Stellar Bancorp 10Q 2021 Q3 Quarterly report

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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 September 30, 2021

☐ 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, 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)

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	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 October 25, 2021, there 24,579,599 were shares of the registrant’s common stock outstanding, including 159,961 shares of unvested restricted stock.

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CBTX, INC.

		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements – (Unaudited)	1
	Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	1
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2021 and 2020	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
	Cautionary Note Regarding Forward-Looking Statements	37
	Overview	38
	Information Regarding COVID-19 Impact and Uncertain Economic Outlook	39
	Results of Operations	41
	Financial Condition	47
	Liquidity and Capital Resources	55
	Interest Rate Sensitivity and Market Risk	58
	Non-GAAP Financial Measures	59
	Critical Accounting Policies	60
	Recently Issued Accounting Pronouncements	60
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60
Item 4.	Controls and Procedures	60

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	61
Item 1A.	Risk Factors	61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	63
SIGNATURES		64

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets (Unaudited)

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




	September 30, 2021		December 31, 2020
Assets:
Cash and due from banks	$	50,642	$	46,814
Interest-bearing deposits at other financial institutions		948,143		491,193
Total cash and cash equivalents		998,785		538,007
Securities		359,539		237,281
Equity investments		17,349		18,652
Loans held for sale		327		2,673
Loans, net of allowance for credit losses of $32,208 and $40,637 at September 30, 2021 and December 31, 2020, respectively		2,576,194		2,883,480
Premises and equipment, net of accumulated depreciation of $38,332 and $35,826 at September 30, 2021 and December 31, 2020, respectively		59,235		61,152
Goodwill		80,950		80,950
Other intangible assets, net of accumulated amortization of $17,166 and $16,607 at September 30, 2021 and December 31, 2020, respectively		3,702		4,171
Bank-owned life insurance		72,771		72,338
Operating lease right-to-use assets		11,527		13,285
Deferred tax assets, net		9,760		10,700
Other assets		18,980		26,528
Total assets	$	4,209,119	$	3,949,217

Liabilities:
Noninterest-bearing deposits	$	1,628,144	$	1,476,425
Interest-bearing deposits		1,903,491		1,825,369
Total deposits		3,531,635		3,301,794
Federal Home Loan Bank advances		50,000		50,000
Operating lease liabilities		14,556		16,447
Other liabilities		48,335		34,525
Total liabilities		3,644,526		3,402,766
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, 25,263,594 and 25,458,816 shares issued at September 30, 2021 and December 31, 2020, respectively; 24,419,638 and 24,612,828 shares outstanding at September 30, 2021 and December 31, 2020, respectively		253		255
Additional paid-in capital		335,226		339,334
Retained earnings		241,012		214,456
Treasury stock, at cost, 843,956 and 845,988 shares held at September 30, 2021 and December 31, 2020, respectively		(14,334)		(14,369)
Accumulated other comprehensive income, net of tax of $648 and $1,801 at September 30, 2021 and December 31, 2020, respectively		2,436		6,775
Total shareholders’ equity		564,593		546,451
Total liabilities and shareholders’ equity	$	4,209,119	$	3,949,217

See accompanying notes to condensed consolidated financial statements.

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CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Interest income:
Interest and fees on loans	$	30,765	$	32,318	$	94,723	$	98,792
Securities		1,435		1,107		3,940		3,698
Interest-bearing deposits at other financial institutions		340		176		740		1,400
Equity investments		157		162		461		509
Total interest income		32,697		33,763		99,864		104,399
Interest expense:
Deposits		1,227		1,831		3,844		7,619
Federal Home Loan Bank advances		221		221		663		682
Other interest-bearing liabilities		—		3		—		12
Total interest expense		1,448		2,055		4,507		8,313
Net interest income		31,249		31,708		95,357		96,086
Provision (recapture) for credit losses:
Provision (recapture) for credit losses for loans		(5,057)		4,569		(8,961)		17,845
Provision (recapture) for credit losses for unfunded commitments		162		(461)		(605)		1,182
Total provision (recapture) for credit losses		(4,895)		4,108		(9,566)		19,027
Net interest income after provision (recapture) for credit losses		36,144		27,600		104,923		77,059
Noninterest income:
Deposit account service charges		1,352		1,176		3,712		3,756
Card interchange fees		1,048		995		3,119		2,832
Earnings on bank-owned life insurance		2,323		1,187		3,103		2,015
Net gain on sales of assets		360		114		918		376
Other		479		551		1,312		2,280
Total noninterest income		5,562		4,023		12,164		11,259
Noninterest expense:
Salaries and employee benefits		15,000		14,332		43,922		42,567
Occupancy expense		2,660		2,496		7,778		7,478
Professional and director fees		1,567		2,446		5,711		5,139
Data processing and software		1,629		1,525		4,866		4,039
Regulatory fees		478		471		1,535		1,050
Advertising, marketing and business development		493		429		1,288		1,062
Telephone and communications		516		486		1,529		1,297
Security and protection expense		425		299		1,352		1,024
Amortization of intangibles		182		198		559		649
Other expenses		1,422		1,176		4,314		4,137
Total noninterest expense		24,372		23,858		72,854		68,442
Net income before income tax expense		17,334		7,765		44,233		19,876
Income tax expense		2,913		1,344		8,090		3,751
Net income	$	14,421	$	6,421	$	36,143	$	16,125
Earnings per common share
Basic	$	0.59	$	0.26	$	1.48	$	0.65
Diluted	$	0.59	$	0.26	$	1.47	$	0.65

See accompanying notes to condensed consolidated financial statements.

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CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	14,421	$	6,421	$	36,143	$	16,125

Change in unrealized gains (losses) on securities available for sale arising during the period		(3,446)		(327)		(5,493)		5,010
Reclassification adjustments for net realized gains included in net income		—		—		—		10
Change in related deferred income tax		723		69		1,154		(1,055)
Other comprehensive income (loss), net of tax		(2,723)		(258)		(4,339)		3,965
Total comprehensive income	$	11,698	$	6,163	$	31,804	$	20,090

See accompanying notes to condensed consolidated financial statements.

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CBTX, 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
Nine Months Ended September 30, 2020:
Balance at December 31, 2019	25,837,048	$	258	$	346,559	$	201,080	(857,346)	$	(14,562)	$	2,386	$	535,721
Net income	—		—		—		16,125	—		—		—		16,125
Cumulative effect of accounting changes from adoption of CECL, net of deferred tax asset	—		—		—		(3,045)	—		—		—		(3,045)
Dividends on common stock, $0.30 per share	—		—		—		(7,480)	—		—		—		(7,480)
Stock-based compensation expense	—		—		1,691		—	—		—		—		1,691
Vesting of restricted stock, net of shares withheld for employee tax liabilities	13,050		—		(45)		—	—		—		—		(45)
Exercise of stock options, net of shares withheld for employee tax liabilities	—		—		(10)		—	2,524		43		—		33
Shares repurchased	(282,363)		(2)		(6,042)		—	—		—		—		(6,044)
Other comprehensive income, net of tax	—		—		—		—	—		—		3,965		3,965
Balance at September 30, 2020	25,567,735	$	256	$	342,153	$	206,680	(854,822)	$	(14,519)	$	6,351	$	540,921

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 income, 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

See accompanying notes to condensed consolidated financial statements.

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CBTX, 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, 2020:
Balance at June 30, 2020	25,609,456	$	256	$	342,256	$	202,754	(854,822)	$	(14,519)	$	6,609	$	537,356
Net income	—		—		—		6,421	—		—		—		6,421
Dividends on common stock, $0.10 per share	—		—		—		(2,495)	—		—		—		(2,495)
Stock-based compensation expense	—		—		582		—	—		—		—		582
Vesting of restricted stock, net of shares withheld for employee tax liabilities	197		—		(1)		—	—		—		—		(1)
Exercise of stock options, net of shares withheld for employee tax liabilities	—		—		—		—	—		—		—		—
Shares repurchased	(41,918)		—		(684)		—	—		—		—		(684)
Other comprehensive loss, net of tax	—		—		—		—	—		—		(258)		(258)
Balance at September 30, 2020	25,567,735	$	256	$	342,153	$	206,680	(854,822)	$	(14,519)	$	6,351	$	540,921

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

See accompanying notes to condensed consolidated financial statements.

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CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net income	$	36,143	$	16,125
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Provision (recapture) for credit losses		(9,566)		19,027
Depreciation expense		2,602		2,341
Amortization of intangibles		559		649
Amortization of premiums on securities		1,181		1,357
Amortization of lease right-to-use assets		1,141		1,100
Accretion of lease liabilities		294		352
Earnings on bank-owned life insurance		(3,103)		(2,015)
Stock-based compensation expense		1,813		1,691
Deferred income tax provision		2,094		(4,885)
Net gain on sales of assets		(918)		(376)
Net (earnings) loss on securities		12		(44)
Change in operating assets and liabilities:
Loans held for sale		3,191		14
Other assets		8,061		(11,888)
Other liabilities		11,476		5,137
Total adjustments		18,837		12,460
Net cash provided by operating activities		54,980		28,585
Cash flows from investing activities:
Purchases of securities		(630,233)		(493,825)
Proceeds from sales, calls and maturities of securities		453,260		453,665
Principal repayments of securities		48,029		49,038
Net (increase) decrease in loans		312,736		(325,302)
Net purchases of loan participations		(208)		(775)
Proceeds from sales of Small Business Administration loans		3,719		769
Net return of capital (contributions) to equity investments		1,303		(1,822)
Redemptions of bank-owned life insurance		2,670		1,965
Net purchases of premises and equipment		(710)		(13,223)
Proceeds from sales of repossessed real estate and other assets		112		—
Net cash provided by (used) in investing activities		190,678		(329,510)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits		151,719		276,122
Net increase in interest-bearing deposits		78,122		42,154
Net increase in securities sold under agreements to repurchase		—		1,668
Dividends paid on common stock		(8,833)		(7,455)
Payments to tax authorities for stock-based compensation		(87)		(45)
Proceeds from exercise of stock options		24		33
Repurchase of common stock		(5,825)		(6,044)
Net cash provided by financing activities		215,120		306,433
Net increase in cash, cash equivalents and restricted cash		460,778		5,508
Cash, cash equivalents and restricted cash, beginning		538,007		372,064
Cash, cash equivalents and restricted cash, ending	$	998,785	$	377,572

See accompanying notes to condensed consolidated financial statements.

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CBTX, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations—CBTX, Inc., or the Company or CBTX, operates 35 branches, 19 in the Houston market area, 15 in the Beaumont/East Texas market area and 1 in Dallas, through its wholly-owned subsidiary, CommunityBank of Texas, N.A., or the Bank. The Bank provides relationship-driven commercial banking products and services primarily to small and mid-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 September 30, 2021 and December 31, 2020, consolidated results of operations and consolidated shareholders’ equity for the three and nine months ended September 30, 2021 and 2020 and consolidated cash flows for the nine months ended September 30, 2021 and 2020.

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, 2020 included within the Company’s Annual Report on Form 10-K.

Reclassification—Within interest expense for 2020, repurchase agreements and note payable and junior subordinated debt have been combined together under the caption “other interest-bearing liabilities”. These reclassifications were made to conform to the 2021 financial statement presentation in the condensed consolidated statements of income.

Share Repurchase Program—During the nine months ended September 30, 2021, 214,219 shares were repurchased under the Company’s share repurchase program at an average price of $27.19 per share. During the nine months ended September 30, 2020, 282,363 shares were repurchased at an average price of $21.41. Shares repurchased during 2021 and 2020 were retired and returned to the status of authorized but unissued shares.

Accounting Standards Recently Adopted—Accounting standards update, or ASU, 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate, or LIBOR, or another reference rate expected to be discontinued if certain criteria are met. LIBOR is used as an index rate for a majority of the Company’s interest-rate swaps and 8.8% of the Company’s loans as of September 30, 2021.

If reference rates are discontinued, the existing contracts will be modified to replace the discontinued rate with a replacement rate. For accounting purposes, such contract modifications would have to be evaluated to determine whether the modified contract is a new contract or a continuation of an existing contract. If they are considered new contracts, the previous contract would be extinguished resulting in the acceleration of previously deferred fees and costs. Under one of the optional expedients of ASU 2020-04, modifications of contracts within the scope of Topic 310, Receivables, and 470, Debt, will be accounted for by prospectively adjusting the effective interest rates and no such evaluation is required. When elected, the optional expedient for contract modifications must be applied consistently for all eligible contracts or eligible

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transactions. The expedients and exceptions in this update are available to all entities starting March 12, 2020 through December 31, 2022. The Company began modifying LIBOR based loans during 2020 and applied the expedients and exceptions. The adoption of this ASU did not have a material effect on the Company, nor does the Company expect it to have a material effect in the future.

Cash Flow Reporting—Historically, the Bank has been required to maintain regulatory reserves with the Federal Reserve Bank of Dallas, or the Federal Reserve Bank. On March 15, 2020, the Board of Governors of the Federal Reserve System announced that it had reduced the required regulatory reserve balance to 0% effective on March 26, 2020 in reaction to the economic dislocation caused by the COVID-19 pandemic. As such, the Bank did not have any reserve requirement balances as of September 30, 2021 and December 31, 2020.

As of September 30, 2021 and December 31, 2020, the Company had $4.0 million and $8.4 million, respectively, in cash held as collateral on deposit with other financial institution counterparties related to interest rate swap transactions. Reserves maintained with the Federal Reserve Bank and cash held as collateral for interest rate swap transactions are considered restricted cash.

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


	Nine Months Ended September 30,
(Dollars in thousands)	2021		2020
Supplemental disclosures of cash flow information:
Cash paid for taxes	$	4,559	$	9,207
Cash paid for interest		4,694		8,661
Supplemental disclosures of non-cash flow information:
Operating lease right-to-use asset increased (decreased) exchange for lease liabilities		(617)		1,067
Change in liability for dividends accrued		(755)		(25)

NOTE 2: SECURITIES

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


			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
September 30, 2021
Debt securities available for sale:
State and municipal securities	$	151,939	$	3,566	$	(1,485)	$	154,020
U.S. Treasury securities		11,885		23		(1)		11,907
U.S. agency securities:
Callable debentures		3,000		9		—		3,009
Collateralized mortgage obligations		41,018		127		(520)		40,625
Mortgage-backed securities		147,433		2,390		(1,026)		148,797
Equity securities		1,187		—		(6)		1,181
Total	$	356,462	$	6,115	$	(3,038)	$	359,539
December 31, 2020
Debt securities available for sale:
State and municipal securities	$	88,741	$	4,296	$	—	$	93,037
U.S. agency securities:
Collateralized mortgage obligations		35,085		347		(30)		35,402
Mortgage-backed securities		103,686		3,963		—		107,649
Equity securities		1,176		17		—		1,193
Total	$	228,688	$	8,623	$	(30)	$	237,281

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The amortized cost and estimated fair value of securities, by contractual maturities, as of the dates shown 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
September 30, 2021
Amortized cost:
Debt securities available for sale:
State and municipal securities	$	884	$	—	$	12,774	$	138,281	$	151,939
U.S. Treasury securities		—		3,054		8,831		—		11,885
U.S. agency securities:
Callable debentures		—		—		3,000		—		3,000
Collateralized mortgage obligations		—		—		4,367		36,651		41,018
Mortgage-backed securities		—		1,113		2,201		144,119		147,433
Equity securities		1,187		—		—		—		1,187
Total	$	2,071	$	4,167	$	31,173	$	319,051	$	356,462
Fair value:
Debt securities available for sale:
State and municipal securities	$	886	$	—	$	13,375	$	139,759	$	154,020
U.S. Treasury securities		—		3,056		8,851		—		11,907
U.S. agency securities:
Callable debentures		—		—		3,009		—		3,009
Collateralized mortgage obligations		—		—		4,456		36,169		40,625
Mortgage-backed securities		—		1,174		2,307		145,316		148,797
Equity securities		1,181		—		—		—		1,181
Total	$	2,067	$	4,230	$	31,998	$	321,244	$	359,539


(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, 2020
Amortized cost:
Debt securities available for sale:
State and municipal securities	$	509	$	1,292	$	9,154	$	77,786	$	88,741
U.S. agency securities:
Collateralized mortgage obligations		—		—		4,910		30,175		35,085
Mortgage-backed securities		33		1,485		798		101,370		103,686
Equity securities		1,176		—		—		—		1,176
Total	$	1,718	$	2,777	$	14,862	$	209,331	$	228,688
Fair value:
Debt securities available for sale:
State and municipal securities	$	512	$	1,298	$	9,540	$	81,687	$	93,037
U.S. agency securities:
Collateralized mortgage obligations		—		—		5,075		30,327		35,402
Mortgage-backed securities		33		1,565		829		105,222		107,649
Equity securities		1,193		—		—		—		1,193
Total	$	1,738	$	2,863	$	15,444	$	217,236	$	237,281

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.

NaN securities were sold in the nine months ended September 30, 2021 and 2020. At September 30, 2021 and December 31, 2020, securities with a carrying amount of $25.0 million and $27.3 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

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The Company considers qualitative factors in determining if an allowance for credit losses, or ACL, is necessary for those securities where the amortized cost basis exceeds the fair value. These factors include, among other things: (i) the extent to which the fair value was less than the amortized cost basis of the security and the length of time; (ii) the structure of the payments and likelihood that the issuer has the ability to make future payments; (iii) adverse conditions related to the security, industry or geographic area; (iv) changes in any credit ratings or financial conditions of the issuer; (v) failure by the issuer to make previous payments; and (vi) past events related to the security, current economic conditions and reasonable and supportable forecasts. Management did not believe that any of the securities the Company held at September 30, 2021 or December 31, 2020 were impaired due to credit quality. Accordingly no ACL was recorded in the Company’s condensed consolidated balance sheets at September 30, 2021 or during 2020.

Amortized costs, as defined by GAAP, include acquisition costs, applicable accrued interest and accretion or amortization of premiums and discounts. The Company made a policy election to exclude accrued interest from amortized costs in the determination of ACL. The Company continues its policy of reversing previously accrued interest when it has been deemed uncollectible. Accrued interest receivable for securities was $1.0 million and $1.2 million at September 30, 2021 and December 31, 2020, respectively, and is included in other assets in the condensed consolidated balance sheets.

The Company held 141 and 18 securities at September 30, 2021 and December 31, 2020, respectively, that were in a gross unrealized loss position. Securities with unrealized losses as of the dates shown below, aggregated by category and the length of time, were as follows:



	Less than Twelve Months				Twelve Months or More
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses
September 30, 2021
Debt securities available for sale:
State and municipal securities	$	70,242	$	(1,476)	$	254	$	(9)
U.S. Treasury securities		3,090		(1)		—		—
U.S. agency securities:
Collateralized mortgage obligations		30,564		(520)		19		—
Mortgage-backed securities		71,929		(1,026)		—		—
Equity securities		1,180		(6)		—		—
	$	177,005	$	(3,029)	$	273	$	(9)
December 31, 2020
Debt securities available for sale:
State and municipal securities	$	263	$	—	$	—	$	—
U.S. agency securities:
Collateralized mortgage obligations		6,913		(30)		—		—
Mortgage-backed securities		—		—		—		—
Equity securities		—		—		—		—
	$	7,176	$	(30)	$	—	$	—

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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, were as follows for the dates indicated below:


	September 30,		December 31,
(Dollars in thousands)	2021		2020
Federal Reserve Bank stock	$	9,271	$	9,271
Federal Home Loan Bank stock		3,961		5,941
The Independent Bankers Financial Corporation stock		141		141
Community Reinvestment Act investments		3,976		3,299
	$	17,349	$	18,652

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 September 30, 2021 and December 31, 2020, the Company had $3.7 million and $4.4 million, respectively, in callable outstanding unfunded commitments to these funds.

The Company’s equity investments are evaluated for impairment based on an assessment of qualitative indicators. Impairment indicators to be considered 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 September 30, 2021.

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NOTE 4: LOANS

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



(Dollars in thousands)	September 30, 2021			December 31, 2020
Commercial and industrial	$	596,251	22.8%	$	742,957	25.3%
Real estate:
Commercial real estate		1,029,137	39.3%		1,041,998	35.5%
Construction and development		393,541	15.0%		522,705	17.8%
1-4 family residential		204,151	7.8%		239,872	8.2%
Multi-family residential		285,852	10.9%		258,346	8.8%
Consumer		27,930	1.1%		33,884	1.1%
Agriculture		8,780	0.4%		8,670	0.3%
Other		71,915	2.7%		88,238	3.0%
Total gross loans		2,617,557	100.0%		2,936,670	100.0%
Less allowance for credit losses for loans		(32,208)			(40,637)
Less deferred loan fees and unearned discounts		(8,828)			(9,880)
Less loans held for sale		(327)			(2,673)
Loans, net	$	2,576,194		$	2,883,480

Accrued interest receivable for loans was $9.7 million and $12.1 million at September 30, 2021 and December 31, 2020, respectively, and was included in other assets in the condensed consolidated balance sheets.

From time to time, the Company will acquire and dispose of interests in loans under participation agreements with other financial institutions. Loan participations purchased and sold during the nine months ending September 30, 2021 and 2020, by loan class, were as follows:


	Participations		Participations
(Dollars in thousands)	Purchased		Sold
September 30, 2021
Commercial and industrial	$	—	$	1,336
Commercial real estate		—		375
Construction and development		—		22
Other		1,941		—
	$	1,941	$	1,733
September 30, 2020
Commercial and industrial		—		1,725
Commercial real estate		2,500		—

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 nine months ended September 30, 2021 and 2020, totaled $3.7 million and $769,000, respectively. The Company recognized gains on these sales of $436,000 and $63,000 for the nine months ended September 30, 2021 and 2020, 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 shown below:


					90 Days or								90 Days
	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
September 30, 2021
Commercial and industrial	$	2,373	$	—	$	—	$	2,373	$	593,878	$	596,251	$	—
Real estate:
Commercial real estate		—		—		—		—		1,029,137		1,029,137		—
Construction and development		257		143		—		400		393,141		393,541		—
1-4 family residential		25		—		104		129		204,022		204,151		—
Multi-family residential		—		—		—		—		285,852		285,852		—
Consumer		100		—		—		100		27,830		27,930		—
Agriculture		—		—		—		—		8,780		8,780		—
Other		—		—		—		—		71,915		71,915		—
Total gross loans	$	2,755	$	143	$	104	$	3,002	$	2,614,555	$	2,617,557	$	—
December 31, 2020
Commercial and industrial	$	51	$	2,055	$	2,269	$	4,375	$	738,582	$	742,957	$	—
Real estate:
Commercial real estate		—		—		—		—		1,041,998		1,041,998		—
Construction and development		—		—		—		—		522,705		522,705		—
1-4 family residential		1,357		19		106		1,482		238,390		239,872		—
Multi-family residential		—		—		—		—		258,346		258,346		—
Consumer		5		—		—		5		33,879		33,884		—
Agriculture		50		—		—		50		8,620		8,670		—
Other		—		—		—		—		88,238		88,238		—
Total gross loans	$	1,463	$	2,074	$	2,375	$	5,912	$	2,930,758	$	2,936,670	$	—

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 shown below were as follows:


	September 30,		December 31,
(Dollars in thousands)	2021		2020
Commercial and industrial	$	9,773	$	12,588
Real estate:
Commercial real estate		10,419		10,665
Construction and development		—		238
1-4 family residential		351		526
Other		42		—
Total nonaccrual loans	$	20,585	$	24,017

Interest income that would have been earned under the original terms of the nonaccrual loans was $568,000 and $417,000 for the nine months ended September 30, 2021 and 2020, respectively.

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Loans restructured due to the borrower’s financial difficulties, or troubled debt restructurings, during the nine months ended September 30, 2021 and 2020, that remained outstanding as of the end of those periods were as follows:


				Post-modification Recorded Investment
										Extended
										Maturity,
		Pre-modification						Extended		Restructured
		Outstanding						Maturity and		Payments
	Number	Recorded		Restructured		Extended		Restructured		and Adjusted
(Dollars in thousands)	of Loans	Investment		Payments		Maturity		Payments		Interest Rate
September 30, 2021
Commercial and industrial	3	$	3,256	$	3,256	$	—	$	—	$	—
Real estate:
Commercial real estate	1		1,206		1,206		—		—		—
1-4 family residential	1		1,548		1,548		—		—		—
Consumer	1		42		—		—		42		—
Total	6	$	6,052	$	6,010	$	—	$	42	$	—
September 30, 2020
Commercial and industrial	19	$	8,019	$	6,645	$	—	$	1,143	$	231
Real estate:
Commercial real estate	9		14,459		14,459		—		—		—
Construction and development	4		12,289		12,032		—		—		257
1-4 family residential	5		1,629		1,651		—		—		—
Total	37	$	36,396	$	34,787	$	—	$	1,143	$	488

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. See Note 6: Allowance for Credit Losses for further discussions on specific reserves.

Troubled debt restructuring during the twelve months ended indicated below with payment defaults were as follows:


	September 30, 2021			September 30, 2020
	Number			Number
(Dollars in thousands)	of Loans	Balance		of Loans	Balance
Commercial and industrial	1	$	1,453	3	$	1,983
Real estate:
Commercial real estate	—		—	—		—
Construction and development	—		—	4		12,274
1-4 family residential	—		—	1		20
Total	1	$	1,453	8	$	14,277

At September 30, 2021 and December 31, 2020, the Company had an outstanding commitment to fund $4.6 million and $593,000, respectively, for loans that were previously restructured.

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


	Troubled Debt Restructurings
(Dollars in thousands)	Accruing		Non-Accrual		Total		Other Non-Accrual		Other Accruing		Total Loans Individually Evaluated
September 30, 2021
Commercial and industrial	$	5,669	$	7,248	$	12,917	$	2,525	$	745	$	16,187
Real estate:
Commercial real estate		7,067		10,361		17,428		58		3,811		21,297
Construction and development		12,303		—		12,303		—		614		12,917
1-4 family residential		3,129		183		3,312		168		—		3,480
Consumer		—		42		42		—		90		132
Other		3,488		—		3,488		—		—		3,488
Total	$	31,656	$	17,834	$	49,490	$	2,751	$	5,260	$	57,501
December 31, 2020
Commercial and industrial	$	2,594	$	8,228	$	10,822	$	4,360	$	746	$	15,928
Real estate:
Commercial real estate		8,103		10,601		18,704		64		—		18,768
Construction and development		12,648		238		12,886		—		—		12,886
1-4 family residential		1,684		106		1,790		420		—		2,210
Other		7,851		—		7,851		—		—		7,851
Total	$	32,880	$	19,173	$	52,053	$	4,844	$	746	$	57,643

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. The Company’s ACL for the loan portfolio has two main components: (i) a reserve based on expected losses on collectively evaluated loans with similar risk characteristics, or general reserve, utilizing an age-based vintage model; and (ii) an ACL for individually evaluated loans that do not share similar risk characteristics with other loans, or specific reserve. To determine the specific ACL, the Company utilizes various methods including discounted cash flow analysis and appraisal valuation on collateral to determine any expected credit losses requiring an ACL.

The Company excludes accrued interest and deferred fees and costs in the determination of an ACL and reverses previously accrued interest when it has been deemed uncollectible. Loans held for sale are excluded from the computation of expected credit losses as they are carried at the lower of cost or market value.

At September 30, 2021 and December 31, 2020, the ratio of the ACL for loans to loans excluding loans held for sale was 1.23% and 1.39%, respectively. The decrease in the ACL from December 31, 2020 to September 30, 2021 was primarily due to continued improvements in the national and local economies and related economic forecasts, the reduction in the loan portfolio and an improvement in loan quality. The improvements in the national and local economic forecasts are a result from the continued recovery from the earlier impacts of the COVID-19 pandemic. The total of the Company’s qualitative and quantitative factors ranged from 0.75% to 2.34% and 0.92% to 2.48% at September 30, 2021 and December 31, 2020, 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 September 30, 2021, 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 September 30, 2021 were as follows:


(Dollars in thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans		Converted Revolving Loans		Total
Commercial and industrial:
Pass	$	207,715	$	66,115	$	67,006	$	24,092	$	9,138	$	6,937	$	187,949	$	5,777	$	574,729
Special mention		—		—		—		19		—		—		3,210		—		3,229
Substandard		—		999		2,025		7,237		—		426		1,723		5,883		18,293
Total commercial and industrial		207,715		67,114		69,031		31,348		9,138		7,363		192,882		11,660		596,251
Commercial real estate:
Pass		118,305		233,693		236,230		168,788		89,847		94,905		35,661		4,450		981,879
Special mention		—		—		869		—		—		93		—		—		962
Substandard		—		3,133		13,170		14,706		347		3,940		—		11,000		46,296
Total commercial real estate		118,305		236,826		250,269		183,494		90,194		98,938		35,661		15,450		1,029,137
Construction and development:
Pass		108,522		105,634		75,264		13,422		18,618		186		58,508		—		380,154
Special mention		—		470		—		—		—		—		—		—		470
Substandard		—		472		—		1,500		10,207		738		—		—		12,917
Total construction and development		108,522		106,576		75,264		14,922		28,825		924		58,508		—		393,541
1-4 family residential:
Pass		26,577		22,957		25,567		34,706		22,906		59,891		5,711		627		198,942
Special mention		—		—		—		—		—		—		—		—		—
Substandard		107		1,548		520		907		131		492		—		1,504		5,209
Total 1-4 family residential		26,684		24,505		26,087		35,613		23,037		60,383		5,711		2,131		204,151
Multi-family residential:
Pass		12,153		20,407		6,525		61,818		9,853		167,914		7,182		—		285,852
Total multi-family residential		12,153		20,407		6,525		61,818		9,853		167,914		7,182		—		285,852
Consumer:
Pass		5,678		4,463		1,442		1,183		341		33		14,102		457		27,699
Substandard		—		41		—		—		—		—		190		—		231
Total consumer		5,678		4,504		1,442		1,183		341		33		14,292		457		27,930
Agriculture:
Pass		3,808		555		48		72		65		12		3,966		190		8,716
Substandard		—		—		—		—		—		20		44		—		64
Total agriculture		3,808		555		48		72		65		32		4,010		190		8,780
Other:
Pass		14,746		4,887		1,193		1,724		11		1,209		44,608		46		68,424
Substandard		—		918		—		—		—		1,204		1,369		—		3,491
Total other		14,746		5,805		1,193		1,724		11		2,413		45,977		46		71,915
Total
Pass		497,504		458,711		413,275		305,805		150,779		331,087		357,687		11,547		2,526,395
Special mention		—		470		869		19		—		93		3,210		—		4,661
Substandard		107		7,111		15,715		24,350		10,685		6,820		3,326		18,387		86,501
Total gross loans	$	497,611	$	466,292	$	429,859	$	330,174	$	161,464	$	338,000	$	364,223	$	29,934	$	2,617,557

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Loans by risk grades, loan class and vintage, at December 31, 2020 were as follows:


(Dollars in thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans		Converted Revolving Loans		Total
Commercial and industrial:
Pass	$	349,697	$	81,131	$	46,973	$	13,161	$	8,349	$	3,432	$	214,160	$	3,562	$	720,465
Special mention		—		—		33		—		—		—		3,371		—		3,404
Substandard		1,001		2,633		6,177		15		20		2,021		779		6,442		19,088
Total commercial and industrial		350,698		83,764		53,183		13,176		8,369		5,453		218,310		10,004		742,957
Commercial real estate:
Pass		262,072		210,954		196,630		138,424		68,468		84,453		30,020		9,482		1,000,503
Special mention		—		1,224		—		—		—		1,390		—		4,905		7,519
Substandard		—		11,532		9,599		476		1,059		1,985		9,325		—		33,976
Total commercial real estate		262,072		223,710		206,229		138,900		69,527		87,828		39,345		14,387		1,041,998
Construction and development:
Pass		165,894		163,658		92,455		20,146		6,707		273		53,800		—		502,933
Substandard		—		238		8,386		10,532		—		616		—		—		19,772
Total construction and development		165,894		163,896		100,841		30,678		6,707		889		53,800		—		522,705
1-4 family residential:
Pass		27,002		30,978		48,561		34,970		24,386		57,122		7,004		631		230,654
Special mention		1,548		—		—		—		1,617		—		—		—		3,165
Substandard		—		534		1,211		1,571		15		1,215		—		1,507		6,053
Total 1-4 family residential		28,550		31,512		49,772		36,541		26,018		58,337		7,004		2,138		239,872
Multi-family residential:
Pass		20,823		3,119		36,971		10,655		2,153		184,539		86		—		258,346
Total multi-family residential		20,823		3,119		36,971		10,655		2,153		184,539		86		—		258,346
Consumer:
Pass		8,937		3,073		1,855		1,875		146		23		17,573		402		33,884
Total consumer		8,937		3,073		1,855		1,875		146		23		17,573		402		33,884
Agriculture:
Pass		3,937		105		338		86		16		—		4,108		7		8,597
Substandard		—		—		—		—		—		23		50		—		73
Total agriculture		3,937		105		338		86		16		23		4,158		7		8,670
Other:
Pass		14,624		3,239		3,562		24		84		1,250		57,603		—		80,386
Substandard		1,211		—		—		—		1,232		—		5,409		—		7,852
Total other		15,835		3,239		3,562		24		1,316		1,250		63,012		—		88,238
Total
Pass		852,986		496,257		427,345		219,341		110,309		331,092		384,354		14,084		2,835,768
Special mention		1,548		1,224		33		—		1,617		1,390		3,371		4,905		14,088
Substandard		2,212		14,937		25,373		12,594		2,326		5,860		15,563		7,949		86,814
Total gross loans	$	856,746	$	512,418	$	452,751	$	231,935	$	114,252	$	338,342	$	403,288	$	26,938	$	2,936,670

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



(Dollars in thousands)	Pass		Special Mention		Substandard		Total Loans
September 30, 2021
Commercial and industrial	$	574,729	$	3,229	$	18,293	$	596,251
Real estate:
Commercial real estate		981,879		962		46,296		1,029,137
Construction and development		380,154		470		12,917		393,541
1-4 family residential		198,942		—		5,209		204,151
Multi-family residential		285,852		—		—		285,852
Consumer		27,699		—		231		27,930
Agriculture		8,716		—		64		8,780
Other		68,424		—		3,491		71,915
Total gross loans	$	2,526,395	$	4,661	$	86,501	$	2,617,557
December 31, 2020
Commercial and industrial	$	720,465	$	3,404	$	19,088	$	742,957
Real estate:
Commercial real estate		1,000,503		7,519		33,976		1,041,998
Construction and development		502,933		—		19,772		522,705
1-4 family residential		230,654		3,165		6,053		239,872
Multi-family residential		258,346		—		—		258,346
Consumer		33,884		—		—		33,884
Agriculture		8,597		—		73		8,670
Other		80,386		—		7,852		88,238
Total gross loans	$	2,835,768	$	14,088	$	86,814	$	2,936,670

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


	September 30, 2021						December 31, 2020
	Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Total		Evaluated		Evaluated		Total
(Dollars in thousands)	Loans		Loans		Loans		Loans		Loans		Loans
Commercial and industrial	$	16,187	$	580,064	$	596,251	$	15,928	$	727,029	$	742,957
Real estate:
Commercial real estate		21,297		1,007,840		1,029,137		18,768		1,023,230		1,041,998
Construction and development		12,917		380,624		393,541		12,886		509,819		522,705
1-4 family residential		3,480		200,671		204,151		2,210		237,662		239,872
Multi-family residential		—		285,852		285,852		—		258,346		258,346
Consumer		132		27,798		27,930		—		33,884		33,884
Agriculture		—		8,780		8,780		—		8,670		8,670
Other		3,488		68,427		71,915		7,851		80,387		88,238
Total gross loans	$	57,501	$	2,560,056	$	2,617,557	$	57,643	$	2,879,027	$	2,936,670

Nonaccrual loans are included in individually evaluated loans and $13.3 million and $11.2 million of nonaccrual loans had 0 related ACL at September 30, 2021 and December 31, 2020, respectively.

The Company had collateral dependent loans totaling $1.6 million pending foreclosure at September 30, 2021.

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Activity in the ACL for loans, segregated by loan class for the nine months ended September 30, 2021 and 2020, was as follows:


			Real Estate
	Commercial				Construction
	and		Commercial		and		1-4 Family		Multi-family
(Dollars in thousands)	Industrial		Real Estate		Development		Residential		Residential		Consumer		Agriculture		Other		Total
September 30, 2021
Beginning balance	$	13,035	$	13,798	$	6,089	$	2,578	$	2,513	$	440	$	137	$	2,047	$	40,637
Provision (recapture)		(2,028)		(2,054)		(2,755)		(875)		(357)		(85)		(75)		(732)		(8,961)
Charge-offs		(495)		—		—		(3)		—		(13)		—		—		(511)
Recoveries		889		—		—		—		—		107		47		—		1,043
Net recoveries		394		—		—		(3)		—		94		47		—		532
Ending balance	$	11,401	$	11,744	$	3,334	$	1,700	$	2,156	$	449	$	109	$	1,315	$	32,208
Period-end amount allocated to:
Specific reserve	$	4,343	$	670	$	—	$	—	$	—	$	131	$	—	$	—	$	5,144
General reserve		7,058		11,074		3,334		1,700		2,156		318		109		1,315		27,064
Total	$	11,401	$	11,744	$	3,334	$	1,700	$	2,156	$	449	$	109	$	1,315	$	32,208
September 30, 2020
Beginning balance	$	7,671	$	7,975	$	4,446	$	2,257	$	1,699	$	388	$	74	$	770	$	25,280
Impact of CECL adoption		852		(140)		100		(275)		294		(25)		64		4		874
Provision (recapture)		4,439		5,069		1,788		959		1,124		243		14		4,209		17,845
Charge-offs		(274)		(163)		—		(71)		—		(107)		—		—		(615)
Recoveries		659		4		—		1		—		8		12		1		685
Net (charge-offs) recoveries		385		(159)		—		(70)		—		(99)		12		1		70
Ending balance	$	13,347	$	12,745	$	6,334	$	2,871	$	3,117	$	507	$	164	$	4,984	$	44,069
Period-end amount allocated to:
Specific reserve	$	4,111	$	—	$	—	$	—	$	—	$	—	$	—	$	3,952	$	8,063
General reserve		9,236		12,745		6,334		2,871		3,117		507		164		1,032		36,006
Total	$	13,347	$	12,745	$	6,334	$	2,871	$	3,117	$	507	$	164	$	4,984	$	44,069

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



	September 30, 2021				December 31, 2020
(Dollars in thousands)	Amount		Percent		Amount		Percent
Commercial and industrial	$	11,401	35.4	%	$	13,035	32.1	%
Real estate:
Commercial real estate		11,744	36.5	%		13,798	34.0	%
Construction and development		3,334	10.3	%		6,089	15.0	%
1-4 family residential		1,700	5.3	%		2,578	6.3	%
Multi-family residential		2,156	6.7	%		2,513	6.2	%
Consumer		449	1.4	%		440	1.1	%
Agriculture		109	0.3	%		137	0.3	%
Other		1,315	4.1	%		2,047	5.0	%
Total allowance for credit losses for loans	$	32,208	100.0	%	$	40,637	100.0	%
Loans excluding loans held for sale		2,608,402				2,924,117
ACL for loans to loans excluding loans held for sale		1.23%				1.39%

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

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


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

Charge-offs and recoveries by loan class and vintage for the nine months ended September 30, 2020 were as follows:


(Dollars in thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans		Converted Revolving Loans		Total
Commercial and industrial:
Charge-off	$	—	$	(38)	$	(57)	$	(35)	$	(42)	$	—	$	(102)	$	—	$	(274)
Recovery		—		3		158		41		25		227		177		28		659
Total commercial and industrial		—		(35)		101		6		(17)		227		75		28		385
Commercial real estate:
Charge-off		—		—		—		—		—		(163)		—		—		(163)
Recovery		—		—		2		—		—		2		—		—		4
Total commercial real estate		—		—		2		—		—		(161)		—		—		(159)
1-4 family residential:
Charge-off		—		(65)		—		—		—		(6)		—		—		(71)
Recovery		—		—		—		—		—		1		—		—		1
Total 1-4 family residential		—		(65)		—		—		—		(5)		—		—		(70)
Consumer:
Charge-off		—		(4)		(8)		(95)		—		—		—		—		(107)
Recovery		6		1		—		—		—		1		—		—		8
Total consumer		6		(3)		(8)		(95)		—		1		—		—		(99)
Agriculture:
Recovery		—		—		—		—		12		—		—		—		12
Total agriculture		—		—		—		—		12		—		—		—		12
Other:
Recovery		—		—		—		1		—		—		—		—		1
Total other		—		—		—		1		—		—		—		—		1
Total:
Charge-off		—		(107)		(65)		(130)		(42)		(169)		(102)		—		(615)
Recovery		6		4		160		42		37		231		177		28		685
Total	$	6	$	(103)	$	95	$	(88)	$	(5)	$	62	$	75	$	28	$	70

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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 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.

Activity in the ACL for unfunded commitments for the nine months ended September 30, 2021 and 2020, was as follows:



	September 30,
(Dollars in thousands)		2021		2020
Beginning balance	$	4,177	$	378
Impact of CECL adoption		—		2,981
Provision (recapture)		(605)		1,182
Ending balance	$	3,572	$	4,541

NOTE 7: PREMISES AND EQUIPMENT

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



	September 30,		December 31,
(Dollars in thousands)	2021		2020
Land	$	15,484	$	15,484
Buildings and leasehold improvements		64,120		64,113
Furniture and equipment		17,079		16,777
Vehicles		248		216
Construction in progress		636		388
		97,567		96,978
Less accumulated depreciation		(38,332)		(35,826)
Premises and equipment, net	$	59,235	$	61,152

Depreciation expense was $2.6 million and $2.3 million for the nine months ended September 30, 2021 and 2020, respectively, and $871,000 and $821,000 for the three months ended September 30, 2021 and 2020, respectively. Depreciation expense is included in net occupancy expense in the Company’s condensed consolidated statements of income.

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NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill was $81.0 million at September 30, 2021 and December 31, 2020 and there were 0 changes in goodwill during the nine months ended September 30, 2021 or the year ended December 31, 2020. Based on the results of the Company’s assessment, management does not believe any impairment of goodwill or other intangible assets existed at September 30, 2021 or December 31, 2020.

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


	Weighted-
	Average
	Remaining	Gross				Net
	Amortization	Intangible		Accumulated		Intangible
(Dollars in thousands)	Period	Assets		Amortization		Assets
September 30, 2021
Core deposits	2.6 years	$	13,750	$	(13,489)	$	261
Customer relationships	7.3 years		6,629		(3,424)		3,205
Servicing assets	11.4 years		489		(253)		236
Total other intangible assets, net		$	20,868	$	(17,166)	$	3,702
December 31, 2020
Core deposits	3.2 years	$	13,750	$	(13,305)	$	445
Customer relationships	8.0 years		6,629		(3,093)		3,536
Servicing assets	10.4 years		399		(209)		190
Total other intangible assets, net		$	20,778	$	(16,607)	$	4,171

Servicing Assets

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



	September 30,
(Dollars in thousands)	2021		2020
Balance at beginning of year	$	190	$	189
Increase from loan sales		92		14
Decrease from serviced loans paid off or foreclosed		(2)		—
Amortization		(44)		(64)
Balance at end of period	$	236	$	139

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. During the nine months ended September 30, 2020, the Company received proceeds in the amount of $2.0 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 $769,000.

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


	September 30,
(Dollars in thousands)	2021		2020
Balance at beginning of period	$	72,338	$	71,881
Redemptions		(2,670)		(1,965)
Net change in cash surrender value		3,103		2,015
Balance at end of period	$	72,771	$	71,931

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NOTE 10: DEPOSITS

Deposits as of the dates shown below were as follows:


	September 30,		December 31,
(Dollars in thousands)	2021		2020
Interest-bearing demand accounts	$	386,196	$	380,175
Money market accounts		1,139,167		1,039,617
Savings accounts		118,794		108,167
Certificates and other time deposits, $100,000 or greater		140,740		152,592
Certificates and other time deposits, less than $100,000		118,594		144,818
Total interest-bearing deposits		1,903,491		1,825,369
Noninterest-bearing deposits		1,628,144		1,476,425
Total deposits	$	3,531,635	$	3,301,794

At September 30, 2021 and December 31, 2020, the Company had $33.1 million and $29.3 million in deposits from public entities and brokered deposits of $64.8 million and $88.0 million, respectively. At September 30, 2021 and December 31, 2020, overdrafts of $697,000 and $336,000, respectively, were reclassified to loans. Accrued interest payable for deposits was $138,000 and $324,000 at September 30, 2021 and December 31, 2020, respectively, and was included in other liabilities in the condensed consolidated balance sheets. The Company had 0 major concentrations of deposits at September 30, 2021 or December 31, 2020 from any single or related groups of depositors. At September 30, 2021, $70.7 million of certificates of deposits or other time deposits 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.

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 September 30, 2021, there were 0 outstanding borrowings on this line of credit and the Company did not draw on this line of credit during 2021 or 2020. The Company can make draws on the line of credit for a period of 24 months, which began on December 13, 2019, after which the Company will not be permitted to make further draws and the outstanding balance will amortize over a period 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 over 24 months beginning December 13, 2019, 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, 2026.

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’s 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 September 30, 2021.

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 $1.0 billion at September 30, 2021 and $1.1 billion at December 31, 2020. Federal Home Loan Bank advances outstanding totaled $50.0 million at both September 30, 2021 and December 31, 2020, and these borrowings were on a long-term basis. See maturity information below. At September 30, 2021 and December 31, 2020, there were $26.0 million and $10.8 million letters of credit outstanding, respectively, that were issued under this

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agreement and used as collateral to secure certain public deposits. After considering the outstanding advances and letter of credit, the net capacity available under the Federal Home Loan Bank facility was $941.6 million at September 30, 2021 and $1.0 billion at December 31, 2020.

During the nine months ended September 30, 2020, the Company also borrowed under this agreement on a short-term basis but did not during the nine months ended September 30, 2021. The average outstanding balance for Federal Home Loan Bank advances for the nine months ended September 30, 2021 and 2020 was $50.0 million and $56.9 million, respectively, and the weighted-average interest rate for the same periods was 1.77% and 1.60%, respectively.

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


(Dollars in thousands)	September 30, 2021
2021	$	0
2022		10,000
2023		20,000
2024		20,000
2025		0
Thereafter		0
Total	$	50,000

At September 30, 2021 and December 31, 2020, the Company maintained federal funds lines of credit with commercial banks that provided for the availability to borrow up to an aggregate of $65.0 million. There were 0 funds under these lines of credit outstanding at September 30, 2021 or December 31, 2020.

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 $139.1 million and $167.6 million in loans to related parties at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021 and December 31, 2020, there were 0 loans made to related parties deemed nonaccrual, past due, restructured in a troubled debt restructuring or classified as potential problem loans.

Unfunded Commitments—At September 30, 2021 and December 31, 2020, the Company had approximately $55.4 million and $47.3 million in unfunded loan commitments to related parties, respectively.

Deposits—The Company held related party deposits of approximately $250.8 million and $210.1 million at September 30, 2021 and December 31, 2020, 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

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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 nine months ended September 30, 2021 and the year ended December 31, 2020, there were 0 transfers of assets or liabilities 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, 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 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

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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 shown below were as follows:


	September 30,		December 31,
(Dollars in thousands)	2021		2020
Fair value of financial assets:
Level 1 inputs:
Equity securities	$	1,181	$	1,193
Debt securities available for sale - U.S. Treasury securities		11,907		—
Level 2 inputs:
Debt securities available for sale:
State and municipal securities		154,020		93,037
U.S. agency securities:
Callable debentures		3,009		—
Collateralized mortgage obligations		40,625		35,402
Mortgage-backed securities		148,797		107,649
Interest rate swaps		4,745		8,618
Level 3 inputs:
Credit risk participation agreement		14		40
Total fair value of financial assets	$	364,298	$	245,939
Fair value of financial liabilities:
Level 2 inputs:
Interest rate swaps	$	4,745	$	8,618
Total fair value of financial liabilities	$	4,745	$	8,618

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 shown below were as follows:


	September 30, 2021						December 31, 2020
(Dollars in thousands)	Recorded Investment		Specific ACL		Net		Recorded Investment		Specific ACL		Net
Level 3 inputs:
Loans evaluated individually
Commercial and industrial	$	9,273	$	4,343	$	4,930	$	10,509	$	5,004	$	5,505
Commercial real estate		2,702		670		2,032		5,727		323		5,404
Consumer		131		131		—		—		—		—
Other		—		—		—		1,232		205		1,027
Total	$	12,106	$	5,144	$	6,962	$	17,468	$	5,532	$	11,936

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

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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 0 write-downs of foreclosed assets for fair value remeasurement subsequent to initial foreclosure during the nine months ended September 30, 2021 or during 2020. There were 0 outstanding foreclosed assets at September 30, 2021 or December 31, 2020.

Financial Instruments Reported at Amortized Cost

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


	September 30, 2021				December 31, 2020
			Carrying				Carrying
(Dollars in thousands)	Fair Value		Amount		Fair Value		Amount
Financial assets:
Level 1 inputs:
Cash and due from banks	$	998,785	$	998,785	$	538,007	$	538,007
Level 2 inputs:
Bank-owned life insurance		72,771		72,771		72,338		72,338
Accrued interest receivable		10,910		10,910		13,350		13,350
Servicing asset		236		236		190		190
Level 3 inputs:
Loans, including held for sale, net		2,599,598		2,576,521		2,919,854		2,886,153
Other investments		17,349		17,349		18,652		18,652
Total financial assets	$	3,699,649	$	3,676,572	$	3,562,391	$	3,528,690
Financial liabilities:
Level 1 inputs:
Noninterest-bearing deposits	$	1,628,144	$	1,628,144	$	1,476,425	$	1,476,425
Level 2 inputs:
Interest-bearing deposits		1,927,037		1,903,491		1,894,558		1,825,369
Federal Home Loan Bank advances		51,063		50,000		51,726		50,000
Accrued interest payable		211		211		398		398
Total financial liabilities	$	3,606,455	$	3,581,846	$	3,423,107	$	3,352,192

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 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 September 30, 2021 and December 31, 2020, management determined there was 0 such deterioration.

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At September 30, 2021 and December 31, 2020, the Company had 22 and 23 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.

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


								Weighted
								Average
		Notional		Fair				Maturity
(Dollars in thousands)	Classification	Amounts		Value		Fixed Rate	Floating Rate	(Years)
September 30, 2021
Interest rate swaps with customers	Other assets	$	98,278		3,927	3.25% - 5.89%	LIBOR 1M + 2.50% - 3.00%	4.17
Interest rate swaps with financial institutions	Other assets		36,515		562	3.50%	LIBOR 1M + 2.50%	8.49
Interest rate swaps with customers	Other assets		5,168		256	4.99%	U.S. Prime	6.21
Interest rate swaps with financial institutions	Other liabilities		5,168		(256)	4.99%	U.S. Prime	6.21
Interest rate swaps with financial institutions	Other liabilities		98,278		(3,927)	3.25% - 5.89%	LIBOR 1M + 2.50% - 3.00%	4.17
Interest rate swaps with customers	Other liabilities		36,515		(562)	3.50%	LIBOR 1M + 2.50%	8.49
Credit risk participation agreement with financial institution	Other assets		13,693		14	3.50%	LIBOR 1M + 2.50%	8.49
Total derivatives		$	293,615	$	14
December 31, 2020
Interest rate swaps with customers	Other assets	$	141,241	$	8,146	3.25% - 5.89%	LIBOR 1M + 2.50% - 3.00%	6.14
Interest rate swaps with customers	Other assets		5,250		472	4.99%	U.S. Prime	6.96
Interest rate swaps with financial institutions	Other liabilities		5,250		(472)	4.99%	U.S. Prime	6.96
Interest rate swaps with financial institutions	Other liabilities		141,241		(8,146)	3.25% - 5.89%	LIBOR 1M + 2.50% - 3.00%	6.14
Credit risk participation agreement with financial institution	Other assets		14,084		40	3.50%	LIBOR 1M + 2.50%	9.24
Total derivatives		$	307,066	$	40

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 consolidated balance sheets and operating lease liabilities in the 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.

During the three months ended September 30, 2021, the operating lease asset decreased $617,000 in exchange for a reduction in operating lease liabilities related to an early termination of a lease at the request of the lessor.

Lease costs for the period shown below were as follows:


	Nine Months Ended September 30,
(Dollars in thousands)	2021		2020
Operating lease cost	$	1,436	$	1,458
Short-term lease cost		13		30
Sublease income		(472)		(221)
Total lease cost	$	977	$	1,267

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


	Nine Months Ended September 30,
(Dollars in thousands)	2021		2020
Amortization of lease right-to-use asset	$	1,141	$	1,100
Accretion of lease liabilities		294		352
Cash paid for amounts included in the measurement of lease liabilities		1,566		1,605
Weighted-average remaining lease term in years		10.7		11.2
Weighted-average discount rate		2.63%		2.70%

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



(Dollars in thousands)	September 30, 2021
1 year or less	$	1,786
Over 1 year through 2 years		1,978
Over 2 years through 3 years		1,884
Over 3 years through 4 years		1,804
Over 4 years through 5 years		1,770
Thereafter		8,079
Total undiscounted lease liability		17,301
Less:
Discount on cash flows		(2,745)
Total operating lease liability	$	14,556

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 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 shown below were as follows:


	September 30,		December 31,
(Dollars in thousands)	2021		2020
Commitments to extend credit, variable interest rate	$	707,276	$	659,385
Commitments to extend credit, fixed interest rate		65,193		80,346
Total commitments	$	772,469	$	739,731
Standby letters of credit	$	19,234	$	26,078

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.

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.

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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. Refer to Note 19: Regulatory Matters for information regarding an investigation of the Bank by the Financial Crimes Enforcement Network of the U.S. Department of Treasury, or FinCEN.

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 nine months ended September 30, 2021 and 2020, the Company contributed $1.7 million and $1.6 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 September 30, 2021 and December 31, 2020, the amount payable, including interest, for this deferred plan was approximately $1.7 million and $2.0 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 $177,000 and $246,000 at September 30, 2021 and December 31, 2020, 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 $839,000 and $640,000 at September 30, 2021 and December 31, 2020, respectively, which is included in other liabilities in the condensed consolidated balance sheets. The liability will continue to accrue over 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.

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 0 additional options may be granted under its terms. As of September 30, 2021, there were options outstanding to acquire 43,688 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 0 options may be granted after May 20, 2024. Options granted under the 2014 Plan expire 10 years from the date of grant and become exercisable in installments over a period of one to five years, beginning on the first anniversary of the date of

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grant. As of September 30, 2021, 963,200 shares were available for future grant. NaN 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 September 30, 2021, 261,816 shares were available for future grant under the 2017 Plan.

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


	Nine Months Ended September 30,
	2021			2020
	Number of	Weighted		Number of	Weighted
	Shares	Average		Shares	Average
	Underlying	Exercise		Underlying	Exercise
	Options	Price		Options	Price
Outstanding at beginning of period	201,720	$	17.22	213,078	$	16.92
Granted	—		—	—		—
Exercised	(2,032)		11.32	(2,524)		12.90
Forfeited/expired	—		—	—		—
Outstanding at end of period	199,688	$	17.28	210,554	$	16.97

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


	September 30, 2021
Stock Options		Exercisable	Unvested	Outstanding
Number of shares underlying options		183,689	15,999	199,688
Weighted-average exercise price per share	$	16.96	21.00	17.28
Aggregate intrinsic value (in thousands)	$	1,731	86	1,817
Weighted-average remaining contractual term (years)		3.7	5.8	3.9

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 are considered 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 are non-transferable and subject to forfeiture until the restricted stock vests and any dividends with respect to the restricted stock are subject to the same restrictions, including the risk of forfeiture.

Non-performance based restricted stock grants 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 below is based upon the attainment of the maximum number of shares possible to be earned.

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Restricted stock activity for the periods shown 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, 2019	161,443	$	28.20	18,000	$	34.46
Granted	41,594		28.24	—		—
Vested	(14,811)		31.68	—		—
Forfeited	(9,432)		27.40	(750)		31.79
Outstanding at September 30, 2020	178,794	$	27.96	17,250	$	34.57

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

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


	September 30, 2021
Restricted Stock		Non-performance Based		Performance-based
Number of shares underlying restricted stock		157,711		2,250
Weighted-average grant date fair value per share	$	27.26	$	34.40
Aggregate fair value (in thousands)	$	4,160	$	59
Weighted-average remaining vesting period (years)		1.4		2.0

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. During the periods shown below, the shares of stock subject to options exercised, restricted stock vested, shares withheld, and shares issued were as follows:


	Exercised/Vested	Shares Withheld	Shares Issued
Nine Months Ended September 30, 2021
Stock options	2,032	—	2,032
Non-performance based restricted stock	22,210	(3,213)	18,997
Nine Months Ended September 30, 2020
Stock options	2,524	—	2,524
Non-performance based restricted stock	14,811	(1,761)	13,050

For the nine months ended September 30, 2021 and 2020, stock compensation expense was $1.8 million and $1.7 million, respectively, and for the three months ended September 30, 2021 and 2020, stock compensation expense was $698,000 and $582,000, respectively. As of September 30, 2021, there was approximately $2.4 million 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 of income over a weighted-average period of 1.3 years.

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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 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 community bank leverage ratio 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. An institution will have until January 1, 2022 before the 9.0% leverage ratio requirement is re-established. 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 permits banking organizations that were required to adopt CECL for purposes of GAAP (as in effect January 1, 2020) 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

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capital, followed by a three-year transition period (i.e., a transition period of five years in total). The Company determined 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 September 30, 2021 and December 31, 2020, that the Company and the Bank met all capital adequacy requirements to which they were subject.

On June 18, 2020, 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, 2020 between the Bank and the OCC relating to the Bank’s BSA/AML compliance program. Although the OCC terminated the Formal Agreement, the Bank may still incur a civil money penalty from the OCC. In addition, the Bank remains the subject of an investigation by FinCEN and is cooperating with this investigation. The Bank has incurred material fees and expenses regarding this matter and may continue to incur material fees and expenses regarding this matter at least through the completion of FinCEN’s investigation. The Bank is in discussions with FinCEN to explore a potential resolution of its investigation which could include a civil monetary penalty against the Bank. As of the date hereof, the Company cannot reasonably estimate a single amount of loss associated with any potential resolution with FinCEN or the OCC; however, the Company estimates the potential range of a civil money penalty from FinCEN to be between 0 and $10 million. Accordingly, the Company has not accrued a loss contingency within the condensed consolidated financial statements as of September 30, 2021. The terms of the resolution and/or the amount of a civil money penalty that FinCEN and/or the OCC could assess against the Bank are uncertain and the minimum amount in the range is not necessarily the amount of loss that will be ultimately incurred. The amount of any civil money penalty may have a material adverse impact on the Company and its financial condition and results of operations.

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At September 30, 2021 and December 31, 2020, 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:


Updat
			Minimum		Required to be
			Capital Required		Considered Well
	Actual		Basel III		Capitalized
(Dollars in thousands)	Amount	Ratio	Amount	Ratio	Amount	Ratio
September 30, 2021
Common Equity Tier 1 to Risk-Weighted Assets:
Consolidated	$ 478,233	16.87%	$ 198,431	7.00%	N/A	N/A
Bank Only	$ 450,008	15.88%	$ 198,415	7.00%	$ 184,243	6.50%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated	$ 478,233	16.87%	$ 240,952	8.50%	N/A	N/A
Bank Only	$ 450,008	15.88%	$ 240,933	8.50%	$ 226,760	8.00%
Total Capital to Risk-Weighted Assets:
Consolidated	$ 513,671	18.12%	$ 297,646	10.50%	N/A	N/A
Bank Only	$ 485,444	17.13%	$ 297,623	10.50%	$ 283,451	10.00%
Tier 1 Leverage Capital to Average Assets:
Consolidated	$ 478,233	11.69%	$ 163,641	4.00%	N/A	N/A
Bank Only	$ 450,008	11.01%	$ 163,557	4.00%	$ 204,447	5.00%

December 31, 2020
Common Equity Tier 1 to Risk-Weighted Assets:
Consolidated	$ 455,391	15.45%	$ 206,296	7.00%	N/A	N/A
Bank Only	$ 421,952	14.32%	$ 206,281	7.00%	$ 191,547	6.50%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated	$ 455,391	15.45%	$ 250,502	8.50%	N/A	N/A
Bank Only	$ 421,952	14.32%	$ 250,484	8.50%	$ 235,750	8.00%
Total Capital to Risk-Weighted Assets:
Consolidated	$ 492,328	16.71%	$ 309,444	10.50%	N/A	N/A
Bank Only	$ 458,886	15.57%	$ 309,421	10.50%	$ 294,687	10.00%
Tier 1 Leverage Capital to Average Assets:
Consolidated	$ 455,391	12.00%	$ 151,797	4.00%	N/A	N/A
Bank Only	$ 421,952	11.12%	$ 151,772	4.00%	$ 189,715	5.00%

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 shown below were as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
(Dollars in thousands)	2021	2020	2021	2020
Income tax expense	$ 2,913	$ 1,344	$ 8,090	$ 3,751
Effective tax rate	16.81%	17.31%	18.29%	18.87%

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 and bank-owned life insurance related earnings.

NOTE 21: EARNINGS PER SHARE

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2021		2020		2021		2020
Net income for common shareholders	$	14,421	$	6,421	$	36,143	$	16,125
Weighted-average shares (thousands)
Basic weighted-average shares outstanding		24,432		24,748		24,462		24,808
Dilutive effect of outstanding stock options and unvested restricted stock awards		112		22		110		39
Diluted weighted-average shares outstanding		24,544		24,770		24,572		24,847
Earnings per share:
Basic	$	0.59	$	0.26	$	1.48	$	0.65
Diluted	$	0.59	$	0.26	$	1.47	$	0.65

For the three and nine months ended September 30, 2021, the Company excluded the impact of 5,907 and 14,858 shares of unvested restricted stock from diluted weighted-average shares as they were anti-dilutive. For the three and nine months ended September 30, 2020, the Company excluded the impact of 150,000 and 80,000 stock options and 163,667 and 174,207 non-performance restricted stock awards, respectively, as they were anti-dilutive. The Company also excluded the impact of the performance based restricted stock awards for all periods as they are contingently issuable and the performance conditions for these issuances have not been met.

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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 Annual Report on Form 10-K, 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 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 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;

●

the Company’s ability to pursue available remedies in the event of a loan default for Paycheck Protection Program, or PPP, loans and the risk of holding such loans at unfavorable interest rates and on terms that are less favorable than those with customers to whom the Company would have otherwise lent;

●

volatility and direction of market interest rates;

●

liquidity risks associated with the Company’s business;

●

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

●

the failure of certain third-party vendors to perform;

●

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

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●

the operational risks associated with the Company’s business;

●

the costs, effects and results of regulatory examinations, investigations, including the ongoing investigation by FinCEN, or reviews or the ability to obtain required regulatory approvals;

●

the possible results and amount of civil money penalties related to such FinCEN investigation and the Company’s BSA/AML program;

●

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

●

governmental or regulatory responses to the COVID-19 pandemic that may impact the Company’s loan portfolio and forbearance practice;

●

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

●

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

●

other factors that are discussed in the section to this Quarterly Report on Form 10-Q entitled “Risk Factors.”

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.

The following discussion and analysis presents what the Company believes is the material information relevant to and assessment of its financial condition and results of operations for the periods presented and should be read in conjunction with the Company’s condensed consolidated financial statements and the accompanying notes included in “Part I—Item 1—Financial Statements” of this Quarterly Report on Form 10-Q, as well as the Company’s consolidated financial statements and the accompanying notes for the year ended December 31, 2020, included in the Company’s Annual Report on Form 10-K.

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

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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.

On June 18, 2020, the Bank and the OCC entered into the Formal Agreement with regard to BSA/AML compliance matters. On September 7, 2021, the OCC terminated the Formal Agreement.

The Bank remains the subject of an investigation by FinCEN regarding the Bank’s compliance with the BSA/AML. The Bank is cooperating with this investigation. The costs to respond to and cooperate with FinCEN’s investigation have been material over the course of the period of the investigation, and the Bank may continue to incur material fees and expenses regarding this matter at least through the completion of FinCEN’s investigation.

Although the OCC terminated the Formal Agreement, the Bank may still incur a civil money penalty from the OCC. In addition, the Bank remains the subject of an investigation by FinCEN and is cooperating with this investigation. The Bank has incurred material fees and expenses regarding this matter and may continue to incur material fees and expenses regarding this matter at least through the completion of FinCEN’s investigation. The Bank is in discussions with FinCEN to explore a potential resolution of its investigation which could include a civil monetary penalty against the Bank. The terms of the resolution and/or the amount of a civil money penalty that FinCEN and/or the OCC may assess against the Bank may have a material adverse impact on the Company and its financial performance. See “Item 1A.—Risk Factors.”

Information Regarding COVID-19 Impact and Uncertain Economic Outlook

The COVID-19 pandemic and actions taken in response to it, combined with the sustained 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 subject to the financial impact of the sustained instability in the oil and gas industry. As a result of these factors and the impact on the loan portfolio, the Company increased the ACL and provision for credit losses during 2020, which negatively impacted the Company’s net income. As a result of improvements in the national and local economies and related forecasts and the reduction of the loan portfolio, the Company reduced the ACL in the second and third quarters of 2021. The future impact of the COVID-19 pandemic 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.

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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:


	September 30,		June 30,		March 31,		December 31,		September 30,
(Dollars in thousands)	2021		2021		2021		2020		2020
Risk grades:
Pass	$	2,526,395	$	2,645,811	$	2,810,248	$	2,835,768	$	2,883,026
Special mention		4,661		14,276		10,508		14,088		5,953
Substandard		86,501		80,535		83,032		86,814		89,348
Total gross loans	$	2,617,557	$	2,740,622	$	2,903,788	$	2,936,670	$	2,978,327
Past due loans:
30 to 59 days past due	$	2,755	$	39	$	1,377	$	1,463	$	14,629
60 to 89 days past due		143		—		495		2,074		7,464
90 days or greater past due		104		217		4,019		2,375		5,103
Total past due loans	$	3,002	$	256	$	5,891	$	5,912	$	27,196
Loans individually evaluated:
Accruing troubled debt restructurings	$	31,656	$	31,789	$	27,709	$	32,880	$	35,494
Non-accrual troubled debt restructurings		17,834		18,196		18,913		19,173		10,123
Total troubled debt restructurings		49,490		49,985		46,622		52,053		45,617
Other non-accrual		2,751		2,777		4,595		4,844		5,453
Other accruing		5,260		836		836		746		9,844
Total loans individually evaluated	$	57,501	$	53,598	$	52,053	$	57,643	$	60,914
Nonperforming assets:
Nonaccrual loans	$	20,585	$	20,973	$	23,508	$	24,017	$	15,576
Accruing loans 90 or more days past due		—		—		—		—		—
Total nonperforming loans		20,585		20,973		23,508		24,017		15,576
Foreclosed assets		—		—		106		—		—
Total nonperforming assets	$	20,585	$	20,973	$	23,614	$	24,017	$	15,576

The table above shows the trend of loan performance indicators over the past five reporting periods. Loan performance indicators reflected worsening loan performance during 2020, primarily as a result of the impact of the COVID-19 pandemic and sustained instability in the oil and gas industry on the Company’s borrowers. Substantially all of the loan performance indicators have shown improvement in the nine months ended September 30, 2021. Although national and local economies and economic forecasts have continued to improve during the second and third quarters of 2021, the COVID-19 pandemic continues to have an ongoing impact through supply disruptions and other uncertainties and the oil and gas industry is still experiencing instability. 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 of customers impacted by the COVID-19 pandemic, the Company offered relief through payment deferrals during 2020 and the first nine months of 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. As of September 30, 2021, the Company had 7 loans subject to such deferral arrangements with total outstanding principal balances of $18.8 million, compared to 9 loans totaling $20.5 million at June 30, 2021, 16 loans totaling $34.3 million at March 31, 2021, 21 loans totaling $38.4 million at December 31, 2020 and 41 loans totaling $82.4 million at September 30, 2020.

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The Company participated in 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 in net income during the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, were primarily due to fluctuations in the provision (recapture) for credit losses, partially offset by the decrease in net interest income and an increase in noninterest expense. See further analysis of the material fluctuations in the related discussions that follow.


	Three Months Ended September 30,							Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		Increase (Decrease)				2021	2020		Increase (Decrease)
Interest income	$	32,697	$	33,763	$	(1,066)	(3.2)%	$	99,864	$	104,399	$	(4,535)	(4.3)%
Interest expense		1,448		2,055		(607)	(29.5)%		4,507		8,313		(3,806)	(45.8)%
Net interest income		31,249		31,708		(459)	(1.4)%		95,357		96,086		(729)	(0.8)%
Provision (recapture) for credit losses		(4,895)		4,108		(9,003)	(219.2)%		(9,566)		19,027		(28,593)	(150.3)%
Noninterest income		5,562		4,023		1,539	38.3%		12,164		11,259		905	8.0%
Noninterest expense		24,372		23,858		514	2.2%		72,854		68,442		4,412	6.4%
Income before income taxes		17,334		7,765		9,569	123.2%		44,233		19,876		24,357	122.5%
Income tax expense		2,913		1,344		1,569	116.7%		8,090		3,751		4,339	115.7%
Net income	$	14,421	$	6,421	$	8,000	124.6%	$	36,143	$	16,125	$	20,018	124.1%

Net Interest Income for the Nine Months Ended September 30, 2021, Compared to the Nine Months Ended September 30, 2020

Net interest income decreased $729,000 during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to lower rates on interest-earning assets, lower average loans and the impact of one less day in the nine months ended September 30, 2021, partially offset by higher average interest-bearing deposits and securities and lower rates on deposits.

The yield on interest-earning assets was 3.52% for the nine months ended September 30, 2021, compared to 4.05% for the nine months ended September 30, 2020. The cost of interest-bearing liabilities was 0.32% for the nine months ended September 30, 2021 and 0.64% for the nine months ended September 30, 2020. Yields on interest-earning assets decreased and the costs of interest-bearing liabilities did not decrease to the same extent, which caused compression of the Company’s net interest margin on a tax equivalent basis to 3.40% for the nine months ended September 30, 2021, compared to 3.76% for the nine months ended September 30, 2020.

Although competitive pressures have caused the costs of interest-bearing deposits to not drop in tandem with decreases in market rates for interest-earning assets, they remain a low-cost source of funds, as compared to other sources of funds.

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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.


	Nine Months Ended September 30,
	2021					2020
	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⁾	$	2,812,449	$	94,723	4.50%	$	2,829,767	$	98,792	4.66%
Securities		296,958		3,940	1.77%		236,756		3,698	2.09%
Interest-bearing deposits at other financial institutions		668,119		740	0.15%		359,134		1,400	0.52%
Equity investments		14,679		461	4.20%		14,716		509	4.62%
Total interest-earning assets		3,792,205	$	99,864	3.52%		3,440,373	$	104,399	4.05%
Allowance for credit losses for loans		(39,594)					(32,499)
Noninterest-earning assets		318,009					309,778
Total assets	$	4,070,620				$	3,717,652
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,846,211	$	3,844	0.28%	$	1,689,772	$	7,619	0.60%
Federal Home Loan Bank advances		50,000		663	1.77%		56,898		682	1.60%
Other interest-bearing liabilities		—		—	—		1,700		12	0.95%
Total interest-bearing liabilities		1,896,211	$	4,507	0.32%		1,748,370	$	8,313	0.64%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		1,568,071					1,377,594
Other liabilities		50,966					48,881
Total noninterest-bearing liabilities		1,619,037					1,426,475
Shareholders’ equity		555,372					542,807
Total liabilities and shareholders’ equity	$	4,070,620				$	3,717,652
Net interest income			$	95,357				$	96,086
Net interest spread⁽³⁾					3.20%					3.41%
Net interest margin⁽⁴⁾					3.36%					3.73%
Net interest margin - tax equivalent⁽⁵⁾					3.40%					3.76%

(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 $989,000 and $754,000 for the nine months ended September 30, 2021 and 2020, respectively, were computed using a federal income tax rate of 21%.

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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, 2021,
	Compared to Nine Months Ended September 30, 2020
	Increase (Decrease) due to
(Dollars in thousands)	Rate		Volume			Days	Total
Interest-earning assets:
Total loans	$	(3,104)	$	(604)	$	(361)	$	(4,069)
Securities		(687)		943		(14)		242
Interest-bearing deposits at other financial institutions		(1,858)		1,203		(5)		(660)
Equity investments		(45)		(1)		(2)		(48)
Total increase (decrease) in interest income		(5,694)		1,541		(382)		(4,535)
Interest-bearing liabilities:
Interest-bearing deposits		(4,450)		703		(28)		(3,775)
Federal Home Loan Bank advances		67		(84)		(2)		(19)
Other interest-bearing liabilities		—		(12)		—		(12)
Total increase (decrease) in interest expense		(4,383)		607		(30)		(3,806)
Increase (decrease) in net interest income	$	(1,311)	$	934	$	(352)	$	(729)

Net Interest Income for the Three Months Ended September 30, 2021, Compared to the Three Months Ended September 30, 2020

Net interest income decreased $459,000 during the third quarter of 2021, compared to the third quarter of 2020, primarily due to lower average loans and higher average interest-bearing deposits, partially offset by lower rates on interest-bearing deposits and higher rates on loans.

The yield on interest-earning assets was 3.33% for the third quarter of 2021, compared to 3.75% for the third quarter of 2020. The cost of interest-bearing liabilities was 0.30% for the third quarter of 2021 and 0.46% for the third quarter of 2020. Yields on interest-earning assets decreased and the costs of interest-bearing liabilities did not decrease to the same extent, which caused compression of the Company’s net interest margin on a tax equivalent basis to 3.22% for the third quarter of 2021, compared to 3.55% for the third quarter of 2020.

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	Three Months Ended September 30,
	2021					2020
	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⁾	$	2,702,248	$	30,765	4.52%	$	2,945,320	$	32,318	4.37%
Securities		327,968		1,435	1.74%		236,015		1,107	1.87%
Interest-bearing deposits at other financial institutions		854,406		340	0.16%		383,626		176	0.18%
Equity investments		13,367		157	4.66%		15,334		162	4.20%
Total interest-earning assets		3,897,989	$	32,697	3.33%		3,580,295	$	33,763	3.75%
Allowance for credit losses for loans		(36,945)					(40,135)
Noninterest-earning assets		313,901					326,590
Total assets	$	4,174,945				$	3,866,750
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,895,617	$	1,227	0.26%	$	1,730,812	$	1,831	0.42%
Federal Home Loan Bank advances		50,000		221	1.75%		50,000		221	1.76%
Other interest-bearing liabilities		—		—	—		2,230		3	0.54%
Total interest-bearing liabilities		1,945,617	$	1,448	0.30%		1,783,042	$	2,055	0.46%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		1,612,985					1,484,557
Other liabilities		52,712					55,386
Total noninterest-bearing liabilities		1,665,697					1,539,943
Shareholders’ equity		563,631					543,765
Total liabilities and shareholders’ equity	$	4,174,945				$	3,866,750
Net interest income			$	31,249				$	31,708
Net interest spread⁽³⁾					3.03%					3.29%
Net interest margin⁽⁴⁾					3.18%					3.52%
Net interest margin - tax equivalent⁽⁵⁾					3.22%					3.55%

(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 $369,000 and $258,000 for the three months ended September 30, 2021 and 2020, respectively, were computed using a federal income tax rate of 21%.

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	Three Months Ended September 30, 2021,
	Compared to Three Months Ended September 30, 2020
	Increase (Decrease) due to
(Dollars in thousands)	Rate		Volume			Days	Total
Interest-earning assets:
Total loans	$	1,117	$	(2,670)	$	—	$	(1,553)
Securities		(104)		432		—		328
Interest-bearing deposits at other financial institutions		(49)		213		—		164
Equity investments		15		(20)		—		(5)
Total increase (decrease) in interest income		979		(2,045)		—		(1,066)
Interest-bearing liabilities:
Interest-bearing deposits		(778)		174		—		(604)
Federal Home Loan Bank advances		—		—		—		—
Other interest-bearing liabilities		—		(3)		—		(3)
Total increase (decrease) in interest expense		(778)		171		—		(607)
Increase (decrease) in net interest income	$	1,757	$	(2,216)	$	—	$	(459)

Provision (Recapture) for Credit Losses

The provision for credit losses was a recapture of credit losses of $9.6 million for the nine months ended September 30, 2021, compared to a provision for credit losses of $19.0 million for the nine months ended September 30, 2020 and the provision for credit losses was a recapture of credit losses of $4.9 million for the third quarter of 2021, compared to a provision for credit losses of $4.1 million for the third quarter of 2020.

The recapture of credit losses for the three and nine months ended September 30, 2021 were primarily the result of certain qualitative factor adjustments made on the ACL. Due to the continued improvements in the national and local economies and related economic forecasts, the Company adjusted certain forecasts and loan qualitative factors. A decrease in the Company’s loan portfolio also resulted in a decrease in the ACL.

The provisions for credit losses for the three and nine months ended September 30, 2020 were impacted by the uncertainties associated with the COVID-19 pandemic, instability in the oil and gas industry, resultant economic conditions and the impact on the Company’s loan portfolio.

Noninterest Income

The following table presents components of noninterest income for the third quarters of 2021 and 2020, the nine months ended September 30, 2021 and 2020 and the period-over-period changes in the categories of noninterest income:


	Three Months Ended September 30,							Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		Increase (Decrease)			2021		2020		Increase (Decrease)
Deposit account service charges	$	1,352	$	1,176	$	176	15.0%	$	3,712	$	3,756	$	(44)	(1.2)%
Card interchange fees		1,048		995		53	5.3%		3,119		2,832		287	10.1%
Earnings on bank-owned life insurance		2,323		1,187		1,136	95.7%		3,103		2,015		1,088	54.0%
Net gain on sales of assets		360		114		246	215.8%		918		376		542	144.1%
Other		479		551		(72)	(13.1)%		1,312		2,280		(968)	(42.5)%
Total noninterest income	$	5,562	$	4,023	$	1,539	38.3%	$	12,164	$	11,259	$	905	8.0%

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The increase in noninterest income of $1.5 million and $905,000 during the three and nine months ended September 30, 2021, respectively, compared to the three and nine months ended September 30, 2020, was primarily due to an increase in earnings on bank-owned life insurance due to related gains of $1.9 million and $769,000 during the third quarter of 2021 and 2020. 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 and $2.0 million during the third quarter of 2021 and the third quarter of 2020, respectively.

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 September 30,							Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		Increase (Decrease)			2021		2020		Increase (Decrease)
Salaries and employee benefits	$	15,000	$	14,332	$	668	4.7%	$	43,922	$	42,567	$	1,355	3.2%
Occupancy expense		2,660		2,496		164	6.6%		7,778		7,478		300	4.0%
Professional and director fees		1,567		2,446		(879)	(35.9)%		5,711		5,139		572	11.1%
Data processing and software		1,629		1,525		104	6.8%		4,866		4,039		827	20.5%
Regulatory fees		478		471		7	1.5%		1,535		1,050		485	46.2%
Advertising, marketing and business development		493		429		64	14.9%		1,288		1,062		226	21.3%
Telephone and communications		516		486		30	6.2%		1,529		1,297		232	17.9%
Security and protection expense		425		299		126	42.1%		1,352		1,024		328	32.0%
Amortization of intangibles		182		198		(16)	(8.1)%		559		649		(90)	(13.9)%
Other expenses		1,422		1,176		246	20.9%		4,314		4,137		177	4.3%
Total noninterest expense	$	24,372	$	23,858	$	514	2.2%	$	72,854	$	68,442	$	4,412	6.4%

The increase in noninterest expense of $4.4 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, was primarily due to a $1.4 million increase in salaries and employee benefits, a $572,000 increase in professional and director fees, a $827,000 increase in data processing and software and a $485,000 increase in regulatory fees. The increase in salaries and employee benefits of $1.4 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020 was primarily due to an increase in costs related to the Company’s self-funded health plan. Professional and director fees increased $572,000 for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to consulting fees related to costs associated with additional loan reviews and general legal fees. Professional fees related to BSA/AML compliance matters were $2.3 million for the nine months ended September 30, 2021, compared to $2.2 million for the nine months ended September 30, 2020. Data processing and software costs increased $827,000 for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020 was primarily due to system upgrades, increased processing fees and an increase in software license fees due to employees and consultants working remotely. Regulatory fees increased $485,000 during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to a refund received in 2020.

The increase in noninterest expense of $514,000 for the third quarter of 2021, compared to the third quarter of 2020, was primarily due to a $668,000 increase in salaries and employee benefits, a $164,000 increase in occupancy expense, a $104,000 increase in data processing and software and a $126,000 increase in security and protection expense, partially offset by a $879,000 decrease in professional and director fees. Professional fees related to BSA/AML compliance matters decreased $1.3 million to $202,000 for the three months ended September 30, 2021, compared to $1.5 million for the three months ended September 30, 2020. This decrease in BSA/AML related professional fees during the third quarter of 2021 was partially offset by increases in consulting fees related to additional loan reviews.

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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 shown below were as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
(Dollars in thousands)	2021	2020	2021	2020
Income tax expense	$ 2,913	$ 1,344	$ 8,090	$ 3,751
Effective tax rate	16.81%	17.31%	18.29%	18.87%

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 and bank-owned life insurance.

Financial Condition

Total assets were $4.2 billion as of September 30, 2021, compared to $3.9 billion as of December 31, 2020. The increase of $259.9 million, or 6.6%, was primarily due to a $460.8 million increase in cash and cash equivalents and a $122.3 million increase in securities, partially offset by a $307.3 million decrease in net loans. Total liabilities were $3.6 billion as of September 30, 2021, compared to $3.4 billion as of December 31, 2020, an increase of $241.8 million primarily due to an increase in deposits of $229.8 million. See further analysis in the related discussions that follow.


	September 30,		December 31,
(Dollars in thousands)	2021		2020		Increase (Decrease)
Assets:
Loans excluding loans held for sale	$	2,608,402	$	2,924,117	$	(315,715)	(10.8)%
Allowance for credit losses		(32,208)		(40,637)		(8,429)	(20.7)%
Loans, net		2,576,194		2,883,480		(307,286)	(10.7)%
Cash and equivalents		998,785		538,007		460,778	85.6%
Securities		359,539		237,281		122,258	51.5%
Premises and equipment, net		59,235		61,152		(1,917)	(3.1)%
Goodwill		80,950		80,950		—	—
Other intangibles		3,702		4,171		(469)	(11.2)%
Loans held for sale		327		2,673		(2,346)	(87.8)%
Operating lease right-to-use asset		11,527		13,285		(1,758)	(13.2)%
Other assets		118,860		128,218		(9,358)	(7.3)%
Total assets	$	4,209,119	$	3,949,217	$	259,902	6.6%
Liabilities:
Deposits	$	3,531,635	$	3,301,794	$	229,841	7.0%
Federal Home Loan Bank advances		50,000		50,000		—	—
Operating lease liabilities		14,556		16,447		(1,891)	(11.5)%
Other liabilities		48,335		34,525		13,810	40.0%
Total liabilities		3,644,526		3,402,766		241,760	7.1%
Shareholders' equity		564,593		546,451		18,142	3.3%
Total liabilities and shareholders' equity	$	4,209,119	$	3,949,217	$	259,902	6.6%

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Loan Portfolio

The loan portfolio by loan class as of the dates indicated was as follows:


	September 30,		December 31,
(Dollars in thousands)	2021		2020		Increase (Decrease)
Commercial and industrial	$	596,251	$	742,957	$	(146,706)	(19.7)%
Real estate:
Commercial real estate		1,029,137		1,041,998		(12,861)	(1.2)%
Construction and development		393,541		522,705		(129,164)	(24.7)%
1-4 family residential		204,151		239,872		(35,721)	(14.9)%
Multi-family residential		285,852		258,346		27,506	10.6%
Consumer		27,930		33,884		(5,954)	(17.6)%
Agriculture		8,780		8,670		110	1.3%
Other		71,915		88,238		(16,323)	(18.5)%
Gross loans		2,617,557		2,936,670		(319,113)	(10.9)%
Less deferred fees and unearned discount		(8,828)		(9,880)		(1,052)	(10.6)%
Less loans held for sale		(327)		(2,673)		(2,346)	87.8%
Loans excluding loans held for sale		2,608,402		2,924,117		(315,715)	(10.8)%
Less allowance for credit losses for loans		(32,208)		(40,637)		(8,429)	(20.7)%
Loans, net	$	2,576,194	$	2,883,480	$	(307,286)	(10.7)%

As of September 30, 2021, loans excluding loans held for sale were $2.6 billion, a decrease of $315.7 million, or 10.8%, compared to December 31, 2020, primarily due to paydowns during the nine months ended September 30, 2021 of $1.4 billion, partially offset by originations and line of credit drawdowns of $1.1 billion during the same period.

At September 30, 2021, the Company had 646 PPP loans totaling $100.8 million, net of deferred loan fees and unearned discounts, and at December 31, 2020, the Company had 1,766 PPP loans totaling $271.2 million, net of deferred loan fees and unearned discounts. The Company recognized a net yield of 5.45% during the nine months ended September 30, 2021 on PPP loans, including $7.0 million of origination fee income. During the nine months ended September 30, 2021, payments for PPP loans totaled $314.4 million and PPP loans originated totaled $142.7 million.

PPP loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit the Company’s ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, the Company is at heightened risk of holding these loans at unfavorable interest rates and underwriting standards as compared to the loans to customers to whom the Company would have otherwise lent.

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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
(Dollars in thousands)	1 Year or Less		Through 5 Years		Through 15 Years		15 years		Total
September 30, 2021
Commercial and industrial:
Fixed rate	$	50,046	$	257,852	$	3,063	$	—	$	310,961
Variable rate		174,915		72,789		37,085		501		285,290
		224,961		330,641		40,148		501		596,251
Real estate:
Commercial real estate:
Fixed rate		48,383		434,608		10,916		—		493,907
Variable rate		75,859		288,237		147,860		23,274		535,230
		124,242		722,845		158,776		23,274		1,029,137
Construction and development:
Fixed rate		33,994		72,871		13,556		—		120,421
Variable rate		72,309		183,240		6,314		11,257		273,120
		106,303		256,111		19,870		11,257		393,541
1-4 family residential:
Fixed rate		5,978		34,549		20,832		13,273		74,632
Variable rate		1,972		3,703		14,056		109,788		129,519
		7,950		38,252		34,888		123,061		204,151
Multi-family residential:
Fixed rate		2,816		6,025		231,183		—		240,024
Variable rate		11,548		32,979		1,301		—		45,828
		14,364		39,004		232,484		—		285,852
Consumer:
Fixed rate		6,284		9,178		—		—		15,462
Variable rate		11,023		1,445		—		—		12,468
		17,307		10,623		—		—		27,930
Agriculture:
Fixed rate		5,794		778		—		—		6,572
Variable rate		1,799		409		—		—		2,208
		7,593		1,187		—		—		8,780
Other:
Fixed rate		2,346		1,742		394		—		4,482
Variable rate		20,107		47,326		—		—		67,433
		22,453		49,068		394		—		71,915
Total:
Fixed rate loans		155,641		817,603		279,944		13,273		1,266,461
Variable rate loans		369,532		630,128		206,616		144,820		1,351,096
Total gross loans	$	525,173	$	1,447,731	$	486,560	$	158,093	$	2,617,557

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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:



	September 30,		December 31,
(Dollars in thousands)	2021		2020
Nonaccrual loans	$	20,585	$	24,017
Accruing loans 90 or more days past due		—		—
Total nonperforming loans		20,585		24,017
Foreclosed assets		—		—
Total nonperforming assets	$	20,585	$	24,017
Total assets	$	4,209,119	$	3,949,217
Loans excluding loans held for sale		2,608,402		2,924,117
Allowance for credit losses for loans		32,208		40,637
Allowance for credit losses for loans to nonaccrual loans		156.46%		169.20%
Nonperforming loans to loans excluding loans held for sale		0.79%		0.82%
Nonperforming assets to total assets		0.49%		0.61%

Nonperforming assets remain relatively low at $20.6 million, or 0.49% of total assets, at September 30, 2021 and $24.0 million, or 0.61% of total assets, at December 31, 2020. The nonperforming assets decreased $3.4 million during the first nine months of 2021 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 nine months ended September 30, 2021 and 2020, which remained outstanding as of the end of those periods were as follows:


				Post-modification Recorded Investment
										Extended
										Maturity,
		Pre-modification						Extended		Restructured
		Outstanding						Maturity and		Payments
	Number	Recorded		Restructured		Extended		Restructured		and Adjusted
(Dollars in thousands)	of Loans	Investment		Payments		Maturity		Payments		Interest Rate
September 30, 2021
Commercial and industrial	3	$	3,256	$	3,256	$	—	$	—	$	—
Real estate:
Commercial real estate	1		1,206		1,206		—		—		—
1-4 family residential	1		1,548		1,548		—		—		—
Consumer	1		42		—		—		42		—
Total	6	$	6,052	$	6,010	$	—	$	42	$	—
September 30, 2020
Commercial and industrial	19	$	8,019	$	6,645	$	—	$	1,143	$	231
Real estate:
Commercial real estate	9		14,459		14,459		—		—		—
Construction and development	4		12,289		12,032		—		—		257
1-4 family residential	5		1,629		1,651		—		—		—
Total	37	$	36,396	$	34,787	$	—	$	1,143	$	488

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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 dates indicated were as follows:


			Special
(Dollars in thousands)	Pass		Mention		Substandard		Total
September 30, 2021
Commercial and industrial	$	574,729	$	3,229	$	18,293	$	596,251
Real estate:
Commercial real estate		981,879		962		46,296		1,029,137
Construction and development		380,154		470		12,917		393,541
1-4 family residential		198,942		—		5,209		204,151
Multi-family residential		285,852		—		—		285,852
Consumer		27,699		—		231		27,930
Agriculture		8,716		—		64		8,780
Other		68,424		—		3,491		71,915
Total gross loans	$	2,526,395	$	4,661	$	86,501	$	2,617,557


			Special
(Dollars in thousands)	Pass		Mention		Substandard		Total
December 31, 2020
Commercial and industrial	$	720,465	$	3,404	$	19,088	$	742,957
Real estate:
Commercial real estate		1,000,503		7,519		33,976		1,041,998
Construction and development		502,933		—		19,772		522,705
1-4 family residential		230,654		3,165		6,053		239,872
Multi-family residential		258,346		—		—		258,346
Consumer		33,884		—		—		33,884
Agriculture		8,597		—		73		8,670
Other		80,386		—		7,852		88,238
Total gross loans	$	2,835,768	$	14,088	$	86,814	$	2,936,670

During the first nine months of 2021, loans with an internal rating of pass decreased $309.4 million primarily due to loan payoffs and payments collected. Loans with an internal rating of special mention decreased $9.4 million and loans with an internal rating of substandard decreased $313,000 during the same period, primarily due to loan payoffs and payments collected.

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:



	September 30, 2021				December 31, 2020
(Dollars in thousands)	Amount		Percent		Amount		Percent
Commercial and industrial	$	11,401	35.4	%	$	13,035	32.1	%
Real estate:
Commercial real estate		11,744	36.5	%		13,798	34.0	%
Construction and development		3,334	10.3	%		6,089	15.0	%
1-4 family residential		1,700	5.3	%		2,578	6.3	%
Multi-family residential		2,156	6.7	%		2,513	6.2	%
Consumer		449	1.4	%		440	1.1	%
Agriculture		109	0.3	%		137	0.3	%
Other		1,315	4.1	%		2,047	5.0	%
Total allowance for credit losses for loans	$	32,208	100.0	%	$	40,637	100.0	%
Loans excluding loans held for sale		2,608,402				2,924,117
ACL for loans to loans excluding loans held for sale		1.23%				1.39%

The ACL for loans was $32.2 million, or 1.23% of loans excluding loans held for sale, at September 30, 2021, compared to $40.6 million, or 1.39% of loans excluding loans held for sale, at December 31, 2020. The ACL was reduced during the nine months ended September 30, 2021 due to improvements in the national and local economies and economic forecasts and the reduction of the loan portfolio.

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


		Nine Months Ended September 30,
(Dollars in thousands)		2021		2020
Beginning balance		$	40,637	$	25,280
Impact of CECL adoption			—		874
Provision (recapture):
Commercial and industrial			(2,028)		4,439
Real estate:
	Commercial real estate		(2,054)		5,069
	Construction and development		(2,755)		1,788
	1-4 family residential		(875)		959
	Multi-family residential		(357)		1,124
Consumer			(85)		243
Agriculture			(75)		14
Other			(732)		4,209
Total provision (recapture)			(8,961)		17,845
Net (charge-offs) recoveries:
Commercial and industrial			394		385
Real estate:
	Commercial real estate		—		(159)
	1-4 family residential		(3)		(70)
Consumer			94		(99)
Agriculture			47		12
Other			—		1
Total net (charge-offs) recoveries			532		70
Ending balance		$	32,208	$	44,069
Total average loans			2,812,449		2,829,767
Annualized net charge-offs (recoveries) to total average loans			(0.03)%		—

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


	Nine Months Ended September 30,
(Dollars in thousands)		2021	2020
Commercial and industrial		(0.08)%	(0.08)%
Real estate:
Commercial real estate		—	(0.02)%
Construction and development		—	—
1-4 family residential		—	(0.03)%
Multi-family residential		—	—
Consumer		(0.41)%	(0.36)%
Agriculture		(0.72)%	0.18%
Other		—	—

The ACL for unfunded commitments was $3.6 million at September 30, 2021 and $4.2 million at December 31, 2020. The decrease in the ACL for unfunded commitments was primarily due to the continued improvements in the national and local economies and related economic forecasts resulting in adjustments to certain forecasts and loan qualitative factors, which was partially offset by an increase in the availability on the unfunded commitments.

Securities

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


			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
September 30, 2021
Debt securities available for sale:
State and municipal securities	$	151,939	$	3,566	$	(1,485)	$	154,020
U.S. Treasury securities		11,885		23		(1)		11,907
U.S. agency securities:
Callable debentures		3,000		9		—		3,009
Collateralized mortgage obligations		41,018		127		(520)		40,625
Mortgage-backed securities		147,433		2,390		(1,026)		148,797
Equity securities		1,187		—		(6)		1,181
Total	$	356,462	$	6,115	$	(3,038)	$	359,539
December 31, 2020
Debt securities available for sale:
State and municipal securities	$	88,741	$	4,296	$	—	$	93,037
U.S. agency securities:
Collateralized mortgage obligations		35,085		347		(30)		35,402
Mortgage-backed securities		103,686		3,963		—		107,649
Equity securities		1,176		17		—		1,193
Total	$	228,688	$	8,623	$	(30)	$	237,281

As of September 30, 2021, the fair value of the Company’s securities totaled $359.5 million, compared to $237.3 million as of December 31, 2020, an increase of $122.3 million. Amortized cost increased $127.8 million during 2021, primarily as a result of purchases totaling $630.2 million outpacing maturities, sales, calls and paydowns totaling $501.3 million. Net unrealized gains on the securities portfolio were $3.1 million at September 30, 2021, compared to $8.6 million at December 31, 2020. This decrease of $5.5 million was due to a reduction in fair value as a result of market fluctuations.

The Company’s mortgage-backed securities at September 30, 2021 and December 31, 2020, 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

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loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A or second lien elements in the securities portfolio.

The weighted-average life of the securities portfolio was 5.4 years with an estimated modified duration of 5.0 years as of September 30, 2021. See “Part I—Item 1.—Financial Statements—Note 2” for securities by contractual maturity.

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
September 30, 2021
Debt securities:
State and municipal securities	2.42%	—	2.68%	2.16%	2.21%
U.S. Treasury securities	—	1.00%	1.17%	—	1.13%
U.S. agency securities:
Callable debentures	—	—	1.37%	—	1.37%
Collateralized mortgage obligations	—	—	1.99%	1.18%	1.27%
Mortgage-backed securities	3.91%	3.50%	2.50%	1.80%	1.82%
Equity securities:	1.00%	—	—	—	1.00%
Total securities	1.61%	1.67%	2.02%	1.88%	1.89%

At September 30, 2021 and December 31, 2020, securities with a carrying amount of approximately $25.0 million and $27.3 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Deposits

Total deposits as of September 30, 2021 were $3.5 billion, an increase of $229.8 million, or 7.0%, compared to December 31, 2020. Noninterest-bearing deposits as of September 30, 2021 were $1.6 billion, an increase of $151.7 million, or 10.3%, compared to December 31, 2020. Total interest-bearing account balances as of September 30, 2021 were $1.9 billion, an increase of $78.1 million, or 4.3%, from December 31, 2020, primarily due to increases in savings and money market accounts, partially offset by decreases in certificates and other time deposits.

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



(Dollars in thousands)	September 30, 2021		December 31, 2020		Increase (Decrease)
Interest-bearing demand accounts	$	386,196	$	380,175	$	6,021	1.6%
Money market accounts		1,139,167		1,039,617		99,550	9.6%
Savings accounts		118,794		108,167		10,627	9.8%
Certificates and other time deposits, $100,000 or greater		140,740		152,592		(11,852)	(7.8)%
Certificates and other time deposits, less than $100,000		118,594		144,818		(26,224)	(18.1)%
Total interest-bearing deposits		1,903,491		1,825,369		78,122	4.3%
Noninterest-bearing deposits		1,628,144		1,476,425		151,719	10.3%
Total deposits	$	3,531,635	$	3,301,794	$	229,841	7.0%

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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)	September 30, 2021
Three months or less	$	18,071
Over three months through six months		22,415
Over six months through 12 months		18,683
Over 12 months		11,520
Total	$	70,689

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

Cash and Equivalents

Cash and equivalents increased $460.8 million during the nine months ended September 30, 2021, primarily due to loan payments received and net deposit inflows.

Other Assets

Other assets decreased $9.4 million from December 31, 2020 to September 30, 2021, primarily due to a reduction in the fair value of the Company’s interest rate swap contracts of $3.9 million, a decrease in interest receivable of $2.4 million and a $2.3 million decrease in net deferred tax assets. See “Part I—Item 1.—Financial Statements—Note 14” for further discussion of the Company’s interest rate swap contracts.

Other Liabilities

Other liabilities increased $13.8 million from December 31, 2020 to September 30, 2021, primarily due to an increase of $17.4 million in payables related to securities purchases, partially offset by a reduction in the fair value of the Company’s interest rate swap contracts of $3.9 million. 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.

At September 30, 2021, the Company had $998.8 million in cash and cash equivalents and $359.5 million of securities, which are considered to be liquid assets, compared to $538.0 million in cash and cash equivalents and $237.3 million of securities at December 31, 2020. This increase in liquid assets of $583.0 million during the first nine months of 2021 was primarily due to a $229.8 million increase in deposits and a decrease of $315.7 million in loans excluding loans held for sale.

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Historically, the cost of the Company’s deposits has been lower than other sources of funds available. Average balances and average rates paid on deposits for the periods indicated are shown in the table below. Average rates paid for the nine months ended September 30, 2021 were computed on an annualized basis.


	Nine Months Ended				Year Ended
	September 30, 2021				December 31, 2020
	Average		Average		Average		Average
(Dollars in thousands)	Balance		Rate		Balance		Rate
Interest-bearing demand accounts	$	381,966	0.05	%	$	363,014	0.10	%
Money market accounts		1,074,493	0.27	%		868,915	0.42	%
Savings accounts		113,453	0.03	%		97,982	0.04	%
Certificates and other time deposits, $100,000 or greater		144,813	0.42	%		192,268	1.27	%
Certificates and other time deposits, less than $100,000		131,486	1.11	%		181,364	1.50	%
Total interest-bearing deposits		1,846,211	0.28	%		1,703,543	0.54	%
Noninterest-bearing deposits		1,568,071	—			1,404,027	—
Total deposits	$	3,414,282	0.15	%	$	3,107,570	0.30	%

The ratio of average noninterest-bearing deposits to average total deposits was 45.9% for the nine months ended September 30, 2021 and 45.2% for the year ended December 31, 2020.

In addition to the liquid assets discussed above, the Company had $1.0 billion and $1.1 billion of available funds under various borrowing arrangements at September 30, 2021 and December 31, 2020, respectively. See “Part I—Item 1.—Financial Statements—Note 11” for additional details of these arrangements. At September 30, 2021, the capacity, amounts outstanding and availability under these arrangements were as follows:


(Dollars in thousands)	Capacity		Outstanding		Availability
Federal Home Loan Bank Facility	$	1,017,593	$	(76,000)	$	941,593
Frost Facility		30,000		—		30,000
Federal Funds		65,000		—		65,000
Total	$	1,112,593	$	(76,000)	$	1,036,593

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


	September 30,		December 31,
	2021		2020
Sources of funds:
Deposits:
Interest-bearing	45.4	%	45.3	%
Noninterest-bearing	38.5	%	37.4	%
Federal Home Loan Bank advances	1.2	%	1.5	%
Other interest-bearing liabilities	—	%	—	%
Other liabilities	1.3	%	1.3	%
Shareholders’ equity	13.6	%	14.5	%
Total sources	100.0	%	100.0	%
Uses of funds:
Loans	69.1	%	76.2	%
Securities	7.3	%	6.3	%
Interest-bearing deposits at other financial institutions	16.4	%	9.7	%
Equity securities	0.4	%	0.4	%
Other noninterest-earning assets	6.8	%	7.4	%
Total uses	100.0	%	100.0	%
Average loans to average deposits	82.4	%	92.1	%

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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
(Dollars in thousands)	or Less		to 3 Years		than 3 Years		Total
September 30, 2021
Federal Home Loan Bank advances	$	—	$	40,000	$	10,000	$	50,000
Non-cancellable future operating leases		1,786		3,862		11,653		17,301
Certificates of deposit		170,084		70,865		18,385		259,334
Total	$	171,870	$	114,727	$	40,038	$	326,635
December 31, 2020
Federal Home Loan Bank advances	$	—	$	30,000	$	20,000	$	50,000
Non-cancellable future operating leases		1,968		4,452		13,092		19,512
Certificates of deposit		204,165		74,708		18,537		297,410
Total	$	206,133	$	109,160	$	51,629	$	366,922

As of September 30, 2021, the Company had no exposure to future cash requirements associated with known uncertainties or capital expenditure 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
(Dollars in thousands)	or Less		to 3 Years		than 3 Years		Total
September 30, 2021
Commitments to extend credit	$	427,213	$	286,827	$	58,429	$	772,469
Standby letters of credit		12,970		6,264		—		19,234
Total	$	440,183	$	293,091	$	58,429	$	791,703
December 31, 2020
Commitments to extend credit	$	498,238	$	177,710	$	63,783	$	739,731
Standby letters of credit		18,713		7,365		—		26,078
Total	$	516,951	$	185,075	$	63,783	$	765,809

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 September 30, 2021 and December 31, 2020, 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 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.

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


	September 30, 2021				December 31, 2020
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	30.0	%	18.7	%	21.5	%	35.7	%
+ 200	19.8	%	19.8	%	14.1	%	32.8	%
+ 100	9.3	%	13.8	%	6.5	%	21.0	%
Base	—	%	—	%	—	%	—	%
−100	(1.7)	%	(35.4)	%	(1.5)	%	(37.0)	%

The model simulation as of September 30, 2021 indicates that the Company’s projected balance sheet was more asset sensitive in comparison to December 31, 2020. The percent change increases in net interest income compared to December 31, 2020 was primarily due to the decrease of $170.5 million in lower yielding PPP loans. The percent change decrease in the fair values of equity were primarily due to an increase in cash and cash equivalents in interest-bearing deposits held at other financial institutions of $457.0 million and an increase in securities of $122.3 million compared to December 31, 2020. The increase of $151.7 million in noninterest-bearing deposits contributed to the increase in interest-earning assets during 2021, which had the effect of creating a higher economic value of equity. Subsequent rate shocks due to the change in interest rates result in differing percentages given the level of economic equity.

LIBOR Transition

LIBOR was used as an index rate for a majority of the Company’s interest-rate swaps and approximately 8.8% of the Company’s loans at September 30, 2021. 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 for its interest-rates swaps and loans using LIBOR as an index rate may span several reporting periods through 2022.

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 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.

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:

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	September 30,		December 31,
(Dollars in thousands, except per share data)	2021		2020
Tangible Equity
Total shareholders’ equity	$	564,593	$	546,451
Adjustments:
Goodwill		(80,950)		(80,950)
Other intangibles		(3,702)		(4,171)
Tangible equity	$	479,941	$	461,330
Tangible Assets
Total assets	$	4,209,119	$	3,949,217
Adjustments:
Goodwill		(80,950)		(80,950)
Other intangibles		(3,702)		(4,171)
Tangible assets	$	4,124,467	$	3,864,096
Common shares outstanding		24,420		24,613
Book value per share	$	23.12	$	22.20
Tangible book value per share	$	19.65	$	18.74
Total shareholders’ equity to total assets		13.41%		13.84%
Tangible equity to tangible assets		11.64%		11.94%

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, 2020. 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, 2020.

Emerging Growth Company

The Jump Start Our Business Start-ups, or JOBS Act, permits an “emerging growth company” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. The Company decided not to take advantage of this provision and 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 of the extended transition period under the JOBS Act is irrevocable.

Recently Issued Accounting Pronouncements

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

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.

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

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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 September 30, 2021, 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

The Bank is the subject of an investigation by FinCEN regarding the Bank’s compliance with the BSA and AML laws and regulations and may face material civil money penalties.

On September 7, 2021, the OCC terminated the Formal Agreement, dated June 18, 2020 between the Bank and the OCC relating to the Bank’s BSA/AML compliance program. Although the OCC terminated the Formal Agreement, the Bank may still incur a civil money penalty from the OCC. In addition, the Bank remains the subject of an investigation by FinCEN and is cooperating with this investigation. The Bank has incurred material fees and expenses regarding this matter and may continue to incur material fees and expenses regarding this matter at least through the completion of FinCEN’s investigation. The Bank is in discussions with FinCEN to explore a potential resolution of its investigation which could include a civil monetary penalty against the Bank. As of the date hereof, the Company cannot reasonably estimate a single amount of loss associated with any potential resolution with FinCEN or the OCC; however, the Company estimates the potential range of a civil money penalty from FinCEN to be between zero and $10 million. Accordingly, the Company has not accrued a loss contingency within the condensed consolidated financial statements as of September 30, 2021. The terms of the resolution and/or the amount of a civil money penalty that FinCEN and/or the OCC could assess against the Bank are uncertain and the minimum amount in the range is not necessarily the amount of loss that will be ultimately incurred. The amount of any civil money penalty may have a material adverse impact on the Company and its financial condition and results of operations.

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 2020, the Company’s Board of Directors authorized a share repurchase program, or the 2020 Repurchase Program, under which the Company could repurchase up to $40.0 million of the Company’s common stock starting October 1, 2020 through September 30, 2021. In 2021, the Company’s Board of Directors authorized a share repurchase program, or the 2021 Repurchase Program, under which the Company may repurchase up to $40.0 million of the Company’s common stock starting September 16, 2021 through September 30, 2022.

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Repurchases under the 2021 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.

The following table provides information with respect to purchases of shares of the Company’s common stock during the three months ended September 30, 2021 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.




				Total Number of	Maximum
				Shares Purchased	Number of Shares That
	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⁾
July 1, 2021 - July 31, 2021	—		—	—	1,222,895
August 1, 2021 - August 31, 2021	122		$ 25.86	33,130	1,150,055
September 1, 2021 - September 30, 2021	—		—	—	1,516,300

(1)

Represents 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)

Purchased under the 2020 Repurchase Program described above.

(3)

Computed based on the closing share price of the Company’s common stock as of the end of each period shown above and reflects the additional shares that may be repurchased at the end of the designated period based on the 2020 Repurchase Program for the July and August figures and based on the 2021 Repurchase Program for the September figure.

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		First Amended and Restated Certificate of Formation of CBTX, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form S-1 filed with the Commission on October 13, 2017, File No. 333-220930)

3.2		Second Amended and Restated Bylaws of CBTX, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Form S-1 filed with the Commission on October 13, 2017, File No. 333-220930)

4.1		Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Form S-1 filed with the Commission on October 13, 2017, File No. 333-220930)

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

101*		The following materials from CBTX’s Quarterly Report on Form 10‑Q for the quarter ended September 30, 2021, 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*		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed with this Quarterly Report on Form 10-Q

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

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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: October 27, 2021		/s/ Robert R. Franklin, Jr.
		Robert R. Franklin, Jr.
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)



Date: October 27, 2021		/s/ Robert T. Pigott, Jr.
		Senior Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Stellar Bancorp (STEL) 10-Q2021 Q3 Quarterly report

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