UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~September~~June 30, ~~2021~~2022


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

For the transition period from ____________ to ____________

Commission file number: 000-12247

SOUTHSIDE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Texas

75-1848732

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

1201 S. Beckham Avenue,

Tyler,

Texas

75701

(Address of Principal Executive Offices)

(Zip Code)

903-531-7111

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $1.25 par value

SBSI

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the issuer’s common stock, par value $1.25, outstanding as of ~~October 26, 2021~~July 27, 2022 was ~~32,276,057~~32,103,712 shares.

TABLE OF CONTENTS

Table of Contents

SOUTHSIDE BANCSHARES, INC.

Glossary of Acronyms, Abbreviations and Terms

The acronyms, abbreviations and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."


Entities:
Southside Bancshares, Inc.						Bank holding company for Southside Bank
Southside Bank						Texas state bank and wholly owned subsidiary of Southside Bancshares, Inc.
Company						Combined entities of Southside Bancshares, Inc. and its subsidiaries, including Southside Bank
Bank						Southside Bank
Southside						Southside Bancshares, Inc.

Other Acronyms, Abbreviations and Terms:
~~2020~~2021 Form 10-K						Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021
401(k) Plan						401(k) Defined Contribution Plan
Acquired Retirement Plan						OmniAmerican Bank defined benefit pension plan
AFS						Available for sale
ALCO						Asset/Liability Committee
AOCI						Accumulated other comprehensive income or loss
ASC						Accounting Standards Codification
ASU						Accounting Standards Update issued by the FASB
ATM						Automated teller machines
Basel Committee						Basel Committee on Banking Supervision
BOLI						Bank owned life insurance
CARES Act						Coronavirus Aid, Relief, and Economic Security Act
CDs						Certificates of deposit
CECL						ASU No. 2016-13, Financial Instruments- Credit Losses, also known as Current Expected Credit Losses
CET1						Common Equity Tier 1
CMOs						Collateralized mortgage obligations
COVID-19						Novel strain of coronavirus
Dodd-Frank Act						Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Economic Aid Act						Economic Aid to Hard-Hit Small Business, Nonprofits and Venues Act
ESOP						Employee Stock Ownership Plan
ETR						Effective tax rate
Exchange Act						Securities Exchange Act of 1934
FASB						Financial Accounting Standards Board
FDIC						Federal Deposit Insurance Corporation
Federal Reserve						The Board of Governors of the Federal Reserve System
FHLB						Federal Home Loan Bank
FRBNY						Federal Reserve Bank of New York
FRDW						Federal Reserve Discount Window
FTE						Fully-taxable equivalents measurements
GAAP						United States generally accepted accounting principles
GSEs						U.S. government-sponsored enterprises
~~Guidelines~~						~~Interagency Guidelines Prescribing Standards for Safety and Soundness adopted by federal banking agencies~~

Southside Bancshares, Inc. |1

Table of Contents


Guidelines						Interagency Guidelines Prescribing Standards for Safety and Soundness adopted by federal banking agencies
HTM						Held to maturity
ITM						Interactive teller machines
LIBOR						London Interbank Offered Rate
MBS						Mortgage-backed securities
MVPE						Market value of portfolio equity
OREO						Other real estate owned
PCD						Purchased financial assets with credit deterioration under CECL
PCI						Financial assets purchased credit impaired under ASC 310-30 prior to CECL
PPP						Paycheck Protection Program
PPP Facility						Paycheck Protection Program Lending Facility
Repurchase agreements						Securities sold under agreements to repurchase
Restoration Plan						Nonfunded supplemental retirement plan
Retirement Plan						Defined benefit pension plan
ROU						Right-of-use
SBA						Small Business Administration
SEC						Securities and Exchange Commission
SOFR						Secured Overnight Financing Rate provided by the Federal Reserve Bank of New York
TDR						Troubled debt restructurings
U.S.						United States

Southside Bancshares, Inc. |2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(UNAUDITED)
(in thousands, except share amounts)


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

ASSETS	ASSETS					ASSETS
Cash and due from banks	Cash and due from banks	$	83,346	$	87,357	Cash and due from banks	$	111,099	$	91,120
Interest earning deposits	Interest earning deposits	3,787		21,051		Interest earning deposits	12,910		110,633
Federal funds sold						Federal funds sold	48,280		—
Total cash and cash equivalents	Total cash and cash equivalents	87,133		108,408		Total cash and cash equivalents	172,289		201,753
Securities:	Securities:					Securities:
Securities AFS, at estimated fair value (amortized cost of $2,650,237 and $2,437,513, respectively)		2,753,104		2,587,305
Securities HTM (estimated fair value of $98,035 and $118,198, respectively)		92,479		108,998
Securities AFS, at estimated fair value (amortized cost of $1,816,349 and $2,655,594, respectively)						Securities AFS, at estimated fair value (amortized cost of $1,816,349 and $2,655,594, respectively)	1,733,354		2,764,325
Securities HTM (estimated fair value of $969,807 and $95,235, respectively)						Securities HTM (estimated fair value of $969,807 and $95,235, respectively)	1,083,672		90,780
FHLB stock, at cost	FHLB stock, at cost	27,248		25,259		FHLB stock, at cost	13,726		14,375
Equity investments	Equity investments	11,794		11,905		Equity investments	11,282		11,841
Loans held for sale	Loans held for sale	1,131		3,695		Loans held for sale	815		1,684
Loans:	Loans:					Loans:
Loans	Loans	3,647,585		3,657,779		Loans	3,963,041		3,645,162
Less: Allowance for loan losses	Less: Allowance for loan losses	(38,022)		(49,006)		Less: Allowance for loan losses	(35,449)		(35,273)
Net loans	Net loans	3,609,563		3,608,773		Net loans	3,927,592		3,609,889
Premises and equipment, net	Premises and equipment, net	142,736		144,576		Premises and equipment, net	142,772		142,509
Operating lease ROU assets	Operating lease ROU assets	15,394		15,063		Operating lease ROU assets	14,427		15,073
Goodwill	Goodwill	201,116		201,116		Goodwill	201,116		201,116
Other intangible assets, net	Other intangible assets, net	7,553		9,744		Other intangible assets, net	5,687		6,895
Interest receivable	Interest receivable	29,097		38,708		Interest receivable	41,539		39,145

Deferred tax asset, net						Deferred tax asset, net	34,458		—
Unsettled trades to sell securities						Unsettled trades to sell securities	72,001		—

BOLI	BOLI	130,522		115,583		BOLI	132,675		131,232
Other assets	Other assets	26,821		29,094		Other assets	18,656		28,985
Total assets	Total assets	$	7,135,691	$	7,008,227	Total assets	$	7,606,061	$	7,259,602

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:	Deposits:					Deposits:
Noninterest bearing	Noninterest bearing	$	1,596,781	$	1,354,815	Noninterest bearing	$	1,735,488	$	1,644,775
Interest bearing	Interest bearing	3,734,874		3,577,507		Interest bearing	4,512,921		4,077,552
Total deposits	Total deposits	5,331,655		4,932,322		Total deposits	6,248,409		5,722,327
Other borrowings	Other borrowings	20,724		23,172		Other borrowings	58,478		23,219
FHLB borrowings	FHLB borrowings	659,204		832,527		FHLB borrowings	153,701		344,038
Subordinated notes, net of unamortized debt issuance costs	Subordinated notes, net of unamortized debt issuance costs	98,500		197,251		Subordinated notes, net of unamortized debt issuance costs	98,604		98,534
Trust preferred subordinated debentures, net of unamortized debt issuance costs	Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,259		60,255		Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,262		60,260
Deferred tax liability, net	Deferred tax liability, net	12,486		15,549		Deferred tax liability, net	—		17,808
Unsettled trades to purchase securities	Unsettled trades to purchase securities	4,433		—		Unsettled trades to purchase securities	174,038		18,995
Operating lease liabilities	Operating lease liabilities	16,967		16,734		Operating lease liabilities	16,096		16,676
Other liabilities	Other liabilities	53,597		55,120		Other liabilities	64,691		45,573
Total liabilities	Total liabilities	6,257,825		6,132,930		Total liabilities	6,874,279		6,347,430

Off-balance-sheet arrangements, commitments and contingencies (Note 12)	Off-balance-sheet arrangements, commitments and contingencies (Note 12)	0		0		Off-balance-sheet arrangements, commitments and contingencies (Note 12)	0		0

Shareholders’ equity:	Shareholders’ equity:					Shareholders’ equity:
Common stock: ($1.25 par value, 80,000,000 shares authorized, 37,960,148 shares issued at September 30, 2021 and 37,934,819 shares issued at December 31, 2020)		47,450		47,419
Common stock: ($1.25 par value, 80,000,000 shares authorized, 37,984,357 shares issued at June 30, 2022 and 37,968,969 shares issued at December 31, 2021)						Common stock: ($1.25 par value, 80,000,000 shares authorized, 37,984,357 shares issued at June 30, 2022 and 37,968,969 shares issued at December 31, 2021)	47,481		47,461
Paid-in capital	Paid-in capital	778,600		771,511		Paid-in capital	782,511		780,501
Retained earnings	Retained earnings	163,809		111,208		Retained earnings	208,171		179,813
Treasury stock: (shares at cost, 5,687,226 at September 30, 2021 and 4,983,645 at December 31, 2020)		(155,967)		(123,921)
Treasury stock: (shares at cost, 5,876,390 at June 30, 2022 and 5,616,917 at December 31, 2021)						Treasury stock: (shares at cost, 5,876,390 at June 30, 2022 and 5,616,917 at December 31, 2021)	(167,046)		(155,308)
AOCI	AOCI	43,974		69,080		AOCI	(139,335)		59,705
Total shareholders’ equity	Total shareholders’ equity	877,866		875,297		Total shareholders’ equity	731,782		912,172
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	7,135,691	$	7,008,227	Total liabilities and shareholders’ equity	$	7,606,061	$	7,259,602

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

Southside Bancshares, Inc. |3

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except per share data)


		Three Months Ended				Nine Months Ended					Three Months Ended				Six Months Ended
		September 30,				September 30,					June 30,				June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Interest income:	Interest income:									Interest income:
Loans	Loans	$	37,034	$	38,185	$	108,792	$	119,195	Loans	$	38,344	$	35,720	$	73,232	$	71,758
Taxable investment securities	Taxable investment securities	3,853		1,175		9,097		2,419		Taxable investment securities	4,632		2,921		9,240		5,244
Tax-exempt investment securities	Tax-exempt investment securities	9,649		9,003		27,787		24,430		Tax-exempt investment securities	10,605		9,173		20,824		18,138
MBS	MBS	4,405		7,048		15,140		27,626		MBS	3,238		4,647		7,255		10,735
FHLB stock and equity investments	FHLB stock and equity investments	111		249		355		1,034		FHLB stock and equity investments	77		108		190		244
Other interest earning assets	Other interest earning assets	24		17		56		220		Other interest earning assets	204		17		232		32
Total interest income	Total interest income	55,076		55,677		161,227		174,924		Total interest income	57,100		52,586		110,973		106,151
Interest expense:	Interest expense:									Interest expense:
Deposits	Deposits	2,234		4,862		7,170		21,010		Deposits	4,264		2,339		7,501		4,936
FHLB borrowings	FHLB borrowings	1,865		2,369		5,590		9,272		FHLB borrowings	224		1,817		590		3,725
Subordinated notes	Subordinated notes	2,417		1,427		7,235		4,250		Subordinated notes	1,000		2,423		1,998		4,818
Trust preferred subordinated debentures	Trust preferred subordinated debentures	345		378		1,045		1,469		Trust preferred subordinated debentures	471		349		827		700
Other borrowings	Other borrowings	9		55		31		365		Other borrowings	63		11		73		22
Total interest expense	Total interest expense	6,870		9,091		21,071		36,366		Total interest expense	6,022		6,939		10,989		14,201
Net interest income	Net interest income	48,206		46,586		140,156		138,558		Net interest income	51,078		45,647		99,984		91,950
Provision for credit losses		(5,071)		(4,746)		(13,543)		25,746
Provision for (reversal of) credit losses										Provision for (reversal of) credit losses	(633)		1,677		(339)		(8,472)
Net interest income after provision for credit losses	Net interest income after provision for credit losses	53,277		51,332		153,699		112,812		Net interest income after provision for credit losses	51,711		43,970		100,323		100,422
Noninterest income:	Noninterest income:									Noninterest income:
Deposit services	Deposit services	6,779		6,129		19,513		17,940		Deposit services	6,496		6,609		13,124		12,734
Net gain on sale of securities AFS		1,381		78		3,399		8,281
Net gain (loss) on sale of securities AFS										Net gain (loss) on sale of securities AFS	(2,177)		15		(3,720)		2,018
Gain on sale of loans	Gain on sale of loans	299		1,071		1,285		1,924		Gain on sale of loans	208		393		386		986
Trust fees	Trust fees	1,494		1,253		4,373		3,779		Trust fees	1,520		1,496		3,014		2,879
BOLI	BOLI	637		680		1,908		1,899		BOLI	720		645		1,411		1,271
Brokerage services	Brokerage services	846		564		2,476		1,643		Brokerage services	1,098		850		1,907		1,630
Other	Other	1,333		1,366		4,371		3,366		Other	1,232		925		3,700		3,038
Total noninterest income	Total noninterest income	12,769		11,141		37,325		38,832		Total noninterest income	9,097		10,933		19,822		24,556
Noninterest expense:	Noninterest expense:									Noninterest expense:
Salaries and employee benefits	Salaries and employee benefits	19,777		19,344		59,825		57,616		Salaries and employee benefits	20,329		20,004		40,298		40,048
Net occupancy	Net occupancy	3,532		3,595		10,698		10,574		Net occupancy	3,654		3,606		7,310		7,166

Advertising, travel & entertainment	Advertising, travel & entertainment	579		519		1,491		1,643		Advertising, travel & entertainment	716		475		1,453		912
ATM expense	ATM expense	311		271		821		728		ATM expense	356		272		637		510
Professional fees	Professional fees	1,135		961		3,166		3,238		Professional fees	1,147		1,040		2,074		2,031
Software and data processing	Software and data processing	1,503		1,215		4,221		3,737		Software and data processing	1,739		1,406		3,370		2,718
Communications	Communications	552		495		1,689		1,494		Communications	509		612		1,012		1,137
FDIC insurance	FDIC insurance	454		469		1,343		668		FDIC insurance	477		435		949		889
Amortization of intangibles	Amortization of intangibles	695		881		2,191		2,792		Amortization of intangibles	586		730		1,208		1,496
Loss on redemption of subordinated notes		1,118		—		1,118		—

Other	Other	2,107		3,866		7,133		9,502		Other	2,593		2,119		4,990		5,026
Total noninterest expense	Total noninterest expense	31,763		31,616		93,696		91,992		Total noninterest expense	32,106		30,699		63,301		61,933
Income before income tax expense	Income before income tax expense	34,283		30,857		97,328		59,652		Income before income tax expense	28,702		24,204		56,844		63,045
Income tax expense	Income tax expense	4,977		3,783		12,614		7,071		Income tax expense	3,297		2,887		6,443		7,637
Net income	Net income	$	29,306	$	27,074	$	84,714	$	52,581	Net income	$	25,405	$	21,317	$	50,401	$	55,408

Earnings per common share – basic	Earnings per common share – basic	$	0.90	$	0.82	$	2.60	$	1.58	Earnings per common share – basic	$	0.79	$	0.65	$	1.56	$	1.69
Earnings per common share – diluted	Earnings per common share – diluted	$	0.90	$	0.82	$	2.59	$	1.58	Earnings per common share – diluted	$	0.79	$	0.65	$	1.56	$	1.69
Cash dividends paid per common share	Cash dividends paid per common share	$	0.33	$	0.31	$	0.98	$	0.93	Cash dividends paid per common share	$	0.34	$	0.33	$	0.68	$	0.65

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

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)

Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net income $ 29,306 $ 27,074 $ 84,714 $ 52,581
Other comprehensive income (loss):
Securities AFS and transferred securities:
Change in unrealized holding (loss) gain on AFS securities during the period (27,714) 1,601 (43,527) 88,900
Reclassification adjustment for amortization related to AFS and HTM debt securities 312 394 1,118 730
Reclassification adjustment for net gain on sale of AFS securities, included in net income (1,381) (78) (3,399) (8,281)
Derivatives:
Change in net unrealized gain (loss) on effective cash flow hedge interest rate swap derivatives 377 (197) 8,296 (25,236)
Reclassification adjustment of net loss related to derivatives designated as cash flow hedges 1,617 1,587 4,784 2,283
Pension plans:
Amortization of net actuarial loss and prior service credit, included in net periodic benefit cost 316 819 948 2,207
Prior service cost adjustment due to plan amendment — — — 163
Change in net actuarial loss — — — (7,558)
Other comprehensive income (loss), before tax (26,473) 4,126 (31,780) 53,208
Income tax benefit (expense) related to items of other comprehensive income (loss) 5,560 (866) 6,674 (11,173)
Other comprehensive (loss) income, net of tax (20,913) 3,260 (25,106) 42,035
Comprehensive income $ 8,393 $ 30,334 $ 59,608 $ 94,616


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Net income	$	25,405	$	21,317	$	50,401	$	55,408
Other comprehensive income (loss):
Securities AFS and transferred securities:
Change in unrealized holding gain (loss) on AFS securities during the period	(33,523)		33,166		(195,424)		(15,813)

Change in net unrealized loss on securities transferred from AFS to HTM	(52,360)		—		(91,504)		—


Reclassification adjustment for amortization related to AFS and HTM debt securities	1,310		390		1,553		806

Reclassification adjustment for net (gain) loss on sale of AFS securities, included in net income	2,177		(15)		3,720		(2,018)

Derivatives:
Change in net unrealized gain (loss) on effective cash flow hedge interest rate swap derivatives	7,047		(3,104)		27,593		7,919

Reclassification adjustment of net (gain) loss related to derivatives designated as cash flow hedges	344		1,599		1,666		3,167

Pension plans:
Amortization of net actuarial loss, included in net periodic benefit cost	241		(9)		447		632


Other comprehensive income (loss), before tax	(74,764)		32,027		(251,949)		(5,307)
Income tax (expense) benefit related to items of other comprehensive income (loss)	15,700		(6,726)		52,909		1,114
Other comprehensive income (loss), net of tax	(59,064)		25,301		(199,040)		(4,193)
Comprehensive income (loss)	$	(33,659)	$	46,618	$	(148,639)	$	51,215

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

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except share and per share data)

Common
Stock Paid In
Capital Retained
Earnings Treasury
Stock Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
Balance at December 31, 2020 $ 47,419 $ 771,511 $ 111,208 $ (123,921) $ 69,080 $ 875,297
Net income — — 34,091 — — 34,091
Other comprehensive loss — — — — (29,494) (29,494)
Issuance of common stock for dividend reinvestment plan (8,918 shares) 11 321 — — — 332
Purchase of common stock (427,396 shares) — — — (15,213) — (15,213)
Stock compensation expense — 674 — — — 674
Net issuance of common stock under employee stock plans (126,260 shares) — 2,309 (41) 1,118 — 3,386
Cash dividends paid on common stock ($0.32 per share) — — (10,476) — — (10,476)
Balance at March 31, 2021 47,430 774,815 134,782 (138,016) 39,586 858,597
Net income — — 21,317 — — 21,317
Other comprehensive income — — — — 25,301 25,301
Issuance of common stock for dividend reinvestment plan (7,780 shares) 9 321 — — — 330
Purchase of common stock (90,884 shares) — — — (3,497) — (3,497)
Stock compensation expense — 686 — — — 686
Net issuance of common stock under employee stock plans (99,217 shares) — 1,591 (47) 897 — 2,441
Cash dividends paid on common stock ($0.33 per share) — — (10,775) — — (10,775)
Balance at June 30, 2021 47,439 777,413 145,277 (140,616) 64,887 894,400
Net income — — 29,306 — — 29,306
Other comprehensive loss — — — — (20,913) (20,913)
Issuance of common stock for dividend reinvestment plan (8,631 shares) 11 313 — — — 324
Purchase of common stock (420,204 shares) — — — (15,438) — (15,438)
Stock compensation expense — 829 — — — 829
Net issuance of common stock under employee stock plans (9,426 shares) — 45 (68) 87 — 64
Cash dividends paid on common stock ($0.33 per share) — — (10,706) — — (10,706)
Balance at September 30, 2021 $ 47,450 $ 778,600 $ 163,809 $ (155,967) $ 43,974 $ 877,866


	Common Stock		Paid In Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance at December 31, 2021	$	47,461	$	780,501	$	179,813	$	(155,308)	$	59,705	$	912,172


Net income	—		—		24,996		—		—		24,996
Other comprehensive income (loss)	—		—		—		—		(139,976)		(139,976)
Issuance of common stock for dividend reinvestment plan (7,671 shares)	10		312		—		—		—		322
Purchase of common stock (82,285 shares)	—		—		—		(3,358)		—		(3,358)
Stock compensation expense	—		819		—		—		—		819
Net issuance of common stock under employee stock plans (16,551 shares)	—		182		(67)		154		—		269
Cash dividends paid on common stock ($0.34 per share)	—		—		(11,003)		—		—		(11,003)



Balance at March 31, 2022	47,471		781,814		193,739		(158,512)		(80,271)		784,241
Net income	—		—		25,405		—		—		25,405
Other comprehensive income (loss)	—		—		—		—		(59,064)		(59,064)
Issuance of common stock for dividend reinvestment plan (7,717 shares)	10		303		—		—		—		313
Purchase of common stock (223,901 shares)	—		—		—		(8,842)		—		(8,842)
Stock compensation expense	—		847		—		—		—		847
Net issuance of common stock under employee stock plans (30,162 shares)	—		(453)		(67)		308		—		(212)
Cash dividends paid on common stock ($0.34 per share)	—		—		(10,906)		—		—		(10,906)



Balance at June 30, 2022	$	47,481	$	782,511	$	208,171	$	(167,046)	$	(139,335)	$	731,782

Southside Bancshares, Inc. |6

Table of Contents

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)

(UNAUDITED)

(in thousands, except share and per share data)

Common
Stock Paid In
Capital Retained
Earnings Treasury
Stock Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
Balance at December 31, 2019 $ 47,360 $ 766,718 $ 80,274 $ (94,008) $ 4,236 $ 804,580
Cumulative effect of accounting change — — (7,830) — — (7,830)
Adjusted beginning balance 47,360 766,718 72,444 (94,008) 4,236 796,750
Net income — — 3,953 — — 3,953
Other comprehensive income — — — — 29,303 29,303
Issuance of common stock for dividend reinvestment plan (10,607 shares) 13 334 — — — 347
Purchase of common stock (869,723 shares) — — — (25,842) — (25,842)
Stock compensation expense — 695 — — — 695
Net issuance of common stock under employee stock plans (47,428 shares) — 693 (40) 435 — 1,088
Cash dividends paid on common stock ($0.31 per share) — — (10,494) — — (10,494)
Balance at March 31, 2020 47,373 768,440 65,863 (119,415) 33,539 795,800
Net income — — 21,554 — — 21,554
Other comprehensive income — — — — 9,472 9,472
Issuance of common stock for dividend reinvestment plan (11,532 shares) 14 322 — — — 336
Stock compensation expense — 772 — — — 772
Net issuance of common stock under employee stock plans (9,342 shares) — (127) (50) 81 — (96)
Cash dividends paid on common stock ($0.31 per share) — — (10,233) — — (10,233)
Balance at June 30, 2020 47,387 769,407 77,134 (119,334) 43,011 817,605
Net income — — 27,074 — — 27,074
Other comprehensive income — — — — 3,260 3,260
Issuance of common stock for dividend reinvestment plan (12,201 shares) 15 322 — — — 337
Stock compensation expense — 786 — — — 786
Net issuance of common stock under employee stock plans (27,477 shares) — 124 (47) 254 — 331
Cash dividends paid on common stock ($0.31 per share) — — (10,245) — — (10,245)
Balance at September 30, 2020 $ 47,402 $ 770,639 $ 93,916 $ (119,080) $ 46,271 $ 839,148


	Common Stock		Paid In Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance at December 31, 2020	$	47,419	$	771,511	$	111,208	$	(123,921)	$	69,080	$	875,297


Net income	—		—		34,091		—		—		34,091
Other comprehensive income (loss)	—		—		—		—		(29,494)		(29,494)
Issuance of common stock for dividend reinvestment plan (8,918 shares)	11		321		—		—		—		332
Purchase of common stock (427,396 shares)	—		—		—		(15,213)		—		(15,213)
Stock compensation expense	—		674		—		—		—		674
Net issuance of common stock under employee stock plans (126,260 shares)	—		2,309		(41)		1,118		—		3,386
Cash dividends paid on common stock ($0.32 per share)	—		—		(10,476)		—		—		(10,476)


Balance at March 31, 2021	47,430		774,815		134,782		(138,016)		39,586		858,597
Net income	—		—		21,317		—		—		21,317
Other comprehensive income	—		—		—		—		25,301		25,301
Issuance of common stock for dividend reinvestment plan (7,780 shares)	9		321		—		—		—		330
Purchase of common stock (90,884 shares)	—		—		—		(3,497)		—		(3,497)
Stock compensation expense	—		686		—		—		—		686
Net issuance of common stock under employee stock plans (99,217 shares)	—		1,591		(47)		897		—		2,441
Cash dividends paid on common stock ($0.33 per share)	—		—		(10,775)		—		—		(10,775)


Balance at June 30, 2021	$	47,439	$	777,413	$	145,277	$	(140,616)	$	64,887	$	894,400

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

Southside Bancshares, Inc. |7

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)


		Nine Months Ended					Six Months Ended
		September 30,					June 30,
		2021		2020			2022		2021
OPERATING ACTIVITIES:	OPERATING ACTIVITIES:					OPERATING ACTIVITIES:
Net income	Net income	$	84,714	$	52,581	Net income	$	50,401	$	55,408
Adjustments to reconcile net income to net cash provided by operations:	Adjustments to reconcile net income to net cash provided by operations:					Adjustments to reconcile net income to net cash provided by operations:
Depreciation and net amortization	Depreciation and net amortization	8,634		9,128		Depreciation and net amortization	5,561		5,780
Securities premium amortization (discount accretion), net	Securities premium amortization (discount accretion), net	17,709		17,954		Securities premium amortization (discount accretion), net	9,346		12,186
Loan (discount accretion) premium amortization, net	Loan (discount accretion) premium amortization, net	(649)		(847)		Loan (discount accretion) premium amortization, net	(323)		(683)
Provision for credit losses		(13,543)		25,746
Provision for (reversal of) credit losses						Provision for (reversal of) credit losses	(339)		(8,472)
Stock compensation expense	Stock compensation expense	2,189		2,253		Stock compensation expense	1,666		1,360
Deferred tax expense (benefit)	Deferred tax expense (benefit)	3,612		(4,305)		Deferred tax expense (benefit)	643		2,022

Net gain on sale of AFS securities		(3,399)		(8,281)
Net (gain) loss on sale of AFS securities						Net (gain) loss on sale of AFS securities	3,720		(2,018)
Loss on impairment of investments						Loss on impairment of investments	38		—
Net loss on premises and equipment	Net loss on premises and equipment	315		821		Net loss on premises and equipment	433		302
Gross proceeds from sales of loans held for sale	Gross proceeds from sales of loans held for sale	36,961		48,343		Gross proceeds from sales of loans held for sale	15,835		27,286
Gross originations of loans held for sale	Gross originations of loans held for sale	(34,397)		(56,646)		Gross originations of loans held for sale	(14,966)		(26,101)
Net (gain) loss on OREO	Net (gain) loss on OREO	(180)		129		Net (gain) loss on OREO	(12)		(2)
Retirement plan curtailment expense		—		163
Loss on redemption of subordinated notes		1,118		—

Net change in:	Net change in:					Net change in:
Interest receivable	Interest receivable	9,611		(1,987)		Interest receivable	(2,394)		2,112
Other assets	Other assets	(2,803)		(35,530)		Other assets	(3,472)		8,409
Interest payable	Interest payable	(1,223)		(3,673)		Interest payable	(346)		(784)
Other liabilities	Other liabilities	19,981		4,402		Other liabilities	62,242		3,414
Net cash provided by operating activities		128,650		50,251
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	128,033		80,219

INVESTING ACTIVITIES:	INVESTING ACTIVITIES:					INVESTING ACTIVITIES:
Securities AFS:	Securities AFS:					Securities AFS:
Purchases	Purchases	(569,807)		(821,232)		Purchases	(523,339)		(392,788)
Sales	Sales	104,728		291,581		Sales	264,792		46,720
Maturities, calls and principal repayments	Maturities, calls and principal repayments	243,507		316,072		Maturities, calls and principal repayments	78,779		181,956
Securities HTM:	Securities HTM:					Securities HTM:

Maturities, calls and principal repayments	Maturities, calls and principal repayments	16,602		19,820		Maturities, calls and principal repayments	6,097		14,220
Proceeds from redemption of FHLB stock and equity investments	Proceeds from redemption of FHLB stock and equity investments	19,240		20,000		Proceeds from redemption of FHLB stock and equity investments	11,041		16,240
Purchases of FHLB stock and equity investments	Purchases of FHLB stock and equity investments	(21,113)		(5,483)		Purchases of FHLB stock and equity investments	(9,833)		(18,973)
Net loan originations		9,314		(222,342)
Net loan paydowns (originations)						Net loan paydowns (originations)	(317,731)		15,333

Purchases of premises and equipment	Purchases of premises and equipment	(6,491)		(10,216)		Purchases of premises and equipment	(4,965)		(4,507)
Purchases of BOLI		(13,000)		(12,500)

Proceeds from sales of premises and equipment	Proceeds from sales of premises and equipment	1,853		114		Proceeds from sales of premises and equipment	7		1,850
Net proceeds from sales of OREO	Net proceeds from sales of OREO	797		277		Net proceeds from sales of OREO	34		59
Proceeds from sales of repossessed assets	Proceeds from sales of repossessed assets	247		158		Proceeds from sales of repossessed assets	47		44
Net cash used in investing activities		(214,123)		(423,751)
Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	(495,071)		(139,846)

(continued)	(continued)					(continued)

Southside Bancshares, Inc. | 8


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES	SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES					SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)	CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)					CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)	(UNAUDITED)					(UNAUDITED)
(in thousands)	(in thousands)					(in thousands)
		Nine Months Ended					Six Months Ended
		September 30,					June 30,
		2021		2020			2022		2021
FINANCING ACTIVITIES:	FINANCING ACTIVITIES:					FINANCING ACTIVITIES:
Net change in deposits	Net change in deposits	$	399,303	$	420,068	Net change in deposits	526,069		223,822
Net change in other borrowings	Net change in other borrowings	(2,448)		13,210		Net change in other borrowings	35,259		611
Proceeds from FHLB borrowings	Proceeds from FHLB borrowings	11,648,180		10,135,401		Proceeds from FHLB borrowings	1,050,000		7,080,064
Repayment of FHLB borrowings	Repayment of FHLB borrowings	(11,821,503)		(10,155,201)		Repayment of FHLB borrowings	(1,240,337)		(7,191,223)
Net proceeds from issuance of subordinated notes	Net proceeds from issuance of subordinated notes	(95)		—		Net proceeds from issuance of subordinated notes	—		(95)
Redemption of subordinated notes		(100,011)		—

Proceeds from stock option exercises	Proceeds from stock option exercises	6,108		1,502		Proceeds from stock option exercises	409		5,979
Cash paid to tax authority related to tax withholding on share-based awards	Cash paid to tax authority related to tax withholding on share-based awards	(217)		(179)		Cash paid to tax authority related to tax withholding on share-based awards	(352)		(152)
Purchase of common stock	Purchase of common stock	(34,148)		(25,842)		Purchase of common stock	(12,200)		(18,710)
Proceeds from the issuance of common stock for dividend reinvestment plan	Proceeds from the issuance of common stock for dividend reinvestment plan	986		1,020		Proceeds from the issuance of common stock for dividend reinvestment plan	635		662

Cash dividends paid	Cash dividends paid	(31,957)		(30,972)		Cash dividends paid	(21,909)		(21,251)
Net cash provided by financing activities		64,198		359,007
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	337,574		79,707

Net (decrease) increase in cash and cash equivalents		(21,275)		(14,493)
Net increase (decrease) in cash and cash equivalents						Net increase (decrease) in cash and cash equivalents	(29,464)		20,080
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	108,408		110,697		Cash and cash equivalents at beginning of period	201,753		108,408
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	87,133	$	96,204	Cash and cash equivalents at end of period	$	172,289	$	128,488

SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:	SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:					SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:

Interest paid	Interest paid	$	22,295	$	40,039	Interest paid	$	11,334	$	14,984
Income taxes paid	Income taxes paid	$	8,750	$	9,000	Income taxes paid	$	5,200	$	6,250

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:	SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:					SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Loans transferred to other repossessed assets and real estate through foreclosure	Loans transferred to other repossessed assets and real estate through foreclosure	$	740	$	627	Loans transferred to other repossessed assets and real estate through foreclosure	$	197	$	531

Transfer of AFS to HTM securities						Transfer of AFS to HTM securities	$	1,089,978	$	—

Unsettled trades to purchase securities						Unsettled trades to purchase securities	$	(174,038)	$	(41,888)
Unsettled trades to sell securities						Unsettled trades to sell securities	$	72,001	$	—

Unsettled trades to purchase securities		$	(4,433)	$	(7,294)

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

Southside Bancshares, Inc. |9

Table of Contents

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Summary of Significant Accounting and Reporting Policies

Basis of Presentation

In this report, the words “the Company,” “we,” “us,” and “our” refer to the combined entities of Southside Bancshares, Inc. and its subsidiaries, including Southside Bank. The words “Southside” and “Southside Bancshares” refer to Southside Bancshares, Inc. The words “Southside Bank” and “the Bank” refer to Southside Bank.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, not all information required by GAAP for complete financial statements is included in these interim statements. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. The preparation of these consolidated financial statements in accordance with GAAP requires the use of management’s estimates. These estimates are subjective in nature and involve matters of judgment. Actual amounts could differ from these estimates.

Interim results are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Accounting Changes and Reclassifications

Certain prior period amounts may be reclassified to conform to current year presentation.

Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 is intended to provide relief for companies preparing for discontinuation of interest rates based on LIBOR. The ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or other reference rates expected to be discontinued. ASU 2020-04 also provides for a one-time sale and/or transfer to AFS or trading to be made for HTM debt securities that both reference an eligible reference rate and were classified as HTM before January 1, 2020. ASU 2020-04 was effective for all entities as of March 12, 2020 and through December 31, 2022. Companies can apply the ASU as of the beginning of the interim period that includes March 12, 2020 or any date thereafter. The guidance requires companies to apply the guidance prospectively to contract modifications and hedging relationships while the one-time election to sell and/or transfer debt securities classified as HTM may be made any time after March 12, 2020. Additionally, in January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope,” which provided additional clarification that certain optional expedients and exceptions noted above apply to derivative instruments that use an interest rate for margining, discounting or contract price alignment that is modified as a result of reference rate reform. We ~~have~~ established an officer level committee to guide our transition from LIBOR and ~~have begun efforts to transition~~are transitioning to alternative rates consistent with industry timelines. We continue to evaluate our LIBOR exposure, and note that we have the option to have certain of our interest rate swaps fall back to an adjusted SOFR index. Additionally, we anticipate the trust preferred subordinated debentures will transition to a SOFR index once the Federal Reserve completes the relevant rule. We have identified our products that utilize LIBOR and ~~are implementing~~have implemented enhanced fallback language to facilitate the transition to alternative reference rates. We are evaluating existing systems and have begun offering ~~new~~alternative rates. We are no longer offering LIBOR indexed rates on ~~a limited basis.~~newly originated loans. ASU 2020-04 and ASU 2021-01 are not expected to have a material impact on our consolidated financial statements.

In March 2022, the FASB issued ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 eliminates the accounting guidance for TDRs, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, ASU 2022-02 requires an entity to disclose current-period gross write-offs by year of origination for financing receivables within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. ASU 2022-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022 for companies that have adopted CECL, which we adopted on January 1, 2020. Early adoption is permitted. The guidance should be applied prospectively with the option to use a modified retrospective transition method for the recognition and measurement of TDRs, resulting in a cumulative-effect adjustment to retained earnings. ASU 2022-02 is not expected to have a material impact on our consolidated financial statements.

Southside Bancshares, Inc. |10

Table of Contents

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring fair value. It also requires the following disclosures for equity securities subject to the contractual sale restrictions: 1) the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet; 2) the nature and remaining duration of the restriction(s); and 3) the circumstances that could cause a lapse in the restriction(s). ASU 2022-03 is effective for the fiscal years and interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The guidance should be applied prospectively. ASU 2022-04 is not expected to have a material impact on our consolidated financial statements.

~~Southside Bancshares, Inc. |10~~

~~Table of Contents~~

2. Earnings Per Share

Earnings per share on a basic and diluted basis are calculated as follows (in thousands, except per share amounts):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Basic and Diluted Earnings:	Basic and Diluted Earnings:									Basic and Diluted Earnings:
Net income	Net income	$	29,306	$	27,074	$	84,714	$	52,581	Net income	$	25,405	$	21,317	$	50,401	$	55,408
Basic weighted-average shares outstanding	Basic weighted-average shares outstanding	32,465		33,047		32,641		33,250		Basic weighted-average shares outstanding	32,119		32,632		32,237		32,730
Add: Stock awards	Add: Stock awards	91		51		118		81		Add: Stock awards	132		167		157		130
Diluted weighted-average shares outstanding	Diluted weighted-average shares outstanding	32,556		33,098		32,759		33,331		Diluted weighted-average shares outstanding	32,251		32,799		32,394		32,860
Basic earnings per share:	Basic earnings per share:									Basic earnings per share:
Net income	Net income	$	0.90	$	0.82	$	2.60	$	1.58	Net income	$	0.79	$	0.65	$	1.56	$	1.69
Diluted earnings per share:	Diluted earnings per share:									Diluted earnings per share:
Net income	Net income	$	0.90	$	0.82	$	2.59	$	1.58	Net income	$	0.79	$	0.65	$	1.56	$	1.69

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, there were ~~approximately 462,000~~18,000 and ~~288,000~~1,000 anti-dilutive shares, respectively. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, there were approximately 3,000 and ~~835,000 and 811,000~~231,000 anti-dilutive shares, respectively.

Southside Bancshares, Inc. |11

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3. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component are as follows (in thousands):


		Three Months Ended September 30, 2021									Three Months Ended June 30, 2022
						Pension Plans
		Unrealized Gains (Losses) on Securities		Unrealized Gains (Losses) on Derivatives			Net Prior Service (Cost) Credit		Net Gain (Loss)			Total			Unrealized Gains (Losses) on Securities		Unrealized Gains (Losses) on Derivatives		Retirement Plans		Total
Beginning balance, net of tax	Beginning balance, net of tax	$	102,628	$	(8,334)		$	149	$	(29,556)		$	64,887	Beginning balance, net of tax	$	(72,699)	$	16,018	$	(23,590)	$	(80,271)
Other comprehensive income (loss):	Other comprehensive income (loss):													Other comprehensive income (loss):
Other comprehensive (loss) income before reclassifications		(27,714)		377			—		—			(27,337)
Other comprehensive income (loss) before reclassifications														Other comprehensive income (loss) before reclassifications	(85,883)		7,047		—		(78,836)
Reclassification adjustments included in net income	Reclassification adjustments included in net income	(1,069)		1,617			—		316			864		Reclassification adjustments included in net income	3,487		344		241		4,072
Income tax benefit (expense)		6,045		(418)			—		(67)			5,560
Net current-period other comprehensive (loss) income, net of tax		(22,738)		1,576			—		249			(20,913)
Income tax (expense) benefit														Income tax (expense) benefit	17,303		(1,552)		(51)		15,700
Net current-period other comprehensive income (loss), net of tax														Net current-period other comprehensive income (loss), net of tax	(65,093)		5,839		190		(59,064)
Ending balance, net of tax	Ending balance, net of tax	$	79,890	$	(6,758)		$	149	$	(29,307)		$	43,974	Ending balance, net of tax	$	(137,792)	$	21,857	$	(23,400)	$	(139,335)

		Nine Months Ended September 30, 2021									Six Months Ended June 30, 2022
						Pension Plans
		Unrealized Gains (Losses) on Securities		Unrealized Gains (Losses) on Derivatives			Net Prior Service (Cost) Credit		Net Gain (Loss)			Total			Unrealized Gains (Losses) on Securities		Unrealized Gains (Losses) on Derivatives		Retirement Plans		Total
Beginning balance, net of tax	Beginning balance, net of tax	$	116,078	$	(17,091)		$	149	$	(30,056)		$	69,080	Beginning balance, net of tax	$	84,716	$	(1,257)	$	(23,754)	$	59,705
Other comprehensive income (loss):	Other comprehensive income (loss):													Other comprehensive income (loss):
Other comprehensive (loss) income before reclassifications	Other comprehensive (loss) income before reclassifications	(43,527)		8,296			—		—			(35,231)		Other comprehensive (loss) income before reclassifications	(286,928)		27,593		—		(259,335)
Reclassification adjustments included in net income	Reclassification adjustments included in net income	(2,281)		4,784			—		948			3,451		Reclassification adjustments included in net income	5,273		1,666		447		7,386

Income tax benefit (expense)	Income tax benefit (expense)	9,620		(2,747)			—		(199)			6,674		Income tax benefit (expense)	59,147		(6,145)		(93)		52,909
Net current-period other comprehensive (loss) income, net of tax	Net current-period other comprehensive (loss) income, net of tax	(36,188)		10,333			—		749			(25,106)		Net current-period other comprehensive (loss) income, net of tax	(222,508)		23,114		354		(199,040)

Ending balance, net of tax	Ending balance, net of tax	$	79,890	$	(6,758)		$	149	$	(29,307)		$	43,974	Ending balance, net of tax	$	(137,792)	$	21,857	$	(23,400)	$	(139,335)

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		Three Months Ended September 30, 2020									Three Months Ended June 30, 2021
						Pension Plans
		Unrealized Gains (Losses) on Securities		Unrealized Gains (Losses) on Derivatives			Net Prior Service (Cost) Credit		Net Gain (Loss)			Total			Unrealized Gains (Losses) on Securities		Unrealized Gains (Losses) on Derivatives		Retirement Plans		Total
Beginning balance, net of tax	Beginning balance, net of tax	$	100,790	$	(20,904)		$	(20)	$	(36,855)		$	43,011	Beginning balance, net of tax	$	76,131	$	(7,144)	$	(29,401)	$	39,586
Other comprehensive income (loss):	Other comprehensive income (loss):													Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	1,601		(197)			—		—			1,404		Other comprehensive income (loss) before reclassifications	33,166		(3,104)		—		30,062
Reclassification adjustments included in net income	Reclassification adjustments included in net income	316		1,587			(2)		821			2,722		Reclassification adjustments included in net income	375		1,599		(9)		1,965
Income tax expense		(403)		(292)			—		(171)			(866)
Income tax (expense) benefit														Income tax (expense) benefit	(7,044)		315		3		(6,726)
Net current-period other comprehensive income (loss), net of tax	Net current-period other comprehensive income (loss), net of tax	1,514		1,098			(2)		650			3,260		Net current-period other comprehensive income (loss), net of tax	26,497		(1,190)		(6)		25,301
Ending balance, net of tax	Ending balance, net of tax	$	102,304	$	(19,806)		$	(22)	$	(36,205)		$	46,271	Ending balance, net of tax	$	102,628	$	(8,334)	$	(29,407)	$	64,887

		Nine Months Ended September 30, 2020									Six Months Ended June 30, 2021
						Pension Plans
		Unrealized Gains (Losses) on Securities		Unrealized Gains (Losses) on Derivatives			Net Prior Service (Cost) Credit		Net Gain (Loss)			Total			Unrealized Gains (Losses) on Securities		Unrealized Gains (Losses) on Derivatives		Retirement Plans		Total
Beginning balance, net of tax	Beginning balance, net of tax	$	38,038	$	(1,672)		$	(145)	$	(31,985)		$	4,236	Beginning balance, net of tax	$	116,078	$	(17,091)	$	(29,907)	$	69,080

Other comprehensive income (loss):	Other comprehensive income (loss):													Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	88,900		(25,236)			163		(7,558)			56,269		Other comprehensive income (loss) before reclassifications	(15,813)		7,919		—		(7,894)
Reclassification adjustments included in net income	Reclassification adjustments included in net income	(7,551)		2,283			(6)		2,213			(3,061)		Reclassification adjustments included in net income	(1,212)		3,167		632		2,587
Income tax (expense) benefit	Income tax (expense) benefit	(17,083)		4,819			(34)		1,125			(11,173)		Income tax (expense) benefit	3,575		(2,329)		(132)		1,114
Net current-period other comprehensive income (loss), net of tax	Net current-period other comprehensive income (loss), net of tax	64,266		(18,134)			123		(4,220)			42,035		Net current-period other comprehensive income (loss), net of tax	(13,450)		8,757		500		(4,193)
Ending balance, net of tax	Ending balance, net of tax	$	102,304	$	(19,806)		$	(22)	$	(36,205)		$	46,271	Ending balance, net of tax	$	102,628	$	(8,334)	$	(29,407)	$	64,887

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The reclassification adjustments out of accumulated other comprehensive income (loss) included in net income are presented below (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

Unrealized gains and losses on securities transferred:	Unrealized gains and losses on securities transferred:									Unrealized gains and losses on securities transferred:
Amortization of unrealized gains and losses (1)	Amortization of unrealized gains and losses (1)	$	(312)	$	(394)	$	(1,118)	$	(730)	Amortization of unrealized gains and losses (1)	$	(1,310)	$	(390)	$	(1,553)	$	(806)
Tax benefit	Tax benefit	66		82		235		153		Tax benefit	275		82		326		169
Net of tax	Net of tax	(246)		(312)		(883)		(577)		Net of tax	(1,035)		(308)		(1,227)		(637)

Unrealized gains and losses on available for sale securities:	Unrealized gains and losses on available for sale securities:									Unrealized gains and losses on available for sale securities:
Realized net gain on sale of securities (2)		1,381		78		3,399		8,281
Realized net gain (loss) on sale of securities (2)										Realized net gain (loss) on sale of securities (2)	(2,177)		15		(3,720)		2,018

Tax expense		(290)		(16)		(714)		(1,739)
Tax (expense) benefit										Tax (expense) benefit	457		(4)		781		(424)
Net of tax	Net of tax	1,091		62		2,685		6,542		Net of tax	(1,720)		11		(2,939)		1,594

Derivatives:	Derivatives:									Derivatives:
Realized net loss on interest rate swap derivatives (3)		(1,617)		(1,593)		(4,784)		(2,303)
Realized net gain (loss) on interest rate swap derivatives (3)										Realized net gain (loss) on interest rate swap derivatives (3)	(344)		(1,599)		(1,666)		(3,167)
Tax benefit	Tax benefit	340		335		1,005		484		Tax benefit	72		336		350		665
Net of tax	Net of tax	(1,277)		(1,258)		(3,779)		(1,819)		Net of tax	(272)		(1,263)		(1,316)		(2,502)

Amortization of unrealized gains on terminated interest rate swap derivatives (3)		—		6		—		20
Tax expense		—		(1)		—		(4)
Net of tax		—		5		—		16

Amortization of pension plan:	Amortization of pension plan:									Amortization of pension plan:
Net actuarial loss (4)	Net actuarial loss (4)	(316)		(821)		(948)		(2,213)		Net actuarial loss (4)	(241)		9		(447)		(632)
Prior service credit (4)		—		2		—		6
Total before tax		(316)		(819)		(948)		(2,207)

Tax benefit	Tax benefit	67		172		199		463		Tax benefit	51		(3)		93		132
Net of tax	Net of tax	(249)		(647)		(749)		(1,744)		Net of tax	(190)		6		(354)		(500)
Total reclassifications for the period, net of tax	Total reclassifications for the period, net of tax	$	(681)	$	(2,150)	$	(2,726)	$	2,418	Total reclassifications for the period, net of tax	$	(3,217)	$	(1,554)	$	(5,836)	$	(2,045)

(1) Included in interest income on the consolidated statements of income.

(2) Listed as net gain (loss) on sale of securities AFS on the consolidated statements of income.

(3) Included in interest expense for FHLB borrowings and deposits on the consolidated statements of income.

(4) These AOCI components are included in the computation of net periodic pension cost (income) presented in “Note 8 – Employee Benefit Plans.”

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4. Securities

Debt securities

The amortized cost, gross unrealized gains and losses and estimated fair value of investment and mortgage-backed AFS and HTM securities as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 are reflected in the tables below (in thousands):


		September 30, 2021								June 30, 2022
		Amortized		Gross Unrealized		Gross Unrealized		Estimated				Amortized		Gross Unrealized		Gross Unrealized		Estimated
AVAILABLE FOR SALE	AVAILABLE FOR SALE	Cost		Gains		Losses		Fair Value			AVAILABLE FOR SALE	Cost		Gains		Losses		Fair Value
Investment securities:	Investment securities:										Investment securities:
U.S. Treasury	U.S. Treasury	$	42,806	$	741	$	—	$	43,547		U.S. Treasury	$	39,465	$	198	$	—	$	39,663

State and political subdivisions	State and political subdivisions	1,890,814		83,140		6,477		1,967,477			State and political subdivisions	1,255,380		1,099		80,248		1,176,231
Corporate bonds and other	Corporate bonds and other	117,332		2,563		196		119,699			Corporate bonds and other	60,215		65		1,462		58,818

MBS: (1)	MBS: (1)										MBS: (1)
Residential	Residential	493,505		20,943		370		514,078			Residential	451,457		3,399		5,344		449,512
Commercial	Commercial	105,780		2,800		277		108,303			Commercial	9,832		—		702		9,130
Total	Total	$	2,650,237	$	110,187	$	7,320	$	2,753,104		Total	$	1,816,349	$	4,761	$	87,756	$	1,733,354

HELD TO MATURITY	HELD TO MATURITY										HELD TO MATURITY
Investment securities:	Investment securities:										Investment securities:
State and political subdivisions	State and political subdivisions	$	788	$	3	$	—	$	791		State and political subdivisions	$	876,065	$	70	$	108,210	$	767,925
Corporate bonds and other											Corporate bonds and other	95,362		112		2,435		93,039
MBS: (1)	MBS: (1)										MBS: (1)
Residential	Residential	40,128		2,616		—		42,744			Residential	65,494		55		2,273		63,276
Commercial	Commercial	51,563		2,937		—		54,500			Commercial	46,751		—		1,184		45,567
Total	Total	$	92,479	$	5,556	$	—	$	98,035		Total	$	1,083,672	$	237	$	114,102	$	969,807


		December 31, 2020									December 31, 2021
		Amortized		Gross Unrealized		Gross Unrealized		Estimated			Amortized		Gross Unrealized		Gross Unrealized		Estimated
AVAILABLE FOR SALE	AVAILABLE FOR SALE	Cost		Gains		Losses		Fair Value		AVAILABLE FOR SALE	Cost		Gains		Losses		Fair Value
Investment securities:	Investment securities:									Investment securities:

U.S. Treasury										U.S. Treasury	$	58,084	$	843	$	50	$	58,877

State and political subdivisions	State and political subdivisions	$	1,475,030	$	105,601	$	37	$	1,580,594	State and political subdivisions	1,962,257		93,893		4,214		2,051,936
Corporate bonds and other	Corporate bonds and other	77,224		1,053		22		78,255		Corporate bonds and other	133,333		2,408		209		135,532

MBS: (1)	MBS: (1)									MBS: (1)
Residential	Residential	771,409		38,674		73		810,010		Residential	411,727		14,895		272		426,350
Commercial	Commercial	113,850		4,746		150		118,446		Commercial	90,193		1,642		205		91,630
Total	Total	$	2,437,513	$	150,074	$	282	$	2,587,305	Total	$	2,655,594	$	113,681	$	4,950	$	2,764,325

HELD TO MATURITY	HELD TO MATURITY									HELD TO MATURITY
Investment securities:	Investment securities:									Investment securities:
State and political subdivisions	State and political subdivisions	$	907	$	13	$	—	$	920	State and political subdivisions	$	788	$	3	$	—	$	791
MBS: (1)	MBS: (1)									MBS: (1)
Residential	Residential	47,948		4,187		—		52,135		Residential	38,644		2,103		—		40,747
Commercial	Commercial	60,143		5,000		—		65,143		Commercial	51,348		2,349		—		53,697
Total	Total	$	108,998	$	9,200	$	—	$	118,198	Total	$	90,780	$	4,455	$	—	$	95,235

(1) All MBS are issued and/or guaranteed by U.S. government agencies or U.S. GSEs.

From time to time, we transfer securities from AFS to HTM due to overall balance sheet strategies. We transferred securities from AFS to HTM with an estimated fair value of $998.5 million during the six months ended June 30, 2022. There were no securities transferred from AFS to HTM during the year ended December 31, 2021. The remaining net unamortized, unrealized loss on the transferred securities included in AOCI in the accompanying balance sheets totaled $91.5 million ($72.3 million, net of tax) at June 30, 2022 and $1.5 million ($1.2 million, net of tax) at December 31, 2021. Any net unrealized gain or loss on the transferred securities included in AOCI at the time of transfer will be amortized over the remaining life of the underlying security as an adjustment to the yield on those securities. Securities transferred with losses included in AOCI continue to be

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included in management’s assessment for impairment for each individual security. We transferred these securities due to overall balance sheet strategies, and our management has the current intent and ability to hold these securities until maturity.

Investment securities and MBS with carrying values of ~~$1.48~~$1.41 billion and ~~$1.56~~$1.61 billion were pledged as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, to collateralize FHLB borrowings, borrowings from the FRDW, repurchase agreements and public fund deposits, for potential liquidity needs or other purposes as required by law.

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The following tables ~~represent~~present the fair value and unrealized losses on AFS and HTM investment securities and MBS, if applicable, for which an allowance for credit losses has not been recorded as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, segregated by major security type and length of time in a continuous loss position (in thousands):


		September 30, 2021													June 30, 2022
		Less Than 12 Months				More Than 12 Months				Total					Less Than 12 Months				More Than 12 Months				Total
		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
AVAILABLE FOR SALE	AVAILABLE FOR SALE													AVAILABLE FOR SALE
Investment securities:	Investment securities:													Investment securities:

State and political subdivisions	State and political subdivisions	$	396,345	$	6,477	$	—	$	—	$	396,345	$	6,477	State and political subdivisions	$	1,034,005	$	80,248	$	—	$	—	$	1,034,005	$	80,248
Corporate bonds and other	Corporate bonds and other	21,352		196		—		—		21,352		196		Corporate bonds and other	50,788		1,462		—		—		50,788		1,462

MBS:	MBS:													MBS:
Residential	Residential	15,790		370		—		—		15,790		370		Residential	254,471		5,344		—		—		254,471		5,344
Commercial	Commercial	—		—		4,602		277		4,602		277		Commercial	6,204		88		2,926		614		9,130		702
Total	Total	$	433,487	$	7,043	$	4,602	$	277	$	438,089	$	7,320	Total	$	1,345,468	$	87,142	$	2,926	$	614	$	1,348,394	$	87,756

HELD TO MATURITY														HELD TO MATURITY
Investment securities:														Investment securities:
State and political subdivisions														State and political subdivisions	$	728,547	$	103,110	$	28,978	$	5,100	$	757,525	$	108,210
Corporate bonds and other														Corporate bonds and other	90,569		2,435		—		—		90,569		2,435
MBS:														MBS:
Residential														Residential	58,136		1,988		4,255		285		62,391		2,273
Commercial														Commercial	45,567		1,184		—		—		45,567		1,184
Total														Total	$	922,819	$	108,717	$	33,233	$	5,385	$	956,052	$	114,102

		December 31, 2020													December 31, 2021
		Less Than 12 Months				More Than 12 Months				Total					Less Than 12 Months				More Than 12 Months				Total
		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
AVAILABLE FOR SALE	AVAILABLE FOR SALE													AVAILABLE FOR SALE
Investment securities:	Investment securities:													Investment securities:

U.S. Treasury														U.S. Treasury	$	9,947	$	50	$	—	$	—	$	9,947	$	50

State and political subdivisions	State and political subdivisions	$	17,305	$	37	$	—	$	—	$	17,305	$	37	State and political subdivisions	260,509		3,622		7,608		592		268,117		4,214
Corporate bonds and other	Corporate bonds and other	11,562		22		—		—		11,562		22		Corporate bonds and other	35,597		209		—		—		35,597		209

MBS:	MBS:													MBS:
Residential	Residential	6,287		73		—		—		6,287		73		Residential	1,225		3		5,168		269		6,393		272
Commercial	Commercial	4,744		150		—		—		4,744		150		Commercial	4,274		7		4,674		198		8,948		205
Total	Total	$	39,898	$	282	$	—	$	—	$	39,898	$	282	Total	$	311,552	$	3,891	$	17,450	$	1,059	$	329,002	$	4,950

For those AFS debt securities in an unrealized loss position where management (i) has the intent to sell or (ii) where it will more-likely-than-not be required to sell the security before the recovery of its amortized cost basis, we write the security down to fair value with an adjustment to earnings. For those AFS debt securities in an unrealized loss position that do not meet either of these criteria, management assesses whether the decline in fair value has resulted from credit-related factors, using both qualitative and quantitative criteria. Determining the allowance under the credit loss method requires the use of a discounted cash flow method to assess the credit losses. Any credit-related impairment will be recognized in allowance for credit losses on the balance sheet with a corresponding adjustment to earnings. Noncredit-related impairment, the portion of the impairment relating to factors other than credit (such as changes in market interest rates), is recognized in other comprehensive income, net of tax.

~~Based~~

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As of June 30, 2022 and December 31, 2021, we did not have an allowance for credit losses on our AFS securities, based on our consideration of the qualitative factors associated with each security type in our AFS ~~portfolio, we did not recognize any~~portfolio. The unrealized losses ~~in income~~ on our investment and MBS are due to changes in interest rates and spreads and other market conditions. At June 30, 2022, we had 644 AFS debt securities ~~during the three and nine months ended September 30, 2021 or 2020.~~in an unrealized loss position. Our state and political subdivisions are highly rated municipal securities with a long history of no credit losses. Our AFS MBS are highly rated securities which are either explicitly or implicitly backed by the U.S. Government through its agencies which are highly rated by major ratings agencies and also have a long history of no credit losses. Our corporate bonds and other investment securities ~~as of September 30, 2021~~ consist of highly rated investment grade bonds. Management does not intend to sell and it is likely we will not be required to sell those securities in an unrealized loss position prior to the anticipated recovery of the amortized cost basis. These unrealized losses on our investment and MBS are due to changes in interest rates and spreads and other market conditions impacted by COVID-19. As of September 30, 2021 and December 31, 2020, we did not have an allowance for credit losses on our AFS securities.

We assess the likelihood of default and the potential amount of default when assessing our HTM securities for credit losses. We utilize term structures and, due to no prior loss exposure on our state and political subdivision securities or our corporate securities, we currently apply a third-party average loss given default rate to model ~~our~~these securities. Due to a small number of HTM ~~municipal~~ securities in our portfolio as of ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, we elected to use the specific identification method to model these securities which aligns with our third-party fair value measurement process. The model determined any expected credit loss over the life of these securities to be ~~remote.~~insignificant. Management further evaluated the remote expectation of loss along with the qualitative factors

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associated with these securities and concluded that, due to the securities being highly rated municipals and investment grade corporates with a long history of no credit losses, no credit loss should be recognized for these securities for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 or ~~2020.~~

From time to time, we have transferred securities from AFS to HTM due to overall balance sheet strategies. The remaining net unamortized, unrealized loss on the transferred securities included in AOCI in the accompanying balance sheets totaled $1.7 million ($1.4 million, net of tax) at September 30, 2021 and $2.9 million ($2.3 million, net of tax) at December 31, 2020. Any net unrealized gain or loss on the transferred securities included in AOCI at the time of transfer will be amortized over the remaining life of the underlying security as an adjustment to the yield on those securities. Securities transferred with losses included in AOCI continue to be included in management’s assessment for impairment for each individual security. There were no securities transferred from AFS to HTM during the nine months ended September 30, 2021 or the year ended December 31, 2020.2021.

The accrued interest receivable on our debt securities is excluded from the credit loss estimate and is included in interest receivable on our consolidated balance sheets. As of ~~September~~June 30, 2022, accrued interest receivable on AFS and HTM debt securities totaled $16.1 million and $10.9 million, respectively. As of December 31, 2021, accrued interest receivable on AFS and HTM debt securities totaled ~~$15.5~~$25.6 million and ~~$240,000, respectively. As of December 31, 2020, accrued interest receivable on AFS and HTM debt securities totaled $22.0 million and $298,000,~~$244,000, respectively. No HTM debt securities were past-due or on nonaccrual status as of ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020.~~2021.

The following table reflects interest income recognized on securities for the periods presented (in thousands):


		Three Months Ended September 30,					Three Months Ended June 30,
		2021		2020			2022		2021
U.S. Treasury	U.S. Treasury	$	182	$	—	U.S. Treasury	$	59	$	169

State and political subdivisions	State and political subdivisions	12,223		9,787		State and political subdivisions	13,788		10,939

Corporate bonds and other	Corporate bonds and other	1,097		391		Corporate bonds and other	1,390		986
MBS	MBS	4,405		7,048		MBS	3,238		4,647
Total interest income on securities	Total interest income on securities	$	17,907	$	17,226	Total interest income on securities	$	18,475	$	16,741


		Nine Months Ended September 30,					Six Months Ended June 30,
		2021		2020			2022		2021
U.S. Treasury	U.S. Treasury	$	388	$	—	U.S. Treasury	$	227	$	206

State and political subdivisions	State and political subdivisions	33,568		26,281		State and political subdivisions	27,120		21,345
Corporate bonds and other	Corporate bonds and other	2,928		568		Corporate bonds and other	2,717		1,831
MBS	MBS	15,140		27,626		MBS	7,255		10,735
Total interest income on securities	Total interest income on securities	$	52,024	$	54,475	Total interest income on securities	$	37,319	$	34,117

There was a ~~$3.4~~$3.7 million net realized loss from the AFS securities portfolio for the six months ended June 30, 2022, which consisted of $4.0 million in realized losses and $290,000 in realized gains. There was a $2.0 million net realized gain from the AFS securities portfolio for the ~~nine~~six months ended ~~September~~June 30, 2021, which consisted of ~~$3.5~~$2.1 million in realized gains and $71,000 in realized losses. There was a $8.3 million net realized gain from the AFS securities portfolio for the nine months ended September 30, 2020, which consisted of $8.4 million in realized gains and $89,000$52,000 in realized losses. There were no sales from the HTM portfolio during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 or ~~2020.~~2021. We calculate realized gains and losses on sales of securities under the specific identification method.

Expected maturities on our securities may differ from contractual maturities because issuers may have the right to call or prepay obligations. MBS are presented in total by category since MBS are typically issued with stated principal amounts and are backed by pools of mortgages that have loans with varying maturities. The characteristics of the underlying pool of mortgages, such as fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the security holder. The term of a mortgage-backed pass-through security thus approximates the term of the underlying mortgages and can vary significantly due to prepayments.

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The amortized cost and estimated fair value of AFS and HTM securities at ~~September~~June 30, ~~2021,~~2022, are presented below by contractual maturity (in thousands):


		September 30, 2021					June 30, 2022
		Amortized Cost		Fair Value			Amortized Cost		Fair Value
AVAILABLE FOR SALE	AVAILABLE FOR SALE					AVAILABLE FOR SALE
Investment securities:	Investment securities:					Investment securities:
Due in one year or less	Due in one year or less	$	4,495	$	4,532	Due in one year or less	$	2,039	$	2,050
Due after one year through five years	Due after one year through five years	26,705		27,841		Due after one year through five years	72,424		72,561
Due after five years through ten years	Due after five years through ten years	175,953		180,006		Due after five years through ten years	86,994		86,038
Due after ten years	Due after ten years	1,843,799		1,918,344		Due after ten years	1,193,603		1,114,063
		2,050,952		2,130,723			1,355,060		1,274,712
MBS:	MBS:	599,285		622,381		MBS:	461,289		458,642
Total	Total	$	2,650,237	$	2,753,104	Total	$	1,816,349	$	1,733,354


		September 30, 2021					June 30, 2022
		Amortized Cost		Fair Value			Amortized Cost		Fair Value
HELD TO MATURITY	HELD TO MATURITY					HELD TO MATURITY
Investment securities:	Investment securities:					Investment securities:
Due in one year or less	Due in one year or less	$	120	$	120	Due in one year or less	$	120	$	120
Due after one year through five years	Due after one year through five years	529		531		Due after one year through five years	1,024		1,024
Due after five years through ten years	Due after five years through ten years	139		140		Due after five years through ten years	99,549		97,202
Due after ten years	Due after ten years	—		—		Due after ten years	870,734		762,618
		788		791			971,427		860,964
MBS:	MBS:	91,691		97,244		MBS:	112,245		108,843
Total	Total	$	92,479	$	98,035	Total	$	1,083,672	$	969,807

Equity Investments

Equity investments on our consolidated balance sheets include Community Reinvestment Act funds with a readily determinable fair value as well as equity investments without readily determinable fair values. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we had equity investments recorded in our consolidated balance sheets of ~~$11.8~~$11.3 million and ~~$11.9~~$11.8 million, respectively.

Any realized and unrealized gains and losses on equity investments are reported in income. Equity investments without readily determinable fair values are recorded at cost less impairment, if any.

The following is a summary of unrealized and realized gains and losses on equity investments recognized in other noninterest income in the consolidated statements of income during the periods presented (in thousands):

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
Net (losses) gains recognized during the period on equity investments $ (28) $ (232) $ (118) $ (178)
Less: Net gains recognized during the period on equity investments sold during the period — — — —
Unrealized (losses) gains recognized during the reporting period on equity investments held at the reporting date $ (28) $ (232) $ (118) $ (178)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net gains (losses) recognized during the period on equity investments	$	(191)	$	17	$	(466)	$	(90)
Less: Net gains recognized during the period on equity investments sold during the period	—		—		—		—
Unrealized gains (losses) recognized during the reporting period on equity investments held at the reporting date	$	(191)	$	17	$	(466)	$	(90)

Equity investments are assessed quarterly for other-than-temporary impairment. Based upon that evaluation, management does not consider any of our equity investments to be other-than-temporarily impaired at ~~September~~June 30, ~~2021.~~2022.

FHLB Stock

Our FHLB stock, which has limited marketability, is carried at cost and is assessed quarterly for other-than-temporary impairment. Based upon evaluation by management at ~~September~~June 30, ~~2021,~~2022, our FHLB stock was not impaired and thus was not considered to be other-than-temporarily impaired.

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5. Loans and Allowance for Loan Losses

Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
Real estate loans:	Real estate loans:					Real estate loans:
Construction	Construction	$	422,095	$	581,941	Construction	$	520,484	$	447,860
1-4 family residential	1-4 family residential	660,689		719,952		1-4 family residential	640,706		651,140
Commercial	Commercial	1,605,132		1,295,746		Commercial	1,834,734		1,598,172
Commercial loans	Commercial loans	443,708		557,122		Commercial loans	428,974		418,998
Municipal loans	Municipal loans	427,259		409,028		Municipal loans	457,239		443,078
Loans to individuals	Loans to individuals	88,702		93,990		Loans to individuals	80,904		85,914
Total loans	Total loans	3,647,585		3,657,779		Total loans	3,963,041		3,645,162
Less: Allowance for loan losses	Less: Allowance for loan losses	38,022		49,006		Less: Allowance for loan losses	35,449		35,273
Net loans	Net loans	$	3,609,563	$	3,608,773	Net loans	$	3,927,592	$	3,609,889

Paycheck Protection Program Loans

In April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amount is still fully guaranteed by the SBA. On December 27, 2020, the Economic Aid Act was signed into law. This second coronavirus relief package granted additional funds for a new round of PPP loans. Additionally, it expanded the eligibility for loans and allowed certain businesses to request a second loan. In return for processing and booking a PPP loan, the SBA paid lenders a processing fee tiered by the size of the loan. These loans are included in commercial loans with an amortized cost basis at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 of ~~$67.5~~$3.0 million and ~~$214.8~~$31.0 million, respectively.

Construction Real Estate Loans

Our construction loans are collateralized by property located primarily in or near the market areas we serve. A number of our construction loans will be owner occupied upon completion. Construction loans for non-owner occupied projects are financed, but these typically have cash flows from leases with tenants, secondary sources of repayment, and in some cases, additional collateral. Our construction loans have both adjustable and fixed interest rates during the construction period. Construction loans to individuals are typically priced and made with the intention of granting the permanent loan on the completed property. ~~Speculative and commercial~~Commercial construction loans are subject to underwriting standards similar to that of the commercial portfolio. Owner occupied 1-4 family residential construction loans are subject to the underwriting standards of the permanent loan.

1-4 Family Residential Real Estate Loans

Residential loan originations are generated by our loan officers, in-house origination staff, marketing efforts, present customers, walk-in customers and referrals from real estate agents and builders. We focus our lending efforts primarily on the origination of loans secured by first mortgages on owner occupied 1-4 family residences. Substantially all of our 1-4 family residential originations are secured by properties located in or near our market areas.

Our 1-4 family residential loans generally have maturities ranging from ~~five~~15 to 30 years. These loans are typically fully amortizing with monthly payments sufficient to repay the total amount of the loan. Our 1-4 family residential loans are made at both fixed and adjustable interest rates.

Underwriting for 1-4 family residential loans includes debt-to-income analysis, credit history analysis, appraised value and down payment considerations. Changes in the market value of real estate can affect the potential losses in the residential portfolio.

Commercial Real Estate Loans

Commercial real estate loans as of ~~September~~June 30, ~~2021~~2022 consisted of ~~$1.32~~$1.55 billion of owner and non-owner occupied real estate, ~~$260.1~~$265.3 million of loans secured by multi-family properties and ~~$22.0~~$21.6 million of loans secured by farmland. Commercial real estate loans primarily include loans collateralized by retail, commercial office buildings, multi-family residential buildings, medical facilities and offices, senior living, assisted living and skilled nursing facilities, warehouse facilities, hotels and churches. In determining whether to originate commercial real estate loans, we generally consider such factors as the financial

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condition of the borrower and the debt service coverage of the property. Commercial real estate loans are made at both fixed and adjustable interest rates for terms generally up to 20 years.

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Commercial Loans

Our commercial loans are diversified loan types including short-term working capital loans for inventory and accounts receivable and short- and medium-term loans for equipment or other business capital expansion. In our commercial loan underwriting, we assess the creditworthiness, ability to repay and the value and liquidity of the collateral being offered. Terms of commercial loans are generally commensurate with the useful life of the collateral offered.

Municipal Loans

We make loans to municipalities and school districts primarily throughout the state of Texas, with a small percentage originating outside of the state. The majority of the loans to municipalities and school districts have tax or revenue pledges and in some cases are additionally supported by collateral. Municipal loans made without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service. Lending money directly to these municipalities allows us to earn a higher yield than we could if we purchased municipal securities for similar durations.

Loans to Individuals

Substantially all originations of our loans to individuals are made to consumers in our market areas. The majority of loans to individuals are collateralized by titled equipment, which are primarily automobiles. Loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards we employ for consumer loans include an application, a determination of the applicant’s payment history on other debts, with the greatest weight being given to payment history with us and an assessment of the borrower’s ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount. Most of our loans to individuals are collateralized, which management believes assists in limiting our exposure.

Credit Quality Indicators

We categorize loans into risk categories on an ongoing basis based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. We use the following definitions for risk ratings:

•Pass (Rating 1 – 4) – This rating is assigned to all satisfactory loans. This category, by definition, consists of acceptable credit. Credit and collateral exceptions should not be present, although their presence would not necessarily prohibit a loan from being rated Pass, if deficiencies are in the process of correction. These loans are not included in the Watch List.

•Pass Watch (Rating 5) – These loans require some degree of special treatment, but not due to credit quality. This category does not include loans specially mentioned or adversely classified; however, particular attention is warranted to characteristics such as:

▪A lack of, or abnormally extended payment program;

▪A heavy degree of concentration of collateral without sufficient margin;

▪A vulnerability to competition through lesser or extensive financial leverage; and

▪A dependence on a single or few customers or sources of supply and materials without suitable substitutes or alternatives.

•Special Mention (Rating 6) – A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in our credit position at some future date. Special Mention loans are not adversely classified and do not expose us to sufficient risk to warrant adverse classification.

•Substandard (Rating 7) – Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

•Doubtful (Rating 8) – Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation, in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

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The following tables set forth the amortized cost basis by class of financing receivable and credit quality indicator for the periods presented (in thousands):


September 30, 2021		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
June 30, 2022																		June 30, 2022	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
		2021		2020		2019		2018		2017		Prior							2022		2021		2020		2019		2018		Prior
Construction real estate:	Construction real estate:																	Construction real estate:
Pass	Pass	$	117,946	$	107,623	$	56,826	$	6,343	$	2,209	$	6,755	$	124,101	$	421,803	Pass	$	70,906	$	211,236	$	44,569	$	9,909	$	2,846	$	7,289	$	173,420	$	520,175
Pass watch	Pass watch	—		—		—		—		—		21		—		21		Pass watch	—		—		—		—		—		—		—		—
Special mention	Special mention	—		—		—		—		—		—		—		—		Special mention	—		—		—		—		—		2		—		2
Substandard	Substandard	—		—		—		—		—		217		—		217		Substandard	—		46		—		12		46		203		—		307
Doubtful	Doubtful	—		—		—		54		—		—		—		54		Doubtful	—		—		—		—		—		—		—		—
Total construction real estate	Total construction real estate	$	117,946	$	107,623	$	56,826	$	6,397	$	2,209	$	6,993	$	124,101	$	422,095	Total construction real estate	$	70,906	$	211,282	$	44,569	$	9,921	$	2,892	$	7,494	$	173,420	$	520,484

1-4 family residential real estate:	1-4 family residential real estate:																	1-4 family residential real estate:
Pass	Pass	$	111,806	$	134,208	$	89,450	$	52,699	$	38,027	$	226,835	$	2,239	$	655,264	Pass	$	62,503	$	131,797	$	116,400	$	70,688	$	40,570	$	212,731	$	2,120	$	636,809
Pass watch	Pass watch	—		—		—		—		—		803		—		803		Pass watch	—		—		—		—		—		—		—		—
Special mention	Special mention	—		—		—		—		—		62		—		62		Special mention	—		—		80		—		—		—		—		80
Substandard	Substandard	9		483		54		—		430		3,227		89		4,292		Substandard	—		46		446		222		185		2,714		42		3,655
Doubtful	Doubtful	—		9		—		—		—		259		—		268		Doubtful	—		—		—		—		—		162		—		162
Total 1-4 family residential real estate	Total 1-4 family residential real estate	$	111,815	$	134,700	$	89,504	$	52,699	$	38,457	$	231,186	$	2,328	$	660,689	Total 1-4 family residential real estate	$	62,503	$	131,843	$	116,926	$	70,910	$	40,755	$	215,607	$	2,162	$	640,706

Commercial real estate:	Commercial real estate:																	Commercial real estate:
Pass	Pass	$	448,184	$	237,377	$	317,768	$	127,342	$	154,680	$	230,388	$	6,281	$	1,522,020	Pass	$	474,786	$	594,621	$	182,409	$	144,639	$	74,072	$	310,337	$	13,916	$	1,794,780
Pass watch	Pass watch	—		—		4,163		23,242		22,159		1,645		—		51,209		Pass watch	—		10,016		—		—		887		249		—		11,152
Special mention	Special mention	—		197		—		—		168		1,919		—		2,284		Special mention	—		—		2,048		2,474		117		1,946		—		6,585
Substandard	Substandard	3,449		609		8,882		8,563		—		7,991		—		29,494		Substandard	596		—		646		12,660		269		7,965		—		22,136
Doubtful	Doubtful	—		—		—		—		—		125		—		125		Doubtful	—		—		—		81		—		—		—		81
Total commercial real estate	Total commercial real estate	$	451,633	$	238,183	$	330,813	$	159,147	$	177,007	$	242,068	$	6,281	$	1,605,132	Total commercial real estate	$	475,382	$	604,637	$	185,103	$	159,854	$	75,345	$	320,497	$	13,916	$	1,834,734

Commercial loans:	Commercial loans:																	Commercial loans:
Pass	Pass	$	131,981	$	78,247	$	28,930	$	15,234	$	4,147	$	6,166	$	174,372	$	439,077	Pass	$	84,254	$	72,829	$	36,975	$	11,107	$	10,132	$	4,183	$	158,199	$	377,679
Pass watch	Pass watch	39		55		504		25		—		—		—		623		Pass watch	226		17		—		247		17		—		31,724		32,231
Special mention	Special mention	—		—		124		381		—		183		373		1,061		Special mention	8,515		5,256		50		—		326		—		3,398		17,545
Substandard	Substandard	91		194		379		165		20		1		1,457		2,307		Substandard	—		54		88		317		96		13		—		568
Doubtful	Doubtful	8		25		141		386		—		80		—		640		Doubtful	—		441		33		130		284		57		6		951
Total commercial loans	Total commercial loans	$	132,119	$	78,521	$	30,078	$	16,191	$	4,167	$	6,430	$	176,202	$	443,708	Total commercial loans	$	92,995	$	78,597	$	37,146	$	11,801	$	10,855	$	4,253	$	193,327	$	428,974

Municipal loans:	Municipal loans:																	Municipal loans:
Pass	Pass	$	56,206	$	65,884	$	63,328	$	30,504	$	57,665	$	153,672	$	—	$	427,259	Pass	$	45,435	$	78,084	$	60,657	$	57,729	$	26,904	$	188,430	$	—	$	457,239
Pass watch	Pass watch	—		—		—		—		—		—		—		—		Pass watch	—		—		—		—		—		—		—		—
Special mention	Special mention	—		—		—		—		—		—		—		—		Special mention	—		—		—		—		—		—		—		—
Substandard	Substandard	—		—		—		—		—		—		—		—		Substandard	—		—		—		—		—		—		—		—
Doubtful	Doubtful	—		—		—		—		—		—		—		—		Doubtful	—		—		—		—		—		—		—		—
Total municipal loans	Total municipal loans	$	56,206	$	65,884	$	63,328	$	30,504	$	57,665	$	153,672	$	—	$	427,259	Total municipal loans	$	45,435	$	78,084	$	60,657	$	57,729	$	26,904	$	188,430	$	—	$	457,239

Loans to individuals:	Loans to individuals:																	Loans to individuals:
Pass	Pass	$	34,329	$	28,335	$	14,196	$	5,195	$	2,188	$	1,068	$	3,236	$	88,547	Pass	$	19,375	$	28,934	$	17,699	$	7,958	$	2,476	$	1,619	$	2,734	$	80,795
Pass watch	Pass watch	—		—		—		—		—		—		—		—		Pass watch	—		—		—		—		—		—		—		—
Special mention	Special mention	—		—		—		40		—		—		—		40		Special mention	—		—		—		—		30		—		—		30
Substandard	Substandard	—		1		27		14		22		10		1		75		Substandard	—		—		—		24		42		7		1		74
Doubtful	Doubtful	—		—		1		11		10		18		—		40		Doubtful	—		—		—		—		—		5		—		5
Total loans to individuals	Total loans to individuals	$	34,329	$	28,336	$	14,224	$	5,260	$	2,220	$	1,096	$	3,237	$	88,702	Total loans to individuals	$	19,375	$	28,934	$	17,699	$	7,982	$	2,548	$	1,631	$	2,735	$	80,904
Total loans	Total loans	$	904,048	$	653,247	$	584,773	$	270,198	$	281,725	$	641,445	$	312,149	$	3,647,585	Total loans	$	766,596	$	1,133,377	$	462,100	$	318,197	$	159,299	$	737,912	$	385,560	$	3,963,041

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December 31, 2020		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
December 31, 2021																		December 31, 2021	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
		2020		2019		2018		2017		2016		Prior							2021		2020		2019		2018		2017		Prior
Construction real estate:	Construction real estate:																	Construction real estate:
Pass	Pass	$	155,693	$	180,536	$	76,090	$	55,636	$	3,191	$	8,297	$	101,793	$	581,236	Pass	$	179,521	$	82,862	$	38,788	$	5,666	$	2,126	$	6,080	$	132,592	$	447,635
Pass watch	Pass watch	—		—		—		—		23		—		—		23		Pass watch	—		—		—		—		—		—		—		—
Special mention	Special mention	—		—		—		—		—		—		—		—		Special mention	—		—		—		—		—		—		—		—
Substandard	Substandard	—		382		62		—		—		58		—		502		Substandard	—		—		—		—		—		175		—		175
Doubtful	Doubtful	—		—		—		—		—		180		—		180		Doubtful	—		—		—		50		—		—		—		50
Total construction real estate	Total construction real estate	$	155,693	$	180,918	$	76,152	$	55,636	$	3,214	$	8,535	$	101,793	$	581,941	Total construction real estate	$	179,521	$	82,862	$	38,788	$	5,716	$	2,126	$	6,255	$	132,592	$	447,860

1-4 family residential real estate:	1-4 family residential real estate:																	1-4 family residential real estate:
Pass	Pass	$	154,003	$	114,063	$	70,621	$	55,557	$	57,680	$	255,003	$	2,833	$	709,760	Pass	$	141,058	$	129,681	$	81,607	$	47,566	$	34,236	$	209,470	$	2,238	$	645,856
Pass watch	Pass watch	—		—		—		—		267		564		—		831		Pass watch	—		—		—		—		—		777		—		777
Special mention	Special mention	—		—		—		—		—		10		—		10		Special mention	—		82		—		—		—		—		—		82
Substandard	Substandard	1,473		—		135		427		1,588		5,134		96		8,853		Substandard	57		403		55		—		295		3,257		88		4,155
Doubtful	Doubtful	—		—		—		36		103		359		—		498		Doubtful	—		—		—		—		—		270		—		270
Total 1-4 family residential real estate	Total 1-4 family residential real estate	$	155,476	$	114,063	$	70,756	$	56,020	$	59,638	$	261,070	$	2,929	$	719,952	Total 1-4 family residential real estate	$	141,115	$	130,166	$	81,662	$	47,566	$	34,531	$	213,774	$	2,326	$	651,140

Commercial real estate:	Commercial real estate:																	Commercial real estate:
Pass	Pass	$	270,087	$	307,161	$	143,177	$	162,180	$	98,828	$	179,919	$	6,957	$	1,168,309	Pass	$	648,002	$	207,370	$	209,923	$	114,788	$	143,350	$	209,368	$	7,566	$	1,540,367
Pass watch	Pass watch	—		—		3,153		40,125		1,696		2,582		—		47,556		Pass watch	21,669		—		2,163		3,074		374		—		—		27,280
Special mention	Special mention	4,555		33,020		7,041		140		4,531		7,850		—		57,137		Special mention	—		2,062		2,217		119		163		1,877		—		6,438
Substandard	Substandard	7,542		—		2,097		65		704		12,282		—		22,690		Substandard	3,299		667		10,830		1,480		—		7,691		—		23,967
Doubtful	Doubtful	—		—		—		—		—		54		—		54		Doubtful	—		—		—		—		—		120		—		120
Total commercial real estate	Total commercial real estate	$	282,184	$	340,181	$	155,468	$	202,510	$	105,759	$	202,687	$	6,957	$	1,295,746	Total commercial real estate	$	672,970	$	210,099	$	225,133	$	119,461	$	143,887	$	219,056	$	7,566	$	1,598,172

Commercial loans:	Commercial loans:																	Commercial loans:
Pass	Pass	$	313,688	$	47,446	$	20,386	$	7,505	$	3,392	$	6,142	$	140,018	$	538,577	Pass	$	140,628	$	51,866	$	24,688	$	13,204	$	2,516	$	4,062	$	178,263	$	415,227
Pass watch	Pass watch	2,599		1,318		2,410		1,981		—		—		370		8,678		Pass watch	—		—		280		22		—		—		—		302
Special mention	Special mention	304		809		433		39		286		265		455		2,591		Special mention	—		57		78		363		—		157		—		655
Substandard	Substandard	405		1,081		473		7		—		—		4,417		6,383		Substandard	—		283		296		174		16		—		1,457		2,226
Doubtful	Doubtful	310		53		475		54		1		—		—		893		Doubtful	7		26		124		359		—		72		—		588
Total commercial loans	Total commercial loans	$	317,306	$	50,707	$	24,177	$	9,586	$	3,679	$	6,407	$	145,260	$	557,122	Total commercial loans	$	140,635	$	52,232	$	25,466	$	14,122	$	2,532	$	4,291	$	179,720	$	418,998

Municipal loans:	Municipal loans:																	Municipal loans:
Pass	Pass	$	72,542	$	68,132	$	33,735	$	61,170	$	25,387	$	148,062	$	—	$	409,028	Pass	$	80,167	$	64,803	$	61,348	$	29,168	$	56,274	$	151,318	$	—	$	443,078
Pass watch	Pass watch	—		—		—		—		—		—		—		—		Pass watch	—		—		—		—		—		—		—		—
Special mention	Special mention	—		—		—		—		—		—		—		—		Special mention	—		—		—		—		—		—		—		—
Substandard	Substandard	—		—		—		—		—		—		—		—		Substandard	—		—		—		—		—		—		—		—
Doubtful	Doubtful	—		—		—		—		—		—		—		—		Doubtful	—		—		—		—		—		—		—		—
Total municipal loans	Total municipal loans	$	72,542	$	68,132	$	33,735	$	61,170	$	25,387	$	148,062	$	—	$	409,028	Total municipal loans	$	80,167	$	64,803	$	61,348	$	29,168	$	56,274	$	151,318	$	—	$	443,078

Loans to individuals:	Loans to individuals:																	Loans to individuals:
Pass	Pass	$	46,722	$	25,302	$	10,132	$	4,716	$	1,867	$	917	$	3,900	$	93,556	Pass	$	40,252	$	24,028	$	11,813	$	4,121	$	1,684	$	849	$	3,052	$	85,799
Pass watch	Pass watch	—		—		—		—		—		—		—		—		Pass watch	—		—		—		—		—		—		—		—
Special mention	Special mention	—		—		51		—		—		—		4		55		Special mention	—		—		—		36		—		—		—		36
Substandard	Substandard	6		35		28		30		9		11		1		120		Substandard	—		1		24		4		23		10		2		64
Doubtful	Doubtful	73		20		6		55		81		24		—		259		Doubtful	—		—		1		7		3		4		—		15
Total loans to individuals	Total loans to individuals	$	46,801	$	25,357	$	10,217	$	4,801	$	1,957	$	952	$	3,905	$	93,990	Total loans to individuals	$	40,252	$	24,029	$	11,838	$	4,168	$	1,710	$	863	$	3,054	$	85,914
Total loans	Total loans	$	1,030,002	$	779,358	$	370,505	$	389,723	$	199,634	$	627,713	$	260,844	$	3,657,779	Total loans	$	1,254,660	$	564,191	$	444,235	$	220,201	$	241,060	$	595,557	$	325,258	$	3,645,162

Watchlisted loans reported as 2022 originations as of June 30, 2022 and watchlisted loans reported as 2021 originations as of December 31, 2021 were, for the majority, first originated in various years prior to 2022 and 2021, respectively, but were renewed in the respective year.

Southside Bancshares, Inc. |22

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The following tables present the aging of the amortized cost basis in past due loans by class of loans (in thousands):


		September 30, 2021													June 30, 2022
		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total			30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total
Real estate loans:	Real estate loans:													Real estate loans:
Construction	Construction	$	72	$	41	$	—	$	113	$	421,982	$	422,095	Construction	$	25	$	57	$	33	$	115	$	520,369	$	520,484
1-4 family residential	1-4 family residential	652		691		580		1,923		658,766		660,689		1-4 family residential	1,491		903		328		2,722		637,984		640,706
Commercial	Commercial	885		—		—		885		1,604,247		1,605,132		Commercial	760		—		154		914		1,833,820		1,834,734
Commercial loans	Commercial loans	1,402		233		31		1,666		442,042		443,708		Commercial loans	1,111		442		295		1,848		427,126		428,974
Municipal loans	Municipal loans	96		—		—		96		427,163		427,259		Municipal loans	—		—		—		—		457,239		457,239
Loans to individuals	Loans to individuals	265		14		12		291		88,411		88,702		Loans to individuals	151		10		—		161		80,743		80,904
Total	Total	$	3,372	$	979	$	623	$	4,974	$	3,642,611	$	3,647,585	Total	$	3,538	$	1,412	$	810	$	5,760	$	3,957,281	$	3,963,041


		December 31, 2020													December 31, 2021
		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total			30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total
Real estate loans:	Real estate loans:													Real estate loans:
Construction	Construction	$	95	$	14	$	444	$	553	$	581,388	$	581,941	Construction	$	82	$	58	$	—	$	140	$	447,720	$	447,860
1-4 family residential	1-4 family residential	7,872		2,469		2,830		13,171		706,781		719,952		1-4 family residential	3,226		606		227		4,059		647,081		651,140
Commercial	Commercial	467		315		86		868		1,294,878		1,295,746		Commercial	1,191		—		99		1,290		1,596,882		1,598,172
Commercial loans	Commercial loans	1,423		4,516		323		6,262		550,860		557,122		Commercial loans	1,523		251		537		2,311		416,687		418,998
Municipal loans	Municipal loans	64		—		—		64		408,964		409,028		Municipal loans	170		—		—		170		442,908		443,078
Loans to individuals	Loans to individuals	519		123		27		669		93,321		93,990		Loans to individuals	315		41		8		364		85,550		85,914
Total	Total	$	10,440	$	7,437	$	3,710��	$	21,587	$	3,636,192	$	3,657,779	Total	$	6,507	$	956	$	871	$	8,334	$	3,636,828	$	3,645,162

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The following table sets forth the amortized cost basis of nonperforming assets for the periods presented (in thousands):


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
Nonaccrual loans:	Nonaccrual loans:					Nonaccrual loans:
Real estate loans:	Real estate loans:					Real estate loans:
Construction	Construction	$	63	$	640	Construction	$	33	$	57
1-4 family residential	1-4 family residential	1,432		3,922		1-4 family residential	1,087		969
Commercial	Commercial	796		1,269		Commercial	796		668
Commercial loans	Commercial loans	674		1,592		Commercial loans	1,188		815

Loans to individuals	Loans to individuals	48		291		Loans to individuals	15		27
Total nonaccrual loans (1)	Total nonaccrual loans (1)	3,013		7,714		Total nonaccrual loans (1)	3,119		2,536

Accruing loans past due more than 90 days	Accruing loans past due more than 90 days	—		—		Accruing loans past due more than 90 days	—		—
TDR loans	TDR loans	9,371		9,646		TDR loans	8,568		9,073
OREO	OREO	25		106		OREO	128		—
Repossessed assets	Repossessed assets	15		14		Repossessed assets	—		—
Total nonperforming assets	Total nonperforming assets	$	12,424	$	17,480	Total nonperforming assets	$	11,815	$	11,609

(1) Includes $1.1 million ~~and $976,000~~ of ~~restructured~~TDR loans as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

We reversed ~~$5,000~~$24,000 and ~~$13,000~~$35,000 of interest income on nonaccrual loans during the three and ~~nine~~six months ended ~~September~~June 30, 2022, and $12,000 and $25,000 for the three and six months ended June 30, 2021, ~~respectively, and $147,000 for the nine months ended September 30, 2020. There was no interest income reversed on nonaccrual loans during the three months ended September 30, 2020.~~respectively. We had ~~$1.1~~$1.3 million and ~~$2.2~~$1.2 million of loans on nonaccrual for which there was no related allowance for credit losses as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

Collateral-dependent loans are loans that we expect the repayment to be provided substantially through the operation or sale of the collateral of the loan and we have determined that the borrower is experiencing financial difficulty. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for selling costs. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we had ~~$9.1~~$9.0 million and ~~$11.5~~$8.5 million, respectively, of collateral-dependent loans, secured mainly by real estate and equipment. There have been no significant changes to the collateral that secures the collateral-dependent assets. Foreclosed assets include OREO and repossessed assets. For 1-4 family residential real estate properties, a loan is recognized as a foreclosed property once legal title to the real estate property has been received upon completion of foreclosure or the borrower has conveyed all interest in the residential property through a deed in lieu of foreclosure. There were no$18,000 and $21,000 loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process as of ~~September~~June 30, ~~2021. As of~~2022 and December 31, ~~2020, there were $1.2 million in loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process.~~

2021, respectively.

Southside Bancshares, Inc. |24

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Troubled Debt Restructurings

The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, restructuring amortization schedules and other actions intended to minimize potential losses. We may provide a combination of concessions which may include an extension of the amortization period, interest rate reduction and/or converting the loan to interest-only for a limited period of time.

In response to the impact of the COVID-19 pandemic on the economy, the CARES Act was signed into law. Under the CARES Act, banks may elect to deem that loan modifications do not result in TDRs if they are: (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the national emergency declaration or (B) December 31, 2020. The Economic Aid Act extended this relief to the earlier of 60 days after the national emergency termination date or January 1, 2022. Additionally, in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised), other short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Loans modified under this guidance are not considered TDRs and as such are not identified in the table below. At September 30, 2021 there were no loans with outstanding payment deferrals. As of December 31, 2020, we had outstanding loans with payment deferrals totaling $47.2 million.

The following tables set forth the recorded balance of loans considered to be TDRs that were restructured and the type of concession by class of loans during the periods presented (dollars in thousands):


		Three Months Ended September 30, 2021										Three Months Ended June 30, 2022
		Extend Amortization Period		Interest Rate Reductions		Combination		Total Modifications		Number of Loans		Extend Amortization Period		Interest Rate Reductions		Combination		Total Modifications		Number of Loans
Real estate loans:	Real estate loans:										Real estate loans:

1-4 family residential	1-4 family residential	$	—	$	—	$	219	$	219	3	1-4 family residential	$	—	$	—	$	101	$	101	1
Commercial		—		—		453		453		1

Commercial loans											Commercial loans	—		—		21		21		1

Loans to individuals											Loans to individuals	—		—		6		6		1
Total	Total	$	—	$	—	$	672	$	672	4	Total	$	—	$	—	$	128	$	128	3


		Nine Months Ended September 30, 2021										Six Months Ended June 30, 2022
		Extend Amortization Period		Interest Rate Reductions		Combination		Total Modifications		Number of Loans		Extend Amortization Period		Interest Rate Reductions		Combination		Total Modifications		Number of Loans
Real estate loans:	Real estate loans:										Real estate loans:

1-4 family residential	1-4 family residential	$	—	$	—	$	344	$	344	5	1-4 family residential	$	—	$	—	$	309	$	309	4
Commercial		—		—		453		453		1

Commercial loans	Commercial loans	—		16		94		110		3	Commercial loans	—		—		30		30		2

Loans to individuals											Loans to individuals	—		—		10		10		2
Total	Total	$	—	$	16	$	891	$	907	9	Total	$	—	$	—	$	349	$	349	8



	Three Months Ended June 30, 2021
	Extend Amortization Period		Interest Rate Reductions		Combination		Total Modifications		Number of Loans




Commercial loans	$	—	$	—	$	106	$	106	2


Total	$	—	$	—	$	106	$	106	2


		Nine Months Ended September 30, 2020										Six Months Ended June 30, 2021
		Extend Amortization Period		Interest Rate Reductions		Combination		Total Modifications		Number of Loans		Extend Amortization Period		Interest Rate Reductions		Combination		Total Modifications		Number of Loans
Real estate loans:	Real estate loans:										Real estate loans:

1-4 family residential											1-4 family residential	$	—	$	—	$	128	$	128	2

Commercial		$	—	$	—	$	58	$	58	1
Commercial loans	Commercial loans	—		—		117		117		3	Commercial loans	—		—		122		122		3

Total	Total	$	—	$	—	$	175	$	175	4	Total	$	—	$	—	$	250	$	250	5

~~There were no TDRs restructured during the three months ended September 30, 2020.~~

~~Southside Bancshares, Inc. |25~~

~~Table of Contents~~

Interest continues to be charged on principal balances outstanding during the extended term. Therefore, the financial effects of the recorded investment of loans restructured as TDRs during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 were not significant.

On an ongoing basis, the performance of the TDRs is monitored for subsequent payment default. Payment default for TDRs is recognized when the borrower is 90 days or more past due. ~~For~~As of June 30, 2022, the ~~three and nine months ended September~~amount of TDRs in default was $139,000. As of June 30, 2021, ~~and 2020~~ the amount of TDRs in default was not significant. Payment defaults for TDRs did not significantly impact the determination of the allowance for loan losses in the periods presented.

At ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, there were no commitments to lend additional funds to borrowers whose terms had been modified in TDRs.

Southside Bancshares, Inc. |25

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Allowance for Loan Losses

In accordance with ASC 326, the allowance for credit losses on loans is estimated and recognized upon origination of the loan based on expected credit losses. The CECL model uses historical experience and current conditions for homogeneous pools of loans, and reasonable and supportable forecasts about future events. The impact of varying economic conditions and portfolio stress factors are a component of the credit loss models applied to each portfolio. Reserve factors are specific to the loan segments that share similar risk characteristics based on the probability of default assumptions and loss given default assumptions, over the contractual term. The forecasted periods gradually mean-revert the economic inputs to their long-run historical trends. Management evaluates the economic data points used in the Moody’s forecasting scenarios on a quarterly basis to determine the most appropriate impact to the various portfolio characteristics based on management’s view and applies weighting to various forecasting scenarios as deemed appropriate based on known and expected economic activities. Management also considers and may apply relevant qualitative factors, not previously considered, to determine the appropriate allowance level. The use of the CECL model includes significant judgment by management and may differ from those of our peers due to different historical loss patterns, economic forecasts, and the length of time of the reasonable and supportable forecast period and reversion period.

We utilize Moody’s Analytics economic forecast scenarios and assign probability weighting to those scenarios which best reflect management’s views on the economic forecast. The probability weighting and scenarios utilized for the estimate of the allowance were generally reflective of an improved economic forecast based on known and knowable information as of September 30, 2021.

When determining the appropriate allowance for credit losses on our loan portfolio, our commercial construction and real estate loans, commercial loans and municipal loans utilize the probability of default/loss given default discounted cash flow approach. Reserves on these loans are based upon risk factors including the loan type and structure, collateral type, leverage ratio, refinancing risk and origination quality, among others. Our consumer construction real estate loans, 1-4 family residential loans and our loans to individuals use a loss rate based upon risk factors including loan types, origination year and credit scores. Loans covered by the PPP may be eligible for loan forgiveness. The remaining loan balance after forgiveness of any amount is still fully guaranteed by the SBA and therefore does not have an associated allowance.

Loans evaluated collectively in a pool are monitored to ensure they continue to exhibit similar risk characteristics with other loans in the pool. If a loan does not share similar risk characteristics with other loans, expected credit losses for that loan are evaluated individually.

~~Southside Bancshares, Inc. |26~~

~~Table of Contents~~

The following tables detail activity in the allowance for loan losses by portfolio segment for the periods presented (in thousands):


		Three Months Ended September 30, 2021												Three Months Ended June 30, 2022
		Real Estate																Real Estate
		Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals			Total			Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Balance at beginning of period	Balance at beginning of period	$	8,018	$	2,520	$	28,930	$	3,097	$	47	$	301		$	42,913	Balance at beginning of period	$	3,604	$	1,982	$	27,225	$	2,454	$	48	$	211	$	35,524
Loans charged-off	Loans charged-off	—		(35)		—		(508)		—		(397)			(940)		Loans charged-off	—		—		—		(46)		—		(433)		(479)
Recoveries of loans charged-off	Recoveries of loans charged-off	1		4		12		74		—		346			437		Recoveries of loans charged-off	1		53		34		114		—		314		516
Net loans (charged-off) recovered	Net loans (charged-off) recovered	1		(31)		12		(434)		—		(51)			(503)		Net loans (charged-off) recovered	1		53		34		68		—		(119)		37
Provision for (reversal of) loan losses	Provision for (reversal of) loan losses	(3,036)		(543)		(684)		(103)		(1)		(21)			(4,388)		Provision for (reversal of) loan losses	(206)		(11)		(38)		36		(2)		109		(112)
Balance at end of period	Balance at end of period	$	4,983	$	1,946	$	28,258	$	2,560	$	46	$	229		$	38,022	Balance at end of period	$	3,399	$	2,024	$	27,221	$	2,558	$	46	$	201	$	35,449


		Nine Months Ended September 30, 2021												Six Months Ended June 30, 2022
		Real Estate																Real Estate
		Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals			Total			Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Balance at beginning of period	Balance at beginning of period	$	6,490	$	2,270	$	35,709	$	4,107	$	46	$	384		$	49,006	Balance at beginning of period	$	3,787	$	1,866	$	26,980	$	2,397	$	47	$	196	$	35,273
Loans charged-off	Loans charged-off	—		(136)		—		(943)		—		(1,183)			(2,262)		Loans charged-off	—		—		—		(177)		—		(857)		(1,034)
Recoveries of loans charged-off	Recoveries of loans charged-off	2		71		13		535		—		904			1,525		Recoveries of loans charged-off	1		92		81		330		—		552		1,056
Net loans (charged-off) recovered	Net loans (charged-off) recovered	2		(65)		13		(408)		—		(279)			(737)		Net loans (charged-off) recovered	1		92		81		153		—		(305)		22
Provision for (reversal of) loan losses	Provision for (reversal of) loan losses	(1,509)		(259)		(7,464)		(1,139)		—		124			(10,247)		Provision for (reversal of) loan losses	(389)		66		160		8		(1)		310		154
Balance at end of period	Balance at end of period	$	4,983	$	1,946	$	28,258	$	2,560	$	46	$	229		$	38,022	Balance at end of period	$	3,399	$	2,024	$	27,221	$	2,558	$	46	$	201	$	35,449


		Three Months Ended September 30, 2020												Three Months Ended June 30, 2021
		Real Estate																Real Estate
		Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals			Total			Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Balance at beginning of period	Balance at beginning of period	$	8,500	$	2,702	$	43,785	$	4,221	$	47	$	613		$	59,868	Balance at beginning of period	$	8,201	$	2,508	$	27,236	$	3,108	$	46	$	355	$	41,454

Loans charged-off	Loans charged-off	(6)		(18)		(12)		(279)		—		(403)			(718)		Loans charged-off	—		(28)		—		(116)		—		(383)		(527)
Recoveries of loans charged-off	Recoveries of loans charged-off	—		9		13		61		—		278			361		Recoveries of loans charged-off	—		12		1		179		—		274		466
Net loans (charged-off) recovered	Net loans (charged-off) recovered	(6)		(9)		1		(218)		—		(125)			(357)		Net loans (charged-off) recovered	—		(16)		1		63		—		(109)		(61)
Provision for (reversal of) loan losses	Provision for (reversal of) loan losses	(2,868)		(58)		(2,001)		489		(1)		38			(4,401)		Provision for (reversal of) loan losses	(183)		28		1,693		(74)		1		55		1,520
Balance at end of period	Balance at end of period	$	5,626	$	2,635	$	41,785	$	4,492	$	46	$	526		$	55,110	Balance at end of period	$	8,018	$	2,520	$	28,930	$	3,097	$	47	$	301	$	42,913

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Nine Months Ended September 30, 2020
Real Estate
Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of period $ 3,539 $ 3,833 $ 9,572 $ 6,351 $ 570 $ 932 $ 24,797
Impact of CECL adoption - cumulative effect adjustment 2,968 (1,447) 7,730 (3,532) (522) (125) 5,072
Impact of CECL adoption - purchased loans with credit deterioration (15) (6) 333 (22) — (59) 231
Loans charged-off (39) (74) (33) (800) — (1,313) (2,259)
Recoveries of loans charged-off 11 29 94 191 — 923 1,248
Net loans (charged-off) recovered (28) (45) 61 (609) — (390) (1,011)
Provision for (reversal of) loan losses(1)
(838) 300 24,089 2,304 (2) 168 26,021
Balance at end of period $ 5,626 $ 2,635 $ 41,785 $ 4,492 $ 46 $ 526 $ 55,110

~~(1) The increase in the provision for credit losses during the~~ ~~nine months ended September 30, 2020~~ ~~was primarily due to the economic impact of COVID-19 on macroeconomic factors used in the CECL model.~~



	Six Months Ended June 30, 2021
	Real Estate
	Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Balance at beginning of period	$	6,490	$	2,270	$	35,709	$	4,107	$	46	$	384	$	49,006


Loans charged-off	—		(101)		—		(435)		—		(786)		(1,322)
Recoveries of loans charged-off	1		67		1		461		—		558		1,088
Net loans (charged-off) recovered	1		(34)		1		26		—		(228)		(234)
Provision for (reversal of) loan losses(1)	1,527		284		(6,780)		(1,036)		1		145		(5,859)
Balance at end of period	$	8,018	$	2,520	$	28,930	$	3,097	$	47	$	301	$	42,913

The accrued interest receivable on our loan receivables is excluded from the allowance for credit loss estimate and is included in interest receivable on our consolidated balance sheets. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the accrued interest on our loan portfolio was ~~$13.3~~$14.6 million and ~~$16.4~~$13.3 million, respectively.

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6. Borrowing Arrangements

Information related to borrowings is provided in the table below (dollars in thousands):


		September 30, 2021			December 31, 2020				June 30, 2022			December 31, 2021
Other borrowings:	Other borrowings:							Other borrowings:
Balance at end of period	Balance at end of period	$	20,724		$	23,172		Balance at end of period	$	58,478		$	23,219
Average amount outstanding during the period (1)	Average amount outstanding during the period (1)	22,387			91,940			Average amount outstanding during the period (1)	29,323			22,257
Maximum amount outstanding during the period (2)	Maximum amount outstanding during the period (2)	24,549			219,259			Maximum amount outstanding during the period (2)	58,478			24,549
Weighted average interest rate during the period (3)	Weighted average interest rate during the period (3)	0.2		%	0.4		%	Weighted average interest rate during the period (3)	0.5		%	0.2		%
Interest rate at end of period (4)	Interest rate at end of period (4)	0.2		%	0.1		%	Interest rate at end of period (4)	1.0		%	0.2		%

FHLB borrowings:	FHLB borrowings:							FHLB borrowings:
Balance at end of period	Balance at end of period	$	659,204		$	832,527		Balance at end of period	$	153,701		$	344,038
Average amount outstanding during the period (1)	Average amount outstanding during the period (1)	684,280			1,032,269			Average amount outstanding during the period (1)	89,202			665,384
Maximum amount outstanding during the period (2)	Maximum amount outstanding during the period (2)	723,584			1,274,370			Maximum amount outstanding during the period (2)	153,701			723,584
Weighted average interest rate during the period (3)	Weighted average interest rate during the period (3)	1.1		%	1.1		%	Weighted average interest rate during the period (3)	1.3		%	1.1		%
Interest rate at end of period (5)	Interest rate at end of period (5)	1.1		%	1.0		%	Interest rate at end of period (5)	1.8		%	1.3		%

(1)The average amount outstanding during the period was computed by dividing the total daily outstanding principal balances by the number of days in the period.

(2)The maximum amount outstanding at any month-end during the period.

(3)The weighted average interest rate during the period was computed by dividing the actual interest expense (annualized for interim periods) by the average amount outstanding during the period. The weighted average interest rate on the FHLB borrowings includes the effect of interest rate swaps.

(4)Stated rate.

(5)The interest rate on the FHLB borrowings includes the effect of interest rate swaps.

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Maturities of the obligations associated with our borrowing arrangements based on scheduled repayments at ~~September~~June 30, ~~2021~~2022 are as follows (in thousands):


		Payments Due by Period															Payments Due by Period
		Less than 1 Year		1-2 Years		2-3 Years		3-4 Years		4-5 Years		Thereafter		Total			Less than 1 Year		1-2 Years		2-3 Years		3-4 Years		4-5 Years		Thereafter		Total
Other borrowings	Other borrowings	$	20,724	$	—	$	—	$	—	$	—	$	—	$	20,724	Other borrowings	$	58,478	$	—	$	—	$	—	$	—	$	—	$	58,478
FHLB borrowings	FHLB borrowings	655,673		702		733		764		582		750		659,204		FHLB borrowings	150,695		724		756		679		396		451		153,701
Total obligations	Total obligations	$	676,397	$	702	$	733	$	764	$	582	$	750	$	679,928	Total obligations	$	209,173	$	724	$	756	$	679	$	396	$	451	$	212,179

Other borrowings may include federal funds purchased, repurchase agreements and borrowings from the FRDW. Southside Bank has 3 unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, TIB – The Independent Bankers Bank and Comerica Bank for $40.0 million, $15.0 million and $7.5 million, respectively. There were no federal funds purchased at ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020.~~2021. To provide more liquidity in response to the economic impact of the COVID-19 pandemic, the Federal Reserve took steps to encourage broader use of the discount window. At ~~September~~June 30, ~~2021,~~2022, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately ~~$476.1~~$391.1 million. There were $29.0 million in borrowings from the FRDW at June 30, 2022. There were no borrowings from the FRDW at ~~September 30, 2021 or~~ December 31, ~~2020.~~2021. Southside Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit, and at ~~September~~June 30, ~~2021,~~2022, the line had 1 outstanding letter of credit for ~~$91,000.~~$155,000. Southside Bank currently has no outstanding letters of credit from FHLB held as collateral for its public fund deposits.

Southside Bank enters into sales of securities under repurchase agreements. These repurchase agreements totaled ~~$20.7~~$29.5 million at ~~September~~June 30, ~~2021~~2022 and $23.2 million at December 31, ~~2020,~~2021, and had maturities of less than one year. Repurchase agreements are secured by investment and MBS securities and are stated at the amount of cash received in connection with the transaction.

FHLB borrowings represent borrowings with fixed interest rates ranging from ~~0.13%~~1.72% to 4.799% and with remaining maturities of ~~four~~22 days to ~~6.8~~6.0 years at ~~September~~June 30, ~~2021.~~2022. FHLB borrowings may be collateralized by FHLB stock, nonspecified loans

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and/or securities. At ~~September~~June 30, ~~2021,~~2022, the amount of additional funding Southside Bank could obtain from FHLB, collateralized by securities, FHLB stock and nonspecified loans and securities, was approximately ~~$1.22~~$1.73 billion, net of FHLB stock purchases required.

Southside Bank has entered into various variable rate agreements and fixed rate short-term pay agreements with third-party financial institutions with rates tied to LIBOR. These agreements totaled $605.0 million at September 30, 2021 and $670.0 million at December 31, 2020. NaN of the agreements have an interest rate tied to three-month LIBOR, and the remaining agreements have interest rates tied to one-month LIBOR. In connection with all of these agreements, Southside Bank also entered into various interest rate swap contracts that are treated as cash flow hedges under ASC Topic 815, “Derivatives and Hedging” that are expected to be effective in hedging the variability in future cash flows attributable to fluctuations in the underlying LIBOR interest rate. The interest rate swap contracts had a weighted average rate of 1.18% with a weighted average maturity of 3.4 years at September 30, 2021. Refer to “Note 9 – Derivative Financial Instruments and Hedging Activities” in our consolidated financial statements included in this report for a detailed description of our hedging policy and methodology related to derivative instruments.

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7. Long-term Debt

Information related to our long-term debt is summarized as follows for the periods presented (in thousands):


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

Subordinated notes: (1)	Subordinated notes: (1)					Subordinated notes: (1)
3.875% Subordinated notes, net of unamortized debt issuance costs (2)	3.875% Subordinated notes, net of unamortized debt issuance costs (2)	$	98,500	$	98,497	3.875% Subordinated notes, net of unamortized debt issuance costs (2)	$	98,604	$	98,534
5.50% Subordinated notes, net of unamortized debt issuance costs (3)		—		98,754

Total Subordinated notes	Total Subordinated notes	98,500		197,251		Total Subordinated notes	98,604		98,534
Trust preferred subordinated debentures: ~~(4)~~(3)	Trust preferred subordinated debentures: ~~(4)~~(3)					Trust preferred subordinated debentures: ~~(4)~~(3)
Southside Statutory Trust III, net of unamortized debt issuance costs ~~(5)~~(4)	Southside Statutory Trust III, net of unamortized debt issuance costs ~~(5)~~(4)	20,567		20,563		Southside Statutory Trust III, net of unamortized debt issuance costs ~~(5)~~(4)	20,570		20,568
Southside Statutory Trust IV	Southside Statutory Trust IV	23,196		23,196		Southside Statutory Trust IV	23,196		23,196
Southside Statutory Trust V	Southside Statutory Trust V	12,887		12,887		Southside Statutory Trust V	12,887		12,887
Magnolia Trust Company I	Magnolia Trust Company I	3,609		3,609		Magnolia Trust Company I	3,609		3,609
Total Trust preferred subordinated debentures	Total Trust preferred subordinated debentures	60,259		60,255		Total Trust preferred subordinated debentures	60,262		60,260

Total Long-term debt	Total Long-term debt	$	158,759	$	257,506	Total Long-term debt	$	158,866	$	158,794

(1)This debt consists of subordinated notes with a remaining maturity greater than one year that qualify under the risk-based capital guidelines as Tier 2 capital, subject to certain limitations.

(2)The unamortized discount and debt issuance costs reflected in the carrying amount of the subordinated notes totaled approximately ~~$1.5~~$1.4 million at ~~September~~June 30, ~~2021~~2022 and ~~December 31, 2020.~~

~~(3)The unamortized discount and debt issuance costs reflected in the carrying amount of the subordinated notes totaled approximately $1.2~~$1.5 million at December 31, ~~2020.~~2021.

~~(4)~~(3)This debt consists of trust preferred securities that qualify under the risk-based capital guidelines as Tier 1 capital, subject to certain limitations.

~~(5)~~(4)The unamortized debt issuance costs reflected in the carrying amount of the Southside Statutory Trust III junior subordinated debentures totaled ~~$52,000~~$49,000 at ~~September~~June 30, ~~2021~~2022 and ~~$56,000~~$51,000 at December 31, ~~2020.~~2021.

As of ~~September~~June 30, ~~2021,~~2022, the details of the subordinated notes and the trust preferred subordinated debentures are summarized below (dollars in thousands):

Date Issued

Amount Issued

Fixed or Floating Rate

Interest Rate

Maturity Date

3.875% Subordinated Notes

November 6, 2020

100,000

Fixed-to-Floating

3.875%

November 15, 2030

Southside Statutory Trust III

September 4, 2003

20,619

Floating

3 month LIBOR + 2.94%

September 4, 2033

Southside Statutory Trust IV

August 8, 2007

23,196

Floating

3 month LIBOR + 1.30%

October 30, 2037

Southside Statutory Trust V

August 10, 2007

12,887

Floating

3 month LIBOR + 2.25%

September 15, 2037

Magnolia Trust Company I (1)

May 20, 2005

3,609

Floating

3 month LIBOR + 1.80%

November 23, 2035

(1)On October 10, 2007, as part of an acquisition we assumed $3.6 million of floating rate junior subordinated debentures issued in 2005 to Magnolia Trust Company I.

On September 19, 2016, the Company issued $100.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes that mature on September 30, 2026. This debt initially bore interest at a fixed rate of 5.50% through September 29, 2021 and thereafter, was to adjust quarterly at a floating rate equal to three-month LIBOR plus 429.7 basis points. On September 30, 2021, the Company completed the redemption of these subordinated notes. The redemption price for

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the subordinated notes was equal to 100% of the principal amount of the subordinated notes redeemed, plus any accrued and unpaid interest. The remaining unamortized discount and debt issuance costs associated with these notes were recorded on our consolidated income statements as loss on redemption of subordinated notes in noninterest expense.

On November 6, 2020, the Company issued $100.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes that mature on November 15, 2030. This debt initially bears interest at a fixed rate of 3.875% per year through November 14, 2025 and thereafter, adjusts quarterly at a floating rate equal to the then current three-month term SOFR, as published by the FRBNY, plus 366 basis points. The proceeds from the sale of the subordinated notes were used for general corporate purposes.

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8. Employee Benefit Plans

The components of net periodic benefit cost (income) related to our employee benefit plans are as follows (in thousands):


		Three Months Ended September 30,													Three Months Ended June 30,
		Defined Benefit Pension Plan				Defined Benefit Pension Plan Acquired				Restoration Plan					Retirement Plan				Acquired Retirement Plan				Restoration Plan
		2021		2020		2021		2020		2021		2020			2022		2021		2022		2021		2022		2021
Service cost		$	—	$	483	$	—	$	—	$	—	$	149

Interest cost	Interest cost	642		672		23		41		130		126		Interest cost	$	691	$	657	$	25	$	22	$	150	$	139
Expected return on assets	Expected return on assets	(1,355)		(1,344)		(53)		(75)		—		—		Expected return on assets	(1,462)		(1,273)		(57)		(47)		—		—
Net loss amortization	Net loss amortization	251		694		1		2		64		125		Net loss amortization	169		(19)		—		—		72		10
Prior service (credit) cost amortization		—		(4)		—		—		—		2

Net periodic benefit (income) cost		$	(462)	$	501	$	(29)	$	(32)	$	194	$	402

Net periodic benefit cost (income)														Net periodic benefit cost (income)	$	(602)	$	(635)	$	(32)	$	(25)	$	222	$	149

Nine Months Ended September 30,
Defined Benefit
Pension Plan Defined Benefit
Pension Plan Acquired Restoration
Plan
2021 2020 2021 2020 2021 2020
Service cost $ — $ 1,311 $ — $ — $ — $ 280
Interest cost 1,927 2,359 69 122 390 442
Expected return on assets (4,065) (4,332) (158) (226) — —
Net loss amortization 752 1,780 4 7 192 426
Prior service (credit) cost amortization — (11) — — — 5
Loss due to curtailment — 151 — — — 12
Net periodic benefit (income) cost $ (1,386) $ 1,258 $ (85) $ (97) $ 582 $ 1,165



	Six Months Ended June 30,
	Defined Benefit Pension Plan				Defined Benefit Pension Plan Acquired				Restoration Plan
	2022		2021		2022		2021		2022		2021

Interest cost	$	1,371	$	1,285	$	51	$	46	$	289	$	260
Expected return on assets	(2,923)		(2,710)		(116)		(105)		—		—
Net loss amortization	320		501		—		3		127		128


Net periodic benefit cost (income)	$	(1,232)	$	(924)	$	(65)	$	(56)	$	416	$	388

Prior to the freeze of all future benefit accruals and accrual of benefit service as of December 31, 2020, the service cost component was recorded on our consolidated income statements as salaries and employee benefits in noninterest expense. All other components other than service costs are recorded in other noninterest expense.

During the three months ended June 30, 2021, we updated our expected long-term rate of return on plan assets for the Retirement Plan and the Acquired Retirement Plan from 6.50% to 6.125%.

The noncash adjustment to the employee benefit plan liabilities, consisting of changes in ~~prior service cost and~~ net loss, was ~~$948,000~~$447,000 and ~~$5.2 million~~$632,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

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9. Derivative Financial Instruments and Hedging Activities

Our hedging policy allows the use of interest rate derivative instruments to manage our exposure to interest rate risk or hedge specified assets and liabilities. These instruments may include interest rate swaps and interest rate caps and floors. All derivative instruments are carried on the balance sheet at their estimated fair value and are recorded in other assets or other liabilities, as appropriate.

Derivative instruments may be designated as cash flow hedges of variable rate assets or liabilities, cash flow hedges of forecasted transactions, fair value hedges of a recognized asset or liability or as non-hedging instruments. Gains and losses on derivative instruments designated as cash flow hedges are recorded in AOCI to the extent they are effective. If the hedge is effective, the amount recorded in other comprehensive income is reclassified to earnings in the same periods that the hedged cash flows impact earnings. The ineffective portion of changes in fair value is reported in current earnings. Gains and losses on derivative instruments designated as fair value hedges, as well as the change in fair value on the hedged item, are recorded in interest income in the consolidated statements of income. Gains and losses due to changes in fair value of the interest rate swap agreements completely offset changes in the fair value of the hedged portion of the hedged item. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.

We have entered into certain interest rate swap contracts on specific variable rate agreements and fixed rate short-term pay agreements with ~~third-party financial institutions.~~third-parties. These interest rate swap contracts were designated as hedging instruments in cash flow hedges under ASC Topic 815. The objective of the interest rate swap contracts is to manage the expected future cash flows on ~~$605.0~~$575.0 million of ~~debt.~~Bank liabilities. The cash flows from the swap contracts are expected to be effective in hedging the variability in future cash flows attributable to fluctuations in the underlying LIBOR interest rate.

During the three months ended June 30, 2022, we entered into partial term fair value hedges, as allowed under ASU 2017-12, for certain of our fixed rate callable AFS municipal securities. These partial term hedges of selected cash flows covering the time periods to the call dates of the hedged securities are expected to be effective in offsetting changes in the fair value of the hedge securities. As of June 30, 2022, hedged securities with a carrying amount of $138.2 million are included in our AFS securities portfolio in our consolidated balance sheets. Changes in the fair value of the interest rate swap are expected to be effective in offsetting changes in the fair value of the hedged item attributable to changes in the SOFR swap rate.

In accordance with ASC Topic 815, if a hedging item is terminated prior to maturity for a cash settlement, the existing gain or loss within AOCI will continue to be reclassified into earnings during the period or periods in which the hedged forecasted transaction affects earnings unless it is probable the forecasted transaction will not occur by the end of the originally specified time period. These transactions are reevaluated on a monthly basis to determine if the hedged forecasted transactions are still probable of occurring. If at a subsequent evaluation, it is determined that the transactions will not occur, any related gains or losses recorded in AOCI are immediately recognized in earnings.

From time to time, we may enter into certain interest rate swaps, cap and floor contracts that are not designated as hedging instruments. These interest rate derivative contracts relate to transactions in which we enter into an interest rate swap, cap or floor with a customer while concurrently entering into an offsetting interest rate swap, cap or floor with a third party financial institution. We agree to pay interest to the customer on a notional amount at a variable rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, we agree to pay a third party financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These interest rate derivative contracts allow our customers to effectively convert a variable rate loan to a fixed rate loan. The changes in the fair value of the underlying derivative contracts primarily offset each other and do not significantly impact our results of operations. We recognized swap fee income associated with these derivative contracts immediately based upon the difference in the bid/ask spread of the underlying transactions with the customer and the third party financial institution. The swap fee income is included in other noninterest income in our consolidated statements of income.

At ~~September~~June 30, ~~2021 and~~2022, net derivative asset included $39.1 million of cash collateral received from counterparties under master netting agreements. At December 31, ~~2020,~~2021, net derivative liabilities included ~~$21.4~~$12.8 million, ~~and $39.3 million, respectively,~~ of cash collateral held by counterparties subject to master netting agreements.

The notional amounts of the derivative instruments represent the contractual cash flows pertaining to the underlying agreements. These amounts are not exchanged and are not reflected in the consolidated balance sheets. The fair value of the interest rate swaps are presented at net in other assets and other liabilities and in the net change in each of these financial statement line items in the accompanying consolidated statements of cash flows when a right of offset exists, based on transactions with a single counterparty that are subject to a legally enforceable master netting agreement.

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The following tables present the notional and estimated fair value amount of derivative positions outstanding (in thousands):


		September 30, 2021						December 31, 2020							June 30, 2022						December 31, 2021
				Estimated Fair Value						Estimated Fair Value							Estimated Fair Value						Estimated Fair Value
		Notional Amount (1)		Asset Derivative		Liability Derivative		Notional Amount (1)		Asset Derivative		Liability Derivative			Notional Amount (1)		Asset Derivative		Liability Derivative		Notional Amount (1)		Asset Derivative		Liability Derivative
Derivatives designated as hedging instruments	Derivatives designated as hedging instruments													Derivatives designated as hedging instruments
Interest rate contracts:	Interest rate contracts:													Interest rate contracts:
Swaps-Cash Flow Hedge-Financial institution counterparties	Swaps-Cash Flow Hedge-Financial institution counterparties	$	605,000	$	1,543	$	10,098	$	670,000	$	—	$	21,635	Swaps-Cash Flow Hedge-Financial institution counterparties	$	575,000	$	27,667	$	—	$	605,000	$	4,274	$	5,866
Swaps-Fair Value Hedge-Financial institution counterparties														Swaps-Fair Value Hedge-Financial institution counterparties	129,650		401		367		—		—		—
Derivatives designated as non-hedging instruments	Derivatives designated as non-hedging instruments													Derivatives designated as non-hedging instruments
Interest rate contracts:	Interest rate contracts:													Interest rate contracts:
Swaps-Financial institution counterparties	Swaps-Financial institution counterparties	215,502		462		14,345		152,280		—		18,537		Swaps-Financial institution counterparties	231,223		11,708		279		214,379		545		13,412
Swaps-Customer counterparties	Swaps-Customer counterparties	215,502		14,345		462		152,280		18,537		—		Swaps-Customer counterparties	231,223		279		11,708		214,379		13,412		545
Gross derivatives	Gross derivatives			16,350		24,905				18,537		40,172		Gross derivatives			40,055		12,354				18,231		19,823
Offsetting derivative assets/liabilities	Offsetting derivative assets/liabilities			(2,005)		(2,005)				—		—		Offsetting derivative assets/liabilities			(646)		(646)				(4,819)		(4,819)
Cash collateral received/posted	Cash collateral received/posted			—		(21,380)				—		(39,270)		Cash collateral received/posted			(39,130)		—				—		(12,810)
Net derivatives included in the consolidated balance sheets (2)	Net derivatives included in the consolidated balance sheets (2)			$	14,345	$	1,520			$	18,537	$	902	Net derivatives included in the consolidated balance sheets (2)			$	279	$	11,708			$	13,412	$	2,194

(1) Notional amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the consolidated balance sheets.

(2) Net derivative assets are included in other assets and net derivative liabilities are included in other liabilities on the consolidated balance sheets. Included in the fair value of net derivative assets and net derivative liabilities are credit valuation adjustments reflecting counterparty credit risk and our credit risk. We had no credit exposure related to interest rate swaps with financial institutions and ~~$14.3 million~~$279,000 related to interest rate swaps with customers at ~~September~~June 30, ~~2021.~~2022. We had no credit exposure related to interest rate swaps with financial institutions and ~~$18.5~~$13.4 million related to interest rate swaps with customers at December 31, ~~2020.~~2021. The credit risk associated with customer transactions is partially mitigated as these are generally secured by the non-cash collateral securing the underlying transaction being hedged.

The summarized expected weighted average remaining maturity of the notional amount of interest rate swaps and the weighted average interest rates associated with the amounts expected to be received or paid on interest rate swap agreements are presented below (dollars in thousands). Variable rates received on fixed pay swaps are based on one-month or three-month LIBOR rates in effect at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


		September 30, 2021							December 31, 2020								June 30, 2022							December 31, 2021
				Weighted Average							Weighted Average								Weighted Average							Weighted Average
		Notional Amount		Remaining Maturity (in years)	Receive Rate		Pay Rate		Notional Amount		Remaining Maturity (in years)	Receive Rate		Pay Rate			Notional Amount		Remaining Maturity (in years)	Receive Rate		Pay Rate		Notional Amount		Remaining Maturity (in years)	Receive Rate		Pay Rate
Swaps-Cash Flow hedge	Swaps-Cash Flow hedge															Swaps-Cash Flow hedge
Financial institution counterparties	Financial institution counterparties	$	605,000	3.4	0.10	%	1.18	%	$	670,000	3.8	0.17	%	1.12	%	Financial institution counterparties	$	575,000	2.8	1.54	%	0.96	%	$	605,000	3.2	0.13	%	1.10	%
Swaps-Fair Value hedge																Swaps-Fair Value hedge
Financial institution counterparties																Financial institution counterparties	129,650		9.2	1.05	%	2.53	%	—		—	—		—
Swaps-Non-hedging	Swaps-Non-hedging															Swaps-Non-hedging
Financial institution counterparties	Financial institution counterparties	215,502		10.5	0.45	%	2.43	%	152,280		9.8	0.50	%	2.57	%	Financial institution counterparties	231,223		9.4	1.92	%	2.68	%	214,379		10.3	0.47	%	2.42	%
Customer counterparties	Customer counterparties	215,502		10.5	2.43	%	0.45	%	152,280		9.8	2.57	%	0.50	%	Customer counterparties	231,223		9.4	2.68	%	1.92	%	214,379		10.3	2.42	%	0.47	%

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10. Fair Value Measurement

Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants. A fair value measurement assumes the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

Valuation techniques including the market approach, the income approach and/or the cost approach are utilized to determine fair value. Inputs to valuation techniques refer to the assumptions market participants would use in pricing the asset or liability. Valuation policies and procedures are determined by our investment department and reported to our ALCO for review. An entity must consider all aspects of nonperforming risk, including the entity’s own credit standing, when measuring fair value of a 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. A fair value hierarchy for valuation inputs gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Certain financial assets are measured at fair value in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of fair value accounting or write-downs of individual assets. A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Securities AFS and Equity Investments with readily determinable fair values – U.S. Treasury securities and equity investments with readily determinable fair values are reported at fair value utilizing Level 1 inputs. Other securities classified as AFS are reported at fair value utilizing Level 2 inputs. For these securities, we obtain fair value measurements from independent pricing services and obtain an understanding of the pricing methodologies used by these independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things, as stated in the pricing methodologies of the independent pricing services.

We review and validate the prices supplied by the independent pricing services for reasonableness by comparison to prices obtained from, in some cases, 2 additional third-party sources. For securities where prices are outside a reasonable range, we further review those securities, based on internal ALCO approved procedures, to determine what a reasonable fair value measurement is for those securities, given available data.

Derivatives – Derivatives are reported at fair value utilizing Level 2 inputs. We obtain fair value measurements from 2 sources including an independent pricing service and the counterparty to the derivatives designated as hedges. The fair value measurements consider observable data that may include dealer quotes, market spreads, the U.S. Treasury yield curve, live trading levels, trade execution data, credit information and the derivatives’ terms and conditions, among other things. We review the prices supplied by the sources for reasonableness. In addition, we obtain a basic understanding of their underlying pricing methodology. We validate prices supplied by the sources by comparison to one another.

Certain nonfinancial assets and nonfinancial liabilities measured at fair value on a recurring basis include reporting units measured at fair value and tested for goodwill impairment.

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Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis, which means that 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). Financial assets and financial liabilities measured at fair value on a nonrecurring basis included foreclosed assets and collateral-dependent loans at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Foreclosed Assets – Foreclosed assets are initially recorded at fair value less costs to sell. The fair value measurements of foreclosed assets can include Level 2 measurement inputs such as real estate appraisals and comparable real estate sales information, in conjunction with Level 3 measurement inputs such as cash flow projections, qualitative adjustments and sales cost estimates. As a result, the categorization of foreclosed assets is Level 3 of the fair value hierarchy. In connection with the measurement and initial recognition of certain foreclosed assets, we may recognize charge-offs through the allowance for credit losses.

Collateral-Dependent Loans (Impaired loans prior to the adoption of ASU 2016-13) – Certain loans may be reported at the fair value of the underlying collateral if repayment is expected substantially from the operation or sale of the collateral. Collateral values are estimated using Level 3 inputs based on customized discounting criteria or appraisals. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the impact of the fair value of collateral-dependent loans was reflected in our allowance for loan losses.

The fair value estimate of financial instruments for which quoted market prices are unavailable is dependent upon the assumptions used. Consequently, those estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented in the fair value tables do not necessarily represent their underlying value.

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The following tables summarize assets measured at fair value on a recurring and nonrecurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):


				Fair Value Measurements at the End of the Reporting Period Using									Fair Value Measurements at the End of the Reporting Period Using
September 30, 2021		Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2022										June 30, 2022	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring fair value measurements	Recurring fair value measurements									Recurring fair value measurements
Investment securities:	Investment securities:									Investment securities:
U.S. Treasury	U.S. Treasury	$	43,547	$	43,547	$	—	$	—	U.S. Treasury	$	39,663	$	39,663	$	—	$	—

State and political subdivisions	State and political subdivisions	1,967,477		—		1,967,477		—		State and political subdivisions	1,176,231		—		1,176,231		—
Corporate bonds and other	Corporate bonds and other	119,699		—		119,699		—		Corporate bonds and other	58,818		—		58,818		—
MBS: (1)	MBS: (1)									MBS: (1)
Residential	Residential	514,078		—		514,078		—		Residential	449,512		—		449,512		—
Commercial	Commercial	108,303		—		108,303		—		Commercial	9,130		—		9,130		—
Equity investments:	Equity investments:									Equity investments:
Equity investments	Equity investments	5,976		5,976		—		—		Equity investments	5,454		5,454		—		—
Derivative assets:	Derivative assets:									Derivative assets:
Interest rate swaps	Interest rate swaps	16,350		—		16,350		—		Interest rate swaps	40,055		—		40,055		—
Total asset recurring fair value measurements	Total asset recurring fair value measurements	$	2,775,430	$	49,523	$	2,725,907	$	—	Total asset recurring fair value measurements	$	1,778,863	$	45,117	$	1,733,746	$	—

Derivative liabilities:	Derivative liabilities:									Derivative liabilities:
Interest rate swaps	Interest rate swaps	$	24,905	$	—	$	24,905	$	—	Interest rate swaps	$	12,354	$	—	$	12,354	$	—
Total liability recurring fair value measurements	Total liability recurring fair value measurements	$	24,905	$	—	$	24,905	$	—	Total liability recurring fair value measurements	$	12,354	$	—	$	12,354	$	—

Nonrecurring fair value measurements	Nonrecurring fair value measurements									Nonrecurring fair value measurements
Foreclosed assets	Foreclosed assets	$	40	$	—	$	—	$	40	Foreclosed assets	$	128	$	—	$	—	$	128
Collateral-dependent loans (2)	Collateral-dependent loans (2)	8,579		—		—		8,579		Collateral-dependent loans (2)	8,451		—		—		8,451
Total asset nonrecurring fair value measurements	Total asset nonrecurring fair value measurements	$	8,619	$	—	$	—	$	8,619	Total asset nonrecurring fair value measurements	$	8,579	$	—	$	—	$	8,579

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				Fair Value Measurements at the End of the Reporting Period Using									Fair Value Measurements at the End of the Reporting Period Using
December 31, 2020		Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2021										December 31, 2021	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring fair value measurements	Recurring fair value measurements									Recurring fair value measurements
Investment securities:	Investment securities:									Investment securities:

U.S. Treasury										U.S. Treasury	$	58,877	$	58,877	$	—	$	—

State and political subdivisions	State and political subdivisions	$	1,580,594	$	—	$	1,580,594	$	—	State and political subdivisions	2,051,936		—		2,051,936		—
Corporate bonds and other	Corporate bonds and other	78,255		—		78,255		—		Corporate bonds and other	135,532		—		135,532		—
MBS: (1)	MBS: (1)									MBS: (1)
Residential	Residential	810,010		—		810,010		—		Residential	426,350		—		426,350		—
Commercial	Commercial	118,446		—		118,446		—		Commercial	91,630		—		91,630		—
Equity investments:	Equity investments:									Equity investments:
Equity investments	Equity investments	6,094		6,094		—		—		Equity investments	5,920		5,920		—		—
Derivative assets:	Derivative assets:									Derivative assets:
Interest rate swaps	Interest rate swaps	18,537		—		18,537		—		Interest rate swaps	18,231		—		18,231		—
Total asset recurring fair value measurements	Total asset recurring fair value measurements	$	2,611,936	$	6,094	$	2,605,842	$	—	Total asset recurring fair value measurements	$	2,788,476	$	64,797	$	2,723,679	$	—

Derivative liabilities:	Derivative liabilities:									Derivative liabilities:
Interest rate swaps	Interest rate swaps	$	40,172	$	—	$	40,172	$	—	Interest rate swaps	$	19,823	$	—	$	19,823	$	—
Total liability recurring fair value measurements	Total liability recurring fair value measurements	$	40,172	$	—	$	40,172	$	—	Total liability recurring fair value measurements	$	19,823	$	—	$	19,823	$	—

Nonrecurring fair value measurements	Nonrecurring fair value measurements									Nonrecurring fair value measurements
Foreclosed assets		$	120	$	—	$	—	$	120

Collateral-dependent loans (2)	Collateral-dependent loans (2)	10,653		—		—		10,653		Collateral-dependent loans (2)	$	8,458	$	—	$	—	$	8,458

Total asset nonrecurring fair value measurements	Total asset nonrecurring fair value measurements	$	10,773	$	—	$	—	$	10,773	Total asset nonrecurring fair value measurements	$	8,458	$	—	$	—	$	8,458

(1)All MBS are issued and/or guaranteed by U.S. government agencies or U.S. GSEs.

(2)Consists of individually evaluated loans. Loans for which the fair value of the collateral and commercial real estate fair value of the properties is less than cost basis are presented net of allowance. Losses on these loans represent charge-offs which are netted against the allowance for loan losses.

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Disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, is required when it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other estimation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Such techniques and assumptions, as they apply to individual categories of our financial instruments, are as follows:

Cash and cash equivalents – The carrying amount for cash and cash equivalents is a reasonable estimate of those assets’ fair value.

Investment and MBS HTM – Fair values for these securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities or estimates from independent pricing services.

FHLB stock – The carrying amount of FHLB stock is a reasonable estimate of the fair value of those assets.

Equity investments – The carrying value of equity investments without readily determinable fair values are measured at cost less impairment, if any, adjusted for observable price changes for an identical or similar investment of the same issuer. This carrying value is a reasonable estimate of the fair value of those assets.

Loans receivable – We estimate the fair value of our loan portfolio to an exit price notion with adjustments for liquidity, credit and prepayment factors. Nonperforming loans continue to be estimated using discounted cash flow analyses or the underlying value of the collateral where applicable.

Loans held for sale – The fair value of loans held for sale is determined based on expected proceeds, which are based on sales contracts and commitments.

Deposit liabilities – The fair value of demand deposits, savings accounts and certain money market deposits is the amount on demand at the reporting date, which is the carrying value. Fair values for fixed rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities.

Other borrowings – Federal funds purchased generally have original terms to maturity of one day and repurchase agreements generally have terms of less than one year, and therefore both are considered short-term borrowings. Consequently, their carrying value is a reasonable estimate of fair value.

FHLB borrowings – The fair value of these borrowings is estimated by discounting the future cash flows using rates at which borrowings would be made to borrowers with similar credit ratings and for the same remaining maturities.

Subordinated notes – The fair value of the subordinated notes is estimated by discounting future cash flows using estimated rates at which long-term debt would be made to borrowers with similar credit ratings and for the remaining maturities.

Trust preferred subordinated debentures – The fair value of the long-term debt is estimated by discounting future cash flows using estimated rates at which long-term debt would be made to borrowers with similar credit ratings and for the remaining maturities.

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The following tables present our financial assets and financial liabilities measured on a nonrecurring basis at both their respective carrying amounts and estimated fair value (in thousands):


				Estimated Fair Value											Estimated Fair Value
September 30, 2021		Carrying Amount		Total		Level 1		Level 2		Level 3
June 30, 2022												June 30, 2022	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:	Financial assets:											Financial assets:
Cash and cash equivalents	Cash and cash equivalents	$	87,133	$	87,133	$	87,133	$	—	$	—	Cash and cash equivalents	$	172,289	$	172,289	$	172,289	$	—	$	—
Investment securities:	Investment securities:											Investment securities:
HTM, at carrying value	HTM, at carrying value	788		791		—		791		—		HTM, at carrying value	971,427		860,964		—		860,964		—
MBS:	MBS:											MBS:
HTM, at carrying value	HTM, at carrying value	91,691		97,244		—		97,244		—		HTM, at carrying value	112,245		108,843		—		108,843		—
FHLB stock, at cost	FHLB stock, at cost	27,248		27,248		—		27,248		—		FHLB stock, at cost	13,726		13,726		—		13,726		—
Equity investments	Equity investments	5,818		5,818		—		5,818		—		Equity investments	5,828		5,828		—		5,828		—
Loans, net of allowance for loan losses	Loans, net of allowance for loan losses	3,609,563		3,755,534		—		—		3,755,534		Loans, net of allowance for loan losses	3,927,592		3,872,618		—		—		3,872,618
Loans held for sale	Loans held for sale	1,131		1,131		—		1,131		—		Loans held for sale	815		815		—		815		—
Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits	Deposits	$	5,331,655	$	5,333,064	$	—	$	5,333,064	$	—	Deposits	$	6,248,409	$	6,211,740	$	—	$	6,211,740	$	—
Other borrowings	Other borrowings	20,724		20,724		—		20,724		—		Other borrowings	58,478		58,478		—		58,478		—
FHLB borrowings	FHLB borrowings	659,204		668,232		—		668,232		—		FHLB borrowings	153,701		153,781		—		153,781		—
Subordinated notes, net of unamortized debt issuance costs	Subordinated notes, net of unamortized debt issuance costs	98,500		98,722		—		98,722		—		Subordinated notes, net of unamortized debt issuance costs	98,604		93,595		—		93,595		—
Trust preferred subordinated debentures, net of unamortized debt issuance costs	Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,259		48,436		—		48,436		—		Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,262		56,545		—		56,545		—


				Estimated Fair Value											Estimated Fair Value
December 31, 2020		Carrying Amount		Total		Level 1		Level 2		Level 3
December 31, 2021												December 31, 2021	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:	Financial assets:											Financial assets:
Cash and cash equivalents	Cash and cash equivalents	$	108,408	$	108,408	$	108,408	$	—	$	—	Cash and cash equivalents	$	201,753	$	201,753	$	201,753	$	—	$	—
Investment securities:	Investment securities:											Investment securities:
HTM, at carrying value	HTM, at carrying value	907		920		—		920		—		HTM, at carrying value	788		791		—		791		—
Mortgage-backed securities:	Mortgage-backed securities:											Mortgage-backed securities:
HTM, at carrying value	HTM, at carrying value	108,091		117,278		—		117,278		—		HTM, at carrying value	89,992		94,444		—		94,444		—
FHLB stock, at cost	FHLB stock, at cost	25,259		25,259		—		25,259		—		FHLB stock, at cost	14,375		14,375		—		14,375		—
Equity investments	Equity investments	5,811		5,811		—		5,811		—		Equity investments	5,921		5,921		—		5,921		—
Loans, net of allowance for loan losses	Loans, net of allowance for loan losses	3,608,773		3,784,291		—		—		3,784,291		Loans, net of allowance for loan losses	3,609,889		3,748,116		—		—		3,748,116
Loans held for sale	Loans held for sale	3,695		3,695		—		3,695		—		Loans held for sale	1,684		1,684		—		1,684		—
Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits	Deposits	$	4,932,322	$	4,936,188	$	—	$	4,936,188	$	—	Deposits	$	5,722,327	$	5,721,694	$	—	$	5,721,694	$	—
Other borrowings	Other borrowings	23,172		23,172		—		23,172		—		Other borrowings	23,219		23,219		—		23,219		—
FHLB borrowings	FHLB borrowings	832,527		854,865		—		854,865		—		FHLB borrowings	344,038		346,604		—		346,604		—
Subordinated notes, net of unamortized debt issuance costs	Subordinated notes, net of unamortized debt issuance costs	197,251		198,391		—		198,391		—		Subordinated notes, net of unamortized debt issuance costs	98,534		98,642		—		98,642		—
Trust preferred subordinated debentures, net of unamortized debt issuance costs	Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,255		51,993		—		51,993		—		Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,260		48,480		—		48,480		—

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11. Income Taxes

The income tax expense included in the accompanying consolidated statements of income consists of the following (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Current income tax expense	Current income tax expense	$	3,387	$	3,133	$	9,002	$	11,376	Current income tax expense	$	2,939	$	3,026	$	5,800	$	5,615
Deferred income tax expense (benefit)	Deferred income tax expense (benefit)	1,590		650		3,612		(4,305)		Deferred income tax expense (benefit)	358		(139)		643		2,022
Income tax expense	Income tax expense	$	4,977	$	3,783	$	12,614	$	7,071	Income tax expense	$	3,297	$	2,887	$	6,443	$	7,637

The net deferred tax ~~liability~~asset totaled ~~$12.5~~$34.5 million at ~~September~~June 30, ~~2021 and $15.5~~2022 as compared to a net deferred tax liability of $17.8 million at December 31, ~~2020.~~2021. The increase in the net deferred tax asset is primarily the result of an increase in unrealized losses in the AFS securities portfolio. No valuation allowance was recorded at ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020,~~2021, as management believes it is more likely than not that all of the deferred tax asset items will be realized in future years. Unrecognized tax benefits were not material at ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020.~~2021.

We recognized income tax expense of ~~$5.0~~$3.3 million and ~~$12.6~~$6.4 million, ~~resulting in~~for an ETR of ~~14.5%~~11.5% and ~~13.0%~~11.3% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, compared to income tax expense of ~~$3.8~~$2.9 million and ~~$7.1~~$7.6 million, ~~with~~for an ETR of ~~12.3%~~11.9% and ~~11.9%~~12.1%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively. The ~~higher~~lower ETR for the ~~three and nine~~six months ended ~~September~~June 30, ~~2021~~2022 was primarily due to ~~a decrease~~an increase in tax-exempt income as a percentage of pre-tax income as compared to the same periods in ~~2020.~~2021. The ETR differs from the statutory rate of 21% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 primarily due to the effect of tax-exempt income from municipal loans and securities, as well as BOLI. We file income tax returns in the U.S. federal jurisdictions and in certain states. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2018 or Texas state tax examinations by tax authorities for years before 2017.

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12. Off-Balance-Sheet Arrangements, Commitments and Contingencies

Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, we are a party to certain financial instruments with off-balance-sheet risk to meet the financing needs of our customers. These off-balance-sheet instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount reflected in the financial statements. The contract or notional amounts of these instruments reflect the extent of involvement and exposure to credit loss that we have in these particular classes of financial instruments. The allowance for credit losses on these off-balance-sheet credit exposures is calculated using the same methodology as loans including a conversion or usage factor to anticipate ultimate exposure and expected losses and is included in other liabilities on our consolidated balance sheets.

Allowance for off-balance-sheet credit exposures were as follows (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

Balance at beginning of period	Balance at beginning of period	$	3,773	$	6,365	$	6,386	$	1,455	Balance at beginning of period	$	2,412	$	3,616	$	2,384	$	6,386
Impact of CECL adoption		—		—		—		4,840

Provision for (reversal of) off-balance-sheet credit exposures	Provision for (reversal of) off-balance-sheet credit exposures	(683)		(345)		(3,296)		(275)		Provision for (reversal of) off-balance-sheet credit exposures	(521)		157		(493)		(2,613)
Balance at end of period	Balance at end of period	$	3,090	$	6,020	$	3,090	$	6,020	Balance at end of period	$	1,891	$	3,773	$	1,891	$	3,773

Contractual commitments to extend credit are agreements to lend to a customer provided the terms established in the contract are met. Commitments to extend credit generally have fixed expiration dates and may require the payment of fees. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in commitments to extend credit and similarly do not necessarily represent future cash obligations.

Financial instruments with off-balance-sheet risk were as follows (in thousands):


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

Commitments to extend credit	Commitments to extend credit	$	954,258	$	793,138	Commitments to extend credit	$	1,198,782	$	1,053,002
Standby letters of credit	Standby letters of credit	10,812		13,658		Standby letters of credit	8,602		12,708
Total	Total	$	965,070	$	806,796	Total	$	1,207,384	$	1,065,710

We apply the same credit policies in making commitments to extend credit and standby letters of credit as we do for on-balance-sheet instruments. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include cash or cash equivalents, negotiable instruments, real estate, accounts receivable, inventory, oil, gas and mineral interests, property, plant and equipment.

Leases. During the three and ~~nine~~six months ended ~~September~~June 30, 2022, there were no operating lease ROU assets obtained in exchange for new operating lease liabilities. During the three months ended June 30, 2021, there were ~~$240,000 and $1.3~~no operating lease ROU assets obtained in exchange for new operating lease liabilities. During the six months ended June 30, 2021, there was $1.1 million ~~respectively,~~ of operating lease ROU assets obtained in exchange for new operating lease liabilities, primarily due to 1 lease that commenced in January 2021 with an initial ROU asset of $1.1 million. During the three months ended September 30, 2020, there was a reduction to operating lease ROU assets obtained in exchange for operating lease liabilities of $89,000 due to a lease amendment that granted additional lease incentives. During the nine months ended September 30, 2020, there were $7.9 million of operating lease ROU assets obtained in exchange for new operating lease liabilities, primarily due to 1 lease that commenced in May 2020 with an initial ROU asset of $6.6 million.

Securities. In the normal course of business we buy and sell securities. At ~~September~~June 30, ~~2021,~~2022, there were ~~$4.4~~$174.0 million of unsettled trades to purchase securities and no$72.0 million unsettled trades to sell securities. At December 31, ~~2020,~~2021, there were no$19.0 million unsettled trades to purchase securities and no unsettled trades to sell securities.

Deposits. There were no unsettled issuances of brokered CDs at ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020.~~2021.

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Litigation. We are involved with various litigation in the normal course of business. Management, after consulting with our legal counsel, believes that any liability resulting from litigation will not have a material effect on our financial position, results of operations or liquidity.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our consolidated financial condition, changes in our financial condition and results of our operations, and should be read and reviewed in conjunction with the financial statements, and the notes thereto, in this Quarterly Report on Form 10-Q and in our ~~2020~~2021 Form 10-K. Certain risks, uncertainties and other factors, including those set forth under "Risk Factors" in Part I, Item 1A. of the ~~2020~~2021 Form 10-K and elsewhere in this Quarterly Report on Form 10-Q, may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis.

Forward-Looking Statements

Certain statements of other than historical fact that are contained in this report may be considered to be “forward-looking statements” within the meaning of and subject to the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. These statements may include words such as “expect,” “estimate,” “project,” “anticipate,” “appear,” “believe,” “could,” “should,” “may,” “might,” “will,” “would,” “seek,” “intend,” “probability,” “risk,” “goal,” “target,” “objective,” “plans,” “potential,” and similar expressions. Forward-looking statements are statements with respect to our beliefs, plans, expectations, objectives, goals, anticipations, assumptions, estimates, intentions and future performance and are subject to significant known and unknown risks and uncertainties, which could cause our actual results to differ materially from the results discussed in the forward-looking statements. For example, discussions of the effect of our expansion, benefits of the Share Repurchase Plan, trends in asset quality, capital, liquidity, our ability to sell nonperforming assets, expense reductions, planned operational efficiencies and earnings from growth and certain market risk disclosures, including the impact of interest rates, tax reform, inflation, ~~and~~the impacts related to or resulting from other economic factors are based upon information presently available to management and are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. Accordingly, our results could materially differ from those that have been estimated. The most ~~recent~~significant factor that could cause future results to differ materially from those anticipated by our forward-looking statements include the ~~negative~~ongoing impact of the COVID-19 pandemic and related variants on our business, financial position, operations and prospects, including our ability to continue our business activities in certain communities we serve, the duration of the pandemic and its continued effects on local, national and global financial markets, a reduction in financial transactions and business activities resulting in decreased deposits and reduced loan originations, ~~increases in unemployment rates impacting our borrowers’ ability to repay their loans,~~ our ability to manage liquidity in a rapidly changing and unpredictable market, ~~additional~~supply chain disruptions, heightened inflation, labor shortages and interest rate ~~changes~~increases by the Federal Reserve and other government actions in response to the pandemic including regulations or laws enacted to counter the effects of the COVID-19 pandemic on the economy. Other factors that could cause actual results to differ materially from those indicated by forward-looking statements include, but are not limited to, the following:

•~~the impact of the COVID-19 pandemic and related variants on our future consolidated financial condition and results of operations;~~

•general (i) political conditions, including, without limitation, governmental action and uncertainty resulting from U.S. and global political trends and (ii) economic conditions, either globally, nationally, in the State of Texas, or in the specific markets in which we operate, including, without limitation, the deterioration of the commercial real estate, residential real estate, construction and development, energy, oil and gas, credit or liquidity markets, which could cause an adverse change in our net interest margin, or a decline in the value of our assets, which could result in realized losses;

•current or future legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we or our customers or our borrowers are engaged, including the impact of the Dodd-Frank Act, the Federal Reserve’s actions with respect to interest rates, the capital requirements promulgated by the Basel Committee, the CARES Act, the Economic Aid Act, ~~uncertainty relating to calculation~~the discontinuation of interest rates based on LIBOR and other regulatory responses to economic conditions;

•~~adverse changes in the status or financial condition of the GSEs which impact the GSEs’ guarantees or ability to pay or issue debt;~~

•~~adverse changes in the credit portfolios of other U.S. financial institutions relative to the performance of certain of our investment securities;~~

•economic or other disruptions caused by acts of terrorism, war or other conflicts, including the Russia-Ukraine conflict, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics or other catastrophic events;

•technological changes, including potential cyber-security incidents and other disruptions, or innovations to the financial services industry, including as a result of the increased telework environment;

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•our ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage of our systems, increased costs, significant losses, or adverse effects to our reputation;

•the risk that our enterprise risk management framework, compliance program or our corporate governance and supervisory oversight functions may not identify or address risks adequately, which may result in unexpected losses;

•changes in the interest rate yield curve such as flat, inverted or steep yield curves, or changes in the interest rate environment that impact net interest margins and may impact prepayments on our MBS portfolio;

•the ongoing impact of the COVID-19 pandemic and related variants on our future consolidated financial condition and results of operations and the financial condition of our customers;

•the effect of compliance with legislation or regulatory changes;

•credit risks of borrowers, including any increase in those risks due to changing economic conditions;

•increases in our nonperforming assets;

•risks related to environmental liability as a result of certain lending activity;

•our ability to maintain adequate liquidity to fund operations and growth;

•our ability to monitor interest rate risk;

•any applicable regulatory limits or other restrictions on the Bank and its ability to pay dividends to us;

•the failure of our assumptions underlying our allowance for credit losses and other estimates;

•the failure to maintain an effective system of controls and procedures, including internal control over financial reporting;

•the effectiveness of our derivative financial instruments and hedging activities to manage risk;

•unexpected outcomes of, and the costs associated with, existing or new litigation involving ~~us, including the costs and effects of litigation related to our participation in government stimulus programs associated with the COVID-19 pandemic;~~us;

•changes impacting our balance sheet and leverage strategy;

•risks related to actual mortgage prepayments diverging from projections;

•~~risks related to actual U.S. agency MBS prepayments exceeding projected prepayment levels;~~

•~~risks related to U.S. agency MBS prepayments increasing due to U.S. government programs designed to assist homeowners to refinance their mortgage that might not otherwise have qualified;~~

•~~our ability to monitor interest rate risk;~~

•risks related to fluctuations in the price per barrel of crude oil;

•significant increases in competition in the banking and financial services industry;

•changes in consumer spending, borrowing and saving habits, including as a result of rising inflation and the economic impact of COVID-19;

•execution of future acquisitions, reorganization or disposition transactions, including the risk that the anticipated benefits of such transactions are not realized;

•our ability to increase market share and control expenses;

•our ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by our customers;

•the effect of changes in federal or state tax laws;

•the effect of ~~compliance with legislation or regulatory changes;~~

•~~the effect of~~ changes in accounting policies and ~~practices, including the implementation of the CECL model;~~practices;

•adverse changes in the status or financial condition of the GSEs which impact the GSEs’ guarantees or ability to pay or issue debt;

•adverse changes in the credit portfolios of other U.S. financial institutions relative to the performance of certain of our investment securities;

•risks ~~of borrowers, including any increase in those~~ related to actual U.S. agency MBS prepayments exceeding projected prepayment levels;

•risks related to U.S. agency MBS prepayments increasing due to ~~changing economic conditions;~~U.S. government programs designed to assist homeowners to refinance their mortgage that might not otherwise have qualified;

•risks related to loans secured by real estate, including the risk that the value and marketability of collateral could decline;

•~~risks related to environmental liability as a result of certain lending activity;~~

•risks associated with our common stock and our other securities, including fluctuations in our stock price and general volatility in the stock market; and

•other risks and uncertainties discussed in “Part I - Item 1A. Risk Factors” in the ~~2020~~2021 Form 10-K.

All written or oral forward-looking statements made by us or attributable to us are expressly qualified by this cautionary notice. We disclaim any obligation to update any factors or to announce publicly the result of revisions to any of the forward-looking statements included herein to reflect future events or developments, unless otherwise required by law.

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Critical Accounting Estimates

Our accounting and reporting estimates conform with U.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We consider accounting estimates that can (1) be replaced by other reasonable estimates and/or (2) changes to an estimate from period to period that have a material impact on the presentation of our financial condition, changes in financial condition or results of operations as well as (3) those estimates that require significant and complex assumptions about matters that are highly uncertain to be critical accounting estimates. We consider our critical accounting policies to include allowance for credit losses on loans ~~estimation of fair value~~ and ~~pension plan accounting.~~off-balance-sheet credit exposure.

Critical accounting estimates include a high degree of uncertainty in the underlying assumptions. Management bases its estimates on historical experience, current information and other factors deemed relevant. The development, selection and disclosure of our critical accounting estimates are reviewed with the Audit Committee of the Company's Board of Directors. Actual results could differ from these estimates. For additional information regarding critical accounting policies, refer to “Note 1 – Summary of Significant Accounting and Reporting Policies,” “Note 5 – Loans and Allowance for Loan Losses,” “Note 8 – Employee Benefit Plans” and “Note 10 – Fair Value Measurement” in the notes to the consolidated financial statements and refer to “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates,,” “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Credit Losses - Loans and Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures,” “Note 1 – Summary of Significant Accounting and Reporting ~~Policies”~~Policies,” “Note 5 – Loans and Allowance for Loan Losses” and “Note 17 - Off-Balance-Sheet Arrangements, Commitments and Contingencies” in the ~~2020~~2021 Form 10-K. As of ~~September~~June 30, ~~2021,~~2022, there have been no significant changes to our critical accounting estimates.

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Non-GAAP Financial Measures

Certain non-GAAP measures are used by management to supplement the evaluation of our performance. These include the following fully taxable-equivalent measures: Net interest income (FTE), net interest margin (FTE) and net interest spread (FTE), which include the effects of taxable-equivalent adjustments using a federal income tax rate of 21% ~~for the three and nine months ended September 30, 2021 and 2020,~~ to increase tax-exempt interest income to a tax-equivalent basis. Interest income earned on certain assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments.

Net interest income (FTE), net interest margin (FTE) and net interest spread (FTE). Net interest income (FTE) is a non-GAAP measure that adjusts for the tax-favored status of net interest income from certain loans and investments and is not permitted under GAAP in the consolidated statements of income. We believe this measure to be the preferred industry measurement of net interest income, and that it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is our net interest income. Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets. The most directly comparable financial measure calculated in accordance with GAAP is our net interest margin. Net interest spread (FTE) is the difference in the average yield on average earning assets on a tax-equivalent basis and the average rate paid on average interest bearing liabilities. The most directly comparable financial measure calculated in accordance with GAAP is our net interest spread.

These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements and other bank holding companies may define or calculate these non-GAAP measures or similar measures differently. Whenever we present a non-GAAP financial measure in an SEC filing, we are also required to present the most directly comparable financial measure calculated and presented in accordance with GAAP and reconcile the differences between the non-GAAP financial measure and such comparable GAAP measure.

In the following table we present the reconciliation of net interest income to net interest income adjusted to a fully taxable-equivalent basis assuming a 21% marginal tax rate for ~~the three and nine months ended September 30, 2021 and 2020, for~~ interest earned on tax-exempt assets such as municipal loans and investment securities (dollars in thousands), along with the calculation of net interest margin (FTE) and net interest spread (FTE).


Non-GAAP Reconciliations	Non-GAAP Reconciliations													Non-GAAP Reconciliations
		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,						Six Months Ended June 30,
		2021			2020			2021			2020				2022			2021			2022			2021
Net interest income (GAAP)	Net interest income (GAAP)	$	48,206		$	46,586		$	140,156		$	138,558		Net interest income (GAAP)	$	51,078		$	45,647		$	99,984		$	91,950
Tax equivalent adjustments:	Tax equivalent adjustments:													Tax equivalent adjustments:
Loans	Loans	722			688			2,180			2,035			Loans	762			722			1,507			1,458
Tax-exempt investment securities	Tax-exempt investment securities	2,666			2,415			7,289			6,385			Tax-exempt investment securities	2,994			2,412			5,458			4,623
Net interest income (FTE) (1)	Net interest income (FTE) (1)	$	51,594		$	49,689		$	149,625		$	146,978		Net interest income (FTE) (1)	$	54,834		$	48,781		$	106,949		$	98,031

Average earning assets	Average earning assets	$	6,467,545		$	6,548,935		$	6,368,906		$	6,498,162		Average earning assets	$	6,670,821		$	6,395,251		$	6,612,589		$	6,318,767

Net interest margin	Net interest margin	2.96		%	2.83		%	2.94		%	2.85		%	Net interest margin	3.07		%	2.86		%	3.05		%	2.93		%
Net interest margin (FTE) (1)	Net interest margin (FTE) (1)	3.16		%	3.02		%	3.14		%	3.02		%	Net interest margin (FTE) (1)	3.30		%	3.06		%	3.26		%	3.13		%

Net interest spread	Net interest spread	2.79		%	2.65		%	2.77		%	2.64		%	Net interest spread	2.91		%	2.70		%	2.90		%	2.77		%
Net interest spread (FTE) (1)	Net interest spread (FTE) (1)	3.00		%	2.84		%	2.97		%	2.81		%	Net interest spread (FTE) (1)	3.14		%	2.89		%	3.12		%	2.96		%

(1) These amounts are presented on a fully taxable-equivalent basis and are non-GAAP measures.

Management believes adjusting net interest income, net interest margin and net interest spread to a fully taxable-equivalent basis is a standard practice in the banking industry as these measures provide useful information to make peer comparisons. Tax-equivalent adjustments are reported in the respective earning asset categories as listed in the “Average Balances with Average Yields and Rates” tables under Results of Operations.

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OVERVIEW

COVID-19

~~During March 2020, the World Health Organization declared COVID-19 a global pandemic in response to the rapidly growing outbreak of the virus.~~ COVID-19 significantly impacted local, national and global economies due to stay-at-home orders and social distancing guidelines. In compliance with social distancing guidelines issued by federal, state and local governments, we ~~initially closed all~~implemented a number of precautionary actions to safeguard our ~~grocery store branches. As stay-at-home orders were issued by local governments in~~business and our market areas to combat the spread of the virus, we closed all traditional lobbies and wealth management and trust offices to walk-in customers, however, most of these traditional locations were offering certain services by appointment only. All other banking services were available to customers through our drive-thrus, ATMs/ITMs and automated telephone, internet and mobile banking products. After careful consideration and implementation of additional safety precautions, all locations were reopened on June 1, 2020. We have since made adjustments to select branch hours and openings, and we continue to closely monitor the COVID-19 situation. Approximately 45% of our workforce has remote working capabilities, however most of our workforce have returned to our office and branch locations.

employees from COVID-19. Additionally, COVID-19 significantly disrupted supply chains, business activity and the overall economic and financial ~~markets. As of September 30, 2021, economic conditions~~markets globally and in ~~Texas have returned to levels close to pre-pandemic levels. Commercial activity has improved to levels close to those existing prior to~~our footprint.

Since the ~~outbreak~~implementation of the pandemic. While the overall outlook has improved based on the availability of the vaccine, the risk of further resurgence and possible reimplementation of restrictions remains. Until the pandemic fully subsides, the potential for adverse impact on the marketsPPP in ~~which we operate and on our business, operations and financial condition is expected to remain elevated.~~

In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. The CARES Act provided an estimated $2.2 trillion to address the economic impact of the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of financial relief. The CARES Act also included provisions to encourage financial institutions to work prudently with borrowers. As an SBA lender, we were well positioned to assist business customers in accessing funds available through the PPP implemented in April of 2020. On December 27, 2020, the Economic Aid Act was signed into law. This second coronavirus relief package granted additional funds for a new round of PPP loans. Additionally, it expanded the eligibility for loans and allowed certain businesses to request a second loan. The SBA began accepting applications for the second round of PPP loans on January 13, 2021, and we accepted new applications through April 6, 2021. During the first half 2021, we originated ~~$112.3~~over $420 million of ~~additional PPP~~ loans ~~under~~in this ~~second round~~program, of ~~PPP loans. At September~~which $3.0 million were still outstanding as of June 30, ~~2021, we had $67.5 million of approved PPP loans outstanding.~~2022.

Additionally, we assisted both our consumer and commercial borrowers that experienced financial hardship due to COVID-19 related challenges. As of ~~September~~June 30, ~~2021,~~2022, there were no remaining loans with payment deferrals. As of June 30, 2021, we had outstanding loans with payment deferrals of $182,000. The decrease in the COVID-19 modified loans are the result of the loans coming out of the deferral periods and resuming performance.

~~Operating Results~~

~~Net income increased $2.2 million, or 8.2%, for~~We continue to monitor and assess the ~~three months ended September 30, 2021, to $29.3 million compared to the same period in 2020. The increase was primarily a result~~impacts of the ~~$1.6 million increase~~COVID-19 pandemic on our employees and customers. The ongoing pandemic could continue to adversely impact the markets in ~~noninterest income,~~which we operate and our business, operations and financial condition.

ECONOMIC CONDITIONS

The economic conditions and growth prospects for our markets, even against the ~~$1.6 million increase in net interest income, partially offset by the $1.2 million increase in income tax expense. Earnings per diluted common share increased $0.08, or 9.8%,~~headwinds of inflation and recessionary concerns, continue to ~~$0.90 for the three months ended September 30, 2021 compared to $0.82 for the three months ended September 30, 2020.~~

~~During the nine months ended September 30, 2021, our net income increased $32.1 million, or 61.1%, to $84.7 million from $52.6 million for the same period in 2020. The increase in net income was~~reflect a direct result of a reversal of provision for credit losses of $13.5 million compared to a large build-up in the allowance for credit losses of $25.7 million in the same period in 2020. The decrease in the provision was primarily due to an improved economic forecast. The increase in net income was also due to the $15.3 million decrease in interest expense, partially offset by the $13.7 million decrease in interest income, the $5.5 million increase in income tax expense, the $1.7 million increase in noninterest expensesolid and the $1.5 million decrease in noninterest income. Earnings per diluted common share increased $1.01, or 63.9%, to $2.59 for the nine months ended September 30, 2021, from $1.58 for the same period in 2020.

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~~Financial Condition~~

Our total assets increased $127.5 million, or 1.8%, to $7.14 billion at September 30, 2021 from $7.01 billion at December 31, 2020. Our securities portfolio increased by $149.3 million, or 5.5%, to $2.85 billion, compared to $2.70 billion at December 31, 2020. The increase in our securities portfolio was comprised of an increase of $471.8 million in investment securities, partially offset by a decrease of $322.5 million in MBS, as the composition of the securities portfolio continued to change as municipal bonds and, to a lesser extent, corporate bonds and U.S. Treasury Notes increased while MBS decreased. Our FHLB stock increased $2.0 million, or 7.9%, to $27.2 million from $25.3 million at December 31, 2020, primarily due to increases in the amount of FHLB stock we were required to hold in relation to our FHLB borrowings.

Loans decreased $10.2 million, or 0.3%, to $3.65 billion at September 30, 2021 from $3.66 billion at December 31, 2020. The net decrease in our loan portfolio was comprised of decreases of $159.8 million of construction loans, $59.3 million of 1-4 family residential loans and $5.3 million of loans to individuals, partially offset by increases of $309.4 million of commercial real estate loans, $33.9 million of commercial loans, excluding PPP loans, and $18.2 million of municipal loans. Our PPP loans, a component of the commercial loan category, decreased $147.3 million, or 68.6%, to $67.5 million as of September 30, 2021, from $214.8 million at December 31, 2020, due to forgiveness payments received from loans funded under the CARES Act. Loans held for sale decreased $2.6 million, or 69.4%, to $1.1 million at September 30, 2021 from $3.7 million at December 31, 2020.

Our nonperforming assets at September 30, 2021 decreased $5.1 million, or 28.9%, to $12.4 million and represented 0.17% of total assets, compared to $17.5 million, or 0.25% of total assets at December 31, 2020. Nonaccruing loans decreased $4.7 million, or 60.9%, to $3.0 million, and the ratio of nonaccruing loans to total loans decreased to 0.08% at September 30, 2021 compared to 0.21% at December 31, 2020. Restructured loans were $9.4 million at September 30, 2021, a decrease of 2.9%, from $9.6 million at December 31, 2020. OREO decreased to $25,000 at September 30, 2021 from $106,000 at December 31, 2020.

Our deposits increased $399.3 million, or 8.1%, to $5.33 billion at September 30, 2021 from $4.93 billion at December 31, 2020, which was comprised of an increase of $242.0 million in noninterest bearing deposits and $157.4 million in interest bearing deposits. The increase was largely driven by PPP loan disbursements and stimulus checks deposited during the first half of 2021. Brokered deposits decreased $24.5 million, or 17.7%, for the nine months ended September 30, 2021.

~~Total FHLB borrowings decreased $173.3 million, or 20.8%, to $659.2 million at September 30, 2021 from $832.5 million at December 31, 2020.~~

Our subordinated notes, net of unamortized debt issuance costs, decreased $98.8 million, or 50.1%, to $98.5 million at September 30, 2021 from $197.3 million at December 31, 2020, a result of the redemption of $100.0 million in aggregate principal amount subordinated notes on September 30, 2021.

Our total shareholders’ equity at September 30, 2021 increased 0.3%, or $2.6 million, to $877.9 million, or 12.3% of total assets, compared to $875.3 million, or 12.5% of total assets, at December 31, 2020. The increase in shareholders’ equity was the result of net income of $84.7 million, net issuance of common stock under employee stock plans of $5.9 million, stock compensation expense of $2.2 million and common stock issued under our dividend reinvestment plan of $986,000. These increases were partially offset by the repurchase of $34.1 million of our common stock, cash dividends paid of $32.0 million and other comprehensive loss of $25.1 million.

~~Economic conditions in our market areas are relatively strong~~positive overall outlook with economic activity ~~having quickly returned to levels~~ close to pre-pandemic levels. Increasing interest rates and rising building costs have caused some slowing of the highly robust single family housing market, however there continues to be a shortage of housing in several Texas markets. Worker shortages especially in the restaurant, hospitality and retail industries combined with supply chain disruptions impacting numerous industries and inflationary conditions has had some impact on the level of economic growth. Ongoing higher inflation levels and higher interest rates could have a negative impact on both our consumer and commercial borrowers. Overall, Texas continues to experience economic growth due to company relocations and expansions combined with overall population growth.

Operating Results

Net income increased $4.1 million, or 19.2%, for the three months ended June 30, 2022, to $25.4 million compared to the same period in 2021. The increase in net income was primarily a result of a $5.4 million increase in net interest income and a reversal of provision for credit losses, partially offset by net losses on sales of securities AFS. For the three months ended June 30, 2022, we reversed $633,000 of provision for credit losses compared to a provision for credit losses of $1.7 million for the same period in 2021. Earnings per diluted common share increased $0.14, or 21.5%, to $0.79 for the three months ended June 30, 2022, compared to $0.65 for the three months ended June 30, 2021.

During the six months ended June 30, 2022, our net income decreased $5.0 million, or 9.0%, to $50.4 million from $55.4 million for the same period in 2021. The decrease in net income was largely driven by a decrease in the reversals of provision for credit losses and the net losses on the sales of securities AFS, partially offset by the increase in net interest income. For the six months ended June 30, 2022, we reversed $339,000 of provision for credit losses compared to a reversal of provision for credit losses of $8.5 million in the same period in 2021. Earnings per diluted common share decreased $0.13, or 7.7%, to $1.56 for the six months ended June 30, 2022, from $1.69 for the same period in 2021.

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Financial Condition

Our total assets increased $346.5 million, or 4.8%, to $7.61 billion at June 30, 2022 from $7.26 billion at December 31, 2021. Our securities portfolio decreased by $38.1 million, or 1.3%, to $2.82 billion, compared to $2.86 billion at December 31, 2021. The decrease in the securities portfolio was due to the increase in the unrealized loss in the portfolio, sales of securities, and principal payments, which more than offset the securities purchased during the first half of 2022.Our FHLB stock decreased $649,000, or 4.5%, to $13.7 million from $14.4 million at December 31, 2021, due to the decline in our FHLB borrowings during the first half of 2022, reducing the amount of FHLB stock we are required to hold.

Loans at June 30, 2022 were $3.96 billion, an increase of $317.9 million, or 8.7%, compared to $3.65 billion at December 31, 2021. Our PPP loans, a component of the commercial loan category, decreased $28.1 million during the six months ended June 30, 2022 due to forgiveness payments received for loans funded under the CARES Act. Excluding PPP loans, total loans increased $345.9 million, or 9.6%, due to increases of $236.5 million in commercial real estate loans, $72.6 million in construction loans, $38.0 million in commercial loans (excluding PPP loans) and $14.2 million in municipal loans. The increases were partially offset by decreases of $10.4 million in 1-4 family residential loans and $5.0 million in loans to individuals. Loans held for sale decreased $869,000, or 51.6%, to $815,000 at June 30, 2022 from $1.7 million at December 31, 2021.

Our nonperforming assets at June 30, 2022 increased $206,000, or 1.8%, to $11.8 million and represented 0.16% of total assets, compared to $11.6 million, or 0.16% of total assets at December 31, 2021. Nonaccruing loans increased $583,000, or 23.0%, to $3.1 million, and the ratio of nonaccruing loans to total loans increased to 0.08% at June 30, 2022 compared to 0.07% at December 31, 2021. TDR loans were $8.6 million and $9.1 million at June 30, 2022 and December 31, 2021, respectively. There was $128,000 of OREO at June 30, 2022 and none at December 31, 2021.

Our deposits increased $526.1 million, or 9.2%, to $6.25 billion at June 30, 2022 from $5.72 billion at December 31, 2021. The increase was primarily due to the increase in our brokered deposits of $364.9 million, or 123.8%, associated with funding our cash flow hedge swaps in place of the FHLB advances to obtain lower cost funding.

Total FHLB borrowings decreased $190.3 million, or 55.3%, to $153.7 million at June 30, 2022 from $344.0 million at December 31, 2021.

Our total shareholders’ equity at June 30, 2022 decreased 19.8%, or $180.4 million, to $731.8 million, or 9.6% of total assets, compared to $912.2 million, or 12.6% of total assets, at December 31, 2021. The decrease in shareholders’ equity was the result of other comprehensive loss of $199.0 million, cash dividends paid of $21.9 million and the repurchase of $12.2 million of our common stock. These decreases were partially offset by net income of $50.4 million, stock compensation expense of $1.7 million, common stock issued under our dividend reinvestment plan of $635,000 and net issuance of common stock under employee stock plans of $57,000.

Key financial indicators management follows include, but are not limited to, numerous interest rate sensitivity and interest rate risk indicators, credit risk, operations risk, liquidity risk, capital risk, regulatory risk, inflation risk, competition risk, yield curve risk, U.S. agency MBS prepayment risk and economic risk indicators.

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Balance Sheet Strategy

Determining the appropriate size of the balance sheet is one of the critical decisions any bank makes. Our balance sheet is not merely the result of a series of micro-decisions, but rather the size is controlled based on the economics of assets compared to the economics of funding and funding sources. Changing interest rate environments and economic conditions require that we monitor the interest rate sensitivity of the assets, the funding driving our growth and closely align ALCO objectives accordingly.

During the first quarter of 2022, we replaced $310 million of FHLB advances with brokered deposits as the funding source of our cash flow hedge swaps to lower our funding cost. Over the past two years, management has used the significant increase in non-maturity deposits, net of brokered deposits, to reduce dependence on more interest rate sensitive wholesale funding. At June 30, 2022, of the remaining wholesale funding, 68% is swapped at a fixed rate, providing protection from rising interest rates. The securities portfolio is currently funded primarily by non-maturity deposits with wholesale funding accounting for approximately 29% of the funding source.

We utilize wholesale funding and securities to enhance overall profitability by maximizing the use of our ~~profitability and balance sheet composition by~~capital, determining acceptable levels of credit, interest rate and liquidity risk consistent with prudent capital management. This balance sheet strategy currently consists of borrowing ~~a combination of long- and short-term~~ funds from the ~~FHLB, the FRDW or the~~ brokered funds ~~market.~~market and the FHLB. These funds are invested primarily in U.S. agency MBS and long-term municipal securities. Although U.S. agency MBS often carry lower yields than ~~traditional mortgage loans and other types of~~ loans we make, these securities generally (i) increase the overall quality of our assets because of either the implicit or explicit guarantees of the U.S. Government, (ii) are more liquid than individual loans and (iii) may be used to collateralize our borrowings or other obligations. While the strategy of investing a portion of our assets in U.S. Agency MBS and municipal securities has historically resulted in lower interest rate spreads and margins, we believe the lower operating expenses and reduced credit risk, combined with the managed interest rate risk of this strategy, has enhanced our overall profitability for many years. At this time, we utilize this balance sheet strategy with the goal of enhancing overall profitability by maximizing the use of our capital.

Risks associated with ~~the~~this asset structure ~~we maintain~~ include a potentially lower net interest rate spread and margin when compared to our peers, changes in the slope of the yield curve, ~~which can reduce our net interest rate spread and margin,~~ increased interest rate risk, the length of interest rate cycles, changes in volatility or spreads associated with the MBS and municipal securities, the unpredictable nature of MBS prepayments and credit risks associated with the municipal securities. See “Part I - Item 1A. Risk Factors – Risks Related to Our Business” in the ~~2020~~2021 Form 10-K for a discussion of risks related to interest rates. ~~Our asset structure, net interest spread and net interest margin require us to closely monitor our interest rate risk.~~ An additional risk is ~~the change in fair value of the AFS securities portfolio as a result of changes in interest rates. Significant~~significant increases in interest rates, especially long-term interest rates, which could adversely impact the fair value of the AFS securities portfolio ~~which~~and could also ~~significantly~~ impact our equity capital. Due to the unpredictable nature of MBS prepayments, the length of interest rate cycles and the slope of the interest rate yield curve, net interest income could fluctuate more than simulated under the scenarios modeled by our ALCO and described under “Item 3. Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q.

~~Determining the appropriate size of the balance sheet is one of the critical decisions any bank makes.~~ Our balance sheet is not merely the result of a series of micro-decisions, but rather the size is controlled based on the economics of assets compared to the economics of funding and funding sources. The low interest rate environment and economic landscape requires that we monitor the interest rate sensitivity of the assets driving our growth and closely align ALCO objectives accordingly.

~~The management of our~~ securities portfolio as a percentage of earning assets is guided by the current economics associated with the securities portfolio, changes in our overall loan and deposit levels and changes in our wholesale funding levels. Our balance sheet strategy is designed such that our securities portfolio should help mitigate financial performance associated with potential business and economic cycles that include slower loan growth and higher credit costs.

~~Our investment securities and U.S. Agency MBS increased~~decreased from ~~$2.70~~$2.86 billion at December 31, ~~2020~~2021 to ~~$2.85~~$2.82 billion at ~~September~~June 30, ~~2021.~~2022. The ~~increase~~decrease in the securities portfolio was due to the increase in ~~conjunction with our balance sheet strategy~~the unrealized loss in the portfolio, sales of securities, and ~~ALCO objectives.~~principal payments, which more than offset the securities purchased during the six months ended June 30, 2022.

During the ~~nine months ended September 30, 2021,~~first half of 2022, the composition of the securities portfolio continued to change as ~~municipal and~~ corporate bonds increased while ~~MBS~~the remaining categories in the portfolio decreased. The decrease in MBS was attributable to ~~very few~~the sales of U.S. Agency MBS and regular principal payments, partially offset by additional MBS purchases ~~and higher MBS prepayment speeds due to~~during the ~~significantly low interest rate environment.~~second quarter. During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we ~~increased security purchases when compared to the latter half of 2020, including $463.5~~purchased $302 million in highly rated primarily Texas municipal securities, ~~$226.2~~$41.2 million of which were taxable, ~~$52.3~~$49 million in U.S. Treasury Notes ~~$45.3~~and $26 million in investment grade subordinated debt, and ~~$13.1~~sold $13 million in ~~U.S. Agency MBS. We~~municipal securities. In March of 2022, we sold approximately ~~$35.1~~$68.1 million ~~AFS electric utility revenue municipals~~of U.S. Treasury Notes due to ~~electric utility company uncertainties caused by~~ the ~~severe winter storm in Texas during February. We also sold $56.6 million in U.S Agency MBS and $9.6 million in U.S. Treasury Notes.~~rising rate environment. Sales of AFS securities for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, resulted in a net realized ~~gain~~loss of ~~$1.4~~$2.2 million and ~~$3.4~~$3.7 million, respectively.

During the three and six months ended June 30, 2022, management transferred to HTM, long duration AFS municipal securities with fair values of approximately $489.1 million and $874.8 million, respectively. Additionally, during the three and six months ended June 30, 2022, management transferred to HTM, $95.3 million in corporate bonds and $28.3 million in MBS. These transfers were made due to management’s intent and ability to hold these securities to maturity. Long duration securities experience greater fair value volatility when interest rates either rise or fall. These transfers reduce any future volatility resulting from unrealized gains or losses, reflected in AOCI. These transfers were made to align the investment portfolio with the current balance sheet strategy.

At ~~September~~June 30, ~~2021,~~2022, securities as a percentage of assets totaled ~~39.9%~~37.0%, compared to ~~38.5%~~39.3% at December 31, ~~2020,~~2021, due to an increase in total assets of $346.5 million and the ~~$149.3~~$38.1 million, or ~~5.5%~~1.3%, ~~increase~~decrease in the securities portfolio. Our balance sheet management strategy is dynamic and is continually evaluated as market conditions warrant. As interest rates, yield curves, MBS prepayments, funding costs, security spreads and loan and deposit portfolios change, our determination of the proper types, amount and maturities of securities to invest in, as well as funding needs and funding sources, will continue to be evaluated. Should the economics of purchasing securities decrease, we may allow the securities portfolio to shrink through run-off or security sales. However, should the economics become more attractive, we may strategically increase the securities portfolio and the balance sheet.

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With respect to ~~liabilities,~~funding sources, we ~~continue to~~ primarily utilize ~~a combination of~~ deposits and ~~FHLB borrowings~~to a lesser extent wholesale funding to achieve our strategy of minimizing cost while achieving overall interest rate risk objectives as well as the liability management objectives of the

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ALCO. Our primary wholesale funding ~~source is~~sources are brokered deposits and FHLB borrowings. Our FHLB borrowings ~~and~~decreased 55.3%, or $190.3 million, to ~~a lesser extent we utilize federal funds purchased, the FRDW and brokered deposits.~~$153.7 million at June 30, 2022 from $344.0 million at December 31, 2021.

For the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, our total wholesale funding as a percentage of deposits, not including brokered deposits, ~~decreased~~increased to ~~14.8%~~15.1%, from ~~20.2%~~11.8% at December 31, ~~2020,~~2021, and ~~27.1%~~decreased from 15.3% at ~~September~~June 30, ~~2020. The decrease~~2021.

Our brokered deposits consist of CDs and non-maturity deposits. Our brokered CDs increased $24.8 million, or 100.4%, from ~~both of the prior year periods was due to the increase in our non-maturity deposits which were used to decrease FHLB borrowings and brokered deposits.~~

~~Our FHLB borrowings decreased 20.8%, or $173.3 million, to $659.2 million at September 30, 2021 from $832.5~~$24.7 million at December 31, ~~2020.~~ 2021 to $49.5 million at June 30, 2022. At June 30, 2022, our brokered CDs had a weighted average cost of 44 basis points and remaining maturities of less than 8 months. Our brokered non-maturity deposits increased to $610.2 million at June 30, 2022 from $270.1 million at December 31, 2021, with a weighted average cost of 100 basis points and 91 basis points, respectively. Our wholesale funding policy currently allows for maximum brokered deposits of $800 million, with an additional $50 million of flexibility for deposits maturing within 30 days. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.

In connection with most of our ~~borrowings,~~wholesale funds, the Bank has entered into various variable rate agreements and fixed or variable rate short-term pay ~~agreements. These~~ agreements ~~totaled $605.0 million and $670.0 million at September 30, 2021 and December 31, 2020, respectively. Six of the agreements have~~with an interest rate tied to three-month LIBOR ~~and the remaining agreements have interest rates tied~~or to one-month LIBOR. In connection with ~~all~~$575.0 million and $605.0 million of the agreements outstanding ~~on September~~at June 30, 2022 and December 31, 2021, respectively, the Bank also entered into various interest rate swap contracts that are treated as cash flow hedges under ASC Topic 815, “Derivatives and Hedging” that are expected to be effective in hedging the variability in future cash flows attributable to fluctuations in the underlying LIBOR interest rate. The interest rate swap contracts had an average interest rate of ~~1.18%~~0.96% with ana remaining average weighted maturity of ~~3.4~~2.8 years at ~~September~~June 30, 2021. These transactions are reevaluated on a monthly basis to determine if the hedged forecasted transactions are still probable of occurring. If at a subsequent evaluation, it is determined that the transactions will not occur, any related gains or losses recorded in AOCI~~are immediately recognized in earnings.~~2022. Refer to “Note 911 – Derivative Financial Instruments and Hedging Activities” in our consolidated financial statements included in this report for a detailed description of our hedging policy and methodology related to derivative instruments.

Our brokered deposits typically consist of CDs and non-maturity money market deposits. Our brokered CDs decreased $24.5 million, or 23.8%, from $102.8 million at December 31, 2020 to $78.4 million at September 30, 2021. At September 30, 2021, our brokered CDs had a weighted average cost of 12 basis points and remaining maturities of less than 10 months. Our brokered non-maturity money market deposits were $35.1 million at September 30, 2021 and December 31, 2020, with a weighted average cost of five basis points and 17 basis points, respectively. To provide management flexibility in managing the interest rate risk of wholesale funding, the ALCO has approved up to $50 million to issue brokered deposits to replace those maturing within 30 days. Our wholesale funding policy allows for maximum brokered deposits of $450 million. This brokered deposit maximum limit could increase or decrease depending on changes in ALCO objectives. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.

On November 6, 2020, we issued 3.875% coupon $100 million in aggregate principal amount of fixed-to-floating rate subordinated notes due on November 15, 2030. Refer to “Note 7 – Long-term Debt” in our consolidated financial statements included in this report for a detailed description of the terms of the subordinated notes.

On September 30, 2021, we redeemed our 5.5% coupon $100 million subordinated notes due September 30, 2026. Refer to “Note 7 – Long-term Debt” in our consolidated financial statements included in this report for a detailed description of the terms of the redemption of the subordinated notes.

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Results of Operations

Our results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on assets (loans and investments) and interest expense due on our funding sources (deposits and borrowings) during a particular period. Results of operations are also affected by our noninterest income, provision for credit losses, noninterest expenses and income tax expense. General economic and competitive conditions, particularly changes in interest rates, changes in interest rate yield curves, prepayment rates of MBS and loans, repricing of loan relationships, government policies and actions of regulatory authorities also significantly affect our results of operations. Future changes in applicable law, regulations or government policies may also have a material impact on us. ~~The adoption of CECL and the COVID-19 pandemic significantly impacted our results of operations in 2020 and 2021 and may continue to impact our results of operations for the remainder of 2021.~~

The following table presents net interest income for the periods presented (in thousands):


		Three Months Ended				Nine Months Ended					Three Months Ended				Six Months Ended
		September 30,				September 30,					June 30,				June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Interest income:	Interest income:									Interest income:
Loans	Loans	$	37,034	$	38,185	$	108,792	$	119,195	Loans	$	38,344	$	35,720	$	73,232	$	71,758
Taxable investment securities	Taxable investment securities	3,853		1,175		9,097		2,419		Taxable investment securities	4,632		2,921		9,240		5,244
Tax-exempt investment securities	Tax-exempt investment securities	9,649		9,003		27,787		24,430		Tax-exempt investment securities	10,605		9,173		20,824		18,138
MBS	MBS	4,405		7,048		15,140		27,626		MBS	3,238		4,647		7,255		10,735
FHLB stock and equity investments	FHLB stock and equity investments	111		249		355		1,034		FHLB stock and equity investments	77		108		190		244
Other interest earning assets	Other interest earning assets	24		17		56		220		Other interest earning assets	204		17		232		32
Total interest income	Total interest income	55,076		55,677		161,227		174,924		Total interest income	57,100		52,586		110,973		106,151
Interest expense:	Interest expense:									Interest expense:
Deposits	Deposits	2,234		4,862		7,170		21,010		Deposits	4,264		2,339		7,501		4,936
FHLB borrowings	FHLB borrowings	1,865		2,369		5,590		9,272		FHLB borrowings	224		1,817		590		3,725
Subordinated notes	Subordinated notes	2,417		1,427		7,235		4,250		Subordinated notes	1,000		2,423		1,998		4,818
Trust preferred subordinated debentures	Trust preferred subordinated debentures	345		378		1,045		1,469		Trust preferred subordinated debentures	471		349		827		700
Repurchase agreements										Repurchase agreements	18		11		28		22
Other borrowings	Other borrowings	9		55		31		365		Other borrowings	45		—		45		—
Total interest expense	Total interest expense	6,870		9,091		21,071		36,366		Total interest expense	6,022		6,939		10,989		14,201
Net interest income	Net interest income	$	48,206	$	46,586	$	140,156	$	138,558	Net interest income	$	51,078	$	45,647	$	99,984	$	91,950

Net Interest Income

Net interest income is one of the principal sources of a financial institution’s earnings stream and represents the difference or spread between interest and fee income generated from interest earning assets and the interest expense paid on interest bearing liabilities. Fluctuations in interest rates or interest rate yield curves, as well as repricing characteristics and volume and changes in the mix of interest earning assets and interest bearing liabilities, materially impact net interest income. During the first ~~quarter~~half of ~~2020,~~2022, the Federal Reserve ~~reduced~~increased the target federal funds rate by 150 basis points to 25175 basis ~~points.~~points and has indicated it anticipates multiple additional rate increases during 2022. The increase in the federal funds rate to date has increased our net interest income. However, as the federal funds rate increases further and the yield curve remains flat, it may be less beneficial to our net interest income.

Net interest income for the three months ended ~~September~~June 30, ~~2021~~2022 increased ~~$1.6~~$5.4 million, or ~~3.5%~~11.9%, compared to the same period in ~~2020.~~2021. The increase in net interest income for the three months ended ~~September~~June 30, ~~2021~~2022 was due to the decrease in interest expense on our interest bearing liabilities due to the overall decline in interest rates and a decline in the average balance of our interest bearing liabilities, partially offset by the decreaseincrease in interest income, a result of a ~~decrease~~combined increase in the average balance as well as the average yield on ~~our~~ interest earning assets. The increase in net interest income is also attributable to a decrease in interest expense due to the change in the mix of our interest bearing liabilities. Total interest income ~~decreased $601,000,~~increased $4.5 million, or ~~1.1%~~8.6%, to ~~$55.1~~$57.1 million for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$55.7~~$52.6 million during the same period in ~~2020.~~2021. Total interest expense decreased ~~$2.2 million,~~$917,000, or ~~24.4%~~13.2%, to ~~$6.9~~$6.0 million for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$9.1~~$6.9 million for the same period in ~~2020.~~2021. Our net interest margin (FTE), a non-GAAP measure, increased to ~~3.16%~~3.30% for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~3.02%~~3.06% for the same period in ~~2020~~2021, and our net interest spread (FTE), also a non-GAAP measure, increased to ~~3.00%~~3.14%, compared to ~~2.84%~~2.89% for the same period in ~~2020.~~

Net interest income was $140.2 million for the nine months ended September 30, 2021 compared to $138.6 million, an increase of $1.6 million, or 1.2%, compared to the same period in 2020. The increase in net interest income for the nine months ended September 30, 2021 was due to the decrease in interest expense on our interest bearing liabilities, partially offset by the decrease in interest income, both primarily a result of an overall decline in interest rates. Total interest expense decreased $15.3 million,2021.

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~~or 42.1%, to $21.1~~Net interest income was $100.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022 compared to ~~$36.4~~$92.0 million for the same period in ~~2020.~~2021, an increase of $8.0 million, or 8.7%. The increase in net interest income for the six months ended June 30, 2022 was due to a result of a combined increase in the average balance as well as the average yield on interest earning assets. The increase in net interest income is also attributable to a decrease in interest expense due to the change in the mix of our interest bearing liabilities. Total interest income ~~decreased $13.7~~increased $4.8 million, or ~~7.8%~~4.5%, to ~~$161.2~~$111.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$174.9~~$106.2 million for the same period in ~~2020.~~2021. Total interest expense decreased $3.2 million, or 22.6%, to $11.0 million for the six months ended June 30, 2022, compared to $14.2 million for the same period in 2021. Our net interest margin (FTE), a non-GAAP measure, increased to ~~3.14%~~3.26% for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~3.02%~~3.13% for the same period in ~~2020,~~2021, and our net interest spread (FTE), also a non-GAAP measure, increased to ~~2.97%~~3.12%, compared to ~~2.81%~~2.96% for the same period in ~~2020.~~2021. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.

Quarterly Analysis of Changes in Interest Income and Interest Expense

The following table presents on a fully taxable-equivalent basis, a non-GAAP measure, the net change in net interest income and sets forth the dollar amount of increase (decrease) in the average volume of interest earning assets and interest bearing liabilities and from changes in yields/rates. Volume/Yield/Rate variances (change in volume times change in yield/rate) have been allocated to amounts attributable to changes in volumes and to changes in yields/rates in proportion to the amounts directly attributable to those changes (in thousands):


		Three Months Ended September 30, 2021 Compared to 2020							Three Months Ended June 30, 2022 Compared to 2021
		Change Attributable to				Total			Change Attributable to				Total
Fully Taxable-Equivalent Basis:	Fully Taxable-Equivalent Basis:	Average Volume		Average Yield/Rate		Change		Fully Taxable-Equivalent Basis:	Average Volume		Average Yield/Rate		Change
Interest income on:	Interest income on:							Interest income on:
Loans (1)	Loans (1)	$	(1,577)	$	479	$	(1,098)	Loans (1)	$	1,407	$	1,252	$	2,659
Loans held for sale	Loans held for sale	(17)		(2)		(19)		Loans held for sale	(1)		6		5
Taxable investment securities	Taxable investment securities	2,811		(133)		2,678		Taxable investment securities	1,657		54		1,711
Tax-exempt investment securities (1)	Tax-exempt investment securities (1)	1,353		(456)		897		Tax-exempt investment securities (1)	2,397		(383)		2,014
Mortgage-backed and related securities	Mortgage-backed and related securities	(2,810)		167		(2,643)		Mortgage-backed and related securities	(2,899)		1,490		(1,409)
FHLB stock, at cost, and equity investments	FHLB stock, at cost, and equity investments	(71)		(67)		(138)		FHLB stock, at cost, and equity investments	(68)		37		(31)
Interest earning deposits	Interest earning deposits	15		(8)		7		Interest earning deposits	22		86		108

Federal funds sold								Federal funds sold	79		—		79
Total earning assets	Total earning assets	(296)		(20)		(316)		Total earning assets	2,594		2,542		5,136
Interest expense on:	Interest expense on:							Interest expense on:
Savings accounts	Savings accounts	57		—		57		Savings accounts	43		52		95
CDs	CDs	(1,223)		(1,556)		(2,779)		CDs	(178)		(180)		(358)
Interest bearing demand accounts	Interest bearing demand accounts	212		(118)		94		Interest bearing demand accounts	421		1,767		2,188
FHLB borrowings	FHLB borrowings	(998)		494		(504)		FHLB borrowings	(2,186)		593		(1,593)
Subordinated notes, net of unamortized debt issuance costs	Subordinated notes, net of unamortized debt issuance costs	1,221		(231)		990		Subordinated notes, net of unamortized debt issuance costs	(1,056)		(367)		(1,423)
Trust preferred subordinated debentures, net of unamortized debt issuance costs	Trust preferred subordinated debentures, net of unamortized debt issuance costs	—		(33)		(33)		Trust preferred subordinated debentures, net of unamortized debt issuance costs	—		122		122
Repurchase agreements								Repurchase agreements	5		2		7
Other borrowings	Other borrowings	(26)		(20)		(46)		Other borrowings	45		—		45
Total interest bearing liabilities	Total interest bearing liabilities	(757)		(1,464)		(2,221)		Total interest bearing liabilities	(2,906)		1,989		(917)
Net change	Net change	$	461	$	1,444	$	1,905	Net change	$	5,500	$	553	$	6,053

(1)Interest yields on loans and securities that are nontaxable for federal income tax purposes are presented on a fully taxable-equivalent basis. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.

The ~~decrease~~increase in total interest income was primarily attributable to an increase in the ~~mix~~average balance of ~~average~~ interest earning assets of $275.6 million, or 4.3%, for the three months ended ~~September~~June 30, ~~2021~~2022 compared to the same period in ~~2020, and a slight decrease~~2021, as well as an increase in the average yield on interest earning ~~assets.~~

assets to 3.66% from 3.49% for the same period in 2021. The decrease in total interest expense for the three months ended ~~September~~June 30, ~~2021~~2022 was attributable to ~~an overall decline~~the change in ~~interest rates paid on total~~the mix of our interest bearing liabilities ~~to 0.59%~~ for the three months ended ~~September~~June 30, ~~2021 from 0.73% for~~2022, when compared to the same period in ~~2020, and the decrease in average interest bearing liabilities.~~2021.

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The “Average Balances with Average Yields and Rates” table that follows shows average earning assets and interest bearing liabilities together with the average yield on the earning assets and the average rate of the interest bearing liabilities (dollars in thousands) for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021. The interest and related yields presented are on a fully taxable-equivalent basis and are therefore non-GAAP measures. See ~~"Non-GAAP~~“Non-GAAP Financial ~~Measures"~~Measures” for more information, and for a reconciliation to GAAP.


		Average Balances with Average Yields and Rates (Annualized)													Average Balances with Average Yields and Rates (Annualized)
		(unaudited)													(unaudited)
		Three Months Ended													Three Months Ended
		September 30, 2021						September 30, 2020							June 30, 2022						June 30, 2021
		Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS	ASSETS													ASSETS
Loans (1)	Loans (1)	$	3,662,496	$	37,744	4.09	%	$	3,815,989	$	38,842	4.05	%	Loans (1)	$	3,847,614	$	39,088	4.07	%	$	3,706,959	$	36,429	3.94	%
Loans held for sale	Loans held for sale	1,640		12		2.90	%	3,934		31		3.13	%	Loans held for sale	1,776		18		4.07	%	1,846		13		2.82	%
Securities:	Securities:													Securities:
Taxable investment securities (2)	Taxable investment securities (2)	532,679		3,853		2.87	%	145,724		1,175		3.21	%	Taxable investment securities (2)	617,603		4,632		3.01	%	396,504		2,921		2.95	%
Tax-exempt investment securities (2)	Tax-exempt investment securities (2)	1,453,275		12,315		3.36	%	1,295,179		11,418		3.51	%	Tax-exempt investment securities (2)	1,653,871		13,599		3.30	%	1,363,678		11,585		3.41	%
Mortgage-backed and related securities (2)	Mortgage-backed and related securities (2)	738,287		4,405		2.37	%	1,209,913		7,048		2.32	%	Mortgage-backed and related securities (2)	417,057		3,238		3.11	%	847,206		4,647		2.20	%
Total securities	Total securities	2,724,241		20,573		3.00	%	2,650,816		19,641		2.95	%	Total securities	2,688,531		21,469		3.20	%	2,607,388		19,153		2.95	%
FHLB stock, at cost, and equity investments	FHLB stock, at cost, and equity investments	39,786		111		1.11	%	60,528		249		1.64	%	FHLB stock, at cost, and equity investments	17,663		77		1.75	%	35,883		108		1.21	%
Interest earning deposits	Interest earning deposits	39,382		24		0.24	%	17,668		17		0.38	%	Interest earning deposits	77,894		125		0.64	%	43,175		17		0.16	%

Federal funds sold														Federal funds sold	37,343		79		0.85	%	—		—		—
Total earning assets	Total earning assets	6,467,545		58,464		3.59	%	6,548,935		58,780		3.57	%	Total earning assets	6,670,821		60,856		3.66	%	6,395,251		55,720		3.49	%
Cash and due from banks	Cash and due from banks	99,113						80,368						Cash and due from banks	100,231						90,735
Accrued interest and other assets	Accrued interest and other assets	684,917						699,351						Accrued interest and other assets	446,136						656,245
Less: Allowance for loan losses	Less: Allowance for loan losses	(43,052)						(61,212)						Less: Allowance for loan losses	(35,895)						(41,768)
Total assets	Total assets	$	7,208,523					$	7,267,442					Total assets	$	7,181,293					$	7,100,463
LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY													LIABILITIES AND SHAREHOLDERS’ EQUITY
Savings accounts	Savings accounts	$	598,118	249		0.17	%	$	461,895	192		0.17	%	Savings accounts	$	670,187	326		0.20	%	$	571,907	231		0.16	%
CDs	CDs	629,718		789		0.50	%	1,172,179		3,568		1.21	%	CDs	518,104		578		0.45	%	658,708		936		0.57	%
Interest bearing demand accounts	Interest bearing demand accounts	2,496,037		1,196		0.19	%	2,069,751		1,102		0.21	%	Interest bearing demand accounts	3,175,385		3,360		0.42	%	2,459,335		1,172		0.19	%
Total interest bearing deposits	Total interest bearing deposits	3,723,873		2,234		0.24	%	3,703,825		4,862		0.52	%	Total interest bearing deposits	4,363,676		4,264		0.39	%	3,689,950		2,339		0.25	%
FHLB borrowings	FHLB borrowings	656,474		1,865		1.13	%	1,037,855		2,369		0.91	%	FHLB borrowings	55,990		224		1.60	%	669,633		1,817		1.09	%
Subordinated notes, net of unamortized debt issuance costs	Subordinated notes, net of unamortized debt issuance costs	195,204		2,417		4.91	%	98,686		1,427		5.75	%	Subordinated notes, net of unamortized debt issuance costs	98,586		1,000		4.07	%	197,284		2,423		4.93	%
Trust preferred subordinated debentures, net of unamortized debt issuance costs	Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,258		345		2.27	%	60,253		378		2.50	%	Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,262		471		3.13	%	60,257		349		2.32	%
Repurchase agreements														Repurchase agreements	30,055		18		0.24	%	22,024		11		0.20	%
Other borrowings	Other borrowings	21,634		9		0.17	%	63,526		55		0.34	%	Other borrowings	6,549		45		2.76	%	—		—		—
Total interest bearing liabilities	Total interest bearing liabilities	4,657,443		6,870		0.59	%	4,964,145		9,091		0.73	%	Total interest bearing liabilities	4,615,118		6,022		0.52	%	4,639,148		6,939		0.60	%
Noninterest bearing deposits	Noninterest bearing deposits	1,551,298						1,371,748						Noninterest bearing deposits	1,702,985						1,485,383
Accrued expenses and other liabilities	Accrued expenses and other liabilities	97,954						96,219						Accrued expenses and other liabilities	98,870						97,137
Total liabilities	Total liabilities	6,306,695						6,432,112						Total liabilities	6,416,973						6,221,668
Shareholders’ equity	Shareholders’ equity	901,828						835,330						Shareholders’ equity	764,320						878,795
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	7,208,523					$	7,267,442					Total liabilities and shareholders’ equity	$	7,181,293					$	7,100,463
Net interest income (FTE)	Net interest income (FTE)			$	51,594					$	49,689			Net interest income (FTE)			$	54,834					$	48,781
Net interest margin (FTE)	Net interest margin (FTE)					3.16	%					3.02	%	Net interest margin (FTE)					3.30	%					3.06	%
Net interest spread (FTE)	Net interest spread (FTE)					3.00	%					2.84	%	Net interest spread (FTE)					3.14	%					2.89	%

(1)Interest on loans includes net fees on loans that are not material in amount.

(2)For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.

Note: As of ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, loans totaling ~~$3.0~~$3.1 million and ~~$6.0~~$5.2 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.

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Year-to-Date Analysis of Changes in Interest Income and Interest Expense


		Nine Months Ended September 30, 2021 Compared to 2020							Six Months Ended June 30, 2022 Compared to 2021
		Change Attributable to				Total			Change Attributable to				Total
Fully Taxable-Equivalent Basis:	Fully Taxable-Equivalent Basis:	Average Volume		Average Yield/Rate		Change		Fully Taxable-Equivalent Basis:	Average Volume		Average Yield/Rate		Change
Interest income on:	Interest income on:							Interest income on:
Loans (1)	Loans (1)	$	(2,406)	$	(7,829)	$	(10,235)	Loans (1)	$	2,090	$	(560)	$	1,530
Loans held for sale	Loans held for sale	(13)		(10)		(23)		Loans held for sale	(16)		9		(7)
Taxable investment securities	Taxable investment securities	6,800		(122)		6,678		Taxable investment securities	4,172		(176)		3,996
Tax-exempt investment securities (1)	Tax-exempt investment securities (1)	5,248		(987)		4,261		Tax-exempt investment securities (1)	4,549		(1,028)		3,521
Mortgage-backed and related securities	Mortgage-backed and related securities	(10,053)		(2,433)		(12,486)		Mortgage-backed and related securities	(5,563)		2,083		(3,480)
Federal Home Loan Bank stock, at cost, and equity investments	Federal Home Loan Bank stock, at cost, and equity investments	(342)		(337)		(679)		Federal Home Loan Bank stock, at cost, and equity investments	(139)		85		(54)
Interest earning deposits	Interest earning deposits	63		(227)		(164)		Interest earning deposits	31		86		117

Federal funds sold								Federal funds sold	83		—		83
Total earning assets	Total earning assets	(703)		(11,945)		(12,648)		Total earning assets	5,207		499		5,706
Interest expense on:	Interest expense on:							Interest expense on:
Savings accounts	Savings accounts	179		(106)		73		Savings accounts	102		57		159
CDs	CDs	(4,942)		(6,835)		(11,777)		CDs	(423)		(570)		(993)
Interest bearing demand accounts	Interest bearing demand accounts	992		(3,128)		(2,136)		Interest bearing demand accounts	877		2,522		3,399
FHLB borrowings	FHLB borrowings	(3,236)		(446)		(3,682)		FHLB borrowings	(3,861)		726		(3,135)
Subordinated notes, net of unamortized debt issuance costs	Subordinated notes, net of unamortized debt issuance costs	3,683		(698)		2,985		Subordinated notes, net of unamortized debt issuance costs	(2,105)		(715)		(2,820)
Trust preferred subordinated debentures, net of unamortized debt issuance costs	Trust preferred subordinated debentures, net of unamortized debt issuance costs	—		(424)		(424)		Trust preferred subordinated debentures, net of unamortized debt issuance costs	—		127		127
Repurchase agreements								Repurchase agreements	3		3		6
Other borrowings	Other borrowings	(195)		(139)		(334)		Other borrowings	45		—		45
Total interest bearing liabilities	Total interest bearing liabilities	(3,519)		(11,776)		(15,295)		Total interest bearing liabilities	(5,362)		2,150		(3,212)
Net change	Net change	$	2,816	$	(169)	$	2,647	Net change	$	10,569	$	(1,651)	$	8,918

The ~~decrease~~increase in total interest income was attributable to the ~~decrease~~increase in average earning assets of $293.8 million, or 4.6%, for the six months ended June 30, 2022, compared to the same period in 2021, and to a lesser extent, an increase in the average yield on earning assets to ~~3.58%~~3.60% from ~~3.77%~~3.58% for the same period in 2020, and a decrease in average earning assets of $129.3 million, or 2.0% for the nine months ended September 30, 2021, compared to the same period in 2020. The decrease in the average yield on total earning assets during the nine months ended September 30, 2021 was a result of decreases in the short-term interest rate yield curve during the first half of 2021 and the tightening credit spreads that occurred primarily during the last half of 2020 and into the first half of 2021. ~~The decrease in average earning assets was primarily the result of a decrease in MBS and loans, partially offset by an increase in investment securities.~~

The decrease in total interest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was attributable to ~~an overall decline~~the change in ~~interest rates paid on total~~the mix of our interest bearing liabilities when compared to ~~0.61% for the nine months ended September 30, 2021 from 0.96% for~~ the same period in ~~2020, and the decrease in average interest bearing liabilities.~~ 2021.

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The “Average Balances with Average Yields and Rates” table that follows shows average earning assets and interest bearing liabilities together with the average yield on the earning assets and the average rate of the interest bearing liabilities (dollars in thousands) for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021. The interest and related yields presented are on a fully taxable-equivalent basis and are therefore non-GAAP measures. See “Non-GAAP Financial Measures” for more information, and for a reconciliation to GAAP.


		Average Balances with Average Yields and Rates (Annualized)													Average Balances with Average Yields and Rates (Annualized)
		(unaudited)													(unaudited)
		Nine Months Ended													Six Months Ended
		September 30, 2021						September 30, 2020							June 30, 2022						June 30, 2021
		Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS	ASSETS													ASSETS
Loans (1)	Loans (1)	$	3,667,941	$	110,927	4.04	%	$	3,743,437	$	121,162	4.32	%	Loans (1)	$	3,776,194	$	74,713	3.99	%	$	3,670,708	$	73,183	4.02	%
Loans held for sale	Loans held for sale	2,092		45		2.88	%	2,664		68		3.41	%	Loans held for sale	1,354		26		3.87	%	2,321		33		2.87	%
Securities:	Securities:													Securities:
Taxable investment securities (2)	Taxable investment securities (2)	409,251		9,097		2.97	%	103,576		2,419		3.12	%	Taxable investment securities (2)	631,079		9,240		2.95	%	346,514		5,244		3.05	%
Tax-exempt investment securities (2)	Tax-exempt investment securities (2)	1,373,206		35,076		3.42	%	1,168,749		30,815		3.52	%	Tax-exempt investment securities (2)	1,608,779		26,282		3.29	%	1,332,507		22,761		3.44	%
Mortgage-backed and related securities (2)	Mortgage-backed and related securities (2)	841,361		15,140		2.41	%	1,388,754		27,626		2.66	%	Mortgage-backed and related securities (2)	491,585		7,255		2.98	%	893,752		10,735		2.42	%
Total securities	Total securities	2,623,818		59,313		3.02	%	2,661,079		60,860		3.05	%	Total securities	2,731,443		42,777		3.16	%	2,572,773		38,740		3.04	%
FHLB stock, at cost, and equity investments	FHLB stock, at cost, and equity investments	37,116		355		1.28	%	63,683		1,034		2.17	%	FHLB stock, at cost, and equity investments	19,161		190		2.00	%	35,760		244		1.38	%
Interest earning deposits	Interest earning deposits	37,939		56		0.20	%	27,299		220		1.08	%	Interest earning deposits	61,360		149		0.49	%	37,205		32		0.17	%

Federal funds sold														Federal funds sold	23,077		83		0.73	%	—		—		—
Total earning assets	Total earning assets	6,368,906		170,696		3.58	%	6,498,162		183,344		3.77	%	Total earning assets	6,612,589		117,938		3.60	%	6,318,767		112,232		3.58	%
Cash and due from banks	Cash and due from banks	92,206						78,484						Cash and due from banks	103,669						88,696
Accrued interest and other assets	Accrued interest and other assets	672,558						656,952						Accrued interest and other assets	522,167						666,280
Less: Allowance for loan losses	Less: Allowance for loan losses	(44,664)						(49,208)						Less: Allowance for loan losses	(35,766)						(45,483)
Total assets	Total assets	$	7,089,006					$	7,184,390					Total assets	$	7,202,659					$	7,028,260
LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY													LIABILITIES AND SHAREHOLDERS’ EQUITY
Savings accounts	Savings accounts	$	562,699	689		0.16	%	$	424,530	616		0.19	%	Savings accounts	$	661,339	599		0.18	%	$	544,696	440		0.16	%
CDs	CDs	674,452		2,954		0.59	%	1,240,506		14,731		1.59	%	CDs	540,726		1,172		0.44	%	697,190		2,165		0.63	%
Interest bearing demand accounts	Interest bearing demand accounts	2,433,120		3,527		0.19	%	2,019,968		5,663		0.37	%	Interest bearing demand accounts	3,136,890		5,730		0.37	%	2,401,140		2,331		0.20	%
Total interest bearing deposits	Total interest bearing deposits	3,670,271		7,170		0.26	%	3,685,004		21,010		0.76	%	Total interest bearing deposits	4,338,955		7,501		0.35	%	3,643,026		4,936		0.27	%
FHLB borrowings	FHLB borrowings	684,280		5,590		1.09	%	1,077,861		9,272		1.15	%	FHLB borrowings	89,202		590		1.33	%	698,413		3,725		1.08	%
Subordinated notes, net of unamortized debt issuance costs	Subordinated notes, net of unamortized debt issuance costs	196,572		7,235		4.92	%	98,642		4,250		5.76	%	Subordinated notes, net of unamortized debt issuance costs	98,569		1,998		4.09	%	197,268		4,818		4.93	%
Trust preferred subordinated debentures, net of unamortized debt issuance costs	Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,257		1,045		2.32	%	60,252		1,469		3.26	%	Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,261		827		2.77	%	60,256		700		2.34	%
Repurchase agreements														Repurchase agreements	25,798		28		0.22	%	22,769		22		0.19	%
Other borrowings	Other borrowings	22,387		31		0.19	%	112,851		365		0.43	%	Other borrowings	3,525		45		2.57	%	—		—		—
Total interest bearing liabilities	Total interest bearing liabilities	4,633,767		21,071		0.61	%	5,034,610		36,366		0.96	%	Total interest bearing liabilities	4,616,310		10,989		0.48	%	4,621,732		14,201		0.62	%
Noninterest bearing deposits	Noninterest bearing deposits	1,475,828						1,242,055						Noninterest bearing deposits	1,673,145						1,437,468
Accrued expenses and other liabilities	Accrued expenses and other liabilities	94,536						87,170						Accrued expenses and other liabilities	87,408						92,802
Total liabilities	Total liabilities	6,204,131						6,363,835						Total liabilities	6,376,863						6,152,002
Shareholders’ equity	Shareholders’ equity	884,875						820,555						Shareholders’ equity	825,796						876,258
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	7,089,006					$	7,184,390					Total liabilities and shareholders’ equity	$	7,202,659					$	7,028,260
Net interest income (FTE)	Net interest income (FTE)			$	149,625					$	146,978			Net interest income (FTE)			$	106,949					$	98,031
Net interest margin (FTE)	Net interest margin (FTE)					3.14	%					3.02	%	Net interest margin (FTE)					3.26	%					3.13	%
Net interest spread (FTE)	Net interest spread (FTE)					2.97	%					2.81	%	Net interest spread (FTE)					3.12	%					2.96	%

(1)Interest on loans includes net fees on loans that are not material in amount.

(2)For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.

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Noninterest Income

Noninterest income consists of revenue generated from a broad range of financial services and activities and other fee generating services that we either provide or in which we participate.

The following table details the categories included in noninterest income (dollars in thousands):


		Three Months Ended September 30,						2021							Three Months Ended June 30,			2022
							Change From						Three Months Ended June 30,	Change From
				2021			2020			2020						2022				2021			2021
Deposit services	Deposit services	$	6,779		$	6,129		$	650		10.6	%					Deposit services	$	6,496		$	6,609		$	(113)	(1.7)	%
Net gain on sale of securities AFS		1,381			78			1,303			1,670.5	%
Net gain (loss) on sale of securities AFS																	Net gain (loss) on sale of securities AFS	(2,177)			15			(2,192)		(14,613.3)	%
Gain on sale of loans	Gain on sale of loans	299			1,071			(772)			(72.1)	%					Gain on sale of loans	208			393			(185)		(47.1)	%
Trust fees	Trust fees	1,494			1,253			241			19.2	%					Trust fees	1,520			1,496			24		1.6	%
BOLI	BOLI	637			680			(43)			(6.3)	%					BOLI	720			645			75		11.6	%
Brokerage services	Brokerage services	846			564			282			50.0	%					Brokerage services	1,098			850			248		29.2	%
Other noninterest income	Other noninterest income	1,333			1,366			(33)			(2.4)	%					Other noninterest income	1,232			925			307		33.2	%
Total noninterest income	Total noninterest income	$	12,769		$	11,141		$	1,628		14.6	%					Total noninterest income	$	9,097		$	10,933		$	(1,836)	(16.8)	%


		Nine Months Ended September 30,			2021									Six Months Ended June 30,			2022
				Change From								Six Months Ended June 30,				Change From
			2021		2020		2020									2022		2021	2021
Deposit services	Deposit services				$	19,513	$	17,940	$	1,573	8.8			%	Deposit services							$	13,124			$	12,734			$	390			3.1	%
Net gain on sale of securities AFS					3,399		8,281		(4,882)		(59.0)	%
Net gain (loss) on sale of securities AFS													Net gain (loss) on sale of securities AFS							(3,720)				2,018				(5,738)				(284.3)	%
Gain on sale of loans	Gain on sale of loans				1,285		1,924		(639)		(33.2)	%	Gain on sale of loans							386				986				(600)				(60.9)	%
Trust fees	Trust fees				4,373		3,779		594		15.7	%	Trust fees							3,014				2,879				135				4.7	%
BOLI	BOLI				1,908		1,899		9		0.5	%	BOLI							1,411				1,271				140				11.0	%
Brokerage services	Brokerage services				2,476		1,643		833		50.7	%	Brokerage services							1,907				1,630				277				17.0	%
Other noninterest income	Other noninterest income				4,371		3,366		1,005		29.9	%	Other noninterest income							3,700				3,038				662				21.8	%
Total noninterest income	Total noninterest income				$	37,325	$	38,832	$	(1,507)	(3.9)	%	Total noninterest income							$	19,822			$	24,556			$	(4,734)			(19.3)	%

The ~~14.6% increase~~16.8% decrease in noninterest income for the three months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same period in ~~2020,~~2021, was due to ~~increases in~~a net ~~gain~~loss on sale of securities AFS ~~deposit services income, brokerage services income~~ and ~~trust fees, partially offset by~~ a decrease in gain on sale of ~~loans.~~loans, partially offset by increases in other noninterest income and brokerage services income. The ~~3.9%~~19.3% decrease in noninterest income for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same period in ~~2020,~~2021, was due to decreases in net gain on sale of securities AFS and gain on sale of loans, partially offset by increases in other noninterest income, deposit services income ~~other noninterest income,~~and brokerage services ~~income and trust fees.~~income.

The increase in deposit services income for the ~~three~~six months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same period in ~~2020,~~2021, was primarily the result of increases in ~~debit card income, service charges on commercial deposit accounts and~~ overdraft ~~income. The increase for the nine months ended September 30, 2021, when compared to the same period in 2020, was primarily the result of increases in debit card~~ income and service charges on commercial deposit accounts, partially offset by a decrease in overdraft income due to an increase in funds available to customers through government issued stimulus checks and PPP loans. The increase in debit card income was the result of an increase in debit card transactions for the three and nine months ended September 30, 2021.accounts.

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we sold ~~MBS, municipal securities and~~ U.S. Treasury securities, MBS and municipal securities that resulted in a net ~~gain~~loss on sale of AFS securities of ~~$1.4~~$2.2 million and ~~$3.4~~$3.7 million, respectively.

Gain on sale of loans decreased for the three and ~~nine~~six months ended ~~September~~June 30, 2022, when compared to the same period in 2021, due to a decrease in the volume of loans sold.

The increase in BOLI income for the three and six months ended June 30, 2022, when compared to the same periods in ~~2020. Overall mortgage loan production~~2021, was due to $13.0 million in additional BOLI purchased during the third quarter of 2021.

Brokerage services income increased ~~during 2020 and into 2021 as a result of lower interest rates, however, the volume of loans we decided to sell decreased~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same periods in ~~2020.~~2021, due to growth in our client base and revenue.

~~Trust fees~~Other noninterest income increased for the three ~~and nine~~ months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same ~~periods~~period in ~~2020,~~2021, primarily due to an increase mortgage serving fee income, partially offset by a decrease in ~~assets under management. The market value of our wealth management and trust assets under management,~~equity investment income. For the six months ended June 30, 2022, noninterest income increased when compared to same period in 2021, primarily due to

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~~which are not reflected in our consolidated balance sheets, increased 8.2%, and were approximately $1.64 billion at September 30, 2021, compared to $1.52 billion at September 30, 2020.~~

~~Brokerage services income increased for the three and nine months ended September 30, 2021, when compared to the same periods in 2020, due to growth in our client base and recurring revenue.~~

~~Other noninterest income increased for the nine months ended September 30, 2021, when compared to the same period in 2020, primarily due to~~ increases in ~~mortgage servicing fee~~investment income and ~~swap~~mortgage servicing fee income, partially offset by ~~decreases~~a decrease in ~~mortgage derivative~~swap fee income and equity investment income.

Noninterest Expense

We incur certain types of noninterest expenses associated with the operation of our various business activities. The following table details the categories included in noninterest expense (dollars in thousands):


		Three Months Ended September 30,						2021							Three Months Ended June 30,			2022
							Change From						Three Months Ended June 30,	Change From
				2021			2020			2020						2022				2021			2021
Salaries and employee benefits	Salaries and employee benefits	$	19,777		$	19,344		$	433		2.2	%					Salaries and employee benefits	$	20,329		$	20,004		$	325	1.6	%
Net occupancy	Net occupancy	3,532			3,595			(63)			(1.8)	%					Net occupancy	3,654			3,606			48		1.3	%

Advertising, travel & entertainment	Advertising, travel & entertainment	579			519			60			11.6	%					Advertising, travel & entertainment	716			475			241		50.7	%
ATM expense	ATM expense	311			271			40			14.8	%					ATM expense	356			272			84		30.9	%
Professional fees	Professional fees	1,135			961			174			18.1	%					Professional fees	1,147			1,040			107		10.3	%
Software and data processing	Software and data processing	1,503			1,215			288			23.7	%					Software and data processing	1,739			1,406			333		23.7	%
Communications	Communications	552			495			57			11.5	%					Communications	509			612			(103)		(16.8)	%
FDIC insurance	FDIC insurance	454			469			(15)			(3.2)	%					FDIC insurance	477			435			42		9.7	%
Amortization of intangibles	Amortization of intangibles	695			881			(186)			(21.1)	%					Amortization of intangibles	586			730			(144)		(19.7)	%
Loss on redemption of subordinated notes		1,118			—			1,118			100.0	%

Other noninterest expense	Other noninterest expense	2,107			3,866			(1,759)			(45.5)	%					Other noninterest expense	2,593			2,119			474		22.4	%
Total noninterest expense	Total noninterest expense	$	31,763		$	31,616		$	147		0.5	%					Total noninterest expense	$	32,106		$	30,699		$	1,407	4.6	%


		Nine Months Ended September 30,			2021									Six Months Ended June 30,			2022
				Change From								Six Months Ended June 30,				Change From
			2021		2020		2020									2022		2021	2021
Salaries and employee benefits	Salaries and employee benefits				$	59,825	$	57,616	$	2,209	3.8			%	Salaries and employee benefits							$	40,298			$	40,048			$	250			0.6	%
Net occupancy	Net occupancy				10,698		10,574		124		1.2	%	Net occupancy							7,310				7,166				144				2.0	%

Advertising, travel & entertainment	Advertising, travel & entertainment				1,491		1,643		(152)		(9.3)	%	Advertising, travel & entertainment							1,453				912				541				59.3	%
ATM expense	ATM expense				821		728		93		12.8	%	ATM expense							637				510				127				24.9	%
Professional fees	Professional fees				3,166		3,238		(72)		(2.2)	%	Professional fees							2,074				2,031				43				2.1	%
Software and data processing	Software and data processing				4,221		3,737		484		13.0	%	Software and data processing							3,370				2,718				652				24.0	%
Communications	Communications				1,689		1,494		195		13.1	%	Communications							1,012				1,137				(125)				(11.0)	%
FDIC insurance	FDIC insurance				1,343		668		675		101.0	%	FDIC insurance							949				889				60				6.7	%
Amortization of intangibles	Amortization of intangibles				2,191		2,792		(601)		(21.5)	%	Amortization of intangibles							1,208				1,496				(288)				(19.3)	%
Loss on redemption of subordinated notes					1,118		—		1,118		100.0	%

Other noninterest expense	Other noninterest expense				7,133		9,502		(2,369)		(24.9)	%	Other noninterest expense							4,990				5,026				(36)				(0.7)	%
Total noninterest expense	Total noninterest expense				$	93,696	$	91,992	$	1,704	1.9	%	Total noninterest expense							$	63,301			$	61,933			$	1,368			2.2	%

The increase in noninterest expense for the three months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same period in ~~2020,~~2021, was primarily the result of ~~a loss on the redemption of subordinated notes~~increases in other noninterest expense, software and ~~increases in~~data processing expense, salaries and employee benefits and ~~software~~advertising, travel and ~~data processing expense, partially offset by decreases in other noninterest~~entertainment expense. The increase for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same period in ~~2020,~~2021, was the result of increases in ~~salaries and employee benefits, a loss on the redemption of subordinated notes, increases in FDIC insurance and~~ software and data processing expense, advertising, travel and entertainment expense, salaries and employee benefits, partially offset by decreases in ~~other noninterest expense and~~the amortization of intangibles.

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Salaries and employee benefits increased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same periods in ~~2020,~~2021, due to ~~increases~~an increase in ~~health insurance expense and~~ direct salary expense, partially offset by ~~a decrease~~decreases in in health insurance expense and retirement expense.

For the three and six months ended June 30, 2022, direct salary expense increased $1.0 million, or 6.0%, and $1.4 million, or 4.3%, respectively, when compared to the same periods in 2021, primarily due to normal salary increases effective in the first quarter of 2022 and market increases in the second quarter of 2022.

Health and life insurance expense, included in salaries and employee benefits, ~~increased $757,000,~~decreased $525,000, or ~~49.1%~~21.8%, and ~~$1.5 million,~~$736,000, or ~~28.6%~~16.9%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, when compared to the same periods in ~~2020.~~2021. We have a self-insured health plan which is supplemented with a stop loss insurance policy. ~~Health insurance costs are rising nationwide and these costs may continue to increase during the remainder~~

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For the three and nine months ended September 30, 2021, direct salary expense increased $336,000, or 2.1%, and $1.75 million, or 3.6%, respectively, when compared to the same periods in 2020, primarily due to normal salary increases effective in the first quarter of 2021.

Retirement expense, included in salaries and employee benefits, decreased ~~$660,000,~~$151,000, or ~~37.6%~~14.5%, and ~~$1.0 million,~~$451,000, or ~~24.4%~~21.8%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, when compared to the same periods in ~~2020. The~~2021. This decrease was primarily due to the freeze of the Retirement Plan and Restoration Plan to further benefit accruals as of December 31, 2020, which resulted in no defined benefit plan service cost expense in 2021. Deferred compensation plan expense also decreased for the three and nine months ended September 30, 2021. These decreases were partially offset by increasesa decrease in our split dollar agreement ~~expense and 401k plan matching~~ expense.

Advertising, travel and entertainment expense increased for the three and six months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same ~~period~~periods in ~~2020,~~2021, primarily due to ~~increased activity as~~increases in travel ~~restrictions eased during 2021. Media advertising, included in advertising, travel~~related expenses, donations and entertainment, also increased for the three months ended September 30, 2021, when compared to the same period in 2020. These increases were partially offset by a decrease in donations for the three months ended September 30, 2021.media advertising.

ATM expense increased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same periods in ~~2020,~~2021, due primarily to higher ~~ATM maintenance expense as new ATMs and ITMs were put into service and hardware upgrades were completed.~~armored car expense.

Professional fees increased for the three and six months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same period in ~~2020,~~2021, due to an increase in ~~legal fees, and, to a lesser extent, an increase in professional fees related to a system conversion and~~ consulting fees.

Software and data processing expense increased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same periods in ~~2020,~~2021, due to ~~entry into several~~ new software contracts and increases in existing contract renewal costs.

Communications expense ~~increased~~decreased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same periods in ~~2020,~~2021, driven by ~~an increase~~a decrease in phone and internet costs.

FDIC insurance increased for the nine months ended September 30, 2021, when compared to the same period in 2020, due to a small bank assessment credit issued by the FDIC and utilized in the first half of 2020.

Amortization of intangibles decreased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same periods in ~~2020,~~2021, due primarily to a decrease in core deposit intangible amortization which is recognized on an accelerated method resulting in a decline in expense over the amortization period.

Loss on redemption of subordinated notes consisted of the remaining unamortized discount of $856,000 and debt issuance costs of $251,000 associated with the notes at the time of redemption on September 30, 2021.

Other noninterest expense ~~decreased~~increased for the three ~~and nine~~ months ended ~~September~~June 30, ~~2021,~~2022, when compared to the same ~~periods~~period in ~~2020,~~2021, primarily due to increases in losses on retired assets, ~~associated with a branch closure~~other losses and ~~branch right sizing during the three months ended September 30, 2020, decreases in~~ retirement expense related to the Retirement Plan and the Restoration ~~Plan and a decrease in losses on other real estate owned for the three and nine months ended September 30, 2021.~~Plan.

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Income Taxes

Pre-tax income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~$34.3~~$28.7 million and ~~$97.3~~$56.8 million, respectively, an increase of ~~11.1%~~18.6% and ~~63.2%~~a decrease of 9.8%, compared to ~~$30.9~~$24.2 million and ~~$59.7~~$63.0 million for the same periods in ~~2020.~~2021. We recorded income tax expense of ~~$5.0~~$3.3 million and ~~$12.6~~$6.4 million, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, compared to income tax expense of ~~$3.8~~$2.9 million and ~~$7.1~~$7.6 million for the same periods in ~~2020.~~2021. The ETR as a percentage of pre-tax income was ~~14.5%~~11.5% and ~~13.0%~~11.3% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021, respectively,~~2022, compared to an ETR as a percentage of pre-tax income of ~~12.3%~~11.9% and ~~11.9%~~12.1% for the same periods in ~~2020.~~2021. The ~~higher~~decrease in the income tax expense for the six months ended June 30, 2022 was a result of a decrease in pre-tax income and the ETR. The decrease in the ETR for the ~~three and nine~~six months ended ~~September~~June 30, ~~2021 was~~2022 is primarily due to ~~a decrease~~an increase in tax-exempt income as a percentage of pre-tax income as compared to the same period in ~~2020.~~2021.

The ETR differs from the statutory rate of 21% ~~for the three and nine months ended September 30, 2021 and 2020~~ primarily due to the effect of tax-exempt income from municipal loans and securities, as well as BOLI. The net deferred tax ~~liability~~asset totaled ~~$12.5~~$34.5 million at ~~September~~June 30, ~~2021,~~2022 as compared to ~~$15.5~~a net deferred tax liability of $17.8 million at December 31, ~~2020.~~2021. The ~~decrease~~increase in the net deferred tax ~~liability~~asset is primarily the result of ~~the decrease~~an increase in unrealized ~~gains~~losses in the AFS securities portfolio.

See “Note 11 – Income Taxes” to our consolidated financial statements included in this report. No valuation allowance was recorded at ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020,~~2021, as management believes it is more likely than not that all of the deferred tax asset items will be realized in future years.

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Composition of Loans

One of our main objectives is to seek attractive lending opportunities in Texas, primarily in the market areas in which we operate. Refer to “Part I - Item 1. Business - Market Area” in the ~~2020~~2021 Form 10-K for a discussion of our primary market area and the geographic concentration of our loan portfolio as of December 31, ~~2020.~~2021. There were no substantial changes in these concentrations during the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The majority of our loan originations are made to borrowers who live in and/or conduct business in the market areas of Texas in which we operate or adjoin, with the exception of municipal loans, which are made primarily throughout the state of Texas. Municipal loans are made to municipalities, counties, school districts and colleges.

The following table sets forth loan totals by class as of the dates presented (dollars in thousands):


								Compared to											Compared to
								December 31, 2020		September 30, 2020										December 31, 2021		June 30, 2021
		September 30, 2021		December 31, 2020		September 30, 2020		Change (%)		Change (%)			June 30, 2022		December 31, 2021		June 30, 2021			Change (%)		Change (%)

Real estate loans:	Real estate loans:											Real estate loans:
Construction	Construction	$	422,095	$	581,941	$	610,394	(27.5)	%	(30.8)	%	Construction	$	520,484	$	447,860	$	528,157		16.2	%	(1.5)	%
1-4 family residential	1-4 family residential	660,689		719,952		738,343		(8.2)	%	(10.5)	%	1-4 family residential	640,706		651,140		678,402			(1.6)	%	(5.6)	%
Commercial	Commercial	1,605,132		1,295,746		1,327,233		23.9	%	20.9	%	Commercial	1,834,734		1,598,172		1,430,900			14.8	%	28.2	%
Commercial loans	Commercial loans	443,708		557,122		629,170		(20.4)	%	(29.5)	%	Commercial loans	428,974		418,998		497,513			2.4	%	(13.8)	%
Municipal loans	Municipal loans	427,259		409,028		387,286		4.5	%	10.3	%	Municipal loans	457,239		443,078		417,398			3.2	%	9.5	%
Loans to individuals	Loans to individuals	88,702		93,990		97,549		(5.6)	%	(9.1)	%	Loans to individuals	80,904		85,914		89,976			(5.8)	%	(10.1)	%
Total loans	Total loans	$	3,647,585	$	3,657,779	$	3,789,975	(0.3)	%	(3.8)	%	Total loans	$	3,963,041	$	3,645,162	$	3,642,346		8.7	%	8.8	%

Our total loan portfolio ~~decreased $10.2~~increased $317.9 million, or ~~0.3%~~8.7%, at ~~September~~June 30, ~~2021~~2022 compared to December 31, ~~2020, with decreases in construction loans, commercial loans, 1-4 family residential loans and loans to individuals, partially offset by increases in commercial real estate and municipal loans.~~2021. For the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, our PPP loans ~~experienced a net decrease of $147.3~~decreased $28.1 million, or ~~68.6%~~90.4%, from ~~$214.8~~$31.0 million at December 31, ~~2020,~~2021, primarily due to forgiveness payments received from loans funded under the CARES Act.

~~Our loan portfolio decreased $142.4~~ Excluding PPP loans, total loans increased $345.9 million, or ~~3.8%~~9.6%, ~~at September 30, 2021 compared to September 30, 2020,~~ with ~~decreases~~increases in commercial real estate loans, construction loans, commercial loans and municipal loans, partially offset by decreases in 1-4 family residential loans and loans to ~~individuals, partially offset by~~individuals.

Excluding a $129.1 million year-over-year decrease in PPP loans, total loans increased $449.8 million, or 12.8%, compared to June 30, 2021, with increases in commercial real estate loans, commercial loans and municipal loans, partially offset by decreases in 1-4 family residential loans, loans to individuals and construction loans.

At ~~September~~June 30, ~~2021,~~2022, our real estate loans represented ~~73.7%~~75.6% of our loan portfolio and were comprised of commercial real estate loans of ~~59.7%~~61.2%, 1-4 family residential loans of ~~24.6%~~21.4% and construction loans of ~~15.7%~~17.4%. Commercial real estate loans primarily include loans collateralized by retail, commercial office buildings, multi-family residential buildings, medical facilities and offices, senior living, assisted living and skilled nursing facilities, warehouse facilities, hotels and churches. Our 1-4 family residential loans consist primarily of loans secured by first mortgages on owner occupied 1-4 family residences. Our construction loans are collateralized by property located primarily in or near the market areas we serve. A number of our construction loans will be owner occupied upon completion. Construction loans for non-owner occupied projects are financed, but these typically have cash flows from leases with tenants, secondary sources of repayment, and in some cases, additional collateral.

Loan Portfolios Most at Risk due to Economic Stress Resulting from Impact of COVID-19

The banking industry is affected by general economic conditions such as interest rates, inflation, recession, unemployment and other factors beyond our control, including the ongoing impact of the COVID-19 pandemic. During the last 30 years the Texas economy has continued to diversify, decreasing the overall impact of fluctuations in oil and gas prices; however, the oil and gas industry is still a significant component of the Texas economy. Oil prices have ~~experienced~~increased significantly during 2022 as a ~~recovery during~~result of strong demand, global supply disruptions and the ~~nine months ended September 30, 2021 following a significant reduction primarily reflective of the economic impact of COVID-19.~~Ukraine/Russia conflict. We cannot predict whether current economic conditions or oil prices will improve, remain the same or decline.

As of ~~September~~June 30, ~~2021,~~2022, the Company’s exposure to the oil and gas industry totaled ~~$70.7~~$154.5 million, or ~~1.94%~~3.90% of gross loans, ~~a decrease~~an increase of ~~$33.9~~$84.8 million, or 121.6%, from December 31, ~~2020,~~2021, and consisted primarily of (i) support/service loans of ~~1.26%~~3.30%, (ii) upstream of ~~0.54%~~0.44%, (iii) midstream of ~~0.08%,~~0.12% and (iv) downstream of ~~0.06%~~0.04%. Expanded monitoring and analysis of these loans has been implemented to address the uncertainty in oil and gas prices as needed.

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The following table sets forth our ~~loans outstanding in the~~ oil and gas ~~industry~~information for the periods presented (dollars in thousands):

September 30, December 31, 2020
2021 2020
Oil and gas related loans $ 70,685 $ 116,428 $ 104,548
Oil and gas related loans as a % of loans 1.94 % 3.07 % 2.86 %
Classified oil and gas related loans $ 4,418 $ 6,788 $ 6,385
Classified oil and gas related loans as a % of oil and gas related loans 6.25 % 5.83 % 6.11 %
Nonaccrual oil and gas related loans $ 342 $ 718 $ 620
Net (recoveries) charge-offs for oil and gas related loans $ (7) $ 7 $ 7
Allowance for oil and gas related loans as a % of oil and gas loans 1.24 % 1.48 % 1.36 %


	June 30, 2022			December 31, 2021			June 30, 2021
Oil and gas related loans	$	154,456		$	69,688		$	94,297
Oil and gas related loans as a % of loans	3.90		%	1.91		%	2.59		%
Classified oil and gas related loans	$	420		$	4,104		$	4,899
Classified oil and gas related loans as a % of oil and gas related loans	0.27		%	5.89		%	5.20		%
Nonaccrual oil and gas related loans	$	258		$	334		$	386
Net (recoveries) charge-offs for oil and gas related loans	$	—		$	(7)		$	(7)
Allowance for oil and gas related loans as a % of oil and gas loans	0.49		%	1.19		%	1.51		%

As of ~~September~~June 30, ~~2021,~~2022, economic conditions in Texas have returned ~~to levels~~ close to pre-pandemic levels. Commercial activity has ~~improved~~resumed to levels close to those existing prior to the outbreak of the pandemic. When the pandemic occurred, in addition to the oil and gas industry, we considered the sectors set forth in the table below to be most vulnerable to financial risks from business disruptions caused by the pandemic mitigation efforts based on North American Industry Classification System categories as of ~~September~~June 30, ~~2021~~2022 (dollars in thousands). As of ~~September~~June 30, 2022, the percent of loans classified in the hotel sector increased to 29.72%, from 14.33% compared to December 31, 2021, a direct result of payoffs in this category of approximately 52%, reducing the remaining balance of loans held in the hotel sector. No additional loans in the hotel sector have been classified since December 31, 2021. As of June 30, 2022, our customers in these industries have not experienced long-term business disruptions initially thought possible. We are, however, continuing to monitor these customers closely.


		September 30, 2021							June 30, 2022
		Loans		Percent of Total Loans		Percent Classified (1)			Loans		Percent of Total Loans		Percent Classified (1)
Retail commercial real estate (2)	Retail commercial real estate (2)	$	338,123	9.27	%	—		Retail commercial real estate (2)	$	489,300	12.35	%	—
Retail goods and services	Retail goods and services	72,166		1.98	%	0.27	%	Retail goods and services	62,579		1.58	%	0.21	%
Hotels	Hotels	62,677		1.72	%	14.17	%	Hotels	29,884		0.75	%	29.72	%
Food services	Food services	46,731		1.28	%	—		Food services	45,841		1.16	%	7.99	%
Arts, entertainment and recreation	Arts, entertainment and recreation	6,480		0.18	%	2.88	%	Arts, entertainment and recreation	5,823		0.14	%	2.33	%
Total	Total	$	526,177	14.43	%	1.76	%	Total	$	633,427	15.98	%	2.02	%


		December 31, 2020							December 31, 2021
		Loans		Percent of Total Loans		Percent Classified (1)			Loans		Percent of Total Loans		Percent Classified (1)
Retail commercial real estate (2)	Retail commercial real estate (2)	$	342,919	9.38	%	0.02	%	Retail commercial real estate (2)	$	384,381	10.54	%	—
Retail goods and services	Retail goods and services	82,936		2.27	%	9.12	%	Retail goods and services	72,650		1.99	%	0.20	%
Hotels	Hotels	69,578		1.90	%	—		Hotels	61,992		1.70	%	14.33	%
Food services	Food services	35,502		0.97	%	—		Food services	45,019		1.24	%	4.33	%
Arts, entertainment and recreation	Arts, entertainment and recreation	9,206		0.25	%	3.80	%	Arts, entertainment and recreation	6,039		0.17	%	2.95	%
Total	Total	$	540,141	14.77	%	1.48	%	Total	$	570,081	15.64	%	1.96	%

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September 30, 2020
Loans
Percent of
Total Loans
Percent
Classified (1)
Retail commercial real estate (2)
$ 329,645 8.70 % 0.03 %
Retail goods and services 85,443 2.25 % 9.04 %
Hotels 68,881 1.82 % 6.34 %
Food services 43,401 1.15 % 0.12 %
Arts, entertainment and recreation 10,400 0.27 % 0.81 %
Total $ 537,770 14.19 % 2.29 %


	June 30, 2021
	Loans		Percent of Total Loans		Percent Classified (1)
Retail commercial real estate (2)	$	307,581	8.44	%	0.02	%
Retail goods and services	76,840		2.11	%	8.82	%
Hotels	68,456		1.88	%	—
Food services	49,772		1.37	%	—
Arts, entertainment and recreation	7,498		0.21	%	4.20	%
Total	$	510,147	14.01	%	1.40	%

(1) Sector classified loans as a percentage of sector total loans.

(2) Loans in the retail commercial real estate sector are included in our commercial real estate portfolio.

~~Allowance for Credit Losses - Loans~~

We utilize Moody’s Analytics economic forecast scenarios and assign probability weighting to those scenarios which best reflect management’s views on the economic forecast. The probability weighting and scenarios utilized for the estimate of the allowance were generally reflective of an improved economic forecast as based on known and knowable information as of September 30, 2021.

As of September 30, 2021, our review of the loan portfolio indicated that an allowance for loan losses of $38.0 million was appropriate to cover expected losses in the portfolio. Changes in economic and other conditions, including the application of the CECL model and the economic uncertainty related to COVID-19, may require future adjustments to the allowance for loan losses.

During the nine months ended September 30, 2021, the allowance for loan losses decreased $11.0 million, or 22.4%, to $38.0 million, or 1.04% of total loans, when compared to $49.0 million, or 1.34% of total loans at December 31, 2020. The decrease in the allowance for credit losses was primarily reflective of an improved economic forecast based on known and knowable information as of September 30, 2021.

For the three and nine months ended September 30, 2021, loan charge-offs were $940,000 and $2.3 million, respectively, and recoveries were $437,000 and $1.5 million, respectively. For the three and nine months ended September 30, 2020, loan charge-offs were $718,000 and $2.3 million, respectively, and recoveries were $361,000 and $1.2 million, respectively. For the three and nine months ended September 30, 2021 we recorded a reversal of provision for credit losses for loans of $4.4 million

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and $10.2 million, respectively. For the three and nine months ended September 30, 2020, we recorded a reversal of provision of $4.4 million and a provision of $26.0 million, respectively. The decrease during the nine months ended September 30, 2021, was primarily due to improvement in the economic forecast.

PCD Loans

We have purchased certain loans that as of the date of purchase have experienced more-than-insignificant deterioration in credit quality since origination. Management evaluates these loans against a probability threshold to determine if substantially all of the contractually required payments will be received. PCD loans are recorded at the purchase price plus an allowance for credit losses which becomes the PCD loan's initial amortized cost. The non-credit related discount or premium, the difference between the initial amortized cost and the par value, will be amortized into interest income over the life of the loan. Any further changes to the allowance for credit losses are recorded through provision expense. In accordance with the adoption of ASU 2016-13, management did not reassess whether PCI assets met the criteria of PCD assets and elected to not maintain pools of loans as of the date of adoption. All PCD loans are evaluated based upon product type within the underlying segment.

Nonperforming Assets

Nonperforming assets consist of delinquent loans 90 days or more past due, nonaccrual loans, OREO, repossessed assets and TDR loans. Nonaccrual loans are loans 90 days or more delinquent and collection in full of both the principal and interest is not expected. Additionally, some loans that are not delinquent or that are delinquent less than 90 days may be placed on nonaccrual status if it is probable that we will not receive contractual principal and interest payments in accordance with the terms of the respective loan agreements. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any accrued balance is reversed for financial statement purposes. OREO represents real estate taken in full or partial satisfaction of debts previously contracted. The dollar amount of OREO is based on a current evaluation of the OREO at the time it is recorded on our books, net of estimated selling costs. Updated valuations are obtained as needed and any additional impairments are recognized. Restructured loans represent loans that have been renegotiated to provide a below market interest rate or deferral of interest or principal because of deterioration in the financial position of the borrowers. The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, restructuring amortization schedules and other actions intended to minimize potential losses. Categorization of a loan as nonperforming is not in itself a reliable indicator of potential loan loss. Other factors, such as the value of collateral securing the loan and the financial condition of the borrower are considered in judgments as to potential loan loss.

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The following table sets forth nonperforming assets for the periods presented (dollars in thousands):

Compared to
December 31, 2020 September 30,
2020
September 30,
2021 December 31, 2020 September 30,
2020 Change (%) Change (%)
Loans on nonaccrual:
Real estate loans:
  Construction $ 63 $ 640 $ 1,246 (90.2) % (94.9) %
  1-4 family residential 1,432 3,922 2,838 (63.5) % (49.5) %
  Commercial 796 1,269 884 (37.3) % (10.0) %
Commercial loans 674 1,592 784 (57.7) % (14.0) %
Loans to individuals 48 291 219 (83.5) % (78.1) %
Total nonaccrual loans 3,013 7,714 5,971 (60.9) % (49.5) %
Accruing loans past due more than 90 days — — — — —
TDR loans 9,371 9,646 10,307 (2.9) % (9.1) %
OREO 25 106 536 (76.4) % (95.3) %
Repossessed assets 15 14 8 7.1 % 87.5 %
Total nonperforming assets $ 12,424 $ 17,480 $ 16,822 (28.9) % (26.1) %


							Compared to
							December 31, 2021		June 30, 2021
	June 30, 2022		December 31, 2021		June 30, 2021		Change (%)		Change (%)







Nonaccrual loans	$	3,119	$	2,536	$	5,154	23.0	%	(39.5)	%
Accruing loans past due more than 90 days	—		—		—		—		—
TDR loans	8,568		9,073		9,549		(5.6)	%	(10.3)	%
OREO	128		—		566		100.0	%	(77.4)	%
Repossessed assets	—		—		—		—		—
Total nonperforming assets	$	11,815	$	11,609	$	15,269	1.8	%	(22.6)	%

Total loans	$	3,963,041	$	3,645,162	$	3,642,346
Allowance for loan losses at end of period	35,449		35,273		42,913


Ratio of nonaccruing loans to:	Ratio of nonaccruing loans to:							Ratio of nonaccruing loans to:
Total loans	Total loans	0.08	%	0.21	%	0.16	%	Total loans	0.08	%	0.07	%	0.14	%
Ratio of nonperforming assets to:	Ratio of nonperforming assets to:							Ratio of nonperforming assets to:
Total assets	Total assets	0.17	%	0.25	%	0.23	%	Total assets	0.16	%	0.16	%	0.21	%
Total loans	Total loans	0.34	%	0.48	%	0.44	%	Total loans	0.30	%	0.32	%	0.42	%
Total loans and OREO	Total loans and OREO	0.34	%	0.48	%	0.44	%	Total loans and OREO	0.30	%	0.32	%	0.42	%
Total loans, excluding PPP loans, and OREO	Total loans, excluding PPP loans, and OREO	0.35	%	0.51	%	0.48	%	Total loans, excluding PPP loans, and OREO	0.30	%	0.32	%	0.43	%
Ratio of allowance for loan losses to:	Ratio of allowance for loan losses to:							Ratio of allowance for loan losses to:
Nonaccruing loans	Nonaccruing loans	1,261.93	%	635.29	%	922.96	%	Nonaccruing loans	1,136.55	%	1,390.89	%	832.62	%
Nonperforming assets	Nonperforming assets	306.04	%	280.35	%	327.61	%	Nonperforming assets	300.03	%	303.84	%	281.05	%
Total loans	Total loans	1.04	%	1.34	%	1.45	%	Total loans	0.89	%	0.97	%	1.18	%
Total loans, excluding PPP loans	Total loans, excluding PPP loans	1.06	%	1.42	%	1.58	%	Total loans, excluding PPP loans	0.90	%	0.98	%	1.22	%
Net charge-offs to average loans outstanding	Net charge-offs to average loans outstanding	0.03	%	0.03	%	0.04	%	Net charge-offs to average loans outstanding	—		0.02	%	0.01	%

We ~~are~~ actively ~~marketing~~market all OREO properties and ~~none are being held~~do not hold them for investment purposes.

Allowance for Credit Losses - Loans

We utilize Moody’s Analytics economic forecast scenarios and assign probability weighting to those scenarios which best reflect management’s views on the economic forecast. The probability weighting and scenarios utilized for the estimate of the allowance were generally reflective of an improved economic forecast as based on known and knowable information as of June 30, 2022.

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~~Liquidity~~Reserves on these loans are based upon risk factors including the loan type and ~~Interest Rate Sensitivity~~structure, collateral type, leverage ratio, refinancing risk and origination quality, among others. Our consumer construction real estate loans, 1-4 family residential loans and our loans to individuals use a loss rate based upon risk factors including loan types, origination year and credit scores. Loans covered by the PPP may be eligible for loan forgiveness. The remaining loan balance after forgiveness of any amount is still fully guaranteed by the SBA and therefore does not have an associated allowance.

As of June 30, 2022, our review of the loan portfolio indicated that an allowance for loan losses of $35.4 million was appropriate to cover expected losses in the portfolio. Changes in economic and other conditions, including the application of the CECL model and the economic uncertainty related to COVID-19, rising interest rates and heightened inflation, may require future adjustments to the allowance for loan losses.

During the six months ended June 30, 2022, the allowance for loan losses increased $176,000, or 0.5%, to $35.4 million, or 0.89% of total loans, when compared to $35.3 million, or 0.97% of total loans at December 31, 2021.

For the three and six months ended June 30, 2022, loan charge-offs were $479,000 and $1.0 million, respectively, and recoveries were $516,000 and $1.1 million, respectively. For the three and six months ended June 30, 2021, loan charge-offs were $527,000 and $1.3 million, respectively, and recoveries were $466,000 and $1.1 million, respectively. For the three months ended June 30, 2022, we recorded a reversal of provision for credit losses for loans of $112,000 and for the six months ended June 30, 2022 we recorded a provision of $154,000. For the three months ended June 30, 2021, we recorded a provision for credit losses for loans of $1.5 million and for the six months ended June 30, 2021, we recorded a reversal of provision for credit losses of $5.9 million, respectively.

~~Liquidity management involves~~

Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures

Allowance for off-balance-sheet credit exposures were as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021

Balance at beginning of period	$	2,412	$	3,616	$	2,384	$	6,386

Provision for (reversal of) off-balance-sheet credit exposures	(521)		157		(493)		(2,613)
Balance at end of period	$	1,891	$	3,773	$	1,891	$	3,773

Our off-balance-sheet credit exposures include contractual commitments to extend credit and standby letters of credit. For these credit exposures we evaluate the expected credit losses using usage given defaults and credit conversion factors depending on the type of commitment and based upon historical usage rates. These assumptions are reevaluated on an annual basis and adjusted if necessary. For the three and six months ended June 30, 2022, there was a reversal of provision for credit losses for off-balance-sheet exposures of $521,000 and $493,000, respectively, compared to a provision of $157,000 and a reversal of $2.6 million, for the three and six months ended June 30, 2021, respectively. For additional information regarding our ~~ability~~methodology used to ~~convert assets to cash with minimum risk of loss while enabling us to meet our obligations~~estimate the allowance for credit losses on off-balance-sheet credit exposures, see “Note 12 - Off-Balance-Sheet Arrangements, Commitments and Contingencies” to our customers at any time. This means addressing (1) the immediate cash withdrawal requirements of depositors and other fund providers; (2) the funding requirements of lines and letters of credit; and (3) the short-term credit needs of customers. Liquidity is provided by cash, interest earning deposits and short-term investments that can be readily liquidated with a minimum risk of loss. At September 30, 2021, these investments were 4.8% of total assets, as compared with 7.4% for December 31, 2020 and 7.9% for September 30, 2020. The decrease to 4.8% at September 30, 2021 as compared to December 31, 2020, is reflective of the increase in total assets combined with the decrease in the short-term investment portfolio. Liquidity is further provided through the matching, by time period, of rate sensitive interest earning assets with rate sensitive interest bearing liabilities. The Bank has three unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, TIB – The Independent Bankers Bank and Comerica Bank for $40.0 million, $15.0 million and $7.5 million, respectively. There were no federal funds purchased at September 30, 2021 or December 31, 2020. To provide more liquidity in response to the economic impact of the COVID-19 pandemic, the Federal Reserve took steps to encourage broader use of the discount window. At September 30, 2021, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately $476.1 million. There were no borrowings from the FRDW at September 30, 2021 or December 31, 2020. At September 30, 2021, the amount of additional funding Southside Bank could obtain from FHLB, collateralized by securities, FHLB stock and nonspecified loans and securities, was approximately $1.22 billion, net of FHLB stock purchases required. The Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit, and at September 30, 2021, the line had one outstanding letter of credit for $91,000. The Bank currently has no outstanding letters of credit from FHLB held as collateral for its public fund deposits.

~~Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our~~consolidated financial ~~needs.~~

Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The ALCO closely monitors various liquidity ratios and interest rate spreads and margins. The ALCO utilizes a simulation model to perform interest rate simulation tests that apply various interest rate scenarios including immediate shocks and MVPE to assist in determining our overall interest rate risk and the adequacy of our liquidity position. In addition, the ALCO utilizes this simulation model to determine the impact on net interest income of various interest rate scenarios. By utilizing this technology, we can determine changes that need to be made to the asset and liability mix to minimize the change in net interest income under these various interest rate scenarios. See Part I - “Item 3. Quantitative and Qualitative Disclosures about Market Risk”statements included in this ~~Quarterly Report on Form 10-Q.~~report.

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Capital Resources and Liquidity

Our total shareholders’ equity at ~~September~~June 30, ~~2021 increased 0.3%~~2022 decreased 19.8%, or ~~$2.6~~$180.4 million, to ~~$877.9~~$731.8 million, or ~~12.3%~~9.6% of total assets, compared to ~~$875.3~~$912.2 million, or ~~12.5%~~12.6% of total assets, at December 31, ~~2020.~~2021. The ~~increase~~decrease in shareholders’ equity was the result of other comprehensive loss of $199.0 million, cash dividends paid of $21.9 million and the repurchase of $12.2 million of our common stock. These decreases were partially offset by net income of ~~$84.7~~$50.4 million, stock compensation expense of $1.7 million, common stock issued under our dividend reinvestment plan of $635,000 and net issuance of common stock under employee stock plans of $5.9 million, stock compensation expense of $2.2 million and common stock issued under our dividend reinvestment plan of $986,000. These increases were partially offset by the repurchase of $34.1 million of our common stock, cash dividends paid of $32.0 million and other comprehensive loss of $25.1 million.$57,000.

The Company’s Common Equity Tier 1 capital includes common stock and related paid-in capital, net of treasury stock, and retained earnings. The Bank’s Common Equity Tier 1 capital includes common stock and related paid-in capital, and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include accumulated other comprehensive income in Common Equity Tier 1. We also elected, for a five-year transitional period, the effects of credit loss accounting under CECL from Common Equity Tier 1, as further discussed below. Common Equity Tier 1 for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities.

Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. For the Company, additional Tier 1 capital at ~~September~~June 30, ~~2021~~2022 included ~~$58.4~~$58.5 million of trust preferred securities. For bank holding companies that had assets of less than $15 billion as of December 31, 2009, trust preferred securities issued prior to May 19, 2010 can be treated as Tier 1 capital to the extent that they do not exceed 25% of Tier 1 capital after the application of capital deductions and adjustments. The Bank did not have any additional Tier 1 capital beyond Common Equity Tier 1 at ~~September~~June 30, ~~2021.~~2022.

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both the Company and the Bank includes a permissible portion of the allowance for credit losses on loans and off-balance sheet exposures. Tier 2 capital for the Company also includes ~~$98.5~~$98.6 million of qualified subordinated debt as of ~~September~~June 30, ~~2021.~~2022. The permissible portion of qualified subordinated notes decreases 20% per year during the final five years of the term of the notes.

In April 2020, the FDIC, Federal Reserve, and the Office of the Comptroller of the Currency issued supplemental instructions allowing banking organizations that implement CECL before the end of 2020, the option to delay for two years an estimate of the CECL methodologies’ effect on regulatory capital, relative to the incurred loss methodologies effect on capital, followed by a three-year transition period. We elected to adopt the five-year transition option. ~~Accordingly,~~In accordance with CECL guidance, a CECL transitional amount totaling ~~$9.0~~$6.1 million has been added back to CET1 as of ~~September~~June 30, ~~2021. The CECL~~2022, representing 75% of the $8.2 million transitional amount ~~includes $7.8 million related to a cumulative effect of adopting CECL and $1.2 million related to the estimated incremental effect of CECL since adoption.~~at December 31, 2021.

Also in April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA. Federal bank regulatory agencies have issued an interim final rule that permits banks to neutralize the regulatory capital effects of participating in the Paycheck Protection Program Lending Facility and clarify that PPP loans have a zero percent risk weight under applicable risk-based capital rules. Specifically, a bank may exclude all PPP loans pledged as collateral to the PPP Facility from its average total consolidated assets for the purposes of calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPP Facility will be included. Our PPP loans are included in the calculation of our leverage ratio as of ~~September~~June 30, ~~2021~~2022, as we did not utilize the PPP Facility for funding purposes.

Management believes that, as of ~~September~~June 30, ~~2021,~~2022, we met all capital adequacy requirements to which we were subject. It is management’s intention to maintain our capital at a level acceptable to all regulatory authorities and future dividend payments will be determined accordingly. Regulatory authorities require that any dividend payments made by either us or the Bank not exceed earnings for that year. Accordingly, shareholders should not anticipate a continuation of the cash dividend payments simply because of the existence of a dividend reinvestment program. The payment of dividends will depend upon future earnings, our financial condition and other related factors including the discretion of the board of directors.

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To be categorized as well capitalized we must maintain minimum Common Equity Tier 1 risk-based, Tier 1 risk-based, Total capital risk-based and Tier 1 leverage ratios as set forth in the following table (dollars in thousands):


		Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Actions Provisions					Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Actions Provisions
September 30, 2021		Amount		Ratio		Amount		Ratio		Amount		Amount
June 30, 2022														June 30, 2022	Amount		Ratio		Amount		Ratio		Amount		Amount
Common Equity Tier 1 (to Risk-Weighted Assets)	Common Equity Tier 1 (to Risk-Weighted Assets)													Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	Consolidated	$	638,756	14.07	%	$	204,358	4.50	%	N/A		N/A		Consolidated	$	674,464	12.83	%	$	236,532	4.50	%	N/A		N/A
Bank Only	Bank Only	$	787,517	17.35	%	$	204,284	4.50	%	$	295,077	6.50	%	Bank Only	$	807,434	15.37	%	$	236,466	4.50	%	$	341,563	6.50	%

Tier 1 Capital (to Risk-Weighted Assets)	Tier 1 Capital (to Risk-Weighted Assets)													Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	Consolidated	$	697,204	15.35	%	$	272,477	6.00	%	N/A		N/A		Consolidated	$	732,915	13.94	%	$	315,376	6.00	%	N/A		N/A
Bank Only	Bank Only	$	787,517	17.35	%	$	272,379	6.00	%	$	363,172	8.00	%	Bank Only	$	807,434	15.37	%	$	315,289	6.00	%	$	420,385	8.00	%

Total Capital (to Risk-Weighted Assets)	Total Capital (to Risk-Weighted Assets)													Total Capital (to Risk-Weighted Assets)
Consolidated	Consolidated	$	825,573	18.18	%	$	363,302	8.00	%	N/A		N/A		Consolidated	$	861,075	16.38	%	$	420,501	8.00	%	N/A		N/A
Bank Only	Bank Only	$	817,386	18.01	%	$	363,172	8.00	%	$	453,965	10.00	%	Bank Only	$	836,990	15.93	%	$	420,385	8.00	%	$	525,481	10.00	%

Tier 1 Capital (to Average Assets) (1)	Tier 1 Capital (to Average Assets) (1)													Tier 1 Capital (to Average Assets) (1)
Consolidated	Consolidated	$	697,204	10.14	%	$	275,091	4.00	%	N/A		N/A		Consolidated	$	732,915	10.34	%	$	283,481	4.00	%	N/A		N/A
Bank Only	Bank Only	$	787,517	11.46	%	$	274,964	4.00	%	$	343,705	5.00	%	Bank Only	$	807,434	11.40	%	$	283,384	4.00	%	$	354,230	5.00	%


		Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Actions Provisions					Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Actions Provisions
December 31, 2020		Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2021														December 31, 2021	Amount		Ratio		Amount		Ratio		Amount		Ratio

Common Equity Tier 1 (to Risk-Weighted Assets)	Common Equity Tier 1 (to Risk-Weighted Assets)													Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	Consolidated	$	612,703	14.68	%	$	187,814	4.50	%	N/A		N/A		Consolidated	$	657,043	14.17	%	$	208,616	4.50	%	N/A		N/A
Bank Only	Bank Only	$	768,200	18.41	%	$	187,801	4.50	%	$	271,268	6.50	%	Bank Only	$	793,271	17.11	%	$	208,576	4.50	%	$	301,277	6.50	%

Tier 1 Capital (to Risk-Weighted Assets)	Tier 1 Capital (to Risk-Weighted Assets)													Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	Consolidated	$	671,147	16.08	%	$	250,418	6.00	%	N/A		N/A		Consolidated	$	715,492	15.43	%	$	278,155	6.00	%	N/A		N/A
Bank Only	Bank Only	$	768,200	18.41	%	$	250,402	6.00	%	$	333,869	8.00	%	Bank Only	$	793,271	17.11	%	$	278,102	6.00	%	$	370,803	8.00	%

Total Capital (to Risk-Weighted Assets)	Total Capital (to Risk-Weighted Assets)													Total Capital (to Risk-Weighted Assets)
Consolidated	Consolidated	$	908,873	21.78	%	$	333,891	8.00	%	N/A		N/A		Consolidated	$	841,300	18.15	%	$	370,874	8.00	%	N/A		N/A
Bank Only	Bank Only	$	808,675	19.38	%	$	333,869	8.00	%	$	417,336	10.00	%	Bank Only	$	820,545	17.70	%	$	370,803	8.00	%	$	463,503	10.00	%

Tier 1 Capital (to Average Assets) (1)	Tier 1 Capital (to Average Assets) (1)													Tier 1 Capital (to Average Assets) (1)
Consolidated	Consolidated	$	671,147	9.81	%	$	273,558	4.00	%	N/A		N/A		Consolidated	$	715,492	10.33	%	$	277,065	4.00	%	N/A		N/A
Bank Only	Bank Only	$	768,200	11.24	%	$	273,432	4.00	%	$	341,790	5.00	%	Bank Only	$	793,271	11.46	%	$	276,932	4.00	%	$	346,165	5.00	%

(1)Refers to quarterly average assets as calculated in accordance with policies established by bank regulatory agencies.

As of ~~September~~June 30, ~~2021,~~2022, Southside Bancshares and Southside Bank met all capital adequacy requirements under the Basel III Capital Rules that became fully phased-in as of January 1, 2019. Refer to the Supervision and Regulation section in the ~~2020~~2021 Form 10-K for further discussion of our capital requirements.

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The table below summarizes our key equity ratios for the periods presented:


		Three Months Ended September 30,					Three Months Ended June 30,
		2021		2020			2022		2021
Return on average assets	Return on average assets	1.61	%	1.48	%	Return on average assets	1.42	%	1.20	%
Return on average shareholders’ equity	Return on average shareholders’ equity	12.89	%	12.89	%	Return on average shareholders’ equity	13.33	%	9.73	%
Dividend payout ratio – Basic	Dividend payout ratio – Basic	36.67	%	37.80	%	Dividend payout ratio – Basic	43.04	%	50.77	%
Dividend payout ratio – Diluted	Dividend payout ratio – Diluted	36.67	%	37.80	%	Dividend payout ratio – Diluted	43.04	%	50.77	%
Average shareholders’ equity to average total assets	Average shareholders’ equity to average total assets	12.51	%	11.49	%	Average shareholders’ equity to average total assets	10.64	%	12.38	%
		Nine Months Ended September 30,					Six Months Ended June 30,
		2021		2020			2022		2021
Return on average assets	Return on average assets	1.60	%	0.98	%	Return on average assets	1.41	%	1.59	%
Return on average shareholders’ equity	Return on average shareholders’ equity	12.80	%	8.56	%	Return on average shareholders’ equity	12.31	%	12.75	%
Dividend payout ratio – Basic	Dividend payout ratio – Basic	37.69	%	58.86	%	Dividend payout ratio – Basic	43.59	%	38.46	%
Dividend payout ratio – Diluted	Dividend payout ratio – Diluted	37.84	%	58.86	%	Dividend payout ratio – Diluted	43.59	%	38.46	%
Average shareholders’ equity to average total assets	Average shareholders’ equity to average total assets	12.48	%	11.42	%	Average shareholders’ equity to average total assets	11.47	%	12.47	%

~~Off-Balance-Sheet Arrangements, Commitments and Contingencies~~Management of Liquidity

~~Financial Instruments~~Liquidity management involves our ability to convert assets to cash with ~~Off-Balance-Sheet Risk. In the normal course~~minimum risk of ~~business, we are a party to certain financial instruments with off-balance-sheet risk~~loss while enabling us to meet our current and future obligations to our customers at any time. This means addressing (1) the ~~financing~~immediate cash withdrawal requirements of depositors and other fund providers; (2) the funding requirements of lines and letters of credit; and (3) the short-term credit needs of ~~our~~ customers. ~~These off-balance-sheet instruments include commitments~~Liquidity is provided by cash, interest earning deposits and short-term investments that can be readily liquidated with a minimum risk of loss. At June 30, 2022, these investments were 3.1% of total assets, as compared with 5.9% for December 31, 2021 and 6.5% for June 30, 2021. The decrease to ~~extend~~3.1% at June 30, 2022 as compared to December 31, 2021 and June 30, 2021, is reflective of the increase in total assets combined with decreases in the short-term investment portfolio and interest earning deposits. Liquidity is further provided through the matching, by time period, of rate sensitive interest earning assets with rate sensitive interest bearing liabilities. The Bank has three unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, TIB – The Independent Bankers Bank and ~~standby~~Comerica Bank for $40.0 million, $15.0 million and $7.5 million, respectively. There were no federal funds purchased at June 30, 2022 or December 31, 2021. To provide more liquidity in response to the economic impact of the COVID-19 pandemic, the Federal Reserve took steps to encourage broader use of the discount window. At June 30, 2022, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately $391.1 million. There were $29.0 million in borrowings from the FRDW at June 30, 2022. There were no borrowings from the FRDW at December 31, 2021. At June 30, 2022, the amount of additional funding Southside Bank could obtain from FHLB, collateralized by securities, FHLB stock and nonspecified loans and securities, was approximately $1.73 billion, net of FHLB stock purchases required. The Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters ~~of credit. These instruments involve, to varying degrees, elements~~ of credit, and at June 30, 2022, the line had one outstanding letter of credit for $155,000. The Bank currently has no outstanding letters of credit from FHLB held as collateral for its public fund deposits.

Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The ALCO closely monitors various liquidity ratios and interest rate spreads and margins. The ALCO utilizes a simulation model to perform interest rate simulation tests that apply various interest rate scenarios including immediate shocks and MVPE to assist in determining our overall interest rate risk and the adequacy of our liquidity position. In addition, the ALCO utilizes this simulation model to determine the impact on net interest income of various interest rate scenarios. By utilizing this technology, we can determine changes that need to be made to the asset and liability mix to minimize the change in ~~excess of~~net interest income under these various interest rate scenarios.

Management continually evaluates our liquidity position and currently believes the ~~amount reflected in the~~Company has adequate funding to meet our financial statements. The contract or notional amounts of these instruments reflect the extent of involvement and exposure to credit loss that we have in these particular classes of financial instruments. The allowance for credit losses on these off-balance-sheet credit exposures is calculated using the same methodology as loans including conversion or usage factor to anticipate ultimate exposure and expected losses and is included in other liabilities on our consolidated balance sheets.

~~Allowance for off-balance-sheet credit exposures were as follows (in thousands):~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
Balance at beginning of period $ 3,773 $ 6,365 $ 6,386 $ 1,455
Impact of CECL adoption — — — 4,840
Provision for (reversal of) off-balance-sheet credit exposures (683) (345) (3,296) (275)
Balance at end of period $ 3,090 $ 6,020 $ 3,090 $ 6,020

Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met. Commitments to extend credit generally have fixed expiration dates and may require the payment of fees. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in commitments to extend credit and similarly do not necessarily represent future cash obligations.needs.

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~~Financial instruments with off-balance-sheet risk were as follows (in thousands):~~

September 30, 2021 December 31, 2020
Unused commitments:
Commitments to extend credit $ 954,258 $ 793,138
Standby letters of credit 10,812 13,658
Total $ 965,070 $ 806,796

~~Leases~~. During the three and nine months ended September 30, 2021, there were $240,000 and $1.3 million, respectively, of operating lease ROU assets obtained in exchange for new operating lease liabilities, primarily due to one lease that commenced in January 2021 with an initial ROU asset of $1.1 million. During the three months ended September 30, 2020, there was a reduction to operating lease ROU assets obtained in exchange for operating lease liabilities of $89,000 due to a lease amendment that granted additional lease incentives. During the nine months ended September 30, 2020, there were $7.9 million of operating lease ROU assets obtained in exchange for new operating lease liabilities, primarily due to one lease that commenced in May 2020 with an initial ROU asset of $6.6 million.

~~Securities~~. In the normal course of business we buy and sell securities. At September 30, 2021, there were $4.4 million of unsettled trades to purchase securities and no unsettled trades to sell securities. At December 31, 2020, there were no unsettled trades to purchase securities and no unsettled trades to sell securities.

~~Deposits. There were no unsettled issuances of brokered CDs at September 30, 2021 or December 31, 2020.~~

~~Litigation~~. We are a party to various litigation in the normal course of business. Management, after consulting with our legal counsel, believes that any liability resulting from litigation will not have a material effect on our financial position, results of operations or liquidity.

Recent Accounting Pronouncements

See “Note 1 – Summary of Significant Accounting and Reporting Policies” in our consolidated financial statements included in this Quarterly Report on Form 10-Q.

Subsequent Events

Subsequent to June 30, 2022 and through July 27, 2022, we purchased 8,613 shares of common stock at an average price of $35.93 pursuant to the Stock Repurchase Plan.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The disclosures set forth in this item are qualified by the section captioned “Forward-Looking Statements” included in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report and other cautionary statements set forth elsewhere in this Quarterly Report on Form 10-Q.

Refer to the discussion of market risks included in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the ~~2020~~2021 Form 10-K.

In the banking industry, a major risk exposure is changing interest rates. The primary objective of monitoring our interest rate sensitivity, or risk, is to provide management the tools necessary to manage the balance sheet to minimize adverse changes in net interest income as a result of changes in the direction and level of interest rates. Federal Reserve monetary control efforts, the effects of deregulation, economic uncertainty and legislative changes have been significant factors affecting the task of managing interest rate sensitivity positions in recent years.

In an attempt to manage our exposure to changes in interest rates, management closely monitors our exposure to interest rate risk through our ALCO. Our ALCO meets regularly and reviews our interest rate risk position and makes recommendations to our board for adjusting this position. In addition, our board regularly reviews our asset/liability ~~position on a monthly basis.~~position. We primarily use two methods for measuring and analyzing interest rate risk: net income simulation analysis and MVPE modeling. We utilize the net income simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. This model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next 12 months. The model is used to measure the impact on net interest income relative to a base case scenario of rates immediately increasing 100 and 200 basis points or decreasing 50 and 100 basis points over the next 12 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate-related risks such as prepayment, basis and option risk are also considered. The model has interest rate floors and no interest rates are assumed to go negative. The interest rate environment ~~declined during~~in 2020 toand much of 2021 was at a point where most treasury terms were under 100 basis points; therefore, we dodid not believe an analysis of an assumed decrease in interest rates beyond 50 basis points would provide meaningful results. We ~~will continue to monitor interest~~have resumed the simulation of rates decreasing 100 basis points and we will resume the simulation of rates decreasing ~~100 and~~ 200 basis points once rates ~~begin~~rise further. We are continuing to ~~rise.~~monitor interest rates and anticipate additional rate increases in the second half of 2022.

The following table reflects the noted increases and decreases in interest rates under the model simulations and the anticipated impact on net interest income relative to the base case over the next 12 months for the periods presented.


		Anticipated impact over the next 12 months					Anticipated impact over the next 12 months
		September 30,					June, 30
Rate projections:	Rate projections:	2021		2020		Rate projections:	2022		2021
Increase:	Increase:					Increase:
100 basis points	100 basis points	2.03	%	1.73	%	100 basis points	5.13	%	2.13	%
200 basis points	200 basis points	4.58	%	3.82	%	200 basis points	6.46	%	4.58	%

Decrease:	Decrease:					Decrease:
50 basis points	50 basis points	(1.47)	%	(2.05)	%	50 basis points	(1.51)	%	(1.64)	%
100 basis points						100 basis points	(3.59)	%	N/A

As part of the overall assumptions, certain assets and liabilities are given reasonable floors. This type of simulation analysis requires numerous assumptions including but not limited to changes in balance sheet mix, prepayment rates on mortgage-related assets and fixed rate loans, cash flows and repricing of all financial instruments, changes in volumes and pricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread and deposit sensitivity. Assumptions are based on management’s best estimates but may not accurately reflect actual results under certain changes in interest rates.

In addition to interest rate risk, beginning in 2020, the COVID-19 pandemic exposed us and ~~will likely~~could continue to expose us to additional market value ~~risk.~~risk in the future. Protracted business closures, furloughs and lay-offs curtailed economic activity, and could curtail economic activity in the future and could result in lower fair values for collateral in our commercial and 1-4 family portfolio segments in the event that COVID-19 and related variants are not contained.

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Economic conditions and growth prospects are currently impacted by record inflation and recessionary concerns. Increasing interest rates and rising building costs have caused some slowing of the single family housing market. Furthermore, worker shortages especially in the restaurant, hospitality and retail industries combined with supply chain disruptions impacting numerous industries and inflationary conditions has had some impact on the level of economic growth. Ongoing higher inflation levels and higher interest rates could have a negative impact on both our consumer and commercial borrowers.

The ALCO monitors various liquidity ratios to ensure a satisfactory liquidity position for us. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to determine the types of investments that should be made and at what maturities. Using this analysis, management from time to time assumes calculated

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interest sensitivity gap positions to maximize net interest income based upon anticipated movements in the general level of interest rates. Regulatory authorities also monitor our gap position along with other liquidity ratios. In addition, as described above, we utilize a simulation model to determine the impact of net interest income under several different interest rate scenarios. By utilizing this model, we can determine changes that need to be made to the asset and liability mixes to mitigate the change in net interest income under these various interest rate scenarios.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), undertook an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report, and, based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, in recording, processing, summarizing and reporting in a timely manner the information that the Company is required to disclose in its reports under the Exchange Act and in accumulating and communicating to the Company’s management, including the Company’s CEO and CFO, such information as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

No changes were made to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended ~~September~~June 30, ~~2021~~2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are a party to various litigation in the normal course of business. Management, after consulting with our legal counsel, believes that any liability resulting from litigation will not have a material effect on our financial position, results of operations or liquidity.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors previously disclosed in the ~~2020~~2021 Form 10-K.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

On ~~September 5, 2019,~~March 1, 2022, our board of directors ~~authorized~~approved a Stock Repurchase Plan, authorizing the repurchase, from time to time, of up to 1.0 million shares of the Company’s outstanding common ~~stock under~~stock. Repurchases may be carried out in open market purchases, privately negotiated transactions or pursuant to any trading plan that might be adopted in accordance with Rule 10b5-1 of the ~~Stock Repurchase Plan. On March 12, 2020, our board of directors increased the authorization~~Exchange Act. The Company has no obligation to repurchase any shares under the Stock Repurchase Plan ~~by an additional 1.0 million shares, for a total authorization to repurchase up to 2.0 million shares. As of September 30, 2021, there were no authorized shares remaining to be purchased under~~and may suspend or discontinue the ~~Stock Repurchase Plan.~~plan at any time.

The following table provides information with respect to purchases made by or on behalf of any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common stock during the three months ended ~~September~~June 30, ~~2021:~~2022:

Period Total Number of
Shares
Purchased Average Price Paid
Per Share Total Number of Shares Purchased as Part of Publicly Announced Plan Maximum Number of Shares That May Yet Be Purchased Under the Stock Repurchase Plan at the End of the Period
July 1, 2021 - July 31, 2021 80,537 $ 35.61 80,537 339,667
August 1, 2021 - August 31, 2021 259,433 36.79 259,433 80,234
September 1, 2021 - September 30, 2021 80,234 37.69 80,234 —
Total 420,204 $ 36.74 420,204


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Number of Shares That May Yet Be Purchased Under the Stock Repurchase Plan at the End of the Period
April 1, 2022 - April 30, 2022	223,901	$	39.49	223,901	693,814
May 1, 2022 - May 31, 2022	—	—		—	693,814
June 1, 2022 - June 30, 2022	—	—		—	693,814
Total	223,901	$	39.49	223,901

Subsequent to June 30, 2022 and through July 27, 2022, we purchased 8,613 shares of common stock at an average price of $35.93 pursuant to the Stock Repurchase Plan.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit Index

Incorporated by Reference

Exhibit Number

Exhibit Description

Filed Herewith

Exhibit

Form

Filing Date

File No.

(3)

Articles of Incorporation and Bylaws

3.1

Restated Certificate of Formation of Southside Bancshares, Inc.

3.1

8-K

05/14/2018

0-12247

3.2

Amended and Restated Bylaws of Southside Bancshares, Inc.

3.1

8-K

02/22/2018

0-12247

(31)

Rule 13a-14(a)/15d-14(a) Certifications

31.1

Certification of Chief Executive Officer

31.2

Certification of Chief Financial Officer

(32)

Section 1350 Certification

†32

Certification of Executive Officer and Chief Financial Officer

(101)

Interactive Date File

101.INS

XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

104

Cover Page Interactive Data File (embedded within the Inline XBRL document).

† The certification attached as Exhibit 32 accompanies this Quarterly Report on Form 10-Q and is “furnished” to the Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by us for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		SOUTHSIDE BANCSHARES, INC.

DATE:	~~October~~July 29, ~~2021~~2022	BY:	/s/ Lee R. Gibson
			Lee R. Gibson, CPA
			President and Chief Executive Officer
			(Principal Executive Officer)




DATE:	~~October~~July 29, ~~2021~~2022	BY:	/s/ Julie N. Shamburger
			Julie N. Shamburger, CPA
			Chief Financial Officer
			(Principal Financial and Accounting Officer)

Southside Bancshares, Inc. ~~|75~~|70



	Nine Months Ended September 30,
	Defined Benefit Pension Plan				Defined Benefit Pension Plan Acquired				Restoration Plan
	2021		2020		2021		2020		2021		2020
Service cost	$	—	$	1,311	$	—	$	—	$	—	$	280
Interest cost	1,927		2,359		69		122		390		442
Expected return on assets	(4,065)		(4,332)		(158)		(226)		—		—
Net loss amortization	752		1,780		4		7		192		426
Prior service (credit) cost amortization	—		(11)		—		—		—		5
Loss due to curtailment	—		151		—		—		—		12
Net periodic benefit (income) cost	$	(1,386)	$	1,258	$	(85)	$	(97)	$	582	$	1,165


							Compared to
							December 31, 2020		September 30, 2020
	September 30, 2021		December 31, 2020		September 30, 2020		Change (%)		Change (%)
Loans on nonaccrual:
Real estate loans:
Construction	$	63	$	640	$	1,246	(90.2)	%	(94.9)	%
1-4 family residential	1,432		3,922		2,838		(63.5)	%	(49.5)	%
Commercial	796		1,269		884		(37.3)	%	(10.0)	%
Commercial loans	674		1,592		784		(57.7)	%	(14.0)	%
Loans to individuals	48		291		219		(83.5)	%	(78.1)	%
Total nonaccrual loans	3,013		7,714		5,971		(60.9)	%	(49.5)	%

Accruing loans past due more than 90 days	—		—		—		—		—
TDR loans	9,371		9,646		10,307		(2.9)	%	(9.1)	%
OREO	25		106		536		(76.4)	%	(95.3)	%
Repossessed assets	15		14		8		7.1	%	87.5	%
Total nonperforming assets	$	12,424	$	17,480	$	16,822	(28.9)	%	(26.1)	%


	September 30, 2021		December 31, 2020
Unused commitments:
Commitments to extend credit	$	954,258	$	793,138
Standby letters of credit	10,812		13,658
Total	$	965,070	$	806,796