 2020 or December 31, 2019

(see note 9).

securities (after applicable income taxes) totaling $ 117,009,000 , $ 123,576,000 and $ 170,395,000 at March 31, 2021 and 2020, and December 31, 2020, respectively, are included in accumulated other comprehensive earnings.

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

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

The Company recorded stock option expense totaling $ 344,000 and $ 431,000 for the three-months ended September 30, 2020 and 2019, respectively.

The Company recorded stock option expense totaling $ 1,033,000 and $ 1,056,000 for the nine-months ended September 30, 2020 and 2019, respectively.

The 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.

The Company recorded expenses associated with its director and officer restricted stock grants totaling $ 569,000 and $ 433,000 , for the three-months ended September 30, 2020 and 2019, respectively.

The Company recorded expenses associated with its director and officer restricted stock grants totaling $ 1,501,000 and $ 1,116,000 for the nine-months ended September 30, 2020 and 2019, respectively.

The grant date fair value is amortized over the vesting period which generally is one to three years.

See Note 8 for further information.

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

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

Anti-dilutive shares for the three and nine-months ended September 30, 2020

approximately

15,000 respectively, and were

excluded from the computation of EPS.

For the three and nine-months ended September 30, 2019, there were no anti-dilutive shares

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

(in thousands)

For the three-months ended September 30, 2020:

Net earnings per share, basic

Effect of stock options and stock grants

Net earnings per share, diluted

(in thousands)

Fo r the nine-month s

ended September 30, 2020 :

Net earnings per share, basic

Effect of stock options and stock grants

Net earnings per share, diluted

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

There were no anti-dilutive shares for the three-months ended March 31, 2021 and 2020.

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

(in thousands)

For the three-months ended September 30, 2019 :

For the three-months ended March 31, 2021:

Net earnings per share, basic

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(in thousands)

For the nine-months ended Septe mber 30, 2019:

For the three-months ended March 31, 2020:

Net earnings per share, basic

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Note 2 - Securities

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

securities follows (in thousands):

September 30, 2020

Holding Gains

Holding Losses

Debt securities have been classified in the 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 (in thousands):

March 31, 2021

Securities available-for-sale:

Obligations of states and political subdivisions

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Total securities available-for-sale

September 30, 2019

Holding Gains

Holding Losses

March 31, 2020

Securities available-for-sale:

Treasury securities

Obligations of states and political subdivisions

Corporate bonds and other

Residential mortgage-backed securities

Commercial mortgage-backed securities

Corporate bonds and other

Total securities available-for-sale

December 31, 2020

Holding Gains

Holding Losses

Treasury securities

Securities available-for-sale:

Obligations of states and political subdivisions

Corporate bonds and other

Residential mortgage-backed securities

Commercial mortgage-backed securities

Corporate bonds and other

Total securities available-for-sale

The Company invests in mortgage-backed securities that have expected maturities

that differ from their contractual maturities.

The Company did not hold any securities classified as held-to-maturity

at March 31, 2021, March 31, 2020, or December 31, 2020.

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

These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty.

These securities include collateralized mortgage obligations (CMOs) and other asset backed securities.

The expected maturities of these securities at September 30, 2020 were computed by using scheduled amortization of balances and historical prepayment rates.

The expected maturities of these securities at March 31, 2021 and 2020, and December 31, 2020, were computed by using scheduled amortization of balances and historical prepayment rates.

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

securities at September 30, 2020 by contractual and expected maturity, are shown below (in thousands):

securities at March 31, 2021, by contractual and expected maturity, are shown below (in thousands):

Estimated Fair

Due within one year

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Due after ten years

Mortgage-backed securities

The following tables disclose the Company’s investment securities that have been in a continuous unrealized-loss

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12 Months or Longer

September 30, 2020

March 31, 2021

Obligations of states and political subdivisions

Residential mortgage-backed securities

Commercial mortgage-backed securities

Corporate bonds and other

Less than 12 Months

12 Months or Longer

September 30, 2019

March 31, 2020

Obligations of states and political subdivisions

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Commercial mortgage-backed securities

Corporate bonds and other

Less than 12 Months

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Commercial mortgage-backed securities

The number of investments in an unrealized loss position totaled 80 at September 30, 2020.

We do not believe these unrealized losses are “other-than-temporary” as (i) we do not have the intent to sell our securities prior to recovery and/or maturity and (ii) it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity.

In making this determination, we also consider the length of time and extent to which fair value has been less than cost and the financial condition of the issuer.

The unrealized losses noted are interest rate related due to the level of interest rates at September 30, 2020 compared to the time of purchase.

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

The number of investments in an unrealized loss position totaled 149 at March 31, 2021.

Any unrealized losses in the obligations of state and political subdivisions, residential and commercial mortgage-backed and asset-backed investment securities at March 31, 2021 and 2020, and 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 March 31, 2021 and 2020, and 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 September 30, 2020, 80.94 % of our available-for-sale

At March 31, 2021, 77.27 % of our available-for-sale

securities that are obligations of states and political subdivisions were issued within the State of Texas, of which 52.70 % are guaranteed by the Texas Permanent School Fund.

At September 30, 2020, $ 2,884,337 ,000 of the Company’s securities were pledged as collateral for public or trust fund deposits, repurchase agreements, a borrowing line with the Federal Reserve Bank of Dallas and for other purposes required or permitted by law.

During the three -

months ended September 30, 2020 and 2019, sales of investment securities that were classified as available-for-sale

totaled $ 10,084 ,000 and $ 1,352 ,000, respectively.

Gross realized gains from security sales during the third quarter of 2020 and 2019 totaled $ 36,000 and $ 54,000 , respectively.

Gross realized losses from security sales during the three-month period ended September 30, 2019 totaled $ 2,000 .

There were no gross realized losses from security sales during the three-month period ended September 30, 2020.

During the nine -

months ended September 30, 2020 and 2019, sales of investment securities classified as available-for-sale

At March 31, 2021, $ 3,103,077,000 of the Company’s securities were pledged as collateral for public or trust fund deposits, repurchase agreements, a borrowing line with the Federal Reserve Bank of Dallas and for other purposes required or permitted by law.

During the three-months ended March 31, 2021 and 2020, sales of investment securities that were classified as available-for-sale

totaled $ 10,631 ,000 and $ 95,437 ,000, respectively.

Gross realized gains from security sales during the nine-month periods ended September 30, 2020 and 2019 totaled $ 3,614,000 and $ 747,000 , respectively.

Gross realized losses from security sales during the nine-month periods ended September 30, 2020 and 2019 totaled $ 4,000 and $ 19,000 , respectively.

Gross realized gains from security sales during the first quarter of 2021 and 2020 totaled $ 808,000 and $ 2,062,000 , respectively.

There were no gross realized losses from security sales during the three-month periods ended March 31, 2021 and 2020, respectively.

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

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and Allowance for Loan Losses

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

For the periods ended March 31, 2021 and December 31, 2020, the following tables outline the Company’s loan portfolio by the ten portfolio segments where applicable.

For disclosures related to the period ended March 31, 2020, management has elected to maintain its previously disclosed loan segments.

Loans held-for-investment

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

September 30,

Total loans held-for-investment

by portfolio segment are as follows (in thousands):

Total Commercial

Construction & Development

Owner Occupied CRE

Total Real Estate

Total Consumer

Allowance for credit losses

Outstanding loan balances at March 31, 2021 and 2020, and December 31, 2020, 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 September 30, 2020, $ 3,150,534,000 in loans held by our bank subsidiary were subje c

t to blanket liens as security for this line of credit.

At September 30, 2020, there was $ 30,000,000 outstanding under this line of credit.

The Company’s non-accrual

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

September 30,

At March 31, 2021, $ 3,252,192,000 in loans held by our bank subsidiary were subject to blanket liens as security for this line of credit.

At March 31, 2021, there was no balance outstanding under this line of credit.

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

Loans still accruing and past due 90 days or more

Troubled debt restructured loans still accruing*

Includes $ 5,978,000 , $ 342,000 and $ 251,000 of purchased credit impaired loans as of September 30, 2020 and 2019, and December 31, 2019, respectively.

Troubled debt restructured loans of $ 4,478,000 , $ 3,983,000 and $ 4,791,000 , whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in non-accrual

loans at September 30, 2020 and 2019, and December 31, 2019,

respectively.

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

September 30,

Recorded Investment

Valuation Allowance

Troubled debt restructured loans of $ 6,619,000

, $ 4,733,000

and $ 7,407,000

, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in nonaccrual loans at March 31, 2021 and 2020, and December 31, 2020, respectively.

The Company had $ 39,658,000 , $ 40,444,000 and $ 42,898,000 in non-accrual,

past due 90 days or more and still accruing, restructured loans and foreclosed assets at September 30, 2020 and 2019, and December 31, 2019, respectively.

loans at September 30, 2020 and 2019, and December 31, 2019, consisted of the following by class of financing receivables (in thousands):

September 30,

No significant additional funds are committed to be advanced in connection with impaired loans as of September 30, 2020.

The Company’s impaired loans and related allowance are summarized in the following tables by class of financing receivables (in thousands).

No interest income was recognized on impaired loans subsequent to their classification as impaired.

September 30, 2020

Includes $ 5,978,000 of purchased credit impaired loans.

September 30, 2019

Includes $ 342,000 of purchased credit impaired loans.

past due 90 days or more and still accruing, restructured loans and foreclosed assets at March 31, 2021 and 2020, and December 31, 2020, respectively.

loans at March 31, 2021 and 2020, and December 31, 2020, consisted of the following (in thousands):

Total Commercial

Construction & Development

Owner Occupied CRE

Total Real Estate

Total Consumer

significant additional funds are committed to be advanced in connection with nonaccrual loans as of March 31, 2021.

Summary information on the allowance for credit losses for the three-months ended March 31, 2021 and 2020, are outlined by portfolio segment in the following tables (in thousands):

March 31, 2021

Construction &

Beginning balance

Provision for loan losses

Ending balance

March 31, 2021 (continued)

Beginning balance

Provision for loan losses

Ending balance

March 31, 2020

Beginning balance

Provision for loan losses

Ending balance

Additionally, the Company records a reserve for unfunded commitments in other liabilities which totaled $ 6,918,000 , $ 809,000 and $ 5,486,000 at March 31, 2021 and 2020, and December 31, 2020, respectively.

The reversal of provision for credit losses of $ 1,997,000

reported in the consolidated statement of earnings for the three-months ended March 31, 2021 is the aggregate reversal of provision of loan losses of $ 3,429,000

net of the provision for unfunded commitments of $ 1,432,000

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

dependent) and their related allowances as of March 31, 2021 and December 31, 2020, are summarized in the following table by loan segment (in thousands):

March 31, 2021

Dependent Loans

Evaluated for

Credit Losses

Dependent Loans

Evaluated for

Credit Losses

Non-Collateral

Evaluated for

Credit Losses

Non-Collateral

Allowance for

Credit Losses

Evaluated for

Credit Losses

Total Commercial

Construction & Development

Owner Occupied CRE

Total Real Estate

Total Consumer

December 31, 2020

Includes $ 251,000 of purchased credit impaired loans.

The Company recognized interest income on impaired loans prior to being recognized as impaired of approximately $ 750,000 during the year ended December 31,

Such amounts for the three-month and nine-month periods ended September 30, 2020 and 2019 were not significant.

Dependent Loans

Evaluated for

Credit Losses

Dependent Loans

Evaluated for

Credit Losses

Non-Collateral

Evaluated for

Credit Losses

Non-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 March 31, 2020, in accordance with the legacy “incurred loss” methodology disclosure requirements (in thousands):

March 31, 2020

The Company’s allowance for loans that are individually evaluated for credit losses and collectively evaluated for credit losses as of March 31, 2021 and December 31, 2020, are summarized in the following table by loan segment (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.

March 31, 2021

Loans individually evaluated for credit losses

Loans collectively

evaluated for credit losses

March 31, 2021 (continued)

Loans individually evaluated for credit losses

Loans collectively evaluated for credit losses

December 31, 2020

Construction &

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 March 31, 2020, are summarized in the following table by loan segment in accordance with the legacy “incurred loss” methodology disclosure requirements (in thousands):

March 31, 2020

Loans individually evaluated for impairment

Loan collectively evaluated for impairment

The Company’s recorded investment in loans as of March 31, 2021 and December 31, 2020, related to the balance in the allowance for credit losses on the basis of the Company’s adopted ASC 326 evaluation methodology follows below (in thousands):

March 31, 2021

Construction &

Loans individually evaluated for credit losses

Loans collectively evaluated for credit losses

March 31, 2021 (continued)

Loans individually evaluated for credit losses

Loans collectively evaluated for credit losses

December 31, 2020

Construction &

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 recorded investment in loans as of March 31, 2020, related to the balance in the allowance for loan losses on the basis of the Company’s legacy “incurred loss” impairment methodology follows below (in thousands):

March 31, 2020

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:

13 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.

Credits rated doubtful are generally also placed on nonaccrual.

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

by class of financing receivables and portfolio segments, which are the same (in thousands):

September 30, 2020

September 30, 2019

December 31, 2019

including the year of origination, by portfolio segments, at March 31, 2021 (in millions):

Special mention

Construction & Development

Special mention

Owner Occupied CRE

Special mention

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

including the year of origination, by portfolio segments, at December 31, 2020 (in millions):

Special mention

Construction & Development

Special mention

Owner Occupied CRE

Special mention

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

at March 31, 2020 (in million):

March 31, 2020

The Company’s past due loans are as follows (in thousands):

September 30, 2020

September 30, 2019

Agricultura l

Table of Content s

March 31, 2021

Total Commercial

Construction & Development

Owner Occupied CRE

Total Real Estate

Total Consumer

December 31, 2020

Total Commercial

Construction & Development

Owner Occupied CRE

Total Real Estate

Total Consumer

March 31, 2020

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

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

The following table details the allowance for loan losses by portfolio segment (in thousands).

There were no allowances for purchased credit impaired loans at September 30, 2020 and 2019, and December 31, 2019.

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

September 30, 2020

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

September 30, 2019

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

December 31, 2019

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Changes in the allowance for loan losses are summarized as follows by portfolio segment (in thousands):

September 30, 2020

Beginning balance

Provision for loan losses

Ending balance

September 30, 2019

Beginning balance

Provision for loan losses

Ending balance

September 30, 2020

Beginning balance

Provision for loan losses

Ending balance

September 30, 2019

Beginning balance

Provision for loan losses

Ending balance

, the Company records a reserve for unfunded commitments in other liabilities which totaled $ 2,300,000 at September 30, 2020 and $ 800,000 at September 30, 2019 and December 31, 2019.

The increase is the result of a $ 1,500,000 provision for unfunded commitments during the three-months ended September 30, 2020.

The provision for loan losses above is combined with the provision for unfunded commitments and reported as provision for credit losses in the statement of earnings.

The Company’s recorded investment in loans related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology is as follows (in thousands).

Purchased credit impaired loans of $ 5,978,000 , $ 342,000 and $ 251,000 at September 30, 2020 and 2019, and December 31, 2019, respectively, are included in loans individually evaluated for impairment .

September 30, 2020

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

September 30, 2019

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

December 31, 2019

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

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 and considered troubled debt restructurings are as follows (in thousands):

Months Ended September 30, 2020

Months Ended September 30, 2019

Three-Months Ended March 31, 2021

Pre-Modification

Total Commercial

Construction & Development

Owner Occupied CRE

Total Real Estate

Total Consumer

Three-Months Ended March 31, 2020

Pre-Modification

The balances below provide information as to how the loans were modified as troubled debt restructured loans (in thousands):

Months Ended September 30, 2020

Months Ended September 30, 2019

During the three

months ended September 30, 2020, no loans were modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default.

During the three and nine-months ended September 30, 2019, two loans totaling $ 28,000 were modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default.

Three-Months Ended March 31, 2021

Total Commercial

Construction & Development

Owner Occupied CRE

Total Real Estate

Total Consumer

Three-Months Ended March 31, 2020

During the three-months ended March 31, 2021 and 2020, no loans were modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default.

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

As of September 30, 2020, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

As discussed in note 1 to these financial statements, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19

as troubled debt restructurings as long as the borrowers were not more than 30 days past due as of December 31, 2019.

The above disclosed troubled debt restructurings were not related to COVID-19

modifications.

Beginning in mid-March

of 2020, the Company began offering deferral and modification of principle and/or interest payments, for

periods but typically no more than 90 days,

to selected borrowers on a case-by-case

At September 30, 2020, the Company had approximately 122 loans

totaling $ 18,650,000 in outstanding loans subject to deferral and modification agreements, representing 0.41 % of outstanding loans held-for-investment,

excluding PPP loans.

As of March 31, 2021, the Company has no

commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

Note 4 - Loans Held-for-Sale

Loans held-for-sale

totaled $ 101,055 ,000, $ 40,499 ,000 and $ 28,228 ,000 at September 30, 2020 and 2019, and December 31, 2019, respectively.

At September 30, 2020 and 2019, and December 31, 2019, $ 6,389,000 , $ 764,000 and $ 5,152,000 are valued at the lower of cost or fair value, and the remaining amounts are valued under the fair value option.

The change to the fair value option for loans held-for-sale

was effective at June 30, 2018 and was done in conjunction with the Company’s move to mandatory delivery in the secondary market and the purchase of forward mortgage-backed securities to manage the changes in fair value (see note 5 for additional information).

totaled $ 65,405 ,000, $ 42,034 ,000 and $ 83,969 ,000 at March 31, 2021 and 2020, and December 31, 2020, respectively.

At March 31, 2021 and 2020, and December 31, 2020, $ 3,894,000 , $ 2,375,000 and $ 4,384,000 are valued at the lower of cost or fair value, and the remaining amounts are valued under the fair value option.

These loans, which are sold on a servicing released basis, are valued using a market approach by utilizing either:

1 unchanged sentence

As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures (see Note 9).

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.

Interest income on mortgage loans held-for-sale

is recognized based on the contractual rates and reflected in interest income on loans in the consolidated statements of earnings.

The Company has no continuing ownership in any residential mortgage loans sold.

7 unchanged sentences

These instruments are typically entered into at the time the IRLC is made in the aggregate.

These financial instruments are not designated as hedging instruments and are used for asset and liability management needs.

These financial instruments are not designated as hedging instruments for accounting purposes.

All derivatives are carried at fair value in either other assets or other liabilities, through earnings in the statement of earnings.

6 unchanged sentences

The impact of these forward contracts is included in gain on sale and fees on mortgage loans in the statement of earnings.

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

September 30, 2020:

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

March 31, 2021:

Forward mortgage-backed securities trades

September 30, 2019:

March 31, 2020:

Forward mortgage-backed securities trades

3 unchanged sentences

Borrowings consisted of the following (dollars in thousands):

September 30,

Securities sold under agreements with customers to repurchase

Federal funds purchased

Advances from Federal Home Loan

Bank of Dallas

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.

4 unchanged sentences

Note 7 – Income Taxes

Income tax expense was $ 10,335 ,000 for the third quarter of 2020 as compared to $ 8,867 ,000 for the same period in 2019.

The Company’s effective tax rates on pretax income were 16.35 % and 17.07 % for the third quarters of 2020 and 2019, respectively.

Income tax expense was $ 28,233 ,000 for the

months ended September 30, 2020 as compared to $ 24,827 ,000 for the same period in 2019.

The Company’s effective tax rates on pretax income were 16.43 % and 16.75 % for the nine -

months ended September 30, 2020 and 2019, respectively.

Income tax expense was $ 11,054 ,000 for the first quarter of 2021 as compared to $ 7,234 ,000 for the same period in 2020.

The Company’s effective tax rates on pretax income were 16.26 % and 16.27 % for the first quarters of 2021 and 2020, respectively.

The effective tax rates differ from the statutory federal tax rate of 21 % primarily due to tax exempt interest income earned on certain investment securities and loans, the deductibility of dividends paid to our employee stock ownership plan and excess tax benefits related to our directors’ deferred compensation plan.

Note 8 - Stock Option Plan and Restricted Stock Plan

Stock Option Plans

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 value at the date of grant.

At March 31, 2021, the Company had reserved 3,559,402 shares of stock for issuance under the plan.

The option plan provides that options granted vest and are exercisable after two years from the date of grant and vest at a rate of 20 % each year and have a 10 -year

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

An analysis of stock option activity for the quarter-ended March 31, 2021 is presented in the table and narrative below:

Outstanding, December 31, 2020

Outstanding, March 31, 2021

Exercisable, March 31, 2021

The options outstanding at March 31, 2021 had exercise prices ranging between $ 7.87 and $ 34.55 .

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

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

On June 26, 2019, the Company granted 398,850 incentive stock options with an exercise price of $ 29.70 per share.

The fair value of the options was $ 7.31 per option and was estimated using the Black-Scholes options pricing model with the following weighted average assumptions:

risk free interest rate of 1.83 %;

expected dividend yield of 1.62 %;

expected life of 6.64 years;

and expected volatility of 26.69 %.

On January 28, 2020, the Company granted 11,250 incentive stock options with an exercise price of $ 34.55 per share.

Other stock option disclosures for this grant have not been provided due to insignificance.

The Company recorded stock option expense totaling $ 344,000 and $ 431,000 for the three-month periods ended September 30, 2020 and 2019, respectively.

The Company recorded stock option expense totaling $ 1,033,000 and $ 1,056,000 for the nine -

months ended September 30, 2020 and 2019, respectively.

The additional disclosure requirements under authoritative accounting guidance have been omitted due to the amounts being insignificant.

On April 24, 2018, upon re-election

of nine of the existing directors, 21,420 restricted shares with a total value of $ 540,000 were granted to these non-employee

directors and were expensed over the period from grant date to April 23, 2019, the date of the next annual shareholders’ meeting at which the directors’ term expired.

On April 23, 2019, upon re-election

of nine of the existing directors and two new directors, 21,714 restricted shares with a total value of $ 660,000 were granted to these non-employee

directors and was expensed over the period from the grant date to April 28, 2020, the date of the

shareholders’ meeting at which the directors’ term expired.

On January 28, 2020, upon the election of a new director, 434 restricted shares with a total value of $ 15,000 were granted to this non-employee

director and was expensed over the period from the grant date to April 28, 2020, the date of the

next annual shareholders’ meeting at which the director term expired.

On April 28, 2020, upon the re-election

of ten of the existing directors, 21,560 restricted shares with a total value of $ 600,000 were granted to these non-employee

directors and will be expensed over the period from the grant date to April 27, 2021, the Company’s next annual shareholders’ meeting at which the directors’ term expires.

The Company recorded director expense related to these restricted share grants of $ 150,000 and $ 185,000 for the three-month periods ended September 30, 2020 and 2019, respectively.

The Company recorded director expense related to these restricted stock grants of $ 485,000 and $ 455,000 for the nine -

months ended September 30, 2020 and 2019, respectively.

On October 24, 2017, the Company granted 28,382 restricted shares with a total value of $ 655,000 to certain officers that are being expensed over the vesting period of one to three years .

On October 23, 2018, the Company granted 52,042 restricted shares with a total value of $ 1,440,000 to certain officers that are being expensed over a three-year vesting period.

On June 26, 2019, the Company granted 23,428 restricted shares with a total value of $ 695,000 to certain officers that are being expensed over the vesting period of three years .

On October 22, 2019, the Company granted 22,188 restricted shares with a total value of $ 785,000 to certain officers that will be expensed over a three-year vesting period.

On January 28, 2020, the Company granted 2,979 restricted shares with a total value of $ 103,000 to certain officers that will be expensed over a three-year vesting period.

On May 18, 2020, the Company granted 7,176 restricted shares with a total value of $ 200,000 to an officer that will be expensed over a three-year vesting period.

The Company recorded restricted stock expense for officers of $ 419,000 and $ 248,000 for the three-month periods ended September 30, 2020 and 2019, respectively.

The Company recorded restricted stock expense for officers of $ 1,016,000 and $ 661,000 for the nine-month periods ended September 30, 2020 and 2019, respectively.

Note 9 - Pension Plan

The Company had a defined benefit pension plan that was frozen effective January 1, 2004, whereby no new participants were added to the Plan and no additional years of service accrued to participants.

The pension plan covered substantially all of the Company’s employees at the time.

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

The Company annuitized approximately 53 % of the pension benefit obligation at that time and recorded a loss on settlement totaling $ 1,546,000 for the year ended December 31, 2018.

In 2019, the Company continued to take steps to completely settle and terminate its remaining pension obligation and recorded loss associated with the final termination of $ 2,673,000 .

The loss incurred included unrealized loss previously recorded in other comprehensive income and refunding to remaining participants for funding balance overages offset by a gain on hedging instrument entered into to minimize interest rate movement during the termination period.

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

For the three and nine-month periods ended September 30, 2019, the Company recorded pension related expense totaling $ 31,000 and $ 973,000 , respectively.

The Company recorded stock option expense totaling $ 319,000 and $ 340,000 for the three-month periods ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, there was $ 3,753,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements related to stock options granted under the Company’s stock option plans.

That cost is expected to be recognized over a weighted-average period of 1.77 years.

The total fair value of shares vested during the three-months ended March 31, 2021 and 2020 was $ 31,000 and $ 119,000 , respectively.

Restricted Stock Plan

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

directors and consultants.

At March 31, 2021, the Company had allocated 633,003 shares of stock for issuance under the plan.

The following table summarized information about vested and unvested restricted stock outstanding at March 31, 2021 and 2020, respectively.

For the three-months ended March 31,

Balance at beginning of period

Forfeited/expired

Balance at end of period

The total fair value of restricted stock vested was $ 39,000 for the three-months ended March 31, 2021.

restricted stock vested during the three-months ended March 31, 2020.

The Company recorded restricted stock expense for employees of $ 290,000 and $ 275,000 , respectively, for the three-months ended March 31, 2021 and 2020, respectively.

The Company recorded director expense related to these restricted stock grants of $ 150,000 and $ 175,000 for the three-months ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, and 2020, there were $ 1,701,000 and $ 2,118,000 , respectively, of total unrecognized compensation cost related to unvested restricted stock which is expected to be recognized over a weighted-average period of 1.44 years and 1.43 years, respectively.

At March 31, 2021 and 2020, and December 31, 2020, there was $ 61,000 , $ 41,000 and $ 49,000 , respectively, accrued in other liabilities related to dividends declared to be paid upon vesting.

On April 28, 2021, the Company approved a new 2021 Omnibus Stock and Incentive Plan and registered and reserved 2,500,000 shares of the Company’s common stock for issuance under this plan.

This plan supersedes all prior stock option and restricted stock plans with previously reserved shares cancelled.

Note 9 - Fair Value Disclosures

11 unchanged sentences

Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability.

Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority

to unobservable inputs.

Inputs may be observable, meaning those

that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The fair value hierarchy is as follows:

9 unchanged sentences

Securities classified as available-for-sale

and trading are reported

at fair value utilizing Level 1 and Level 2 inputs.

securities, the Company obtains fair value measurements from an independent pricing service.

and trading are reported at fair value utilizing Level 1 and Level 2 inputs.

For these securities, the Company obtains fair value measurements from an independent pricing service.

The fair value measurements consider observable data that may include market spreads, cash flows, the United States Treasury yield curve, live trading levels, trade execution data, dealer quotes, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other items.

See notes 4 and 5 related to the determination of fair value

for loans held-for-sale,

forward mortgage-backed securities trades.

There were no transfers between Level 1 and Level 2 or Level 2 and Level 3 during the three and nine-months ended September 30, 2020 and 2019, and the year ended December 31, 2019.

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

IRLCs and forward mortgage-backed securities trades.

There were no transfers between Level 2 and Level 3 during the three-months ended March 31, 2021 and 2020, and the year ended December 31, 2020.

The following table summarizes the Company’s available-for-sale

1 unchanged sentence

and derivatives which are measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):

March 31, 2021

Available-for-sale

1 unchanged sentence

Obligations of states and political subdivisions

Corporate bonds

Residential mortgage-backed securities

2 unchanged sentences

Loans held-for-sale

Forward mortgage-backed securities trades

Forward mortgage-backed securities trades asset

March 31, 2020

Available-for-sale

7 unchanged sentences

Loans held-for-sale

Forward mortgage-backed securities trades

Forward mortgage-backed securities trades liability

December 31, 2020

Available-for-sale

investment securities:

Treasury securities

Obligations of states and political subdivisions

Corporate bonds

Obligations of state and political subdivisions

Residential mortgage-backed securities

Commercial mortgage

-backed securities

Commercial mortgage-backed securities

Other securities

Loans held-for-sale

Forward mortgage-backed securities trades

The following table summarize s

the Company’s loans held-for-sale

at fair value and the net unrealized gains as of the balance sheet dates show n

(in thousands):

September 30,

Forward mortgage-backed securities trades liability

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

2 unchanged sentences

at fair value

The following table summarize the Company’s gains on sale and fees

of mortgage loans for the three and nine -

months ended September 30, 2020 and 2019 (in thousand):

The following table summarizes the Company’s gains on sale and fees of mortgage loans for the three-months ended March 31, 2021 and 2020 (in thousand):

Three-Months ended

September 30,

Nine-Months ended

September 30,

Realized gain on sale

mortgage loans*

Realized gain on sale and fees on mortgage loans*

Change in fair value on loans held-for-sale

forward mortgage-backed securities trades

Change in forward mortgage-backed securities trades

Total gain on sale of mortgage loans

This includes gains on loans held-for-sale

carried under the fair value method and lower

carried under the fair value method and lower of cost or market.

No residential mortgage loans held-for-sale

were 90 days or more past due or considered impaired as of September 30, 2020 or 2019, or December 31, 2019.

were 90 days or more past due or considered impaired as of March 31, 2021 or 2020, or December 31, 2020.

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

for the three and

nine month periods ended September 30, 2020 and 2019.

Certain financial assets and financial

liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Impaired loans are reported at the fair value of the underlying collateral less selling costs if repayment is expected solely from the collateral.

Collateral values are estimated using Level 2 inputs based on observable market data.

At September 30, 2020, impaired loans with a carrying value of $ 20,583,000 were reduced by specific valuation reserves totaling $ 3,241,000 resulting in a net fair value of $ 17,342,000 .

for the three-months ended March 31, 2021 and 2020.

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.

1 unchanged sentence

assets measured at fair value on a non-recurring

basis during the three and nine-months ended September 30, 2020 and 2019 include other real estate owned which, subsequent to their initial transfer to other real estate owned from loans, were re-measured

basis during the three-months ended March 31, 2021 and 2020 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.

5 unchanged sentences

There were no other real estate owned properties that were re-measured

subsequent to their initial transfer to other real estate owned during the three and nine-months ended September 30, 2020 and 2019.

At September 30, 2020 and 2019, and December 31, 2019, other real estate owned totaled $ 157,000 , $ 1,329,000 and $ 982,000 , respectively.

The Company is required under current authoritative accounting guidance to disclose the estimated

fair value of their financial instrument assets and liabilities including those subject to the requirements discussed above.

subsequent to their initial transfer to other real estate owned during the three-months ended March 31, 2021 and 2020.

At March 31, 2021 and 2020, and December 31, 2020, other real estate owned totaled $ 255,000 , $ 982,000 and $ 119,000 , respectively.

The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instrument assets and liabilities including those subject to the requirements discussed above.

For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments.

Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.

The estimated fair value amounts of financial instruments have been determined

by the Company using available market information and appropriate valuation methodologies.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies.

However, considerable judgment is required to interpret data to develop the estimates of fair value.

9 unchanged sentences

The estimated fair values and carrying values of all financial instruments under current authoritative guidance were as follows (in thousands).

September 30,

Cash and due from banks

Federal funds sold

Interest-bearing demand deposits in banks

Available-for-sale securities

Loans held-for-investment, net of allowance for loan losses

Available-for-sale

Levels 1 and 2

Loans held-for-investment,

net of allowance for credit losses

Loans held-for-sale

Accrued interest receivable

2 unchanged sentences

Accrued interest payable

Forward mortgage-backed securities trades

Forward mortgage-backed securi-ties trades asset (liability)

Note 10 – Acquisition

9 unchanged sentences

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.

Factors that contributed to a purchase price resulting in goodwill include its record of earnings, strong management and board of directors, strong local economic environment and opportunity for growth.

The results of operations from this acquisition are included in the consolidated earnings of the Company commencing January 1, 2020.

The following table presents the preliminary amounts recorded on the consolidated balance sheet on the acquisition date (dollars in thousands):

The following table presents the final amounts recorded on the consolidated balance sheet on the acquisition date (dollars in thousands):

Fair value of consideration paid:

14 unchanged sentences

The fair value of total loans acquired was $ 447,702 ,000 at acquisition compared to contractual amounts of $ 455,181,000 .

The fair value of purchased credit impaired loans at acquisition was $ 7,517,000 compared to contractual amounts of $ 10,061,000 .

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

All other acquired loans were considered performing loans.

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-Q

Item 1. Financial Statements