# FIRST FINANCIAL BANKSHARES INC (FFIN) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FIRST FINANCIAL BANKSHARES INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/36029/000095017022001583/ffin-20211231.htm
Accession: 0000950170-22-001583
Filing date: 2022-02-22
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FFIN/
All MD&A years: /company/FFIN/mda/
Next year: /company/FFIN/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited to those listed in “Item 1A – Risk Factors” and in the “Cautionary Statement Regarding Forward-Looking Statements” notice on page 1.

Introduction

As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, gain on sale of mortgage loans and service charges. Our primary source of funding for our loans and investments are deposits held by our bank subsidiary, First Financial Bank, N.A. Our largest expenses are salaries and related employee benefits. We measure our performance by calculating our return on average assets, return on average equity, regulatory capital ratios, net interest margin and efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income.

The following discussion and analysis of the major elements of our consolidated balance sheets as of December 31, 2021 and 2020, and consolidated statements of earnings for the years 2019 through 2021 should be read in conjunction with our consolidated financial statements, accompanying notes, and selected financial data presented elsewhere in this Form 10-K.

Critical Accounting Policies

We prepare consolidated financial statements based on generally accepted accounting principles (“GAAP”) and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions.

We deem a policy critical if (1) the accounting estimate required us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (2) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements.

We deem our most critical accounting policies to be (1) our allowance for credit losses and our provision for credit losses and (2) our valuation of financial instruments. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period. A discussion of (1) our allowance for credit losses and our provision for credit losses and (2) our valuation of financial instruments is included in Notes 1 and 10, respectively, to our Consolidated Financial Statements.

Acquisitions

On September 19, 2019, we entered into an agreement and plan of reorganization to acquire TB&T Bancshares, Inc. and its wholly-owned bank subsidiary, The Bank & Trust of Bryan/College Station, Texas. On January 1, 2020, the transaction was completed. Pursuant to the agreement, we issued 6.28 million shares of the Company’s common shares in exchange for all of the outstanding shares of TB&T Bancshares, Inc. In addition, in accordance with the plan of reorganization, TB&T Bancshares, Inc. paid a special dividend totaling $1.92 million to its shareholders prior to the closing of this transaction. At the closing, Brazos Merger Sub, Inc., a wholly-owned subsidiary of the Company, merged into TB&T Bancshares Inc., with TB&T Bancshares, Inc. surviving as a wholly-owned subsidiary of the Company. Immediately following such merger, TB&T Bancshares, Inc. was merged into the Company and The Bank & Trust of Bryan/College Station, Texas was merged into First Financial Bank, N.A., a wholly-owned subsidiary of the Company. The total purchase price of $220.27 million exceeded the estimated fair value of the net assets acquired by approximately $141.92 million and the Company recorded such excess as goodwill. The balance sheet and results of operations of TB&T Bancshares, Inc. have been included in the financial statements of the Company effective January 1, 2020.

Stock Split and Increase in Authorized Shares

On April 23, 2019, the Company’s Board of Directors declared a two-for-one stock split of the Company’s outstanding common shares effective June 3, 2019. In addition, the shareholders of the Company approved an amendment to the Amended and Restated Certificate of Formation to increase the number of authorized shares to 200,000,000. All per share amounts in this report have been restated to reflect this stock split. An amount equal to the par value of the additional common shares to be issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock in the consolidated financial statements as of and for the year ended December 31, 2019.

34

Table of Contents

Stock Repurchase

On July 27, 2021, the Company's Board of Directors authorized the repurchase of up to 5,000,000 common shares through July 31, 2023. Previously, the Board of Directors had authorized the repurchase of up to 2,000,000 common shares through September 30, 2020. On March 12, 2020, the Company’s Board of Directors increased the authorization for the repurchase of up to 4,000,000 common shares through September 30, 2021. The stock repurchase plan authorizes management to repurchase and retire the stock at such time as repurchases are considered beneficial to the Company and its stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number of shares that the Company is required to repurchase. Through July 27, 2021, 324,802 shares were repurchased and retired (all during the months of March and April of 2020) totaling $8,008,000 under the prior repurchase plan. Subsequent to July 27, 2021 and through February 22, 2022, no additional shares were repurchased.

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

On January 1, 2020, Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, became effective for the Company. Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) replaced the previous “incurred loss” model for measuring credit losses with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance-sheet (“OBS”, “reserve for unfunded commitments”) credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

On March 27, 2020, the CARES Act was signed by the President of the United States that included an option for entities to delay the implementation of ASC 326 until the earlier of the termination date of the national emergency declaration by the President, or December 31, 2020. Under this option, the Company elected to delay implementation of CECL and calculated and recorded the provision for credit losses through the nine-months ended September 30, 2020 under the incurred loss model. At December 31, 2020, the Company elected to adopt ASC 326, effective as of January 1, 2020, through a transition charge to retained earnings of $589 thousand ($466 thousand net of applicable income taxes), which was reflected in the consolidated financial statements as of and for the year-ended December 31, 2020 . This transition adjustment was comprised of a decrease of $619 thousand in allowance for credit losses and an increase of $1.21 million in the reserve for unfunded commitments.

The Company completed its CECL implementation plan by forming a cross-functional working group, under the direction of our Chief Lending Officer along with our Chief Accounting Officer and Chief Financial Officer. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. The implementation plan included assessment and documentation of processes, internal controls and data sources, model development, documentation and validation, and system configuration, among other things. The Company contracted with a third-party vendor to assist in the implementation of CECL.

Other Recently Issued and Effective Authoritative Accounting Guidance

ASU 2017-04, “Intangibles – Goodwill and Other.” ASU 2017-04 amended and simplified current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. ASU 2017-04 became effective for the Company on January 1, 2020 and did not have a significant impact on the Company’s financial statements.

ASU 2018-13, “Fair Value Measurement (Topic 820). – Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modified the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 became effective on January 1, 2020 and did not have a significant impact on the Company’s financial statements.

ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12, simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intra-period tax aspects of the accounting for

35

Table of Contents

franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 was effective for the Company for annual reporting periods after December 15, 2020, and interim periods within. Adoption of ASU 2019-12 did not have a significant impact on the Company’s financial statements and related disclosures.

ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. ASU2020-04 was effective upon issuance and generally can be applied through December 31, 2022. The adoption of ASU 2020-04 did not have a significant impact on our financial statements.

ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” ASU 2021-01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance and generally can be applied through December 31, 2022. The adoption of ASU 2021-01 did not have a significant impact on our financial statements.

36

Table of Contents

Selected Financial Data

The selected financial data presented below as of and for the years ended December 31, 2021, 2020, 2019, 2018, and 2017, have been derived from our audited consolidated financial statements. The data set forth below may not be fully comparable from period to period due to acquisitions in 2020 and 2018 and changes in accounting, including the allowance for credit losses in 2020 (see Notes 1, 3 and 21 to the Notes to Consolidated Financial Statements for further information). The results of operations presented below are not necessarily indicative of the results of operations that may be achieved in the future.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","2019","","","2018","","","2017"],["","","(dollars in thousands, except per share data)"],["Summary Income Statement Information:"],["Interest income","","$","376,405","","","$","364,128","","","$","319,192","","","$","291,690","","","$","245,975"],["Interest expense","","","6,042","","","","14,243","","","","30,102","","","","18,930","","","","9,288"],["Net interest income","","","370,363","","","","349,885","","","","289,090","","","","272,760","","","","236,687"],["Provision for credit losses","","","(1,139",")","","","19,517","","","","2,965","","","","5,665","","","","6,530"],["Noninterest income","","","142,176","","","","139,935","","","","108,428","","","","101,764","","","","91,017"],["Noninterest expense","","","241,708","","","","227,938","","","","196,521","","","","190,684","","","","173,986"],["Earnings before income taxes","","","271,970","","","","242,365","","","","198,032","","","","178,175","","","","147,188"],["Income tax expense","","","44,408","","","","40,331","","","","33,220","","","","27,537","","","","26,817"],["Net earnings","","$","227,562","","","$","202,034","","","$","164,812","","","$","150,638","","","$","120,371"],["Per Share Data:"],["Earnings per share, basic","","$","1.60","","","$","1.42","","","$","1.22","","","$","1.11","","","$","0.91"],["Earnings per share, diluted","","","1.59","","","","1.42","","","","1.21","","","","1.11","","","","0.91"],["Cash dividends declared","","","0.58","","","","0.51","","","","0.47","","","","0.41","","","","0.38"],["Book value at period-end","","","12.34","","","","11.80","","","","9.03","","","","7.77","","","","6.97"],["Earnings performance ratios:"],["Return on average assets","","","1.89","%","","","1.98","%","","","2.08","%","","","1.98","%","","","1.72","%"],["Return on average equity","","","13.31","","","","12.93","","","","14.37","","","","15.37","","","","13.63"],["Dividend payout ratio","","","36.30","","","","35.88","","","","38.31","","","","36.84","","","","41.24"],["Summary Balance Sheet Data (Period-end):"],["Securities","","$","6,573,179","","","$","4,393,029","","","$","3,413,317","","","$","3,158,777","","","$","3,087,473"],["Loans, held-for-investment","","","5,388,972","","","","5,171,033","","","","4,194,969","","","","3,953,636","","","","3,485,569"],["Total assets","","","13,102,461","","","","10,904,500","","","","8,262,227","","","","7,731,854","","","","7,254,715"],["Deposits","","","10,566,488","","","","8,675,817","","","","6,603,806","","","","6,180,389","","","","5,962,961"],["Total liabilities","","","11,343,237","","","","9,226,310","","","","7,035,030","","","","6,678,559","","","","6,331,947"],["Total shareholders\u2019 equity","","","1,759,224","","","","1,678,190","","","","1,227,197","","","","1,053,295","","","","922,768"],["Asset quality ratios:"],["Allowance for credit losses/period-end loans held-for-investment","","","1.18","%","","","1.29","%","","","1.25","%","","","1.30","%","","","1.38","%"],["Nonperforming assets/period-end loans held- for-investment plus foreclosed assets","","","0.63","","","","0.83","","","","0.61","","","","0.75","","","","0.58"],["Net charge offs/average loans","","","0.02","","","","0.06","","","","0.04","","","","0.07","","","","0.12"],["Capital ratios:"],["Average shareholders\u2019 equity/average assets","","","14.20","%","","","15.32","%","","","14.44","%","","","12.89","%","","","12.65","%"],["Leverage ratio (1)","","","11.13","","","","11.86","","","","12.60","","","","11.85","","","","11.09"],["Tier 1 risk-based capital (2)","","","19.35","","","","20.79","","","","20.06","","","","19.47","","","","18.66"],["Common equity tier 1 capital (3)","","","19.35","","","","20.79","","","","20.06","","","","19.47","","","","18.66"],["Total risk-based capital (4)","","","20.34","","","","22.03","","","","21.13","","","","20.61","","","","19.85"]]
[[/GREPCENT_TABLE]]

(1)
Calculated by dividing at period-end, shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets by fourth quarter average assets less intangible assets.

(2)
Calculated by dividing at period-end, shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets by risk-adjusted assets.

(3)
Calculated by dividing at period-end, shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets by risk-adjusted assets.

(4)
Calculated by dividing at period-end, shareholders’ equity (before accumulated other comprehensive earnings/loss) less intangible assets plus allowance for loan losses to the extent allowed under regulatory guidelines by risk-adjusted assets.

37

Table of Contents

Results of Operations

Performance Summary. Net earnings for 2021 were $227.56 million, an increase of $25.53 million, or 12.64%, over net earnings for 2020 of $202.03 million. Net earnings for 2019 were $164.81 million. The increase in net earnings for 2021 over 2020 and 2020 over 2019 was primarily attributable to the overall growth in net interest income from the growth in earning assets, lower funding costs and noninterest income from trust, mortgage and deposit related fees as discussed below. Net earnings in 2021 also include a net reversal of provision for credit losses of $1.14 million compared to a positive provision for credit losses of $19.52 million in 2020 and $2.97 million in 2019. The net reversal of the Company's provision for credit losses in 2021 reflects the continued improvement in the economic outlook for our markets across Texas and overall improvements in asset quality offset by loan growth. The provision for credit losses in 2020 reflected primarily the stress on our loan portfolio from the increase in unemployment and economic effects of the COVID pandemic.

On a diluted net earnings per share basis, net earnings were $1.59 for 2021, as compared to $1.42 for 2020 and $1.21 for 2019. The return on average assets was 1.89% for 2021, as compared to 1.98% for 2020 and 2.08% for 2019. The return on average equity was 13.31% for 2021, as compared to 12.93% for 2020 and to 14.37% for 2019. The return on average tangible equity was 16.35% for 2021, as compared to 16.25% for 2020 and to 16.95% for 2019.

Net Interest Income. Net interest income is the difference between interest income on earning assets and interest expense on liabilities incurred to fund those assets. Our earning assets consist primarily of loans and investment securities. Our liabilities to fund those assets consist primarily of noninterest-bearing and interest-bearing deposits.

Tax-equivalent net interest income was $385.05 million in 2021, as compared to $361.15 million in 2020, and $295.88 million in 2019. Average earning assets were $11.34 billion in 2021, as compared to $9.52 billion in 2020 and $7.44 billion in 2019. The increase in tax-equivalent net interest income in 2021 compared to 2020 was largely attributable to increases in interest earning assets. The increase of $1.82 billion in average earning assets in 2021 when compared to 2020 was primarily a result of increases in taxable securities of $665.29 million and tax-exempt securities of $620.51 million when compared to 2020. The increase in tax-equivalent net interest income in 2020 compared to 2019 was also largely attributable to increases in interest earning assets. The increase of $2.08 billion in average earning assets in 2020 when compared to 2019 was primarily a result of increases in loans of $1.08 billion and tax-exempt securities of $689.80 million when compared to 2019. Average interest-bearing liabilities were $6.78 billion in 2021, as compared to $5.76 billion in 2020 and $4.61 billion in 2019. The yield on earning assets decreased forty-nine basis points in 2021 when compared to 2020 while the rate paid on interest-bearing liabilities decreased sixteen basis points. The yield on earning assets decreased forty-four basis points in 2020 when compared to 2019 while the rate paid on interest-bearing liabilities decreased forty basis points. Additionally, interest income on loans included PPP related loan fees of $23.49 million and $14.96 million for 2021 and 2020, respectively.

38

Table of Contents

The table below allocates the change in tax-equivalent net interest income between the amount of change attributable to volume and to rate.

Changes in Interest Income and Interest Expense (in thousands):

[[GREPCENT_TABLE]]
[["","","2021 Compared to 2020","","","2020 Compared to 2019"],["","","Change Attributable to","","","Total","","","Change Attributable to","","","Total"],["","","Volume","","","Rate","","","Change","","","Volume","","","Rate","","","Change"],["Short-term investments","","$","1,286","","","$","(1,500",")","","$","(214",")","","$","3,689","","","$","(4,628",")","","$","(939",")"],["Taxable investment securities","","","15,326","","","","(19,392",")","","","(4,066",")","","","3,812","","","","(8,026",")","","","(4,214",")"],["Tax-exempt investment securities (1)","","","19,249","","","","(7,399",")","","","11,850","","","","24,671","","","","(8,932",")","","","15,739"],["Loans (1) (2)","","","9,696","","","","(1,558",")","","","8,138","","","","59,719","","","","(20,900",")","","","38,819"],["Interest income","","","45,557","","","","(29,849",")","","","15,708","","","","91,891","","","","(42,486",")","","","49,405"],["Interest-bearing deposits","","","2,589","","","","(10,004",")","","","(7,415",")","","","6,379","","","","(20,382",")","","","(14,003",")"],["Short-term borrowings","","","(10",")","","","(776",")","","","(786",")","","","1,223","","","","(3,079",")","","","(1,856",")"],["Interest expense","","","2,579","","","","(10,780",")","","","(8,201",")","","","7,602","","","","(23,461",")","","","(15,859",")"],["Net interest income","","$","42,978","","","$","(19,069",")","","$","23,909","","","$","84,289","","","$","(19,025",")","","$","65,264"]]
[[/GREPCENT_TABLE]]

(1)
Computed on a tax-equivalent basis assuming a marginal tax rate of 21%.

(2)
Nonaccrual loans are included in loans.

The net interest margin for 2021 was 3.40% which was a decrease of thirty-nine basis points from 2020. The net interest margin in 2020 was 3.79%, a decrease of nineteen basis points from 2019. We continued to experience downward pressures on our net interest margin in 2021 primarily due to (i) the extended period of historically low levels of short-term interest rates and (ii) the flat to inverted yield curve being experienced in the bond market. We have been able to somewhat mitigate the impact of these lower short-term interest rates and the flat/inverted yield curve by establishing minimum interest rates on certain of our loans, improving the pricing for loan risk, and reducing the rates paid on interest-bearing liabilities. In March 2020, as the market experienced volatility, we took advantage of that volatility to purchase high quality municipal bonds at favorable tax-equivalent interest yields. The Federal Reserve decreased rates 75 basis points during the third and fourth quarters of 2019 and then an additional 150 basis points in the first quarter of 2020, resulting in a current target rate range of zero to 25 basis points.

39

Table of Contents

The net interest margin, which measures tax-equivalent net interest income as a percentage of average earning assets, is illustrated in the table below for the years 2019 through 2021.

Average Balances and Average Yields and Rates (in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","","2021","","","2020","","","2019"],["","","Average Balance","","","Income/ Expense","","","Yield/ Rate","","","Average Balance","","","Income/ Expense","","","Yield/ Rate","","","Average Balance","","","Income/ Expense","","","Yield/ Rate"],["Assets"],["Short-term investments (1)","","$","592,494","","","$","739","","","","0.12","%","","$","251,086","","","$","953","","","","0.38","%","","$","84,430","","","$","1,892","","","","2.24","%"],["Taxable investment securities (2)","","","2,898,924","","","","47,390","","","","1.63","","","","2,233,634","","","","51,456","","","","2.30","","","","2,090,490","","","","55,670","","","","2.66"],["Tax-exempt investment securities (2)(3)","","","2,503,220","","","","70,253","","","","2.81","","","","1,882,711","","","","58,403","","","","3.10","","","","1,192,908","","","","42,664","","","","3.58"],["Loans (3)(4)","","","5,341,332","","","","272,714","","","","5.11","","","","5,152,531","","","","264,576","","","","5.13","","","","4,074,667","","","","225,757","","","","5.54"],["Total earning assets","","","11,335,970","","","$","391,096","","","","3.45","%","","","9,519,962","","","$","375,388","","","","3.94","%","","","7,442,495","","","$","325,983","","","","4.38","%"],["Cash and due from banks","","","209,384","","","","","","","","","","189,849","","","","","","","","","","175,417"],["Bank premises and equipment, net","","","145,504","","","","","","","","","","139,880","","","","","","","","","","133,239"],["Other assets","","","97,952","","","","","","","","","","92,612","","","","","","","","","","66,003"],["Goodwill and other intangible assets, net","","","317,527","","","","","","","","","","318,818","","","","","","","","","","174,138"],["Allowance for credit losses","","","(64,082",")","","","","","","","","","(67,606",")","","","","","","","","","(52,170",")"],["Total assets","","$","12,042,255","","","","","","","","","$","10,193,515","","","","","","","","","$","7,939,122"],["Liabilities and Shareholders\u2019 Equity"],["Interest-bearing deposits","","$","6,224,621","","","$","5,704","","","","0.09","%","","$","5,198,554","","","$","13,119","","","","0.25","%","","$","4,208,666","","","$","27,122","","","","0.64","%"],["Short-term borrowings","","","556,610","","","","338","","","","0.06","","","","561,505","","","","1,124","","","","0.20","","","","398,142","","","","2,980","","","","0.75"],["Total interest-bearing liabilities","","","6,781,231","","","$","6,042","","","","0.09","%","","","5,760,059","","","$","14,243","","","","0.25","%","","","4,606,808","","","$","30,102","","","","0.65","%"],["Noninterest-bearing deposits","","","3,449,313","","","","","","","","","","2,782,896","","","","","","","","","","2,137,089"],["Other liabilities","","","102,279","","","","","","","","","","88,550","","","","","","","","","","48,658"],["Total liabilities","","","10,332,823","","","","","","","","","","8,631,505","","","","","","","","","","6,792,555"],["Shareholders\u2019 equity","","","1,709,432","","","","","","","","","","1,562,010","","","","","","","","","","1,146,567"],["Total liabilities and shareholders\u2019 equity","","$","12,042,255","","","","","","","","","$","10,193,515","","","","","","","","","$","7,939,122"],["Net interest income","","","","","$","385,054","","","","","","","","","$","361,145","","","","","","","","","$","295,881"],["Rate Analysis:"],["Interest income/earning assets","","","","","","","","","3.45","%","","","","","","","","","3.94","%","","","","","","","","","4.38","%"],["Interest expense/earning assets","","","","","","","","","(0.05",")","","","","","","","","","(0.15",")","","","","","","","","","(0.40",")"],["Net interest margin","","","","","","","","","3.40","%","","","","","","","","","3.79","%","","","","","","","","","3.98","%"]]
[[/GREPCENT_TABLE]]

(1)
Short-term investments are comprised of federal funds sold, interest-bearing deposits in banks and interest- bearing time deposits in banks.

(2)
Average balances include unrealized gains and losses on available-for-sale securities.

(3)
Computed on a tax-equivalent basis assuming a marginal tax rate of 21%.

(4)
Nonaccrual loans are included in loans.

Noninterest Income. Noninterest income for 2021 was $142.18 million, an increase of $2.24 million, or 1.60%, as compared to 2020. Increases in certain categories of noninterest income included (1) trust fees of $6.61 million, (2) ATM, interchange and credit card fees of $5.81 million, (3) interest on loan recoveries of $3.18 million and (4) service charges on deposit accounts of $584 thousand when compared to 2020. The increase in trust fees resulted from an increase in assets under management over the prior year and an increase in oil and gas production driven by increasing oil and gas prices. The fair value of our trust assets managed, which are not reflected in our consolidated balance sheets, totaled $8.70 billion at December 31, 2021, as compared to $7.51 billion at December 31, 2020. Oil and gas production income increased related trust fees by $1.87 million in 2021 over 2020. The increase in ATM, interchange and credit card fees was driven by the over 16,000 net new accounts opened in 2021, debit cards issued and overall customer utilization. Interest on loan recoveries increased as a result of several larger loan recoveries in 2021. The increase in service charges on deposit accounts was primarily due to the continued growth in net new accounts and growth in treasury management services. Offsetting these increases was a decrease of $10.63 million in mortgage income due to lower overall origination volumes and declining margins on loan sales.

40

Table of Contents

Noninterest income for 2020 was $139.94 million, an increase of $31.51 million, or 29.06%, as compared to 2019. Increases in certain categories of noninterest income included (1) real estate mortgage operations income of $25.73 million, (2) gain on sale of available-for-sale securities of $2.90 million, (3) ATM, interchange and credit card fees of $2.61 million, (4) miscellaneous income of $2.12 million which includes $1.40 million in Main Street Lending Program fees and (5) trust fees of $1.13 million when compared to 2019. The mortgage related income increase was mainly due to a significant increase in the volume of loans originated to $1.21 billion in 2020 up from $551.77 million in 2019 driven by the lower rate environment and a strong housing market in Texas. The increase in ATM, interchange and credit card fees was driven by continued growth in the number of debit cards issued as well as our TB&T acquisition. The increase in trust fees resulted from an increase in assets under management over the prior year. The fair value of our trust assets managed, which are not reflected in our consolidated balance sheets, totaled $7.51 billion at December 31, 2020, as compared to $6.75 billion at December 31, 2019. Offsetting these increases was a decline in service charge revenue in 2020 when compared with 2019 of $1.47 million that was primarily driven by lower overdraft fees in the current year as a result of the effects of the pandemic and related stimulus programs.

ATM and interchange fees are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. ATM and interchange fees consist of income from debit card usage, point of sale income for debit card transactions and ATM service fees.

Federal Reserve rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is limited to the sum of 21 cents per transaction plus 5 basis points multiplied by the value of the transaction. Management has estimated the impact of this reduction in ATM and interchange fees to approximate $16 million annually (pre-tax) once the Federal Reserve rules apply to the Company. Federal Reserve requirements stipulate that these rules would go into effect on July 1st following the year-end in which a financial institution’s total assets exceeded $10 billion at December 31st. This effect was delayed to 2021 by the Federal Reserve in late 2020; however, will become effective for the Company on July 1, 2022.

Noninterest Income (in thousands):

[[GREPCENT_TABLE]]
[["","","2021","","","Increase (Decrease)","","","2020","","","Increase (Decrease)","","","2019"],["Trust fees","","$","36,145","","","$","6,614","","","$","29,531","","","$","1,130","","","$","28,401"],["Service charges on deposit accounts","","","21,156","","","","584","","","","20,572","","","","(1,467",")","","","22,039"],["ATM, interchange and credit card fees","","","38,278","","","","5,809","","","","32,469","","","","2,606","","","","29,863"],["Gain on sale and fees of mortgage loans","","","33,245","","","","(10,627",")","","","43,872","","","","25,728","","","","18,144"],["Net gain on sale of available-for-sale securities","","","815","","","","(2,818",")","","","3,633","","","","2,900","","","","733"],["Net gain (loss) on sale of foreclosed assets","","","190","","","","31","","","","159","","","","(115",")","","","274"],["Net gain (loss) on sale of assets","","","210","","","","98","","","","112","","","","(207",")","","","319"],["Interest on loan recoveries","","","4,039","","","","3,183","","","","856","","","","(1,236",")","","","2,092"],["Other:"],["Wire transfer fees","","","1,424","","","","271","","","","1,153","","","","141","","","","1,012"],["Check printing fees","","","212","","","","(81",")","","","293","","","","82","","","","211"],["Safe deposit rental fees","","","867","","","","135","","","","732","","","","197","","","","535"],["Credit life and debt protection fees","","","1,093","","","","217","","","","876","","","","(102",")","","","978"],["Brokerage commissions","","","1,392","","","","82","","","","1,310","","","","(271",")","","","1,581"],["Miscellaneous income","","","3,110","","","","(1,257",")","","","4,367","","","","2,121","","","","2,246"],["Total other","","","8,098","","","","(633",")","","","8,731","","","","2,168","","","","6,563"],["Total Noninterest Income","","$","142,176","","","$","2,241","","","$","139,935","","","$","31,507","","","$","108,428"]]
[[/GREPCENT_TABLE]]

Noninterest Expense. Total noninterest expense for 2021 amounted to $241.71 million, an increase of $13.77 million, or 6.04%, as compared to 2020. Total noninterest expense for 2020 was $227.94 million, an increase of $31.42 million, or 15.99%, as compared to 2019. An important measure in determining whether a financial institution effectively manages noninterest expenses is the efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax-equivalent basis and noninterest income. Lower ratios indicate better efficiency since more income is generated with a lower noninterest expense total. Our efficiency ratio for 2021 was 45.84%, as compared to 45.49% for 2020 and 48.61% for 2019. The reduction in the Company’s efficiency ratio during 2020 primarily resulted from the growth in the Company’s balance sheet and interest-earning assets as a result of the Company’s participation in the PPP loan program and the deferral of $3.62 million in noninterest expenses related to PPP loan origination costs during the second quarter of 2020.

41

Table of Contents

Salaries and employee benefits for 2021 totaled $142.04 million, an increase of $6.92 million, or 5.12%, as compared to 2020. The increase was primarily driven by annual merit-based pay increases that were effective March 1, 2021 and an increase in medical insurance costs.

All other categories of noninterest expense for 2021 totaled $99.67 million, an increase of $6.85 million, or 7.38%, as compared to 2020. Included in noninterest expense during 2021 was an increase of $1.37 million in FDIC insurance premiums due to FDIC credit applied in 2020 as previously discussed.

Salaries and employee benefits for 2020 totaled $135.12 million, an increase of $22.79 million, or 20.28%, as compared to 2019. The increase was primarily driven by (i) the TB&T acquisition, (ii) annual merit-based pay increases that were effective March 1, 2020, (iii) an increase in our profit sharing and other incentive expenses, and (iv) higher mortgage related commissions.

All other categories of noninterest expense for 2020 totaled $92.82 million, an increase of $8.63 million, or 10.25%, as compared to 2019. Included in noninterest expense in 2020 were technology contract termination and conversion related expenses totaling $4.88 million related to the TB&T acquisition. Also included in noninterest expense during 2020 were increases in net occupancy expenses, professional and service fees and ATM, interchange and credit card expenses when compared to 2019 primarily due to the TB&T acquisition. Also, in 2019 the Company incurred $2.67 million in expenses related to the termination of its pension plan.

42

Table of Contents

Noninterest Expense (in thousands):

[[GREPCENT_TABLE]]
[["","","2021","","","Increase (Decrease)","","","2020","","","Increase (Decrease)","","","2019"],["Salaries","","$","107,656","","","$","6,296","","","$","101,360","","","$","17,079","","","$","84,281"],["Medical","","","11,043","","","","637","","","","10,406","","","","1,281","","","","9,125"],["Profit sharing","","","10,134","","","","(606",")","","","10,740","","","","3,079","","","","7,661"],["Pension","","","\u2014","","","","\u2014","","","","\u2014","","","","(351",")","","","351"],["401(k) match expense","","","3,590","","","","216","","","","3,374","","","","615","","","","2,759"],["Payroll taxes","","","6,974","","","","409","","","","6,565","","","","890","","","","5,675"],["Stock option expense","","","1,316","","","","(61",")","","","1,377","","","","(112",")","","","1,489"],["Restricted stock expense","","","1,329","","","","28","","","","1,301","","","","306","","","","995"],["Total salaries and employee benefits","","","142,042","","","","6,919","","","","135,123","","","","22,787","","","","112,336"],["Cost related to termination of pension plan","","","\u2014","","","","\u2014","","","","\u2014","","","","(2,673",")","","","2,673"],["Net occupancy expense","","","13,009","","","","621","","","","12,388","","","","1,232","","","","11,156"],["Equipment expense","","","9,173","","","","777","","","","8,396","","","","(656",")","","","9,052"],["FDIC insurance premiums","","","3,130","","","","1,372","","","","1,758","","","","667","","","","1,091"],["ATM, interchange and credit card expenses","","","11,973","","","","738","","","","11,235","","","","1,379","","","","9,856"],["Professional and service fees","","","9,334","","","","(12",")","","","9,346","","","","1,493","","","","7,853"],["Printing, stationery and supplies","","","1,910","","","","(253",")","","","2,163","","","","351","","","","1,812"],["Amortization of intangible assets","","","1,613","","","","(377",")","","","1,990","","","","974","","","","1,016"],["Other:"],["Data processing fees","","","1,782","","","","163","","","","1,619","","","","69","","","","1,550"],["Postage","","","1,539","","","","93","","","","1,446","","","","(101",")","","","1,547"],["Advertising","","","3,025","","","","1,073","","","","1,952","","","","(1,655",")","","","3,607"],["Correspondent bank service charges","","","1,001","","","","93","","","","908","","","","201","","","","707"],["Telephone","","","3,627","","","","(192",")","","","3,819","","","","141","","","","3,678"],["Public relations and business development","","","3,343","","","","693","","","","2,650","","","","(556",")","","","3,206"],["Directors\u2019 fees","","","2,374","","","","11","","","","2,363","","","","391","","","","1,972"],["Audit and accounting fees","","","1,759","","","","(473",")","","","2,232","","","","772","","","","1,460"],["Legal fees and other related costs","","","2,251","","","","975","","","","1,276","","","","62","","","","1,214"],["Regulatory exam fees","","","1,423","","","","318","","","","1,105","","","","(74",")","","","1,179"],["Travel","","","1,418","","","","451","","","","967","","","","(674",")","","","1,641"],["Courier expense","","","948","","","","93","","","","855","","","","(3",")","","","858"],["Operational and other losses","","","3,293","","","","831","","","","2,462","","","","583","","","","1,879"],["Other real estate","","","49","","","","(34",")","","","83","","","","(119",")","","","202"],["Software amortization and expense","","","11,120","","","","2,258","","","","8,862","","","","1,557","","","","7,305"],["Other miscellaneous expense","","","10,572","","","","(2,368",")","","","12,940","","","","5,269","","","","7,671"],["Total other","","","49,524","","","","3,985","","","","45,539","","","","5,863","","","","39,676"],["Total Noninterest Expense","","$","241,708","","","$","13,770","","","$","227,938","","","$","31,417","","","$","196,521"]]
[[/GREPCENT_TABLE]]

Income Taxes. Income tax expense was $44.41 million for 2021, as compared to $40.33 million for 2020 and $33.22 million for 2019. Our effective tax rates on pretax income were 16.33%, 16.64% and 16.78%, respectively, for the years 2021, 2020 and 2019. The effective tax rates differ from the statutory federal tax rate of 21.0% largely due to tax exempt interest income earned on certain investment securities and loan.

Balance Sheet Review

Loans. Our portfolio is comprised of loans made to businesses, professionals, individuals, and farm and ranch operations located in the primary trade areas throughout Texas served by our subsidiary bank. As of December 31, 2021, total loans held-for-investment were $5.39 billion, an increase of $217.94 million, as compared to December 31, 2020. During 2021, the Company originated $267.42 million in additional PPP loans and forgave $698.29 million resulting in a balance of $52.79 million at December 31, 2021, which are included in the Company’s commercial loan totals. The average balances of PPP loans were $327.10 million and $479.43 million for the years ended December 31, 2021 and 2020, respectively. At December 31, 2021, $1.80 million of deferred loan fees related to PPP loans continues to be amortized over the shorter of the repayment period or the contractual life of 24 to 60 months.

43

Table of Contents

As compared to year-end 2020 balances, total real estate loans increased $427.25 million, total commercial loans decreased $297.73 million, agricultural loans increased $3.23 million and total consumer loans increased $85.19 million. Loans averaged $5.34 billion during 2021, an increase of $188.80 million over 2020 average balances.

In conjunction with the adoption of ASC 326, the Company expanded its four loan portfolio segments used under the legacy disclosure requirements into the following ten portfolio segments. For modeling purposes, our loan portfolio segments include Commercial and Industrial (“C&I”), Municipal, Agricultural, Construction and Development, Farm, Non-Owner Occupied and Owner Occupied Commercial Real Estate (“CRE”), Residential, Consumer Auto and Consumer Non-Auto. This additional segmentation allows for a more precise pooling of loans with similar credit risk characteristics and credit monitor procedures for the Company’s calculation of its allowance for credit losses.

The table below outlines the composition of the Company’s held-for-investment loans by portfolio segment. For all periods prior to December 31, 2020, management has elected to maintain its previously disclosed loan portfolio segments.

Composition of Loans Held-For-Investment (in thousands):

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2021","","","2020","","","2019","","","2018","","","2017"],["Commercial:"],["C&I","","$","837,075","","","$","1,131,382","","","$ N/A","","","$ N/A","","","$ N/A"],["Municipal","","","177,905","","","","181,325","","","N/A","","","N/A","","","N/A"],["Total Commercial","","","1,014,980","","","","1,312,707","","","","856,326","","","","844,953","","","","684,099"],["Agricultural","","","98,089","","","","94,864","","","","103,640","","","","96,677","","","","94,543"],["Real Estate:"],["Construction & Development","","","749,793","","","","553,959","","","N/A","","","N/A","","","N/A"],["Farm","","","217,220","","","","152,237","","","N/A","","","N/A","","","N/A"],["Non-Owner Occupied CRE","","","623,434","","","","617,686","","","N/A","","","N/A","","","N/A"],["Owner Occupied CRE","","","821,653","","","","746,974","","","N/A","","","N/A","","","N/A"],["Residential","","","1,334,419","","","","1,248,409","","","N/A","","","N/A","","","N/A"],["Total Real Estate","","","3,746,519","","","","3,319,265","","","","2,823,372","","","","2,639,346","","","","2,302,998"],["Consumer:"],["Auto","","","405,416","","","","353,595","","","N/A","","","N/A","","","N/A"],["Non-Auto","","","123,968","","","","90,602","","","N/A","","","N/A","","","N/A"],["Total Consumer","","","529,384","","","","444,197","","","","411,631","","","","372,660","","","","403,929"],["Total","","$","5,388,972","","","$","5,171,033","","","$","4,194,969","","","$","3,953,636","","","$","3,485,569"]]
[[/GREPCENT_TABLE]]

Loans held-for-sale, consisting of secondary market mortgage loans, totaled $37.81 million and $83.97 million at December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, $3.69 million and $4.38 million are valued at the lower of cost or fair value, and the remaining amount is valued under the fair value option.

The Company has certain lending policies and procedures in place that are designed to maximize loan growth with an acceptable level of risk. Management reviews and approves these policies and procedures on an annual basis and makes changes as appropriate with input from our Board of Directors. Management receives and reviews monthly reports related to loan originations, quality, concentrations, delinquencies, nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geographic location.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and include personal guarantees.

Agricultural loans are subject to underwriting standards and processes similar to commercial loans. These agricultural loans are based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most agricultural loans are secured by the agriculture related assets being financed, such as farm land, cattle or equipment, and include personal guarantees.

44

Table of Contents

Real estate loans are also subject to underwriting standards and processes similar to commercial and agricultural loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s real estate portfolio are generally diverse in terms of type and geographic location within Texas. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry. Generally, real estate loans are owner-occupied which further reduces the Company’s risk.

Consumer loan underwriting utilizes methodical credit standards and analysis to supplement the Company’s underwriting policies and procedures. The Company’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimize the Company’s risk.

Maturity Distribution and Interest Sensitivity of Loans at December 31, 2021 (in thousands):

The following tables summarize maturity information of our loan portfolio as of December 31, 2021. The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.

[[GREPCENT_TABLE]]
[["","","Due in One Year or Less","","","After One but Within Five Years","","","After Five but Within Fifteen Years","","","After Fifteen Years","","","Total"],["Commercial:"],["C&I","","$","344,007","","","$","357,673","","","$","73,401","","","$","9,201","","","$","784,282"],["PPP","","","1,970","","","","50,823","","","","\u2014","","","","\u2014","","","","52,793"],["Municipal","","","21,611","","","","42,332","","","78721","","","35241","","","","177,905"],["Total Commercial","","","367,588","","","","450,828","","","","152,122","","","","44,442","","","","1,014,980"],["Agricultural","","","76,603","","","","20,313","","","","1,173","","","","\u2014","","","","98,089"],["Real Estate:"],["Construction & Development","","","383,052","","","","141,248","","","","127,030","","","","98,463","","","","749,793"],["Farm","","","20,467","","","","29,979","","","","113,095","","","","53,679","","","","217,220"],["Non-Owner Occupied CRE","","","18,354","","","","197,726","","","","285,991","","","","121,363","","","","623,434"],["Owner Occupied CRE","","","38,106","","","","158,234","","","","413,565","","","","211,748","","","","821,653"],["Residential","","","103,472","","","","101,174","","","","628,889","","","","500,884","","","","1,334,419"],["Total Real Estate","","","563,451","","","","628,361","","","","1,568,570","","","","986,137","","","","3,746,519"],["Consumer:"],["Auto","","","6,278","","","","390,958","","","","8,180","","","","\u2014","","","","405,416"],["Non-Auto","","","24,073","","","","84,732","","","","11,646","","","","3,517","","","","123,968"],["Total Consumer","","","30,351","","","","475,690","","","","19,826","","","","3,517","","","","529,384"],["Total","","$","1,037,993","","","$","1,575,192","","","$","1,741,691","","","$","1,034,096","","","$","5,388,972"],["% of Total Loans","","","19.26","%","","","29.23","%","","","32.32","%","","","19.19","%","","","100.00","%"]]
[[/GREPCENT_TABLE]]

45

Table of Contents

[[GREPCENT_TABLE]]
[["Loans with fixed interest rates:","","Due in One Year or Less","","","After One but Within Five Years","","","After Five but Within Fifteen Years","","","After Fifteen Years","","","Total"],["Commercial:"],["C&I","","$","52,370","","","$","207,547","","","$","5,462","","","$","\u2014","","","$","265,379"],["PPP","","","1,970","","","","50,823","","","","\u2014","","","","\u2014","","","","52,793"],["Municipal","","","5,868","","","","40,557","","","","65,728","","","","\u2014","","","","112,153"],["Total Commercial","","","60,208","","","","298,927","","","","71,190","","","","\u2014","","","","430,325"],["Agricultural","","","8,818","","","","11,718","","","","482","","","","\u2014","","","","21,018"],["Real Estate:"],["Construction & Development","","","131,342","","","","80,851","","","","32,080","","","","944","","","","245,217"],["Farm","","","5,125","","","","21,537","","","","59,737","","","","2,198","","","","88,597"],["Non-Owner Occupied CRE","","","8,676","","","","130,501","","","","57,792","","","","\u2014","","","","196,969"],["Owner Occupied CRE","","","18,888","","","","112,828","","","","42,992","","","","729","","","","175,437"],["Residential","","","29,432","","","","82,433","","","","415,525","","","","38,018","","","","565,408"],["Total Real Estate","","","193,463","","","","428,150","","","","608,126","","","","41,889","","","","1,271,628"],["Consumer:"],["Auto","","","6,278","","","","390,958","","","","8,180","","","","\u2014","","","","405,416"],["Non-Auto","","","19,291","","","","81,989","","","","11,214","","","","3,099","","","","115,593"],["Total Consumer","","","25,569","","","","472,947","","","","19,394","","","","3,099","","","","521,009"],["Total","","$","288,058","","","$","1,211,742","","","$","699,192","","","$","44,988","","","$","2,243,980"],["% of Total Loans","","","5.35","%","","","22.49","%","","","12.97","%","","","0.83","%","","","41.64","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Loans with floating interest rates:","","Due in One Year or Less","","","After One but Within Five Years","","","After Five but Within Fifteen Years","","","After Fifteen Years","","","Total"],["Commercial:"],["C&I","","$","291,637","","","$","150,126","","","$","67,939","","","$","9,201","","","$","518,903"],["PPP","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Municipal","","","15,743","","","","1,775","","","","12,993","","","","35,241","","","","65,752"],["Total Commercial","","","307,380","","","","151,901","","","","80,932","","","","44,442","","","","584,655"],["Agricultural","","","67,785","","","","8,595","","","","691","","","","\u2014","","","","77,071"],["Real Estate:"],["Construction & Development","","","251,710","","","","60,397","","","","94,950","","","","97,519","","","","504,576"],["Farm","","","15,342","","","","8,442","","","","53,358","","","","51,481","","","","128,623"],["Non-Owner Occupied CRE","","","9,678","","","","67,225","","","","228,199","","","","121,363","","","","426,465"],["Owner Occupied CRE","","","19,218","","","","45,406","","","","370,573","","","","211,019","","","","646,216"],["Residential","","","74,040","","","","18,741","","","","213,364","","","","462,866","","","","769,011"],["Total Real Estate","","","369,988","","","","200,211","","","","960,444","","","","944,248","","","","2,474,891"],["Consumer:"],["Auto","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Non-Auto","","","4,782","","","","2,743","","","","432","","","","418","","","","8,375"],["Total Consumer","","","4,782","","","","2,743","","","","432","","","","418","","","","8,375"],["Total","","$","749,935","","","$","363,450","","","$","1,042,499","","","$","989,108","","","$","3,144,992"],["% of Total Loans","","","13.92","%","","","6.74","%","","","19.35","%","","","18.35","%","","","58.36","%"]]
[[/GREPCENT_TABLE]]

Of the $3.14 billion of the floating interest rate loans shown above, loans totaling $1.36 billion mature or reprice over the next twelve months. Of this amount, approximately $340 million will reprice immediately upon changes in the underlying index rate (primarily U.S. prime rate) with the remaining $1.02 billion being subject to floors above the current index.

Asset Quality. Our loan portfolio is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by bank regulatory agencies. Loans are placed on nonaccrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Nonaccrual, past due 90 days or more and still accruing, and restructured loans plus foreclosed assets were $34.16 million at December 31, 2021, as compared to $42.90 million at December 31, 2020 and $25.77 million at December 31, 2019. As a percent of loans held-for-investment and foreclosed assets, these assets were 0.63% at December 31, 2021, as compared to 0.83% at December 31, 2020 and 0.61% at December 31, 2019. As a percent of total assets, these assets were 0.26% at December 31, 2021, as compared to 0.39% at December 31, 2020 and 0.31% at December 31, 2019. We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming at December 31, 2021.

46

Table of Contents

Supplemental Oil and Gas Information. At December 31, 2021, the Company’s exposure to the oil and gas industry was 2.62% of loans held-for-investment, excluding PPP loans, or $140.03 million, compared to 2.27% of loans held-for-investment, or $106.24 million at December 31, 2020. These oil and gas loans consisted (based on collateral supporting the loan) of (i) development and production loans of 11.07%, (ii) oil and gas field servicing loans of 4.21%, (iii) real estate loans of 33.71%, (iv) accounts receivable and inventory of 22.82%, (v) automobile of 24.92% and (vi) other of 3.27%. These loans have warranted additional scrutiny because of fluctuating oil and gas prices and the COVID pandemic. The Company instituted additional monitoring procedures for these loans and has classified and downgraded loans as appropriate. The following oil and gas information is as of and for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2021","","","2020"],["Oil and gas related loans, excluding PPP loans","","$","140,034","","","$","106,237"],["Oil and gas related loans as a % of total loans held-for- investment, excluding PPP loans","","","2.62","%","","","2.27","%"],["Classified oil and gas related loans","","$","11,821","","","$","13,298"],["Nonaccrual oil and gas related loans","","$","3,701","","","$","4,774"],["Net charge-offs for oil and gas related loans for year then ended","","$","28","","","$","825"]]
[[/GREPCENT_TABLE]]

Additionally, the Company's trust revenues may be impacted by oil and gas prices which represented approximately 12% and 9% of total trust revenues in 2021 and 2020, respectively.

Supplemental COVID Industry Exposure. In addition, at December 31, 2021, loan balances in the retail/restaurant/hospitality industries totaled $526.09 million or 9.86% of the Company’s total loans held-for-investment, excluding PPP loans. Classified and nonperforming loans for these industries combined at December 31, 2021, totaled $32.75 million and $1.49 million, respectively. Net recoveries related to this portfolio totaled $464 thousand for the year ended December 31, 2021. Additional information related to the Company’s retail/restaurant/hospitality industries follows below (in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","","2020"],["Retail loans","$","375,752","","","$","216,244"],["Restaurant loans","","60,894","","","","48,618"],["Hotel loans","","62,404","","","","71,716"],["Other hospitality loans","","26,438","","","","21,970"],["Travel loans","","598","","","","780"],["Total Retail/Restaurant/Hospitality loans, excluding PPP loans","$","526,086","","","$","359,328"],["Retail/Restaurant/Hospitality loans as a % of total loans held- for-investment, excluding PPP loans","","9.86","%","","","7.67","%"],["Classified Retail/Restaurant/Hospitality loans","$","32,747","","","$","31,192"],["Nonaccrual Retail/Restaurant/Hospitality loans","","1,487","","","","5,975"],["Net Charge-Offs (Recoveries) for Retail/Restaurant/Hospitality loans","","(464",")","","","895"]]
[[/GREPCENT_TABLE]]

47

Table of Contents

Nonaccrual, Past Due 90 Days or More and Still Accruing, Restructured Loans and Foreclosed Assets (in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","","At December 31,"],["","","2021","","","2020","","","2019","","","2018","","","2017"],["Nonaccrual loans","","$","31,652","","","$","42,619","","","$","24,582","","","$","27,534","","","$","17,670"],["Loans still accruing and past due 90 days or more","","","8","","","","113","","","","153","","","","1,008","","","","288"],["Troubled debt restructured loans*","","","21","","","","24","","","","26","","","","513","","","","627"],["Nonperforming loans","","","31,681","","","","42,756","","","","24,761","","","","29,055","","","","18,585"],["Foreclosed assets","","","2,477","","","","142","","","","1,009","","","","577","","","","1,532"],["Total nonperforming assets","","$","34,158","","","$","42,898","","","$","25,770","","","$","29,632","","","$","20,117"],["As a % of loans held-for-investment and foreclosed assets","","","0.63","%","","","0.83","%","","","0.61","%","","","0.75","%","","","0.58","%"],["As a % of total assets","","","0.26","","","","0.39","","","","0.31","","","","0.38","","","","0.28"]]
[[/GREPCENT_TABLE]]

* Troubled debt restructured loans of $6.72 million, $7.41 million, $4.79 million, $3.84 million and $4.63 million, respectively, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in nonaccrual loans as of December 31, 2021, 2020, 2019, 2018 and 2017.

We record interest payments received on nonaccrual loans as reductions of principal. Prior to the loans being placed on nonaccrual, we recognized interest income on these loans as of December 31, 2021 of approximately $1.35 million during the year ended December 31, 2021. If interest on these loans had been recognized on a full accrual basis during the year ended December 31, 2021, such income would have approximated $2.61 million.

Included in our loan portfolio are certain other loans not included in the table above that are deemed to be potential problem loans. Potential problem loans are those loans that are currently performing, but for which known information about trends, uncertainties or possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present repayment terms, possibly resulting in the transfer of such loans to nonperforming status. These potential problem loans totaled $6.63 million as of December 31, 2021.

See Note 3 to the Consolidated Financial Statements for more information on these assets.

Allowance for Credit Losses. The allowance for credit losses is the amount we determine as of a specific date to be appropriate to absorb current expected credit losses on existing loans. For a discussion of our methodology, see our accounting policies in Note 1 to the Consolidated Financial Statements. The provision for credit losses was a net reversal of $1.14 million in 2021, as compared to a provision of $19.52 million in 2020 and $2.97 million in 2019. The net reversal of the Company's provision for credit losses in 2021 reflects the continued improvement in the economic outlook for our markets across Texas and overall improvements in asset quality offset by loan growth. The provision for credit losses in 2020 reflected primarily the stress on our loan portfolio from the increase in unemployment and economic effects of the COVID pandemic. As a percent of average loans, net loan charge-offs were 0.02% during 2021, 0.06% during 2020 and 0.04% during 2019. The allowance for credit losses as a percent of loans held-for-investment was 1.18% as of December 31, 2021, as compared to 1.29% as of December 31, 2020 and 1.25% as of December 31, 2019. The allowance for credit losses as a percent of loans held-for-investment, excluding PPP loans, was 1.19% as of December 31, 2021, as compared to 1.42% as of December 31, 2020 and 1.25% as of December 31, 2019. Included in the following tables are further analysis of our allowance for credit losses.

Although we believe we use the best information available to make credit loss allowance determinations, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making our initial determinations. A downturn in the economy or lower employment could result in increased levels of nonaccrual, past due 90 days or more and still accruing, restructured loans, foreclosed assets, charge-offs, increased provision for credit losses and reductions in income. Additionally, as an integral part of their examination process, bank regulatory agencies periodically review the adequacy of our allowance for credit losses. The banking agencies could require additions to our allowance for credit losses based on their judgment of information available to them at the time of their examinations of our bank subsidiary.

48

Table of Contents

Loan Loss Experience and Allowance for Credit Losses (in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","","2021","","","2020","","","2019","","","2018","","","2017"],["Balance at January 1,","","$","66,534","","","$","52,499","","","$","51,202","","","$","48,156","","","$","45,779"],["Impact of adopting ASC 326","","","\u2014","","","","(619",")","","","\u2014","","","","\u2014","","","","\u2014"],["Initial allowance on acquired TB&T PCD loans","","","\u2014","","","","1,678","","","","\u2014","","","","\u2014","","","","\u2014"],["Charge-offs:"],["Commercial:"],["C&I","","","(1,600",")","","","(2,516",")","","N/A","","","N/A","","","N/A"],["Municipal","","","\u2014","","","","\u2014","","","N/A","","","N/A","","","N/A"],["Total Commercial","","","(1,600",")","","","(2,516",")","","","(1,545",")","","","(1,418",")","","","(3,018",")"],["Agricultural","","","(2,683",")","","","(372",")","","","(319",")","","","\u2014","","","","(71",")"],["Real estate:"],["Construction & Development","","","\u2014","","","","\u2014","","","N/A","","","N/A","","","N/A"],["Farm","","","\u2014","","","","\u2014","","","N/A","","","N/A","","","N/A"],["Non-Owner Occupied CRE","","","(6",")","","","(563",")","","N/A","","","N/A","","","N/A"],["Owner Occupied CRE","","","(231",")","","","(567",")","","N/A","","","N/A","","","N/A"],["Residential real estate","","","(93",")","","","(373",")","","N/A","","","N/A","","","N/A"],["Total real estate","","","(330",")","","","(1,503",")","","","(1,335",")","","","(1,479",")","","","(1,215",")"],["Consumer:"],["Auto","","","(610",")","","","(548",")","","N/A","","","N/A","","","N/A"],["Non-Auto","","","(285",")","","","(375",")","","N/A","","","N/A","","","N/A"],["Total Consumer","","","(895",")","","","(923",")","","","(927",")","","","(1,550",")","","","(1,517",")"],["Total charge-offs","","","(5,508",")","","","(5,314",")","","","(4,126",")","","","(4,447",")","","","(5,821",")"],["Recoveries:"],["Commercial:"],["C&I","","","2,150","","","","1,315","","","N/A","","","N/A","","","N/A"],["Municipal","","","\u2014","","","","\u2014","","","N/A","","","N/A","","","N/A"],["Total Commercial","","","2,150","","","","1,315","","","","1,364","","","","839","","","","942"],["Agricultural","","","36","","","","31","","","","158","","","","15","","","","33"],["Real estate:"],["Construction & Development","","","1","","","","\u2014","","","N/A","","","N/A","","","N/A"],["Farm","","","110","","","","157","","","N/A","","","N/A","","","N/A"],["Non-Owner Occupied CRE","","","702","","","","131","","","N/A","","","N/A","","","N/A"],["Owner Occupied CRE","","","821","","","","17","","","N/A","","","N/A","","","N/A"],["Residential real estate","","","96","","","","151","","","N/A","","","N/A","","","N/A"],["Total Real Estate","","","1,730","","","","456","","","","404","","","","462","","","","192"],["Consumer:"],["Auto","","","401","","","","269","","","N/A","","","N/A","","","N/A"],["Non-Auto","","","211","","","","171","","","N/A","","","N/A","","","N/A"],["Total Consumer","","","612","","","","440","","","","532","","","","512","","","","501"],["Total recoveries","","","4,528","","","","2,242","","","","2,458","","","","1,828","","","","1,668"],["Net charge-offs","","","(980",")","","","(3,072",")","","","(1,668",")","","","(2,619",")","","","(4,153",")"],["Provision for credit losses (excluding provision for unfunded commitment)","","","(2,089",")","","","16,048","","","","2,965","","","","5,665","","","","6,530"],["Balance at December 31,","","$","63,465","","","$","66,534","","","$","52,499","","","$","51,202","","","$","48,156"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Loans, held-for-investment at year-end","","$","5,388,972","","","$","5,171,033","","","$","4,194,969","","","$","3,953,636","","","$","3,485,569"],["Average loans","","","5,341,332","","","","5,152,531","","","","4,074,667","","","","3,828,040","","","","3,435,447"],["Net charge-offs/average loans","","","0.02","%","","","0.06","%","","","0.04","%","","","0.07","%","","","0.12","%"],["Allowance for credit losses/year-end loans held-for-investment","","","1.18","%","","","1.29","%","","","1.25","%","","","1.30","%","","","1.38","%"],["Allowance for credit losses/nonaccrual, past due 90 days still accruing and restructured loans","","","200.33","","","","155.61","","","","212.02","","","","176.22","","","","259.11"]]
[[/GREPCENT_TABLE]]

49

Table of Contents

Allocation of Allowance for Credit Losses (in thousands):

[[GREPCENT_TABLE]]
[["","","At December 31,"],["","","2021","","","2020","","","2019","","","2018","","","2017"],["","","Allocation Amount","","","Allocation Amount","","","Allocation Amount","","","Allocation Amount","","","Allocation Amount"],["Commercial:"],["C&I","","$","12,280","","","$","13,609","","","$ N/A","","","$ N/A","","","$ N/A"],["Municipal","","","348","","","","1,552","","","N/A","","","N/A","","","N/A"],["Total Commercial","","","12,628","","","","15,161","","","","12,122","","","","11,948","","","","10,865"],["Agricultural","","","1,597","","","","1,255","","","","1,206","","","","1,446","","","","1,305"],["Real estate:"],["Construction & Development","","","17,627","","","","13,512","","","N/A","","","N/A","","","N/A"],["Farm","","","663","","","","1,876","","","N/A","","","N/A","","","N/A"],["Non-Owner Occupied CRE","","","10,722","","","","8,391","","","N/A","","","N/A","","","N/A"],["Owner Occupied CRE","","","10,828","","","","12,347","","","N/A","","","N/A","","","N/A"],["Residential real estate","","","8,133","","","","12,601","","","N/A","","","N/A","","","N/A"],["Total Real Estate","","","47,973","","","","48,727","","","","33,974","","","","32,342","","","","29,896"],["Consumer:"],["Auto","","","896","","","","1,020","","","N/A","","","N/A","","","N/A"],["Non-Auto","","","371","","","","371","","","N/A","","","N/A","","","N/A"],["Total Consumer","","","1,267","","","","1,391","","","","5,197","","","","5,466","","","","6,090"],["Total","","$","63,465","","","$","66,534","","","$","52,499","","","$","51,202","","","$","48,156"]]
[[/GREPCENT_TABLE]]

Percent of Loans in Each Category of Total Loans:

[[GREPCENT_TABLE]]
[["","","2021","","","2020","","","2019","","","2018","","","2017"],["Commercial:"],["C&I","","","15.53","%","","","21.88","%","","N/A%","","","N/A%","","","N/A%"],["Municipal","","","3.30","","","","3.51","","","N/A","","","N/A","","","N/A"],["Total Commercial","","","18.83","","","","25.39","","","","20.41","","","","21.37","","","","19.63"],["Agricultural","","","1.83","","","","1.83","","","","2.47","","","","2.45","","","","2.71"],["Real estate:"],["Construction & Development","","","13.91","","","","10.71","","","N/A","","","N/A","","","N/A"],["Farm","","","4.03","","","","2.94","","","N/A","","","N/A","","","N/A"],["Non-Owner Occupied CRE","","","11.57","","","","11.95","","","N/A","","","N/A","","","N/A"],["Owner Occupied CRE","","","15.25","","","","14.45","","","N/A","","","N/A","","","N/A"],["Residential real estate","","","24.76","","","","24.14","","","N/A","","","N/A","","","N/A"],["Total Real Estate","","","69.52","","","","64.19","","","","67.31","","","","66.75","","","","66.07"],["Consumer:"],["Auto","","","7.52","","","","6.84","","","N/A","","","N/A","","","N/A"],["Non-Auto","","","2.30","","","","1.75","","","N/A","","","N/A","","","N/A"],["Total Consumer","","","9.82","","","","8.59","","","","9.81","","","","9.43","","","","11.59"],["Total","","","100.00","%","","","100.00","%","","","100.00","%","","","100.00","%","","","100.00","%"]]
[[/GREPCENT_TABLE]]

Interest-Bearing Demand Deposits in Banks. The Company had interest-bearing demand deposits in banks of $323.54 million at December 31, 2021 and $517.97 million at December 31, 2020, respectively. At December 31, 2021, our interest-bearing deposits in banks included $323.12 million maintained at the Federal Reserve Bank of Dallas and $413 thousand on deposit with the Federal Home Loan Bank of Dallas (FHLB). The average balance of interest-bearing deposits in banks was $590.84 million, $249.70 million and $80.81 million in 2021, 2020 and 2019, respectively. The average yield on interest-bearing deposits in banks was 0.12%, 0.38% and 2.22% in 2021, 2020 and 2019, respectively.

50

Table of Contents

Available-for-Sale Securities. At December 31, 2021, securities with a fair value of $6.57 billion were classified as securities available-for-sale. There were no securities classified as held-to-maturity at December 31, 2021 and 2020. As compared to December 31, 2020, the available-for-sale portfolio at December 31, 2021, reflected (1) an increase of $126.84 million in U.S. Treasury securities; (2) an increase of $326.60 million in obligations of states and political subdivisions; (3) an increase of $63.74 million in corporate bonds and other; and (4) an increase of $1.66 billion in mortgage-backed securities. As compared to December 31, 2019, the available-for-sale portfolio at December 31, 2020, reflected (1) a decrease of $10.02 million in U.S. Treasury securities; (2) an increase of $1.14 billion in obligations of states and political subdivisions; (3) a decrease of $151 thousand in corporate bonds and other securities; and (4) a decrease of $148.01 million in mortgage-backed securities. Securities-available-for-sale included fair value adjustments of $125.67 million, $215.85 million and $84.51 million at December 31, 2021, 2020 and 2019, respectively. Our mortgage related securities are backed by GNMA, FNMA or FHLMC or are collateralized by securities backed by these agencies.

See the below table and Note 2 to the Consolidated Financial Statements for additional disclosures relating to the maturities and fair values of the investment portfolio at December 31, 2021 and 2020.

Maturities and Yields of Available-for-Sale Held at December 31, 2021 (in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","","Maturing"],["","","One Year or Less","","","After One Year Through Five Years","","","After Five Years Through Ten Years","","","After Ten Years","","","Total"],["Available-for-Sale:","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield"],["U.S. Treasury securities","","$","\u2014","","","","\u2014","%","","$","126,841","","","","1.17","%","","$","\u2014","","","","\u2014","%","","$","\u2014","","","","\u2014","%","","$","126,841","","","","1.17","%"],["Obligations of states and political subdivisions","","","140,066","","","","4.32","","","","713,240","","","","3.87","","","","1,880,360","","","","2.60","","","","19,805","","","","2.45","","","","2,753,471","","","","3.01"],["Corporate bonds and other securities","","","4,431","","","","1.20","","","","21,254","","","","1.51","","","","42,613","","","","1.71","","","","\u2014","","","","\u2014","","","","68,298","","","","1.61"],["Mortgage-backed securities","","","119,677","","","","2.42","","","","2,288,673","","","","1.63","","","","908,608","","","","1.62","","","","307,611","","","","2.16","","","","3,624,569","","","","1.70"],["Total","","$","264,174","","","","3.41","%","","$","3,150,008","","","","2.12","%","","$","2,831,581","","","","2.27","%","","$","327,416","","","","2.18","%","","$","6,573,179","","","","2.24","%"]]
[[/GREPCENT_TABLE]]

All yields are computed on a tax-equivalent basis assuming a marginal tax rate of 21%. Yields on available-for-sale securities are based on amortized cost. Maturities of mortgage-backed securities are based on contractual maturities and could differ due to prepayments of underlying mortgages. Maturities of other securities are reported at the earlier of maturity date or call date.

As of December 31, 2021, the investment portfolio had an overall tax equivalent yield of 2.24%, a weighted average life of 5.45 years and modified duration of 4.84 years. At December 31, 2020, the investment portfolio had an overall tax equivalent yield of 2.76%, a weighted average life of 4.66 years and modified duration of 4.14 years.

Deposits. Deposits held by our subsidiary bank represent our primary source of funding. Total deposits were $10.57 billion as of December 31, 2021, as compared to $8.68 billion as of December 31, 2020 and $6.60 billion as of December 31, 2019. The table below provides a breakdown of average deposits and rates paid over the past three years and the remaining maturity of time deposits of $250,000 or more:

Composition of Average Deposits and Remaining Maturity of Time Deposits of $250,000 or More (in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","","2021","","","2020","","","2019"],["","","Average Balance","","","Average Rate","","","Average Balance","","","Average Rate","","","Average Balance","","","Average Rate"],["Noninterest-bearing deposits","","$","3,449,313","","","\u2014%","","","$","2,782,896","","","\u2014%","","","$","2,137,089","","","\u2014%"],["Interest-bearing deposits"],["Interest-bearing checking","","","3,068,952","","","","0.07","","","","2,513,627","","","","0.21","","","","2,097,109","","","","0.68"],["Savings and money market accounts","","","2,682,266","","","","0.07","","","","2,214,569","","","","0.20","","","","1,679,168","","","","0.54"],["Time deposits under $250,000","","","318,886","","","","0.28","","","","335,740","","","","0.55","","","","313,930","","","","0.74"],["Time deposits of $250,000 or more","","","154,517","","","","0.47","","","","134,618","","","","1.04","","","","118,459","","","","1.30"],["Total interest-bearing deposits","","","6,224,621","","","","0.09","%","","","5,198,554","","","","0.25","%","","","4,208,666","","","","0.64","%"],["Total average deposits","","$","9,673,934","","","","","","$","7,981,450","","","","","","$","6,345,755"],["Total cost of deposits","","","","","","0.06","%","","","","","","0.16","%","","","","","","0.42","%"]]
[[/GREPCENT_TABLE]]

51

Table of Contents

[[GREPCENT_TABLE]]
[["","","As of December 31, 2021"],["Three months or less","","$","78,564"],["Over three through six months","","","24,749"],["Over six through twelve months","","","26,629"],["Over twelve months","","","21,402"],["Total time deposits of $250,000 or more","","$","151,344"]]
[[/GREPCENT_TABLE]]

The estimated amount of uninsured and uncollateralized deposits including related interest accrued and unpaid is approximately $3.86 billion as of December 31, 2021.

Borrowings. Included in borrowings were federal funds purchased, securities sold under repurchase agreements, advances from the FHLB and other borrowings of $671.15 million, $430.09 million and $381.36 million at December 31, 2021, 2020 and 2019, respectively. Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term liquidity for their funds for which we pledge certain securities that have a fair value equal to at least the amount of the short-term borrowing. The average balances of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were $556.61 million, $561.51 million, and $398.14 million in 2021, 2020 and 2019, respectively. The average rates paid on federal funds purchased, securities sold under repurchase agreements and advances from the FHLB were 0.06%, 0.20% and 0.75% for the years ended December 31, 2021, 2020 and 2019, respectively. The weighted average interest rate on federal funds purchased, securities sold under repurchase agreements and advances from the FHLB was 0.06%, 0.08% and 0.48% at December 31, 2021, 2020 and 2019, respectively. The highest amount of federal funds purchased, securities sold under repurchase agreements and advances from the FHLB at any month-end during 2021, 2020 and 2019 was $674.88 million, $925.42 million and $423.67 million, respectively.

Interest Rate Risk

Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. Our exposure to interest rate risk is managed primarily through our strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities that generate favorable earnings while limiting the potential negative effects of changes in market interest rates. We use no off-balance-sheet financial instruments to manage interest rate risk.

Our subsidiary bank has an asset liability management committee that monitors interest rate risk and compliance with investment policies. The subsidiary bank utilizes an earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next twelve months. The model measures the impact on net interest income relative to a base case scenario of hypothetical fluctuations in interest rates over the next twelve months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the re-pricing and maturity characteristics of the existing and projected balance sheet.

The following analysis depicts the estimated impact on net interest income of immediate changes in interest rates at the specified levels for the periods presented.

[[GREPCENT_TABLE]]
[["","","Percentage change in net interest income:"],["Change in interest rates:","","December 31,"],["(in basis points)","","2021","","","2020"],["+400","","","10.56","%","","","18.18","%"],["+300","","","8.52","%","","","13.99","%"],["+200","","","6.13","%","","","9.51","%"],["+100","","","3.42","%","","","4.75","%"],["-100","","","(5.64",")%","","","(3.46",")%"],["-200","","","(9.06",")%","","","(5.44",")%"]]
[[/GREPCENT_TABLE]]

The results for the net interest income simulations as of December 31, 2021 and December 31, 2020 resulted in an asset sensitive position. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each year-end will remain constant over the relevant twelve-month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics on specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. We believe these

52

Table of Contents

estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities reprice in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material.

Should we be unable to maintain a reasonable balance of maturities and repricing of our interest-earning assets and our interest-bearing liabilities, we could be required to dispose of our assets in an unfavorable manner or pay a higher than market rate to fund our activities. Our asset liability committee oversees and monitors this risk.

Capital and Liquidity

Capital. We evaluate capital resources by our ability to maintain adequate regulatory capital ratios to do business in the banking industry. Issues related to capital resources arise primarily when we are growing at an accelerated rate but not retaining a significant amount of our profits or when we experience significant asset quality deterioration.

Total shareholders’ equity was $1.76 billion, or 13.43% of total assets at December 31, 2021, as compared to $1.68 billion, or 15.39% of total assets at December 31, 2020. Included in shareholders’ equity at December 31, 2021 and 2020 were $99.25 million and $170.40 million, respectively, in unrealized gains on investment securities available-for-sale, net of related income taxes. During 2021, total shareholders’ equity averaged $1.71 billion, or 14.20% of average assets, as compared to $1.56 billion, or 15.32% of average assets during 2020.

Banking regulators measure capital adequacy by means of the risk-based capital ratios and leverage ratio under the Basel III Rules and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and off-balance-sheet commitments and contingencies according to prescribed risk categories. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders’ equity less intangible assets by quarter-to-date average assets less intangible assets.

Beginning in January 2015, under the Basel III Rules, the implementation of the capital conservation buffer was effective for the Company starting at the 0.625% level and increasing 0.625% each year thereafter, until it reached 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including divided payments and stock repurchase, and to pay discretionary bonuses to executive officers.

As of December 31, 2021 and 2020, we had a total risk-based capital ratio of 20.34% and 22.03%, a Tier 1 capital to risk-weighted assets ratio of 19.35% and 20.79%, a common equity Tier 1 capital to risk-weighted ratio of 19.35% and 20.79% and a Tier 1 leverage ratio of 11.13% and 11.86%, respectively. The regulatory capital ratios as of December 31, 2021 and 2020 were calculated under Basel III Rules.

Our subsidiary bank made the election to continue to exclude accumulated other comprehensive income from capital in connection with its March 31, 2015 quarterly financial filing and, in effect, to retain the accumulated other comprehensive income treatment under the prior capital rules.

Liquidity. Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. The potential need for liquidity arising from these types of financial instruments is represented by the contractual notional amount of the instrument. Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. Liquid assets include cash, federal funds sold, and short-term investments in time deposits in banks. Liquidity is also provided by access to funding sources, which include core depositors and correspondent banks that maintain accounts with and sell federal funds to our subsidiary bank. Other sources of funds include our ability to borrow from short-term sources, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and other borrowings, which amounted to $671.15 million at December 31, 2021, and an unfunded $25.00 million revolving line of credit established with Frost Bank, a nonaffiliated bank, which matures on June 30, 2023 (see next paragraph). Our subsidiary bank also has federal funds purchased lines of credit with two non-affiliated banks totaling $130.00 million. At December 31, 2021, there were no amounts drawn on these lines of credit. Our subsidiary bank also has (i) an available line of credit with the FHLB totaling $2.09 billion

53

Table of Contents

at December 31, 2021, secured by portions of our loan portfolio and certain investment securities; and (ii) access to the Federal Reserve Bank of Dallas lending program. At December 31, 2021, the Company did not have any balances outstanding under this line of credit.

The Company renewed its loan agreement, effective June 30, 2021, with Frost Bank. Under the loan agreement, as renewed and amended, we are permitted to draw up to $25.00 million on a revolving line of credit. See Note 8 - Line of Credit in the accompanying notes to consolidated financial statements regarding further information on this line of credit.

In addition, we anticipate that any future acquisition of financial institutions, expansion of branch locations or offering of new products could also place a demand on our cash resources. Available cash and cash equivalents at the Company, which totaled $152.36 million at December 31, 2021, investment securities which totaled $2.49 million at December 31, 2021 with maturities over 8 to 9 years, available dividends from our subsidiaries which totaled $348.57 million at December 31, 2021, utilization of available lines of credit, and future debt or equity offerings are expected to be the source of funding for these potential acquisitions or expansions.

Given the strong core deposit base and relatively low loan to deposit ratios maintained at our subsidiary bank, we consider our current liquidity position to be adequate to meet our short-term and long-term liquidity needs.

In the ordinary course of business we have entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to consolidated financial statements for the expected timing of such payments as of December 31, 2021. These payments related to time deposits with stated maturity dates (Note 7 - Deposits and Borrowings) and operating leases (Note 11 - Commitments and Contingencies). In addition, we have construction contracts with remaining future minimum contractual obligations of approximately $12.33 million in 2022.

Off-Balance Sheet/Reserve for Unfunded Commitments. We are a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of our customers. These financial instruments include unfunded lines of credit, commitments to extend credit and federal funds sold to correspondent banks and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. At December 31, 2021, the Company’s reserve for unfunded commitments totaled $6.44 million which is recorded in other liabilities.

Our exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. We generally use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments.

Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, as we deem necessary upon extension of credit, is based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment and income-producing commercial properties.

Standby letters of credit are conditional commitments we issue 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 customers. The average collateral value held on letters of credit usually exceeds the contract amount.

See further disclosure of the unfunded lines of credit, unfunded commitments to extend credit and standby letters of credit (Note 12 - Financial Instruments with Off-Balance-Sheet Risk). Future notional amounts committed are $1.03 million in less than one year, $208 thousand in more than one year but less than three years and $465 thousand thereafter.

We believe we have no other OBS arrangements or transactions with unconsolidated, special purpose entities that would expose us to liability that is not reflected on the face of the financial statements.

Parent Company Funding. Our ability to fund various operating expenses, dividends, and cash acquisitions is generally dependent on our own earnings (without giving effect to our subsidiaries), cash reserves and funds derived from our subsidiaries. These funds historically have been produced by intercompany dividends and management fees that are limited to reimbursement of actual expenses. We anticipate that our recurring cash sources will continue to include dividends and management fees from our subsidiaries. At December 31, 2021, $348.57 million was available for the payment of intercompany dividends by our subsidiaries without the prior approval of regulatory agencies. Our subsidiaries paid aggregate dividends to us of $96.50 million in 2021 and $87.50 million in 2020.

54

Table of Contents

Dividends. Our long-term dividend policy is to pay cash dividends to our shareholders of approximately 35% to 40% of annual net earnings while maintaining adequate capital to support growth. We are also restricted by a loan covenant within our line of credit agreement with Frost Bank to dividend no greater than 55% of net income, as defined in such loan agreement. The cash dividend payout ratios have amounted to 36.30%, 35.88% and 38.31% of net earnings, respectively, in 2021, 2020 and 2019. Given our current capital position, projected earnings and asset growth rates, we do not anticipate any significant change in our current dividend policy.

Our bank subsidiary, which is a national banking association and a member of the Federal Reserve System, is required by federal law to obtain the prior approval of the OCC to declare and pay dividends if the total of all dividends declared in any calendar year would exceed the total of (1) such bank’s net profits (as defined and interpreted by regulation) for that year plus (2) its retained net profits (as defined and interpreted by regulation) for the preceding two calendar years, less any required transfers to surplus.

To pay dividends, we and our subsidiary bank must maintain adequate capital above regulatory guidelines. In addition, if the applicable regulatory authority believes that a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the authority may require, after notice and hearing, that such bank cease and desist from the unsafe practice. The Federal Reserve Board, the FDIC and the OCC have each indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve, the OCC and the FDIC have issued policy statements that recommend that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.