UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~March 31,~~September 30, 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: 001-38280

~~CBTX,~~Stellar Bancorp, Inc.

(Exact name of registrant as specified in its charter)


Texas		20-8339782

(State or other jurisdiction of		(I.R.S. employer

incorporation or organization)		identification no.)

9 Greenway Plaza, Suite 110

Houston, Texas 77046

(Address of principal executive offices)

(713) 210-7600

(Registrant’s telephone number, including area code)

CBTX, Inc.

9 Greenway Plaza, Suite 110

Houston, Texas 77046

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	~~CBTX~~STEL	The 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 ☒

As of ~~April 25,~~October 24, 2022, there were ~~24,606,405~~52,297,690 shares of the registrant’s common stock, par value $0.01 per share outstanding ~~including 104,225 shares of unvested restricted stock deemed to have beneficial ownership~~.

Table of Contents

~~CBTX, INC.~~Stellar Bancorp, Inc.

		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements – (Unaudited)	1
	Condensed Consolidated Balance Sheets as of ~~March 31,~~September 30, 2022 and December 31, 2021	1
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended ~~March 31,~~September 30, 2022 and 2021	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended ~~March 31,~~September 30, 2022 and 2021	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended ~~March 31,~~September 30, 2022 and 2021	4
	Condensed Consolidated Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2022 and 2021	56
	Notes to Condensed Consolidated Financial Statements	67
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3538
	Cautionary Note Regarding Forward-Looking Statements	3538
	Overview	3840
	Impact and Uncertain Economic Outlook	3940
	Results of Operations	4041
	Financial Condition	4447
	Liquidity and Capital Resources	5255
	Interest Rate Sensitivity and Market Risk	5557
	Non-GAAP Financial Measures	5659
	Critical Accounting Policies	5760
	Recently Issued Accounting Pronouncements	5760
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5761
Item 4.	Controls and Procedures	5861

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	5861
Item 1A.	Risk Factors	5861
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5861
Item 3.	Defaults Upon Senior Securities	5962
Item 4.	Mine Safety Disclosures	5962
Item 5.	Other Information	5962
Item 6.	Exhibits	6063
SIGNATURES		6265

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

~~CBTX, INC. AND SUBSIDIARY~~Stellar Bancorp, Inc. and Subsidiary

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except par value and share amounts)

March 31, 2022

December 31, 2021
Assets:




Cash and due from banks

$
47,718

$
27,689
Interest-bearing deposits at other financial institutions

723,273

922,457
Total cash and cash equivalents

770,991

950,146
Securities

547,979

425,046
Equity investments

17,101

17,727
Loans held for sale

748

164
Loans, net of allowance for credit losses of $31,442 and $31,345 at March 31, 2022 and December 31, 2021, respectively

2,848,438

2,836,179
Premises and equipment, net of accumulated depreciation of $38,912 and $39,196 at March 31, 2022 and December 31, 2021, respectively

56,665

58,417
Goodwill

80,950

80,950
Other intangible assets, net of accumulated amortization of $17,526 and $17,345 at March 31, 2022 and December 31, 2021, respectively

3,540

3,658
Bank-owned life insurance

73,527

73,156
Operating lease right-to-use assets

10,850

11,191
Deferred tax assets, net

16,724

9,973
Other assets

18,464

19,394
Total assets

$
4,445,977

$
4,486,001

Liabilities:




Noninterest-bearing deposits

$
1,801,323

$
1,784,981
Interest-bearing deposits

2,019,902

2,046,303
Total deposits

3,821,225

3,831,284
Federal Home Loan Bank advances

50,000

50,000
Operating lease liabilities

13,752

14,142
Other liabilities

21,277

28,450
Total liabilities

3,906,254

3,923,876
Commitments and contingencies (Note 16)




Shareholders’ equity:




Preferred stock, $0.01 par value, 10,000,000 shares authorized, 0 shares issued

—

—
Common stock, $0.01 par value, 90,000,000 shares authorized, 25,338,008 and 25,323,558 shares issued at March 31, 2022 and December 31, 2021, respectively; 24,502,180 and 24,487,730 shares outstanding at March 31, 2022 and December 31, 2021, respectively

253

253
Additional paid-in capital

336,214

335,846
Retained earnings

244,672

237,165
Treasury stock, at cost, 835,828 shares held at both March 31, 2022 and December 31, 2021

(14,196)

(14,196)
Accumulated other comprehensive income (loss), net of tax of $(7,236) and $813 at March 31, 2022 and December 31, 2021, respectively

(27,220)

3,057
Total shareholders’ equity

539,723

562,125
Total liabilities and shareholders’ equity

$
4,445,977

$
4,486,001



	September 30, 2022		December 31, 2021
Assets:
Cash and due from banks	$	41,219	$	27,689
Interest-bearing deposits at other financial institutions		329,229		922,457
Total cash and cash equivalents		370,448		950,146
Securities		511,282		425,046
Equity investments		17,835		17,727
Loans held for sale		—		164
Loans, net of allowance for credit losses of $32,577 and $31,345 at September 30, 2022 and December 31, 2021, respectively		3,093,844		2,836,179
Premises and equipment, net of accumulated depreciation of $40,493 and $39,196 at September 30, 2022 and December 31, 2021, respectively		55,594		58,417
Goodwill		80,950		80,950
Other intangible assets, net of accumulated amortization of $17,863 and $17,345 at September 30, 2022 and December 31, 2021, respectively		3,188		3,658
Bank-owned life insurance		74,274		73,156
Operating lease right-to-use assets		10,992		11,191
Deferred tax assets, net		29,581		9,973
Other assets		23,843		19,394
Total assets	$	4,271,831	$	4,486,001

Liabilities:
Noninterest-bearing deposits	$	1,780,473	$	1,784,981
Interest-bearing deposits		1,943,301		2,046,303
Total deposits		3,723,774		3,831,284
Federal Home Loan Bank advances		—		50,000
Operating lease liabilities		13,748		14,142
Other liabilities		32,884		28,450
Total liabilities		3,770,406		3,923,876
Commitments and contingencies (Note 16)
Shareholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued		—		—
Common stock, $0.01 par value, 90,000,000 shares authorized, 24,015,272 and 25,323,558 shares issued at September 30, 2022 and December 31, 2021, respectively; 24,015,272 and 24,487,730 shares outstanding at September 30, 2022 and December 31, 2021, respectively		240		253
Additional paid-in capital		308,197		335,846
Retained earnings		262,804		237,165
Treasury stock, at cost, 835,828 shares held at December 31, 2021		—		(14,196)
Accumulated other comprehensive income (loss), net of tax of $(18,559) and $813 at September 30, 2022 and December 31, 2021, respectively		(69,816)		3,057
Total shareholders’ equity		501,425		562,125
Total liabilities and shareholders’ equity	$	4,271,831	$	4,486,001

See accompanying notes to condensed consolidated financial statements.

Table of Contents

~~CBTX, INC. AND SUBSIDIARY~~Stellar Bancorp, Inc. and Subsidiary

Condensed Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share amounts)

Three Months Ended March 31,


2022

2021
Interest income:




Interest and fees on loans

$
31,221

$
33,165
Securities

2,292

1,173
Interest-bearing deposits at other financial institutions

348

177
Equity investments

154

146
Total interest income

34,015

34,661
Interest expense:




Deposits

1,164

1,350
Federal Home Loan Bank advances

221

221
Total interest expense

1,385

1,571
Net interest income

32,630

33,090
Provision for credit losses:

Provision for credit losses for loans

20

286
Provision for credit losses for unfunded commitments

415

126
Total provision for credit losses

435

412
Net interest income after provision for credit losses

32,195

32,678
Noninterest income:




Deposit account service charges

1,370

1,193
Card interchange fees

1,037

976
Earnings on bank-owned life insurance

371

390
Net gain on sales of assets

530

192
Other

2,021

360
Total noninterest income

5,329

3,111
Noninterest expense:




Salaries and employee benefits

15,254

14,188
Occupancy expense

2,371

2,521
Professional and director fees

879

1,703
Data processing and software

1,763

1,576
Regulatory fees

614

556
Advertising, marketing and business development

249

285
Telephone and communications

454

463
Security and protection expense

324

390
Amortization of intangibles

181

191
Other expenses

2,563

1,412
Total noninterest expense

24,652

23,285
Net income before income tax expense

12,872

12,504
Income tax expense

2,277

2,485
Net income

$
10,595

$
10,019
Earnings per common share




Basic

$
0.43

$
0.41
Diluted

$
0.43

$
0.41


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest income:
Interest and fees on loans	$	39,058	$	30,765	$	102,047	$	94,723
Securities		3,046		1,435		8,275		3,940
Interest-bearing deposits at other financial institutions		2,408		340		3,994		740
Equity investments		161		157		473		461
Total interest income		44,673		32,697		114,789		99,864
Interest expense:
Deposits		1,661		1,227		4,003		3,844
Federal Home Loan Bank advances		—		221		272		663
Total interest expense		1,661		1,448		4,275		4,507
Net interest income		43,012		31,249		110,514		95,357
Provision (recapture) for credit losses:
Provision (recapture) for credit losses for loans		523		(5,057)		1,022		(8,961)
Provision (recapture) for credit losses for unfunded commitments		489		162		551		(605)
Total provision (recapture) for credit losses		1,012		(4,895)		1,573		(9,566)
Net interest income after provision (recapture) for credit losses		42,000		36,144		108,941		104,923
Noninterest income:
Deposit account service charges		1,320		1,352		4,076		3,712
Card interchange fees		1,056		1,048		3,228		3,119
Earnings on bank-owned life insurance		376		2,323		1,118		3,103
Net gain on sales of assets		85		360		673		918
Other		612		479		3,229		1,312
Total noninterest income		3,449		5,562		12,324		12,164
Noninterest expense:
Salaries and employee benefits		16,453		15,000		46,405		43,922
Occupancy expense		2,595		2,660		7,362		7,778
Professional and director fees		942		1,567		2,963		5,711
Data processing and software		1,502		1,629		4,723		4,866
Regulatory fees		599		478		2,016		1,535
Advertising, marketing and business development		350		493		965		1,288
Telephone and communications		348		516		1,151		1,529
Security and protection expense		386		425		880		1,352
Amortization of intangibles		165		182		518		559
Other expenses		5,981		1,422		10,748		4,314
Total noninterest expense		29,321		24,372		77,731		72,854
Net income before income tax expense		16,128		17,334		43,534		44,233
Income tax expense		3,381		2,913		8,485		8,090
Net income	$	12,747	$	14,421	$	35,049	$	36,143
Earnings per common share
Basic	$	0.52	$	0.59	$	1.43	$	1.48
Diluted	$	0.52	$	0.59	$	1.43	$	1.47

See accompanying notes to condensed consolidated financial statements.

Table of Contents

~~CBTX, INC. AND SUBSIDIARY~~Stellar Bancorp, Inc. and Subsidiary

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

Three Months Ended March 31,

2022

2021
Net income

$
10,595

$
10,019

Change in unrealized losses on securities available for sale arising during the period

(38,325)

(4,339)
Change in related deferred income tax

8,048

911
Other comprehensive income (loss), net of tax

(30,277)

(3,428)
Total comprehensive income (loss)

$
(19,682)

$
6,591


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income	$	12,747	$	14,421	$	35,049	$	36,143

Change in unrealized gains (losses) on securities available for sale arising during the period		(29,119)		(3,446)		(92,244)		(5,493)
Change in related deferred income tax		6,115		723		19,371		1,154
Other comprehensive loss, net of tax		(23,004)		(2,723)		(72,873)		(4,339)
Total comprehensive income (loss)	$	(10,257)	$	11,698	$	(37,824)	$	31,804

See accompanying notes to condensed consolidated financial statements.

Table of Contents

~~CBTX, INC. AND SUBSIDIARY~~Stellar Bancorp, Inc. and Subsidiary

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(Dollars in thousands, except share amounts)

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Treasury Stock

Comprehensive


Shares

Amount

Capital

Earnings

Shares

Amount

Income (Loss)

Total
Balance at December 31, 2020

25,458,816

$
255

$
339,334

$
214,456

(845,988)

$
(14,369)

$
6,775

$
546,451

Net income

—

—

—

10,019

—

—

—

10,019
Dividends on common stock, $0.13 per share

—

—

—

(3,196)

—

—

—

(3,196)
Stock-based compensation expense

—

—

541

—

—

—

—

541
Vesting of restricted stock, net of shares withheld for employee tax liabilities

10,727

—

(70)

—

—

—

—

(70)
Shares repurchased

(181,089)

(2)

(4,966)

—

—

—

—

(4,968)
Other comprehensive loss, net of tax

—

—

—

—

—

—

(3,428)

(3,428)
Balance at March 31, 2021

25,288,454

$
253

$
334,839

$
221,279

(845,988)

$
(14,369)

$
3,347

$
545,349

Balance at December 31, 2021

25,323,558

$
253

$
335,846

$
237,165

(835,828)

$
(14,196)

$
3,057

$
562,125

Net income

—

—

—

10,595

—

—

—

10,595
Dividends on common stock, $0.13 per share

—

—

—

(3,088)

—

—

—

(3,088)
Stock-based compensation expense

—

—

483

—

—

—

—

483
Vesting of restricted stock, net of shares withheld for employee tax liabilities

14,450

—

(115)

—

—

—

—

(115)
Other comprehensive loss, net of tax

—

—

—

—

—

—

(30,277)

(30,277)
Balance at March 31, 2022

25,338,008

$
253

$
336,214

$
244,672

(835,828)

$
(14,196)

$
(27,220)

$
539,723


											Accumulated
				Additional							Other
	Common Stock			Paid-In		Retained		Treasury Stock			Comprehensive
	Shares	Amount		Capital		Earnings		Shares	Amount		Income (Loss)		Total
Nine Months Ended September 30, 2021:
Balance at December 31, 2020	25,458,816	$	255	$	339,334	$	214,456	(845,988)	$	(14,369)	$	6,775	$	546,451
Net income	—		—		—		36,143	—		—		—		36,143
Dividends on common stock, $0.39 per share	—		—		—		(9,587)	—		—		—		(9,587)
Stock-based compensation expense	—		—		1,813		—	—		—		—		1,813
Vesting of restricted stock, net of shares withheld for employee tax liabilities	18,997		—		(87)		—	—		—		—		(87)
Exercise of stock options, net of shares withheld for employee tax liabilities	—		—		(11)		—	2,032		35		—		24
Shares repurchased	(214,219)		(2)		(5,823)		—	—		—		—		(5,825)
Other comprehensive loss, net of tax	—		—		—		—	—		—		(4,339)		(4,339)
Balance at September 30, 2021	25,263,594	$	253	$	335,226	$	241,012	(843,956)	$	(14,334)	$	2,436	$	564,593

Nine Months Ended September 30, 2022:
Balance at December 31, 2021	25,323,558	$	253	$	335,846	$	237,165	(835,828)	$	(14,196)	$	3,057	$	562,125
Net income	—		—		—		35,049	—		—		—		35,049
Dividends on common stock, $0.39 per share	—		—		—		(9,410)	—		—		—		(9,410)
Stock-based compensation expense	—		—		1,537		—	—		—		—		1,537
Vesting of restricted stock, net of shares withheld for employee tax liabilities	22,463		—		(135)		—	—		—		—		(135)
Exercise of stock options, net of shares withheld for employee tax liabilities	6,407		—		23		—	8,833		150		—		173
Shares repurchased	(510,161)		(5)		(15,036)		—	—		—		—		(15,041)
Retirement of Treasury Stock	(826,995)		(8)		(14,038)		—	826,995		14,046		—		—
Other comprehensive loss, net of tax	—		—		—		—	—		—		(72,873)		(72,873)
Balance at September 30, 2022	24,015,272	$	240	$	308,197	$	262,804	—	$	—	$	(69,816)	$	501,425

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Stellar Bancorp, Inc. and Subsidiary

Condensed Consolidated Statements of Quarterly Changes in Shareholders’ Equity (Unaudited)

(Dollars in thousands, except share amounts)


											Accumulated
				Additional							Other
	Common Stock			Paid-In		Retained		Treasury Stock			Comprehensive
	Shares	Amount		Capital		Earnings		Shares	Amount		Income		Total
Three Months Ended September 30, 2021:
Balance at June 30, 2021	25,296,385	$	253	$	335,399	$	229,785	(845,988)	$	(14,369)	$	5,159	$	556,227
Net income	—		—		—		14,421	—		—		—		14,421
Dividends on common stock, $0.13 per share	—		—		—		(3,194)	—		—		—		(3,194)
Stock-based compensation expense	—		—		698		—	—		—		—		698
Vesting of restricted stock, net of shares withheld for employee tax liabilities	339		—		(3)		—	—		—		—		(3)
Exercise of stock options, net of shares withheld for employee tax liabilities	—		—		(11)		—	2,032		35		—		24
Shares repurchased	(33,130)		—		(857)		—	—		—		—		(857)
Other comprehensive income, net of tax	—		—		—		—	—		—		(2,723)		(2,723)
Balance at September 30, 2021	25,263,594	$	253	$	335,226	$	241,012	(843,956)	$	(14,334)	$	2,436	$	564,593

Three Months Ended September 30, 2022:
Balance at June 30, 2022	25,252,256	$	253	$	334,104	$	253,180	(826,995)	$	(14,046)	$	(46,812)	$	526,679
Net income	—		—		—		12,747	—		—		—		12,747
Dividends on common stock, $0.13 per share	—		—		—		(3,123)	—		—		—		(3,123)
Stock-based compensation expense	—		—		515		—	—		—		—		515
Vesting of restricted stock, net of shares withheld for employee tax liabilities	350		—		(4)		—	—		—		—		(4)
Exercise of stock options, net of shares withheld for employee tax liabilities	6,407		—		73		—	—		—		—		73
Shares repurchased	(416,746)		(5)		(12,453)		—	—		—		—		(12,458)
Retirement of Treasury Stock	(826,995)		(8)		(14,038)		—	826,995		14,046		—		—
Other comprehensive loss, net of tax	—		—		—		—	—		—		(23,004)		(23,004)
Balance at September 30, 2022	24,015,272	$	240	$	308,197	$	262,804	—	$	—	$	(69,816)	$	501,425

See accompanying notes to condensed consolidated financial statements.

Table of Contents

~~CBTX, INC. AND SUBSIDIARY~~Stellar Bancorp, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

Three Months Ended March 31,


2022

2021
Cash flows from operating activities:



Net income

$
10,595

$
10,019
Adjustments to reconcile consolidated net income to net cash provided by operating activities:



Provision for credit losses

435

412
Depreciation expense

840

863
Amortization of intangibles

181

191
Amortization of premiums on securities

298

400
Amortization of lease right-to-use assets

341

385
Accretion of lease liabilities

86

100
Earnings on bank-owned life insurance

(371)

(390)
Stock-based compensation expense

483

541
Deferred income tax provision

1,297

611
Net gain on sales of assets

(530)

(192)
Net loss on securities

52

16
Change in operating assets and liabilities:

Loans held for sale

(184)

1,900
Other assets

930

4,426
Other liabilities

(7,949)

(3,382)
Total adjustments

(4,091)

5,881
Net cash provided by operating activities

6,504

15,900
Cash flows from investing activities:



Purchases of securities

(324,328)

(227,793)
Proceeds from sales, calls and maturities of securities

151,385

152,530
Principal repayments of securities

11,335

18,698
Net decrease in loans

17,334

31,956
Net purchases of loan participations

(32,415)

—
Proceeds from sales of Small Business Administration loans

2,802

374
Net return of capital (contributions) to equity investments

1,843

(134)
Net purchases of premises and equipment

(238)

(313)
Net cash used in investing activities

(172,282)

(24,682)
Cash flows from financing activities:



Net increase in noninterest-bearing deposits

16,342

144,983
Net increase in interest-bearing deposits

(26,401)

(62,030)
Dividends paid on common stock

(3,203)

(2,469)
Payments to tax authorities for stock-based compensation

(115)

(70)
Repurchase of common stock

—

(4,968)
Net cash (used) provided by financing activities

(13,377)

75,446
Net increase (decrease) in cash, cash equivalents and restricted cash

(179,155)

66,664
Cash, cash equivalents and restricted cash, beginning

950,146

538,007
Cash, cash equivalents and restricted cash, ending

$
770,991

$
604,671


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	35,049	$	36,143
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Provision (recapture) for credit losses		1,573		(9,566)
Depreciation expense		2,520		2,602
Amortization of intangibles		518		559
Amortization of premiums on securities		480		1,181
Amortization of lease right-to-use assets		1,008		1,141
Accretion of lease liabilities		260		294
Earnings on bank-owned life insurance		(1,118)		(3,103)
Stock-based compensation expense		1,537		1,813
Deferred income tax (benefit) provision		(76)		2,094
Net gain on sales of assets		(673)		(918)
Net loss on securities		128		12
Change in operating assets and liabilities:
Loans held for sale		539		3,191
Other assets		(4,451)		8,061
Other liabilities		2,429		11,476
Total adjustments		4,674		18,837
Net cash provided by operating activities		39,723		54,980
Cash flows from investing activities:
Purchases of securities		(662,554)		(630,233)
Proceeds from sales, calls and maturities of securities		451,400		453,260
Principal repayments of securities		32,066		48,029
Net (increase) decrease in loans		(204,893)		312,736
Net (purchases) sales of loan participations		(56,596)		(208)
Proceeds from sales of Small Business Administration loans		2,802		3,719
Net return of capital from equity investments		1,302		1,303
Redemptions of bank-owned life insurance		—		2,670
Net purchases of premises and equipment		(857)		(710)
Proceeds from sales of repossessed real estate and other assets		—		112
Net cash (used in) provided by investing activities		(437,330)		190,678
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits		(4,508)		151,719
Net (decrease) increase in interest-bearing deposits		(103,002)		78,122
Repayment of Federal Home Loan advances		(50,000)		—
Dividends paid on common stock		(9,578)		(8,833)
Payments to tax authorities for stock-based compensation		(135)		(87)
Proceeds from exercise of stock options		173		24
Repurchase of common stock		(15,041)		(5,825)
Net cash (used in) provided by financing activities		(182,091)		215,120
Net increase (decrease) in cash, cash equivalents and restricted cash		(579,698)		460,778
Cash, cash equivalents and restricted cash, beginning		950,146		538,007
Cash, cash equivalents and restricted cash, ending	$	370,448	$	998,785

See accompanying notes to condensed consolidated financial statements.

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~~CBTX, INC. AND SUBSIDIARY~~Stellar Bancorp, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations—Stellar Bancorp, Inc., formerly known as CBTX, Inc., or the Company, ~~or CBTX, operates~~operated 34 branches, 18 in the Houston market area, 15 in the Beaumont/East Texas market area and 1one in Dallas, through its wholly-owned subsidiary, CommunityBank of Texas, N.A., or the ~~Bank.~~ Bank, as of September 30, 2022.

Effective October 1, 2022, the Company completed its previously announced merger of equals, or the Merger, with Allegiance Bancshares, Inc. or Allegiance and changed its name to Stellar Bancorp, Inc. See Note: 22. Subsequent Events for further discussion regarding the Merger.

The Bank provides relationship-driven commercial banking products and services primarily to small and medium-sized businesses and professionals with operations within the Bank’s markets.

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and the Bank. All material intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP, but do not include all the information and footnotes required for complete consolidated financial statements. In management’s opinion, these interim unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of the Company’s consolidated financial position at ~~March 31,~~September 30, 2022 and December 31, 2021 and consolidated results of operations and consolidated shareholders’ equity for the three and nine months ended September 30, 2022 and 2021 and consolidated cash flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and the results for the interim periods shown in this report are not necessarily indicative of results to be expected for the full year due in part to global economic and financial market conditions, interest rates, access to sources of liquidity, market competition and interruptions of business processes. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2021 included within the Company’s Annual Report on Form 10-K.

Treasury Stock – During the three months ended September 30, 2022, the Company retired 826,995 treasury shares with a cost basis of $14.0 million. These shares were returned to the status of authorized but unissued shares.

Share Repurchase Program—~~There were 0~~The Company repurchased 510,161 shares ~~repurchased~~ under the Company’s share repurchase program during the ~~three~~nine months ended ~~March 31, 2022. During the three months ended March 31, 2021, 181,089 shares were repurchased~~September 30, 2022 at an average price of ~~$27.44.~~$29.48. During the nine months ended September 30, 2021, the Company repurchased 214,219 shares at an average price of $27.19. Shares repurchased were retired and returned to the status of authorized but unissued shares.

Accounting Standards Not Yet Adopted—Accounting Standards Update, or ASU, 2022-02, eliminates the ~~accounting guidance for~~ troubled debt ~~restructurings,~~receivable, or TDR, accounting model for creditors that have already adopted Topic 326, which is commonly referred to as the current expected credit loss, or CECL model. The FASB’s decision to eliminate the TDR accounting model is in response to feedback that the allowance under CECL already incorporates credit losses from loans modified as TDRs byand, consequently, the related accounting and disclosures, which preparers often find onerous to apply, no longer provide the same level of benefit to users.

In lieu of the TDR accounting model, creditors ~~while enhancing disclosure requirements~~will apply the general loan modification guidance in Subtopic 310-20 to all loan modifications, including modifications made for ~~certain loan refinancing and restructurings by creditors when a borrower is~~borrowers experiencing financial difficulty. Under the ~~new~~general loan modification guidance, ~~the creditor must determine whether~~ a modification ~~results in~~is treated as a new loan ~~or a~~only if the following two conditions are met:

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(i) the terms of the new loan are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks; and (ii) modifications to the terms of the original loan are more than minor. If either condition is not met, the modification is accounted for as the continuation of ~~an existing loan. ASU 2022-02 also requires~~ the ~~disclosure~~old loan with any effect of the ~~current-period gross loan charge-offs by year of origination.~~ modification treated as a prospective adjustment to the loan’s effective interest rate.

This update iswill become effective for the Company for fiscal years beginning after December 31, 2022, including interim periods within those fiscal ~~years. Early adoption~~years, and is ~~permitted and~~not expected to have a significant impact on the amendments about TDRs and related disclosure enhancements may be adopted separately from the amendments related to vintage disclosures. The Company is in the process of evaluating the impact of this ASU.Company’s financial statements.

Cash Flow Reporting—As of ~~March 31, 2022 and~~ December 31, 2021, the Company had ~~$220,000 and~~ $1.8 million ~~respectively,~~ in cash held as collateral on deposit with other financial institution counterparties related to interest rate swap transactions that are considered restricted cash. As of September 30, 2022, the Company had no cash held as collateral related to interest rate swap transactions.

~~Table of Contents~~

Supplemental disclosures of cash flow information were as follows for the periods indicated below:


	Three Months Ended March 31,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Supplemental disclosures of cash flow information:
Cash paid for taxes					$	6,750	$	4,559
Cash paid for interest	$	1,413	$	1,688		4,171		4,694
Supplemental disclosures of non-cash flow information:
Operating lease right-to-use asset increased (decreased) in exchange for lease liabilities						809		(617)
Change in liability for dividends accrued		115		(727)		167		(755)
Repossessed real estate and other assets		—		106

NOTE 2: SECURITIES

The amortized cost, related gross unrealized gains and losses and fair values of investments in securities as of the dates indicated below were as follows:


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized				Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
March 31, 2022
September 30, 2022
Debt securities available for sale:
State and municipal securities	$	171,658	$	488	$	(16,372)	$	155,774	$	175,763	$	—	$	(40,665)	$	135,098
U.S. Treasury securities		110,597		—		(1,553)		109,044		111,045		—		(3,786)		107,259
U.S. agency securities:
Callable debentures		3,000		—		(193)		2,807		3,000		—		(436)		2,564
Collateralized mortgage obligations		94,876		2		(4,954)		89,924		97,307		—		(12,909)		84,398
Mortgage-backed securities		201,184		258		(12,133)		189,309		211,497		—		(30,579)		180,918
Equity securities		1,193		—		(72)		1,121		1,201		—		(156)		1,045
Total	$	582,508	$	748	$	(35,277)	$	547,979	$	599,813	$	—	$	(88,531)	$	511,282
December 31, 2021
Debt securities available for sale:
State and municipal securities	$	168,541	$	4,451	$	(392)	$	172,600	$	168,541	$	4,451	$	(392)	$	172,600
U.S. Treasury securities		11,888		—		(91)		11,797		11,888		—		(91)		11,797
U.S. agency securities:
Callable debentures		3,000		—		(27)		2,973		3,000		—		(27)		2,973
Collateralized mortgage obligations		63,129		115		(862)		62,382		63,129		115		(862)		62,382
Mortgage-backed securities		173,446		1,805		(1,130)		174,121		173,446		1,805		(1,130)		174,121
Equity securities		1,189		—		(16)		1,173		1,189		—		(16)		1,173
Total	$	421,193	$	6,371	$	(2,518)	$	425,046	$	421,193	$	6,371	$	(2,518)	$	425,046

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The amortized cost and estimated fair value of securities, by contractual maturities, as of the dates indicated below were as follows:


(Dollars in thousands)	1 Year or Less		After 1 Year to 5 Years		After 5 Years to 10 Years		After 10 Years		Total		1 Year or Less		After 1 Year to 5 Years		After 5 Years to 10 Years		After 10 Years		Total
March 31, 2022
September 30, 2022
Amortized cost:
Debt securities available for sale:
State and municipal securities	$	—	$	507	$	15,874	$	155,277	$	171,658	$	—	$	506	$	21,400	$	153,857	$	175,763
U.S. Treasury securities		10,129		94,708		5,760		—		110,597		69,486		38,655		2,904		—		111,045
U.S. agency securities:
Callable debentures		—		—		3,000		—		3,000		—		—		3,000		—		3,000
Collateralized mortgage obligations		—		—		3,834		91,042		94,876		—		—		2,487		94,820		97,307
Mortgage-backed securities		—		851		13,835		186,498		201,184		2		593		24,013		186,889		211,497
Equity securities		1,193		—		—		—		1,193		1,201		—		—		—		1,201
Total	$	11,322	$	96,066	$	42,303	$	432,817	$	582,508	$	70,689	$	39,754	$	53,804	$	435,566	$	599,813
Fair value:
Debt securities available for sale:
State and municipal securities	$	—	$	508	$	15,646	$	139,620	$	155,774	$	—	$	484	$	19,797	$	114,817	$	135,098
U.S. Treasury securities		10,076		93,567		5,401		—		109,044		68,069		36,672		2,518		—		107,259
U.S. agency securities:
Callable debentures		—		—		2,807		—		2,807		—		—		2,564		—		2,564
Collateralized mortgage obligations		—		—		3,815		86,109		89,924		—		—		2,408		81,990		84,398
Mortgage-backed securities		—		869		13,823		174,617		189,309		2		575		22,280		158,061		180,918
Equity securities		1,121		—		—		—		1,121		1,045		—		—		—		1,045
Total	$	11,197	$	94,944	$	41,492	$	400,346	$	547,979	$	69,116	$	37,731	$	49,567	$	354,868	$	511,282


(Dollars in thousands)	1 Year or Less		After 1 Year to 5 Years		After 5 Years to 10 Years		After 10 Years		Total
December 31, 2021
Amortized cost:
Debt securities available for sale:
State and municipal securities	$	881	$	—	$	12,339	$	155,321	$	168,541
U.S. Treasury securities		—		6,138		5,750		—		11,888
U.S. agency securities:
Callable debentures		—		—		3,000		—		3,000
Collateralized mortgage obligations		—		—		4,528		58,601		63,129
Mortgage-backed securities		—		953		4,056		168,437		173,446
Equity securities		1,189		—		—		—		1,189
Total	$	2,070	$	7,091	$	29,673	$	382,359	$	421,193
Fair value:
Debt securities available for sale:
State and municipal securities	$	883	$	—	$	12,905	$	158,812	$	172,600
U.S. Treasury securities		—		6,072		5,725		—		11,797
U.S. agency securities:
Callable debentures		—		—		2,973		—		2,973
Collateralized mortgage obligations		—		—		4,591		57,791		62,382
Mortgage-backed securities		—		994		4,166		168,961		174,121
Equity securities		1,173		—		—		—		1,173
Total	$	2,056	$	7,066	$	30,360	$	385,564	$	425,046

Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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~~NaN~~No securities were sold in the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021. At ~~March 31,~~September 30, 2022 and December 31, 2021, securities with a carrying amount of ~~$26.8~~$25.4 million and $25.6 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Management did not believe that any of the securities the Company held at ~~March 31,~~September 30, 2022 or December 31, 2021 were impaired due to credit quality. Accordingly, 0no allowance for credit losses, or ACL, was recorded in the Company’s condensed consolidated balance sheets at ~~March 31,~~September 30, 2022 or during 2021. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.

Accrued interest receivable for securities was ~~$1.5~~$1.7 million and $2.0 million at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively, and is included in other assets in the condensed consolidated balance sheets.

The Company held ~~334~~472 and 115 securities at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively, that were in a gross unrealized loss position.

Securities with unrealized losses as of the dates indicated below, aggregated by category and the length of time, were as follows:



	Less than Twelve Months				Twelve Months or More				Less than Twelve Months				Twelve Months or More
			Gross				Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses		Value		Losses
March 31, 2022
September 30, 2022
Debt securities available for sale:
State and municipal securities	$	117,448	$	(15,734)	$	3,269	$	(638)	$	110,933	$	(28,504)	$	24,165	$	(12,161)
U.S. Treasury securities		109,044		(1,553)		—		—		104,544		(3,427)		2,715		(359)
U.S. agency securities:
Callable debentures		2,807		(193)		—		—		2,564		(436)		—		—
Collateralized mortgage obligations		77,644		(3,692)		11,189		(1,262)		62,830		(8,187)		21,568		(4,722)
Mortgage-backed securities		149,009		(9,777)		19,934		(2,356)		138,312		(20,371)		42,529		(10,208)
Equity securities		1,121		(72)		—		—		—		—		1,045		(156)
	$	457,073	$	(31,021)	$	34,392	$	(4,256)	$	419,183	$	(60,925)	$	92,022	$	(27,606)
December 31, 2021
Debt securities available for sale:
State and municipal securities	$	36,962	$	(387)	$	257	$	(5)	$	36,962	$	(387)	$	257	$	(5)
U.S. Treasury securities		11,797		(91)		—		—		11,797		(91)		—		—
U.S. agency securities:
Callable debentures		2,973		(27)		—		—		2,973		(27)		—		—
Collateralized mortgage obligations		40,776		(860)		241		(2)		40,776		(860)		241		(2)
Mortgage-backed securities		87,220		(1,130)		—		—		87,220		(1,130)		—		—
Equity securities		1,173		(16)		—		—		1,173		(16)		—		—
	$	180,901	$	(2,511)	$	498	$	(7)	$	180,901	$	(2,511)	$	498	$	(7)

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NOTE 3: EQUITY INVESTMENTS

The Company’s unconsolidated investments that are considered equity securities as they represent ownership interests, such as common or preferred stock as of the dates indicated below were as follows:



(Dollars in thousands)	March 31, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Federal Reserve Bank stock	$	9,271	$	9,271	$	9,271	$	9,271
Federal Home Loan Bank stock		3,973		3,967		3,991		3,967
The Independent Bankers Financial Corporation stock		141		141		141		141
Community Reinvestment Act investments		3,716		4,348		4,432		4,348
	$	17,101	$	17,727	$	17,835	$	17,727

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Banks that are members of the Federal Home Loan Bank are required to maintain a stock investment in the Federal Home Loan Bank calculated as a percentage of aggregate outstanding mortgages, outstanding Federal Home Loan Bank advances and other financial instruments. As a member of the Federal Reserve, the Bank is required to annually subscribe to Federal Reserve Bank stock in specific ratios to the Bank’s equity. Although Federal Home Loan Bank and Federal Reserve Bank stock are considered equity securities, they do not have readily determinable fair values because ownership is restricted, and they lack a readily-available market. These investments can be sold back only at their par value of $100 per share and can only be sold to the Federal Home Loan Banks or the Federal Reserve Banks or to another member institution. In addition, the equity ownership rights are more limited than would be the case for a public company because of the oversight role exercised by regulators in the process of budgeting and approving dividends. As a result, these investments are carried at cost and evaluated for impairment.

The Company also holds an investment in the stock of The Independent Bankers Financial Corporation, which has limited marketability. As a result, this investment is carried at cost and evaluated for impairment.

The Company has investments in investment funds and limited partnerships that are qualified Community Reinvestment Act, or CRA, investments and investments under the Small Business Investment Company program of the Small Business Administration, or SBA. There are limited to no observable price changes in orderly transactions for identical investments or similar investments from the same issuers that are actively traded and, as a result, these investments are stated at cost. At ~~March 31,~~September 30, 2022 and December 31, 2021, the Company had ~~$5.9~~$7.9 million and $6.3 million, respectively, in outstanding unfunded commitments to these funds, which are subject to call.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, 2two of these investment funds sold underlying investments for more than their book value and the Company recorded a total gain of ~~$1.2~~$1.4 million, which is included in net gains on sales of assets in the condensed consolidated income statement.

The Company’s equity investments are evaluated for impairment based on an assessment of qualitative indicators, which include, but are not limited to: (i) a significant deterioration in the earnings, performance, credit rating, asset quality or business prospects of the investee; (ii) a significant adverse change in the regulatory, economic or technological environment of the investee; (iii) a significant adverse change in the general market conditions of either the geographical area or the industry in which the investee operates; and (iv) a bona fide offer to purchase, an offer by the investee to sell, or completed auction process for the same or similar investment for an amount less than the carrying amount of the investment. There were no such qualitative indicators as of ~~March 31,~~September 30, 2022.

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NOTE 4: LOANS

Loans by loan class, or major loan category, as of the dates indicated below were as follows:



(Dollars in thousands)	March 31, 2022			December 31, 2021			September 30, 2022			December 31, 2021
Commercial and industrial	$	600,990	20.8%	$	634,384	22.0%	$	568,071	18.1%	$	634,384	22.0%
Real estate:
Commercial real estate		1,142,646	39.5%		1,091,969	38.0%		1,242,118	39.6%		1,091,969	38.0%
Construction and development		473,326	16.4%		460,719	16.0%		507,570	16.2%		460,719	16.0%
1-4 family residential		263,213	9.1%		277,273	9.6%		288,456	9.2%		277,273	9.6%
Multi-family residential		279,099	9.7%		286,396	10.0%		370,391	11.8%		286,396	10.0%
Consumer		28,230	1.0%		28,090	1.0%		24,509	0.8%		28,090	1.0%
Agriculture		6,287	0.2%		7,941	0.3%		11,185	0.4%		7,941	0.3%
Other		95,187	3.3%		89,655	3.1%		123,591	3.9%		89,655	3.1%
Total gross loans		2,888,978	100.0%		2,876,427	100.0%		3,135,891	100.0%		2,876,427	100.0%
Less allowance for credit losses for loans		(31,442)			(31,345)			(32,577)			(31,345)
Less deferred loan fees and unearned discounts		(8,350)			(8,739)			(9,470)			(8,739)
Less loans held for sale		(748)			(164)			—			(164)
Loans, net	$	2,848,438		$	2,836,179		$	3,093,844		$	2,836,179

Accrued interest receivable for loans was ~~$9.3~~$9.0 million and $9.6 million at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively, and was included in other assets in the condensed consolidated balance sheets.

~~Table of Contents~~

From time to time, the Company will acquire and dispose of interests in loans under participation agreements with other financial institutions. ~~The Company did not purchase or sell loan participations during the three months ended March 31, 2021.~~ Loan participations purchased and sold during the ~~three~~nine months ending ~~March 31,~~September 30, 2022 and 2021, by loan class, were as follows:


	Participations		Participations		Participations		Participations
(Dollars in thousands)	Purchased		Sold		Purchased		Sold
March 31, 2022
September 30, 2022
Commercial and industrial	$	15,844	$	1,943	$	24,192		1,943
Commercial real estate		17,955		1,247		30,455		1,247
Construction and development		—		—		—		122
Other		1,806		—		5,261		—
	$	35,605	$	3,190	$	59,908	$	3,312
September 30, 2021
Commercial and industrial					$	—	$	1,336
Commercial real estate						—		375
Construction and development						—		22
Other						1,941		—
					$	1,941	$	1,733

The Company participates in the SBA loan program. When advantageous, the Company will sell the guaranteed portions of these loans with servicing retained. SBA loans that were sold with servicing retained during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, totaled $2.8 million and ~~$374,000,~~$3.7 million, respectively. Net gains recognized on sales of SBA loans were ~~$343,000~~$328,000 and ~~$60,000~~$436,000 for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, respectively.

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NOTE 5: LOAN PERFORMANCE

The following is an aging analysis of the Company’s past due loans, segregated by loan class, as of the dates indicated below:


					90 Days or								90 Days						90 Days or								90 Days
	30 to 59 Days		60 to 89 Days		Greater		Total		Total				Past Due and		30 to 59 Days		60 to 89 Days		Greater		Total		Total				Past Due and
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current Loans		Total Loans		Still Accruing		Past Due		Past Due		Past Due		Past Due		Current Loans		Total Loans		Still Accruing
March 31, 2022
September 30, 2022
Commercial and industrial	$	3,517	$	498	$	—	$	4,015	$	596,975	$	600,990	$	—	$	4,374	$	3,416	$	281	$	8,071	$	560,000	$	568,071	$	—
Real estate:
Commercial real estate		9,941		—		—		9,941		1,132,705		1,142,646		—		5,360		4,447		—		9,807		1,232,311		1,242,118		—
Construction and development		—		—		140		140		473,186		473,326		—		1,350		—		—		1,350		506,220		507,570		—
1-4 family residential		145		1,534		—		1,679		261,534		263,213		—		—		1,309		1,601		2,910		285,546		288,456		—
Multi-family residential		—		—		—		—		279,099		279,099		—		—		—		—		—		370,391		370,391		—
Consumer		—		—		—		—		28,230		28,230		—		—		—		—		—		24,509		24,509		—
Agriculture		—		—		—		—		6,287		6,287		—		15		—		—		15		11,170		11,185		—
Other		—		—		—		—		95,187		95,187		—		—		—		—		—		123,591		123,591		—
Total gross loans	$	13,603	$	2,032	$	140	$	15,775	$	2,873,203	$	2,888,978	$	—	$	11,099	$	9,172	$	1,882	$	22,153	$	3,113,738	$	3,135,891	$	—
December 31, 2021
Commercial and industrial	$	14	$	—	$	—	$	14	$	634,370	$	634,384	$	—	$	14	$	—	$	—	$	14	$	634,370	$	634,384	$	—
Real estate:
Commercial real estate		650		—		55		705		1,091,264		1,091,969		—		650		—		55		705		1,091,264		1,091,969		—
Construction and development		—		—		142		142		460,577		460,719		—		—		—		142		142		460,577		460,719		—
1-4 family residential		150		34		—		184		277,089		277,273		—		150		34		—		184		277,089		277,273		—
Multi-family residential		—		—		—		—		286,396		286,396		—		—		—		—		—		286,396		286,396		—
Consumer		50		—		—		50		28,040		28,090		—		50		—		—		50		28,040		28,090		—
Agriculture		—		—		—		—		7,941		7,941		—		—		—		—		—		7,941		7,941		—
Other		41		—		—		41		89,614		89,655		—		41		—		—		41		89,614		89,655		—
Total gross loans	$	905	$	34	$	197	$	1,136	$	2,875,291	$	2,876,427	$	—	$	905	$	34	$	197	$	1,136	$	2,875,291	$	2,876,427	$	—

The Company places loans on nonaccrual status because of delinquency or because collection of principal or interest is doubtful. Nonaccrual loans, segregated by loan class, as of the dates indicated below were as follows:


(Dollars in thousands)	September 30, 2022		December 31, 2021
Commercial and industrial	$	7,985	$	9,090
Real estate:
Commercial real estate		11,076		11,512
Construction and development		139		142
1-4 family residential		3,176		1,784
Consumer		34		40
Total nonaccrual loans	$	22,410	$	22,568

Interest income that would have been earned under the original terms of the nonaccrual loans was $809,000 and $568,000 for the nine months ended September 30, 2022 and 2021, respectively.

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(Dollars in thousands)

March 31, 2022

December 31, 2021
Commercial and industrial

$
8,765

$
9,090
Real estate:

Commercial real estate

11,363

11,512
Construction and development

140

142
1-4 family residential

1,777

1,784
Consumer

38

40
Total nonaccrual loans

$
22,083

$
22,568

~~Interest income that would have been earned under the original terms of the nonaccrual loans was $249,000 and $191,000 for the three months ended March 31, 2022 and 2021, respectively.~~

Loans restructured due to the borrower’s financial difficulties, or troubled debt restructurings, during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, that remained outstanding as of the end of those periods were as follows:


				Post-modification Recorded Investment											Post-modification Recorded Investment
										Extended											Extended
										Maturity,											Maturity,
		Pre-modification						Extended		Restructured			Pre-modification						Extended		Restructured
		Outstanding						Maturity and		Payments			Outstanding						Maturity and		Payments
	Number	Recorded		Restructured		Extended		Restructured		and Adjusted		Number	Recorded		Restructured		Extended		Restructured		and Adjusted
(Dollars in thousands)	of Loans	Investment		Payments		Maturity		Payments		Interest Rate		of Loans	Investment		Payments		Maturity		Payments		Interest Rate
March 31, 2022
September 30, 2022
Commercial and industrial	7	$	3,870	$	1,093	$	—	$	—	$	2,777	7	$	3,870	$	1,093	$	—	$	—	$	2,777
Real estate:
Commercial real estate	1		234		—		—		—		245	2		2,273		—		—		2,040		245
Construction and development												3		431		—		—		431		—
Total	8	$	4,104	$	1,093	$	—	$	—	$	3,022	12	$	6,574	$	1,093	$	—	$	2,471	$	3,022
March 31, 2021
September 30, 2021
Commercial and industrial												3	$	3,256	$	3,256	$	—	$	—	$	—
Real estate:
Commercial real estate	1	$	1,206	$	1,206	$	—	$	—	$	—	1		1,206		1,206		—		—		—
1-4 family residential	1		1,548		1,548		—		—		—	1		1,548		1,548		—		—		—
Consumer												1		42		—		—		42		—
Total	2	$	2,754	$	2,754	$	—	$	—	$	—	6	$	6,052	$	6,010	$	—	$	42	$	—

Loan modifications related to a loan refinancing or restructuring other than a troubled debt restructuring are accounted for as a new loan if the terms provided to the borrower are at least as favorable to the Company as terms for comparable loans to other borrowers with similar collection risks that is not a loan refinancing or restructuring. If the loan refinancing or restructuring does not meet this condition or if only minor modifications are made to the original loan contract, it is not considered a new loan and is considered a renewal or modification of the original contract. Restructured or modified loans are not considered past due if they are performing under the terms of the modified or restructured payment schedule.

A troubled debt restructuring is considered in default when a payment in accordance with the terms of the restructuring is more than 30 days past due. All loans restructured in a troubled debt restructuring are individually evaluated based on the underlying collateral for the determination of an ACL.

There were four commercial and industrial loans totaling $1.7 million and one commercial and industrial loan of $1.5 million that were troubled debt restructurings and have payment defaults during the twelve months ended September 30, 2022 and 2021, respectively.

At September 30, 2022 and December 31, 2021, the Company had an outstanding commitment to fund $1.1 million and $2.5 million, respectively, for loans that were previously restructured.

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There were 0 troubled debt restructurings with payment defaults during the twelve months ended March 31, 2022 and troubled debt restructuring during the twelve months ended March 31, 2021 with payment defaults were as follows:

March 31, 2021

Number

(Dollars in thousands)

of Loans

Balance
Commercial and industrial

5

$
7,904
Real estate:

Commercial real estate

4

8,114
Construction and development

3

11,882
1-4 family residential

2

102
Total

14

$
28,002

~~At March 31, 2022 and December 31, 2021, the Company had an outstanding commitment to fund $5.7 million and $2.5 million, respectively, for loans that were previously restructured.~~

Loans individually evaluated for credit losses were as follows for the dates indicated below:


	Troubled Debt Restructurings										Total Loans		Troubled Debt Restructurings										Total Loans
(Dollars in thousands)	Accruing		Non-Accrual		Total		Other Non-Accrual		Other Accruing		Individually Evaluated		Accruing		Non-Accrual		Total		Other Non-Accrual		Other Accruing		Individually Evaluated
March 31, 2022
September 30, 2022
Commercial and industrial	$	6,606	$	8,700	$	15,306	$	65	$	1,081	$	16,452	$	1,870	$	7,934	$	9,804	$	51	$	1,077	$	10,932
Real estate:
Commercial real estate		5,863		11,258		17,121		105		2,040		19,266		7,629		10,980		18,609		96		—		18,705
Construction and development		12,261		—		12,261		140		292		12,693		10,325		139		10,464		—		—		10,464
1-4 family residential		1,547		1,724		3,271		53		—		3,324		26		3,149		3,175		27		—		3,202
Consumer		—		38		38		—		81		119		—		34		34		—		82		116
Other		2,151		—		2,151		—		—		2,151		8,523		—		8,523		—		—		8,523
Total	$	28,428	$	21,720	$	50,148	$	363	$	3,494	$	54,005	$	28,373	$	22,236	$	50,609	$	174	$	1,159	$	51,942
December 31, 2021
Commercial and industrial	$	5,661	$	6,851	$	12,512	$	2,239	$	1,828	$	16,579	$	5,661	$	6,851	$	12,512	$	2,239	$	1,828	$	16,579
Real estate:
Commercial real estate		5,755		11,401		17,156		111		3,790		21,057		5,755		11,401		17,156		111		3,790		21,057
Construction and development		12,282		—		12,282		142		292		12,716		12,282		—		12,282		142		292		12,716
1-4 family residential		1,571		1,727		3,298		57		—		3,355		1,571		1,727		3,298		57		—		3,355
Consumer		—		40		40		—		85		125		—		40		40		—		85		125
Other		5,440		—		5,440		—		—		5,440		5,440		—		5,440		—		—		5,440
Total	$	30,709	$	20,019	$	50,728	$	2,549	$	5,995	$	59,272	$	30,709	$	20,019	$	50,728	$	2,549	$	5,995	$	59,272

NOTE 6: ALLOWANCE FOR CREDIT LOSSES

The Company primarily manages credit quality and credit risk associated with its loan portfolio based on the risk grading assigned to each individual loan within the loan class. Each loan class is a grouping of loan receivables within the portfolio based on risk characteristics and the method for monitoring and assessing the associated credit risks.

Risk Grading

The methodology used by the Company in the determination of its ACL, which is performed at least on a quarterly basis, is designed to be responsive to changes in the credit quality of the loan portfolio as well as forecasted economic conditions. The credit quality of the loan portfolio is assessed through different processes. At origination, a risk grade is assigned to each loan based on underwriting procedures and criteria. The risk grades used are described below. The Company monitors the credit quality of the loan portfolio on an on-going basis by performing loan reviews, both internally and through a third-party vendor, on loans meeting certain risk and exposure criteria. Through these reviews, loans that

~~Table of Contents~~

require risk grade changes are approved by executive management. In addition, executive management reviews classified and criticized loans to assess changes in credit quality of the underlying loan, and when determined appropriate, based on individual evaluation, approve specific reserves.

Pass—Credits in this category contain an acceptable amount of risk.

Special Mention—Credits in this category contain more than the normal amount of risk and are referred to as special mention in accordance with regulatory guidelines. These credits possess clearly identifiable temporary weaknesses or trends that, if not corrected or revised, may result in a condition that exposes the Company to a higher level of risk of loss.

Substandard—Credits in this category are substandard in accordance with regulatory guidelines and of unsatisfactory credit quality with well-defined weaknesses or weaknesses that jeopardize the liquidation of the debt. Credits in this category are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Often, the assets in this category will have a valuation allowance representative of management’s

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estimated loss that is probable to be incurred. Loans deemed substandard and on nonaccrual status are individually evaluated for expected credit losses.

Doubtful—Credits in this category are considered doubtful in accordance with regulatory guidelines, are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Generally, these credits will have a valuation allowance based upon management’s best estimate of the losses probable to occur in the liquidation of the debt.

Loss—Credits in this category are considered loss in accordance with regulatory guidelines and are considered uncollectible and of such little value as to question their continued existence as assets on the Company’s financial statements. Such credits are charged off or charged down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. This category does not intend to imply that the debt or some portion of it will never be paid, nor does it in any way imply that the debt will be forgiven.

The Company had no loans graded loss or doubtful at ~~March 31,~~September 30, 2022 or December 31, 2021.

At ~~March 31,~~September 30, 2022 and December 31, 2021, the ratio of the ACL for loans to loans excluding loans held for sale was ~~1.09%~~1.04% and 1.09%, respectively. The ACL increased from $31.3 million at December 31, 2021 to ~~$31.4~~$32.6 million at ~~March 31,~~September 30, 2022, primarily due to ~~an increase in collectively evaluated loans resulting from~~ growth in the loan ~~portfolio~~portfolio. Although national and ~~adjustments to certain~~local economies and economic forecasts improved during 2021 and 2022, geopolitical instabilities, inflation, rising interest rates, supply disruptions and other uncertainties continue and these factors are considered in the forecasts and qualitative factors ~~which was partially offset by a decrease in~~used to determine the ~~ACL related to individually evaluated loans resulting from a reduction in the associated principal balances.~~Company’s ACL.

The total of the Company’s qualitative and quantitative factors ranged from ~~0.63%~~0.64% to ~~2.04%~~1.92% and 0.62% to 2.08% at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively. All factors are reassessed at the end of each quarter.

The review of the appropriateness of the ACL, which includes evaluation of historical loss trends, qualitative adjustments and forecasted economic conditions applied to general reserves, is performed by executive management and presented to the Board of Directors for its review on a quarterly basis. The ACL at ~~March 31,~~September 30, 2022, reflects the Company’s assessment based on the information available at that time.

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Loans by risk grades, loan class and vintage, at ~~March 31,~~September 30, 2022 were as follows:


(Dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans		Converted Revolving Loans		Total		2022		2021		2020		2019		2018		Prior		Revolving Loans		Converted Revolving Loans		Total
Commercial and industrial:
Pass	$	44,587	$	176,013	$	45,558	$	49,416	$	18,908	$	11,813	$	228,831	$	4,861	$	579,987	$	97,529	$	131,496	$	29,688	$	41,184	$	15,542	$	5,762	$	210,724	$	23,616	$	555,541
Special mention		—		—		—		—		10		—		2,924		—		2,934
Substandard		—		—		999		2,905		6,538		367		2,289		4,971		18,069		—		—		—		2,745		3,585		300		1,540		4,360		12,530
Total commercial and industrial		44,587		176,013		46,557		52,321		25,456		12,180		234,044		9,832		600,990		97,529		131,496		29,688		43,929		19,127		6,062		212,264		27,976		568,071
Commercial real estate:
Pass		177,416		221,547		196,087		188,977		115,515		129,496		54,617		13,666		1,097,321		409,433		226,016		196,281		159,697		80,581		77,497		42,858		17,631		1,209,994
Special mention		—		—		—		848		—		31		—		—		879		—		—		—		—		2,161		—		—		—		2,161
Substandard		—		52		2,926		12,764		14,449		3,543		—		10,712		44,446		—		47		1,083		8,132		6,746		3,470		—		10,485		29,963
Total commercial real estate		177,416		221,599		199,013		202,589		129,964		133,070		54,617		24,378		1,142,646		409,433		226,063		197,364		167,829		89,488		80,967		42,858		28,116		1,242,118
Construction and development:
Pass		39,508		208,277		89,540		36,188		6,638		15,647		64,276		91		460,165		169,575		183,167		27,542		24,518		5,889		11,691		74,221		82		496,685
Special mention		—		—		468		—		—		—		—		—		468		421		—		—		—		—		—		—		—		421
Substandard		—		—		292		—		1,500		10,901		—		—		12,693		—		—		291		—		2,700		7,473		—		—		10,464
Total construction and development		39,508		208,277		90,300		36,188		8,138		26,548		64,276		91		473,326		169,996		183,167		27,833		24,518		8,589		19,164		74,221		82		507,570
1-4 family residential:
Pass		16,917		109,806		21,599		14,350		25,034		65,027		5,320		193		258,246		64,430		107,974		19,278		11,647		22,871		48,751		7,289		246		282,486
Substandard		—		—		1,548		504		898		515		—		1,502		4,967		—		1,310		1,548		494		891		226		—		1,501		5,970
Total 1-4 family residential		16,917		109,806		23,147		14,854		25,932		65,542		5,320		1,695		263,213		64,430		109,284		20,826		12,141		23,762		48,977		7,289		1,747		288,456
Multi-family residential:
Pass		2,274		18,557		18,145		6,420		57,240		175,895		568		—		279,099		50,748		35,442		59,609		17,732		35,974		170,319		567		—		370,391
Total multi-family residential		2,274		18,557		18,145		6,420		57,240		175,895		568		—		279,099		50,748		35,442		59,609		17,732		35,974		170,319		567		—		370,391
Consumer:
Pass		2,171		4,993		3,348		986		556		207		15,059		691		28,011		5,356		3,290		2,485		558		446		48		12,095		—		24,278
Substandard		—		—		38		—		—		—		81		100		219		—		—		34		—		—		—		197		—		231
Total consumer		2,171		4,993		3,386		986		556		207		15,140		791		28,230		5,356		3,290		2,519		558		446		48		12,292		—		24,509
Agriculture:
Pass		523		1,213		394		33		53		32		3,784		189		6,221		4,680		722		362		24		26		28		5,284		—		11,126
Substandard		—		—		—		—		—		17		49		—		66		—		—		—		—		—		15		44		—		59
Total agriculture		523		1,213		394		33		53		49		3,833		189		6,287		4,680		722		362		24		26		43		5,328		—		11,185
Other:
Pass		7,874		31,941		2,986		620		1,480		1,194		49,053		39		95,187		22,473		34,745		1,198		—		1,255		1,149		62,770		—		123,590
Substandard																				—		—		—		1		—		—		—		—		1
Total other		7,874		31,941		2,986		620		1,480		1,194		49,053		39		95,187		22,473		34,745		1,198		1		1,255		1,149		62,770		—		123,591
Total
Pass		291,270		772,347		377,657		296,990		225,424		399,311		421,508		19,730		2,804,237		824,224		722,852		336,443		255,360		162,584		315,245		415,808		41,575		3,074,091
Special mention		—		—		468		848		10		31		2,924		—		4,281		421		—		—		—		2,161		—		—		—		2,582
Substandard		—		52		5,803		16,173		23,385		15,343		2,419		17,285		80,460		—		1,357		2,956		11,372		13,922		11,484		1,781		16,346		59,218
Total gross loans	$	291,270	$	772,399	$	383,928	$	314,011	$	248,819	$	414,685	$	426,851	$	37,015	$	2,888,978	$	824,645	$	724,209	$	339,399	$	266,732	$	178,667	$	326,729	$	417,589	$	57,921	$	3,135,891

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Loans by risk grades, loan class and vintage, at December 31, 2021 were as follows:


(Dollars in thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans		Converted Revolving Loans		Total
Commercial and industrial:
Pass	$	230,432	$	53,744	$	60,514	$	21,059	$	8,117	$	5,533	$	228,247	$	5,773	$	613,419
Special mention		—		—		290		15		—		—		3,177		—		3,482
Substandard		—		1,014		1,852		7,075		4		391		1,647		5,500		17,483
Total commercial and industrial		230,432		54,758		62,656		28,149		8,121		5,924		233,071		11,273		634,384
Commercial real estate:
Pass		243,666		197,625		232,074		141,591		69,995		84,398		55,253		13,799		1,038,401
Special mention		—		—		859		7,934		—		62		—		—		8,855
Substandard		—		2,953		12,967		14,556		334		3,046		—		10,857		44,713
Total commercial real estate		243,666		200,578		245,900		164,081		70,329		87,506		55,253		24,656		1,091,969
Construction and development:
Pass		197,900		99,420		54,017		7,127		16,133		142		72,698		96		447,533
Special mention		—		470		—		—		—		—		—		—		470
Substandard		—		292		—		1,500		10,207		717		—		—		12,716
Total construction and development		197,900		100,182		54,017		8,627		26,340		859		72,698		96		460,719
1-4 family residential:
Pass		115,451		23,298		20,210		31,416		21,607		53,253		6,516		466		272,217
Substandard		—		1,548		514		902		126		464		1,502		—		5,056
Total 1-4 family residential		115,451		24,846		20,724		32,318		21,733		53,717		8,018		466		277,273
Multi-family residential:
Pass		16,744		18,236		6,473		58,750		9,784		167,033		9,376		—		286,396
Total multi-family residential		16,744		18,236		6,473		58,750		9,784		167,033		9,376		—		286,396
Consumer:
Pass		6,427		3,637		1,199		714		277		11		14,921		679		27,865
Substandard		—		40		—		—		—		—		85		100		225
Total consumer		6,427		3,677		1,199		714		277		11		15,006		779		28,090
Agriculture:
Pass		2,954		423		42		57		35		—		4,198		190		7,899
Substandard		—		—		—		—		—		18		24		—		42
Total agriculture		2,954		423		42		57		35		18		4,222		190		7,941
Other:
Pass		27,656		3,744		630		1,509		10		2,157		53,906		43		89,655
Total other		27,656		3,744		630		1,509		10		2,157		53,906		43		89,655
Total
Pass		841,230		400,127		375,159		262,223		125,958		312,527		445,115		21,046		2,783,385
Special mention		—		470		1,149		7,949		—		62		3,177		—		12,807
Substandard		—		5,847		15,333		24,033		10,671		4,636		3,258		16,457		80,235
Total gross loans	$	841,230	$	406,444	$	391,641	$	294,205	$	136,629	$	317,225	$	451,550	$	37,503	$	2,876,427

1618

Table of Contents

Loans by risk grades and loan class as of the dates indicated below were as follows:



(Dollars in thousands)	Pass		Special Mention		Substandard		Total Loans		Pass		Special Mention		Substandard		Total Loans
March 31, 2022
September 30, 2022
Commercial and industrial	$	579,987	$	2,934	$	18,069	$	600,990	$	555,541	$	—	$	12,530	$	568,071
Real estate:
Commercial real estate		1,097,321		879		44,446		1,142,646		1,209,994		2,161		29,963		1,242,118
Construction and development		460,165		468		12,693		473,326		496,685		421		10,464		507,570
1-4 family residential		258,246		—		4,967		263,213		282,486		—		5,970		288,456
Multi-family residential		279,099		—		—		279,099		370,391		—		—		370,391
Consumer		28,011		—		219		28,230		24,278		—		231		24,509
Agriculture		6,221		—		66		6,287		11,126		—		59		11,185
Other		95,187		—		—		95,187		123,590		—		1		123,591
Total gross loans	$	2,804,237	$	4,281	$	80,460	$	2,888,978	$	3,074,091	$	2,582	$	59,218	$	3,135,891
December 31, 2021
Commercial and industrial	$	613,419	$	3,482	$	17,483	$	634,384	$	613,419	$	3,482	$	17,483	$	634,384
Real estate:
Commercial real estate		1,038,401		8,855		44,713		1,091,969		1,038,401		8,855		44,713		1,091,969
Construction and development		447,533		470		12,716		460,719		447,533		470		12,716		460,719
1-4 family residential		272,217		—		5,056		277,273		272,217		—		5,056		277,273
Multi-family residential		286,396		—		—		286,396		286,396		—		—		286,396
Consumer		27,865		—		225		28,090		27,865		—		225		28,090
Agriculture		7,899		—		42		7,941		7,899		—		42		7,941
Other		89,655		—		—		89,655		89,655		—		—		89,655
Total gross loans	$	2,783,385	$	12,807	$	80,235	$	2,876,427	$	2,783,385	$	12,807	$	80,235	$	2,876,427

Loans individually evaluated and collectively evaluated as of the dates indicated below were as follows:


	March 31, 2022						December 31, 2021						September 30, 2022						December 31, 2021
	Individually		Collectively				Individually		Collectively				Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Total		Evaluated		Evaluated		Total		Evaluated		Evaluated		Total		Evaluated		Evaluated		Total
(Dollars in thousands)	Loans		Loans		Loans		Loans		Loans		Loans		Loans		Loans		Loans		Loans		Loans		Loans
Commercial and industrial	$	16,452	$	584,538	$	600,990	$	16,579	$	617,805	$	634,384	$	10,932	$	557,139	$	568,071	$	16,579	$	617,805	$	634,384
Real estate:
Commercial real estate		19,266		1,123,380		1,142,646		21,057		1,070,912		1,091,969		18,705		1,223,413		1,242,118		21,057		1,070,912		1,091,969
Construction and development		12,693		460,633		473,326		12,716		448,003		460,719		10,464		497,106		507,570		12,716		448,003		460,719
1-4 family residential		3,324		259,889		263,213		3,355		273,918		277,273		3,202		285,254		288,456		3,355		273,918		277,273
Multi-family residential		—		279,099		279,099		—		286,396		286,396		—		370,391		370,391		—		286,396		286,396
Consumer		119		28,111		28,230		125		27,965		28,090		116		24,393		24,509		125		27,965		28,090
Agriculture		—		6,287		6,287		—		7,941		7,941		—		11,185		11,185		—		7,941		7,941
Other		2,151		93,036		95,187		5,440		84,215		89,655		8,523		115,068		123,591		5,440		84,215		89,655
Total gross loans	$	54,005	$	2,834,973	$	2,888,978	$	59,272	$	2,817,155	$	2,876,427	$	51,942	$	3,083,949	$	3,135,891	$	59,272	$	2,817,155	$	2,876,427

The Company had collateral dependent loans totaling $1.5 million pending foreclosure at both ~~March 31,~~September 30, 2022 and December 31, 2021.

1719

Table of Contents

Activity in the ACL for loans, segregated by loan class for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, was as follows:


			Real Estate																		Real Estate
	Commercial				Construction														Commercial				Construction
	and		Commercial		and		1-4 Family		Multi-family										and		Commercial		and		1-4 Family		Multi-family
(Dollars in thousands)	Industrial		Real Estate		Development		Residential		Residential		Consumer		Agriculture		Other		Total		Industrial		Real Estate		Development		Residential		Residential		Consumer		Agriculture		Other		Total
March 31, 2022
September 30, 2022
Beginning balance	$	11,214	$	11,015	$	3,310	$	2,105	$	1,781	$	406	$	88	$	1,426	$	31,345	$	11,214	$	11,015	$	3,310	$	2,105	$	1,781	$	406	$	88	$	1,426	$	31,345
Provision (recapture)		(383)		282		119		(81)		(11)		(5)		(28)		127		20		(2,101)		1,195		654		152		723		22		24		353		1,022
Charge-offs		—		—		—		(2)		—		—		—		—		(2)		(44)		(25)		—		(8)		—		(63)		—		—		(140)
Recoveries		64		—		—		3		—		2		10		—		79		328		—		—		6		—		6		10		—		350
Net recoveries		64		—		—		1		—		2		10		—		77		284		(25)		—		(2)		—		(57)		10		—		210
Ending balance	$	10,895	$	11,297	$	3,429	$	2,025	$	1,770	$	403	$	70	$	1,553	$	31,442	$	9,397	$	12,185	$	3,964	$	2,255	$	2,504	$	371	$	122	$	1,779	$	32,577
Period-end amount allocated to:
Specific reserve	$	3,686	$	98	$	—	$	—	$	—	$	119	$	—	$	—	$	3,903	$	2,517	$	28	$	—	$	—	$	—	$	116	$	—	$	—	$	2,661
General reserve		7,209		11,199		3,429		2,025		1,770		284		70		1,553		27,539		6,880		12,157		3,964		2,255		2,504		255		122		1,779		29,916
Total	$	10,895	$	11,297	$	3,429	$	2,025	$	1,770	$	403	$	70	$	1,553	$	31,442	$	9,397	$	12,185	$	3,964	$	2,255	$	2,504	$	371	$	122	$	1,779	$	32,577
March 31, 2021
September 30, 2021
Beginning balance	$	13,035	$	13,798	$	6,089	$	2,578	$	2,513	$	440	$	137	$	2,047	$	40,637	$	13,035	$	13,798	$	6,089	$	2,578	$	2,513	$	440	$	137	$	2,047	$	40,637
Provision (recapture)		872		482		(644)		(120)		201		(10)		(72)		(423)		286		(2,028)		(2,054)		(2,755)		(875)		(357)		(85)		(75)		(732)		(8,961)
Charge-offs		(309)		—		—		—		—		—		—		—		(309)		(495)		—		—		(3)		—		(13)		—		—		(511)
Recoveries		214		—		—		—		—		4		42		—		260		889		—		—		—		—		107		47		—		1,043
Net (charge-offs) recoveries		(95)		—		—		—		—		4		42		—		(49)		394		—		—		(3)		—		94		47		—		532
Ending balance	$	13,812	$	14,280	$	5,445	$	2,458	$	2,714	$	434	$	107	$	1,624	$	40,874	$	11,401	$	11,744	$	3,334	$	1,700	$	2,156	$	449	$	109	$	1,315	$	32,208
Period-end amount allocated to:
Specific reserve	$	5,476	$	274	$	—	$	—	$	—	$	6	$	—	$	—	$	5,756	$	4,343	$	670	$	—	$	—	$	—	$	131	$	—	$	—	$	5,144
General reserve		8,336		14,006		5,445		2,458		2,714		428		107		1,624		35,118		7,058		11,074		3,334		1,700		2,156		318		109		1,315		27,064
Total	$	13,812	$	14,280	$	5,445	$	2,458	$	2,714	$	434	$	107	$	1,624	$	40,874	$	11,401	$	11,744	$	3,334	$	1,700	$	2,156	$	449	$	109	$	1,315	$	32,208

The ACL for loans by loan class as of the dates indicated was as follows:



		March 31, 2022				December 31, 2021					September 30, 2022				December 31, 2021
(Dollars in thousands)		Amount		Percent		Amount		Percent			Amount		Percent		Amount		Percent
Commercial and industrial		$	10,895	34.7	%	$	11,214	35.7	%		$	9,397	28.9	%	$	11,214	35.7	%
Real estate:
Commercial real estate			11,297	35.9	%		11,015	35.1	%			12,185	37.4	%		11,015	35.1	%
Construction and development			3,429	10.9	%		3,310	10.6	%			3,964	12.2	%		3,310	10.6	%
1-4 family residential			2,025	6.4	%		2,105	6.7	%			2,255	6.9	%		2,105	6.7	%
Multi-family residential			1,770	5.6	%		1,781	5.7	%			2,504	7.7	%		1,781	5.7	%
Consumer			403	1.3	%		406	1.3	%			371	1.1	%		406	1.3	%
Agriculture			70	0.3	%		88	0.3	%			122	0.4	%		88	0.3	%
Other			1,553	4.9	%		1,426	4.6	%			1,779	5.4	%		1,426	4.6	%
Total allowance for credit losses for loans		$	31,442	100.0	%	$	31,345	100.0	%		$	32,577	100.0	%	$	31,345	100.0	%
Loans excluding loans held for sale	Loans excluding loans held for sale		2,879,880				2,867,524			Loans excluding loans held for sale		3,126,421				2,867,524
ACL for loans to loans excluding loans held for sale	ACL for loans to loans excluding loans held for sale		1.09%				1.09%			ACL for loans to loans excluding loans held for sale		1.04%				1.09%

Allocation of a portion of the ACL to one class of loans above does not preclude its availability to absorb losses in other classes.

Nonaccrual loans are included in individually evaluated loans and ~~$16.7~~$15.9 million and $16.0 million of nonaccrual loans had 0no related ACL at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively.

1820

Table of Contents

Charge-offs and recoveries by loan class and vintage for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 were as follows:

~~��~~


(Dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans		Converted Revolving Loans		Total		2022		2021		2020		2019		2018		Prior		Revolving Loans		Converted Revolving Loans		Total
Commercial and industrial:
Charge-off																			$	(43)	$	—	$	—	$	—	$	—	$	(1)	$	—	$	—	$	(44)
Recovery	$	—	$	—	$	—	$	—	$	12	$	20	$	32	$	—	$	64		1		—		—		—		207		55		65		—		328
Total commercial and industrial		—		—		—		—		12		20		32		—		64		(42)		—		—		—		207		54		65		—		284
Commercial real estate:
Charge-off																				—		—		—		(25)		—		—		—		—		(25)
Total commercial real estate loans																				—		—		—		(25)		—		—		—		—		(25)
1-4 family residential:
Charge-off		—		—		—		—		(2)		—		—		—		(2)		—		—		—		—		(2)		(6)		—		—		(8)
Recovery		—		—		—		—		—		3		—		—		3		—		—		—		—		—		6		—		—		6
Total 1-4 family residential		—		—		—		—		(2)		3		—		—		1		—		—		—		—		(2)		—		—		—		(2)
Consumer:
Charge-off																				—		—		(12)		—		—		—		(1)		(50)		(63)
Recovery		1		—		—		1		—		—		—		—		2		—		—		—		1		—		3		—		2		6
Total consumer		1		—		—		1		—		—		—		—		2		—		—		(12)		1		—		3		(1)		(48)		(57)
Agriculture:
Recovery		—		—		—		—		—		10		—		—		10		—		—		—		—		—		10		—		—		10
Total agriculture		—		—		—		—		—		10		—		—		10		—		—		—		—		—		10		—		—		10
Total:
Charge-off		—		—		—		—		(2)		—		—		—		(2)		(43)		—		(12)		(25)		(2)		(7)		(1)		(50)		(140)
Recovery		1		—		—		1		12		33		32		—		79		1		—		—		1		207		74		65		2		350
Total	$	1	$	—	$	—	$	1	$	10	$	33	$	32	$	—	$	77	$	(42)	$	—	$	(12)	$	(24)	$	205	$	67	$	64	$	(48)	$	210

Charge-offs and recoveries by loan class and vintage for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 were as follows:


(Dollars in thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans		Converted Revolving Loans		Total		2021		2020		2019		2018		2017		Prior		Revolving Loans		Converted Revolving Loans		Total
Commercial and industrial:
Charge-off	$	—	$	—	$	(191)	$	(74)	$	—	$	—	$	(44)	$	—	$	(309)	$	—	$	—	$	(191)	$	(260)	$	—	$	—	$	—	$	(44)	$	(495)
Recovery		—		—		1		13		33		158		9		—		214		—		—		5		39		43		762				40		889
Total commercial and industrial		—		—		(190)		(61)		33		158		(35)		—		(95)		—		—		(186)		(221)		43		762		—		(4)		394
1-4 family residential:
Charge-off																				—		—		—		—		—		(3)		—		—		(3)
Total 1-4 family residential																				—		—		—		—		—		(3)		—		—		(3)
Consumer:
Charge-off																				(10)		—		(3)		—		—		—		—		—		(13)
Recovery		3		—		1		—		—		—		—		—		4		4		—		4		—		—		99		—		—		107
Total consumer		3		—		1		—		—		—		—		—		4		(6)		—		1		—		—		99		—		—		94
Agriculture:
Recovery		—		—		—		—		—		42		—		—		42		—		—		—		—		—		47		—		—		47
Total agriculture		—		—		—		—		—		42		—		—		42		—		—		—		—		—		47		—		—		47
Total:
Charge-off		—		—		(191)		(74)		—		—		(44)		—		(309)		(10)		—		(194)		(260)		—		(3)		—		(44)		(511)
Recovery		3		—		2		13		33		200		9		—		260		4		—		9		39		43		908		—		40		1,043
Total	$	3	$	—	$	(189)	$	(61)	$	33	$	200	$	(35)	$	—	$	(49)	$	(6)	$	—	$	(185)	$	(221)	$	43	$	905	$	—	$	(4)	$	532

The Company has unfunded commitments, comprised of letters of credit and commitments to extend credit that are not unconditionally cancellable by the Company. See Note 16: Commitments and Contingencies and Financial

Table of Contents

Instruments with Off-Balance-Sheet Risk. Unfunded commitments have similar characteristics as loans and their ACL was determined using the model and methodology for loans noted above as well as historical and expected utilization levels.

~~Table of Contents~~

Activity in the ACL for unfunded commitments for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, was as follows:



	March 31,				Nine Months Ended September 30,
(Dollars in thousands)		2022		2021		2022		2021
Beginning balance	$	3,266	$	4,177	$	3,266	$	4,177
Provision		415		126
Provision (recapture)						551		(605)
Ending balance	$	3,681	$	4,303	$	3,817	$	3,572

NOTE 7: PREMISES AND EQUIPMENT

The components of premises and equipment as of the dates indicated below were as follows:



(Dollars in thousands)	March 31, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Land	$	15,484	$	15,484	$	15,484	$	15,484
Buildings and leasehold improvements		62,227		64,298		62,260		64,298
Furniture and equipment		17,122		17,087		17,619		17,087
Vehicles		248		248		248		248
Construction in progress		496		496		476		496
		95,577		97,613		96,087		97,613
Less accumulated depreciation		(38,912)		(39,196)		(40,493)		(39,196)
Premises and equipment, net	$	56,665	$	58,417	$	55,594	$	58,417

Depreciation expense was ~~$840,000~~$2.5 million and ~~$863,000~~$2.6 million for the nine months ended September 30, 2022 and 2021, respectively and $842,000 and $871,000 for the three months ended ~~March 31,~~September 30, 2022 and 2021, respectively. Depreciation expense is included in net occupancy expense in the Company’s condensed consolidated statements of income.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, the Company recorded a loss of $1.2 million, which is included in net gains on sales of assets in the condensed consolidated income statement, for disposals of buildings and improvements and furniture and equipment for a land lease that was terminated early at the request of the lessor.

NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill was $81.0 million at ~~March 31,~~September 30, 2022 and December 31, 2021 and there were 0no changes in goodwill during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 or the year ended December 31, 2021. Based on the results of the Company’s assessment, management does not believe any impairment of goodwill or other intangible assets existed at ~~March 31,~~September 30, 2022 or December 31, 2021.

Other intangibles as of the dates indicated below were as follows:


	Weighted-							Weighted-
	Average							Average
	Remaining	Gross				Net		Remaining	Gross				Net
	Amortization	Intangible		Accumulated		Intangible		Amortization	Intangible		Accumulated		Intangible
(Dollars in thousands)	Period	Assets		Amortization		Assets		Period	Assets		Amortization		Assets
March 31, 2022
September 30, 2022
Core deposits	2.2 years	$	13,750	$	(13,582)	$	168	1.9 years	$	13,750		(13,653)	$	97
Customer relationships	6.8 years		6,629		(3,646)		2,983	6.3 years		6,629		(3,866)		2,763
Servicing assets	10.0 years		687		(298)		389	7.3 years		672		(344)		328
Total other intangible assets, net		$	21,066	$	(17,526)	$	3,540		$	21,051	$	(17,863)	$	3,188
December 31, 2021
Core deposits	2.4 years	$	13,750	$	(13,538)	$	212	2.4 years	$	13,750	$	(13,538)	$	212
Customer relationships	7.0 years		6,629		(3,535)		3,094	7.0 years		6,629		(3,535)		3,094
Servicing assets	11.5 years		624		(272)		352	11.5 years		624		(272)		352
Total other intangible assets, net		$	21,003	$	(17,345)	$	3,658		$	21,003	$	(17,345)	$	3,658

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Servicing Assets

Changes in servicing assets as of the dates indicated below were as follows:



	March 31,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Balance at beginning of year	$	352	$	190	$	352	$	190
Increase from loan sales		63		11		62		92
Decrease from serviced loans paid off or foreclosed						(14)		(2)
Amortization		(26)		(13)		(72)		(44)
Balance at end of period	$	389	$	188	$	328	$	236

NOTE 9: BANK-OWNED LIFE INSURANCE

During the nine months ended September 30, 2021, the Company received proceeds in the amount of $2.7 million as the owner and beneficiary under a bank-owned insurance policy as the result of claims submitted on a covered individual and the Company recorded a gain of $1.9 million.

Bank-owned life insurance policies and the net change in cash surrender value during the periods indicated below were as follows:


	March 31,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Balance at beginning of period	$	73,156	$	72,338	$	73,156	$	72,338
Redemptions						—		(2,670)
Net change in cash surrender value		371		390		1,118		3,103
Balance at end of period	$	73,527	$	72,728	$	74,274	$	72,771

NOTE 10: DEPOSITS

Deposits as of the dates indicated below were as follows:


(Dollars in thousands)	March 31, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Interest-bearing demand accounts	$	444,571	$	468,361	$	415,970	$	468,361
Money market accounts		1,218,082		1,209,659		1,144,969		1,209,659
Savings accounts		130,218		127,031		128,886		127,031
Certificates and other time deposits, $100,000 or greater		127,798		134,775		161,975		134,775
Certificates and other time deposits, less than $100,000		99,233		106,477		91,501		106,477
Total interest-bearing deposits		2,019,902		2,046,303		1,943,301		2,046,303
Noninterest-bearing deposits		1,801,323		1,784,981		1,780,473		1,784,981
Total deposits	$	3,821,225	$	3,831,284	$	3,723,774	$	3,831,284

At ~~March 31,~~September 30, 2022 and December 31, 2021, the Company had ~~$36.9~~$37.6 million and $37.3 million in deposits from public entities and brokered deposits of ~~$46.4~~$39.8 million and $52.9 million, respectively. At ~~March 31,~~September 30, 2022 and December 31, 2021, overdrafts of ~~$322,000~~$986,000 and $402,000, respectively, were reclassified to loans. Accrued interest payable for deposits was ~~$100,000~~$306,000 and $128,000 at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively, which was included in other liabilities in the condensed consolidated balance sheets. The Company had 0no major concentrations of deposits at ~~March 31,~~September 30, 2022 or December 31, 2021 from any single or related groups of depositors. At ~~March 31,~~September 30, 2022 and December 31, 2021, the Company had ~~$65.8~~$101.9 million and $70.5 million, respectively, of certificates of deposits or other time deposits that were uninsured. Securities pledged and the letter of credit issued under the Company’s Federal Home Loan blanket lien arrangement which secure public deposits were not considered in determining the amount of uninsured time deposits.

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NOTE 11: LINES OF CREDIT

Line of Credit

The Company has entered into a loan agreement with another financial institution, or Loan Agreement, which has been periodically amended and provides for a $30.0 million revolving line of credit. At ~~March 31,~~September 30, 2022, there were 0no outstanding borrowings on this line of credit and the Company did not draw on this line of credit during 2022 or 2021. The Company can make draws on the line of credit for a period of 12 months, which began on December 13, 2021, after which the Company will not be permitted to make further draws and the outstanding balance will amortize over a period

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of 60 months. Interest accrues on outstanding borrowings at a rate equal to the maximum “Latest” U.S. prime rate of interest per annum and payable quarterly in the first 12 months and thereafter, quarterly principal and interest payments are required over a term of 60 months. The entire outstanding balance and unpaid interest is payable in full on December 13, 2027.

The Company may prepay the principal amount of the line of credit without premium or penalty. The obligations of the Company under the Loan Agreement are secured by a valid and perfected first priority lien on all of the issued and outstanding shares of capital stock of the Bank.

Covenants made under the Loan Agreement include, among other things, the Company maintaining tangible net worth of not less than $300.0 million, the Company maintaining a free cash flow coverage ratio of not less than 1.25 to 1.00, the Bank Texas Ratio (as defined in the Loan Agreement) not to exceed 15%, the Bank’s Total Capital Ratio (as defined under the Loan Agreement) of not less than 12% and restrictions on the ability of the Company and its subsidiaries to incur certain additional debt. The Company was in compliance with these covenants at ~~March 31,~~September 30, 2022.

Additional Lines of Credit

The Federal Home Loan Bank allows the Company to borrow on a blanket floating lien status collateralized by certain loans and the blanket lien amount was ~~$1.1~~$1.2 billion at ~~March 31,~~September 30, 2022 and $999.3 million at December 31, 2021. Federal Home Loan Bank advances outstanding totaled $50.0 million at ~~both March 31, 2022 and~~ December 31, ~~2021, and these~~2021. These borrowings ~~mature as shown below.~~were paid in full during the nine months ended September 30, 2022. At ~~both March 31,~~September 30, 2022 and December 31, 2021, there were $27.0 million and $26.0 million, respectively, of letters of credit outstanding that were issued under this agreement and used as collateral to secure certain public deposits. After considering the outstanding advances and letters of credit, the net capacity available under the Federal Home Loan Bank facility was ~~$1.0~~$1.2 billion at ~~March 31,~~September 30, 2022 and $923.3 million at December 31, 2021.

The Company has historically borrowed under this agreement on a short-term basis but did not during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021. The weighted-average interest rate for Federal Home Loan Bank advances for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021 was ~~1.79%~~1.99% and ~~1.79%~~1.77%, respectively.

~~The scheduled maturities of Federal Home Loan Bank advances as of the date indicated below were as follows:~~

(Dollars in thousands)

March 31, 2022
2022

10,000
2023

20,000
2024

20,000
Total

$
50,000

At ~~March 31,~~September 30, 2022 and December 31, 2021, the Company maintained federal funds lines of credit with commercial banks that provided for the availability to borrow up to an aggregate of $45.0 million and $65.0 ~~million.~~million, respectively. There were 0no funds under these lines of credit outstanding at ~~March 31,~~September 30, 2022 or December 31, 2021.

NOTE 12: RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company, through the Bank, has and expects to continue to conduct routine banking business with related parties, including its executive officers and directors. Related parties also include shareholders and their affiliates who directly or indirectly have 5% or more beneficial ownership in the Company.

Loans—In the opinion of management, loans to related parties were on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectability or present any other unfavorable features to the Company. The Company had approximately ~~$157.7~~$109.6 million and $138.1 million in loans to related parties at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively. At ~~March 31,~~September 30, 2022 and December 31, 2021, there were 0no loans made to related parties deemed nonaccrual, past due, restructured in a troubled debt restructuring or classified as potential problem loans.

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Unfunded Commitments—At ~~March 31,~~September 30, 2022 and December 31, 2021, the Company had approximately ~~$67.3~~$101.1 million and $55.6 million in unfunded loan commitments to related parties, respectively.

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Deposits—The Company held related party deposits of approximately ~~$278.2~~$243.4 million and $249.9 million at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively.

NOTE 13: FAIR VALUE DISCLOSURES

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring 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. In estimating fair value, the Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied.

Inputs to valuation techniques refer to the assumptions used in pricing the asset or liability. Valuation inputs are categorized in a three-level hierarchy, that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

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

Level 2 Inputs—Other observable inputs that may 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 or other inputs that are observable for the asset or liability such as interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates or inputs that are observable or can be corroborated by observable market data.

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

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and the year ended December 31, 2021, there were 0 no transfers of assetsorliabilities within the levels of the fair value hierarchy.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use observable market-based parameters as inputs. Valuation adjustments may be made to ensure that assets and liabilities are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.

The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value could result in different estimates of fair value. Fair value estimates are based on judgments regarding current economic conditions, risk characteristics of the various instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.

Financial Instruments Measured at Fair Value on a Recurring Basis

The Company’s assets and liabilities measured at fair value on a recurring basis include the following:

Debt Securities Available for Sale—Debt securities classified as available for sale are recorded at fair value. For those debt securities classified as Level 1 and Level 2, the Company obtains fair value measurements from an independent pricing service. 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 prepayments speeds,

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credit information and the security’s terms and conditions, among other things. The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies for reasonableness.

Equity Securities—Equity securities are recorded at fair value and the fair value measurements are based on observable data obtained from a third-party pricing service. The Company reviews the prices supplied by the service against publicly available information. The equity securities are mutual funds publicly traded on the National Association of Securities Dealers Automated Quotations and the fair value is determined by using unadjusted quoted market prices which are considered Level 1 inputs.

Interest Rate Swaps—The Company obtains fair value measurements for its interest rate swaps from an

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independent pricing service which uses the income approach. The income approach calls for the utilization of valuation techniques to convert future cash flows as due to be exchanged per the terms of the financial instrument, into a single present value amount. Measurement is based on the value indicated by the market expectations about those future amounts as of the measurement date. The proprietary curves of the independent pricing service utilize pricing models derived from industry standard analytic tools, considering both Level 1 and Level 2 inputs. Interest rate swaps are classified as Level 2.

Financial assets and financial liabilities measured at fair value on a recurring basis as of the dates indicated below were as follows:

(Dollars in thousands)

March 31, 2022

December 31, 2021
Fair value of financial assets:




Level 1 inputs:

Equity securities

$
1,121

$
1,173
Debt securities available for sale - U.S. Treasury securities

109,044

11,797
Level 2 inputs:

Debt securities available for sale:

State and municipal securities

155,774

172,600
U.S. agency securities:




Callable debentures

2,807

2,973
Collateralized mortgage obligations

89,924

62,382
Mortgage-backed securities

189,309

174,121
Interest rate swaps

4,469

3,543
Level 3 inputs:

Credit risk participation agreement

9

15
Total fair value of financial assets

$
552,457

$
428,604
Fair value of financial liabilities:




Level 2 inputs:

Interest rate swaps

$
4,469

$
3,543
Total fair value of financial liabilities

$
4,469

$
3,543


(Dollars in thousands)		September 30, 2022		December 31, 2021
Fair value of financial assets:
Level 1 inputs:	Equity securities	$	1,045	$	1,173
	Debt securities available for sale - U.S. Treasury securities		107,259		11,797
Level 2 inputs:	Debt securities available for sale:
	State and municipal securities		135,098		172,600
	U.S. agency securities:
	Callable debentures		2,564		2,973
	Collateralized mortgage obligations		84,398		62,382
	Mortgage-backed securities		180,918		174,121
	Interest rate swaps		9,944		3,543
Level 3 inputs:	Credit risk participation agreement		27		15
	Total fair value of financial assets	$	521,253	$	428,604
Fair value of financial liabilities:
Level 2 inputs:	Interest rate swaps	$	9,944	$	3,543
	Total fair value of financial liabilities	$	9,944	$	3,543

Financial Instruments Measured at Fair Value on a Non-recurring Basis

A portion of financial instruments are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances. Financial assets measured at fair value on a non-recurring basis during the dates shown below include certain loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral or a discounted cash flow method if not. Prior to foreclosure, estimated fair values for collateral is estimated based on Level 3 inputs based on customized discounting criteria.

The Company’s financial assets measured at fair value on a non-recurring basis are certain individually evaluated loans and as of the dates indicated below were as follows:


	September 30, 2022						December 31, 2021
(Dollars in thousands)	Recorded Investment		Specific ACL		Net		Recorded Investment		Specific ACL		Net
Level 3 inputs:
Loans evaluated individually
Commercial and industrial	$	9,205	$	2,517	$	6,688	$	9,624	$	3,986	$	5,638
Commercial real estate		733		28		705		2,629		609		2,020
Consumer		116		116		—		125		125		—
Total	$	10,054	$	2,661	$	7,393	$	12,378	$	4,720	$	7,658

Non-Financial Assets and Non-Financial Liabilities Measured at Fair Value on a Non-recurring Basis

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~~The Company’s financial assets measured at fair value on a non-recurring basis are certain individually evaluated loans and as of the dates indicated below were as follows:~~

March 31, 2022

December 31, 2021
(Dollars in thousands)

Recorded Investment

Specific ACL

Net

Recorded Investment

Specific ACL

Net
Level 3 inputs:

Loans evaluated individually

Commercial and industrial

$
9,188

$
3,686

$
5,502

$
9,624

$
3,986

$
5,638
Commercial real estate

824

98

726

2,629

609

2,020
Consumer

119

119

—

125

125

—
Total

$
10,131

$
3,903

$
6,228

$
12,378

$
4,720

$
7,658

~~Non-Financial Assets and Non-Financial Liabilities Measured at Fair Value on a Non-recurring Basis~~

The Company’s non-financial assets measured at fair value on a non-recurring basis for the periods reported are foreclosed assets (upon initial recognition or subsequent impairment). The Company’s other non-financial assets whose fair value may be measured on a non-recurring basis when there is evidence of impairment and may be subject to impairment adjustments include goodwill and intangible assets, among other assets.

The fair value of foreclosed assets may be estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria less estimated selling costs. There were 0no write-downs of foreclosed assets for fair value remeasurement subsequent to initial foreclosure during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 or during 2021. There were 0no outstanding foreclosed assets at ~~March 31,~~September 30, 2022 or December 31, 2021.

Financial Instruments Reported at Amortized Cost

Fair market values and carrying amounts of financial instruments that are reported at cost as of the dates indicated below were as follows:


	March 31, 2022				December 31, 2021					September 30, 2022				December 31, 2021
			Carrying				Carrying					Carrying				Carrying
(Dollars in thousands)	Fair Value		Amount		Fair Value		Amount			Fair Value		Amount		Fair Value		Amount
Financial assets:
Level 1 inputs:									Cash and due from banks	$	370,448	$	370,448	$	950,146	$	950,146
Cash and due from banks	$	770,991	$	770,991	$	950,146	$	950,146
Level 2 inputs:									Bank-owned life insurance		74,274		74,274		73,156		73,156
Bank-owned life insurance		73,527		73,527		73,156		73,156
Accrued interest receivable		10,925		10,925		11,616		11,616
Servicing asset		389		389		352		352
									Accrued interest receivable		10,777		10,777		11,616		11,616
									Servicing asset		328		328		352		352
Level 3 inputs:									Loans, including held for sale, net		2,906,108		3,093,844		2,864,663		2,836,343
Loans, including held for sale, net		2,810,655		2,849,186		2,864,663		2,836,343
Other investments		17,101		17,101		17,727		17,727
									Other investments		17,835		17,835		17,727		17,727
Total financial assets	$	3,683,588	$	3,722,119	$	3,917,660	$	3,889,340		$	3,379,770	$	3,567,506	$	3,917,660	$	3,889,340
Financial liabilities:
Level 1 inputs:									Noninterest-bearing deposits	$	1,780,473	$	1,780,473	$	1,784,981	$	1,784,981
Noninterest-bearing deposits	$	1,801,323	$	1,801,323	$	1,784,981	$	1,784,981
Level 2 inputs:									Interest-bearing deposits		1,938,023		1,943,301		2,040,794		2,046,303
Interest-bearing deposits		1,919,719		2,019,902		2,040,794		2,046,303
Federal Home Loan Bank advances		49,416		50,000		50,591		50,000
Accrued interest payable		174		174		201		201
									Federal Home Loan Bank advances		—		—		50,591		50,000
									Accrued interest payable		306		306		201		201
Total financial liabilities	$	3,770,632	$	3,871,399	$	3,876,567	$	3,881,485	Total financial liabilities	$	3,718,802	$	3,724,080	$	3,876,567	$	3,881,485

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value and as such the fair values shown above are not necessarily indicative of the amounts

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

NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS

The Company has outstanding interest rate swap contracts with certain customers and equal and offsetting interest rate swaps with other financial institutions entered into at the same time. These interest rate swap contracts are not designated as hedging instruments for mitigating interest rate risk. The objective of the transactions is to allow customers to effectively convert a variable rate loan to a fixed rate.

In connection with each swap transaction, the Company agreed to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agreed 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. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts are designed to offset each other and do not significantly impact the Company’s operating results except in certain situations where there is a significant deterioration in the customer’s credit worthiness or that of the counterparties. At ~~March 31,~~September 30, 2022 and December 31, 2021, management determined there was 0no such deterioration.

At ~~March 31,~~September 30, 2022 and December 31, 2021, the Company had 1814 and 19 interest rate swap agreements outstanding with borrowers and financial institutions, respectively. These derivative instruments are not designated as ~~accounting hedges and changes in the net fair value are recognized in other noninterest income. Fair value amounts are included in other assets and other liabilities.~~

The Company has a credit risk participation agreement with another financial institution that is associated with an interest rate swap related to a loan for which the Company is the lead agent bank and the other financial institution provides credit protection to the Company should the borrower fail to perform under the terms of the interest rate swap agreement. The fair value of the agreement is determined based on the market value of the underlying interest rate swap adjusted for credit spreads and recovery rates.

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accounting hedges and changes in the net fair value are recognized in other noninterest income. Fair value amounts are included in other assets and other liabilities.

At September 30, 2022 and December 31, 2021, the Company had three and one credit risk participation agreements with another financial institution, respectively, that are associated with interest rate swaps related to loans for which the Company is the lead agent bank and the other financial institution provides credit protection to the Company should the borrower fail to perform under the terms of the interest rate swap agreements. The fair value of the agreements is determined based on the market value of the underlying interest rate swaps adjusted for credit spreads and recovery rates.

Derivative instruments outstanding as of the dates indicated below were as follows:


								Weighted								Weighted
								Average								Average
		Notional		Fair				Maturity		Notional		Fair				Maturity
(Dollars in thousands)	Classification	Amounts		Value		Fixed Rate	Floating Rate	(Years)	Classification	Amounts		Value		Fixed Rate	Floating Rate	(Years)
March 31, 2022
September 30, 2022
Interest rate swaps with financial institutions									Other assets	$	87,537	$	8,485	3.25% - 5.58%	LIBOR 1M + 2.50% - 3.00%	4.58
Interest rate swaps with customers	Other assets	$	31,514	$	184	4.85 - 5.60%	LIBOR 1M + 2.50% - 3.00%	4.34	Other assets		22,676		1,021	5.35% - 5.40%	SOFR CME 1M + 2.50%	10.22
Interest rate swaps with financial institutions	Other assets		88,755		4,203	3.25% - 5.15%	LIBOR 1M + 2.50% - 3.00%	5.41	Other assets		5,057		438	4.99%	U.S. Prime	5.21
Interest rate swaps with customers	Other assets		5,113		82	4.99%	U.S. Prime	5.71	Other liabilities		5,057		(438)	4.99%	U.S. Prime	5.21
Interest rate swaps with financial institutions	Other liabilities		5,113		(82)	4.99%	U.S. Prime	5.71	Other liabilities		22,676		(1,021)	5.35% - 5.40%	SOFR CME 1M + 2.50%	10.22
Interest rate swaps with financial institutions	Other liabilities		31,514		(184)	4.85 - 5.60%	LIBOR 1M + 2.50% - 3.00%	4.34
Interest rate swaps with customers	Other liabilities		88,755		(4,203)	3.25% - 5.15%	LIBOR 1M + 2.50%	5.41	Other liabilities		87,537		(8,485)	3.25% - 5.58%	LIBOR 1M + 2.50% - 3.00%	4.58
Credit risk participation agreement with financial institution									Other assets		13,163		2	3.50%	LIBOR 1M + 2.50%	7.49
Credit risk participation agreement with financial institution	Other assets		13,433		9	3.50%	LIBOR 1M + 2.50%	7.99	Other assets		8,503		25	5.35% - 5.40%	SOFR CME 1M + 2.50%	10.22
Total derivatives		$	264,197	$	9					$	252,206	$	27
December 31, 2021
Interest rate swaps with customers	Other assets	$	56,440	$	2,474	4.00% - 5.60%	LIBOR 1M + 2.50% - 3.00%	5.10	Other assets	$	56,440	$	2,474	4.00% - 5.60%	LIBOR 1M + 2.50% - 3.00%	5.10
Interest rate swaps with financial institutions	Other assets		66,650		875	3.25% - 3.50%	LIBOR 1M + 2.50%	5.59	Other assets		66,650		875	3.25% - 3.50%	LIBOR 1M + 2.50%	5.59
Interest rate swaps with customers	Other assets		5,141		194	4.99%	U.S. Prime	5.96	Other assets		5,141		194	4.99%	U.S. Prime	5.96
Interest rate swaps with financial institutions	Other liabilities		5,141		(194)	4.99%	U.S. Prime	5.96	Other liabilities		5,141		(194)	4.99%	U.S. Prime	5.96
Interest rate swaps with financial institutions	Other liabilities		56,440		(2,474)	4.00% - 5.60%	LIBOR 1M + 2.50% - 3.00%	5.10	Other liabilities		56,440		(2,474)	4.00% - 5.60%	LIBOR 1M + 2.50% - 3.00%	5.10
Interest rate swaps with customers	Other liabilities		66,650		(875)	3.25% - 3.50%	LIBOR 1M + 2.50%	5.59	Other liabilities		66,650		(875)	3.25% - 3.50%	LIBOR 1M + 2.50%	5.59
Credit risk participation agreement with financial institution	Other assets		13,563		15	3.50%	LIBOR 1M + 2.50%	8.24	Other assets		13,563		15	3.50%	LIBOR 1M + 2.50%	8.24
Total derivatives		$	270,025	$	15					$	270,025	$	15

NOTE 15: OPERATING LEASES

The Company leases certain office space, stand-alone buildings and land, which are recognized as operating lease right-of-use assets in the condensed consolidated balance sheets and operating lease liabilities in the condensed consolidated balance sheets represent the Company’s liability to make lease payments under these operating leases, on a discounted basis. The Company excludes short-term leases, defined as lease terms of 12 months or less from its operating lease right-of-use assets and operating lease liabilities.

Lease costs for the periods indicated below were as follows:

Three Months Ended March 31,
(Dollars in thousands)

2022

2021
Operating lease cost

$
427

$
485
Short-term lease cost

4

4
Sublease income

(157)

(161)
Total lease cost

$
274

$
328

~~Other information related to operating leases for the periods indicated below was as follows:~~

Three Months Ended March 31,
(Dollars in thousands)

2022

2021
Amortization of lease right-to-use asset

$
341

$
385
Accretion of lease liabilities

86

100
Cash paid for amounts included in the measurement of lease liabilities

476

487
Weighted-average remaining lease term in years

10.4

10.7
Weighted-average discount rate

2.65%

2.64%


	Nine Months Ended September 30,
(Dollars in thousands)	2022		2021
Operating lease cost	$	1,244	$	1,436
Short-term lease cost		15		13
Sublease income		(469)		(472)
Total lease cost	$	790	$	977

2728

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Other information related to operating leases for the periods indicated below was as follows:


	Nine Months Ended September 30,
(Dollars in thousands)	2022		2021
Amortization of lease right-to-use assets	$	1,008	$	1,141
Accretion of lease liabilities		260		294
Cash paid for amounts included in the measurement of lease liabilities		1,461		1,566
Weighted-average remaining lease term in years		10.1		10.7
Weighted-average discount rate		2.63%		2.63%

A maturity analysis of operating lease liabilities as of the date indicated below was as follows:



(Dollars in thousands)	March 31, 2022		September 30, 2022
1 year or less	$	1,835	$	1,775
Over 1 year through 2 years		1,970		1,928
Over 2 years through 3 years		1,805		1,966
Over 3 years through 4 years		1,807		1,928
Over 4 years through 5 years		1,695		1,821
Thereafter		7,212		6,836
Total undiscounted lease liability		16,324		16,254
Less:
Discount on cash flows		(2,572)		(2,506)
Total operating lease liability	$	13,752	$	13,748

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, the Company terminated a land lease at the request of the lessor. The Company received a payment of $1.5 million from the lessor for the early termination of the lease, which is reflected in other noninterest income in the condensed consolidated income statements.

During the nine months ended September 30, 2022, the operating lease right-of-use asset and liabilities were both increased $809,000 due to a lease modification to extend the term of a lease.

NOTE 16: COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

Financial Instruments with Off-Balance-Sheet Risk

The Company enters into commitments to extend credit and standby letters of credit to meet customer financing needs and, in accordance with GAAP, these commitments are not reflected as liabilities in the condensed consolidated balance sheets. Due to the nature of these commitments, the amounts disclosed in the tables below do not necessarily represent future cash requirements.

Commitments to extend credit and standby letters of credit as of the dates indicated below were as follows:


	March 31,		December 31,
(Dollars in thousands)	March 31, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Commitments to extend credit, variable interest rate	$	810,482	$	714,084	$	853,644	$	714,084
Commitments to extend credit, fixed interest rate		96,610		60,876		135,404		60,876
Total commitments	$	907,092	$	774,960	$	989,048	$	774,960
Standby letters of credit	$	16,972	$	18,109	$	11,611	$	18,109

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract, generally have fixed expiration dates or other termination clauses and may expire without being fully drawn upon.

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Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to the Company’s customers.

Litigation

The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing the Company, it is the opinion of management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the financial position or results of operations of the Company.

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NOTE 17: EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION ARRANGEMENTS

Employee Benefit Plans

The Company maintains a 401(k) employee benefit plan and substantially all employees that complete three months of service may participate. The Company matches a portion of each employee’s contribution and may, at its discretion, make additional contributions. During the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, the Company contributed ~~$804,000~~$1.7 million and ~~$726,000~~$1.7 million to the plan, respectively.

Executive Deferred Compensation Arrangements

The Company established an executive incentive compensation arrangement with several officers of the Bank, in which these officers are eligible for performance-based incentive bonus compensation. As part of this compensation arrangement, the Company contributes one-fourth of the incentive bonus amount into a deferred compensation account. The deferred amounts accrue at a market rate of interest and are payable to the employees upon separation from the Bank provided vesting arrangements have been met. At ~~March 31,~~September 30, 2022 and December 31, 2021, the amount payable, including interest, for this deferred plan was approximately ~~$1.7~~$1.4 million and $1.7 million, respectively, which is included in other liabilities in the condensed consolidated balance sheets.

Salary Continuation Agreements

The Company entered into a salary continuation arrangement in 2008 with the Company’s then President and Chief Executive Officer, or CEO, that calls for payments of $100,000 per year for a period of 10 years commencing at age 65. Payments under the plan began during 2014. The Company’s liability was ~~$130,000~~$82,000 and $153,000 at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively, which is included in other liabilities in the condensed consolidated balance sheets and equals the present value of the benefits expected to be provided.

In October 2017, the Company entered into a salary continuation arrangement with the Company’s President and CEO that calls for payments of $200,000 per year payable for a period of 10 years commencing at age 70. Payments under the plan will begin in 2024. The Company’s liability was ~~$962,000~~$1.5 million and $900,000 at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively, which is included in other liabilities in the condensed consolidated balance sheets. The liability ~~will continue to accrue over~~stopped accruing on October 1, 2022 and was paid in full as a result of the ~~remaining period until payments commence such that the accrued amount at the eligibility date will equal the present value of all the future benefits expected to be paid.~~Merger.

NOTE 18: STOCK-BASED COMPENSATION

The Company acquired a stock option plan, which originated under VB Texas, Inc. as a part of a merger of the two companies, or the 2006 Plan. At the merger date, all outstanding options under this plan became fully vested and exercisable. The plan expired in 2016 and no additional options may be granted under its terms. As of ~~March 31,~~September 30, 2022, there were options outstanding to acquire ~~35,560~~10,160 shares of the Company’s common stock under the 2006 Plan, ~~all of~~ which will expire in 2022 if not exercised.

In 2014, the Company adopted the 2014 Stock Option Plan, or the 2014 Plan, which was approved by the Company’s shareholders and limits the number of shares that may be optioned to 1,127,200. The 2014 Plan provides that 0no options may be granted after May 20, 2024. Options granted under the 2014 Plan expire 10 years from the date of grant

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and become exercisable in installments over a period of one to five years, beginning on the first anniversary of the date of grant. As of ~~March 31,~~September 30, 2022, 963,200 shares were available for future grant. ~~NaN~~No options have been issued under the 2014 Plan since 2017.

In 2017, the Company adopted the 2017 Omnibus Incentive Plan, or the 2017 Plan. The 2017 Plan authorizes the Company to grant options, performance-based and non-performance based restricted stock awards as well as various other types of stock-based awards and other awards that are not stock-based to eligible employees, consultants and non-employee directors up to an aggregate of 600,000 shares of common stock. As of ~~March 31,~~September 30, 2022, ~~243,138~~244,140 shares were available for future grant under the 2017 Plan.

~~Table~~In connection with the closing of ~~Contents~~the Merger on October 1, 2022, the 2022 Omnibus Incentive Plan approved by the Company’s shareholders at the special meeting of shareholders on May 23, 2022 became effective and no grants or future awards may be made under the 2014 Plan or the 2017 Plans, or the Prior Plans. In addition, all restricted stock awards outstanding under the Prior Plans as of the effective time of the Merger became fully vested and exercisable, other than certain restricted stock awards granted to the Company’s non-employee directors on February 1, 2022. All outstanding options were fully vested prior to September 30, 2022. See Note 22: Subsequent Events.

Stock option activity for the periods indicated below was as follows:


	Three Months Ended March 31,						Nine Months Ended September 30,
	2022			2021			2022			2021
	Number of	Weighted		Number of	Weighted		Number of	Weighted		Number of	Weighted
	Shares	Average		Shares	Average		Shares	Average		Shares	Average
	Underlying	Exercise		Underlying	Exercise		Underlying	Exercise		Underlying	Exercise
	Options	Price		Options	Price		Options	Price		Options	Price
Outstanding at beginning of period	191,560	$	17.53	201,720	$	17.22	191,560	$	17.53	201,720	$	17.22
Granted	—		—	—		—	—		—	—		—
Exercised	0		0	0		0	(15,240)		11.32	(2,032)		11.32
Forfeited/expired	—		—	—		—	(10,160)		11.32	—		—
Outstanding at end of period	191,560	$	17.53	201,720	$	17.22	166,160	$	18.48	199,688	$	17.28

A summary of stock options as of the date indicated below was as follows:


	March 31, 2022						September 30, 2022
Stock Options		Exercisable		Unvested		Outstanding		Exercisable		Unvested		Outstanding
Number of shares underlying options		175,561		15,999		191,560		166,160		—		166,160
Weighted-average exercise price per share	$	17.22	$	21.00	$	17.53	$	18.48	$	—	$	18.48
Aggregate intrinsic value (in thousands)	$	2,420		160		2,580	$	1,789	$	—	$	1,789
Weighted-average remaining contractual term (years)		3.4		5.3		3.5		3.5		—		3.5

The fair value of the Company’s restricted stock awards is estimated based on the market value of the Company’s common stock at the date of grant. Restricted stock ~~shares~~awards are considered legally fully issued at the time of the grant and the grantee becomes the record owner of the restricted stock and has voting, dividend and other shareholder rights. The shares of restricted stock awards are non-transferable and subject to forfeiture until the restricted stock ~~vests~~awards vest and any dividends with respect to the restricted stock awards are subject to the same restrictions, including the risk of forfeiture.

Non-performance based restricted stock ~~grants~~awards vest over the service period in equal increments over a period of two to five years, beginning on the first anniversary of the date of grant.

The number of shares earned under the Company’s performance-based restricted stock award agreements is based on the achievement of certain branch production goals. Compensation expense for performance-based restricted stock is recognized for the probable award level over the period estimated to achieve the performance conditions and other goals, on a straight-line basis. If the probable award level and/or the period estimated to be achieved change, compensation expense will be adjusted via a cumulative catch-up adjustment to reflect these changes. The performance conditions and goals must be achieved within five years or the awards expire. ~~The number of performance-based shares granted presented in the table.~~

~~Restricted stock activity for the periods indicated below was as follows:~~

Non-performance Based

Performance-based

Weighted

Weighted

Average

Average

Number of

Grant Date

Number of

Grant Date

Shares

Fair Value

Shares

Fair Value
Outstanding at December 31, 2020

129,667

$
28.22

2,250

$
34.40
Granted

33,285

26.32

—

—
Vested

(13,369)

30.72

—

—
Forfeited

—

—

—

—
Outstanding at March 31, 2021

149,583

27.58

2,250

34.40

Outstanding at December 31, 2021

83,563

27.85

2,250

34.40
Granted

38,457

29.42

—

—
Vested

(18,342)

29.39

—

—
Forfeited

(1,703)

33.63

—

—
Outstanding at March 31, 2022

101,975

28.07

2,250

34.40

3031

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Restricted stock activity for the periods indicated below was as follows:


	Non-performance Based			Performance-based
		Weighted			Weighted
		Average			Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
Outstanding at December 31, 2020	129,667	$	28.22	2,250	$	34.40
Granted	51,665		26.31	—		—
Vested	(22,210)		30.57	—		—
Forfeited	(1,411)		28.82	—		—
Outstanding at September 30, 2021	157,711		27.26	2,250		34.40

Outstanding at December 31, 2021	83,563		27.85	2,250		34.40
Granted	38,457		29.42	—		—
Vested	(27,083)		29.70	—		—
Forfeited	(1,977)		33.04	—		—
Outstanding at September 30, 2022	92,960		27.86	2,250		34.40

A summary of restricted stock as of the date indicated below was as follows:


	March 31, 2022				September 30, 2022
Restricted Stock		Non-performance Based		Performance-based		Non-performance Based		Performance-based
Number of shares underlying restricted stock		101,975		2,250		92,960		2,250
Weighted-average grant date fair value per share	$	28.07	$	34.40	$	27.86	$	34.40
Aggregate fair value (in thousands)	$	3,161	$	70	$	2,719	$	66
Weighted-average remaining vesting period (years)		1.5		1.5		—		—

The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to options exercised or restricted stock vested or to pay the exercise price of the options. The shares of stock subject to options exercised, restricted stock vested, shares withheld and shares issued for the periods indicated below were as follows:


	Exercised/Vested	Shares Withheld	Shares Issued	Exercised/Vested	Shares Withheld	Shares Issued
Three Months Ended March 31, 2022
Nine Months Ended September 30, 2022
Stock options				15,240	—	15,240
Non-performance based restricted stock	18,342	(3,892)	14,450	27,083	(4,620)	22,463
Three Months Ended March 31, 2021
Nine Months Ended September 30, 2021
Stock options				2,032	—	2,032
Non-performance based restricted stock	13,369	(2,642)	10,727	22,210	(3,213)	18,997

For the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, stock compensation expense was ~~$483,000~~$1.5 million and ~~$541,000,~~$1.8 million, respectively, and for the three months ended September 30, 2022 and 2021, stock compensation expense was $515,000 and $698,000, respectively. As of ~~March 31,~~September 30, 2022, there was approximately ~~$2.2 million~~$962,000 of total unrecognized compensation expense related to the unvested ~~stock options, non-performance based~~ restricted stock ~~and performance-based restricted stock, which is expected to be recognized in the Company’s consolidated statements~~awards.

Table of ~~income over a weighted-average period of 1.5 years.~~Contents

NOTE 19: REGULATORY MATTERS

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

The Company and the Bank’s Common Equity Tier 1 capital includes common stock and related capital surplus, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, the Company and the Bank elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1 capital. Common Equity Tier 1 capital for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities.

The Basel III Capital Rules require the Company and the Bank to maintain: (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital ratio, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0%); (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.

The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company and the Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress and, as detailed above, effectively increases the

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minimum required risk-weighted capital ratios. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

In November 2019, the federal bank regulatory agencies published a final rule, the Community Bank Leverage Ratio Framework, or the Framework, to simplify capital calculations for community banks. The Framework provides for a simple measure of capital adequacy for certain community banking organizations. The Framework is optional and is designed to reduce burden by removing requirements for calculating and reporting risk-based capital ratios. Depository institutions and depository institution holding companies that have less than $10.0 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9.0%, are considered qualifying community banking organizations and are eligible to opt into the Framework. A qualifying community banking organization that elects to use the Framework and that maintains a Tier 1 capital-to-adjusted total assets ratio, or leverage capital ratio, of greater than 9.0% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III Capital Rules and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules. The final rule became effective January 1, 2020, and organizations that opt into the Framework and meet the criteria established by the rule can use the Framework for regulatory reports for the year ended December 31, 2020. In April 2020, the federal bank regulatory agencies announced two interim final rules to provide relief associated with Section 4012 of the Coronavirus Aid Relief and Economic Security Act, or CARES Act. For institutions that elect the Framework, the interim rules temporarily lowered the leverage ratio requirement to 8.0% for the second quarter of 2020 through the end of calendar year 2020 and to 8.5% for the 2021 calendar year and greater than 9.0% thereafter. The Company determined not to opt into the Framework and will continue to compute regulatory capital ratios based on the Basel III Capital Rules discussed above.

In September 2020, the federal bank regulatory agencies finalized an interim final rule that allows banking organizations to mitigate the effects of CECL on their regulatory capital computations. The rule permitted banking organizations that were required to adopt CECL for purposes of GAAP (as in effect January 1, 2021) for a fiscal year beginning during the calendar year 2020, the option to delay for up to two years an estimate of CECL’s effect on regulatory capital, followed by a three-year transition period (i.e., a transition period of five years in total). The Company determined

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not to use the transition provision and has reported the full effect of CECL upon adoption and for each reporting period thereafter in its regulatory capital calculation and ratios.

The Company is subject to the regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and, for the Bank, those administered by the Office of Comptroller of Currency, or OCC. Regulatory authorities can initiate certain mandatory actions if the Company or the Bank fail to meet the minimum capital requirements, which could have a direct material effect on the Company’s financial statements. Management believes, as of ~~March 31,~~September 30, 2022 and December 31, 2021, that the Company and the Bank met all capital adequacy requirements to which they were subject.

On June 18, 2021, the Bank and the OCC entered into a formal agreement, or the Formal Agreement, with regard to Bank Secrecy Act, or BSA, and anti-money laundering, or AML, compliance matters. On September 7, 2021, the OCC terminated the Formal Agreement, dated June 18, 2021 between the Bank and the OCC relating to the Bank’s BSA/AML compliance program.

To resolve the BSA/AML compliance matters, on December 16, 2021, the Bank, entered into an OCC Consent Order. Under the OCC Consent Order, the Bank paid a civil money penalty of $1.0 million.

On December 15, 2021, the Bank entered into a FinCEN Consent Order. Under the terms of the FinCEN Consent Order, the Bank paid a civil money penalty of $8.0 million; provided, however, that FinCEN agreed to credit the Bank the $1.0 million civil money penalty imposed by the OCC described above. As a result, the Bank paid an aggregate sum of $8.0 million ~~which is included in Regulatory fees in the consolidated statements of income,~~ under the OCC Consent Order and the FinCEN Consent Order. The OCC Consent Order and the FinCEN Consent Order each settled the civil money proceedings against the Bank initiated by the OCC and FinCEN.

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At ~~March 31,~~September 30, 2022 and December 31, 2021, the Company and the Bank were “well capitalized” based on the ratios presented below. Actual and required capital ratios for the Company and the Bank were as follows for the dates presented:



			Minimum		Required to be				Minimum		Required to be
			Capital Required		Considered Well				Capital Required		Considered Well
	Actual		Basel III		Capitalized		Actual		Basel III		Capitalized
(Dollars in thousands)	Amount	Ratio	Amount	Ratio	Amount	Ratio	Amount	Ratio	Amount	Ratio	Amount	Ratio
March 31, 2022
September 30, 2022
Common Equity Tier 1 to Risk-Weighted Assets:
Consolidated	$ 483,115	14.97%	$ 225,939	7.00%	N/A	N/A	$ 487,717	14.05%	$ 243,053	7.00%	N/A	N/A
Bank Only	$ 456,183	14.13%	$ 225,917	7.00%	$ 209,780	6.50%	$ 479,175	13.81%	$ 242,969	7.00%	$ 225,614	6.50%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated	$ 483,115	14.97%	$ 274,354	8.50%	N/A	N/A	$ 487,717	14.05%	$ 295,135	8.50%	N/A	N/A
Bank Only	$ 456,183	14.13%	$ 274,328	8.50%	$ 258,191	8.00%	$ 479,175	13.81%	$ 295,034	8.50%	$ 277,679	8.00%
Total Capital to Risk-Weighted Assets:
Consolidated	$ 518,239	16.06%	$ 338,908	10.50%	N/A	N/A	$ 524,112	15.09%	$ 364,579	10.50%	N/A	N/A
Bank Only	$ 491,307	15.22%	$ 338,876	10.50%	$ 322,739	10.00%	$ 515,570	14.85%	$ 364,454	10.50%	$ 347,099	10.00%
Tier 1 Leverage Capital to Average Assets:
Consolidated	$ 483,115	11.08%	$ 174,353	4.00%	N/A	N/A	$ 487,717	11.42%	$ 170,891	4.00%	N/A	N/A
Bank Only	$ 456,183	10.47%	$ 174,248	4.00%	$ 217,810	5.00%	$ 479,175	11.22%	$ 170,856	4.00%	$ 213,570	5.00%

December 31, 2021
Common Equity Tier 1 to Risk-Weighted Assets:
Consolidated	$ 475,154	15.31%	$ 217,300	7.00%	N/A	N/A	$ 475,154	15.31%	$ 217,300	7.00%	N/A	N/A
Bank Only	$ 447,819	14.43%	$ 217,270	7.00%	$ 201,757	6.50%	$ 447,819	14.43%	$ 217,270	7.00%	$ 201,757	6.50%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated	$ 475,154	15.31%	$ 263,864	8.50%	N/A	N/A	$ 475,154	15.31%	$ 263,864	8.50%	N/A	N/A
Bank Only	$ 447,819	14.43%	$ 263,836	8.50%	$ 248,316	8.00%	$ 447,819	14.43%	$ 263,836	8.50%	$ 248,316	8.00%
Total Capital to Risk-Weighted Assets:
Consolidated	$ 509,766	16.42%	$ 325,950	10.50%	N/A	N/A	$ 509,766	16.42%	$ 325,950	10.50%	N/A	N/A
Bank Only	$ 482,431	15.54%	$ 325,915	10.50%	$ 310,395	10.00%	$ 482,431	15.54%	$ 325,915	10.50%	$ 310,395	10.00%
Tier 1 Leverage Capital to Average Assets:
Consolidated	$ 475,154	11.22%	$ 169,470	4.00%	N/A	N/A	$ 475,154	11.22%	$ 169,470	4.00%	N/A	N/A
Bank Only	$ 447,819	10.58%	$ 169,381	4.00%	$ 211,726	5.00%	$ 447,819	10.58%	$ 169,381	4.00%	$ 211,726	5.00%

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Dividend Restrictions

In the ordinary course of business, the Company may be dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years.

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NOTE 20: INCOME TAXES

The provision for income tax expense and effective tax rates for the periods indicated below were as follows:


	Three Months Ended March 31,		Three Months Ended September 30,		Nine Months Ended September 30,
(Dollars in thousands)	2022	2021	2022	2021	2022	2021
Income tax expense	$ 2,277	$ 2,485	$ 3,381	$ 2,913	$ 8,485	$ 8,090
Effective tax rate	17.69%	19.87%	20.96%	16.81%	19.49%	18.29%

The differences between the federal statutory rate of 21%and the effective tax rates presented in the table above were largely attributable to permanent differences primarily related to tax exempt interest income, bank-owned life insurance related earnings and ~~merger-related costs.~~costs related to the Merger.

NOTE 21: EARNINGS PER SHARE

The computation of basic and diluted earnings per share for the periods indicated below was as follows:


	Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2022			2021	2022		2021		2022			2021
Net income for common shareholders	$	10,595	$	10,019	$	12,747	$	14,421	$	35,049	$	36,143
Weighted-average shares (thousands)
Basic weighted-average shares outstanding		24,497		24,508		24,345		24,432		24,445		24,462
Dilutive effect of outstanding stock options and unvested restricted stock awards		108		108		119		112		107		110
Diluted weighted-average shares outstanding		24,605		24,616		24,464		24,544		24,552		24,572
Earnings per share:
Basic	$	0.43	$	0.41	$	0.52	$	0.59	$	1.43	$	1.48
Diluted	$	0.43	$	0.41	$	0.52	$	0.59	$	1.43	$	1.47

For the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and ~~2021,~~ the ~~Company excluded~~three and nine months ended September 30, 2021, the impact of ~~32,998~~1,802, 5,907 and ~~1,800~~14,858, respectively, shares of unvested restricted stock ~~respectively,~~were excluded from diluted weighted-average shares as they were anti-dilutive. The Company also excluded the impact of 2,250 shares of performance based restricted stock awards for the three and nine months ended ~~March 31, 2022 and~~September 30, 2021 as they are contingently issuable and the performance conditions for these awards were not deemed likely to be met at that time.

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NOTE 22: SUBSEQUENT EVENTS

Effective October 1, 2022, or the Effective Time, the Company completed its previously announced merger of equals with Allegiance, a Texas corporation, pursuant to an Agreement and Plan of Merger, or the Merger Agreement, dated as of November 5, 2021, by and between the Company and Allegiance. At the Effective Time, Allegiance merged with and into the Company, with the Company as the surviving corporation. At the Effective Time, the Company changed its name from CBTX, Inc. to Stellar Bancorp, Inc. and changed its ticker symbol to “STEL”.

Immediately after the Merger, the Company’s wholly owned bank subsidiary, CommunityBank of Texas, N.A., merged with and into Allegiance’s wholly owned bank subsidiary, Allegiance Bank, a Texas state banking association, or Allegiance Bank, with Allegiance Bank as the surviving entity.

Pursuant to the Merger Agreement, each share of Allegiance common stock, $1.00 par value per share, or Allegiance common stock, outstanding as of immediately prior to the Effective Time, other than certain shares of Allegiance common stock held by Allegiance or the Company, was converted into the right to receive 1.4184 shares, or the Exchange Ratio, of common stock of the Company, $0.01 par value per share, or the Company common stock, with cash to be paid in lieu of fractional shares, or the Merger Consideration. As a result of the Merger, Allegiance shareholders hold shares which represent approximately 53.9% of outstanding Company common stock. Each outstanding share of Company common stock remained outstanding and was unaffected by the Merger

In connection with the closing of the Merger, the Company also amended and restated its certificate of formation, which among other things, increased the number of authorized shares of Company common stock from 90,000,000 to 140,000,000 shares.

At the Effective Time, each outstanding equity award of the Company under the Company’s equity compensation plans fully vested, other than the restricted stock awards granted to the Company’s non-employee directors on February 1, 2022. The vesting of the non-employee director restricted stock awards was prorated based on the number of days that elapsed from January 1, 2022 through September 30, 2022 and the remaining unvested shares of restricted stock were forfeited at the Effective Time.

The Merger will be accounted for as a reverse acquisition in accordance with the provisions of Accounting Standards Codification Topic 805-10, Business Combinations, or ASC 805. Management is undertaking a comprehensive review and determination of the fair value of the assets and liabilities of the Company to ensure that they conform to the measurement and reporting guidance as set forth for the accounting for business combinations. Determining the fair value of assets and liabilities, especially in the loan portfolio, is a complicated process involving significant judgment regarding estimates and assumptions used to calculate estimated fair values. Accordingly, the initial accounting for the Merger is not complete. Management is also undertaking a comprehensive review of the classification of certain assets and liabilities to ensure that they conform to the Company’s current policies and reporting practices. As a result of these efforts, the value and classification of certain assets and liabilities may vary in subsequent reporting periods.

Additional disclosures required by ASC 805 have been omitted from this report because the information required for the disclosures, including the purchase price accounting fair value adjustments, are not ~~been met.~~available due to the close proximity of the closing of the transaction with the date the accompanying condensed consolidated financial statements were issued.

Future filings will include the financial statements of Stellar for all periods presented, with recognition of the Company’s activity from the date the Merger was completed. The Company’s financial statements for all periods through the date of the Merger will not be included in future filings.

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The tables below present condensed financial information of Allegiance as of and for the period indicated, which is not included in the accompanying condensed financial statements of the Company.


Allegiance Bancshares, Inc. Condensed Balance Sheet (Unaudited)
(Dollars in thousands)	September 30, 2022
Assets:
Cash and cash equivalents	$	118,567
Securities		1,618,995
Loans held for investment		4,591,912
Allowance for credit losses for loans		(52,147)
Loans, net		4,539,765
Premises and equipment		57,837
Goodwill		223,642
Other assets		171,536
Total assets	$	6,730,342
Liabilities:
Noninterest-bearing deposits	$	2,465,839
Interest-bearing deposits		3,194,880
Total deposits		5,660,719
Borrowed funds		257,000
Subordinated debt		109,241
Other liabilities		47,080
Total liabilities		6,074,040
Total shareholders’ equity		656,302
Total liabilities and shareholders’ equity	$	6,730,342


Allegiance Bancshares, Inc. Condensed Statements of Income (Unaudited)	Three Months Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2022		September 30, 2022
Net interest income	$	60,690	$	173,344
Provision for credit losses		1,962		5,919
Net interest income after provision for credit losses		58,728		167,425
Noninterest income		2,995		9,717
Noninterest expense		44,031		116,452
Net income before income tax expense		17,692		60,690
Income tax expense		3,406		11,310
Net income	$	14,286	$	49,380
Earnings per common share
Basic	$	0.72	$	2.44
Diluted	$	0.71	$	2.42

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~~Item~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements reflect the Company’s current views with respect to, among other things, future events and the Company’s financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. Accordingly, the Company cautions that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause the Company’s actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the risks described in “Part I— Item 1A.—Risk Factors” in the Company’s and Allegiance’s Annual Report on Form 10-K for the year ended December 31, 2021 and the Company’s other SEC filings, including the Joint/Proxy Statement/Prospectus regarding the Merger that the Company filed with the SEC on April 7, 2022 pursuant to Rule 424(b)(3), this Quarterly Report on Form 10-Q and the following:

●

natural disasters and adverse weather on the Company’s market area, acts of terrorism, pandemics, an outbreak of hostilities, such as the conflict in Ukraine, or other international or domestic calamities and other matters beyond the Company’s control;

●

the Company’s ability to manage the economic risks related to the ~~ongoing~~ impact of the COVID-19 pandemic (including risks related to its customers’ credit quality, deferrals and modifications to loans);

●

the geographic concentration of the Company’s markets in Houston and Beaumont, Texas;

●

the Company’s ability to manage changes and the continued health or availability of management personnel;

●

the amount of nonperforming and classified assets that the Company holds and the time and effort necessary to resolve nonperforming assets;

●

deterioration of asset quality;

●

interest rate risk associated with the Company’s business;

●

national business and economic conditions in general, in the financial services industry and within the Company’s primary markets;

●

sustained instability of the oil and gas industry in general and within Texas;

●

the composition of the Company’s loan portfolio, including the identity of the Company’s borrowers and the concentration of loans in specialized industries;

●

changes in the value of collateral securing the Company’s loans;

●

the Company’s ability to maintain important deposit customer relationships and its reputation;

●

the Company’s ability to maintain effective internal control over financial reporting;

●

volatility and direction of market interest rates;

●

liquidity risks associated with the Company’s ~~business;~~business, including lack of access to liquidity;

●

systems failures, interruptions or breaches involving the Company’s information technology and telecommunications systems or third- or fourth-party servicers;

●

the failure of certain third- or fourth-party vendors to perform;

●

the institution and outcome of litigation and other legal proceedings against the Company or to which it may become subject;

●

the operational risks associated with the Company’s business;

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●

the costs, effects and results of regulatory examinations, investigations, or reviews or the ability to obtain required regulatory ~~approvals;~~approvals or meet conditions associated with the same;

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●

changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting, tax, trade, monetary and fiscal matters;

●

further government intervention in the U.S. financial system that may impact how the Company achieves its performance goals;

●

the ~~possible substantial costs related~~risk that the integration of operations resulting from the Merger will be materially delayed or will be more costly or difficult than expected or that the parties are otherwise unable to successfully integrate each party’s businesses into the ~~pending merger and integration;~~other’s businesses;

●

the risk that the cost savings and any revenue synergies from the ~~pending merger~~Merger may not be fully realized or may take longer than anticipated to be realized;

●

the ~~possibility that the pending merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;~~

●

~~the~~ ability to retain personnel of the Company or Allegiance ~~Bancshares, Inc., or Allegiance, after~~with the ~~pending merger is completed;~~

●

~~the ability by each of Allegiance and the Company to obtain required governmental approvals~~completion of the ~~pending merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction);~~

●

~~the occurrence of any event, change or other circumstances that could give rise to the right of us and/or Allegiance to terminate the merger agreement with respect to the pending merger;~~

●

~~disruption to the parties’ businesses as a result of the announcement and pendency of the pending merger;~~Merger;

●

the risks related to the Company’s assumption of certain of Allegiance’s outstanding debt obligations and the combined company’s level of ~~indebtedness following the completion of the merger;~~indebtedness;

●

the dilution caused by the Company’s issuance of additional shares of its common stock in the ~~merger;~~

●

~~the failure of the closing conditions in the merger agreement to be satisfied, or any unexpected delay in closing the pending merger;~~

●

~~the failure to obtain the necessary approvals by the shareholders of Allegiance or the Company;~~

●

~~reputational risk and the reaction of each company’s customers, suppliers, employees or other business partners to the pending merger;~~Merger;

●

and other risks, uncertainties, and factors that are discussed from time to time in the Company’s reports and documents filed with the SEC.

~~Pending Merger~~

On November 8, 2021, Allegiance, and the Company jointly announced that they entered into a definitive merger agreement pursuant to which the companies will combine in an all-stock merger of equals. Under the terms of the definitive merger agreement, Allegiance shareholders will receive 1.4184 shares of the Company’s common stock for each share of Allegiance common stock they own. Based on the number of outstanding shares of Allegiance and the Company as of November 5, 2021, Allegiance shareholders will own approximately 54% and the Company’s shareholders will own approximately 46% of the combined company. The companies have submitted the required regulatory filings and subject to satisfaction of the closing conditions, including approval of the merger agreement by both companies’ shareholders, the parties anticipate closing in the second quarter of 2022. Each company has scheduled a special meeting for May 24, 2022 at which its respective shareholders will consider and vote on the merger agreement and other related matters.

There are or will be important factors that could cause the actual results of the merger to differ materially from those indicated in these forward-looking statements, including, but not limited to, the risks described in “Part I.—Item 1A. —Risk Factors” in the Company’s Annual Report on Form 10-K.

●

~~the risk that the cost savings and any revenue synergies from the merger may not be fully realized or may take longer than anticipated to be realized;~~

●

~~disruption to the parties’ businesses as a result of the announcement and pendency of the merger;~~

●

~~the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement;~~

●

the risk that the integration of each party’s operations will be materially delayed or will be more costly or difficult than expected or that the parties are otherwise unable to successfully integrate each party’s

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~~businesses into the other’s businesses;~~

●

~~the failure to obtain the necessary approvals by the shareholders of Allegiance or the Company;~~

●

the amount of the costs, fees, expenses and charges related to the merger; the ability by each of Allegiance and the Company to obtain required governmental approvals of the merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction);

●

reputational risk and the reaction of each company’s customers, suppliers, employees or other business partners to the merger; the failure of the closing conditions in the merger agreement to be satisfied, or any unexpected delay in closing the merger;

●

~~the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;~~

●

~~the dilution caused by the Company’s issuance of additional shares of its common stock in the merger; general competitive, economic, political and market conditions;~~

●

~~and other factors that may affect future results of the Company and Allegiance, including changes in asset quality and credit risk;~~

●

~~the inability to sustain revenue and earnings growth;~~

●

~~changes in interest rates and capital markets;~~

●

~~inflation; customer borrowing, repayment, investment and deposit practices;~~

●

~~the impact, extent and timing of technological changes;~~

●

capital management activities; and other actions of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and OCC and legislative and regulatory actions and reforms;

●

~~and other risks, uncertainties, and factors that are discussed from time to time in the Company’s reports and documents filed with the SEC.~~

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. If one or more events related to these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may differ materially from what is anticipated. ~~Additionally, many of these risks and uncertainties have been elevated by and may continue to be elevated by the COVID-19 pandemic and the sustained instability of the oil and gas industry.~~ Undue reliance should not be placed on any such forward-looking statements. Any forward-looking statement speaks only as of the date made, and the Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible to predict which will arise. In addition, the Company cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

~~Information about~~Merger

Effective October 1, 2022, or the Effective Time, the Company completed its previously announced merger of equals with Allegiance, a Texas corporation, pursuant to the Merger Agreement dated as of November 5, 2021, by and ~~Where~~between the Company and Allegiance. At the Effective Time, Allegiance merged with and into the Company, with the Company as the surviving corporation. At the Effective Time, the Company changed its name from CBTX, Inc. to ~~Find It~~Stellar Bancorp, Inc. and changed its ticker symbol to “STEL”.

~~This communication does not constitute an offer~~Immediately after the Merger, the Company’s wholly owned bank subsidiary, CommunityBank of Texas, N.A., merged with and into Allegiance’s wholly owned bank subsidiary, Allegiance Bank, a Texas state banking association, or Allegiance Bank, with Allegiance Bank as the surviving entity.

Pursuant to ~~sell~~the Merger Agreement, each share of Allegiance common stock, $1.00 par value per share, or Allegiance common stock, outstanding as of immediately prior to the Effective Time, other than certain shares of Allegiance common stock held by Allegiance or the ~~solicitation~~Company, was converted into the right to receive 1.4184 shares, or the Exchange Ratio, of ~~an offer~~common stock of the Company, $0.01 par value per share, or the Company common stock, with cash to ~~buy any securities~~be paid in lieu of fractional shares, or the Merger Consideration. As a ~~solicitation~~result of ~~any vote or approval.~~the Merger Allegiance shareholders hold shares which represent approximately 53.9% of outstanding Company common stock. Each outstanding share of Company common stock remained outstanding and was unaffected by the Merger.

In connection with the ~~proposed merger,~~closing of the Merger, the Company ~~filed a registration statement on Form S-4 (Registration No. 333-262322) with~~also amended and restated its certificate of formation, which among other things, increased the ~~Securities and Exchange Commission, or SEC, to register the~~number of authorized shares of ~~the Company’s~~Company common stock ~~that will be issued~~from 90,000,000 to Allegiance shareholders in connection with the merger. The registration statement on Form S-4, as amended, was declared effective by the SEC on April 7, 2022. The registration statement includes a joint proxy statement/prospectus and other relevant materials in connection with the proposed merger. The Company and Allegiance commenced mailing the definitive joint proxy statement/prospectus to their respective shareholders on or about April 15, 2022.140,000,000 shares.

WE URGE INVESTORS AND SECURITY HOLDERS TO READ THE REGISTRATION STATEMENT ON FORM S-4, THE JOINT PROXY STATEMENT/PROSPECTUS INCLUDED WITHIN THE REGISTRATION STATEMENT ON FORM S-4 AND ANY OTHER RELEVANT DOCUMENTS FILED OR TO BE FILED WITH THE

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~~SEC IN CONNECTION WITH THE PROPOSED MERGER BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT CBTX, ALLEGIANCE AND THE PROPOSED MERGER.~~At the Effective Time, each outstanding equity award of the Company under the Company’s equity compensation plans fully vested, other than the restricted stock awards granted to the Company’s non-employee directors on February 1, 2022. The vesting of the non-employee director restricted stock awards was prorated based on the number of days that elapsed from January 1, 2022 through September 30, 2022 and the remaining unvested shares of restricted stock were forfeited at the Effective Time.

~~Investors and security holders may obtain free copies of these documents and other documents filed~~The Merger will be accounted for as a reverse acquisition in accordance with the ~~SEC by Allegiance~~provisions of Accounting Standards Codification Topic 805-10, Business Combinations, or ASC 805. Management is undertaking a comprehensive review and determination of the ~~Company through~~fair value of the website maintained by the SEC at https://www.sec.gov. Documents filed with the SEC by the Company are available free of charge by accessing the Company’s website at www.communitybankoftx.com under the heading “Investor Relations” or, alternatively, by directing a request by mail or telephone to CBTX, Inc., 9 Greenway Plaza, Suite 110, Houston, Texas 77046, Attn: Investor Relations, (713) 210-7600,assets and documents filed with the SEC by Allegiance are available free of charge by accessing Allegiance’s website at www.allegiancebank.com under the heading “Investor Relations” or, alternatively, by directing a request by mail or telephone to Allegiance Bancshares, Inc., 8847 West Sam Houston Parkway, N., Suite 200, Houston, Texas 77040, (281) 894-3200.

~~Participants in the Solicitation~~

~~The Company, Allegiance and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the shareholders~~liabilities of the Company to ensure that they conform to the measurement and ~~Allegiance~~reporting guidance as set forth for the accounting for business combinations. Determining the fair value of assets and liabilities, especially in ~~connection with~~ the ~~proposed merger. Certain information~~loan portfolio, is a complicated process involving significant judgment regarding estimates and assumptions used to calculate estimated fair values. Accordingly, the ~~interests~~initial accounting for the Merger is not complete. Management is also undertaking a comprehensive review of the classification of certain assets and liabilities to ensure that they conform to the Company’s current policies and reporting practices. As a result of these ~~participants~~efforts, the value and ~~a description~~classification of ~~their direct or indirect interests, by security holdings or otherwise, are included~~certain assets and liabilities may vary in the joint proxy statement/prospectus regarding the proposed merger. Additional information about the directors and executive officers of the Company and their ownership of the Company’s common stock is set forth in the Company’s annual report on Form 10-K, filed with the SEC on February 25, 2022. Additional information about the directors and executive officers of Allegiance and their ownership of Allegiance’s common stock is set forth in Allegiance’s proxy statement for its annual meeting of shareholders, filed with the SEC on March 10, 2022. These documents can be obtained free of charge from the sources described above.subsequent reporting periods.

Overview

The Company operates through one segment. The Company’s primary source of funds is deposits and its primary use of funds is loans. Most of the Company’s revenue is generated from interest on loans and investments. The Company incurs interest expense on deposits and other borrowed funds as well as noninterest expense, such as salaries and employee benefits and occupancy expenses.

The Company’s operating results depend primarily on net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in market interest rates and the interest rates earned on interest-earning assets or paid on interest-bearing liabilities, as well as in the volume and types of interest-earning assets and interest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets.

Periodic changes in the volume and types of loans in the Company’s loan portfolio are affected by, among other factors, economic and competitive conditions in Texas, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within the Company’s target markets and throughout the state of Texas. The Company maintains diversity in its loan portfolio as a means of managing risk associated with fluctuations in economic conditions. The Company’s focus on lending to small to medium-sized businesses and professionals in its market areas has resulted in a diverse loan portfolio comprised primarily of core relationships. The Company carefully monitors exposure to certain asset classes to minimize the impact of a downturn in the value of such assets.

The Company seeks to remain competitive with respect to interest rates on loans and deposits, as well as prices on fee-based services, which are typically significant competitive factors within the banking and financial services industry. Many of the Company’s competitors are much larger financial institutions that have greater financial resources and compete aggressively for market share. Through the Company’s relationship-driven, community banking strategy, a significant portion of its growth has been through referral business from its existing customers and professionals in the Company’s markets including attorneys, accountants and other professional service providers.

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Uncertain Economic Outlook

The COVID-19 pandemic and actions taken in response to it, combined with instability in the oil and gas industry, negatively impacted the global economy and financial markets. The Company’s markets, including its primary markets in Houston and Beaumont are particularly impacted by the oil and gas industry. The conflict in Ukraine increased the instability in the oil and gas markets and although oil prices increased in 2022, the U.S. oil and gas industry has not rebounded and continues to remain a concern. In addition, inflation rose in the first quarter of 2022, which also impacts the U.S. and local economies. The future impact of these items is uncertain but could materially affect the Company’s future financial and operational results. See “Part I—Item 1A.—Risk Factors” in the Company’s Annual Report on Form 10-K.

The risk grades of the Company’s loan portfolio, past due loans, loans individually evaluated and nonperforming loans, or loan performance indicators, as of the dates indicated below were as follows:

March 31,

December 31,

September 30,

June 30,

March 31,
(Dollars in thousands)

2022

2021

2021

2021

2021
Risk grades:

Pass

$
2,804,237

$
2,783,385

$
2,526,395

$
2,645,811

$
2,810,248
Special mention

4,281

12,807

4,661

14,276

10,508
Substandard

80,460

80,235

86,501

80,535

83,032
Total gross loans

$
2,888,978

$
2,876,427

$
2,617,557

$
2,740,622

$
2,903,788
Past due loans:

30 to 59 days past due

$
13,603

$
905

$
2,755

$
39

$
1,377
60 to 89 days past due

2,032

34

143

—

495
90 days or greater past due

140

197

104

217

4,019
Total past due loans

$
15,775

$
1,136

$
3,002

$
256

$
5,891
Loans individually evaluated:

Accruing troubled debt restructurings

$
28,428

$
30,709

$
31,656

$
31,789

$
27,709
Non-accrual troubled debt restructurings

21,720

20,019

17,834

18,196

18,913
Total troubled debt restructurings

50,148

50,728

49,490

49,985

46,622
Other non-accrual

363

2,549

2,751

2,777

4,595
Other accruing

3,494

5,995

5,260

836

836
Total loans individually evaluated

$
54,005

$
59,272

$
57,501

$
53,598

$
52,053
Nonperforming assets:

Nonaccrual loans

$
22,083

$
22,568

$
20,585

$
20,973

$
23,508
Accruing loans 90 or more days past due

—

—

—

—

—
Total nonperforming loans

22,083

22,568

20,585

20,973

23,508
Foreclosed assets

—

—

—

—

106
Total nonperforming assets

$
22,083

$
22,568

$
20,585

$
20,973

$
23,614

~~The table above shows the trend of loan performance indicators over the past five reporting periods.~~ Although national and local economies and economic forecasts improved during 2021 and 2022, geopolitical instabilities, inflation, rising interest rates, supply disruptions and other uncertainties continue and these factors are considered in the forecasts and qualitative factors used to determine the Company’s ACL. If the national and/or local economies and economic forecasts and loan performance indicators worsen in the future, increases in the ACL through additional provisions for credit losses may occur which would negatively impact net income.

~~In support~~ The future impact of ~~customers impacted by~~these items is uncertain but could materially affect the ~~COVID-19 pandemic,~~Company’s future financial and operational results. See “Part I—Item 1A.—Risk Factors” in the Company offered relief through payment deferrals during 2020 and 2021. A majority of borrowers with deferral arrangements have returned to normal contractual payment schedules and the Company continues to provide deferred payment arrangements to a small number of businesses. The Company had four loans subject to such deferral arrangements with an outstanding aggregate principal balance ofCompany’s Annual Report on Form 10-K.

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~~$15.1 million at March 31, 2022~~The table below shows the trend of the risk grades of the Company’s loan portfolio, past due loans, loans individually evaluated and ~~seven~~nonperforming loans, ~~on deferral arrangements with an outstanding aggregate principal balance~~or loan performance indicators as of ~~$18.5 million at December 31, 2021.~~the dates indicated.


	September 30,		June 30,		March 31,		December 31,		September 30,
(Dollars in thousands)	2022		2022		2022		2021		2021
Risk grades:
Pass	$	3,074,091	$	2,972,739	$	2,804,237	$	2,783,385	$	2,526,395
Special mention		2,582		468		4,281		12,807		4,661
Substandard		59,218		68,768		80,460		80,235		86,501
Total gross loans	$	3,135,891	$	3,041,975	$	2,888,978	$	2,876,427	$	2,617,557
Past due loans:
30 to 59 days past due	$	11,099	$	537	$	13,603	$	905	$	2,755
60 to 89 days past due		9,172		4,611		2,032		34		143
90 days or greater past due		1,882		10,276		140		197		104
Total past due loans	$	22,153	$	15,424	$	15,775	$	1,136	$	3,002
Loans individually evaluated:
Accruing troubled debt restructurings	$	28,373	$	26,117	$	28,428	$	30,709	$	31,656
Non-accrual troubled debt restructurings		22,236		22,761		21,720		20,019		17,834
Total troubled debt restructurings		50,609		48,878		50,148		50,728		49,490
Other non-accrual		174		5,512		363		2,549		2,751
Other accruing		1,159		1,152		3,494		5,995		5,260
Total loans individually evaluated	$	51,942	$	55,542	$	54,005	$	59,272	$	57,501
Nonperforming assets:
Nonaccrual loans	$	22,410	$	28,273	$	22,083	$	22,568	$	20,585
Accruing loans 90 or more days past due		—		—		—		—		—
Total nonperforming loans		22,410		28,273		22,083		22,568		20,585
Foreclosed assets		—		—		—		—		—
Total nonperforming assets	$	22,410	$	28,273	$	22,083	$	22,568	$	20,585

The Company participated in Paycheck Protection Program, or PPP, lending under the CARES Act, which facilitates loans to small businesses. See “Part I—Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Loan Portfolio.”

Results of Operations

The ~~increase~~decreases in net income during the three and nine months ended ~~March 31,~~September 30, 2022, compared to the three and nine months ended ~~March 31,~~September 30, 2021, were primarily due to an increase in ~~noninterest income, partially offset by a decrease in net interest income~~the provision (recapture) for credit losses and an increase in noninterest ~~expense.~~expense, partially offset by an increase in net interest income. See further analysis of the material fluctuations in the related discussions that follow.

Three Months Ended March 31,
(Dollars in thousands)

2022

2021

Increase (Decrease)
Interest income

$
34,015

$
34,661

$
(646)

(1.9%)
Interest expense

1,385

1,571

(186)

(11.8%)
Net interest income

32,630

33,090

(460)

(1.4%)
Provision for credit losses

435

412

23

5.6%
Noninterest income

5,329

3,111

2,218

71.3%
Noninterest expense

24,652

23,285

1,367

5.9%
Income before income taxes

12,872

12,504

368

2.9%
Income tax expense

2,277

2,485

(208)

(8.4%)
Net income

$
10,595

$
10,019

$
576

5.7%
Earnings per share - basic

$
0.43

$
0.41

Earnings per share - diluted

0.43

0.41

Dividends per share

0.13

0.13

~~Net Interest Income for the Three Months Ended March 31, 2022, Compared to the Three Months Ended March 31, 2021~~

Net interest income decreased $460,000 during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to lower rates on loans and lower average loans during the three months ended March 31, 2022, partially offset by higher average securities and lower rates on deposits.

The yield on interest-earning assets was 3.31% for the three months ended March 31, 2022, compared to 3.85% for the three months ended March 31, 2021. The cost of interest-bearing liabilities was 0.27% for the three months ended March 31, 2022 and 0.34% for the three months ended March 31, 2021. Yields on interest-earning assets decreased and the costs of interest-bearing liabilities remained at about the same level, which caused compression of the Company’s net interest margin on a tax equivalent basis to 3.22% for the three months ended March 31, 2022, compared to 3.71% for the three months ended March 31, 2021.


	Three Months Ended September 30,							Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		Increase (Decrease)				2022	2021		Increase (Decrease)
Interest income	$	44,673	$	32,697	$	11,976	36.6%	$	114,789	$	99,864	$	14,925	14.9%
Interest expense		1,661		1,448		213	14.7%		4,275		4,507		(232)	(5.1%)
Net interest income		43,012		31,249		11,763	37.6%		110,514		95,357		15,157	15.9%
Provision (recapture) for credit losses		1,012		(4,895)		5,907	120.7%		1,573		(9,566)		11,139	116.4%
Noninterest income		3,449		5,562		(2,113)	(38.0%)		12,324		12,164		160	1.3%
Noninterest expense		29,321		24,372		4,949	20.3%		77,731		72,854		4,877	6.7%
Income before income taxes		16,128		17,334		(1,206)	(7.0%)		43,534		44,233		(699)	(1.6%)
Income tax expense		3,381		2,913		468	16.1%		8,485		8,090		395	4.9%
Net income	$	12,747	$	14,421	$	(1,674)	(11.6%)	$	35,049	$	36,143	$	(1,094)	(3.0%)
Earnings per share - basic	$	0.52	$	0.59				$	1.43	$	1.48
Earnings per share - diluted		0.52		0.59					1.43		1.47
Dividends per share		0.13		0.13					0.39		0.39

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Net Interest Income for the Nine Months Ended September 30, 2022, Compared to the Nine Months Ended September 30, 2021

Net interest income increased $15.2 million during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to higher average balances and higher average rates on loans and securities and higher average rates on interest-bearing deposits at other financial institutions.

The yield on interest-earning assets was 3.74% for the nine months ended September 30, 2022, compared to 3.52% for the nine months ended September 30, 2021. The cost of interest-bearing liabilities was 0.29% for the nine months ended September 30, 2022 and 0.32% for the nine months ended September 30, 2021. The Company’s net interest margin on a tax equivalent basis was 3.65% for the nine months ended September 30, 2022, compared to 3.40% for the nine months ended September 30, 2021.

The following table presents for the periods indicated, average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest income or interest expense and the average yield or rate for the periods indicated.


	Three Months Ended March 31,										Nine Months Ended September 30,
	2022					2021					2022					2021
	Average		Interest		Average	Average		Interest		Average	Average		Interest		Average	Average		Interest		Average
	Outstanding		Earned/		Yield/	Outstanding		Earned/		Yield/	Outstanding		Earned/		Yield/	Outstanding		Earned/		Yield/
(Dollars in thousands)	Balance		Interest Paid		Rate⁽¹⁾	Balance		Interest Paid		Rate⁽¹⁾	Balance		Interest Paid		Rate⁽¹⁾	Balance		Interest Paid		Rate⁽¹⁾
Assets
Interest-earning assets:
Total loans⁽²⁾	$	2,886,765	$	31,221	4.39%	$	2,901,291	$	33,165	4.64%	$	2,953,607	$	102,047	4.62%	$	2,812,449	$	94,723	4.50%
Securities		497,640		2,292	1.87%		259,341		1,173	1.84%		537,889		8,275	2.06%		296,958		3,940	1.77%
Interest-bearing deposits at other financial institutions		768,665		348	0.18%		475,279		177	0.15%		595,458		3,994	0.90%		668,119		740	0.15%
Equity investments		13,379		154	4.67%		15,353		146	3.86%		13,386		473	4.72%		14,679		461	4.20%
Total interest-earning assets		4,166,449	$	34,015	3.31%		3,651,264	$	34,661	3.85%		4,100,340	$	114,789	3.74%		3,792,205	$	99,864	3.52%
Allowance for credit losses for loans		(31,602)					(41,078)					(31,599)					(39,594)
Noninterest-earning assets		307,796					321,334					313,938					318,009
Total assets	$	4,442,643				$	3,931,520				$	4,382,679				$	4,070,620
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	2,019,609	$	1,164	0.23%	$	1,802,175	$	1,350	0.30%	$	1,971,247	$	4,003	0.27%	$	1,846,211	$	3,844	0.28%
Federal Home Loan Bank advances		50,000		221	1.79%		50,000		221	1.79%		18,315		272	1.99%		50,000		663	1.77%
Total interest-bearing liabilities		2,069,609	$	1,385	0.27%		1,852,175	$	1,571	0.34%		1,989,562	$	4,275	0.29%		1,896,211	$	4,507	0.32%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		1,762,729					1,478,183					1,803,702					1,568,071
Other liabilities		49,990					51,634					44,479					50,966
Total noninterest-bearing liabilities		1,812,719					1,529,817					1,848,181					1,619,037
Shareholders’ equity		560,315					549,528					544,936					555,372
Total liabilities and shareholders’ equity	$	4,442,643				$	3,931,520				$	4,382,679				$	4,070,620
Net interest income			$	32,630				$	33,090				$	110,514				$	95,357
Net interest spread⁽³⁾					3.04%					3.51%					3.45%					3.20%
Net interest margin⁽⁴⁾					3.18%					3.68%					3.60%					3.36%
Net interest margin - tax equivalent⁽⁵⁾					3.22%					3.71%					3.65%					3.40%

(1)	Annualized.

(2)	Includes average outstanding balances related to loans held for sale.

(3)	Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

(4)	Net interest margin is equal to net interest income divided by average interest-earning assets.

(5)	Tax equivalent adjustments of ~~$463,000~~$1.5 million and ~~$299,000~~$989,000 for the nine months ended September 30, 2022 and 2021, respectively, were computed using a federal income tax rate of 21%.

Table of Contents

The following table presents information regarding changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.


	Nine Months Ended September 30, 2022,
	Compared to Nine Months Ended September 30, 2021
	Increase (Decrease) due to
(Dollars in thousands)	Rate		Volume		Total
Interest-earning assets:
Total loans	$	2,573	$	4,751	$	7,324
Securities		1,145		3,190		4,335
Interest-bearing deposits at other financial institutions		3,336		(82)		3,254
Equity investments		53		(41)		12
Total increase in interest income		7,107		7,818		14,925
Interest-bearing liabilities:
Interest-bearing deposits		(103)		262		159
Federal Home Loan Bank advances		28		(419)		(391)
Total decrease in interest expense		(75)		(157)		(232)
Increase in net interest income	$	7,182	$	7,975	$	15,157

Net Interest Income for the Three Months Ended September 30, 2022, Compared to the Three Months Ended September 30, 2021

Net interest income increased $11.8 million during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to higher rates on interest-earning assets and higher average loans and securities.

The yield on interest-earning assets was 4.36% for the three months ended September 30, 2022, compared to 3.33% for the three months ended September 30, 2021. The cost of interest-bearing liabilities was 0.34% for the three months ended September 30, 2022 and 0.30% for the three months ended September 30, 2021. The Company’s net interest margin on a tax equivalent basis was 4.25% for the three months ended September 30, 2022, compared to 3.22% for the three months ended September 30, 2021.

Table of Contents


	Three Months Ended September 30,
	2022					2021
	Average		Interest		Average	Average		Interest		Average
	Outstanding		Earned/		Yield/	Outstanding		Earned/		Yield/
(Dollars in thousands)	Balance		Interest Paid		Rate⁽¹⁾	Balance		Interest Paid		Rate⁽¹⁾
Assets
Interest-earning assets:
Total loans⁽²⁾	$	3,074,655	$	39,058	5.04%	$	2,702,248	$	30,765	4.52%
Securities		552,901		3,046	2.19%		327,968		1,435	1.74%
Interest-bearing deposits at other financial institutions		428,196		2,408	2.23%		854,406		340	0.16%
Equity investments		13,393		161	4.77%		13,367		157	4.66%
Total interest-earning assets		4,069,145	$	44,673	4.36%		3,897,989	$	32,697	3.33%
Allowance for credit losses for loans		(32,106)					(36,945)
Noninterest-earning assets		318,761					313,901
Total assets	$	4,355,800				$	4,174,945
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,954,854	$	1,661	0.34%	$	1,895,617	$	1,227	0.26%
Federal Home Loan Bank advances		—		—	—		50,000		221	1.75%
Total interest-bearing liabilities		1,954,854	$	1,661	0.34%		1,945,617	$	1,448	0.30%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		1,822,323					1,612,985
Other liabilities		40,684					52,712
Total noninterest-bearing liabilities		1,863,007					1,665,697
Shareholders’ equity		537,939					563,631
Total liabilities and shareholders’ equity	$	4,355,800				$	4,174,945
Net interest income			$	43,012				$	31,249
Net interest spread⁽³⁾					4.02%					3.03%
Net interest margin⁽⁴⁾					4.19%					3.18%
Net interest margin - tax equivalent⁽⁵⁾					4.25%					3.22%

(1)	Annualized.

(2)	Includes average outstanding balances related to loans held for sale.

(3)	Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

(4)	Net interest margin is equal to net interest income divided by average interest-earning assets.

(5)	Tax equivalent adjustments of $578,000 and $369,000 for the three months ended ~~March 31,~~September 30, 2022 and 2021, respectively, were computed using a federal income tax rate of 21%.

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	Three Months Ended March 31, 2022,								Three Months Ended September 30, 2022,
	Compared to Three Months Ended March 31, 2021								Compared to Three Months Ended September 30, 2021
	Increase (Decrease) due to								Increase (Decrease) due to
(Dollars in thousands)	Rate		Volume			Days	Total		Rate		Volume		Total
Interest-earning assets:
Total loans	$	(1,778)	$	(166)	$	—	$	(1,944)	$	4,051	$	4,242	$	8,293
Securities		38		1,081		—		1,119		624		987		1,611
Interest-bearing deposits at other financial institutions		62		109		—		171		2,239		(171)		2,068
Equity investments		27		(19)		—		8		4		—		4
Total increase (decrease) in interest income		(1,651)		1,005		—		(646)
Total increase in interest income										6,918		5,058		11,976
Interest-bearing liabilities:
Interest-bearing deposits		(347)		161		—		(186)		394		40		434
Federal Home Loan Bank advances		—		—		—		—		—		(221)		(221)
Total increase (decrease) in interest expense		(347)		161		—		(186)
Increase (decrease) in net interest income	$	(1,304)	$	844	$	—	$	(460)
Total decrease in interest expense										394		(181)		213
Increase in net interest income									$	6,524	$	5,239	$	11,763

Provision for Credit Losses

The provision for credit losses was ~~$435,000~~$1.0 million and $1.6 million for the three and nine months ended ~~March 31,~~September 30, 2022, respectively, compared to ~~$412,000~~recaptures of $4.9 million and $9.6 million for the three and nine months ended ~~March 31, 2021.~~ September 30, 2021, respectively.

The provision for credit losses for the three and nine months ended ~~March 31,~~September 30, 2022 was comprised of ~~a $415,000 provision for credit losses related to unfunded commitments and a $20,000 provision~~provisions for credit losses for ~~loans. The provision~~loans of $523,000 and $1.0 million, respectively, due to increases in the loan portfolio and provisions for credit losses for unfunded commitments of $489,000 and $551,000, respectively, due to fluctuations in available unfunded commitments.

The recapture of credit losses for the ~~first quarter of~~three and nine months ended September 30, 2021 was ~~comprised~~the result of ~~$286,000 and $126,000~~certain qualitative factor adjustments made on the ACL. Due to improvements in the ~~ACL for loans~~national economy, economic forecasts and ~~unfunded commitments, respectively.~~improved loan quality during those periods, the Company adjusted its economic forecasts and certain loan quality factors.

Noninterest Income

The following table presents components of noninterest income for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021 and the period-over-period changes in the categories of noninterest income:


	Three Months Ended March 31,							Three Months Ended September 30,							Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		Increase (Decrease)			2022		2021		Increase (Decrease)			2022		2021		Increase (Decrease)
Deposit account service charges	$	1,370	$	1,193	$	177	14.8%	$	1,320	$	1,352	$	(32)	(2.4%)	$	4,076	$	3,712	$	364	9.8%
Card interchange fees		1,037		976		61	6.3%		1,056		1,048		8	0.8%		3,228		3,119		109	3.5%
Earnings on bank-owned life insurance		371		390		(19)	(4.9%)		376		2,323		(1,947)	(83.8%)		1,118		3,103		(1,985)	(64.0%)
Net gain on sales of assets		530		192		338	176.0%		85		360		(275)	(76.4%)		673		918		(245)	(26.7%)
Other		2,021		360		1,661	461.4%		612		479		133	27.8%		3,229		1,312		1,917	146.1%
Total noninterest income	$	5,329	$	3,111	$	2,218	71.3%	$	3,449	$	5,562	$	(2,113)	(38.0%)	$	12,324	$	12,164	$	160	1.3%

The ~~increase~~decrease in noninterest income of ~~$2.2~~$2.1 million during the three months ended ~~March 31,~~September 30, 2022, compared to the three months ended ~~March 31,~~September 30, 2021, was primarily due to the impact of earnings on bank-owned life insurance due to related gains of $1.9 million during the third quarter of 2021. As the owner and beneficiary under bank-owned insurance policies as the result of claims submitted on covered individuals, the Company received proceeds of $2.7 million during the third quarter of 2021.

Table of Contents

Total other noninterest income increased $160,000 during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The nine months ended September 30, 2022 includes payments totaling $1.5 million recognized for early termination of a land lease included in other noninterest income and a gain of ~~$1.2~~$1.4 million for sales of assets underlying a portion of the Company’s equity investments, partially offset by a loss of $1.2 million included in net gain on sale of assets for disposals of buildings and improvements and furniture and equipment for the land lease that was terminated early. See “Part I—Item 1.—Financial Statements—Note 3”. The nine months ended September 30, 2021 was impacted by earnings on bank-owned life insurance noted in the three month period discussion above.

~~Table of Contents~~

Noninterest Expense

Generally, noninterest expense is composed of employee expenses and costs associated with operating facilities, obtaining and retaining customer relationships and providing bank services. See further analysis of these changes in the related discussions that follow.


		Three Months Ended March 31,							Three Months Ended September 30,							Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		Increase (Decrease)			2022		2021		Increase (Decrease)			2022		2021		Increase (Decrease)
Salaries and employee benefits	$	15,254	$	14,188	$	1,066	7.5%	$	16,453	$	15,000	$	1,453	9.7%	$	46,405	$	43,922	$	2,483	5.7%
Occupancy expense		2,371		2,521		(150)	(6.0%)		2,595		2,660		(65)	(2.4%)		7,362		7,778		(416)	(5.3%)
Professional and director fees		879		1,703		(824)	(48.4%)		942		1,567		(625)	(39.9%)		2,963		5,711		(2,748)	(48.1%)
Data processing and software		1,763		1,576		187	11.9%		1,502		1,629		(127)	(7.8%)		4,723		4,866		(143)	(2.9%)
Regulatory fees		614		556		58	10.4%		599		478		121	25.3%		2,016		1,535		481	31.3%
Advertising, marketing and business development		249		285		(36)	(12.6%)		350		493		(143)	(29.0%)		965		1,288		(323)	(25.1%)
Telephone and communications		454		463		(9)	(1.9%)		348		516		(168)	(32.6%)		1,151		1,529		(378)	(24.7%)
Security and protection expense		324		390		(66)	(16.9%)		386		425		(39)	(9.2%)		880		1,352		(472)	(34.9%)
Amortization of intangibles		181		191		(10)	(5.2%)		165		182		(17)	(9.3%)		518		559		(41)	(7.3%)
Other expenses		2,563		1,412		1,151	81.5%		5,981		1,422		4,559	320.6%		10,748		4,314		6,434	149.1%
Total noninterest expense	$	24,652	$	23,285	$	1,367	5.9%	$	29,321	$	24,372	$	4,949	20.3%	$	77,731	$	72,854	$	4,877	6.7%

Total noninterest expense increased $4.9 million for both the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021.

The increase in noninterest expense ~~of $1.4 million~~ for the ~~three~~nine months ended ~~March 31,~~September 30, 2022, compared to the ~~three~~nine months ended ~~March 31,~~September 30, 2021, was primarily due to $7.8 million of costs related to the Merger, partially offset by a ~~$1.1~~$2.7 million ~~increase in salaries and employee benefits, a $824,000~~ decrease in professional and director fees, and a $1.2 million increase in other expenses. The increase in salaries and employee benefits of $1.1 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, is primarily due to a $874,000 increase in salaries due to merit increases and a $165,000 increase in bonus accruals. Professional and director fees decreased $824,000 for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to a decrease in professional fees related to BSA/AML compliance matters ~~of $531,000~~ and ~~a $213,000 decrease in~~ legal fees. ~~Other expenses increased $1.2 million during~~

The increase in noninterest expense for the ~~three months ended March 31,~~third quarter of 2022, compared to the ~~three months ended March 31,~~third quarter of 2021, was primarily due to ~~$784,000~~$5.9 million of costs related to the ~~pending merger with Allegiance.~~Merger, partially offset by a $625,000 decrease in professional and director fees, primarily related to BSA/AML compliance matters and legal fees.

Income Tax Expense

The amount of income tax expense is impacted by the amounts of pre-tax income, tax-exempt income and other nondeductible expenses. Income tax expense and effective tax rates for the periods indicated below were as follows:


	Three Months Ended March 31,		Three Months Ended September 30,		Nine Months Ended September 30,
(Dollars in thousands)	2022	2021	2022	2021	2022	2021
Income tax expense	$ 2,277	$ 2,485	$ 3,381	$ 2,913	$ 8,485	$ 8,090
Effective tax rate	17.69%	19.87%	20.96%	16.81%	19.49%	18.29%

The differences between the federal statutory rate of 21% and the effective tax rates presented in the table above were primarily related to tax exempt interest income, bank-owned life insurance and ~~merger-related costs.~~costs related to the Merger.

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Financial Condition

Total assets were ~~$4.4~~$4.3 billion as of ~~March 31,~~September 30, 2022, compared to $4.5 billion as of December 31, 2021. The decrease of ~~$40.0~~$214.2 million, or ~~0.9%~~4.8%, was primarily due to a ~~$179.2~~$579.7 million decrease in cash and cash equivalents, partially offset by a ~~$122.9~~$258.9 million increase in loans excluding loans held for sale and a $86.2 million increase in securities. Total liabilities were $3.8 billion and $3.9 billion ~~as of both March 31,~~at September 30, 2022 and December 31, ~~2021.~~2021, respectively. The decrease in liabilities from December 31, 2021 to September 30. 2022 is primarily due to a $107.5 million decrease in deposits and the repayment of Federal Home Loan Bank advances totaling $50.0 million. See further analysis in the related discussions that follow.


(Dollars in thousands)	March 31, 2022		December 31, 2021		Increase (Decrease)			September 30, 2022		December 31, 2021		Increase (Decrease)
Assets:
Loans excluding loans held for sale	$	2,879,880	$	2,867,524	$	12,356	0.4%	$	3,126,421	$	2,867,524	$	258,897	9.0%
Allowance for credit losses		(31,442)		(31,345)		97	0.3%		(32,577)		(31,345)		1,232	3.9%
Loans, net		2,848,438		2,836,179		12,259	0.4%		3,093,844		2,836,179		257,665	9.1%
Cash and cash equivalents		770,991		950,146		(179,155)	(18.9%)		370,448		950,146		(579,698)	(61.0%)
Securities		547,979		425,046		122,933	28.9%		511,282		425,046		86,236	20.3%
Premises and equipment		56,665		58,417		(1,752)	(3.0%)		55,594		58,417		(2,823)	(4.8%)
Goodwill		80,950		80,950		—	—		80,950		80,950		—	—
Other intangible assets		3,540		3,658		(118)	(3.2%)		3,188		3,658		(470)	(12.8%)
Loans held for sale		748		164		584	356.1%		—		164		(164)	(100.0%)
Operating lease right-to-use asset		10,850		11,191		(341)	(3.0%)		10,992		11,191		(199)	(1.8%)
Other assets		125,816		120,250		5,566	4.6%		145,533		120,250		25,283	21.0%
Total assets	$	4,445,977	$	4,486,001	$	(40,024)	(0.9%)	$	4,271,831	$	4,486,001	$	(214,170)	(4.8%)
Liabilities:
Noninterest-bearing deposits	$	1,801,323	$	1,784,981	$	16,342	0.9%	$	1,780,473	$	1,784,981	$	(4,508)	(0.3%)
Interest-bearing deposits		2,019,902		2,046,303		(26,401)	(1.3%)		1,943,301		2,046,303		(103,002)	(5.0%)
Total deposits		3,821,225		3,831,284		(10,059)	(0.3%)		3,723,774		3,831,284		(107,510)	(2.8%)
Federal Home Loan Bank advances		50,000		50,000		—	—		—		50,000		(50,000)	(100.0%)
Operating lease liabilities		13,752		14,142		(390)	(2.8%)		13,748		14,142		(394)	(2.8%)
Other liabilities		21,277		28,450		(7,173)	(25.2%)		32,884		28,450		4,434	15.6%
Total liabilities		3,906,254		3,923,876		(17,622)	(0.4%)		3,770,406		3,923,876		(153,470)	(3.9%)
Shareholders' equity		539,723		562,125		(22,402)	(4.0%)		501,425		562,125		(60,700)	(10.8%)
Total liabilities and shareholders' equity	$	4,445,977	$	4,486,001	$	(40,024)	(0.9%)	$	4,271,831	$	4,486,001	$	(214,170)	(4.8%)

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Loan Portfolio

The components of the loan portfolio as of the dates indicated was as follows:


(Dollars in thousands)		March 31, 2022		December 31, 2021		Increase (Decrease)			September 30, 2022		December 31, 2021		Increase (Decrease)
Commercial and industrial:
Oil and gas	$		117,902	$	135,081	$	(17,179)	(12.7%)	$	102,282	$	135,081	$	(32,799)	(24.3%)
Industrial construction			71,264		67,618		3,646	5.4%		80,512		67,618		12,894	19.1%
Equipment rental			65,092		60,206		4,886	8.1%		69,900		60,206		9,694	16.1%
Professional/medical			59,886		57,365		2,521	4.4%		47,828		57,365		(9,537)	(16.6%)
Manufacturing			31,949		31,120		829	2.7%		39,461		31,120		8,341	26.8%
PPP loans			17,970		54,262		(36,292)	(66.9%)		2,302		54,262		(51,960)	(95.8%)
Other			236,927		228,732		8,195	3.6%		225,786		228,732		(2,946)	(1.3%)
Total commercial and industrial			600,990		634,384		(33,394)	(5.3%)		568,071		634,384		(66,313)	(10.5%)
Commercial real estate:
Non-owner occupied			620,515		581,229		39,286	6.8%		685,560		581,229		104,331	18.0%
Owner occupied			457,334		443,853		13,481	3.0%		500,690		443,853		56,837	12.8%
Oil and gas			64,797		66,887		(2,090)	(3.1%)		55,868		66,887		(11,019)	(16.5%)
Total commercial real estate			1,142,646		1,091,969		50,677	4.6%		1,242,118		1,091,969		150,149	13.8%
Construction and development:
Land and development			175,604		177,506		(1,902)	(1.1%)		207,665		177,506		30,159	17.0%
Commercial			119,979		107,663		12,316	11.4%		154,344		107,663		46,681	43.4%
Multi-family community development			114,156		119,363		(5,207)	(4.4%)		73,343		119,363		(46,020)	(38.6%)
1-4 family - commercial			42,313		39,345		2,968	7.5%		47,465		39,345		8,120	20.6%
1-4 family - primary			18,715		14,285		4,430	31.0%		23,343		14,285		9,058	63.4%
Oil and gas			2,559		2,557		2	0.1%		1,410		2,557		(1,147)	(44.9%)
Total construction and development			473,326		460,719		12,607	2.7%		507,570		460,719		46,851	10.2%
Multi-family residential:
Multi-family community development			229,119		238,913		(9,794)	(4.1%)		305,567		238,913		66,654	27.9%
Other			49,980		47,483		2,497	5.3%		64,824		47,483		17,341	36.5%
Total multi-family residential			279,099		286,396		(7,297)	(2.5%)		370,391		286,396		83,995	29.3%
Total commercial loans			2,496,061		2,473,468		22,593	0.9%		2,688,150		2,473,468		214,682	8.7%
1-4 family residential			263,213		277,273		(14,060)	(5.1%)		288,456		277,273		11,183	4.0%
Consumer			28,230		28,090		140	0.5%		24,509		28,090		(3,581)	(12.7%)
Other loans			94,879		89,309		5,570	6.2%		123,293		89,309		33,984	38.1%
Agriculture			6,287		7,941		(1,654)	(20.8%)		11,185		7,941		3,244	40.9%
Other oil and gas loans			308		346		(38)	(11.0%)		298		346		(48)	(13.9%)
Total gross loans			2,888,978		2,876,427		12,551	0.4%		3,135,891		2,876,427		259,464	9.0%
Less deferred fees and unearned discount			(8,350)		(8,739)		389	(4.5%)		(9,470)		(8,739)		(731)	8.4%
Less loans held for sale			(748)		(164)		(584)	356.1%		—		(164)		164	(100.0%)
Loans excluding loans held for sale			2,879,880		2,867,524		12,356	0.4%		3,126,421		2,867,524		258,897	9.0%
Less allowance for credit losses for loans			(31,442)		(31,345)		(97)	0.3%		(32,577)		(31,345)		(1,232)	3.9%
Loans, net		$	2,848,438	$	2,836,179	$	12,259	0.4%	$	3,093,844	$	2,836,179	$	257,665	9.1%

As of ~~March 31,~~September 30, 2022, loans excluding loans held for sale were ~~$2.9~~$3.1 billion, an increase of ~~$12.4~~$258.9 million, or ~~0.4%~~9.0%, compared to December 31, 2021, primarily due to originations and line of credit drawdowns outpacing paydowns.

As of ~~March 31,~~September 30, 2022, the Company had ~~122~~11 loans outstanding funded under the Paycheck Protection Program, or PPP, ~~loans~~under the CARES Act totaling ~~$18.0 million and as~~$2.3 million. As of December 31, 2021, the Company had 330 PPP loans totaling $54.3 million. The Company recognized a net yield of 12.48% during the three months ended March 31, 2022 on PPP loans, including $989,000 of origination fee income. During the three months ended March 31, 2022, payments for PPP loans totaled $36.3 million.

As of ~~March 31,~~September 30, 2022 and December 31, 2021, the Company’s loan portfolio included ~~$185.6~~$159.9 million and $204.9 million, respectively, of loans directly or indirectly related to the oil and gas industry. Oil and gas loans are loans with revenue related to well-head, oil in the ground or extracting oil or gas, including any activity, product or service related to

~~Table of Contents~~

the oil and gas industry, such as exploration and production, drilling, equipment, services, midstream companies,

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service companies and commercial real estate companies with significant reliance on oil and gas companies.

As of ~~March 31,~~September 30, 2022 and December 31, 2021, the Company’s loan portfolio included ~~$343.3~~$378.9 million and $358.3 million, respectively, of community development loans, which fund Texas based projects to promote affordable housing.

The contractual maturity ranges of loans in the loan portfolio and the amount of such loans with fixed and variable interest rates in each maturity range as of the date indicated were as follows:



			1 Year		5 Years		After						1 Year		5 Years		After
(Dollars in thousands)	1 Year or Less		Through 5 Years		Through 15 Years		15 years		Total		1 Year or Less		Through 5 Years		Through 15 Years		15 years		Total
March 31, 2022
September 30, 2022
Commercial and industrial:
Fixed rate	$	70,279	$	171,349	$	2,218	$	—	$	243,846	$	52,941	$	147,256	$	4,320	$	—	$	204,517
Variable rate		187,451		122,643		46,560		490		357,144		175,044		125,566		62,464		480		363,554
		257,730		293,992		48,778		490		600,990		227,985		272,822		66,784		480		568,071
Real estate:
Commercial real estate:
Fixed rate		47,625		509,854		30,414		—		587,893		71,069		520,448		82,018		—		673,535
Variable rate		52,406		270,075		210,038		22,234		554,753		26,456		339,615		182,475		20,037		568,583
		100,031		779,929		240,452		22,234		1,142,646		97,525		860,063		264,493		20,037		1,242,118
Construction and development:
Fixed rate		39,431		100,243		15,782		12,163		167,619		52,706		86,184		1,728		12,163		152,781
Variable rate		70,961		216,226		4,965		13,555		305,707		66,967		260,955		10,701		16,166		354,789
		110,392		316,469		20,747		25,718		473,326		119,673		347,139		12,429		28,329		507,570
1-4 family residential:
Fixed rate		4,863		38,601		20,750		94,056		158,270		3,458		42,936		16,973		111,825		175,192
Variable rate		480		2,909		13,111		88,443		104,943		1,134		2,975		14,043		95,112		113,264
		5,343		41,510		33,861		182,499		263,213		4,592		45,911		31,016		206,937		288,456
Multi-family residential:
Fixed rate		1,393		10,615		225,768		—		237,776		1,273		16,505		200,984		41,100		259,862
Variable rate		3,350		36,738		1,235		—		41,323		80,710		29,618		201		—		110,529
		4,743		47,353		227,003		—		279,099		81,983		46,123		201,185		41,100		370,391
Consumer:
Fixed rate		6,922		8,066		—		—		14,988		6,276		8,356		—		—		14,632
Variable rate		12,044		1,198		—		—		13,242		7,935		1,795		147		—		9,877
		18,966		9,264		—		—		28,230		14,211		10,151		147		—		24,509
Agriculture:
Fixed rate		3,306		888		—		—		4,194		6,711		1,299		—		—		8,010
Variable rate		2,060		33		—		—		2,093		3,151		24		—		—		3,175
		5,366		921		—		—		6,287		9,862		1,323		—		—		11,185
Other:
Fixed rate		1,158		782		350		—		2,290		2,128		1,007		—		—		3,135
Variable rate		18,186		70,128		4,583		—		92,897		28,131		88,110		4,215		—		120,456
		19,344		70,910		4,933		—		95,187		30,259		89,117		4,215		—		123,591
Total:
Fixed rate loans		174,977		840,398		295,282		106,219		1,416,876		196,562		823,991		306,023		165,088		1,491,664
Variable rate loans		346,938		719,950		280,492		124,722		1,472,102		389,528		848,658		274,246		131,795		1,644,227
Total gross loans	$	521,915	$	1,560,348	$	575,774	$	230,941	$	2,888,978	$	586,090	$	1,672,649	$	580,269	$	296,883	$	3,135,891

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Nonperforming Assets

Nonperforming assets include nonaccrual loans, loans that are accruing over 90 days past due and foreclosed assets. Generally, loans are placed on nonaccrual status when they become more than 90 days past due and/or the collection of principal or interest is in doubt. The components of nonperforming assets as of the dates indicated were as follows:



(Dollars in thousands)	March 31, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Nonaccrual loans	$	22,083	$	22,568	$	22,410	$	22,568
Accruing loans 90 or more days past due		—		—		—		—
Total nonperforming loans		22,083		22,568		22,410		22,568
Foreclosed assets		—		—		—		—
Total nonperforming assets	$	22,083	$	22,568	$	22,410	$	22,568
Total assets	$	4,445,977	$	4,486,001	$	4,271,831	$	4,486,001
Loans excluding loans held for sale		2,879,880		2,867,524		3,126,421		2,867,524
Allowance for credit losses for loans		31,442		31,345		32,577		31,345
Allowance for credit losses for loans to nonaccrual loans		142.38%		138.89%		145.37%		138.89%
Nonperforming loans to loans excluding loans held for sale		0.77%		0.79%		0.72%		0.79%
Nonperforming assets to total assets		0.50%		0.50%		0.52%		0.50%

Nonperforming assets were ~~$22.1~~$22.4 million, or ~~0.50%~~0.52% of total assets, as of ~~March 31,~~September 30, 2022 and $22.6 million, or 0.50% of total assets, as of December 31, 2021. ~~The nonperforming assets decreased $485,000 during the first three months of 2022 primarily due to payments received from borrowers.~~

Troubled Debt Restructurings

Loans restructured due to the borrower’s financial difficulties, or troubled debt restructurings, during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, which remained outstanding as of the end of those periods were as follows:


				Post-modification Recorded Investment											Post-modification Recorded Investment
										Extended											Extended
										Maturity,											Maturity,
		Pre-modification						Extended		Restructured			Pre-modification						Extended		Restructured
		Outstanding						Maturity and		Payments			Outstanding						Maturity and		Payments
	Number	Recorded		Restructured		Extended		Restructured		and Adjusted		Number	Recorded		Restructured		Extended		Restructured		and Adjusted
(Dollars in thousands)	of Loans	Investment		Payments		Maturity		Payments		Interest Rate		of Loans	Investment		Payments		Maturity		Payments		Interest Rate
March 31, 2022
September 30, 2022
Commercial and industrial	7	$	3,870	$	1,093	$	—	$	—	$	2,777	7	$	3,870	$	1,093	$	—	$	—	$	2,777
Real estate:
Commercial real estate	1		234		—		—		—		245	2		2,273		—		—		2,040		245
Construction and development												3		431		—		—		431		—
Total	8	$	4,104	$	1,093	$	—	$	—	$	3,022	12	$	6,574	$	1,093	$	—	$	2,471	$	3,022
March 31, 2021
September 30, 2021
Commercial and industrial												3	$	3,256	$	3,256	$	—	$	—	$	—
Real estate:
Commercial real estate	1	$	1,206	$	1,206	$	—	$	—	$	—	1		1,206		1,206		—		—		—
1-4 family residential	1		1,548		1,548		—		—		—	1		1,548		1,548		—		—		—
Consumer												1		42		—		—		42		—
Total	2	$	2,754	$	2,754	$	—	$	—	$	—	6	$	6,052	$	6,010	$	—	$	42	$	—

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Risk Gradings

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the ACL, management assigns and tracks risk gradings as described below that are used as credit quality indicators.

The internal ratings of loans as of the periods indicated were as follows:


			Special								Special
(Dollars in thousands)	Pass		Mention		Substandard		Total		Pass		Mention		Substandard		Total
March 31, 2022
September 30, 2022
Commercial and industrial	$	579,987	$	2,934	$	18,069	$	600,990	$	555,541	$	—	$	12,530	$	568,071
Real estate:
Commercial real estate		1,097,321		879		44,446		1,142,646		1,209,994		2,161		29,963		1,242,118
Construction and development		460,165		468		12,693		473,326		496,685		421		10,464		507,570
1-4 family residential		258,246		—		4,967		263,213		282,486		—		5,970		288,456
Multi-family residential		279,099		—		—		279,099		370,391		—		—		370,391
Consumer		28,011		—		219		28,230		24,278		—		231		24,509
Agriculture		6,221		—		66		6,287		11,126		—		59		11,185
Other		95,187		—		—		95,187		123,590		—		1		123,591
Total gross loans	$	2,804,237	$	4,281	$	80,460	$	2,888,978	$	3,074,091	$	2,582	$	59,218	$	3,135,891


			Special
(Dollars in thousands)	Pass		Mention		Substandard		Total
December 31, 2021
Commercial and industrial	$	613,419	$	3,482	$	17,483	$	634,384
Real estate:
Commercial real estate		1,038,401		8,855		44,713		1,091,969
Construction and development		447,533		470		12,716		460,719
1-4 family residential		272,217		—		5,056		277,273
Multi-family residential		286,396		—		—		286,396
Consumer		27,865		—		225		28,090
Agriculture		7,899		—		42		7,941
Other		89,655		—		—		89,655
Total gross loans	$	2,783,385	$	12,807	$	80,235	$	2,876,427

During the ~~first quarter~~nine months of 2022, loans with an internal rating of pass increased ~~$20.9~~$290.7 million primarily due to new originations, loans with an internal rating of special mention decreased ~~$8.5~~$10.2 million primarily due to ~~a payoff received on one~~ loan payoffs changes in risk gradings and loans with an internal rating of substandard ~~increased $225,000~~decreased $21.0 million primarily due to payoffs and loans upgraded to pass during the same period.

Allowance for Credit Losses

The Company maintains an ACL that represents management’s best estimate of the expected credit losses and risks inherent in the loan portfolio. The amount of the ACL should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the ACL, the Company estimates losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the ACL is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current and forecasted economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. Please refer to “Part I—Item 1.—Financial Statements—Note 6.”

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The ACL by loan category as of the dates indicated was as follows:



		March 31, 2022				December 31, 2021					September 30, 2022				December 31, 2021
(Dollars in thousands)		Amount		Percent		Amount		Percent			Amount		Percent		Amount		Percent
Commercial and industrial		$	10,895	34.7	%	$	11,214	35.7	%		$	9,397	28.9	%	$	11,214	35.7	%
Real estate:
Commercial real estate			11,297	35.9	%		11,015	35.1	%			12,185	37.4	%		11,015	35.1	%
Construction and development			3,429	10.9	%		3,310	10.6	%			3,964	12.2	%		3,310	10.6	%
1-4 family residential			2,025	6.4	%		2,105	6.7	%			2,255	6.9	%		2,105	6.7	%
Multi-family residential			1,770	5.6	%		1,781	5.7	%			2,504	7.7	%		1,781	5.7	%
Consumer			403	1.3	%		406	1.3	%			371	1.1	%		406	1.3	%
Agriculture			70	0.3	%		88	0.3	%			122	0.4	%		88	0.3	%
Other			1,553	4.9	%		1,426	4.6	%			1,779	5.4	%		1,426	4.6	%
Total allowance for credit losses for loans		$	31,442	100.0	%	$	31,345	100.0	%		$	32,577	100.0	%	$	31,345	100.0	%
Loans excluding loans held for sale	Loans excluding loans held for sale		2,879,880				2,867,524			Loans excluding loans held for sale		3,126,421				2,867,524
ACL for loans to loans excluding loans held for sale	ACL for loans to loans excluding loans held for sale		1.09%				1.09%			ACL for loans to loans excluding loans held for sale		1.04%				1.09%

The ACL for loans was ~~$31.4~~$32.6 million, or ~~1.09%~~1.04% of loans excluding loans held for sale, at ~~March 31,~~September 30, 2022, compared to $31.3 million, or 1.09% of loans excluding loans held for sale, at December 31, 2021.The increase in the ACL from December 31, 2021 to ~~March 31,~~September 30, 2022 was primarily due to anthe increase ~~in collectively evaluated loans resulting from growth~~ in the loan ~~portfolio~~portfolio.

Although national and ~~adjustments to certain~~local economies and economic forecasts improved during 2021 and 2022, geopolitical instabilities, inflation, rising interest rates, supply disruptions and other uncertainties continue and these factors are considered in the forecasts and qualitative factors ~~which was partially offset by a decrease in~~used to determine the ~~ACL related to individually evaluated loans resulting from a reduction in the associated principal balances.~~Company’s ACL.

Activity in the ACL for loans for the periods indicated was as follows:


		Three Months Ended March 31,					Nine Months Ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2022		2021		(Dollars in thousands)	2022		2021
Beginning balance	Beginning balance	$	31,345	$	40,637	Beginning balance	$	31,345	$	40,637
Provision (recapture):	Provision (recapture):					Provision (recapture):
Commercial and industrial	Commercial and industrial		(383)		872	Commercial and industrial		(2,101)		(2,028)
Real estate:	Real estate:					Real estate:
	Commercial real estate		282		482	Commercial real estate		1,195		(2,054)
	Construction and development		119		(644)	Construction and development		654		(2,755)
	1-4 family residential		(81)		(120)	1-4 family residential		152		(875)
	Multi-family residential		(11)		201	Multi-family residential		723		(357)
Consumer	Consumer		(5)		(10)	Consumer		22		(85)
Agriculture	Agriculture		(28)		(72)	Agriculture		24		(75)
Other	Other		127		(423)	Other		353		(732)
Total provision (recapture)	Total provision (recapture)		20		286	Total provision (recapture)		1,022		(8,961)
Net (charge-offs) recoveries:	Net (charge-offs) recoveries:					Net (charge-offs) recoveries:
Commercial and industrial	Commercial and industrial		64		(95)	Commercial and industrial		284		394
Real estate:	Real estate:					Real estate:
	1-4 family residential		1		—	Commercial real estate		(25)		—
						1-4 family residential		(2)		(3)
Consumer	Consumer		2		4	Consumer		(57)		94
Agriculture	Agriculture		10		42	Agriculture		10		47
Other			—		—
Total net (charge-offs) recoveries	Total net (charge-offs) recoveries		77		(49)	Total net (charge-offs) recoveries		210		532
Ending balance	Ending balance	$	31,442	$	40,874	Ending balance	$	32,577	$	32,208
Total average loans	Total average loans		2,886,765		2,901,291	Total average loans		2,953,607		2,812,449
Net charge-offs (recoveries) to total average loans	Net charge-offs (recoveries) to total average loans		(0.01%)		0.01%	Net charge-offs (recoveries) to total average loans		(0.01%)		(0.03%)

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Annualized net charge-off (recoveries) to average loans by loan category for the periods indicated below were as follows:


	Three Months Ended March 31,			Nine Months Ended September 30,
(Dollars in thousands)		2022	2021		2022	2021
Commercial and industrial		(0.04%)	0.05%		(0.06%)	(0.08%)
Real estate:
Commercial real estate					0.00%	—
1-4 family residential					0.00%	0.00%
Consumer		(0.03%)	(0.05%)		0.29%	(0.41%)
Agriculture		(0.57%)	(2.18%)		(0.14%)	(0.72%)

The ACL for unfunded commitments ~~increased to $3.7~~was $3.8 million ~~at March 31, 2022 from~~and $3.3 million atSeptember 30, 2022 and December 31, 2021, ~~primarily due to an increase in commitments to extend credit.~~respectively.

Securities

The amortized cost, related gross unrealized gains and losses and fair values of investments in securities as of the dates indicated below were as follows:


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized				Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
March 31, 2022
September 30, 2022
Debt securities available for sale:
State and municipal securities	$	171,658	$	488	$	(16,372)	$	155,774	$	175,763	$	—	$	(40,665)	$	135,098
U.S. Treasury securities		110,597		—		(1,553)		109,044		111,045		—		(3,786)		107,259
U.S. agency securities:
Callable debentures		3,000		—		(193)		2,807		3,000		—		(436)		2,564
Collateralized mortgage obligations		94,876		2		(4,954)		89,924		97,307		—		(12,909)		84,398
Mortgage-backed securities		201,184		258		(12,133)		189,309		211,497		—		(30,579)		180,918
Equity securities		1,193		—		(72)		1,121		1,201		—		(156)		1,045
Total	$	582,508	$	748	$	(35,277)	$	547,979	$	599,813	$	—	$	(88,531)	$	511,282
December 31, 2021
Debt securities available for sale:
State and municipal securities	$	168,541	$	4,451	$	(392)	$	172,600	$	168,541	$	4,451	$	(392)	$	172,600
U.S. Treasury securities		11,888		—		(91)		11,797		11,888		—		(91)		11,797
U.S. agency securities:
Callable debentures		3,000		—		(27)		2,973		3,000		—		(27)		2,973
Collateralized mortgage obligations		63,129		115		(862)		62,382		63,129		115		(862)		62,382
Mortgage-backed securities		173,446		1,805		(1,130)		174,121		173,446		1,805		(1,130)		174,121
Equity securities		1,189		—		(16)		1,173		1,189		—		(16)		1,173
Total	$	421,193	$	6,371	$	(2,518)	$	425,046	$	421,193	$	6,371	$	(2,518)	$	425,046

As of ~~March 31,~~September 30, 2022, the fair value of the Company’s securities totaled ~~$548.0~~$511.3 million, compared to $425.0 million as of December 31, 2021, an increase of ~~$122.9~~$86.2 million. Amortized cost increased ~~$161.3~~$178.6 million during 2022, primarily as a result of purchases totaling ~~$324.3~~$662.6 million outpacing maturities, calls and paydowns totaling ~~$162.7~~$483.5 million. Net unrealized losses on the securities portfolio were ~~$34.5~~$88.5 million at ~~March 31,~~September 30, 2022, compared to a net unrealized gains of $3.9 million at December 31, 2021. This decrease of ~~$38.4~~$92.4 million was due to a reduction in fair value as a result of interest rate increases and anticipated increases.

The Company’s mortgage-backed securities at ~~March 31,~~September 30, 2022 and December 31, 2021 were agency securities. The Company does not hold any Federal National Mortgage Loan Association, or Fannie Mae, or Federal Home Mortgage Corporation, or Freddie Mac, preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A or second lien elements in the securities portfolio.

Table of Contents

The weighted-average life of the securities portfolio was ~~6.8~~7.5 years with an estimated modified duration of ~~5.8~~6.0 years as of ~~March 31,~~September 30, 2022. See “Part I—Item 1.—Financial Statements—Note 2” for securities by contractual maturity.

~~Table of Contents~~

Weighted-average yields by security type and maturity based on estimated annual income divided by the average amortized cost of the Company’s available for sale securities portfolio as of the date indicated was as follows:


(Dollars in thousands)	1 Year or Less	After 1 Year to 5 Years	After 5 Years to 10 Years	After 10 Years	Total	1 Year or Less	After 1 Year to 5 Years	After 5 Years to 10 Years	After 10 Years	Total
March 31, 2022
September 30, 2022
Debt securities:
State and municipal securities	—	2.20%	2.58%	2.15%	2.19%	—	2.20%	2.60%	2.17%	2.22%
U.S. Treasury securities	1.20%	1.40%	1.25%	—	1.13%	1.34%	1.43%	1.26%	—	1.37%
U.S. agency securities:
Callable debentures	—	—	1.37%	—	1.37%	—	—	1.37%	—	1.37%
Collateralized mortgage obligations	—	—	2.20%	1.94%	1.95%	—	—	2.56%	2.23%	2.24%
Mortgage-backed securities	—	3.51%	2.67%	1.90%	1.96%	3.71%	3.44%	2.80%	2.01%	2.10%
Equity securities:	1.05%	—	—	—	1.05%	1.25%	—	—	—	1.25%
Total securities	1.18%	1.42%	2.31%	2.00%	1.86%	1.34%	1.47%	2.55%	2.11%	2.02%

At ~~March 31,~~September 30, 2022 and December 31, 2021, securities with a carrying amount of approximately ~~$26.8~~$25.4 million and $25.6 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Deposits

Total deposits as of ~~March 31,~~September 30, 2022 were ~~$3.8~~$3.7 billion, a decrease of ~~$10.1~~$107.5 million, or ~~0.3%~~2.8%, compared to December 31, 2021. Noninterest-bearing deposits as of ~~March 31,~~September 30, 2022 were $1.8 billion, ~~an increase~~a decrease of ~~$16.3~~$4.5 million, or ~~0.9%~~0.3%, compared to December 31, 2021. Total interest-bearing account balances as of ~~March 31,~~September 30, 2022 were ~~$2.0~~$1.9 billion, a decrease of ~~$26.4~~$103.0 million, or ~~1.3%~~5.0%, from December 31, 2021, primarily due to decreases in interest-bearing demand deposits, money market accounts and certificates ~~and other time deposits,~~less than $100,000, partially offset by increases in ~~savings and money market accounts.~~certificates over $100,000.

The components of deposits as of the dates indicated below were as follows:



(Dollars in thousands)	March 31, 2022		December 31, 2021		Increase (Decrease)			September 30, 2022		December 31, 2021		Increase (Decrease)
Interest-bearing demand accounts	$	444,571	$	468,361	$	(23,790)	(5.1%)	$	415,970	$	468,361	$	(52,391)	(11.2%)
Money market accounts		1,218,082		1,209,659		8,423	0.7%		1,144,969		1,209,659		(64,690)	(5.3%)
Savings accounts		130,218		127,031		3,187	2.5%		128,886		127,031		1,855	1.5%
Certificates and other time deposits, $100,000 or greater		127,798		134,775		(6,977)	(5.2%)		161,975		134,775		27,200	20.2%
Certificates and other time deposits, less than $100,000		99,233		106,477		(7,244)	(6.8%)		91,501		106,477		(14,976)	(14.1%)
Total interest-bearing deposits		2,019,902		2,046,303		(26,401)	(1.3%)		1,943,301		2,046,303		(103,002)	(5.0%)
Noninterest-bearing deposits		1,801,323		1,784,981		16,342	0.9%		1,780,473		1,784,981		(4,508)	(0.3%)
Total deposits	$	3,821,225	$	3,831,284	$	(10,059)	(0.3%)	$	3,723,774	$	3,831,284	$	(107,510)	(2.8%)

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The scheduled maturities of uninsured certificates of deposit or other time deposits as of the date indicated were as follows:



(Dollars in thousands)	March 31, 2022		September 30, 2022
Three months or less	$	8,822	$	46,359
Over three months through six months		5,227		20,219
Over six months through 12 months		15,891		10,822
Over 12 months		35,854		24,476
Total	$	65,794	$	101,876

Securities pledged which secure certain public deposits were not considered in determining the amount of uninsured deposits.

Cash and Equivalents

Cash and equivalents decreased ~~$179.2~~$579.7 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2022, primarily due to purchases of ~~securities.~~securities, increases in loans, net deposit outflows and repayment of Federal Home Loan Bank advances.

Other Assets

Other assets increased ~~$5.6~~$25.3 million from December 31, 2021 to ~~March 31,~~September 30, 2022, primarily due to a ~~$6.8~~$19.6 million increase in net deferred tax assets resulting from an increase in the deferred tax asset related to unrealized losses on the Company’s available for sale securities and a ~~$926,000~~$6.4 million increase in the fair value of the Company’s interest rate swap ~~contracts, partially offset by a $626,000 decrease in equity investments and a $428,000 decrease in interest receivables.~~

~~Other Liabilities~~

Other liabilities decreased $7.2 million from December 31, 2021 to March 31, 2022, primarily due to a $6.8 million decrease in bonus accrual resulting from bonus payouts, partially offset by an increase in the fair value of the Company’s interest rate swap contracts of $926,000. See “Part I—Item 1.—Financial Statements—Note 14” for further discussion of the Company’s interest rate swap contracts.

Liquidity and Capital Resources

The Company monitors its liquidity and may seek to obtain additional financing to further support its business if necessary. The Company’s primary source of funds has been customer deposits and the primary use of funds has been funding of loans.

As of ~~March 31,~~September 30, 2022, the Company had ~~$771.0~~$370.4 million in cash and cash equivalents and ~~$548.0~~$511.3 million of securities, which are considered to be liquid assets, compared to $950.1 million in cash and cash equivalents and $425.0 million of securities as of December 31, 2021. This decrease in liquid assets of ~~$56.2~~$493.4 million during the ~~first three~~nine months ofended September 30, 2022 was primarily due to a ~~$10.1~~$107.5 million decrease in deposits, ~~and~~ an increase of ~~$12.4~~$258.9 million in loans excluding loans held for ~~sale.~~

~~Table~~sale and repayment of ~~Contents~~$50.0 million of Federal Home Loan Bank advances.

Historically, the cost of the Company’s deposits has been lower than other sources of funds available. Average rates paid for the three and nine months ended ~~March 31,~~September 30, 2022 were computed on an annualized basis. Average balances and average rates paid on deposits for the periods indicated were as follows:


	Three Months Ended March 31, 2022				Year Ended December 31, 2021				Nine Months Ended September 30, 2022				Year Ended December 31, 2021
(Dollars in thousands)	Average Balance		Average Rate		Average Balance		Average Rate		Average Balance		Average Rate		Average Balance		Average Rate
Interest-bearing demand accounts	$	455,558	0.05	%	$	391,388	0.05	%	$	438,589	0.06	%	$	391,388	0.05	%
Money market accounts		1,202,139	0.28	%		1,094,042	0.27	%		1,154,766	0.31	%		1,094,042	0.27	%
Savings accounts		128,496	0.03	%		115,972	0.03	%		129,582	0.04	%		115,972	0.03	%
Certificates and other time deposits, $100,000 or greater		132,059	0.21	%		142,605	0.37	%		95,526	0.39	%		142,605	0.37	%
Certificates and other time deposits, less than $100,000		101,357	0.86	%		126,141	1.07	%		152,784	0.84	%		126,141	1.07	%
Total interest-bearing deposits		2,019,609	0.23	%		1,870,148	0.27	%		1,971,247	0.27	%		1,870,148	0.27	%
Noninterest-bearing deposits		1,762,729	—			1,603,006	—			1,803,702	—			1,603,006	—
Total deposits	$	3,782,338	0.12	%	$	3,473,154	0.14	%	$	3,774,949	0.14	%	$	3,473,154	0.14	%

Table of Contents

The ratio of average noninterest-bearing deposits to average total deposits was ~~46.6%~~47.8% for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 46.2% for the year ended December 31, 2021.

In addition to the liquid assets discussed above, the Company had ~~$1.1~~$1.3 billion and $1.0 billion of available funds under various borrowing arrangements at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively. See “Part I—Item 1.—Financial Statements—Note 11” for additional details of these arrangements. At ~~March 31,~~September 30, 2022, the capacity, amounts outstanding and availability under these arrangements were as follows:


(Dollars in thousands)	Capacity		Outstanding⁽¹⁾		Availability		Capacity		Outstanding⁽¹⁾		Availability
Federal Home Loan Bank Facility	$	1,098,853	$	(76,000)	$	1,022,853	$	1,241,283	$	(27,000)	$	1,214,283
Loan Agreement		30,000		—		30,000		30,000		—		30,000
Federal Funds		65,000		—		65,000		45,000		—		45,000
Total	$	1,193,853	$	(76,000)	$	1,117,853	$	1,316,283	$	(27,000)	$	1,289,283

(1)	Outstanding amount for the Federal Home Loan Bank Facility includes ~~$50.0 million of advances and $26.0~~$27.0 million of letters of credit pledged to secure public funds’ deposit balances.

The composition of funding sources and uses as a percentage of average total assets for the periods indicated was as follows:



	March 31, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Sources of funds:
Deposits:
Interest-bearing	45.5	%	45.2	%	45.0	%	45.2	%
Noninterest-bearing	39.7	%	38.8	%	41.2	%	38.8	%
Federal Home Loan Bank advances	1.1	%	1.2	%	0.4	%	1.2	%
Other liabilities	1.1	%	1.3	%	1.0	%	1.3	%
Shareholders’ equity	12.6	%	13.5	%	12.4	%	13.5	%
Total sources	100.0	%	100.0	%	100.0	%	100.0	%
Uses of funds:
Loans	65.0	%	67.4	%	67.4	%	67.4	%
Securities	11.2	%	7.8	%	12.3	%	7.8	%
Interest-bearing deposits at other financial institutions	17.3	%	17.7	%	13.6	%	17.7	%
Equity securities	0.3	%	0.4	%	0.3	%	0.4	%
Other noninterest-earning assets	6.2	%	6.7	%	6.4	%	6.7	%
Total uses	100.0	%	100.0	%	100.0	%	100.0	%
Average loans to average deposits	76.3	%	80.2	%	78.2	%	80.2	%

~~Table of Contents~~

A portion of the Company’s liquidity capacity will be used for contractual obligations entered into in the normal course of business, such as obligations for operating leases, certificates of deposits and borrowings. Future cash payments associated with the Company’s contractual obligations as of the dates indicated were as follows:




	1 Year		Over 1 Year		Greater				1 Year		Over 1 Year		Greater
(Dollars in thousands)	or Less		to 3 Years		than 3 Years		Total		or Less		to 3 Years		than 3 Years		Total
March 31, 2022
Federal Home Loan Bank advances⁽¹⁾	$	10,000	$	40,000	$	—	$	50,000
September 30, 2022
Non-cancellable future operating leases		1,835		3,775		10,714		16,324	$	1,775	$	3,894	$	10,585	$	16,254
Certificates of deposit		158,787		57,876		10,368		227,031		206,671		35,875		10,930		253,476
Total	$	170,622	$	101,651	$	21,082	$	293,355	$	208,446	$	39,769	$	21,515	$	269,730
December 31, 2021
Federal Home Loan Bank advances	$	10,000	$	40,000	$	—	$	50,000	$	10,000	$	40,000	$	—	$	50,000
Non-cancellable future operating leases		1,812		3,823		11,164		16,799		1,812		3,823		11,164		16,799
Certificates of deposit		162,153		68,956		10,143		241,252		162,153		68,956		10,143		241,252
Total	$	173,965	$	112,779	$	21,307	$	308,051	$	173,965	$	112,779	$	21,307	$	308,051

~~(1)~~

~~The Company’s Federal Home Loan Bank advances were paid in full in April 2022.~~

Table of Contents

As of ~~March 31,~~September 30, 2022, the Company had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.

The Company also enters into commitments to extend credit and standby letters of credit to meet customer financing needs and, in accordance with GAAP, these commitments are not reflected as liabilities in the consolidated balance sheets. Due to the nature of these commitments, the amounts disclosed in the table below 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. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to the Company’s customers.

Commitments to extend credit and standby letters of credit expiring by period as of the dates indicated were as follows:



	1 Year		Over 1 Year		Greater				1 Year		Over 1 Year		Greater
(Dollars in thousands)	or Less		to 3 Years		than 3 Years		Total		or Less		to 3 Years		than 3 Years		Total
March 31, 2022
September 30, 2022
Commitments to extend credit	$	451,687	$	376,600	$	78,805	$	907,092	$	517,940	$	400,095	$	71,013	$	989,048
Standby letters of credit		16,056		916		—		16,972		10,241		1,370		—		11,611
Total	$	467,743	$	377,516	$	78,805	$	924,064	$	528,181	$	401,465	$	71,013	$	1,000,659
December 31, 2021
Commitments to extend credit	$	400,006	$	293,606	$	81,348	$	774,960	$	400,006	$	293,606	$	81,348	$	774,960
Standby letters of credit		16,532		1,415		162		18,109		16,532		1,415		162		18,109
Total	$	416,538	$	295,021	$	81,510	$	793,069	$	416,538	$	295,021	$	81,510	$	793,069

As a general matter, Federal Deposit Insurance Corporation, or FDIC, insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. The Company and the Bank are both subject to regulatory capital requirements. At ~~March 31,~~September 30, 2022 and December 31, 2021, the Company and the Bank were in compliance with all applicable regulatory capital requirements at the bank holding company and bank levels, and the Bank was classified as “well capitalized” for purposes of the FDIC’s prompt corrective action regulations. The OCC or the FDIC may require the Bank to maintain capital ratios above the required minimums and the Federal Reserve may require the Company to maintain capital ratios above the required minimums. See “Part I—Item 1.—Financial Statements—Note 19.”

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Interest Rate Sensitivity and Market Risk

Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates and prices. As a financial institution, the Company’s primary component of market risk is interest rate risk due to future interest rate changes. Fluctuations in interest rates impact both income and expense recorded on most of the Company’s assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short-term to maturity period.

The Company manages exposure to interest rates by structuring its balance sheet in the ordinary course of business. The Company does not enter into instruments such as leveraged derivatives, financial options, financial future contracts or forward delivery contracts to reduce interest rate risk. The Company enters into interest rate swaps as an accommodation to customers. The Company is not subject to foreign exchange or commodity price risk and does not own any trading assets.

The Company has asset, liability and funds management policies that provide the guidelines for effective funds management and has established a measurement system for monitoring the net interest rate sensitivity position. The Company’s exposure to interest rate risk is managed by the Funds Management Committee of the Bank. The committee formulates strategies based on appropriate levels of interest rate risk with consideration of the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business

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strategies and other factors. The committee meets regularly to review, among other things, the relationships between interest-earning assets and interest-bearing liabilities, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity.

The Company uses interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model, as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of non-maturity deposit accounts are based on standard regulatory decay assumptions and are incorporated into the model. The assumptions used are inherently uncertain and the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results may differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.

On a quarterly basis, two simulation models are run, including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. The results from these models are impacted by the behavior of interest-rate sensitive assets and liabilities as well as the mixture of those assets and liabilities. Under the static and dynamic growth models, rates are shocked instantaneously and ramped rate changes over a 12-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. The Company’s internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one-year period should not decline by more than 10.0% for a 100-basis point shift, 20.0% for a 200-basis point shift and 30.0% for a 300-basis point shift.

~~Table of Contents~~

Simulated ~~change~~changes in net interest income and the fair value of equity over a 12-month ~~horizon~~period as of the dates indicated below were as follows:

March 31, 2022

December 31, 2021
Change in Interest

Percent Change in

Percent Change

Percent Change in

Percent Change
Rates (Basis Points)

Net Interest Income

Fair Value of Equity

Net Interest Income

Fair Value of Equity
+ 300

22.7
%

(15.8)
%

25.4
%

6.7
%
+ 200

15.9
%

(6.5)
%

16.9
%

13.0
%
+ 100

8.3
%

(1.5)
%

7.9
%

8.8
%
Base

—
%

—
%

—
%

—
%
−100

(7.0)
%

(13.5)
%

(2.5)
%

(37.2)
%


	September 30, 2022				December 31, 2021
Change in Interest	Percent Change in		Percent Change		Percent Change in		Percent Change
Rates (Basis Points)	Net Interest Income		Fair Value of Equity		Net Interest Income		Fair Value of Equity
+ 300	10.6	%	(3.6)	%	25.4	%	6.7	%
+ 200	7.1	%	(0.6)	%	16.9	%	13.0	%
+ 100	3.7	%	0.8	%	7.9	%	8.8	%
Base	—	%	—	%	—	%	—	%
−100	(9.2)	%	(10.3)	%	(2.5)	%	(37.2)	%
−200	(19.0)	%	(22.6)	%	(3.2)	%	(70.8)	%

The Company's model simulation as of ~~March 31,~~September 30, 2022 indicates that ~~the Company’s~~its projected balance sheet was ~~slightly~~ less asset sensitive in comparison to its balance sheet as of December 31, ~~2021~~2021. The shift to ~~up-rate shocks~~a less asset sensitive position was primarily due to the deployment of interest-bearing cash deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) to originate loan growth during 2022 and ~~slightly~~deposit balance run off that resulted in an increase to the economic value of equity. This combined with the recent interest rate increases from the Fed resulted in less sensitivity to future rate increases and more sensitive to ~~down-rate shocks, but nothing that shows significant risk. Fair Value of Equity shocks resulted in lower values due to increases in the interest~~downward rate ~~forecast from expectations of rising rates from Fed and Wall Street forecasts.~~movements.

LIBOR Transition

LIBOR was used as an index rate for a majority of the Company’s interest-rate swaps and approximately ~~8.0%~~4.5% of the Company’s loans at ~~March 31,~~September 30, 2022. In March 2021, the UK Financial Conduct authority formally confirmed that a number of U.S. dollar LIBOR rates will be available until the end of June 2023 to support the rundown of legacy contracts. The Company’s transition away from LIBOR may span several reporting periods through June ~~2023~~2023.

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The Company’s loans that remain indexed to LIBOR are primarily participations and syndications where the Company is not the lead agent bank and the transition away from LIBOR is dependent on the lead agent bank. The Company is in active discussions with the lead agent banks regarding these loans indexed to LIBOR. These lead agent banks have LIBOR transition programs in place to assist in the transition from LIBOR. The Company’s interest-rate swaps are paired swaps and the interest-rate swaps are established by dealers that have many such agreements and have established or will establish fallback language to transition away from LIBOR.

If not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks to the Company. One of the major identified risks is inadequate fallback language in various existing instruments’ contracts that may result in issues establishing the alternative index and adjusting the margin as applicable. The Company continues to monitor this activity and evaluate the related risks to its ~~business~~.business.

Non-GAAP Financial Measures

The Company’s accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, the Company also evaluates its performance based on certain additional non-GAAP financial measures. The Company classifies a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are not included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP in the statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating, other statistical measures or ratios calculated using exclusively financial measures calculated in accordance with GAAP. Non-GAAP financial measures should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the way the Company calculates non-GAAP financial measures may differ from that of other companies reporting measures with similar names.

The Company calculates tangible equity as total shareholders’ equity, less goodwill and other intangible assets, net of accumulated amortization, and tangible book value per share as tangible equity divided by shares of common stock outstanding at the end of the relevant period. The most directly comparable GAAP financial measure for tangible book value per share is book value per share. The Company calculates tangible assets as total assets less goodwill and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible equity to tangible assets is total shareholders’ equity to total assets. The Company believes that tangible book value per

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share and tangible equity to tangible assets are measures that are important to many investors in the marketplace who are interested in book value per share and total shareholders’ equity to total assets, exclusive of change in intangible assets.

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The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible equity, total assets to tangible assets and presents book value per share, tangible book value per share, total shareholders’ equity to total assets and tangible equity to tangible assets:




(Dollars in thousands, except per share data)	March 31, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Tangible Equity
Total shareholders’ equity	$	539,723	$	562,125	$	501,425	$	562,125
Adjustments:
Goodwill		(80,950)		(80,950)		(80,950)		(80,950)
Other intangibles		(3,540)		(3,658)		(3,188)		(3,658)
Tangible equity	$	455,233	$	477,517	$	417,287	$	477,517
Tangible Assets
Total assets	$	4,445,977	$	4,486,001	$	4,271,831	$	4,486,001
Adjustments:
Goodwill		(80,950)		(80,950)		(80,950)		(80,950)
Other intangibles		(3,540)		(3,658)		(3,188)		(3,658)
Tangible assets	$	4,361,487	$	4,401,393	$	4,187,693	$	4,401,393
Common shares outstanding		24,502		24,488		24,015		24,488
Book value per share	$	22.03	$	22.96	$	20.88	$	22.96
Tangible book value per share	$	18.58	$	19.50	$	17.38	$	19.50
Total shareholders’ equity to total assets		12.14%		12.53%		11.74%		12.53%
Tangible equity to tangible assets		10.44%		10.85%		9.96%		10.85%

Critical Accounting Policies

The Company’s accounting policies are described in “Part II—Item 8.—Financial Statements and Supplementary Data—Note 1” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The Company’s accounting policies that it considers critical because they involve a higher degree of judgment and complexity are described in “Part II—Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Emerging Growth Company

The Company qualifies as an “emerging growth company” under the Jump Start Our Business Start-ups, or JOBS ~~Act, permits~~Act. As an ~~“emerging~~emerging growth ~~company” to take~~company, the Company has taken advantage of ~~an extended transition period to comply with new or revised accounting standards~~reduced reporting and other requirements that are otherwise generally applicable to public companies. Emerging growth company are:

●

exempt from the requirement to obtain an attestation and report from the Company’s auditors on management’s assessment of internal control over financial reporting under the Sarbanes-Oxley Act of 2002;

●

permitted to have an extended transition period for adopting any new or revised accounting standards that may be issued by the Financial Accounting Standards Board or by the Securities and Exchange Commission;

●

permitted to provide less extensive disclosure about the Company’s executive compensation arrangements; and

●

not required to give shareholders nonbinding advisory votes on executive compensation or golden parachute arrangements.

The Company ~~decided not to take advantage of this provision and~~will lose its emerging growth status December 31, 2022, which is ~~complying with new or revised accounting standards to~~ the ~~same extent that compliance is required for non-emerging growth companies. The decision to opt out~~end of the ~~extended transition period under~~fiscal year in which the ~~JOBS Act is irrevocable.~~fifth anniversary of its initial public offering occurs.

Recently Issued Accounting Pronouncements

See “Part I—Item 1.—Financial Statements—Note 1.”

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

See “Part I—Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Sensitivity and Market Risk” for a discussion of how the Company manages market risk.

~~Table of Contents~~

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures—As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in internal control over financial reporting—There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended ~~March 31,~~September 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not currently subject to any material legal proceedings. The Company is from time to time subject to claims and litigation arising in the ordinary course of business.

At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on the Company’s results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against the Company could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially and adversely affect the Company’s reputation, even if resolved in the Company’s favor.

Item 1A. Risk Factors

There have been no material changes in the risk factors aspreviously disclosed by the Company and Allegiance. Investors should carefully consider the risks described in ~~Part I,~~ “Part I—Item ~~1A of our~~1A.—Risk Factors” in the Company’s and Allegiance’s Annual ~~Report~~Reports on Form 10-K for the year ended December 31, ~~2021.~~2021 and the Company’s other SEC filings, including the Joint Proxy Statement Prospectus regarding the Merger that the Company filed with the SEC on April 7, 2022 pursuant to Rule 424(b)(3).

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In 2021, the Company’s Board of Directors authorized a share repurchase program, or the 2021 Repurchase Program, under which the Company ~~may~~could repurchase up to $40.0 million of the Company’s common stock starting September 16, 2021 through September 30, 2022. In 2022, the Company’s Board of Directors authorized a share

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repurchase program, or the 2022 Repurchase Program, under which the Company may repurchase up to $40.0 million of the Company’s common stock starting September 22, 2022 through September 30, 2023. No shares were repurchased under the 2022 Repurchase Program during the three months ended September 30, 2022.

Repurchases under the 2021 Repurchase Program and 2022 Repurchase Program may be made from time to time at the Company’s discretion in open market transactions, through block trades, in privately negotiated transactions, and pursuant to any trading plan that may be adopted by the Company’s management in accordance with Rule 10b5-1 of the Exchange Act or otherwise. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and may be modified, suspended or discontinued at any time.

~~Table of Contents~~

The following table provides information with respect to purchases of shares of the Company’s common stock during the three months ended ~~March 31,~~September 30, 2022 that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act.



				Shares Purchased	Number of Shares That					Shares Purchased	Number of Shares That
	Total Number of	Average Price		as Part of Publicly	May Yet be Purchased	Total Number of		Average Price		as Part of Publicly	May Yet be Purchased
Period	Shares Purchased⁽¹⁾	Paid per Share		Announced Plan⁽²⁾	Under the Plan⁽³⁾	Shares Purchased		Paid per Share		Announced Plan⁽²⁾	Under the Plan⁽³⁾
January 1, 2022 - January 31, 2022	—		—	—	1,359,157
February 1, 2022 - February 28, 2022	3,818		$ 29.44	—	1,330,672
March 1, 2022 - March 31, 2022	74		$ 30.99	—	1,290,323
July 1, 2022 - July 31, 2022						—			—	—	1,208,842
August 1, 2022 -August 31, 2022						47,111	⁽¹⁾		$ 29.80	47,000	1,208,444
September 1, 2022 - September 30, 2022						369,746	⁽²⁾		$ 29.90	369,746	1,367,521
Total						416,857			$ 29.89	416,746

(1)

~~Represents~~Includes 47,000 shares repurchased under the 2021 Repurchase Program described above and 111 shares employees ~~have~~ elected to have withheld to satisfy their tax liabilities related to options exercised or restricted stock vested or to pay the exercise price of the options as allowed under the Company’s stock compensation plans. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock.

(2)

~~No shares were purchased~~Purchased under the 2021 Repurchase Program ~~during the first quarter of 2022.~~described above.

(3)

Computed based on the closing share price of the Company’s common stock as of the end of each period shown.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

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Item 6. Exhibits


Exhibit
Number		Description of Exhibit

~~3.1~~2.1+	Agreement and Plan of Merger, dated as of November 5, 2021 by and between CBTX, Inc. and Allegiance Bancshares, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on November 12, 2021)
2.2	First Amendment, dated as of August 25, 2022, to the Agreement and Plan of Merger, dated as of November 5, 2021, by and between CBTX, Inc. and Allegiance Bancshares, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on August 25, 2022)
3.1	Second Amended and Restated Certificate of Formation of ~~CBTX,~~Stellar Bancorp, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form ~~S-1~~8-K filed ~~with the Commission~~ on October ~~13, 2017, File No. 333-220930)~~3, 2022

3.2	~~Second Amended and Restated~~ Bylaws of ~~CBTX,~~Stellar Bancorp, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form ~~S-1~~8-K filed ~~with the Commission~~ on October ~~13, 2017, File No. 333-220930)~~3, 2022)

4.1	Specimen Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form ~~S-1~~8-K filed ~~with the Commission~~ on October ~~13, 2017, File No. 333-220930)~~3, 2022)
10.1***
~~10.1†~~		Executive Employment Agreement dated March 17, 2022, by and among CBTX. Inc., CommunityBank of Texas, N.A. and Robert R. Franklin, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed ~~with the Commission~~ on March 18, ~~2022, File No. 001-38280)~~2022)
10.2***
~~10.2†~~		Change in Control Severance Agreement, dated March 17, 2022, by and between CBTX, Inc. and Robert T. Pigott, Jr. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed ~~with the Commission~~ on March ~~18,2022, File No. 001-38280)~~18, 2022)
10.3***
~~10.3~~		~~First Amendment to the Second Amended and Restated Loan~~Employment Agreement, dated ~~December 16, 2021 (incorporated~~August 26, 2022, by ~~reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on December 19, 2021, File 001-38280)~~

~~10.4~~		~~Revolving Promissory Note (Floating Rate)~~and among CBTX, Inc., ~~dated December 13, 2021~~CommunityBank of Texas, N.A. and J. Pat Parsons (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Commission on ~~December 19, 2021, File No. 001-38280~~August 26, 2022))
10.4***	Form of Allegiance Bancshares, Inc.’s Executive Employment Agreement (incorporated herein by reference to Exhibit 10.1 to the Allegiance Bancshares, Inc.’s Current Report on Form 8-K filed on March 18, 2022)
10.5***	Stellar Bancorp, Inc. 2022 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 3, 2022)
10.6***	Form of Stellar Bancorp, Inc. Indemnification Agreement (incorporated herein by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on October 3, 2022)
10.7***	Form of Allegiance Bancshares, Inc. Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.4 to Amendment No. 1 to Allegiance Bancshares, Inc. Registration Statement on Form S-1 filed on September 28, 2015)
10.8***	Change in Control Severance Plan (incorporated herein by reference to Exhibit 10.1 to Allegiance Bancshares, Inc.'s Form 8-K filed on February 4, 2020)
10.9***	~~Form~~Amended and Restated Employment Agreement, dated August 26, 2022, by and among CommunityBank of ~~Voting Agreement entered into in connection with Agreement~~Texas, N.A. and ~~Plan of Merger, dated November 5, 2021~~Travis Jaggers (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed ~~with the Commission~~ on ~~November 12, 2021, File No. 38280)~~August 26, 2022)

~~10.6~~		Form of Director Support Agreement entered into in connection with Agreement and Plan of Merger, dated November 5, 2021 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Commission on November 12, 2021, File No. 38280)

31.1*	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934

31.2*	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934

32.1**	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350

32.2**	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

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101*	The following materials from CBTX’s Quarterly Report on Form 10-Q for the quarter ended ~~March 31,~~September 30, 2022, formatted in Inline XBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.
104
104*		~~Cover~~ Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

+ The schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K

* Filed with this Quarterly Report on Form ~~10-Q~~10-Q.

** Furnished with this Quarterly Report on Form ~~10-Q~~10-Q.

†***	Indicates a management contract or compensatory plan.

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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.


		CBTX, INC.
		(Registrant)



Date: ~~April~~October 28, 2022		/s/ Robert R. Franklin, Jr.
		Robert R. Franklin, Jr.
		~~Chairman, President and~~ Chief Executive Officer
		(Principal Executive Officer)



Date: ~~April~~October 28, 2022		/s/ ~~Robert T. Pigott, Jr.~~Paul P. Egge
		Senior Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

6265


	March 31, 2021
	Number
(Dollars in thousands)	of Loans	Balance
Commercial and industrial	5	$	7,904
Real estate:
Commercial real estate	4		8,114
Construction and development	3		11,882
1-4 family residential	2		102
Total	14	$	28,002