UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)


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

For the fiscal year ended December 31, ~~2020~~2021


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

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 001-38484

Spirit of Texas Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Texas		90-0499552
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1836 Spirit of Texas Way Conroe, TX		77301
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (936) 521-1836

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

Title of each class		Ticker symbol		Name of each exchange on which registered
Common Stock, no par value per share		STXB		NASDAQ

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒

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

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

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

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☒☐ Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on June 30, ~~2020~~2021, was $~~198~~346.31 million.

The number of shares of Registrant’s Common Stock outstanding as of ~~March~~February 128, ~~2021~~2022 was 17,~~127~~455,~~808~~887.

Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on May 27, 2021, are incorporated by reference into Part III of this Annual Report on Form 10-K.

TABLE OF CONTENTS

		Page No.
PART I
Item 1. Business		7
Item 1A. Risk Factors		27
Item 1 B. Unresolved Staff Comments		4150
Item 2. Properties		4251
Item 3. Legal Proceedings		4554
Item 4. Mine Safety Disclosures		4554
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		4655
Item 6. Selected Financial Data		49
Item 6. Reserved		56
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		5157
Item 8. Financial Statements and Supplementary Data		90
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		91
Item 8. Financial Statements and Supplementary Data		92
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets		F-2
Consolidated Statements of Income		F-3
Consolidated Statements of Comprehensive Income		F-4
Consolidated Statements of Changes in Stockholders’ Equity		F-5
Consolidated Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-79
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		92
Item 9A. Controls and Procedures		92
Item 9B. Other Information		93
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections		93
PART III
Item 10. Directors, Executive Officers and Corporate Governance		94
Item 11. Executive Compensation		94100
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		94119
Item 13. Certain Relationships and Related Transactions, and Director Independence		94121
Item 14. Principal Accounting Fees and Services		94123
PART IV
Item 15. Exhibits, Financial Statement Schedules		95125
Item 16. Form 10-K Summary		97128
SIGNATURES		98129

Important Notice about Information in this Annual Report

Unless we state otherwise or the context otherwise requires, references in this Annual Report on Form 10-K for the year ended December 31, 2021 (this “Annual Report on Form 10-K”) to “we,” “our,” “us,” “the Company” and “Spirit” refer to Spirit of Texas Bancshares, Inc. and its consolidated subsidiaries, including Spirit of Texas Bank SSB, which we sometimes refer to as “the Bank” or “our Bank.”

The information contained in this Annual Report on Form 10-K is accurate only as of the date of this Annual Report on Form 10-K and as of the dates specified herein.

CAUTIONARY STATEMENT REGARDING

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, including information included or incorporated by reference in this document, contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements speak only as of the date they are made and may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of our company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation:

•

risks related to the concentration of our business in Texas, and specifically in the Houston, Dallas/Fort Worth, Bryan/College Station, San Antonio-New Braunfels, Corpus Christi, Tyler and Austin metropolitan areas and North Central Texas, including risks associated with any downturn in the real estate sector and risks associated with a decline in the values of single family homes in our Texas markets;

•

general market conditions and economic trends nationally, regionally and particularly in our Texas markets, including a decrease in or the volatility of oil and gas prices;

• the impact, duration and severity of the COVID-19 pandemic (or any current or future variant thereof), the response of governmental authorities to the pandemic and our participation in COVID-19-related government programs such as the Paycheck Protection Program (the “PPP”) and Main Street Lending Program;

•

risks related to our concentration in our primary markets, which are susceptible to severe weather events that could negatively impact the economies of our markets, our operations or our customers, any of which could have a material adverse effect on our business, financial condition and results of operations;

•

our ability to implement our growth strategy, including identifying and consummating suitable acquisitions;

•

risks related to the integration of any acquired businesses, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms, procedures and personnel, retention of customers and employees, the need for additional capital to finance such transactions, and possible failures in realizing the anticipated benefits from acquisitions;

•

changes in Small Business Administration (“SBA”) loan products, including specifically the Section 7(a) program and Section 504 loans, or changes in SBA standard operating procedures;

•

risks associated with our loans to and deposit accounts from foreign nationals;

•

our ability to develop, recruit and retain successful bankers that meet our expectations in terms of customer relationships and profitability;

•

risks associated with the relatively unseasoned nature of a significant portion of our loan portfolio;

•

risks related to our strategic focus on lending to small to medium-sized businesses;

•

the accuracy and sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses and other estimates;

•

the risk of deteriorating asset quality and higher loan charge-offs;

•

the time and effort necessary to resolve nonperforming assets;

•

risks associated with our commercial loan portfolio, including the risk for deterioration in value of the general business assets that generally secure such loans;

•

risks associated with our nonfarm nonresidential and construction loan portfolios, including the risks inherent in the valuation of the collateral securing such loans;

•

potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;

•

risks related to the significant amount of credit that we have extended to a limited number of borrowers and in a limited geographic area;

•

our ability to maintain adequate liquidity and to raise necessary capital to fund our acquisition strategy and operations or to meet increased minimum regulatory capital levels;

•

material decreases in the amount of deposits we hold, or a failure to grow our deposit base as necessary to help fund our growth and operations;

•

changes in market interest rates that affect the pricing of our loans and deposits and our net interest income, as well as the potential discontinuance of London Interbank Offer Rate (“LIBOR”) and the uncertainty around its replacement;

•

potential fluctuations in the market value and liquidity of our investment securities;

•

the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

•

our ability to maintain an effective system of disclosure controls and procedures and internal control over financial reporting;

•

risks associated with fraudulent, negligent, or other acts by our customers, employees or vendors;

•

our ability to keep pace with technological change or difficulties when implementing new technologies;

•

risks associated with system failures or failures to protect against cybersecurity threats, such as breaches of our network security;

•

risks associated with data processing system failures and errors;

•

potential impairment on the goodwill we have recorded or may record in connection with business acquisitions;

•

the initiation and outcome of litigation and other legal proceedings against us or to which we become subject;

•

our ability to comply with various governmental and regulatory requirements applicable to financial institutions, including regulatory requirements to maintain minimum capital levels;

•

the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, such as implementation of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”);

•

changes in tariffs and trade barriers;

•

governmental monetary and fiscal policies, including the policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);

•

our ability to comply with supervisory actions by federal and state banking agencies;

• changes in the scope and cost of Federal Deposit Insurance Corporation (the “FDIC”) insurance and other coverage; ~~and~~

• systemic risks associated with the soundness of other financial institutions.;

•

disruption to our businesses as a result of our November 18, 2021 announcement and pendency of our merger (the “Proposed Merger”) with and into Simmons First National Corporation (“Simmons”), including through deposit attrition, customer and revenue loss, diversion of management time and attention to planning integration activities, and our ability to retain sufficient staffing;

•

cost savings and any revenue synergies from the Proposed Merger may not be fully realized or may take longer than anticipated to be realized;

•

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

•

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

•

the risk that the integration of ours and/or Simmons’ operations will be materially delayed or will be more costly or difficult than expected, or that the parties are otherwise unable to successfully integrate each party’s businesses into the other’s businesses;

•

the ability by Simmons and us to obtain required governmental approvals of the Proposed Merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the surviving corporation or the expected benefits of the transaction);

•

reputational risk and the reaction of each of our and Simmons’ customers, suppliers, employees or other business partners to the Proposed Merger;

•

the failure of the closing conditions in the merger agreement to be satisfied in connection with the Proposed Merger, or any unexpected delay in closing the Proposed Merger; and

•

the outcome of any legal proceedings that may be instituted against us or Simmons with respect to the Proposed Merger which may delay or prevent completion of the transaction.

Because of these and other risks and uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of this Annual Report on Form 10-K. In addition, our past results of operations do not necessarily indicate our future results. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. Except as required by law, we undertake no obligation to update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Part I

Item 1. Business

General

Spirit of Texas Bancshares, Inc. is a Texas corporation and a registered bank holding company located in the Houston metropolitan area with headquarters in Conroe, Texas. We offer a broad range of commercial and retail banking services through our wholly-owned bank subsidiary, Spirit of Texas Bank SSB. As of the date of this Annual Report on Form 10-K, we operate through 3835 locations primarily in the Houston, Dallas/Fort Worth, Bryan/College Station, San Antonio-New Braunfels, Corpus Christi, Tyler and Austin metropolitan areas, along with North Central Texas. As of December 31, ~~2020~~2021, we had total assets of $3.0827 billion, loans held for investment of $2.3932 billion, total deposits of $2.4678 billion and total stockholders’ equity of $~~360~~393.882 million.

We are a business-focused bank that delivers relationship-driven financial services to small and medium-sized businesses and individuals in our market areas. Our philosophy is to target commercial customers whose businesses generate between $3 to $30 million of annual revenue. Our product offerings consist of a wide range of commercial products, including term loans and operating lines of credit to commercial and industrial companies; commercial real estate loans; construction and development loans; SBA loans; commercial deposit accounts; and treasury management services. In addition, our retail offerings include consumer loans, 1-4 single family residential real estate loans and retail deposit products.

We operate in one reportable segment of business, community banking, which includes Spirit of Texas Bank SSB, our sole banking subsidiary.

Pending Merger of Simmons First National Corporation and Spirit of Texas Bancshares, Inc.

On November 18, 2021, we entered into an Agreement and Plan of Merger (the “merger agreement”) with Simmons First National Corporation (“Simmons”), parent company of Simmons Bank, pursuant to which the companies will combine in an all‐stock transaction. Under the terms of the merger agreement, which was approved by both companies’ Boards of Directors, Spirit will merge with and into Simmons, with Simmons surviving (the “Proposed Merger”), and the combined holding company and bank will operate under the Simmons name and brand with the company’s headquarters remaining in Little Rock, Arkansas. Pending regulatory and shareholder approvals and the satisfaction of the closing conditions set forth in the merger agreement, the Proposed Merger is expected to close during the second calendar quarter of 2022.

Acquisition Activities

Since our inception in 2008, we have implemented a growth strategy that includes organic loan and deposit generation through the establishment of de novo branches, as well as strategic acquisitions that have either strengthened our presence in existing markets or expanded our operations into new markets with attractive business prospects. We have completed eleven acquisitions in ~~eleven~~twelve years, four of which followed our initial public offering in May 2018.

On November 14, 2018, we completed our acquisition (the “Comanche acquisition”) of Comanche National Corporation and its subsidiary, The Comanche National Bank (together, “Comanche”). This transaction resulted in eight additional branches in the North Central Texas region. The Company issued 2,142,857 shares of its common stock, as well as a net cash payment to Comanche shareholders of $12.2 million, for total consideration of $52.9 million.

On April 2, 2019, Spirit completed its acquisition (the “Beeville acquisition”) of First Beeville Financial Corporation and its subsidiary, The First National Bank of Beeville (together, “Beeville”). This transaction resulted in three additional branches and two loan production offices in the South Texas region. The Company issued 1,579,191 shares of its common stock, as well as a net cash payment to Beeville shareholders of $32.4 million, for total consideration of $65.9 million.

On November 5, 2019, Spirit completed its acquisition (the “Citizens acquisition”) of Chandler Bancorp, Inc. and its subsidiary, Citizens State Bank (together, “Citizens”). This transaction resulted in seven additional branches in the Northeast Texas region. The Company issued 2,100,000 shares of its common stock, as well as $17.9 million in cash, for total consideration of $62.5 million.

On February 28, 2020, Spirit completed its acquisition of certain assets and assumption of certain liabilities associated with five banking locations of Simmons Bank (the “Simmons branch acquisition”). The offices are located in Austin, San Antonio and Tilden, Texas. The Company paid total consideration of $131.6 million in the Simmons branch acquisition.

Market Area and Market Share

We have 3835 locations primarily in the Houston, Dallas/Fort Worth, Bryan/College Station, San Antonio-New Braunfels, Corpus Christi, Tyler and Austin metropolitan areas, along with North Central Texas. We believe our exposure to these dynamic and complementary markets provides us with economic diversification and the opportunity for expansion across Texas.

Our top four markets include the Houston-The Woodlands-Sugar Land MSA, Dallas-Fort Worth-Arlington MSA, College Station-Bryan MSA and San Antonio-New Braunfels MSA. As of ~~December~~June 3130, ~~2020~~2021, our deposit market share in each of these respective markets was 0.1923%, 0.0407%, 43.8190% and 0.0930%. Overall, in the State of Texas, we rank ~~42nd~~38th in total deposits as of June 30, 2021 according to ~~SNL~~S&P ~~Financial~~Capital IQ Pro.

Competition

The banking business is highly competitive, and our profitability will depend principally upon our ability to compete with other banks and non-bank financial institutions located in each of our banking center locations for lending opportunities, deposit funds, bankers and acquisition candidates. Our banking competitors in our target markets include various community banks and national and regional banks. There were over ~~409~~495 FDIC-insured depository institutions that operate in the State of Texas as of December 31, ~~2020~~2021.

We are subject to vigorous competition in all aspects of our business from banks, savings banks, savings and loan associations, finance companies, credit unions and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, asset-based non-bank lenders, insurance companies and certain other non-financial entities, including retail stores which may maintain their own credit programs and certain governmental organizations which may offer more favorable financing than we can. Many of the banks and other financial institutions with which we compete have significantly greater financial resources, marketing capability and name recognition than us and operate on a local, statewide, regional or nationwide basis.

Our strategy to compete effectively in our markets is to emphasize our identity as a community-oriented bank in contrast to larger, national and regional banks. As a community bank, we can respond to loan requests quickly and flexibly through decisions made locally. Our marketing strategy is relationship and referral-based. We rely heavily on our bankers and the efforts of our officers and directors for building and strengthening those relationships. Additionally, our bankers, directors and officers are actively involved in our primary markets and are a strong source of introductions and referrals.

Human Capital Resources

As of December 31, ~~2020~~2021, we had ~~383~~380 employees of which ~~370~~363 were full-time employees. None of our employees are represented by a union. Management believes that our relationship with employees is good.

Lending Activities

Lending Limits. Our lending activities are subject to a variety of lending limits imposed by state and federal law. In general, we are subject to a legal limit on loans to a single borrower equal to 25% of the Bank’s tier 1 capital. This limit increases or decreases as the Bank’s capital increases or decreases. As of December 31, ~~2020~~2021, our legal lending limit was $6983.82 million and our largest relationship was $3545.82 million. In order to ensure compliance with legal lending limits and in accordance with our strong risk management culture, we maintain internal lending limits that are significantly less than the legal lending limits. We are able to sell participations in our larger loans to other financial institutions, which allows us to manage the risk involved in these loans and to meet the lending needs of our customers requiring extensions of credit in excess of these limits.

Credit Department. The Bank maintains a large credit department under the direction of the Bank’s Chief Credit Officer. The credit department prepares and provides in-depth credit administration reporting to the Bank’s Asset Quality Committee on a quarterly basis to aid the committee in monitoring and adjusting the Bank’s loan focus as it grows. In addition, the credit department provides analytical and underwriting services in support of the loan officers developing their respective loan portfolios. The credit department also serves as a training ground for the Bank’s newest credit analysts who will be used to support our most senior loan officers as they are further trained to be our future lending officers.

Loan Review. The Bank utilizes an internal loan review system called the Relationship Review Process. Generally, all loan relationships greater than $500 thousand are reviewed by the loan officer at least annually. The loan officer will prepare a Relationship Review Memo that updates the credit file with new financials, review of the collateral status, and provide any meaningful commentary that documents changes in the borrower’s overall condition. For loan relationships greater than $2 million, the Relationship Review Process is done semi-annually. Upon completion of the Relationship Review Memo, the loan officer must present the memo to the Chief or Deputy Chief Credit Officer for final review, appropriate grade change, if needed, and then approval to place in the credit file for future reference. We believe this process gives the Chief Credit Officer and executive management strong insight into the underlying performance of the Bank’s loan portfolio allowing for accurate and proper real-time grading of the loan portfolio.

Additionally, we employ an external third-party loan review team to review up to 70% of the Bank’s entire loan portfolio on an annual basis. This review will include all large loan relationships, insider loans, all criticized loans and the Bank’s allowance for loan and lease losses calculations.

Nonperforming Loans. We stringently monitor loans that are classified as nonperforming. Nonperforming loans include nonaccrual loans, loans past due 90 days or more, and loans renegotiated or restructured because of a borrower’s financial difficulties. Loans are generally placed on nonaccrual status if any of the following events occur: (i) the classification of a loan as nonaccrual internally or by regulatory examiners; (ii) delinquency on principal for 90 days or more unless we are in the process of collection; (iii) a balance remains after repossession of collateral; (iv) notification of bankruptcy; or (v) we determine that nonaccrual status is appropriate.

Allowance for Loan and Lease Losses. The allowance for loan and lease losses (the “allowance”) is maintained at a level that we believe is adequate to absorb all probable losses on loans then present in the loan portfolio. The amount of the allowance is affected by: (i) loan charge-offs, which decrease the allowance; (ii) recoveries on loans previously charged-off, which increase the allowance; and (iii) the provision of possible loan losses charged to income, which increases the allowance. In determining the provision for possible loan losses, we monitor fluctuations in the allowance resulting from actual charge-offs and recoveries, and we periodically review the size and composition of the loan portfolio in light of current and anticipated economic conditions in an effort to evaluate portfolio risks. The amount of the provision is based on our judgment of those risks.

Investments

We maintain a portfolio of investments, primarily in obligations of the United States or obligations guaranteed as to principal and interest by the United States and other taxable securities, to provide liquidity and an additional source of income, to manage interest rate risk, to meet pledging requirements and to meet regulatory capital requirements.

We invest in U.S. Treasury bills and notes, as well as in securities of federally-sponsored agencies, such as Federal Home Loan Bank bonds. We may invest in federal funds, negotiable certificates of deposit, banker’s acceptances, mortgage-backed securities, corporate bonds and municipal or other tax-free bonds. No investment in any of those instruments will exceed any applicable limitation imposed by law or regulation. Our asset/liability/investment committee reviews the investment portfolio on an ongoing basis in order to ensure that the investments conform to our internal policy set by our board.

Sources of Funds

General. Deposits traditionally have been our primary source of funds for our investment and lending activities. Our primary outside borrowing source is the Federal Home Loan Bank of Dallas (“FHLB” or “FHLB of Dallas”). Our additional sources of funds are scheduled loan payments, maturing investments, loan repayments, retained earnings, income on other earning assets and the proceeds of loan sales.

Core Deposits. Our core deposits include checking accounts, money market accounts, savings accounts, a variety of certificates of deposit and individual retirement accounts. To attract core deposits, we employ an aggressive marketing plan in our primary service areas and feature a broad product line and competitive offerings. The primary sources of core deposits are residents and businesses located in the markets we serve. We obtain these core deposits through personal solicitation by our lenders, officers and directors, direct mail solicitations and advertisements in the local media.

Borrowings. To supplement our core deposits, we maintain borrowings consisting of advances from the FHLB of Dallas, borrowings under the Paycheck Protection Program Liquidity Facility (“PPPLF”), long-term subordinated notes, and a holding company line of credit with a third-party lender. At December 31, 2021, FHLB advances totaled $38.5 million, or 1.3% of total liabilities. At December 31, 2021, we had additional capacity to borrow from the FHLB of $841.9 million. At December 31, 2021, all borrowings under the PPPLF had been repaid, and subordinated notes, net of debt issuance costs totaled $36.5 million, or 1.3% of total liabilities. We had $50.0 million available to be drawn on a line of credit with a third-party lender as of December 31, 2021.

Borrowings. To supplement our core deposits, we maintain borrowings consisting of advances from the FHLB of Dallas, borrowings under the Paycheck Protection Program Liquidity Facility (“PPPLF”), long-term subordinated notes, and a holding company line of credit with a third-party lender. At December 31, 2020, FHLB advances totaled $61.9 million, or 2.3% of total liabilities. At December 31, 2020, we had additional capacity to borrow from the FHLB of $654.9 million. At December 31, 2020, borrowings under the PPPLF totaled $149.8 million, or 5.5% of total liabilities, and subordinated notes, net of debt issuance costs totaled $36.3 million, or 1.3% of total liabilities. We had $50.0 million available to be drawn on a line of credit with a third-party lender as of December 31, 2020.

Other Banking Services

We offer banking products and services that we believe are attractively priced and easily understood by our customers. In addition to traditional bank accounts such as checking, savings, money markets and CDs, we offer a full range of ancillary banking services, including a full suite of treasury management services, consumer and commercial online banking services, mobile applications, safe deposit boxes, wire transfer services, debit cards and ATM access. Merchant services (credit card processing) and co-branded credit card services are offered through a correspondent bank relationship. We do not exercise trust powers.

SUPERVISION AND REGULATION

General

We are extensively regulated under U.S. federal and state law. As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Texas Department of Savings and Mortgage Lending (the “TDSML”), the Federal Reserve, the FDIC and the Consumer Financial Protection Bureau (the “CFPB”). Furthermore, tax laws administered by the Internal Revenue Service (the “IRS”) and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board (“FASB”), securities laws administered by the Securities and Exchange Commission (“SEC”) and state securities authorities and anti-money laundering laws enforced by the U.S. Department of the Treasury (the “Treasury Department”), also impact our business, financial condition and results of operations. The nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.

Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of banks, their holding companies and their affiliates. These laws are intended primarily for the protection of depositors, customers and the Deposit Insurance Fund (the “DIF”) rather than for shareholders. Federal and state laws, and the related regulations of the bank regulatory agencies, affect, among other things, the scope of business, the kinds and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with insiders and affiliates and the payment of dividends.

This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that, while not publicly available, can affect the conduct and growth of their businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management’s ability and performance, earnings, liquidity and various other factors. These regulatory agencies have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management’s ability and performance, earnings, liquidity and various other factors. These regulatory agencies have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

Holding Company Regulation

As a registered bank holding company, the Company is required to furnish to the Federal Reserve periodic reports of its financial condition and results of operations and may also be required to furnish such additional information and reports as the Federal Reserve may require.

Permitted Activities

Under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), a bank holding company that is not a financial holding company, as discussed below, is generally permitted to engage in, or acquire direct or indirect control of more than five percent of any class of the voting shares of any company that is not a bank or bank holding company and that is engaged in, the following activities (in each case, subject to certain conditions and restrictions and prior approval of the Federal Reserve unless otherwise exempt): banking or managing or controlling banks; furnishing services to or performing services for our subsidiaries; and any activity that the Federal Reserve determines by regulation or order to be so closely related to banking as to be a proper incident to the business of banking. The Federal Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of its activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.

Under the BHC Act, as amended by the Gramm-Leach-Bliley Act (the “GLBA”), a bank holding company may also file an election with the Federal Reserve to become a financial holding company and engage, directly or through its non-bank subsidiaries, in any activity that is financial in nature or incidental to such financial activity or in any other activity that is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. These activities include securities underwriting and dealing, insurance underwriting and making merchant banking investments. Such an election is subject to certain eligibility requirements, including the requirement that the bank holding company be both “well capitalized” and “well managed”, as defined in the BHC Act and implementing regulations. The Company has not made an election to become a financial holding company.

Acquisitions, Activities and Change in Control

The BHC Act generally requires the prior approval by the Federal Reserve for (x) any merger involving a bank holding company, (y) a bank holding company’s acquisition of more than 5% of a class of voting securities of any additional bank or bank holding company, or (z) to acquire all or substantially all of the assets of any additional bank or bank holding company. In reviewing applications seeking approval of merger and acquisition transactions, the Federal Reserve considers, among other things, the competitive effect and public benefits of the transactions, the capital position and managerial resources of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment Act (the “CRA”) and the effectiveness of all organizations involved in the merger or acquisition in combating money laundering activities. In addition, failure to implement or maintain adequate compliance programs could cause bank regulators not to approve an acquisition where regulatory approval is required or to prohibit an acquisition even if approval is not required.

Subject to certain conditions (including deposit concentration limits established by the BHC Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to complete interstate mergers or acquisitions. For a discussion of the capital requirements, see “Regulatory Capital Requirements” below.

Subject to certain conditions, including deposit concentration limits established by the BHC Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to complete interstate mergers or acquisitions. For a discussion of the capital requirements, see “Regulatory Capital Requirements” below.

Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 5.00% and 24.99% voting ownership. In January 2020, the Federal Reserve adopted a final rule to revise its regulations related to determinations of whether a company with an ownership interest between 5% and 25% of any class of voting securities of another company has the ability to exercise a controlling influence over such company for purposes of the BHC Act, which became effective on September 30, 2020. The final rule expands and codifies the presumptions for use in such control determinations according to a tiered methodology using 5%, 10% and 15% as the presumption thresholds. By codifying the presumptions, the final rule provides greater transparency on the types of relationships that the Federal Reserve generally views as supporting a facts-and-circumstances determination that one company controls another company. The Federal Reserve’s final rule applies to questions of control under the BHC Act, but does not extend to Change in Bank Control Act, as amended (the “Change in Bank Control Act”).

The Change in Bank Control Act defines “control” as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank. A rebuttable presumption of control arises under the Change in Bank Control Act where a person or group controls 10% or more, but less than 25%, of a class of the voting stock of a company or insured bank which is a reporting company under the Exchange Act, such as the Company, or such ownership interest is greater than the ownership interest held by any other person or group.

In addition, the Change in Bank Control Act prohibits any entity from acquiring 25% (or 5% in the case of an acquirer that is a bank holding company) or more of a bank holding company’s or bank’s voting securities, or otherwise obtaining control or a controlling influence over a bank holding company or bank without the approval of the Federal Reserve. On September 22, 2008, the Federal Reserve issued a policy statement on equity investments in bank holding companies and banks, which allows the Federal Reserve to generally be able to conclude that an entity’s investment is not “controlling” if the investment in the form of voting and nonvoting shares represents in the aggregate (i) less than one-third of the total equity of the banking organization (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting securities held by the entity) and (ii) less than 15% of any class of voting securities of the banking organization.

Bank Holding Company Obligations to Bank Subsidiaries

Under current law and Federal Reserve policy, a bank holding company is expected to act as a source of financial and managerial strength to its depository institution subsidiaries and to maintain resources adequate to support such subsidiaries, which could require us to commit resources to support the Bank in situations where additional investments in a bank may not otherwise be warranted. These situations include guaranteeing the compliance of an “undercapitalized” bank with its obligations under a capital restoration plan, as described further under “Bank Regulation—Capitalization Requirements and Prompt Corrective Action” below. As a result of these obligations, a bank holding company may be required to contribute additional capital to its subsidiaries including in the form of capital notes or other instruments that qualify as capital under regulatory rules. Any such loan from a holding company to a subsidiary bank is likely to be unsecured and subordinated to the bank’s depositors and perhaps to other creditors of the bank.

Restrictions on Bank Holding Company Dividends and Stock Redemptions and Repurchases

It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. Additionally, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong. The Federal Reserve possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks

~~and~~Restrictions ~~bank~~on ~~holding~~Bank ~~companies.~~Holding ~~Further, the~~ Company’s ~~ability~~Dividends toand ~~pay~~Stock ~~dividends~~Redemptions ~~could~~and ~~be impaired if its capital levels fall below the capital conservation buffer discussed below.~~Repurchases

Bank holding companies must consult with the Federal Reserve before redeeming any equity or other capital instrument included in tier 1 or tier 2 capital prior to stated maturity, if (x) such redemption could have a material effect on the level or composition of the organization’s capital base or (y) as a result of such repurchase, there is a net reduction of the outstanding amount of common stock or preferred stock outstanding at the beginning of the quarter in which the redemption or repurchase occurs. In addition, bank holding companies are unable to repurchase shares equal to 10% or more of their net worth if they would not be well-capitalized (as defined by the Federal Reserve) after giving effect to such repurchase. Bank holding companies experiencing financial weaknesses, or that are at significant risk of developing financial weaknesses, must consult with the Federal Reserve before redeeming or repurchasing common stock or other regulatory capital instruments.

Generally, a Texas corporation may not make distributions to its shareholders if (i) after giving effect to the dividend, the corporation would be insolvent, or (ii) the amount of the dividend exceeds the surplus of the corporation. Dividends may be declared and paid in a corporation’s own treasury shares that have been reacquired by the corporation’s own authorized but unissued shares out of the surplus of the corporation upon the satisfaction of certain conditions. In addition, since our legal entity is separate and distinct from the Bank and does not conduct stand-alone operations, our ability to pay dividends depends on the ability of the Bank to pay dividends to us, which is also subject to regulatory restrictions as described in “Bank Regulation—Bank Dividends” below.

Capital Regulations

The federal banking agencies have adopted risk-based capital adequacy guidelines for banks and bank holding companies. These risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure, to minimize disincentives for holding liquid assets and to achieve greater consistency in evaluating the capital adequacy of major banks throughout the world.

The ~~Basel~~Company ~~III~~is ~~Capital~~subject ~~Rules became effective on January 1, 2015 and became fully phased-in as of January 1, 2019. In addition~~ to ~~establishing new minimum capital requirements,~~ the Basel III Capital Rules, which implement a capital conservation buffer on top of its minimum risk-based capital requirements that must be met in order to avoid restrictions on capital distributions or discretionary bonus payments to executives. This buffer must consist solely of tier 1 common equity, but the buffer applies to all three risk-based ratios (CET 1 Capital (as defined below), tier 1 capital and total capital). The capital conservation buffer was phased in incrementally over time, becoming fully effective on January 1, 2019, and consists of an additional amount of common equity equal to 2.5% of risk-weighted assets.

~~Accordingly,~~The ~~the~~ Basel III Capital Rules require the following minimum capital requirements:

•

a common equity tier 1 risk-based capital ratio of 4.5%, plus the 2.5% capital conservation buffer, effectively resulting in a minimum ratio of CET1 Capital to risk-weighted assets of at least 7%;

•

a tier 1 risk-based capital ratio of 6%, plus the capital conservation buffer, effectively resulting in a minimum tier 1 capital ratio of 8.5%;

•

a total risk-based capital ratio of 8%, plus the capital conservation buffer, effectively resulting in a minimum total capital ratio of 10.5%; and

•

a leverage ratio of 4%.

As of December 31, 2020, the Company and the Bank exceeded all capital adequacy requirements under the Basel III Capital Rules.

~~are~~As ~~in the form~~ of ~~common~~December ~~stock.~~31, ~~Additional~~2021, ~~tier~~the 1Company ~~capital~~and ~~includes~~the ~~other~~Bank ~~perpetual~~exceeded ~~instruments~~all ~~historically~~capital ~~included~~adequacy inrequirements ~~tier~~under 1the ~~capital,~~Basel ~~such~~III asCapital ~~non-cumulative perpetual preferred stock~~Rules.

Under the Basel III Capital Rules, tier 1 capital is defined to include two components: common equity tier 1 capital (“CET1 Capital”) and additional tier 1 capital. CET1 Capital consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income and limited amounts of minority interests that are in the form of common stock. Additional tier 1 capital includes other perpetual instruments historically included in tier 1 capital, such as non-cumulative perpetual preferred stock.

The Basel III Capital Rules require certain deductions from or adjustments to capital. Deductions from CET1 Capital are required for goodwill (net of associated deferred tax liabilities); intangible assets such as non-mortgage servicing assets and purchased credit card relationships (net of associated deferred tax liabilities); deferred tax assets that arise from net operating loss and tax credit carryforwards (net of any related valuations allowances and net of deferred tax liabilities); any gain on sale in connection with a securitization exposure; any defined benefit pension fund net asset (net of any associated deferred tax liabilities) held by a bank holding company (this provision does not apply to a bank or savings association); the aggregate amount of outstanding equity investments (including retained earnings) in financial subsidiaries; and identified losses. Other deductions are necessary from different levels of capital. The Basel III Capital Rules also increased the risk weight for certain assets, meaning that more capital must be held against such assets. For example, commercial real estate loans that do not meet certain underwriting requirements must be risk-weighted at 150%.

Additionally, the Basel III Capital Rules provide for the deduction of three categories of assets: (i) deferred tax assets arising from temporary differences that cannot be realized through net operating loss carrybacks (net of related valuation allowances and of deferred tax liabilities), (ii) mortgage servicing assets (net of associated deferred tax liabilities) and (iii) investments in more than 10% of the issued and outstanding common stock of unconsolidated financial institutions (net of associated deferred tax liabilities). The amount in each category that exceeds 10% of CET1 Capital must be deducted from CET1 Capital. The remaining, non-deducted amounts are then aggregated, and the amount by which this total amount exceeds 15% of CET1 Capital must be deducted from CET1 Capital. Amounts of minority investments in consolidated subsidiaries that exceed certain limits and investments in unconsolidated financial institutions may also have to be deducted from the category of capital to which such instruments belong.

Accumulated other comprehensive income (“AOCI”) is presumptively included in CET1 Capital and often would operate to reduce this category of capital. The Basel III Capital Rules provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI and we determined to opt out.

Furthermore, in an effort to support our communities during the COVID-19 pandemic, we are participating in the Paycheck Protection Program (“PPP”) established by the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and implemented by the SBA and, as a result, have access to the PPPLF established by the Federal Reserve. At December 31, ~~2020~~2021, ~~borrowings~~there ~~under the PPPLF totaled $149.8 million and $149.8 million in PPP loans~~ were ~~pledged~~no asborrowings ~~collateral~~under ~~for~~ the PPPLF. Any PPP loans pledged as collateral for the PPPLF would be excluded from average assets used in the leverage ratio calculation. All PPP loans are fully guaranteed by the SBA and have no impact on our risk-based capital ratios.

Community Bank Leverage Ratio

On September 17, 2019, the federal banking agencies jointly finalized a rule to be effective January 1, 2020 and intended to simplify the regulatory capital requirements described above for qualifying community banking organizations that opt into the Community Bank Leverage Ratio (“CBLR”) framework, as required by Section 201 of the EGRRCPA. The final rule became effective on January 1, 2020, and the CBLR framework became available for banks to use beginning with their March 31, 2020 Call Reports. Under the final rule, if a qualifying community banking organization opts into the CBLR framework and meets all requirements under the framework, it will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations described below and will not be required to report or calculate risk-based capital. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. However, Section 4012 of the CARES Act required that the CBLR be temporarily lowered to 8%. The federal regulators issued a rule implementing the lower CBLR effective April 23, 2020. The rule also established a two-quarter grace period for a qualifying institution whose leverage ratio falls below the 8% CBLR requirement so long as the bank maintains a leverage ratio of 7% or greater. Another rule was issued to transition back to the 9% CBLR by increasing the ratio to 8.5% for calendar year 2021 and 9% thereafter. Although the Company and the Bank are qualifying community banking organizations, the Company and the Bank have elected not to opt in to the CBLR framework at this time and will continue to follow the Basel III capital requirements as described above.

Tie in Arrangements

Federal law prohibits bank holding companies and any subsidiary banks from engaging in certain tie in arrangements in connection with the extension of credit. For example, the Bank may not extend credit, lease or sell property, or furnish any services, or fix or vary the consideration for any of the foregoing on the condition that (i) the customer must obtain or provide some additional credit, property or services from or to the Bank other than a loan, discount, deposit or trust services, (ii) the customer must obtain or provide some additional credit, property or service from or to the Company or the Bank, or (iii) the customer must not obtain some other credit, property or services from competitors, except reasonable requirements to assure soundness of credit extended.

Executive Compensation

In 2010, the federal banking agencies issued guidance to regulated banks and holding companies intended to ensure that incentive compensation arrangements at financial organizations take into account risk and are consistent with safe and sound practices. The guidance is based on three “key principles” calling for incentive compensation plans to: appropriately balance risks and rewards; be compatible with effective controls and risk management; and be backed up by strong corporate governance. Further, in 2016 the federal banking regulators re-proposed rules that would prohibit incentive compensation arrangements that would encourage inappropriate risks by providing excessive compensation or that could lead to a material financial loss, and include certain prescribed standards for governance and risk management for incentive compensation for institutions, such as us, that have over $1 billion in consolidated assets.

The Dodd-Frank Act requires public companies to include, at least once every three years, a separate non-binding “say-on-pay” vote in their proxy statement by which shareholders may vote on the compensation of the public company’s named executive officers. The Dodd-Frank Act also requires public companies to conduct a separate shareholder vote on the future frequency of the “say-on-pay” vote. The vote on the frequency of “say-on-pay,” frequently referred to as “say-on-frequency,” must be held every six years. In addition, if such public companies are involved in a merger, acquisition, or consolidation, or if they propose to sell or dispose of all or substantially all of their assets, shareholders have a right to an advisory vote on any golden parachute arrangements in connection with such transaction (frequently referred to as “say-on-golden parachute” vote). As an emerging growth company, we are not required to obtain “say-on-pay,” “say-on-frequency” or “say-on-golden-parachute” votes from our shareholders for so long as we remain an emerging growth company.

Bank Regulation

The Bank is a state savings bank that is chartered by and headquartered in the State of Texas. The Bank is subject to supervision and regulation by the TDSML and the FDIC. The TDSML supervises and regulates all areas of the Bank’s operations including, without limitation, the making of loans, the issuance of securities, the conduct of the Bank’s corporate affairs, the satisfaction of capital adequacy requirements, the payment of dividends, and the establishment or closing of banking offices. The FDIC is the Bank’s primary federal regulatory agency, which periodically examines the Bank’s operations and financial condition and compliance with federal consumer protection laws. In addition, the Bank’s deposit accounts are insured by the FDIC to the maximum extent permitted by law, and the FDIC has certain enforcement powers over the Bank.

As a state savings bank in Texas, the Bank is empowered by statute, subject to the limitations contained in those statutes, to take and pay interest on savings and time deposits, to accept demand deposits, to make loans on residential and other real estate, to make consumer and commercial loans, to invest, with certain limitations, in equity securities and in debt obligations of banks and corporations and to provide various other banking services for the benefit of the Bank’s clients. Various state consumer laws and regulations also affect the operations of the Bank, including state usury laws and consumer credit laws.

The Texas Finance Code further provides that, subject to the limitations established by rule of the Texas Finance Commission, a Texas savings bank may make any loan or investment or engage in any activity permitted under state law for a bank or savings and loan association or under federal law for a federal savings and loan association, savings bank or national bank if such institution’s principal office is located in Texas. This provision is commonly referred to as the “Expansion of Powers” provision of the Texas Finance Code applicable to state savings banks.

Under federal law, a Texas state savings bank is a state bank. The Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”) provides that no state bank or subsidiary thereof may engage as a principal in any activity not permitted for national banks, unless the institution complies with applicable capital requirements and the FDIC determines that the activity poses no significant risk to the DIF.

Texas state-chartered savings banks are required to maintain at least 50% of their portfolio assets in qualified thrift investments as defined by 12 U.S.C. § 1467a(m)(4)(C) and other assets determined by the commissioner of the TDSML under rules adopted by the Texas Finance Commission, to be substantially equivalent to qualified thrift investments or which further residential lending or community development.

Capital Adequacy

See “Holding Company Regulation—Capital Regulations” above.

Prompt Corrective Action

Federal law and regulations establish a capital-based regulatory framework designed to promote early intervention for troubled banks and require the FDIC to choose the least expensive resolution of bank failures. The capital-based regulatory framework contains five categories of regulatory capital requirements, including “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” To qualify as a “well capitalized” institution for these purposes, a bank must have a leverage ratio of no less than 5%, a tier 1 capital ratio of no less than 8%, a CETI Capital ratio of no less than 6.5% and a total risk-based capital ratio of no less than 10%, and a bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level. Generally, a financial institution must be “well capitalized” before the Federal Reserve will approve an application by a bank holding company to acquire a bank or merge with a bank holding company. The FDIC applies the same requirement in approving bank merger applications.

Immediately upon becoming undercapitalized, a depository institution becomes subject to the provisions of Section 38 of the Federal Deposit Insurance Act of 1950 (“FDIA”), which: (i) restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution’s assets; and (v) require prior approval of certain expansion proposals. Bank holding companies controlling financial institutions can be called upon to boost the institutions’ capital and to partially guarantee the institutions’ performance under their capital restoration plans. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions are necessary to resolve the problems of the institution at the least possible long-term cost to the deposit insurance fund, subject in certain cases to specified procedures. These discretionary supervisory actions include: (i) requiring the institution to raise additional capital; (ii) restricting transactions with affiliates; (iii) requiring divestiture of the institution or the sale of the institution to a willing purchaser; (iv) requiring the institution to change and improve its management; (iv) prohibiting the acceptance of deposits from correspondent banks; (v) requiring prior Federal Reserve approval for any capital distribution by a bank holding company controlling the institution; and (vi) any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions.

As of December 31, ~~2020~~2021, the Bank had sufficient capital to qualify as “well capitalized” under the requirements contained in the applicable regulations, policies and directives pertaining to capital adequacy, and it is unaware of any material violation or alleged material violation of these regulations, policies or directives. Rapid growth, poor loan portfolio performance, or poor earnings performance, or a combination of these factors, could change the Bank’s capital position in a relatively short period of time, making additional capital infusions necessary.

It should be noted that the minimum ratios referred to above in this section are merely guidelines, and the Bank’s regulators possess the discretionary authority to require higher capital ratios.

Bank Dividends

The FDIC prohibits any distribution that would result in the Bank being “undercapitalized” (<4% leverage, <4.5% CET1 risk-based, <6% tier 1 risk-based, or <8% total risk-based). Unless the approval of the FDIC is obtained, the Bank may not declare or pay a dividend if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the Bank’s net income during the current calendar year and the retained net income of the prior two calendar years. Under Texas law, the Bank is permitted to declare and pay a dividend on capital stock only out of current or retained income.

Insurance of Accounts and Other Assessments

The Bank pays deposit insurance assessments to the DIF, which is determined through a risk-based assessment system. The Bank’s deposit accounts are currently insured by the DIF, generally up to a maximum of $250,000 per separately insured depositor.

The Bank pays assessments to the FDIC for such deposit insurance. Under the current assessment system, the FDIC assigns an institution to a risk category based on the institution’s most recent supervisory and capital evaluations, which are designed to measure risk. For deposit insurance assessment purposes, an insured depository institution is placed in one of four risk categories each quarter. An institution’s assessment is determined by multiplying its assessment rate by its assessment base. Under the FDIA, the FDIC may terminate a bank’s deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, agreement or condition imposed by the FDIC.

In connection with the Dodd Frank Act's requirement that insurance assessments be based on assets, in July 2016, the FDIC redefined its deposit insurance premium assessment base to be an institution's average consolidated total assets minus average tangible equity and revised its deposit insurance assessment rate schedule. In addition, the FDIC is considering, and is expected to adopt, a final rule to apply the CBLR framework to the deposit insurance assessment system.

On September 30, 2018, the DIF reserve ratio reached 1.36%. Because the reserve ratio exceeded the targeted 1.35% by the Dodd-Frank Act, two deposit assessment changes occurred under FDIC regulations: (i) surcharges on large banks ended, and the last surcharge on large banks was collected on December 28, 2018; and (ii) small banks were awarded assessment credits for the portion of their assessment that contributed to the growth in the reserve ratio from 1.15% to 1.35%, to be applied when the reserve ratio is at least 1.38%. The Bank's assessment credit as calculated by the FDIC was $427 thousand and was applied to the Bank's September 2019 Quarterly Invoice for Deposit Insurance, and was fully utilized during the first quarter of 2020. As of September 30, 2020, the FDIC announced that the ratio had declined to 1.30% due largely to consequences of the COVID-19 pandemic. The FDIC adopted a plan to restore the DIF to the 1.35% ratio within eight years but did not change its assessment schedule. Under the FDIC’s restoration plan, FDIC staff will update its projections for the DIF balance and DIF reserve ratio at least semiannually while the restoration plan is in effect. FDIC staff may in the future recommend assessment rate adjustments if deemed necessary.

The Bank is also required to pay quarterly assessments to the TDSML to support the activities and operations of the agency.

Audit Reports

For insured institutions with total assets of $1.0 billion or more, financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), management’s certifications signed by our and the Bank’s chief executive officer and chief accounting or financial officer concerning management’s responsibility for the financial statements, and an attestation by the auditors regarding the Bank’s internal controls must be submitted. For institutions with total assets of more than $3.0 billion, independent auditors may be required to review quarterly financial statements. FDICIA requires that the Bank have an independent audit committee, consisting of outside directors only, or that we have an audit committee that is entirely independent. The committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel and must not include representatives of large customers. The Company’s audit committee consists entirely of independent directors.

Restrictions on Transactions with Affiliates

The Bank is subject to sections 23A and 23B of the Federal Reserve Act of 1913 (the “FRA”), and the Federal Reserve’s Regulation W, as made applicable to state nonmember banks by Section 18(j) of the FDIA. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with such bank. Accordingly, transactions between the Bank, on the one hand, and the Company or any affiliates, on the other hand, will be subject to a number of restrictions. Sections 23A and 23B of the FRA impose restrictions and limitations on the Bank from engaging in certain types of transactions between the Bank, on the one hand, and the Company or any affiliates, on the other hand, including making extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or other affiliates, the purchase of, or investment in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of the Company or other non-bank affiliates. Such restrictions and limitations prevent the Company or other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Furthermore, such “covered transactions” are limited, individually, to 10% of the Bank’s capital and surplus and in the aggregate to 20% of the Bank’s capital and surplus.

All such transactions must be on terms that are no less favorable to the Bank than those that would be available from nonaffiliated third parties. Federal Reserve policies also forbid the payment by bank subsidiaries of management fees which are unreasonable in amount or exceed the fair market value of the services rendered or, if no market exists, actual costs plus a reasonable profit.

Financial Subsidiaries

Under the GLBA, subject to certain conditions imposed by their respective banking regulators, national and state-chartered banks are permitted to form “financial subsidiaries” that may conduct financial activities or activities incidental thereto, thereby permitting bank subsidiaries to engage in certain activities that previously were impermissible. The GLBA imposes several safeguards and restrictions on financial subsidiaries, including that the parent bank’s equity investment in the financial subsidiary be deducted from the bank’s assets and tangible equity for purposes of calculating the bank’s capital adequacy. In addition, the GLBA imposed new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and non-bank affiliates. As of December 31, ~~2020~~2021, the Bank did not have any financial subsidiaries.

Loans to Insiders

Loans to executive officers, directors or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls or has the power to vote more than 10% of any class of voting securities of a bank (“10% Shareholders”) or to any political or campaign committee the funds or services of which will benefit those executive officers, directors, or 10% Shareholders or which is controlled by those executive officers, directors or 10% Shareholders, are subject to Sections 22(g) and 22(h) of the FRA and their corresponding regulations, which is referred to as Regulation O. Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire board of directors. Regulation O prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution’s unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the Bank’s unimpaired capital and unimpaired surplus. Section 22(g) of the FRA identifies limited circumstances in which the Bank is permitted to extend credit to executive officers. Furthermore, the Bank must periodically report all loans made to directors and other insiders to the bank regulators.

Branching

The Dodd-Frank Act permits insured state banks to engage in interstate branching if the laws of the state where the new banking office is to be established would permit the establishment of the banking office if it were chartered by a bank in such state. Under current Texas law, our Bank can establish a branch in Texas or in any other state. All branch applications of the Bank require prior approval of the TDSML and the FDIC. Finally, the Company may also establish banking offices in other states by merging with banks or by purchasing banking offices of other banks in other states, subject to certain restrictions.

Liquidity Requirements

Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III Capital Rules liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests. The federal banking agencies adopted final Liquidity Coverage Ratio rules in September 2014 and proposed Net Stable Funding Ratio rules in May 2016. These rules introduced two liquidity related metrics: (i) Liquidity Coverage Ratio is intended to require financial institutions to maintain sufficient high-quality liquid resources to survive an acute stress scenario that lasts for one month; and (ii) Net Stable Funding Ratio is intended to require financial institutions to maintain a minimum amount of stable sources relative to the liquidity profiles of the institution’s assets and contingent liquidity needs over a one-year period.

While the Liquidity Coverage Ratio and the proposed Net Stable Funding Ratio rules apply only to the largest banking organizations in the country, certain elements may filter down and become applicable to or expected of all insured depository institutions and bank holding companies.

Reserve Requirements

In accordance with regulations of the Federal Reserve, all banking organizations are required to maintain average daily reserves at mandated ratios against their transaction accounts (primarily NOW and Super NOW checking accounts). In addition, reserves must be maintained on certain non-personal time deposits. These reserves must be maintained in the form of vault cash or in an account at a Federal Reserve Bank.

Brokered Deposits

The FDIA restricts the use of brokered deposits by depository institutions that are not well capitalized. Under the applicable regulations, (i) a well-capitalized insured depository institution may solicit and accept, renew or roll over any brokered deposit without restriction, (ii) an adequately capitalized insured depository institution may not accept, renew or roll over any brokered deposit unless it has applied for and been granted a waiver of this prohibition by the FDIC and (iii) an undercapitalized insured depository institution may not accept, renew or roll over any brokered deposit. The FDIC may, on a case-by-case basis and upon application by an adequately capitalized insured depository institution, waive the restriction on brokered deposits upon a finding that the acceptance of brokered deposits does not constitute an unsafe or unsound practice with respect to such institution. As of December 31, ~~2020~~2021, the Bank was eligible to accept brokered deposits without a waiver from the FDIC.

Lending Limit

Because of the availability of the savings bank expansion of powers language in the Texas Finance Code, savings banks have flexibility in the calculation of their applicable lending limit. The lending limit applicable to state banks in Texas is broader than the limit applicable to national banks. The Texas Finance Code adopts the lending limit applicable to federal savings associations under the Home Owners’ Loan Act for state savings banks, however, Texas savings bank are permitted under the expansion of power authority to adopt the legal lending limit applicable to national banks or state banks. Generally (subject to certain exceptions) the lending limit for loans to one person for national banks and federal savings associations is 15% of unimpaired capital and unimpaired surplus plus an additional 10% of unimpaired capital and unimpaired surplus if the loan is fully secured by readily marketable collateral. The lending limit for state banks in Texas is generally 25% of unimpaired capital and unimpaired surplus plus an additional 15% of unimpaired capital and unimpaired surplus if the loan is fully secured by readily marketable collateral. The adoption of the lending limit for national banks or state banks must incorporate the limitations applicable to the standard adopted.

The Bank has adopted the lending limit applicable to state banks or 25% of unimpaired capital and unimpaired surplus plus an additional 15% of unimpaired capital and unimpaired surplus if the loan is fully secured by readily marketable collateral.

Concentrated Commercial Real Estate Lending Regulations

The federal banking agencies, including the FDIC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development and other land represent 100% or more of total capital or (ii) total reported loans secured by commercial real estate loans represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. If a concentration is present, management must employ heightened risk management practices that address the following key elements: including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing and maintenance of increased capital levels as needed to support the level of commercial real estate lending. Commercial real estate loans are land development and construction loans (including 1 to 4 family residential and commercial construction loans) and other land and development, commercial real estate loans secured by multifamily property and certain nonfarm nonresidential property (excluding loans secured by owner-occupied properties) and certain loans to real estate investment trusts and unsecured loans to developers.

The Basel III Rules also require loans categorized as “high-volatility commercial real estate” (“HVCRE”) to be assigned a 150% risk weighting and require additional capital support. However, the EGRRCPA prohibits federal banking regulators from imposing this higher capital standards on HVCRE exposures unless they are for higher risk loans for acquisition, development or construction (“ADC”) and clarifying ADC status.

On November 20, 2019, federal banking regulators jointly issued a final rule revising the definition of a HVCRE exposure and providing interpretations of certain aspects of Acquisition Development and Construction loans. The interpretation under this final rule took effect on April 1, 2020 ~~and may impact the Banks' Consolidated Report of Condition and Income~~.

Examination and Examination Fees

The FDIC periodically examines and evaluates state savings banks that are not member banks of the Federal Reserve System. Based on such an examination, the Bank, among other things, may be required to revalue its assets and establish specific reserves to compensate for the difference between the Bank’s assessment and that of the FDIC. The TDSML also conducts examinations of state savings banks and generally conducts joint examinations with the FDIC. The TDSML charges assessments and fees which recover the costs of examining state savings banks, processing applications and other filings and covering direct and indirect expenses in regulating state savings banks. The federal banking agencies also have the authority to assess additional supervision fees.

Bank Secrecy Act, Anti-Money Laundering and OFAC

Under federal laws, including the Bank Secrecy Act, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) and as further amended by the National Defense Authorization Act for Fiscal Year 2021 (the “National Defense Authorization Act”), financial institutions must maintain anti-money laundering (“AML”) programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with non-U.S. financial institutions and non-U.S. customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and law enforcement authorities have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s compliance with such obligations in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The Treasury Department’s Office of Foreign Assets Control (“OFAC”) is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. The regulatory authorities have imposed “cease and desist” orders and civil money penalty sanctions against institutions found to be violating these obligations.

Additionally, the USA PATRIOT Act requires each financial institution to develop a customer identification program (“CIP”) as part of its AML program. The key components of the CIP are identification, verification, government list comparison, notice and record retention. The purpose of the CIP is to enable the financial institution to determine the true identity and anticipated account activity of each customer. To make this determination, among other things, the financial institution must collect certain information from customers at the

~~other things, the financial institution must collect certain information from customers at the~~ time they enter into the customer relationship with the financial institution. This information must be verified within a reasonable time through documentary and non-documentary methods. Furthermore, all customers must be screened against any CIP-related government lists of known or suspected terrorists. Financial institutions are also required to comply with various reporting and recordkeeping requirements. The Federal Reserve and the FDIC consider an applicant’s effectiveness in combating money laundering, among other factors, in connection with an application to approve a bank merger or acquisition of control of a bank or bank holding company.

Likewise, OFAC administers and enforces economic and trade sanctions against targeted foreign countries and regimes under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of persons, organizations and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If we or the Bank find a name on any transaction, account or wire transfer that is on an OFAC list, we or the Bank must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate authorities.

The Financial Crimes Enforcement Network ("FinCEN") issued a final rule regarding customer due diligence requirements for covered financial institutions in connection with their Bank Secrecy Act and Anti-Money Laundering policies, that became effective in May 2018. The final rule adds a requirement to understand the nature and purpose of customer relationships and identify the "beneficial owner" (25% or more ownership interest) of legal entity customers. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution's anti-money laundering compliance when considering regulatory applications filed by the institution, including applications for bank mergers and acquisitions. The regulatory authorities have imposed "cease and desist" orders and civil money penalty sanctions against institutions found to be violating these obligations.

Further, on January 1, 2021, Congress passed the National Defense Authorization Act, which enacted the most significant overhaul of the Bank Secrecy Act and related AML laws since the USA PATRIOT Act. Notable amendments include (1) significant changes to the collection of beneficial ownership information and the establishment of a beneficial ownership registry, which requires corporate entities (generally, any corporation, limited liability company, or other similar entity with 20 or fewer employees and annual gross income of $5 million or less) to report beneficial ownership information to FinCEN (which will be maintained by FinCEN and made available upon request to financial institutions); (2) enhanced whistleblower provisions, which provide that one or more whistleblowers who voluntarily provide original information leading to the successful enforcement of violations of the anti-money laundering laws in any judicial or administrative action brought by the Secretary of the Treasury or the Attorney General resulting in monetary sanctions exceeding $1 million (including disgorgement and interest but excluding forfeiture, restitution, or compensation to victims) will receive not more than 30 percent of the monetary sanctions collected and will receive increased protections; (3) increased penalties for violations of the Bank Secrecy Act; (4) improvements to existing information sharing provisions that permit financial institutions to share information relating to suspicious activity reports (SARs) with foreign branches, subsidiaries, and affiliates (except those located in China, Russia, or certain other jurisdictions) for the purpose of combating illicit finance risks; and (5) expanded duties and powers of FinCEN. Many of the amendments, including those with respect to beneficial ownership, require the Department of Treasury and FinCEN to promulgate rules.

Failure of a financial institution to maintain and implement adequate AML and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Privacy and Data Security

Under the GLBA, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The GLBA also directed federal regulators, including the FDIC, to prescribe standards for the security of consumer information. The Bank is subject to such standards, as well as standards for notifying clients in the event of a security breach.

Consumer Laws and Regulations

Banking organizations are subject to numerous laws and regulations intended to protect consumers. These laws include, among others:

•

Truth in Lending Act;

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Truth in Savings Act;

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Electronic Funds Transfer Act;

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Expedited Funds Availability Act;

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Equal Credit Opportunity Act;

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Fair and Accurate Credit Transactions Act;

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Fair Housing Act;

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Fair Credit Reporting Act;

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Fair Debt Collection Act;

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Gramm-Leach-Bliley Act;

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Home Mortgage Disclosure Act;

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Right to Financial Privacy Act;

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Real Estate Settlement Procedures Act;

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laws regarding unfair and deceptive acts and practices; and

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usury laws.

Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above. These federal, state and local laws mandate certain disclosure requirements and regulate the manner in which financial institutions deal with customers when taking deposits, making loans, or conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability. The creation of the CFPB by the Dodd-Frank Act has led to enhanced enforcement of consumer financial protection laws.

Community Reinvestment Act

The CRA and its corresponding regulations is intended to encourage banks to help meet the credit needs of their communities, including low and moderate-income neighborhoods, consistent with safe and sound operations. The federal bank agencies examine and assign each bank a public CRA rating. The CRA then requires the federal banking agencies to take into account the federally-insured bank’s record in meeting the needs of its communities when considering an application by a bank to establish or relocate a branch or the bank or its holding company to conduct certain mergers or acquisitions. In the case of a bank holding company, the CRA performance record of all banks involved in the merger or acquisition are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other financial holding company. An unsatisfactory record can substantially delay, block or impose conditions on the transaction. The Bank received a satisfactory rating on its most recent CRA assessment.

On December 12, 2019, the Office of the Comptroller of the Currency (the “OCC”) and the FDIC issued a joint proposal to revamp how the agencies will assess banks' performance under the CRA. Among other changes, the proposal (i) expands the concept of assessment area (“AA”) to include geographies outside of a bank's current AAs and in which the bank receives at least 5% of its retail deposits and (ii) introduces a series of objective tests for determining a bank's presumptive CRA rating. While the OCC adopted a final rule on May 20, 2020, published on June 5, 2020 (the “June 2020 CRA rule”), that was generally consistent with the proposed rule, the FDIC did not join in the ~~final~~June 2020 CRA rule and has indicated it is not ready to adopt a final rule at this time, particularly in light ~~of the ongoing COVID-19 pandemic. Members of Congress and community~~

~~groups~~of ~~have~~the ongoing COVID-19 pandemic. Members of Congress and community groups expressed hostility to the ~~new~~June ~~OCC~~2020 CRA rule, and ~~have~~ raised the possibility of repealing it through legislative action. In light of this ~~uncertainty~~, ~~and~~ the ~~fact~~OCC ~~that~~issued ~~the~~a ~~FDIC~~final ~~has~~rule ~~not~~on ~~yet~~December ~~taken~~14, ~~action~~2021 onrescinding ~~new~~the June 2020 CRA rule, and replaced it iswith ~~impossible~~a torule ~~predict~~based on the ~~substance~~CRA ~~and~~rules ~~timing~~adopted ofjointly aby ~~revised~~the ~~CRA~~federal ~~rule~~banking ~~from~~agencies ~~the~~in ~~FDIC~~1995. The Company and the Bank will continue to monitor ~~this~~these ~~proposal~~developments.

Environmental Laws Potentially Impacting the Bank

We are subject to state and federal environmental laws and regulations. The Comprehensive Environmental Response, Compensation and Liability Act, (“CERCLA”), is a federal statute that generally imposes strict liability on all prior and present "owners and operators" of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing that the term "owner and operator" excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this "secured creditor exemption" has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan, which costs often substantially exceed the value of the property.

The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018

Key provisions of the EGRRCPA as it relates to community banks and bank holding companies include, but are not limited to: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading; (iii) establishing the CBLR framework; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; (vi) clarifying definitions pertaining to HVCRE, which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings; and (vii) changing the eligibility for use of the small bank holding company policy statement from institutions with under $1 billion in assets to institutions with under $3 billion in assets.

For those regulations that have been implemented, most will have little to no impact on the Company. However, the Company may be impacted by future agency rulemaking in connection with implementation of the EGRRCPA and it is difficult to anticipate the continued impact this expansive legislation may have on the Company, its customers and the financial industry generally.

For more information on the EGRRCPA, please see the following sections “Permissible Activities,” “Community Bank Leverage Ratio,” and “Concentrated Commercial Real Estate Lending Regulations,” above, and “Consumer Financial Protection Bureau” and “HMDA,” below.

Consumer Financial Protection Bureau

The CFPB was created under the Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and thrifts, including the Equal Credit Opportunity Act, Truth-in Lending Act (“TILA”), Real Estate Settlement Procedures Act (“RESPA”), Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. Banking institutions with total assets of $10 billion or less, such as the Bank, remain subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws and such additional regulations as may be adopted by the CFPB.

The “Ability-to-Repay/Qualified Mortgage” rules, which amended TILA’s implementing regulation, Regulation Z generally requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay for certain consumer credit transactions secured by a dwelling and establishes certain protections from liability under this requirement for “qualified mortgages.” The EGRRCPA provides that for certain insured depository institutions and insured credit unions with less than $10 billion in total consolidated assets, mortgage loans that are originated and retained in portfolio will automatically be deemed to satisfy the “ability to repay” requirement. To

institutions and insured credit unions with less than $10 billion in total consolidated assets, mortgage loans that are originated and retained in portfolio will automatically be deemed to satisfy the “ability to repay” requirement. To qualify for this treatment, the insured depository institutions and credit unions must meet conditions relating to prepayment penalties, points and fees, negative amortization, interest-only features and documentation.

The Dodd-Frank Act implemented significant increases in the regulation of mortgage lending and servicing by banks and non-banks. In particular, the Dodd-Frank Act includes, among other things, (i) requirements that mortgage originators act in the best interests of a consumer and seek to ensure that a consumer will have the capacity to repay a loan that the consumer enters into; (ii) requirements that mortgage originators be properly qualified, registered, and licensed and comply with any regulations designed by the CFPB to monitor their operations; (iii) mandates of comprehensive additional and enhanced residential mortgage loan related disclosures, both prior to loan origination and after; and (iv) mandates of additional appraisal practices for loans secured by residential dwellings, including potential additional appraisals at the banks cost.

Home Mortgage Disclosure Act (“HMDA”)

On October 15, 2015, pursuant to Section 1094 of the Dodd-Frank Act, the CFPB issued amended rules in regard to the collection, reporting and disclosure of certain residential mortgage transactions under the Home Mortgage Disclosure Act (the "HMDA Rules"). The Dodd-Frank Act mandated additional loan data collection points in addition to authorizing the Bureau to require other data collection points under implementing Regulation C. Most of the provisions of the HMDA Rule went into effect on January 1, 2018 and apply to data collected in 2018 and reporting in 2019 and later years. The HMDA Rule adopts a uniform loan volume threshold for all financial institutions, modifies the types of transactions that are subject to collection and reporting, expands the loan data information being collected and reported, and modifies procedures for annual submission and annual public disclosures. EGRRCPA amended provisions of the HMDA Rule to exempt certain insured institutions from most of the expanded data collection requirements required of the Dodd-Frank Act. Institutions originating fewer than 500 dwelling secured closed-end mortgage loans or fewer than 500 dwelling secured open-end lines are exempt from the expanded data collection requirements that went into effect January 1, 2018. The Bank does not receive this reporting relief based on the number of dwelling secured mortgage loans reported annually.

UDAP and UDAAP

Banking regulatory agencies have increasingly used a general consumer protection statute to address "unethical" or otherwise "bad" business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act, referred to as the FTC Act, which is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce. "Unjustified consumer injury" is the principal focus of the FTC Act. UDAP laws and regulations were expanded under the Dodd-Frank Act to apply to "unfair, deceptive or abusive acts or practices," referred to as UDAAP, which have been delegated to the CFPB for rule-making. The federal banking agencies have the authority to enforce such rules and regulations.

Government and Regulatory Response to the COVID-19 Pandemic

The onset of the COVID-19 pandemic in the United States ~~has~~ in certain respects, at least temporarily, impacted the Company’s operations and risk management and resulted in changes to its safety and soundness regulation. For instance, the federal banking agencies have encouraged banking organizations to work constructively and prudently with borrowers impacted by the COVID-19 pandemic in order to meet the borrowers’ financial needs. Guidance published by the Federal Reserve encourages banking organizations to consider undertaking a variety of efforts during a major disaster or national emergency such as the COVID-19 pandemic, including: waiving ATM, overdraft, and late fees, as well as early withdrawal penalties on time deposits; increasing ATM daily cash withdrawal limits; easing credit terms for new loans; increasing credit limits for creditworthy customers; offering payment accommodations such as allowing loan customers to defer or skip some payments or extending payment due dates, which would avoid delinquencies and negative credit bureau reporting caused by disaster-related disruptions; and conducting a review of an affected borrower's financial condition in an effort to implement a prudent loan workout arrangement. The federal banking agencies have stated that they will not criticize a banking organization that implements prudent loan workouts for affected customers even if the restructured loans result in adverse classifications or credit risk downgrades. In

prudent loan workout arrangement. The federal banking agencies have stated that they will not criticize a banking organization that implements prudent loan workouts for affected customers even if the restructured loans result in adverse classifications or credit risk downgrades. In addition, the agencies temporarily suspended examination activity in the second quarter of 2020 to allow banking organization to focus on the needs of their customers and revised examination guidance to require examiners to consider, in conducting supervisory assessments, whether banking organizations have taken appropriate actions in response to the stress caused by the COVID-19 pandemic and managed associated risk appropriately. Consistent with the regulators’ guidance, the Company has and continues to work with its customers during the COVID-19 pandemic to provide them with greater access to their funds, waive certain fees and provide short-term payment deferrals for borrowers impacted by the COVID-19 pandemic and requiring assistance.

In response to the COVID-19 pandemic, Congress, through the enactment of the CARES Act, and the federal banking agencies, though rulemaking, interpretive guidance and modifications to agency policies and procedures, have taken a series of actions to address regulatory capital, liquidity risk management, financial management and reporting, and operational considerations for banking organizations. Notable developments not otherwise discussed above include the following.

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On March 15, 2020, the Federal Reserve issued a statement encouraging banks to use their capital and liquidity buffers to lend to households and businesses impacted by the COVID-19 pandemic. The following day, the Federal Reserve issued a statement encouraging banks to access the Federal Reserve’s discount window to assist with capital and liquidity management in light of the increased credit needs of banking customers.

•

The Bank is also typically required by the Federal Reserve Bank of Dallas (“FRB”) to maintain in reserves certain amounts of vault cash and/or deposits with the FRB, however, in response to the COVID-19 pandemic, this requirement has been eliminated until further notice.

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Section 4013 of the CARES Act provides financial institutions the option to suspend the application of GAAP to any loan modification related to COVID-19 from treatment as a troubled debt restructuring (“TDR”) for the period between March 1, 2020 and the earlier of (i) 60 days after the end of the national emergency proclamation or (ii) December 31, 2020. Section 541 of the Consolidated Appropriations Act, 2021, amended Section 4013 of the CARES Act to extend this relief to the earlier of (i) 60 days after the end of the national emergency proclamation or (ii) January 1, 2022. A financial institution may elect to suspend GAAP only for a loan that was not more than 30 days past due as of December 31, 2019. In addition, the temporary suspension of GAAP does not apply to any adverse impact on the credit of a borrower that is not related to COVID-19. The suspension of GAAP is applicable for the entire term of the modification, including an interest rate modification, a forbearance agreement, a repayment plan, or other agreement that defers or delays the payment of principal and/or interest. Accordingly, a financial institution that elects to suspend GAAP should not be required to increase its reported TDRs at the end of the period of relief, unless the loans require further modification after the expiration of that period.

For additional information regarding actions taken by regulatory agencies to provide relief to consumers who have been adversely impacted by the ongoing COVID-19 pandemic, see the discussion below under Item 1A, "Risk Factors—Risks Related to our Business," of this Form 10-K.

Future Legislative Developments

Various legislative acts are from time to time introduced in the U.S. Congress and the Texas Legislature. This legislation may change banking statutes and the environment in which we operate in substantial and unpredictable ways. With the change in U. S. Presidential administration, numerous regulations have been identified for potential revision, including laws and regulations associated with the Dodd-Frank Act and EGRRCPA. We cannot determine the ultimate effect that potential legislation, if enacted, or implementing regulations and interpretations with respect thereto, would have on our financial condition or results of operations.

AVAILABLE INFORMATION

We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports available free of charge on www.sotb.com as soon as reasonably practicable after the reports are electronically filed with the SEC. Our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q are also available our internet website in interactive data format using the eXtensible Business Reporting Language (“XBRL”), which allows financial statement information to be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software and used within investment models in other software formats. These filings are also accessible on the SEC’s website at www.sec.gov.

Additionally, our corporate governance policies, including the charters of the Audit, Compensation and Corporate Governance and Nominating Committees, and our Code of Business Conduct and Ethics may also be found under the “Investor Relations” section of our website. A written copy of the foregoing corporate governance policies is available upon written request. Except as explicitly provided, information furnished by the Company and information on, or accessible through, the SEC’s or the Company’s website is not incorporated into this Annual Report on Form 10-K or our other securities filings and is not a part of them.

Item 1A. Risk Factors

~~Risks~~The ~~Related~~summary below provides an overview of many of the risks we are exposed to ~~Our~~in ~~Business~~the normal course of our business activities. As a result, the below summary risks do not contain all of the information that may be important to you. Additional risks, beyond those summarized below or discussed in this section, may also materially and adversely impact our business, financial conditions and results of operation, and you should read the summary risks together with the more detailed discussion of risks set forth following this section as well as elsewhere in this Annual Report. The occurrence of one or more of the events or circumstances described in this section "Risk Factors," alone or in combination with other events or circumstances, may materially adversely affect our business, financial condition and operating results. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. Consistent with the foregoing, the risks we face include, but are not limited to, the following:

~~The~~Risks ~~COVID-19~~Related ~~pandemic~~to isthe ~~adversely affecting us and our customers, employees, and third~~COVID-~~party~~19 ~~service providers, and the adverse impacts on our business, financial position, results of operations, and prospects could be significant.~~Pandemic

• The ~~COVID-19 pandemic has negatively impacted the~~ global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, increased unemployment levels and decreased consumer confidence generally. In addition, many state and local governments responded to the COVID-19 pandemic ~~with~~could ~~the~~harm temporary closure of brick-and-mortar “non-essential” businesses, schools, and limitations on social gatherings, stay-at-home advisories and mandates, and travel bans and restrictions. Although many of these restrictions have eased or been lifted, these restrictions have resulted in significant adverse effects on our ~~customers and~~ business ~~partners, particularly those in the retail, hospitality~~ and food and beverage industries, among many others, including a significant number of layoffs and furloughs of employees nationwide, and in the regions and communities in which we operate. The COVID-19 pandemic could cause us to experience higher credit losses in our lending portfolio, impairment of our goodwill and other financial assets, impairment of the ability of borrowers to repay outstanding loans, impairment of the value of collateral securing loans, reduced demand for our products and services, lost revenue and other negative impacts on our financial position, results of operations ~~and prospects~~. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize OTTI in future periods on the securities we hold as well as reductions in other comprehensive income. Furthermore, in addition to the express risks set forth in this Risk Factors section, the COVID-19 pandemic may exacerbate and magnify the other risks described in this Risk Factors section.

~~The~~• ~~extent~~We of the impact of the COVID-19 pandemic on our capital, liquidity and other financial positions and on our business, results of operations, and prospects will depend on a number of evolving factors, including: (i) the duration, extent and severity of the pandemic, (ii) the response of governmental and nongovernmental authorities, (iii) the effect on our customers, counterparties, employees and third-party service providers, (iv) the effect on economies and markets, and (v) the success of hardship relief efforts to bridge the gap to reopening the economy. The duration of the pandemic and the resulting business interruptions and related impacts on our business and operations, which will depend on future developments, are ~~highly~~subject ~~uncertain and cannot be reasonably estimated at this time. Even after the COVID-19 pandemic has subsided, we may continue~~ to ~~experience~~increasing ~~materially~~credit ~~adverse~~risk ~~impacts to our business~~ as a result of the ~~virus's~~COVID-19 ~~global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future~~pandemic.

~~The~~• ~~U.S.~~Changes ~~government~~in ~~has~~market ~~implemented~~interest ~~programs~~rates ~~to directly compensate individuals and grant~~ or ~~loan~~capital ~~money~~markets tocould ~~businesses~~affect inour anrevenues ~~effort to provide funding while the economy is shut down~~ and inexpenses, the ~~process~~value of ~~re-opening.~~assets ~~Many~~and ~~banks~~obligations, ~~including~~and the ~~Bank,~~availability ~~have implemented hardship relief programs that include payment deferrals~~ and ~~short-term~~cost ~~funding options. The success~~ of ~~these~~capital ~~programs~~or ~~could mute the effect on the Company’s credit losses, which may be difficult to determine~~liquidity.

A• ~~significant~~Unpredictable ~~number~~future ofdevelopments ~~our~~related ~~borrowers have requested and received short-term loan payment deferrals. Although most of these loans have returned~~ to ~~normal~~or ~~payment~~resulting ~~schedules~~from ~~upon~~ the ~~expiration of their deferral, outstanding deferrals may negatively impact our revenue and other results of operations in the near term and, if not effective in mitigating the effect of~~ COVID-19 onpandemic ~~our~~could ~~customers,~~materially ~~may~~and adversely affect our business ~~and results of operations more substantially over a longer period of time~~. Moreover, the cumulative effects of the COVID-19 pandemic and the measures implemented by governments to combat the pandemic on the mortgaged properties may cause borrowers to be unable to meet their payment obligations under mortgage loans that we hold and may result in significant losses.

~~There~~Risks ~~are~~Relating ~~no comparable recent events that provide guidance as~~ to the ~~effect~~Proposed the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. Merger

~~Changes~~• inThe ~~market interest rates or capital markets, including volatility resulting from the COVID-19 pandemic, could affect our revenues and expenses, the~~ value of ~~assets~~the ~~and~~per ~~obligations,~~share ~~and~~merger ~~the~~consideration ~~availability~~to ~~and~~be ~~cost~~received ofby ~~capital~~Spirit orshareholders ~~liquidity~~is uncertain.

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Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.

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Failure of the Proposed Merger to be completed could negatively impact Simmons and Spirit.

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We will be subject to business uncertainties and contractual restrictions while the Proposed Merger is pending.

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Our directors and executive officers have interests in the Proposed Merger that may be different from our shareholders.

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The merger agreement contains provisions that may discourage other companies from pursuing a business combination with Spirit that might result in greater value to Spirit shareholders.

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Shares of Simmons common have different rights from the shares of Spirit common stock.

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The Proposed Merger is expected to, but may not, qualify as a reorganization under Section 368(a) of the Code.

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Litigation against Spirit or Simmons could result in significant costs, distraction, and/or a delay.

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The COVID-19 pandemic may delay and adversely affect the completion of the Proposed Merger.

Risks Relating to the Combined Company’s Business Following the Proposed Merger

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The market price of the common stock of the combined company after the Proposed Merger may be affected by factors different from those currently affecting the shares of Simmons or Spirit common stock.

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Sales of Simmons common stock in the open market could depress Simmons’ stock price.

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Combining the two companies may be difficult, costly or time consuming.

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The combined company expects to incur substantial expenses related to the Proposed Merger.

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Holders of Spirit common stock will have a reduced ownership after the Proposed Merger.

~~The~~Risks ~~COVID-19~~Relating ~~pandemic~~to ~~has~~Our significantly affected the financial markets and has resulted in a number of Federal Reserve actions. Market interest rates have declined significantly over the past year. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income and margins and our profitability.Business

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We conduct our operations exclusively in Texas, which imposes risks and may magnify the consequences of any regional or local economic downturn affecting its Texas markets.

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We may not be able to implement aspects of our growth strategy.

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Our SBA lending program is dependent upon the federal government and we face specific risks associated with originating SBA loans.

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We face specific risks associated with foreign nationals.

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Our ability to develop, retain and recruit bankers is critical to the success of our business strategy, and any failure to do so could adversely affect our business.

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The small- to medium-sized businesses to which we lend to may have fewer resources to weather adverse business developments, which may impair a borrower’s ability to repay a loan.

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If our allowance for loan and lease losses is insufficient, our earnings may be affected.

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A large portion of our loan portfolio is comprised of commercial loans secured by collateral, the deterioration in value of which could increase the potential for future losses.

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A portion of our loan portfolio is comprised of 1-4 single family residential real estate loans, and negative changes in the economy affecting real estate could impair the value of collateral.

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Our commercial real estate and construction, land and development loan portfolios expose us to credit risks that could be greater than the risks related to other types of loans.

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Climate change and related legislative and regulatory initiatives may materially affect our business.

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Our primary markets are susceptible to severe weather events that could negatively impact our markets.

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A failure in or breach of our operational or security systems could disrupt our business and cause losses.

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We have a concentration of loans outstanding to a limited number of borrowers.

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A lack of liquidity could impair our ability to fund operations and jeopardize our business.

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Fluctuations in interest rates could reduce net interest income and otherwise negatively impact us.

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Uncertainty related to the LIBOR may adversely affect our results of operations.

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We could recognize losses on investment securities held in its securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.

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We face strong competition from financial services companies and companies that offer banking services.

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Negative public opinion regarding us could adversely affect our business.

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The obligations associated with being a public company require significant resources and attention.

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We could be subject to harm due to acts on the part of our loan customers, employees or vendors.

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Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations.

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We are subject to environmental liability risk associated with lending activities.

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Changes in U.S. trade policies and other factors beyond our control may adversely impact our business.

Risks Related to Our Industry and Regulation

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We operate in a highly regulated environment and the laws and regulations that govern our operations could adversely affect us.

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Legislative and regulatory actions taken now or in the future may increase impact our business.

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As a regulated entity, we and the Bank must maintain certain required levels of regulatory capital that may limit our and the Bank’s operations and potential growth.

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State and federal banking agencies periodically conduct examinations of our business and our failure to comply with any supervisory actions could adversely affect us.

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We face a risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes.

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We are subject to numerous lending laws designed to protect consumers and failure to comply with these laws could lead to material sanctions and penalties and restrictions on our expansion opportunities.

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The Federal Reserve may require us to commit capital resources to support the Bank.

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We could be adversely affected by the soundness of other financial institutions.

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Monetary policies and regulations of the Federal Reserve could adversely affect our business.

Risks Related to Our Common Stock

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An active trading market for our common stock may not be sustained.

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The market price of our common stock could be volatile and may fluctuate significantly.

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If securities or industry analysts change their recommendations regarding our common stock or if our operating results do not meet their expectations, our stock price could decline.

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We are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

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Our shareholders may be deemed to be in control of us, which could impose notice, approval and ongoing regulatory requirements and result in adverse regulatory consequences.

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Our directors and executive officers could have the ability to influence shareholder actions in a manner that may be adverse to your personal investment objectives.

Investing in our common stock involves a significant degree of risk. The material risks and uncertainties that management believes affect us are described below. Before investing in our common stock, you should carefully consider the risks and uncertainties described below, in addition to the other information contained in this Annual Report on Form 10-K. Any of the following risks, as well as risks that we do not know or currently deem immaterial, could have a material adverse effect on our business operations and/or financial condition. As a result, the trading price of our common stock could decline, and you could lose some or all of your investment. Further, to the extent that any of the information in this report, or in other reports we file with the SEC, constitutes forward-looking statements, the risk factors below are cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. See “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to the COVID-19 Pandemic

The global COVID-19 pandemic has led to periods of significant volatility in financial, real estate, commodities and other markets and could harm our business and results of operations.

In December 2019, a COVID-19 outbreak was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. Since that time, the coronavirus has spread throughout the United States, including in the regions and communities in which the Company operates. In response, many state and local governments, including the State of Texas, instituted various emergency restrictions that substantially limited the operation of non-essential businesses and the activities of individuals. Although many of these restrictions have eased or been lifted, these restrictions have resulted in significant adverse effects on our customers and business partners, particularly those in the retail, hospitality and food and beverage industries, among many others, including a significant number of layoffs and furloughs of employees nationwide, and in the regions and communities in which we operate. These measures may be implemented again in the event of another COVID-19 outbreak or any current or future variant thereof and could adversely affect our business, operations and financial condition, as well as the business, operations and financial conditions of our customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities.

The ultimate effect of COVID-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on the stock price, business prospects, financial condition and results of operations of the Company, including as a result of quarantines, market volatility, market downturns, changes in consumer behavior, business closures, deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations to the Company (and any related forbearances or restructurings that may be implemented), declines in the value of collateral securing outstanding loans, branch or office closures and business interruptions.

We are subject to increasing credit risk as a result of the COVID-19 pandemic, which could adversely impact our profitability.

Our business depends on our ability to successfully measure and manage credit risk. We are exposed to the risk that the principal of, or interest on, a loan will not be paid timely or at all or that the value of any collateral supporting a loan will be insufficient to cover our outstanding exposure. In addition, we are exposed to risks resulting from changes in economic and industry conditions and risks inherent in dealing with loans and borrowers. As the overall economic climate in the U.S., generally, and in our market areas specifically, experience material disruption due to the COVID-19 pandemic, our borrowers have had, and may have again, difficulties in repaying their loans. Governmental actions providing payment relief to borrowers affected by COVID-19 could preclude our ability to initiate foreclosure proceedings in certain circumstances and, as a result, the collateral we hold may decrease in value or become illiquid, and the level of our nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for loan losses. Additional factors related to the credit quality of certain commercial real estate and multifamily residential loans include the duration of state and local moratoriums on evictions for non-payment of rent or other fees. The payment on these loans that are secured by income producing properties are typically dependent on the successful operation of the related real estate property and may subject us to risks from adverse conditions in the real estate market or the general economy.

Bank regulatory agencies and various governmental authorities are urging financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. We have been actively working to support our borrowers to mitigate the impact of the COVID-19 pandemic on them and on our loan portfolio, including through loan modifications that defer payments for those who experienced a hardship as a result of the COVID-19 pandemic. Although loans on deferral related to the COVID-19 pandemic at December 31, 2021 were only $13.9 million, we cannot predict whether any such future loan modifications may ultimately have an adverse impact on our profitability in future periods. Our inability to successfully manage the increased credit risk caused by the COVID-19 pandemic could have a material adverse effect on our business, financial condition and results of operations.

Changes in market interest rates or capital markets, including volatility resulting from the COVID-19 pandemic, could affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital or liquidity.

The COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of Federal Reserve actions. Market interest rates declined significantly in 2020 and have remained at such levels over the past year. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income and margins and our profitability.

Given our business mix, and the fact that most of our assets and liabilities are financial in nature, we tend to be sensitive to market interest rate movements and the performance of the financial markets. Our primary source of income is net interest income. Prevailing economic conditions, fiscal and monetary policies and the policies of various regulatory agencies all affect market rates of interest and the availability and cost of credit, which, in turn, significantly affect financial institutions' net interest income. If the interest we pay on deposits and other borrowings increases at a faster rate than increases in the interest we receive on loans and investments, net interest income, and, therefore, our earnings, could be affected. Earnings could also be affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and other borrowings.

In addition, the continued spread of COVID-19, and any current or future variant thereof, has also led to disruption and volatility in financial markets, which could increase our cost of capital and adversely affect our ability to access financial markets~~, which may in turn affect the value of the subordinated notes~~. This market volatility could result in a significant decline in our stock price and market capitalization, which could result in goodwill impairment charges.

~~The~~Unpredictable ~~Bank’s~~future ~~participation~~developments inrelated ~~the~~to ~~SBA’s~~or ~~Paycheck~~resulting ~~Protection~~from ~~Program~~the ~~may~~COVID-19 ~~result~~pandemic incould ~~operational,~~materially ~~credit~~and ~~or other shortfalls that may~~ adversely affect our ~~financial~~business ~~condition,~~and results of operations~~, and future prospects~~.

In response to the COVID-19 pandemic, President Trump signed into law the CARES Act on March 27, 2020. Among other things, the CARES Act created a new facility, titled the “Paycheck Protection Program,” to the SBA’s 7(a) Loan Program. As of December 31, 2020, the Bank had over 2,600 remaining loans under the PPP, representing an unpaid principal balance of $277.8 million. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the requirements and operation of the PPP, which exposes the Company to lending risks relating to noncompliance with the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on a PPP loan if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded or serviced. We cannot predict what operational, credit, or other shortfalls may arise as a result of the Bank making loans under the PPP or how such shortfalls may adversely affect our financial condition, results of operations and future prospects 30

Given the ongoing and dynamic nature of the circumstances, it is not possible to predict the ultimate impact of the coronavirus outbreak on our stock price, business prospects, financial condition or results of operations. Any future development is highly uncertain and cannot be predicted, including the scope and duration of the pandemic, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the pandemic. We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on us. However, if the pandemic continues to spread or otherwise results in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows as well as our regulatory capital and liquidity ratios could be materially adversely affected and many of the risks described herein will be heightened.

Risks Relating to the Proposed Merger

Because the market price of Simmons common stock and the amount of fully diluted shares of Spirit common stock outstanding will both fluctuate, the value of the per share merger consideration to be received by Spirit shareholders is uncertain.

On November 18, 2021, we entered into a merger agreement with Simmons First National Corporation, pursuant to and subject to the terms of which we will merge with and into Simmons, with Simmons as the surviving corporation. Based on the assumptions set forth herein, upon completion of the Proposed Merger, each share of outstanding Spirit common stock (except for shares of Spirit common stock held directly or indirectly by Spirit or Simmons and any dissenting shares) will be converted into the right to receive the per share merger consideration, with cash paid in lieu of any resulting fractional shares. Any change in the market price of Simmons common stock prior to the completion of the Proposed Merger will affect the market value of the per share merger consideration that Spirit shareholders will receive upon completion of the Proposed Merger. The value of the per share merger consideration could also change if the amount of fully diluted shares of Spirit common stock outstanding changes after the date hereof. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the respective businesses, operations and prospects of Simmons or Spirit, and regulatory considerations, among other things. Many of these factors are beyond the control of Simmons and Spirit.

There will be no adjustment to the per share merger consideration based upon changes in the market price of Simmons common stock or Spirit common stock prior to the time the Proposed Merger is completed, and the merger agreement cannot be terminated due to a change in the price of Simmons common stock.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.

Before the transactions contemplated by the merger agreement, including the Proposed Merger and the bank merger, may be completed, various approvals must be obtained from bank regulatory authorities. In determining whether to grant these approvals, the applicable regulatory authorities consider a variety of factors, including the competitive impact of the proposal in the relevant geographic markets; financial, managerial and other supervisory considerations, including the future prospects, of each party; potential effects of the Proposed Merger on the convenience and needs of the communities to be served and the record of the insured depository institution subsidiaries under the Community Reinvestment Act of 1977 and the regulations promulgated thereunder, which we refer to as the Community Reinvestment Act, including the subsidiaries’ overall compliance records and recent fair lending examinations; effectiveness of the parties in combatting money laundering activities; the extent to which the proposal would result in greater or more concentrated risks to the stability of the United States banking or financial system; and whether Simmons controls or would after consummation of the Proposed Merger control deposits in excess of certain limits. These regulatory authorities may impose conditions on the granting of such approvals. Such conditions or changes and the process of obtaining pending regulatory approvals could have the effect of delaying completion of the Proposed Merger or of imposing additional costs or limitations on the combined company following the Proposed Merger. While some regulatory approvals have been received, pending regulatory approvals may not be received at all, may not be received in a timely fashion, or may contain conditions on the completion of the Proposed Merger that are not anticipated or cannot be met. Furthermore, such conditions or changes may constitute a burdensome condition that may allow Simmons to terminate the merger agreement and Simmons may exercise its right to terminate the merger agreement. If the consummation of the Proposed Merger is delayed, including by a delay in receipt of necessary regulatory approvals, the business, financial condition and results of operations of each party may also be adversely affected.

Failure of the Proposed Merger to be completed, the termination of the merger agreement or a significant delay in the consummation of the Proposed Merger could negatively impact Simmons and Spirit.

The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the Proposed Merger. These conditions to the consummation of the Proposed Merger may not be fulfilled and, accordingly, the Proposed Merger may not be completed. In addition, if the merger is not completed by November 30, 2022, either Simmons or Spirit may choose to terminate the merger agreement at any time after such date if the failure to consummate the transactions contemplated by the merger agreement is not caused by any breach of the merger agreement by the party electing to terminate the merger agreement, before or after Spirit shareholder approval of the Proposed Merger.

If the Proposed Merger is not consummated, the ongoing business, financial condition and results of operations of each party may be adversely affected and the market price of Simmons common stock and Spirit common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the Proposed Merger will be consummated. If the consummation of the Proposed Merger is delayed, including by the receipt of a competing acquisition proposal, the business, financial condition and results of operations of each party may be adversely affected.

In addition, each party has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement, as well as the costs and expenses of filing, printing and mailing our proxy statement/prospectus and all filing and other fees paid to the SEC and other regulatory agencies in connection with the Proposed Merger. If the Proposed Merger is not completed, the parties would have to recognize these expenses without realizing the expected benefits of the merger. Any of the foregoing, or other risks arising in connection with the failure of or delay in consummating the Proposed Merger, including the diversion of management attention from pursuing other opportunities and the constraints in the merger agreement on the ability to make significant changes to each party’s ongoing business during the pendency of the Proposed Merger, could have an adverse effect on each party’s business, financial condition and results of operations.

Additionally, Simmons’ or Spirit’s business may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Proposed Merger, without realizing any of the anticipated benefits of completing the Proposed Merger, and the market price of Simmons’ or Spirit’s common stock might decline to the extent that the current market price reflects a market assumption that the Proposed Merger will be completed. If the merger agreement is terminated and a party’s board of directors seeks another Proposed Merger or business combination, such party’s shareholders cannot be certain that such party will be able to find a party willing to engage in a transaction on more attractive terms than the Proposed Merger.

Some of the conditions to the Proposed Merger may be waived by Simmons or Spirit without resoliciting Spirit shareholder approval of the merger agreement.

Some of the conditions to the Proposed Merger set forth in the merger agreement may be waived by Spirit or Simmons, subject to the agreement of the other party in specific cases. If any such conditions are waived, Spirit and Simmons will evaluate whether an amendment of our proxy statement/prospectus and resolicitation of proxies is warranted. In the event that the Spirit board of directors determines that resolicitation of Spirit shareholders is not warranted, Simmons and Spirit will have the discretion to complete the Proposed Merger without seeking further Spirit shareholder approval.

Simmons and Spirit will be subject to business uncertainties and contractual restrictions while the Proposed Merger is pending.

Uncertainty about the effect of the Proposed Merger on employees, customers (including depositors and borrowers), suppliers and vendors may have an adverse effect on the business, financial condition and results of operations of the parties to the Proposed Merger. These uncertainties may impair Simmons’ or Spirit’s ability to attract, retain and motivate key personnel and customers (including depositors and borrowers) pending the consummation of the Proposed Merger, as such personnel and customers may experience uncertainty about their future roles and relationships following the consummation of the Proposed Merger. Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with Simmons and/or Spirit to seek to change existing business relationships with Simmons and/or Spirit or fail to extend an existing relationship with Simmons and/or Spirit. In addition, competitors may target each party’s existing customers by highlighting potential uncertainties and integration difficulties that may result from the Proposed Merger.

The pursuit of the Proposed Merger and the preparation for the integration may place a burden on each company’s management and internal resources. Any significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have an adverse effect on each party’s business, financial condition and results of operations.

In addition, the merger agreement restricts each party from taking certain actions without the other party’s consent while the Proposed Merger is pending. These restrictions could have an adverse effect on each party’s business, financial condition and results of operations.

Spirit’s directors and executive officers have interests in the Proposed Merger that may be different from the interests of the Spirit shareholders.

Spirit’s directors and executive officers have interests in the Proposed Merger that may be different from, or in addition to, the interests of the Spirit shareholders generally. The Spirit board of directors was aware of these interests and considered them, among other matters, in approving the merger agreement and the transactions contemplated by the merger agreement and recommending to Spirit shareholders that they vote to approve the Proposed Merger.

The merger agreement contains provisions that may discourage other companies from pursuing, announcing or submitting a business combination proposal to Spirit that might result in greater value to Spirit shareholders.

The merger agreement contains provisions that may discourage a third party from pursuing, announcing or submitting a business combination proposal to Spirit that might result in greater value to the Spirit shareholders than the Proposed Merger. These provisions include a general prohibition on Spirit from soliciting or entering into discussions with any third party regarding any acquisition proposal or offers for competing transactions. Furthermore, if the merger agreement is terminated, under certain circumstances, Spirit may be required to pay Simmons a termination fee equal to $22,750,000. Spirit also has an unqualified obligation to submit its merger-related proposals to a vote by its shareholders, including if Spirit receives an unsolicited proposal that the Spirit board of directors has determined in good faith is superior to the Proposed Merger.

In connection with entering into the merger agreement, each member of the Spirit board of directors and Spirit’s named executive officers, in their capacities as individuals, have separately entered into a Spirit voting agreement pursuant to which they agreed to vote their beneficially owned shares of Spirit common stock in favor of the merger proposal and certain related matters and against alternative transactions. Shares constituting approximately 24.7% of the Spirit common stock entitled to vote at the Spirit special meeting are subject to Spirit voting agreements.

The shares of Simmons common stock to be received by holders of Spirit common stock as a result of the Proposed Merger will have different rights from the shares of Spirit common stock.

The rights of Spirit shareholders are currently governed by the second amended and restated certificate of formation of Spirit, which we refer to as the Spirit charter, and the second amended and restated bylaws of Spirit, as amended, which we refer to as the Spirit bylaws. Upon completion of the Proposed Merger, the rights of former holders of Spirit common stock will be governed by the Simmons charter and the Simmons bylaws. Simmons is organized under Arkansas law, while Spirit is organized under Texas law. The rights associated with Spirit common stock are different from the rights associated with Simmons common stock.

The Proposed Merger is expected to, but may not, qualify as a reorganization under Section 368(a) of the Code.

The parties expect the Proposed Merger to be treated as a “reorganization” within the meaning of Section 368(a) of the Code, and the obligations of Simmons and Spirit to complete the Proposed Merger are conditioned upon the receipt of U.S. federal income tax opinion to that effect from Covington & Burling LLP, which we refer to as Covington. This tax opinion represents the legal judgment of counsel rendering the opinion and is not binding on the United States Internal Revenue Service, which we refer to as the IRS, or the courts. The expectation that the Proposed Merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Code reflects assumptions and takes into account the relevant information available to Simmons and Spirit at the time. However, this information is not a fact and should not be relied upon as necessarily indicative of future results. Furthermore, such expectation constitutes a forward-looking statement. For information on forward-looking statements, see the section entitled “Cautionary Statement Regarding Forward-Looking Statements.”

If the Proposed Merger does not qualify as a “reorganization” within the meaning of Section 368(a) of the Code, then the exchange of Spirit common stock for Simmons common stock pursuant to the Proposed Merger may be treated as a taxable transaction to holders of Spirit common stock. Consequently, a holder of Spirit common stock may be required to recognize gain or loss equal to the difference between (1) the sum of the fair market value of Simmons common stock received by the Spirit shareholder in the Proposed Merger and the amount of cash, if any, received by the Spirit shareholder, and (2) the Spirit shareholder’s adjusted tax basis in the shares of Spirit common stock exchanged therefor. You should consult your tax advisor to determine the particular tax consequences to you.

The opinion of Stephens Inc. delivered to the Spirit board of directors prior to the signing of the merger agreement will not reflect changes in circumstances after the date of the opinion.

The Spirit board of directors received a fairness opinion from Stephens Inc., Spirit’s financial advisor, dated November 18, 2021. Such opinion has not been updated as of the date of our proxy statement/prospectus and will not be updated at, or prior to, the time of the completion of the Proposed Merger. Changes in the operations and prospects of Simmons or Spirit, general market and economic conditions and other factors that may be beyond the control of Simmons and Spirit may alter the value of Simmons or Spirit or the prices of shares of Simmons common stock or Spirit common stock by the time the Proposed Merger is completed. The opinion does not speak as of the time the Proposed Merger is completed or as of any other date than the date of the opinion.

Litigation against Spirit or Simmons, or the members of the Spirit or Simmons board of directors, could result in significant costs, management distraction, and/or a delay of or injunction against the Proposed Merger.

While Simmons and Spirit believe that any claims that may be asserted by purported shareholder plaintiffs related to the Proposed Merger would be without merit, the results of any such potential legal proceedings are difficult to predict and could delay or prevent the Proposed Merger from being competed in a timely manner. The existence of litigation related to the Proposed Merger could affect the likelihood of obtaining the required approval from Spirit shareholders. Moreover, any litigation could be time consuming and expensive, could divert Simmons and Spirit management’s attention away from their regular business and, any lawsuit adversely resolved against Spirit, Simmons or members of the Spirit or Simmons board of directors, could have an adverse effect on each party’s business, financial condition and results of operations.

If the actions remain unresolved, they could prevent or delay the completion of the Proposed Merger. One of the conditions to the consummation of the Proposed Merger is the absence of any law or order (whether temporary, preliminary or permanent) by any court or regulatory authority of competent jurisdiction prohibiting, restricting or making illegal consummation of the consummation of the transactions contemplated by the merger agreement (including the Proposed Merger). Consequently, if a settlement or other resolution is not reached in any lawsuit that is filed or any regulatory proceeding and a claimant secures injunctive or other relief or a regulatory authority issues an order or other directive prohibiting, restricting or making illegal consummation of the consummation of the transactions contemplated by the merger agreement (including the Proposed Merger), then such injunctive or other relief may prevent the Proposed Merger from becoming effective in a timely manner or at all.

The COVID-19 pandemic may delay and adversely affect the completion of the Proposed Merger.

The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the business, financial condition, liquidity, capital and results of operations of Simmons and Spirit. If the effects of the COVID-19 pandemic, or any current or future variant of COVID-19, cause continued or extended decline in the economic environment and the financial results of Simmons or Spirit, or the business operations of Simmons or Spirit are disrupted as a result of the COVID-19 pandemic, efforts to complete the Proposed Merger and integrate the businesses of Simmons and Spirit may also be delayed and adversely affected. Additional time may be required to obtain the requisite regulatory approvals, and regulatory authorities may impose additional requirements on Simmons or Spirit that must be satisfied prior to completion of the Proposed Merger, which could delay and adversely affect the completion of the Proposed Merger.

Risks Relating to the Combined Company’s Business Following the Proposed Merger

Upon the completion of the Proposed Merger, Simmons shareholders and Spirit shareholders will become shareholders of the combined company. Simmons’ business differs from that of Spirit, and, accordingly, the results of operations of the combined company and the market price of the combined company’s shares of common stock

may be affected by factors different from those currently affecting the independent results of operations of each of Simmons and Spirit.

Sales of substantial amounts of Simmons common stock in the open market by former Spirit shareholders could depress Simmons’ stock price.

Shares of Simmons common stock that are issued to Spirit shareholders in the Proposed Merger will be freely tradable without restrictions or further registration under the Securities Act. Simmons currently expects to issue 18,325,000 shares of Simmons common stock in connection with the Proposed Merger based on the assumptions described herein. If the Proposed Merger is completed and if Spirit’s former shareholders sell substantial amounts of Simmons common stock in the public market following completion of the Proposed Merger, the market price of Simmons common stock may decrease. These sales might also make it more difficult for Simmons to sell equity or equity-related securities at a time and price that it otherwise would deem appropriate.

Combining the two companies may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of the Proposed Merger may not be realized.

The success of the Proposed Merger will depend on, among other things, the combined company’s ability to combine the businesses of Simmons and Spirit. If the combined company is not able to successfully achieve this objective, the anticipated benefits of the merger may not be realized fully, or at all, or may take longer to realize than expected.

Simmons and Spirit have operated and, until the completion of the Proposed Merger, will continue to operate, independently. The success of the Proposed Merger, including anticipated benefits and cost savings, will depend, in part, on the successful combination of the businesses of Simmons and Spirit. To realize these anticipated benefits and cost savings, after the completion of the Proposed Merger, Simmons expects to integrate Spirit’s business into its own. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the Proposed Merger. The loss of key employees could have an adverse effect on the companies’ financial results and the value of their common stock. If Simmons experiences difficulties with the integration process, the anticipated benefits of the Proposed Merger may not be realized fully, or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause Simmons or Spirit to lose current customers or cause current customers to remove their accounts from Simmons or Spirit and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of Simmons or Spirit during this transition period and for an undetermined period after consummation of the Proposed Merger.

The combined company expects to incur substantial expenses related to the Proposed Merger.

The combined company expects to incur substantial expenses in connection with consummation of the Proposed Merger and combining the business, operations, networks, systems, technologies, policies and procedures of the two companies. Although Simmons and Spirit have assumed that a certain level of transaction and combination expenses would be incurred, there are a number of factors beyond their control that could affect the total amount or the timing of their combination expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. Due to these factors, the transaction and combination expenses associated with the Proposed Merger could, particularly in the near term, exceed the savings that the combined company expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings related to the combination of the businesses following the consummation of the Proposed Merger. As a result of these expenses, both Simmons and Spirit expect to take charges against their earnings before and after the completion of the Proposed Merger. The charges taken in connection with the Proposed Merger are expected to be significant, although the aggregate amount and timing of such charges are uncertain at present.

Holders of Simmons and Spirit common stock will have a reduced ownership and voting interest after the Proposed Merger and will exercise less influence over management.

Holders of Simmons and Spirit common stock currently have the right to vote for the election of the directors and on other matters affecting Simmons and Spirit, respectively. Upon the completion of the Proposed Merger, each Spirit shareholder who receives shares of Simmons common stock will become a shareholder of Simmons with a

percentage ownership of Simmons common stock that is smaller than such shareholder’s percentage ownership of Spirit common stock. Following completion of the Proposed Merger, it is currently expected that former holders of Spirit common stock as a group will own approximately 14.0% of the combined company’s common stock and existing Simmons common shareholders as a group will own approximately 86.0% of the combined company’s common stock. As a result, Spirit shareholders will have less influence on the management and policies of the combined company than they now have on the management and policies of Spirit, and existing Simmons shareholders may have less influence than they now have on the management and policies of Simmons.

Risks Related to Our Business

We conduct our operations exclusively in Texas, specifically in the Houston, Dallas/Fort Worth and Bryan/College Station, San Antonio-New Braunfels, Corpus Christi, Tyler and Austin metropolitan areas and North Central Texas, which imposes risks and may magnify the consequences of any regional or local economic downturn affecting its Texas markets, including any downturn in the energy, technology or real estate sectors.

As of December 31, ~~2020~~2021, the substantial majority of the loans in our loan portfolio were made to borrowers who live and/or conduct business in our Texas markets. Likewise, as of such date, the substantial majority of our secured loans were secured by collateral located in Texas. Accordingly, we are exposed to risks associated with a lack of geographic diversification. The economic conditions in Texas significantly affect our business, financial condition, results of operations and future prospects, and any adverse economic developments, among other things, could negatively affect the volume of loan originations, increase the level of non-performing assets, increase the rate of foreclosure losses on loans and reduce the value of our loans and loan servicing portfolio.

The economies in our markets are also highly dependent on the energy sector as well as the technology and real estate sectors. In particular, a decline in or volatility of the prices of crude oil or natural gas could adversely affect many of our customers. Any downturn or adverse development in ~~its~~our Texas markets, including as a result of a downturn in the energy, technology or real estate sectors, could result in increases in loan delinquencies, increases in non-performing assets and foreclosures, decreases in demand for our products and services, which could adversely affect our liquidity position, and decreases in the value of the collateral securing our loans, especially real estate, which could reduce customers’ borrowing power and repayment ability, all of which, in turn, would adversely affect our business, financial condition and results of operations.

28In addition, the inflationary outlook in the United States remains uncertain. The consumer price index increased 7 percent year-over-year in December 2021. The risks to our business from inflation depends on the durability of the current inflationary pressures in our markets. Transitory increases in inflation are unlikely to have a material impact on our business or earnings. However, more persistent inflation could lead to tighter-than-expected monetary policy which could, in turn, increase the borrowings costs of our customers, making it more difficult for them to repay their loans or other obligations. High interest rates may be needed to tame persistent inflationary price pressures, which could also push down asset prices and weaken economic activity. A deterioration in economic conditions in the United States and our markets could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services, all of which, in turn, would adversely affect our business, financial condition and results of operations.

We may not be able to implement aspects of our growth strategy, which may affect our ability to maintain our historical earnings trends.

Our strategy focuses on organic growth and acquisitions. We may not be able to execute on aspects of our growth strategy to sustain our historical rate of growth or may not be able to grow at all. More specifically, we may not be able to generate sufficient new loans and deposits within acceptable risk and expense tolerances, obtain the personnel or funding necessary for additional growth or find suitable acquisition candidates. Various factors, such as economic conditions and competition, may impede or prohibit the growth of our operations, the opening of new branches and the consummation of acquisitions. Further, we may be unable to attract and retain experienced bankers, which could adversely affect our growth. The success of our strategy also depends on our ability to effectively manage growth, which is dependent upon a number of factors, including our ability to adapt our existing credit, operational, technology and governance infrastructure to accommodate expanded operations. If we fail to implement one or more aspects of our strategy, we may be unable to maintain our historical earnings trends, which could have an adverse effect on our business.

Our strategy of pursuing acquisitions exposes us to financial, execution and operational risks that could have a material adverse effect on our business, financial condition, results of operations and future prospects.

We intend to continue pursuing a strategy that includes acquisitions. We face significant competition in pursuing acquisition targets from other banks and financial institutions, many of which possess greater financial, human, technical and other resources than we do. Our ability to compete in acquiring target institutions will depend on our available financial resources to fund the acquisitions, including the amount of cash and cash equivalents we have and the liquidity and market price of our common stock. In addition, increased competition may also drive up the acquisition consideration that we will be required to pay in order to successfully capitalize on attractive acquisition opportunities. To the extent that we are unable to find suitable acquisition targets, an important component of our growth strategy may not be realized.

Acquisitions of financial institutions also involve operational risks and uncertainties, such as unknown or contingent liabilities with no available manner of recourse, exposure to unexpected problems such as asset quality, the retention of key employees and customers and other issues that could negatively affect our business. We may not be able to complete future acquisitions or, if completed, we may not be able to successfully integrate the operations, technology platforms, management, products and services of the entities that we acquire or successfully eliminate redundancies. The integration process may also require significant time and attention from our management that would otherwise be directed toward servicing existing business and developing new business. Failure to successfully integrate the entities we acquire into our existing operations in a timely manner may increase our operating costs significantly and adversely affect our business, financial condition and results of operations. Further, acquisitions in Texas typically involve the payment of a premium over book and market values. Therefore, some dilution of our tangible book value and earnings per share may occur in connection with any future acquisition, and the carrying amount of any goodwill that we currently maintain or may acquire may be subject to impairment in future periods.

SBA lending is an important part of our business. Our SBA lending program is dependent upon the federal government and our status as a participant in the SBA’s Preferred Lenders Program, and we face specific risks associated with originating SBA loans and selling the guaranteed portion thereof.

We have been approved by the SBA to participate in the SBA’s Preferred Lenders Program. As an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. If we lose our status as an SBA Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders, which could adversely affect our business, financial condition and results of operations.

SBA lending programs typically guarantee 75.0% of the principal on an underlying loan. We generally sell the guaranteed portion of our SBA 7(a) loans in the secondary market. These sales have resulted in both premium income for us at the time of sale, and created a stream of future servicing income. There can be no assurance that we will be able to continue originating these loans, that a secondary market for these loans will continue to exist or that we will continue to realize premiums upon the sale of the guaranteed portion of these loans. When we sell the guaranteed portion of our SBA 7(a) loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on the non-guaranteed portion of a loan, we share any loss and recovery related to the loan pro-rata with the SBA. Furthermore, if our employees do not follow the SBA guidelines in originating loans and if our loan review and audit programs fail to identify and rectify such failures, the SBA may reduce or, in some cases, refuse to honor its guarantee obligations and we may incur losses as a result.

The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future. In addition, the aggregate amount of SBA 7(a) and 504 loan guarantees by the SBA must be approved each fiscal year by the federal government. We cannot predict the effects of these changes or decisions on our business and profitability. If the federal government were to reduce the amount of SBA loan guarantees, such reduction could adversely impact our SBA lending program, including making and selling the guaranteed portion of fewer SBA 7(a) and 504 loans. In addition, any default by the U.S. government on its obligations or any prolonged government shutdown could, among other things, impede our ability to originate SBA or U.S. Department of Agriculture loans or sell such loans in the secondary market, which could materially and adversely affect our business, financial condition and results of operations.

Loans to and deposits from foreign nationals are an important part of our business and we face specific risks associated with foreign nationals.

As of December 31, ~~2020~~2021, loans to foreign nationals of $~~124~~143.63 million comprised 56.2% of our loan portfolio and deposits from foreign nationals of $2630.1 8 million comprised 1.1% of our total deposits. We define foreign nationals as those who derive more than 50.0% of their personal income from non-U.S. sources. We intend to grow this segment of its loan and deposit portfolio in the future. These borrowers typically lack a U.S. credit history and have a potential to leave the United States without fulfilling their mortgage obligation and leaving us with little recourse to them personally. Additionally, transactions with foreign nationals place additional pressure on our policies, procedures and systems for complying with the Bank Secrecy Act and other AML statutes and regulations.

recourse to them personally. Additionally, transactions with foreign nationals place additional pressure on our policies, procedures and systems for complying with the Bank Secrecy Act and other AML statutes and regulations.

Our ability to develop bankers, retain bankers and recruit additional successful bankers is critical to the success of our business strategy, and any failure to do so could adversely affect our business, financial condition, results of operations and future prospects.

Our ability to retain and grow our loans, deposits and fee income depends upon the business generation capabilities, reputation and relationship management skills of our bankers, many of whom we develop internally. If we lose the services of any of our bankers, including successful bankers employed by financial institutions that we may acquire, to a new or existing competitor or otherwise, or fail to successfully recruit bankers or develop bankers internally, we may not be able to implement our growth strategy, retain valuable relationships and some of our customers could choose to use the services of a competitor instead of our services. Additionally, we may incur significant expenses and expend significant time and resources on training, integration and business development before it is able to determine whether a new banker will be profitable or effective. If we are unable to develop, attract or retain successful bankers, or if our bankers fail to meet our expectations in terms of customer relationships and profitability, we may be unable to execute our business strategy and our business, financial condition, results of operations and future prospects may be adversely affected.

The small- to medium-sized businesses to which we lend to may have fewer resources to weather adverse business developments, which may impair a borrower’s ability to repay a loan, and such impairment could adversely affect our results of operations and financial condition.

We focus our business development and marketing strategy primarily on small- to medium-sized businesses, which we define as commercial borrowing relationships with customers with revenues of $3.0 million to $30.0 million. Small- to medium-sized businesses frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small and medium-sized business often depends on the management skills, talents and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact our primary service areas specifically or Texas generally and small- to medium-sized businesses are adversely affected or our borrowers are otherwise affected by adverse business developments, our business, financial condition and results of operations could be adversely affected.

could have a material adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact our primary service areas specifically or Texas generally and small- to medium-sized businesses are adversely affected or our borrowers are otherwise affected by adverse business developments, our business, financial condition and results of operations could be adversely affected.

If our allowance for loan and lease losses is not sufficient to cover actual loan losses, our earnings may be affected.

We establish our allowance for loan and lease losses and maintain it at a level considered adequate by management to absorb probable loan losses based on our analysis of our loan portfolio and market environment. Although we believe that the allowance for loan and lease losses is adequate, there can be no assurance that the allowance will prove sufficient to cover future losses. The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates.

We may be required to take additional provisions for loan and lease losses in the future to further supplement the allowance for loan and lease losses, either due to management’s decision to do so or requirements by our banking regulators, which would result in a decrease in our net income and our capital balance. These adjustments could adversely affect our business, financial condition and results of operations.

In the aftermath of the 2008 financial crisis, the FASB decided to review how banks estimate losses in the allowance calculation, and it issued the final current expected credit loss standard (“CECL”) in June 2016. The current allowance model will be replaced by the new CECL model that will become effective for us, as an emerging growth company, for the first interim and annual reporting periods beginning after December 15, 2022. Under the new CECL model, financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model will bring with it significantly greater data requirements and changes to methodologies to accurately account for expected losses under the new parameters, and there is the potential for an increase in the allowance at adoption date. We expect to continue developing and implementing processes and procedures to ensure we are fully compliant with the CECL requirements at its adoption date.

A large portion of our loan portfolio is comprised of commercial loans secured by receivables, promissory notes, inventory, equipment or other commercial collateral, the deterioration in value of which could increase the potential for future losses.

As of December 31, ~~2020~~2021, $~~575~~464.0 7 million, or 2420.10% of our loans held for investment, were comprised of commercial loans to businesses. These commercial loans are typically larger in amount than loans to individuals and, therefore, have the potential for larger losses on a single loan basis. Additionally, the repayment of commercial loans is subject to the ongoing business operations of the borrower. The collateral securing such loans generally includes moveable property such as equipment and inventory, which may decline in value more rapidly than we anticipate exposing us to increased credit risk. A portion of our commercial loans are secured by promissory notes that evidence loans made by us to borrowers that in turn make loans to others that are secured by real estate. Accordingly, significant adverse changes in the economy or local market conditions in which our commercial lending customers operate could cause rapid declines in loan collectability and the values associated with general business assets resulting in inadequate collateral coverage that may expose us to credit losses and could adversely affect our business, financial condition and results of operations.

Because a portion of our loan portfolio is comprised of 1-4 single family residential real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.

As of December 31, ~~2020~~2021, $~~364~~362.12 million, or 15.36% of our loans held for investment, were comprised of loans with 1-4 single family residential real estate as a primary component of collateral. As a result, adverse developments affecting real estate values in our primary markets could increase the credit risk associated with our real estate loan portfolio. Negative changes in the economy affecting real estate values and liquidity in our market areas could significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses. Collateral may have to be sold for less than the outstanding balance of the loan, which could result in losses on such loans. Such declines and losses could have a material adverse impact on our business, results of operations and growth prospects. If real estate values decline, it is also more likely that we would be required to increase our allowance for loan and lease losses, which could adversely affect our business, financial condition and results of operations.

Our commercial real estate and construction, land and development loan portfolios expose us to credit risks that could be greater than the risks related to other types of loans.

As of December 31, ~~2020~~2021, $~~956~~1.~~7 million~~03 billion, or 4044.14% of our loans held for investment, were comprised of commercial real estate loans (including owner-occupied commercial real estate loans and multifamily loans) and $~~415.5~~401 million, or 17.43% of our loans held for investment, were comprised of construction, land and development loans. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. The availability of such income for repayment may be adversely affected by changes in the economy or local market conditions. These loans expose a lender to greater credit risk than loans secured by other types of collateral because the collateral securing these loans is typically more difficult to liquidate due to the fluctuation of real estate values. Additionally, nonowner-occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers. Unexpected deterioration in the credit quality of our nonowner-occupied commercial real estate loan portfolio could require us to increase our allowance for loan and lease losses, which would reduce our profitability and could have a material adverse effect on our business, financial condition and results of operations.

Construction, land and development loans also involve risks attributable to the fact that loan funds are secured by a project under construction and the project is of uncertain value prior to its completion. It can be difficult to accurately evaluate the total funds required to complete a project, and this type of lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If we are forced to foreclose on a project prior to completion, we may be unable to recover the entire unpaid portion of the loan. In addition, we may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time, any of which could adversely affect our business, financial condition and results of operations.

Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and results of operations.

The effects of climate change continue to create an alarming level of concern for the state of the global environment. As a result, the global business community has increased its political and social awareness surrounding the issue. Further, the U.S. Congress, state legislatures and federal and state regulatory agencies continue to propose numerous initiatives to supplement the global effort to combat climate change. Similar and even more expansive initiatives are expected under the current administration, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact our financial condition and results of operations; however, the physical effects of climate change may also directly impact us. Specifically, unpredictable and more frequent weather disasters may adversely impact the value of real property securing the loans in our portfolios. Additionally, if insurance obtained by our borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to our borrowers, the collateral securing our loans may be negatively impacted by climate change, which could impact our financial condition and results of operations. Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on our customers and impact the communities in which we operate. Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on our financial condition and results of operations.

Our primary markets are susceptible to severe weather events that could negatively impact the economies of our markets, our operations or our customers, any of which impacts could have a material adverse effect on our business, financial condition and results of operations.

Our primary markets are susceptible to tornadoes, hurricanes, tropical storms and other natural disasters and severe weather conditions. Future severe weather events in our markets could potentially result in extensive and costly property damage to businesses and residences, force the relocation of residents and significantly disrupt economic activity in our markets. If the economies in our primary markets experience an overall decline as a result of a catastrophic event, demand for loans and our other products and services could decline. In addition, the rates of delinquencies, foreclosures, bankruptcies and losses on our loan portfolios may increase substantially after events such as hurricanes, as uninsured property losses, interruptions of our customers’ operations or sustained job interruption or loss may materially impair the ability of borrowers to repay their loans. Moreover, the value of real estate or other collateral that secures our loans could be materially and adversely affected by a catastrophic event. A severe weather event, therefore, could have a materially adverse impact on our financial condition, results of operations and business, as well as potentially increase our exposure to credit and liquidity risks.

A failure in or breach of our operational or security systems, or those of our third-party service providers, including as a result of cyber-attacks, could disrupt our business, result in unintentional disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.

As a financial institution, our operations rely heavily on the secure data processing, storage and transmission of confidential and other information on our computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in our online banking system, customer relationship management, general ledger, deposit and loan servicing and other systems. The security and integrity of our systems could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber-attacks, electronic fraudulent activity or attempted theft of financial assets. We may be required to expend significant additional resources in the future to modify and enhance our protective measures.

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Additionally, we face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems. Any failures, interruptions or security breaches in our information systems could damage our reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.

We may be subject to additional credit risk with respect to loans that we make to other lenders.

As a part of our commercial lending activities, we may make loans to customers that, in turn, make commercial and residential real estate loans to other borrowers. When we make a loan of this nature, we take as collateral the promissory notes issued by the end borrowers to our customer, which are themselves secured by the underlying real estate. Because we are not lending directly to the end borrower, and because our collateral is a promissory note rather than the underlying real estate, we may be subject to risks that are different from those we are exposed to when it makes a loan directly that is secured by commercial or residential real estate. Because the ability of the end borrower to repay its loan from our customer could affect the ability of our customer to repay its loan from us, our inability to exercise control over the relationship with the end borrower and the collateral, except under limited circumstances, could expose us to credit losses that adversely affect our business, financial condition and results of operations.

We have a concentration of loans outstanding to a limited number of borrowers, which may increase our risk of loss.

We have extended significant amounts of credit to a limited number of borrowers, and as of December 31, ~~2020~~2021, the aggregate amount of loans to our 10 and 20 largest borrowers (including related entities) amounted to $~~232~~227.21 million, or 9.78% of loans held for investment, and $~~386~~392.60 million, or 16.29% of loans held for investment, respectively. In the event that one or more of these borrowers is not able to make payments of interest and principal in respect of such loans, the potential loss to us is more likely to have a material adverse effect on our business, financial condition and results of operations.

A lack of liquidity could impair our ability to fund operations and adversely affect our operations and jeopardize our business, financial condition and results of operations.

Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations. Our most important source of funds is deposits. If customers move money out of bank deposits and into other investments such as money market funds, we would lose a relatively low-cost source of funds, increasing its funding costs and reducing its net interest income and net income.

Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors that affect us specifically or the financial services industry or economy generally, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. Our access to funding sources could also be affected by a decrease in the level of our business activity as a result of a downturn in our primary markets, or by one or more adverse regulatory actions against us. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity and could, in turn, adversely affect our business, financial condition and results of operations.

An inability to raise additional capital in the future or otherwise could adversely affect our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance.

We face significant capital and other regulatory requirements as a financial institution. Importantly, regulatory capital requirements could increase from current levels, which could require us to raise additional capital or reduce our operations. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions, investor perceptions regarding the banking industry, market conditions and governmental activities, and our financial condition and performance. Accordingly, we may not be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our liquidity, business, financial condition and results of operations could be adversely affected.

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Fluctuations in interest rates could reduce net interest income and otherwise negatively impact our financial condition and results of operations.

Our profitability depends to a great extent upon the level of our net interest income. Changes in interest rates can increase or decrease our net interest income because different types of assets and liabilities may react differently and at different times to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income. Our interest sensitivity profile was asset sensitive as of December 31, ~~2020~~2021, meaning that we estimate our net interest income would increase more from rising interest rates than from falling interest rates.

Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our ability to originate loans and decrease loan repayment rates. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on its loan portfolio and increased competition for deposits. Accordingly, changes in the level of market interest rates affect our net yield on interest-earning assets, loan origination volume, loan portfolio and our overall results. Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in market interest rates, those rates are affected by many factors outside of our control, including governmental monetary policies, inflation, deflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets.

Uncertainty related to the LIBOR determination process and ~~replacement~~LIBOR discontinuance may adversely affect our results of operations.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after December 31, 2021. While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, the Alternative Reference Rates Committee (the “ARRC”) has proposed the Secured Overnight Financing Rate (“SOFR”) as the alternative rate for use in derivatives and other financial contracts currently being indexed to LIBOR. SOFR is a daily index of the interest rate banks and hedge funds pay to borrow money overnight, secured by U.S. Treasury securities. Currently no forward-looking term index (like LIBOR) yet exists and the development of a SOFR-based term rate is ongoing. Historically, SOFR has been lower than LIBOR because it does not take into account bank credit risk. Accordingly, a credit spread adjustment is being considered. Since the proposed SOFR is calculated differently than LIBOR, payments under contracts referencing the new rates may differ from those referencing LIBOR. At this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement tool, and the future of LIBOR is still uncertain.

In October 2021, the federal bank regulatory agencies issued a Joint Statement on Managing the LIBOR Transition. In that guidance, the agencies offered their regulatory expectations and outlined potential supervisory and enforcement consequences for banks that fail to adequately plan for and implement the transition away from LIBOR. The failure to properly transition away from LIBOR may result in increased supervisory scrutiny. In addition, the implementation of LIBOR reform proposals may result in increased compliance costs and operational costs, including costs related to continued participation in LIBOR and the transition to a replacement reference rate or rates. We cannot reasonably estimate the expected cost.

We could recognize losses on investment securities held in its securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.

While we attempt to invest a significant majority of our total assets in loans, we invest a percentage of our total assets (713.70% as of December 31, ~~2020~~2021) in investment securities with the primary objectives of providing a source of liquidity, providing an appropriate return on funds invested, managing interest rate risk, meeting pledging requirements and meeting regulatory capital requirements. Factors beyond our control can significantly and adversely influence the fair value of securities in our portfolio. Such factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual borrowers with respect to the underlying securities, and instability in the credit markets. Any of the foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses. Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may incur realized or unrealized losses in future periods, which could have an adverse effect on our business, financial condition and results of operations.

We face strong competition from financial services companies and other companies that offer banking services, which could adversely affect our business, financial condition and results of operations.

Many of our competitors offer the same, or a wider variety of, banking services within our primary market areas. These competitors include banks with nationwide operations, regional banks and other community banks. We also face competition from many other types of financial institutions, including savings banks, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based non-bank lenders and certain other non-financial entities, such as retail stores which may maintain their own credit programs and certain governmental organizations which may offer more favorable financing or deposit terms than we can. In addition, a number of out-of-state financial intermediaries have production offices or otherwise solicit loan and deposit products in our market areas. Furthermore, our legal lending limit is significantly less than the limits for many of our competitors, and this may hinder our ability to establish relationships with larger businesses in our primary service area. If we are unable to attract and retain banking customers, we may be unable to continue to grow our loan and deposit portfolios, and our business, financial condition and results of operations could be adversely affected.

addition, a number of out-of-state financial intermediaries have production offices or otherwise solicit loan and deposit products in our market areas. Furthermore, our legal lending limit is significantly less than the limits for many of our competitors, and this may hinder our ability to establish relationships with larger businesses in our primary service area. If we are unable to attract and retain banking customers, we may be unable to continue to grow our loan and deposit portfolios, and our business, financial condition and results of operations could be adversely affected.

Negative public opinion regarding us or failure to maintain our reputation in the communities we serve could adversely affect our business and prevent us from growing our business.

As a community bank, our reputation within the communities we serve is critical to our success. If our reputation is negatively affected by the actions of our employees or otherwise, we may be less successful in attracting new customers, and our business, financial condition, results of operations and future prospects could be materially and adversely affected. Further, negative public opinion can expose us to litigation and regulatory action or delay in acting as we seek to implement our growth strategy.

InCompanies ~~addition,~~are ~~investors~~facing ~~have~~increasing ~~begun~~scrutiny tofrom ~~consider~~customers, ~~how~~regulators, ~~corporations~~investors, ~~are~~and ~~addressing~~other stakeholders related to their environmental, social and governance ~~matters~~(“ESG”) practices and disclosure. Investor advocacy groups, ~~commonly~~investment ~~known~~funds and influential investors are also increasingly focused on these practices, especially as ~~“ESG~~they ~~matters”~~relate ~~when~~to ~~making~~the ~~investment~~environment, ~~decisions.~~health and safety, diversity, labor conditions and human rights. For example, certain investors are beginning to incorporate the business risks of climate change and the adequacy of companies’ responses to climate change and other ESG matters as part of their investment theses. These shifts in investing priorities may result in adverse effects on the trading price of the Company’s common stock if investors determine that the Company has not made sufficient progress on ESG matters. In addition, new government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure. Increased ESG related compliance costs could result in increases to our overall operational costs.

If we fail to maintain an effective system of disclosure controls and procedures and internal control over financial reporting, we may not be able to accurately report its financial results or prevent fraud.

Our management may conclude that our internal control over financial reporting is not effective due to our failure to cure any identified material weakness or otherwise. Moreover, even if our management concludes that its internal control over financial reporting is effective, our independent registered public accounting firm may not conclude that our internal control over financial reporting is effective. In addition, during the course of the evaluation, documentation and testing of our internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the FDIC for compliance with the requirement of FDICIA. Any such deficiencies may also subject us to adverse regulatory consequences. If we fail to achieve and maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may be unable to report our financial information on a timely basis, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act or FDICIA, and we may suffer adverse regulatory consequences or violations of listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in the reliability of our financial statements.

that we may not be able to remediate in time to meet the deadline imposed by the FDIC for compliance with the requirement of FDICIA. Any such deficiencies may also subject us to adverse regulatory consequences. If we fail to achieve and maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may be unable to report our financial information on a timely basis, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act or FDICIA, and we may suffer adverse regulatory consequences or violations of listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in the reliability of our financial statements.

The obligations associated with being a public company require significant resources and management attention.

We expect to incur significant incremental costs related to operating as a public company, particularly when we no longer qualify as an emerging growth company. We are subject to the reporting requirements of the Exchange Act, which require that we file annual, quarterly and current reports with respect to our business and financial condition and proxy and other information statements, and the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act, the Public Company Accounting Oversight Board (the “PCAOB”) and NASDAQ, each of which imposes additional reporting and other obligations on public companies.

We expect these rules and regulations and changes in laws, regulations and standards relating to corporate governance and public disclosure to increase legal and financial compliance costs and make some activities more time consuming and costly. These laws, regulations and standards are subject to varying interpretations, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our investment in compliance with existing and evolving regulatory requirements will result in increased administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities, which could have a material adverse effect on our business, financial condition and results of operations.

We could be subject to losses, regulatory action or reputational harm due to fraudulent, negligent or other acts on the part of our loan customers, employees or vendors.

Employee errors or employee or customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding from us unauthorized activities, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors or employee or customer misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

In addition, in deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished by or on behalf of customers and counterparties, including representations and warranties, financial statements, property appraisals, title information, employment and income documentation, account information and other financial information. Any such misrepresentation or incorrect or incomplete information may not be detected prior to funding a loan or during our ongoing monitoring of outstanding loans. Any of these developments could have a material adverse effect on our business, financial condition, results of operations and future prospects.

We have a continuing need for technological change, and we may not have the resources to effectively implement new technology, or we may experience operational challenges when implementing new technology.

Our future success will depend, at least in part, upon our ability to respond to future technological changes and our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our product and service offerings. We may experience operational challenges as we implement these new technology enhancements or products, which could result in us not fully realizing the anticipated benefits from such new technology or require it to incur significant costs to remedy any such challenges in a timely manner.

In addition, changes may be more difficult or expensive than we anticipate. Many of our larger competitors may be able to offer additional or superior products compared to those that we will be able to provide. Accordingly, we may lose customers seeking new technology-driven products and services to the extent it is unable to provide such products and services.

Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations.

We depend on a number of relationships with third-party service providers. Specifically, we receive certain third-party services including, but not limited to, core systems processing, essential web hosting and other Internet systems, online banking services, deposit processing and other processing services. If these third-party service providers experience difficulties or terminate their services, and we are unable to replace them with other service providers, particularly on a timely basis, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected, perhaps materially. Even if we are able to replace third-party service providers, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could adversely affect our business, financial condition and results of operations.

Changes in U.S. trade policies and other factors beyond our control, including the imposition of tariffs and retaliatory tariffs and the impacts of epidemics or pandemics, may adversely impact our business, financial condition and results of operations.

There have been changes and discussions with respect to U.S. trade policies, legislation, treaties and tariffs. Tariffs, retaliatory tariffs or other trade restrictions on products and materials that our customers import or export could cause the prices of our customers’ products to increase which could reduce demand for such products, or reduce our customer margins, and adversely impact their revenues, financial results and ability to service debt; which, in turn, could adversely affect our financial condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate our business, results of operations and financial condition could be materially and adversely impacted in the future. It remains unclear what the U.S. Administration or foreign governments will or will not do with respect to tariffs already imposed, additional tariffs that may be imposed, or international trade agreements and policies. A trade war or other governmental action related to tariffs or international trade agreements or policies, as well as coronavirus or other potential epidemics or pandemics, have the potential to negatively impact our and/or our customers’ costs, demand for our customers’ products, and/or the U.S. economy or certain sectors thereof and, thus, adversely affect our business, financial condition, and results of operations.

Risks Related to Our Industry and Regulation

We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, could adversely affect us.

We are subject to extensive regulation, supervision and legal requirements that govern almost all aspects of our operations. These laws and regulations are not intended to protect our shareholders. Rather, these laws and regulations are intended to protect customers, depositors, the DIF and the overall financial stability of the banking system in the United States. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition and results of operations.

Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.

New proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry, impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including in the areas of compensation, interest rates, financial product offerings and disclosures, and have an effect on bankruptcy proceedings with respect to consumer residential real estate mortgages, among other things.

Certain aspects of current or proposed regulatory or legislative changes, including laws applicable to the financial industry and federal and state taxation, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply, and could have a material adverse effect on our business, financial condition and results of operations. In addition, any proposed legislative or regulatory changes, including those that could benefit our business, financial condition and results of operations, may not occur on the timeframe that is proposed, or at all, which could result in additional uncertainty for our business.

As a regulated entity, we and the Bank must maintain certain required levels of regulatory capital that may limit our and the Bank’s operations and potential growth.

We and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve and the FDIC, respectively. See “Supervision and Regulation—Regulatory Capital Requirements.”

Many factors affect the calculation of our risk-based assets and our ability to maintain the level of capital required to achieve acceptable capital ratios. For example, any increases in our risk-weighted assets will require a corresponding increase in our capital to maintain the applicable ratios. In addition, recognized loan losses in excess of amounts reserved for such losses, loan impairments, impairment losses on securities and other factors will decrease our capital, thereby reducing the level of the applicable ratios. Our failure to remain well-capitalized for bank regulatory purposes could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends to the Company and the Company’s ability to pay dividends on its common stock, the Company’s ability to make acquisitions and on our and the Company’s business, results of operations and financial condition. Under regulatory rules, if we cease to be a well-capitalized institution for bank regulatory purposes, the interest rates that we pay on deposits and our ability to accept brokered deposits may be restricted.

regulatory purposes could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends to the Company and the Company’s ability to pay dividends on its common stock, the Company’s ability to make acquisitions and on our and the Company’s business, results of operations and financial condition. Under regulatory rules, if we cease to be a well-capitalized institution for bank regulatory purposes, the interest rates that we pay on deposits and our ability to accept brokered deposits may be restricted.

State and federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we become subject as a result of such examinations could adversely affect it.

Texas and federal bank regulatory agencies periodically conduct examinations of our business, including compliance with laws and regulations. If, as a result of an examination, a regulatory agency were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we, the Bank or our respective management, were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital levels, to restrict our growth, to assess civil monetary penalties against us, the Bank or our respective officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Bank’s deposit insurance, with the result that the Bank would be closed. If we become subject to such regulatory actions, our business, financial condition, results of operations and reputation could be adversely affected.

Many of our new activities and expansion plans require regulatory approvals, and failure to obtain them may restrict our growth.

Generally, we must receive federal and state regulatory approval before we can acquire an FDIC-insured depository institution or related business. Such regulatory approvals may not be granted on terms that are acceptable to us, or at all. We may also be required to sell branches or other business lines as a condition to receiving regulatory approval, which condition may not be acceptable to us or, if acceptable to us, may reduce the benefit of any acquisition.

Financial institutions, such as the Bank, face a risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations, and associated enforcement actions.

The Bank Secrecy Act, the USA PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements, and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice (the “Justice Department”), the Drug Enforcement Administration and the IRS. There is also increased scrutiny of compliance with the sanctions programs and rules administered and enforced by OFAC.

If our policies, procedures and systems are deemed deficient, we could be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and on expansion opportunities, including acquisitions.

We are subject to numerous lending laws designed to protect consumers, including the CRA and fair lending laws, and failure to comply with these laws could lead to material sanctions and penalties and restrictions on our expansion opportunities.

The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The CFPB, the FDIC, the Justice Department and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.

The Federal Reserve may require us to commit capital resources to support the Bank.

The Dodd-Frank Act and Federal Reserve require a bank holding company to act as a source of financial and managerial strength to its subsidiary banks and to commit resources to support its subsidiary banks. Accordingly, we could be required to provide financial assistance to the Bank if it experiences financial distress.

Such a capital injection may be required at a time when our resources are limited and we may be required to raise capital or borrow the funds to make the required capital injection. Any borrowing that must be done by the holding company in order to make the required capital injection may be difficult and expensive and may adversely impact the holding company’s business, financial condition and results of operations.

We could be adversely affected by the soundness of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when our collateral cannot be foreclosed upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due. Any such losses could adversely affect our business, financial condition and results of operations.

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the U.S. money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of both the discount rate and the federal funds rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

Although we cannot determine the effects of such policies on it at this time, such policies could adversely affect our business, financial condition and results of operations.

Risks Related to Our Common Stock

An active trading market for our common stock may not ~~develop~~be sustained.

We completed the initial public offering of our common stock and the Company’s common stock began trading on NASDAQ in May 2018. An active trading market for shares of our common stock may not be sustained. If an active trading market is not sustained, you may have difficulty selling your shares of our common stock at an attractive price, or at all. Consequently, you may not be able to sell your shares of our common stock at or above an attractive price at the time that you would like to sell.

The market price of our common stock could be volatile and may fluctuate significantly, which could cause the value of an investment in our common stock to decline.

The market price of our common stock could fluctuate significantly due to a number of factors, many of which are beyond our control, including the realization of any of the risks described in this “Risk Factors” section. In addition, the stock market in general, and the market for banks and financial services companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.

If securities or industry analysts change their recommendations regarding our common stock or if our operating results do not meet their expectations, its stock price could decline.

The trading market for our common stock could be influenced by the research and reports that industry or securities analysts may publish about us or our business. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline and our common stock to be less liquid. Moreover, if one or more of the analysts who cover us downgrade our stock or if our operating results do not meet their expectations, either absolutely or relative to our competitors, the price of our common stock could decline significantly.

Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock.

We may seek to raise additional funds, finance acquisitions or develop strategic relationships by issuing additional shares of our common stock.

We may also grant registration rights covering those shares of our common stock or other securities in connection with any such acquisitions and investments. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Future sales or the availability for sale of substantial amounts of our common stock in the public market could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through future sales of equity securities.

We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise materially adversely affect our shareholders, which could depress the price of our common stock.

Our certificate of formation authorizes us to issue up to 5,000,000 shares of one or more series of preferred stock. Our board of directors has the authority to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our shareholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discourage bids for our common stock at a premium over the market price and materially adversely affect the market price and the voting and other rights of our shareholders.

We are dependent upon the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted, which could impact our ability to satisfy our obligations.

Our primary asset is the Bank. As such, we depend upon the Bank for cash distributions through dividends on the Bank’s stock to pay our operating expenses and satisfy our obligations, including debt obligations. There are numerous laws and banking regulations that limit the Bank’s ability to pay dividends to us. If the Bank is unable to pay dividends to us, we will not be able to satisfy our obligations or pay dividends.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”) and we have taken advantage of certain disclosure exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We will remain an emerging growth company for up to five years, though we may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, it is deemed to be a large accelerated filer under the rules of the SEC. Investors and securities analysts may find it more difficult to evaluate our common stock because we may rely on one or more of these exemptions, and, as a result, investor confidence and the market price of our common stock may be materially and adversely affected.

Our shareholders may be deemed to be acting in concert or otherwise in control of us, which could impose notice, approval and ongoing regulatory requirements and result in adverse regulatory consequences for such holders.

We are subject to the BHC Act, and federal and state banking regulation, that will impact the rights and obligations of owners of our common stock. Any bank holding company or foreign bank that is subject to the BHC Act may need approval to acquire or retain 5.0% or more of the then outstanding shares of our common stock, and any holder (or group of holders deemed to be acting in concert) may need regulatory approval to acquire or retain 10.0% or more of the shares of our common stock. A holder or group of holders may also be deemed to control us if they own 25.0% or more of its total equity. Under certain limited circumstances, a holder or group of holders acting in concert may exceed the 25.0% threshold and not be deemed to control us until they own 33.3% or more of our total equity. The amount of total equity owned by a holder or group of holders acting in concert is calculated by aggregating all shares held by the holder or group, whether as a combination of voting or non-voting shares or through other positions treated as equity for regulatory or accounting purposes and meeting certain other conditions. Holders deemed to be in “control” of us will be subject to certain reporting and other obligations with the Federal Reserve. Our shareholders should consult their own counsel with regard to regulatory implications.

25.0% or more of its total equity. Under certain limited circumstances, a holder or group of holders acting in concert may exceed the 25.0% threshold and not be deemed to control us until they own 33.3% or more of our total equity. The amount of total equity owned by a holder or group of holders acting in concert is calculated by aggregating all shares held by the holder or group, whether as a combination of voting or non-voting shares or through other positions treated as equity for regulatory or accounting purposes and meeting certain other conditions. Holders deemed to be in “control” of us will be subject to certain reporting and other obligations with the Federal Reserve. Our shareholders should consult their own counsel with regard to regulatory implications.

Our directors and executive officers could have the ability to influence shareholder actions in a manner that may be adverse to your personal investment objectives.

Due to the significant ownership interests of our directors and executive officers, our directors and executive officers are able to exercise significant influence over our management and affairs. For example, our directors and executive officers may be able to influence the outcome of director elections or block significant transactions, such as a merger or acquisition, or any other matter that might otherwise be approved by the shareholders.

An investment in our common stock is not an insured deposit and is not guaranteed by the FDIC, so you could lose some or all of your investment.

An investment in our common stock is not a bank deposit and, therefore, is not insured against loss or guaranteed by the FDIC, any other deposit insurance fund or by any other public or private entity. An investment in our common stock is inherently risky for the reasons described herein. As a result, if you acquire our common stock, you could lose some or all of your investment.

Our corporate organizational documents and certain corporate and banking provisions of Texas law to which it is subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition of us that you may favor.

Our certificate of formation and bylaws contain certain provisions that may have an anti-takeover effect and may delay, discourage or prevent an attempted acquisition or change of control of us. These provisions include (i) staggered terms for directors, who may only be removed for cause; (ii) authorization for our board of directors to issue shares of one or more series of preferred stock without shareholder approval and upon such terms as our board of directors may determine; (iii) a prohibition of shareholder action by less than unanimous written consent; (iv) a prohibition of cumulative voting in the election of directors; (v) a provision establishing certain advance notice procedures for nomination of candidates for election of directors and for shareholder proposals; and (vi) a limitation on the ability of shareholders to call special meetings to those shareholders or groups of shareholders owning at least 50.0% of the shares of our common stock that are issued, outstanding and entitled to vote. In addition, certain provisions of Texas law, including a provision which restricts certain business combinations between a Texas corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control. Moreover, banking laws impose notice, approval, and ongoing regulatory requirements on any shareholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution. These laws could delay or prevent an acquisition.

Our certificate of formation contains an exclusive forum provision that limits the judicial forums where our shareholders may initiate derivative actions and certain other legal proceedings against us and our directors and officers.

Our certificate of formation provides that the state and federal courts located in Montgomery County, Texas will, to the fullest extent permitted by law, be the sole and exclusive forum for certain causes of action, which may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us. Alternatively, if a court were to find the choice of forum provision contained in our certificate of formation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.

Item 1B. Unresolved Staff Comments

None.

4150

Item 2. Properties

Our principal offices and headquarters are located at 1836 Spirit of Texas Way, Conroe, Texas 77301. All of our branches are located in Texas. We own 2928 of our branch locations and lease the remaining ~~nine~~seven locations. The terms of our leases range from five to ten years and generally give us the option to renew for subsequent terms of equal duration or otherwise extend the lease term subject to price adjustment based on market conditions at the time of renewal. The following table sets forth a list of our locations as of the date of this Annual Report on Form 10-K.

Houston-The Woodlands-Sugar Land MSA
Location	Own or Lease	Sq. Ft.(1)
Houston
Post Oak Branch	Lease		16,403
720 N. Post Oak Road, Suites 101, 620 and 650, Houston, Texas 77024
Stafford Branch	Lease		6,372
12840 Southwest Freeway, Stafford, Texas 77477
Richmond Branch	Lease		5,890
3100 Richmond Avenue, Suite 100, Houston, Texas 77098
The Woodlands
Woodlands North Branch	Own		24,000	(2)
16610 Interstate 45 North, The Woodlands, Texas 77384
Woodlands Central Center	Own		14,925	(2)
1525 Lake Front Circle, The Woodlands, Texas 77380
Woodlands West Branch	Own		6,700	(2)
30350 FM 2978, Magnolia, Texas 77354
Conroe
Conroe Branch	Own		24,000	(2)
1836 Spirit of Texas Way (815 W. Davis Street), Conroe, Texas 77301
Conroe Operations Support Center	Own		12,932
1824 Spirit of Texas Way (815 W. Davis Street), Conroe, Texas 77301
Montgomery
Montgomery Branch	Own		12,568	(2)
165 Lone Star Parkway, Montgomery, Texas 77356
Tomball
Tomball Branch	Own		12,798	(2)
1100 W. Main Street, Tomball, Texas 77375
Magnolia
Magnolia Branch	Lease		3,600
6910 FM 1488, Suites 1, 2, 3 and 4, Magnolia, Texas 77354

Dallas-Fort Worth-Arlington MSA
Location	Own or Lease	Sq. Ft.
Dallas
Dallas Branch	Own		23,602
5301 Spring Valley Road Dallas, Texas 75254
Fort Worth
Fort Worth Branch	Own		7,483
1120 Summit Avenue Fort Worth, Texas 76102
Colleyville
Colleyville Branch	Lease		4,100
5712 Colleyville Boulevard, Suite 100, Colleyville, Texas 76034
Grapevine
Grapevine Branch	Lease		3,327
601 W. Northwest Highway, Suite 100, Grapevine, Texas 76051
Parker
Cool Branch	Own		3,479
9702 Mineral Wells Highway, Weatherford, Texas 76088

Mineral Wells MSA
Location	Own or Lease	Sq. Ft.
Mineral Wells
Mineral Wells Branch	Own		2,544
701 E. Hubbard Street, Mineral Wells, Texas 76067
Mingus Branch	Own		1,572
117 Highway 193, Mingus, Texas 76463
Palo Pinto Branch	Own		1,800
539 Oak Street, Palo Pinto, Texas 76484
Santo Branch	Own		1,760
14003 S. FM 4, Santo, Texas 76472

4352

Jack County
Location	Own or Lease	Sq. Ft.
Jacksboro
Jacksboro Branch	Own		4,196
1220 N. Main Street, Jacksboro, Texas 76458
South Texas MSA
Location	Own or Lease	Sq. Ft.
Beeville
Beeville Branch	Own		26,442
1400 E. Houston Street, Beeville, Texas 78102
Yorktown
Yorktown Branch	Own		7,164
142 N. Riedel Street, Yorktown, Texas 78164
Seguin
Sequin Branch	Own		9,817
125 S. State Highway 46, Sequin, Texas 78155
Corpus Christi
Corpus Christi Branch	Own		12,318
2051 Rodd Field Rd, Corpus Christi, Texas 78412
Northeast Texas MSA
Location	Own or Lease	Sq. Ft.
Tyler
Tyler-South West Branch	Own		23,382
3915 S.S.W. Loop 323, Tyler, Texas 75711
Highway 64 Branch	Own		2,021
11433 Highway. 64 West, Tyler, Texas 75704
Lindale
Lindale Branch	Lease		2,598
16920 Village Lake Drive, Lindale, Texas 75771
Chandler
Chandler Branch	Own		5,916
216 N. Broad Street, Chandler, Texas 75758
Mabank
Mabank Branch	Own		5,472
1381 S. 3rd Street, Mabank, Texas 75147
Athens
Athens Branch	Own		4,572
713 East Tyler, Athens, Texas, 75751
Seven Points
Seven Points Branch	Own		4,950
220 E. Cedar Creek Parkway, Seven Points, Texas, 75143

Austin MSA
Location	Own or Lease	Sq. Ft.
San Antonio
Medical Hill Branch	Own		4,940
9324 Huebner Road, San Antonio, Texas 78240
Pyramid Branch	Lease		5,017
601 NW Loop 410, Suite 230, San Antonio, Texas 78216
Austin
Austin Branch	Lease		6,000
3001 Palm Way, Austin, Texas 78758
Avery Ranch Branch	Own		5,336
14951 Avery Ranch Blvd, Austin, Texas 78717
Tilden
Tilden Branch	Own		2,748
205 Elm Street, Tilden, Texas 78072

(1)	Square footage does not include drive thru.

(2)	We lease a portion of these owned space to third-party tenants.

Item 3. Legal Proceedings

In the ordinary course of our banking business, we may be a party to various legal proceedings from time to time. We do not believe that there is any pending or threatened proceeding against us, which, if determined adversely, would have a material effect on our business, results of operations, or financial condition. Other than regular, routine examinations by federal and state banking authorities, there are no proceedings pending or known to be contemplated by any governmental authorities. However, changes in circumstances or additional information could result in additional accruals or resolution of these matters in excess of established accruals, which could adversely affect our financial condition, results of operations or cash flows, potentially materially.

Item 4. Mine Safety Disclosures

Not applicable.

4554

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Market Information for Common Stock

The Company’s common stock, no par value per share, is traded on the NASDAQ Global Select Market under the trading symbol “STXB”.

Holders of Record

As of December 31, ~~2020~~2021 there were approximately ~~379~~300 holders of record of the Company’s common stock.

Dividends

OnThe ~~September~~Company ~~24,~~paid ~~2020,~~quarterly ~~the~~cash ~~Company~~dividends ~~announced~~to ~~that~~shareholders ~~our~~of ~~board~~$0.09 per share during the first and second quarters of ~~directors~~2021. ~~declared~~In August of 2021 the ~~initiation~~Board of aDirectors ~~regular~~voted ~~quarterly~~to ~~cash~~increase the dividend ofto $0.0712 per share offor ~~our~~the ~~outstanding~~third ~~common~~quarter ~~stock~~of 2021. The ~~dividend~~Company ~~was~~ paid onquarterly ~~October~~cash ~~23,~~dividends ~~2020~~ to shareholders of ~~record~~$0.12 atper share during the ~~close~~third and fourth quarters of ~~business~~2021. onA ~~October~~component 9,of ~~2020.~~return Onto ~~December~~common 18shareholders, ~~2020,~~the ~~our~~Company ~~board~~intends ofto ~~directors~~pay ~~declared~~cash adividends ~~quarterly~~when ~~cash~~corporate ~~dividend~~financial ofperformance ~~$0.09~~and ~~per~~capital ~~share~~strength onallow ~~our~~it ~~outstanding~~to ~~common~~do ~~stock~~so. ~~The~~All dividend ~~was~~payments ~~paid~~must onbe ~~January~~approved ~~19,~~and ~~2021~~declared toby ~~shareholders~~the ofBoard ~~record as~~ of ~~January~~Directors 5,and ~~2021.~~are ~~Total~~required ~~cash~~to ~~dividends~~be ~~declared~~in tocompliance ~~the~~with ~~Company’s~~all ~~shareholders~~applicable inlaws ~~2020~~and ~~equaled $2~~regulations.77 ~~million.~~

The timing, declaration, amount and payment of any future cash dividends are at the discretion of our board of directors and will depend on many factors, including our results of operations, financial condition, capital requirements, investment opportunities, growth opportunities, any legal, regulatory, contractual or other limitations on our ability to pay dividends and other factors our board of directors may deem relevant. In addition, there are regulatory restrictions on our ability and the ability of the Bank to pay dividends. See “Item 1A. Risk Factors—Our dividend policy may change without notice, our future ability to pay dividends is subject to restrictions, and we may not pay dividends in the future” and “Item 1. Business— Supervision and Regulation—Holding Company Regulation—Restrictions on Bank Holding Company Dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

Plan Category

Number of Shares to be Issued Upon Exercise of Outstanding Awards

Weighted- Average Exercise Price of Outstanding Awards

Number of Shares Available for Future Grants

Equity compensation plans approved by shareholders(1)

1763,~~038,586~~970

14.2563

~~942~~112,~~638~~547

Equity compensation plans not approved by shareholders

—

Total

1763,~~038,586~~970

14.2563

~~942~~112,~~638~~547

(1) The number of shares available for future issuance includes ~~628~~112,~~263~~547 shares available under the Company’s 2017 Stock Incentive Plan (which allows for the issuance of options, as well as various other stock-based awards) ~~and 314,375 shares available under the Company’s 2008 Stock Incentive Plan~~.

Issuer Purchases of Securities

On June 1318, ~~2019~~2021, the Company’s ~~board~~previously-announced ofstock ~~directors~~buyback program (the “2020 Stock Buyback Program”) expired pursuant to its terms. On June 15, 2021, the Company approved a new stock buyback program (the “2021 Stock Buyback Program”) pursuant to which the Company may, from time to time, purchase up to $1110.70 million of ~~its~~the Company’s outstanding shares of common stock, beginning on June 19, 2021 and concluding on June 18, 2022. The shares of Company common stock may be repurchased under the 2021 Stock Buyback Program from time to time in privately negotiated transactions or the open market, including pursuant to block trades or Rule 10b5-1 trading plans, and in accordance with applicable regulations of the SEC. The timing and exact amount of any repurchases under the 2021 Stock Buyback Program will depend on various factors including, the performance of the Company’s stock price, general market and other conditions, applicable legal requirements and other factors. ~~The~~There is no assurance that the Company will repurchase any shares under the 2021 Stock Buyback Program, ~~had~~and anthe ~~expiration~~2021 ~~date~~Stock ofBuyback ~~June~~Program ~~18,~~may ~~2020.~~be Onterminated ~~June~~or ~~15,~~amended ~~2020,~~by the Company’s board of directors ofat any time prior to the expiration date. Furthermore, the Company ~~amended~~may, in its discretion, begin or terminate repurchases at any time prior to the 2021 Stock Buyback Program’s expiration, without any prior notice.

46The Company purchased 58,506 shares at an average price of $18.17 under the 2020 Stock Buyback Program before its expiration. The Company did not purchase any shares under the 2021 Stock Buyback Program during the three months ended December 31, 2021.

Buyback Program to authorize the Company to repurchase an additional $10 million of its outstanding shares of common stock and to extend the Stock Buyback Program until June 18, 2021. The Stock Buyback Program may be terminated or amended by the Company’s board of directors at any time prior to the expiration date.55

~~The~~Item ~~following table summarizes the share repurchase activity from the inception of the Stock Buyback Program through December 31, 2020~~6.

	Total Shares Repurchased		Average Price Paid Per Share		Total Dollar Amount Purchased Pursuant to Publicly-Announced Plan		Maximum Dollar Amount Remaining Available for Repurchase Pursuant to Publicly-Announced Plan
July 2019		—	$	—	$	—	$	11,700,000
August 2019		7,090		20.59		146,007		11,553,993
September 2019		2,500		20.63		197,582		11,502,418
October 2019		4,433		20.69		289,350		11,410,650
November 2019		—		—		289,350		11,410,650
December 2019		—		—		289,350		11,410,650
Total		14,023
January 2020		13,822	$	20.73	$	575,787	$	11,124,213
February 2020		85,979	$	20.23		2,320,854	$	9,379,146
March 2020		221,409	$	12.85		5,094,533	$	6,605,467
April 2020		290,632	$	10.17		8,101,233	$	3,598,767
May 2020		228,390	$	11.23		10,682,327	$	1,017,673
June 2020		83,917	$	12.67		11,777,860	$	9,922,140
July 2020		22,832	$	11.31	$	12,036,189		9,663,811
August 2020		20,262	$	12.51		12,289,454		9,410,546
September 2020		21,099	$	11.69		12,533,884		9,166,116
October 2020		21,263	$	13.13		12,810,632		8,889,368
November 2020		214,535	$	15.37		15,600,090		6,099,910
December 2020		9,599	$	16.58		15,758,903		5,941,097
Total		1,233,739

Reserved.

Stock Performance Graph

The stock price performance graph below shall not be deemed incorporated by reference by any general statement incorporating by reference in this Annual Report on Form 10-K into any filing under the Securities Act or under the Exchange Act, except to the extent the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.

The following graph compares the cumulative total stockholders’ return on our common stock compared to the cumulative total returns for the Standard & Poor’s (S&P) 500 Index, ~~the SNL Small Cap U.S. Bank Index~~ and an index representing a group of peer banks from May 4, 2018 (the date our common stock commenced trading on NASDAQ) through December 31, ~~2020~~2021. The comparison assumes that $100 was invested on May 4, 2018 in our common stock and in each of the indices. The cumulative total return on each investment assumes reinvestment of dividends (if applicable).

4856

Item 6. Selected Financial Data

The following table should be read in conjunction with “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8 - Financial Statements and Supplementary Data,” below. The selected historical consolidated financial information set forth below as of and for the years ended December 31, 2020 and 2019 is derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated financial information set forth below as of and for the years ended December 31, 2018, 2017 and 2016 is derived from our audited financial statements not included in this Annual Report on Form 10-K. Recent acquisitions in 2020 and 2019 may affect the comparability of the information presented below. The selected historical results shown below and elsewhere in this Annual Report on Form 10-K are not necessarily indicative of our future performance.

	As of and for the Years Ended December 31,
	2020			2019			2018			2017			2016
				(Dollars in thousands, except per share data)
Selected Period-End Balance Sheet Data:
Total assets(1)	$	3,084,759		$	2,384,622		$	1,476,621		$	1,038,092		$	985,093
Loans held for sale		1,470			3,989			3,945			3,814			4,003
Loans held for investment(1)		2,388,532			1,767,182			1,102,808			876,913			777,465
Allowance for loan and lease losses		(16,026	)		(6,737	)		(6,286	)		(5,652	)		(4,357	)
Loans, net(1)		2,372,506			1,760,445			1,096,522			871,261			773,108
Total deposits		2,459,135			1,928,126			1,182,648			835,368			814,438
Short-term borrowings		10,000			—			12,500			15,000			5,000
Long-term borrowings(1)		242,020			105,140			77,784			84,205			70,620
Total stockholders' equity		360,779			345,705			198,796			99,139			92,896
Selected Period-End Income Statement Data:
Total interest income		123,545			95,260			57,339			46,907			40,210
Total interest expense		17,610			17,370			10,324			8,328			6,730
Net interest income		105,935			77,890			47,015			38,579			33,480
Provision for loan losses		11,257			2,856			2,160			2,475			1,617
Net interest income after provision for loan losses		94,678			75,034			44,855			36,104			31,863
Total noninterest income		18,876			14,567			10,489			9,638			8,342
Total noninterest expense		74,784			63,044			43,364			37,402			34,881
Income before income tax expense		38,770			26,557			11,980			8,340			5,324
Income tax expense		7,459			5,421			2,002			3,587			1,609
Net income		31,311			21,136			9,978			4,753			3,715
Selected Share and Per Share Data:
Earnings per common share--Basic		1.78			1.44			1.08			0.65			0.51
Earnings per common share--Diluted		1.77			1.40			1.03			0.63			0.50
Book value per share(2)		21.12			18.93			16.42			13.62			12.83
Tangible book value per share(3)		16.11			14.55			14.21			12.52			11.63
Weighted average common shares outstanding--Basic		17,567,117			14,697,342			9,258,216			7,233,783			7,065,243
Weighted average common shares outstanding--Diluted		17,649,463			15,112,827			9,642,408			7,519,944			7,205,709
Shares outstanding at end of period		17,081,831			18,258,222			12,103,753			7,280,183			7,239,763
Selected Performance Ratios:
Return on average assets		1.11	%		1.14	%		0.89	%		0.47	%		0.41	%
Return on average stockholders' equity		8.98			8.38			6.77			4.88			4.09
Net interest margin(4)		4.19			4.58			4.60			4.19			4.09
Noninterest expense to average assets		2.65			3.39			3.85			3.71			3.86
Efficiency ratio		59.92			68.19			75.41			77.57			83.40
Average interest-earning assets to average interest-bearing liabilities		142.66			136.71			131.04			126.42			125.04
Loans to deposits		97.20			91.65			92.41			104.30			95.46
Yield on interest-earning assets		4.83			5.57			5.55			4.97			4.79
Cost of interest-bearing liabilities		0.91			1.39			1.31			1.12			1.00
Interest rate spread		3.92			4.18			4.24			3.85			3.79
Asset and Credit Quality Ratios:
Nonperforming loans to loans held for investment		0.36	%		0.37	%		0.49	%		0.41	%		0.49	%
Nonperforming assets to loans plus OREO		0.37			0.57			0.56			0.42			0.50
Nonperforming assets to total assets		0.28			0.57			0.42			0.35			0.39
Net charge-offs to average loans		0.09			0.42			0.16			0.14			0.05
Allowance for loan and lease losses to nonperforming loans		186.41			104.18			118.18			157.22			114.45
Allowance for loan and lease losses to loans held for investment		0.67			0.38			0.58			0.65			0.56
Capital Ratios:
Average equity to average total assets		12.36	%		13.55	%		13.09	%		9.66	%		10.04	%
Tangible equity to tangible assets(5)		9.18			11.53			11.94			8.92			8.67

(1) 2017 and 2016 balances have been updated from those previously reported to include secured borrowings.

(2) Book value per share is calculated as total stockholders’ equity at the end of the relevant period divided by the outstanding number of shares of common stock at the end of the relevant period.

(3) Tangible book value per share is calculated as total stockholders’ equity less goodwill and other intangible assets, net of accumulated amortization at the end of the relevant period, divided by the outstanding number of shares of common stock at the end of the relevant period. Tangible book value per share is a non-GAAP financial measure. The most directly comparable GAAP financial measure is book value per share. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures.”

(4) Net interest margin is shown on a fully taxable equivalent basis, which is a non-GAAP financial measure. We calculate the GAAP-based net interest margin as interest income divided by average interest-earning assets. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Non-GAAP Financial Measures.”

(5) We calculate tangible equity as total stockholders’ equity less goodwill and other intangible assets, net of accumulated amortization, and we calculate tangible assets as total assets less goodwill and other intangible assets, net of accumulated amortization. Tangible equity to tangible assets is a non-GAAP financial measure. The most directly comparable GAAP financial measure is total stockholders’ equity to total assets. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Historical Consolidated Financial Data” and our consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. Except as required by law, we assume no obligation to update any of these forward-looking statements.

Overview

We are a Texas corporation and a registered bank holding company located in the Houston metropolitan area with headquarters in Conroe, Texas. We offer a broad range of commercial and retail banking services through our wholly-owned bank subsidiary, Spirit of Texas Bank SSB. We operate through 3835 full-service branches located primarily in the Houston, Dallas/Fort Worth, Bryan/College Station, San Antonio-New Braunfels, Corpus Christi, Tyler, and Austin metropolitan areas metropolitan areas. As of December 31, ~~2020~~2021, we had total assets of $3.0827 billion, loans held for investment of $2.3932 billion, total deposits of $2.4678 billion and total stockholders’ equity of $~~360~~393.882 million.

As a bank holding company, we generate most of our revenues from interest income on loans, gains on sale of the guaranteed portion of SBA loans, customer service and loan fees, brokerage fees derived from secondary mortgage originations and interest income from investments in securities. We incur interest expense on deposits and other borrowed funds and noninterest expenses, such as salaries and employee benefits and occupancy expenses. Our goal is to maximize income generated from interest earning assets, while also minimizing interest expense associated with our funding base to widen net interest spread and drive net interest margin expansion. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings that are used to fund those assets. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities.

Changes in market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target markets and throughout Texas.

Pending Merger of Simmons First National Corporation and Spirit of Texas Bancshares, Inc.

On November 18, 2021, we entered into an Agreement and Plan of Merger (the “merger agreement”) with Simmons First National Corporation (“Simmons”), parent company of Simmons Bank, pursuant to which the companies will combine in an all‐stock transaction. Under the terms of the merger agreement, which was approved by both companies’ Boards of Directors, Spirit will merge with and into Simmons, with Simmons surviving (the “Proposed Merger”), and the combined holding company and bank will operate under the Simmons name and brand with the company’s headquarters remaining in Little Rock, Arkansas. Pending regulatory approvals and the satisfaction of the closing conditions set forth in the merger agreement, the Proposed Merger is expected to close during the second calendar quarter of 2022.

COVID-19 Pandemic

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China, and has since spread ~~to a number of other countries, including the United States~~worldwide. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. In addition, the “Delta” and “Omicron” variants of COVID-19, which are the most transmissible variants identified to date, have spread in the United States in 2021. The impact of these variants, or any other new variants of COVID-19, cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of COVID-19 vaccines against variants, and the response by governmental bodies and regulators. The ongoing COVID-19 pandemic has severely impacted the level of economic activity in the local, national and global economies and financial markets. As a result, the Company and certain of its customers have been adversely affected by the COVID-19 pandemic. The extent to which the COVID-19 pandemic, or any current or future variant thereof, negatively impacts the Company's business, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, is unknown at this time and will depend on future developments, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic, or any current or future variant thereof. If the pandemic is sustained for a prolonged period of time, it may further adversely impact the Company and impair the ability of the Company's customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on its business operations, asset valuations, financial condition, and results of operations. Please refer to Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K.

51In April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA. Terms of the PPP loans include the following (i) maximum amount limited to the lesser of $10 million or an amount calculated using a payroll-based formula, (ii) maximum loan term of two years, (iii) interest rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no payments are required for six months following the loan disbursement date and (vi) loan forgiveness up to the full principal amount of the loan and any accrued interest, subject to certain requirements including that no more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. In return for processing and booking the loan, the SBA will pay the lender a processing fee tiered by the size of the loan (5% for loans of not more than $350 thousand; 3% for loans more than $350 thousand and less than $2 million; and 1% for loans of at least $2 million). At December 31, 2021, PPP loans totaled $43.9 million which are included in commercial and industrial loans.

~~their~~The ~~contractual~~Economic ~~obligations~~Aid toAct, ~~the~~signed ~~Company.~~into ~~This~~law ~~could~~on ~~cause~~December ~~the~~27, ~~Company~~2020, toauthorized ~~experience~~new aPPP ~~material~~funding ~~adverse~~and ~~effect~~extended onthe ~~its~~authority ~~business~~of ~~operations,~~lenders ~~asset~~to ~~valuations,~~make ~~financial~~PPP ~~condition~~loans through March 31, ~~and~~2021. ~~results~~Under the revised terms of ~~operations.~~the ~~Please~~PPP, ~~refer~~loans may be made to ~~Part~~first I,time ~~Item~~borrowers ~~1A,~~as ~~“Risk~~well ~~Factors”~~as ofcertain ~~this~~businesses ~~Annual~~that ~~Report~~previously onreceived ~~Form~~a ~~10-K~~PPP loan and experienced a significant reduction in revenue.

InDuring ~~April~~the ~~2020,~~year weended ~~began~~December ~~originating~~31, ~~loans~~2021, towe ~~qualified~~also ~~small~~participated ~~businesses~~in ~~under~~ the ~~PPP~~Federal ~~administered~~Reserve's byPPPLF, ~~the~~which ~~SBA~~expired ~~under~~on ~~the~~July ~~provisions~~30, ~~of the CARES Act~~2021. ~~Loans~~As ~~covered~~of byDecember ~~the~~31, ~~PPP may be eligible for loan forgiveness for certain costs incurred related to payroll~~2021, ~~group~~we ~~health~~had ~~care~~no ~~benefit~~borrowings ~~costs~~under ~~and~~the ~~qualifying mortgage, rent and utility payments~~PPPLF. The ~~remaining~~maturity ~~loan~~date ~~balance after forgiveness~~ of ~~any~~a ~~amounts~~borrowing isunder ~~still~~the ~~fully~~PPPLF ~~guaranteed~~was byequal to the ~~SBA.~~maturity ~~Terms~~date of the PPP ~~loans~~loan ~~include~~pledged ~~the following (i) maximum amount limited~~ to secure the ~~lesser~~borrowing ofand ~~$10 million~~would orbe anaccelerated ~~amount calculated using a payroll-based formula,~~ (iii) ~~maximum~~if ~~loan~~the ~~term~~underlying ofPPP ~~two~~loan ~~years,~~goes ~~(iii) interest~~into ~~rate~~default ofand ~~1.00%,~~is ~~(iv) no~~sold ~~collateral~~to orthe ~~personal~~SBA ~~guarantees~~to ~~are~~realize ~~required,~~on ~~(v) no payments are required for six months following~~ the ~~loan~~SBA ~~disbursement~~guarantee ~~date~~or ~~and~~ (viii) ~~loan forgiveness up~~ to the ~~full~~extent ~~principal~~that ~~amount of the loan and~~ any ~~accrued~~PPP ~~interest, subject to certain requirements including that no more than 25% of the~~ loan forgiveness ~~amount~~reimbursement ~~may~~is bereceived ~~attributable~~from tothe ~~non-payroll costs~~SBA. InBorrowings ~~return~~under ~~for processing and booking~~ the ~~loan,~~PPPLF ~~the~~bear ~~SBA~~interest ~~will~~at ~~pay the lender~~ a ~~processing~~rate ~~fee tiered by the size~~ of ~~the loan (5~~0.35% ~~for loans of not more than $350 thousand; 3% for loans more than $350 thousand~~ and ~~less~~there ~~than~~were ~~$2 million;~~no ~~and~~fees 1%to ~~for loans of at least $2 million)~~us. ~~At December 31, 2020, PPP loans totaled $277.8 million which are included in commercial and industrial loans.~~

The Economic Aid Act, signed into law on December 27, 2020, authorized new PPP funding and extended the authority of lenders to make PPP loans through March 31, 2021. Under the revised terms of the PPP, loans may be made to first time borrowers as well as certain businesses that previously received a PPP loan and experienced a significant reduction in revenue. The Company is participating in the new round of the PPP by offering first and second draw loans.

We are also currently participating in the Federal Reserve's PPPLF which, through December 31, 2020, will extend loans to banks who are loaning money to small businesses under the PPP. The amount outstanding at December 31, 2020, was $149.8 million and is non-recourse and secured by the amount of the PPP loans we originate. The maturity date of a borrowing under the PPPLF is equal the maturity date of the PPP loan pledged to secure the borrowing and would be accelerated (i) if the underlying PPP loan goes into default and is sold to the SBA to realize on the SBA guarantee or (ii) to the extent that any loan forgiveness reimbursement is received from the SBA. Borrowings under the PPPLF bear interest at a rate of 0.35% and there are no fees to us.

Federal bank regulatory agencies have issued an interim final rule that permits banks to neutralize the regulatory capital effects of participating in the PPP and, if applicable, the PPPLF. Specifically, all PPP loans have a zero percent risk weight under applicable risk-based capital rules. Additionally, a bank may exclude all PPP loans pledged as collateral to the PPPLF from its average total consolidated assets for the purposes of calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPPLF will be included.

Acquisition of Beeville

On April 2, 2019, the Company completed its acquisition of First Beeville Financial Corporation and its subsidiary, The First National Bank of Beeville. This transaction resulted in three additional branches and two LPO’s in the South Texas region. The Company issued 1,579,191 shares of its common stock as well as a net cash payment to Beeville shareholders of $32.4 million. For more information about the acquisition, see “Note 3. Business Combinations” in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Acquisition of Chandler

On November 5, 2019, the Company completed its acquisition of Chandler Bancorp Inc., and its subsidiary, Citizens State Bank. This transaction resulted in seven additional branches in the North Texas region. The Company issued 2,100,000 shares of its common stock as well as a net cash payment to Citizens shareholders of $17.9 million. For more information about the acquisition, see “Note 3. Business Combinations” in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Simmons Branch Acquisition

On February 28, 2020, Spirit completed its acquisition of certain assets and assumption of certain liabilities associated with five banking offices of Simmons Bank. The offices are located in Austin, San Antonio and Tilden, Texas. The Company paid total consideration of $131.6 million in the Simmons branch acquisition. For more information about the acquisition, see “Note 3. Business Combinations” in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Results of Operations

Our results of operations depend substantially on net interest income and noninterest income. Other factors contributing to our results of operations include our level of noninterest expenses, such as salaries and employee benefits, occupancy and equipment and other miscellaneous operating expenses.

Net Interest Income

Net interest income represents interest income less interest expense. We generate interest income from interest, dividends and fees received on interest-earning assets, including loans and investment securities we own. We incur interest expense from interest paid on interest-bearing liabilities, including interest-bearing deposits and borrowings. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread, (4) our net interest margin and (5) our provisions for loan losses. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and stockholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Noninterest Income

Our noninterest income includes the following: (1) service charges and fees; (2) SBA loan servicing fees; (3) mortgage referral fees; (4) gain on the sales of loans, net; (5) gain (loss) on sales of investment securities; (6) swap fees; (7) swap referral fees; and (8) other.

Noninterest Expense

Our noninterest expense includes the following: (1) salaries and employee benefits; (2) occupancy and equipment expenses; (3) professional services; (4) data processing and network; (5) regulatory assessments and insurance; (6) amortization of core deposit intangibles; (7) advertising; (8) marketing; (9) telephone expenses; (10) conversion expense; and (11) other.

Financial Condition

The primary factors we use to evaluate and manage our financial condition include liquidity, asset quality and capital.

Liquidity

We manage liquidity based upon factors that include the amount of core deposits as a percentage of total deposits, the level of diversification of our funding sources, the allocation and amount of our deposits among deposit types, the short-term funding sources used to fund assets, the amount of non-deposit funding used to fund assets, the availability of unused funding sources, off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold, and the repricing characteristics and maturities of our assets when compared to the repricing characteristics of our liabilities, the ability to securitize and sell certain pools of assets and other factors.

Asset Quality

We manage the diversification and quality of our assets based upon factors that include the level, distribution, severity and trend of problem, classified, delinquent, nonaccrual, nonperforming and restructured assets, the adequacy of our allowance for loan and lease losses, discounts and reserves for unfunded loan commitments, the diversification and quality of loan and investment portfolios and credit risk concentrations.

Capital

We manage capital based upon factors that include the level and quality of capital and our overall financial condition, the trend and volume of problem assets, the adequacy of discounts and reserves, the level and quality of earnings, the risk exposures in our balance sheet, the levels of tier 1 (core), risk-based and tangible common equity capital, the ratios of tier 1 (core), risk-based and tangible common equity capital to total assets and risk-weighted assets and other factors.

Analysis of Results of Operations

Net income for the year ended December 31, ~~2020~~2021 totaled $3142.31 million, which generated diluted earnings per common share of $12.7738 and adjusted diluted earnings per common share, which is a non-GAAP financial measure that excludes gain on sale of securities and ~~merger-~~expenses related ~~expenses~~to the Proposed Merger, of $12.7942 for the year ended December 31, ~~2020~~2021. Net income for the year ended December 31, ~~2019~~2020 totaled $2131.13 million, which generated diluted earnings per common share of $1.4077 and adjusted diluted earnings per common share of $1.4379 for the year ended December 31, ~~2019~~2020. The increase in net income was driven by an increase in interest income of $282.30 million that was primarily attributable to ~~acquired and~~ organic loan growth and origination fees net of costs recognized on Paycheck Protection Program loans. In addition, interest expense decreased $6.2 million primarily due to market rate resets which occurred on all products during the year ended December 31, 2021. Increased interest income was partially offset by ana ~~increase~~decrease inof ~~salaries~~non-interest ~~and~~income ~~benefits expense~~ of $54.6 8 million ~~and~~primarily andue ~~increase~~to a decrease in ~~occupancy~~gain ~~expense~~on sale of loans of $34.24 million, ~~which~~offset ~~was~~by ~~mainly~~an ~~the~~increase ~~result~~in ofSwap ~~increased~~fees ~~locations~~of ~~from~~$1.0 ~~acquisitions~~million. Our results of operations for the year ended December 31, ~~2020~~2021 produced a return on average assets of 1.1134% compared to a return on average assets of 1.1411% for the year ended December 31, ~~2019~~2020. We had a return on average stockholders’ equity of 811.9817% compared to a return on average stockholders’ equity of 8.3898% for the year ended December 31, ~~2019~~2020.

Net income for the year ended December 31, ~~2019~~2020 totaled $2131.13 million, which generated diluted earnings per common share of $1.4077 and adjusted diluted earnings per common share, which is a non-GAAP financial measure that excludes gain on sale of securities and ~~merger~~acquisition-related expenses, of $1.4379 for the year ended December 31, ~~2019~~2020. Net income for the year ended December 31, ~~2018~~2019 totaled $1021.01 million, which generated diluted earnings per common share of $1.0340 and adjusted diluted earnings per common share of $1.1943 for the year ended December 31, ~~2018~~2019. The increase in net income was driven by an increase in interest income of $37.9 million that was primarily attributable to acquired loan growth, partially offset by an increase in interest expense of $7.0 million, which was mainly the result of increased deposit balances from acquisitions. Our results of operations for the year ended December 31, ~~2019~~2020 produced a return on average assets of 1.1411% compared to a return on average assets of 01.8914% for the year ended December 31, ~~2018~~2019. We had a return on average stockholders’ equity of 8.3898% compared to a return on average stockholders’ equity of 68.7738% for the year ended December 31, ~~2018~~2019.

Net Interest Income and Net Interest Margin

The following table presents, for the periods indicated, information about (1) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (2) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (3) the interest rate spread; (4) net interest income and margin; and (5) net interest income and margin (tax equivalent). Interest earned on loans that are classified as nonaccrual is not recognized in income, however the balances are reflected in ~~average outstanding balances for that period. Any nonaccrual loans have been included in the table as loans carrying a zero yield.~~

	Years Ended December 31,
	2020							2019							2018
	Average Balance(1)		Interest/ Expense		Yield/ Rate			Average Balance(1)		Interest/ Expense		Yield/ Rate			Average Balance(1)		Interest/ Expense		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits in other banks	$	183,065	$	1,301		0.71	%	$	135,457	$	2,892		2.13	%	$	28,077	$	568		2.02	%
Loans, including loans held for sale(2)		2,254,802		119,904		5.32	%		1,411,139		87,547		6.20	%		944,363		55,087		5.83	%
Investment securities and other		117,947		2,340		1.98	%		164,422		4,821		2.93	%		60,113		1,684		2.80	%
Total interest-earning assets		2,555,814		123,545		4.83	%		1,711,018		95,260		5.57	%		1,032,553		57,339		5.55	%
Noninterest-earning assets		263,887							150,432							93,041
Total assets	$	2,819,701						$	1,861,450						$	1,125,594
Interest-bearing liabilities:
Interest-bearing demand deposits	$	371,811	$	732		0.20	%	$	261,498	$	1,180		0.45	%	$	19,324	$	100		0.52	%
Interest-bearing NOW accounts		20,174		52		0.26	%		11,092		29		0.26	%		8,078		12		0.15	%
Savings and money market accounts		527,149		3,105		0.59	%		283,865		2,500		0.88	%		228,413		1,384		0.61	%
Time deposits		694,087		10,681		1.54	%		623,189		11,831		1.90	%		447,368		6,986		1.56	%
FHLB advances and other borrowings		178,328		3,040		1.70	%		71,899		1,830		2.55	%		84,777		1,842		2.17	%
Total interest-bearing liabilities		1,791,549		17,610		0.98	%		1,251,543		17,370		1.39	%		787,960		10,324		1.31	%
Noninterest-bearing liabilities and shareholders' equity
Noninterest-bearing demand deposits		655,328							353,579							187,080
Other liabilities		24,314							4,118							3,269
Stockholders' equity		348,510							252,210							147,285
Total liabilities and stockholders' equity	$	2,819,701						$	1,861,450						$	1,125,594
Net interest rate spread						3.85	%						4.18	%						4.24	%
Net interest income and margin			$	105,935		4.14	%			$	77,890		4.55	%			$	47,015		4.55	%
Net interest income and margin (tax equivalent)(3)			$	107,712		4.21	%			$	78,336		4.58	%			$	47,573		4.60	%

average outstanding balances for that period. Any nonaccrual loans have been included in the table as loans carrying a zero yield.

	Years Ended December 31,
	2021							2020							2019
	Average Balance(1)		Interest/ Expense		Yield/ Rate			Average Balance(1)		Interest/ Expense		Yield/ Rate			Average Balance(1)		Interest/ Expense		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits in other banks	$	147,681	$	252		0.17	%	$	183,065	$	1,301		0.71	%	$	135,457	$	2,892		2.13	%
Loans, including loans held for sale(2)		2,313,838		118,922		5.14	%		2,254,802		119,904		5.32	%		1,411,139		87,547		6.20	%
Investment securities and other		429,071		6,350		1.48	%		117,947		2,340		1.98	%		164,422		4,821		2.93	%
Total interest-earning assets		2,890,590		125,524		4.34	%		2,555,814		123,545		4.83	%		1,711,018		95,260		5.57	%
Noninterest-earning assets		257,489							263,887							150,432
Total assets	$	3,148,079						$	2,819,701						$	1,861,450
Interest-bearing liabilities:
Interest-bearing demand deposits	$	533,445	$	653		0.12	%	$	371,811	$	732		0.20	%	$	261,498	$	1,180		0.45	%
Interest-bearing NOW accounts		10,675		5		0.05	%		20,174		52		0.26	%		11,092		29		0.26	%
Savings and money market accounts		688,499		2,474		0.36	%		527,149		3,105		0.59	%		283,865		2,500		0.88	%
Time deposits		608,644		4,594		0.75	%		694,087		10,681		1.54	%		623,189		11,831		1.90	%
FHLB advances and other borrowings		141,052		3,682		2.61	%		178,328		3,040		1.70	%		71,899		1,830		2.55	%
Total interest-bearing liabilities		1,982,315		11,408		0.58	%		1,791,549		17,610		0.98	%		1,251,543		17,370		1.39	%
Noninterest-bearing liabilities and shareholders' equity
Noninterest-bearing demand deposits		774,528							655,328							353,579
Other liabilities		14,863							24,314							4,118
Stockholders' equity		376,373							348,510							252,210
Total liabilities and stockholders' equity	$	3,148,079						$	2,819,701						$	1,861,450
Net interest rate spread						3.77	%						3.85	%						4.18	%
Net interest income and margin			$	114,116		3.95	%			$	105,935		4.14	%			$	77,890		4.55	%
Net interest income and margin (tax equivalent)(3)			$	114,581		3.96	%			$	107,712		4.21	%			$	78,336		4.58	%

(1)	Average balances presented are derived from daily average balances.

(2)	Includes loans on nonaccrual status.

(3) In order to make pretax income and resultant yields on tax-exempt loans comparable to those on taxable loans, a tax-equivalent adjustment has been computed using a federal tax rate of 21% for the years ended December 31, ~~2020~~2021, ~~2019~~2020 and ~~2018~~2019, which is a non-GAAP financial measure. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities for the periods indicated. The effect of changes in volume is determined by multiplying the change in volume by the prior period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume.

5561

A summary of increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and average interest rates follows:

	Years Ended December 31, 2020 Compared to 2019									Years Ended December 31, 2019 Compared to 2018
	Years Ended December 31, 2021 Compared to 2020									Years Ended December 31, 2020 Compared to 2019
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume(1)			Rate(1)			Total			Volume(1)			Rate(1)			Total
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits in other banks	$	~~782~~478		$	(21,~~373~~527	)	$	(1,~~591~~049	)	$	~~2,172~~782		$	~~350~~(2,373	)	$	2(1,~~522~~591	)
Loans, including loans held for sale(2)		466,~~306~~828			(137,~~949~~810	)		~~32,357~~(982	)		2746,~~228~~306			5(13,~~231~~949	)		32,~~459~~357
Investment securities and other		(14,~~157~~860	)		(~~1,324~~850	)		(24,~~481~~010	)		2(1,~~922~~157	)		18(1,324	)		(2,~~940~~481	)
Total change in interest income	$	4512,~~931~~166		$	(1710,~~646~~187	)	$	281,~~285~~979		$	3245,~~322~~931		$	5(17,~~599~~646	)	$	3728,~~921~~285
Interest-bearing liabilities:
Interest-bearing demand deposits	$	~~378~~376		$	(~~826~~455	)	$	(~~448~~79	)	$	~~1,253~~378		$	(~~173~~826	)	$	~~1,080~~(448	)
Interest-bearing NOW accounts		2315			—(62	)		23(47	)		423			13—			1723
Savings and money market accounts		1,~~631~~379			(12,~~026~~010	)		~~605~~(631	)		~~336~~1,631			~~780~~(1,026	)		~~1,116~~605
Time deposits		13,~~250~~034			(29,~~400~~121	)		(16,~~150~~087	)		21,~~746~~250			(2,~~099~~400	)		4(1,~~845~~150	)
FHLB advances and other borrowings		~~1,977~~384			~~(767~~258	)		~~1,210~~642			~~(280~~1,977	)		~~268~~(767	)		~~(12~~1,210	)
Total change in interest expenses		5,~~259~~188			(511,~~019~~390	)		~~240~~(6,202	)		45,~~059~~259			2(5,~~987~~019	)		~~7,046~~240
Total change in net interest income	$	406,~~672~~978		$	~~(12~~1,~~627~~203	)	$	288,~~045~~181		$	2840,~~263~~672		$	2(12,~~612~~627	)	$	3028,~~875~~045

(1)	Variances attributable to both volume and rate are allocated on a consistent basis between rate and volume based on the absolute value of the variances in each category.

(2)	Includes loans on nonaccrual status.

Year ended December 31, 2021 compared to Year ended December 31, 2020

Net interest income was $114.1 million for the year ended December 31, 2021 compared to $105.9 million for the year ended December 31, 2020, representing an increase of 8.2 million, or 7.7%. The increase in net interest income was primarily due to an increase in interest income of $2.0 million due to organic loan growth and origination fees net of costs recognized on Paycheck Protection Program loans and by a decrease in interest expense of $6.2 million due to market rate resets which occurred on all products during the year ended December 31, 2021. Interest income on loans decreased by $982 thousand for the year ended December 31, 2021. The effects of growth in average loans of $59.0 million, including loans held for sale, for the year ended December 31, 2021 was more than offset by declines in interest rates during the year.

Interest expense was $11.4 million for the year ended December 31, 2021 compared to $17.6 million for the year ended December 31, 2020, representing a decrease of $6.2 million, or 35.2%. This decrease was mainly due to a decrease in interest expense on deposits. Interest expense on FHLB advances and other borrowings totaled $3.7 million for the year ended December 31, 2021 compared to $3.0 million for the year ended December 31, 2020, representing an increase of $642 thousand, resulting primarily from interest expense on subordinated debt issued during the year ended December 31, 2020 which yields 6.0%. Interest on subordinated debt was offset by declines in interest expense on deposits related to lower overall market interest rates.

Interest expense on deposits decreased by $6.8 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease was primarily attributable to a decrease in overall market rates offset by an increase in the average balance of interest bearing deposits of $228.0 million. The average cost of deposits for the year ended December 31, 2021 was 0.30% compared to the average cost of deposits of 0.64% for the year ended December 31, 2020. The decrease in cost of deposits was primarily attributable to the decrease in interest rates by the Federal Open Market Committee during the year ended December 31, 2020. For the year ended December 31, 2021, the average rate paid on time deposits was 0.75% compared to 1.54% for the year ended December 31, 2020.

Net interest margin was 3.95% for the year ended December 31, 2021, compared to 4.14% for the year ended December 31, 2020, representing a decrease of 19 basis points. The tax equivalent net interest margin (which is a non-GAAP measure) was 3.96% for the year ended December 31, 2021 compared to 4.21% for the year ended December 31, 2020, representing a decrease of 25 basis points. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.” The average yield on interest-earning assets decreased by 49 basis points for the year ended December 31, 2021, compared to the year ended December 31, 2020 and the average rate paid on interest-bearing liabilities decreased by 40 basis points, resulting in 8 basis point decrease in the interest rate spread.

We currently expect volatility within our net interest income and net interest margin throughout the year ending December 31, 2022 as competition for loans places downward pressure on loan yields offset by any Federal Rate hikes during the year ending December 31, 2022 and the deployment of excess cash into higher yielding loans.

Year ended December 31, 2020 compared to Year ended December 31, 2019

Net interest income was $105.9 million for the year ended December 31, 2020, compared to $77.9 million for the year ended December 31, 2019, representing an increase of $28.0 million, or 36.0%. The increase in net interest income was primarily due to an increase in interest income of $28.3 million partially offset by an increase in interest expense of $240 thousand. Interest income on loans increased by $32.4 million for the year ended December 31, 2020. The effects of growth in average loans of $843.7 million, including loans held for sale, for the year ended December 31, 2020 was more than offset by declines in interest rates during the year and the primary driver of the increase in interest income on loans of $6.8 million was origination fees recognized in conjunction with the PPP.

Interest expense was $17.6 million for the year ended December 31, 2020 compared to $17.4 million for the year ended December 31, 2019, representing an increase of $240 thousand, or 1.4%. This increase was mainly due to an increase in interest expense on FHLB advances and other borrowings. Interest expense on FHLB advances and other borrowings totaled $3.0 million for the year ended December 31, 2020 compared to $1.8 million for the year ended December 31, 2019, representing an increase of $1.2 million, resulting primarily from interest expense on subordinated debt issued during the year ended December 31, 2020 which yields 6.0%. Interest on subordinated debt was offset by declines in interest expense on deposits related to lower overall market interest rates.

Interest expense on deposits decreased by $970 thousand for the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease was primarily attributable to a decrease in overall market rates offset by an increase in the average balance of interest bearing deposits of $433.6 million. The average cost of deposits for the year ended December 31, 2020 was 0.64% compared to the average cost of deposits of 1.01% for the year ended December 31, 2019. The decrease in cost of deposits was primarily attributable to the decrease in interest rates by the Federal Open Market Committee during the year ended December 31, 2020. For the year ended December 31, 2020, the average rate paid on time deposits was 1.54% compared to 1.90% for the year ended December 31, 2019.

Net interest margin was 4.14% for the year ended December 31, 2020, compared to 4.55% for the year ended December 31, 2019, representing a decrease of 41 basis points. The tax equivalent net interest margin (which is a non-GAAP measure) was 4.21% for the year ended December 31, 2020 compared to 4.58% for the year ended December 31, 2019, representing a decrease of 37 basis points. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.” The average yield on interest-earning assets decreased by 74 basis points for the year ended December 31, 2020, compared to the year ended December 31, 2019 and the average rate paid on interest-bearing liabilities decreased by 41 basis points, resulting in a 33 basis point decrease in the interest rate spread.

We currently expect our net interest income and net interest margin to remain stable throughout 2021 as the majority of variable rate loans are currently at their respective floors. Additionally, our participation in the PPP, as further discussed below, is expected to impact net interest income and net interest margin as loans are forgiven and deferred costs and fees are recognized in full through yield.

Year ended December 31, 2019 compared to Year ended December 31, 2018

Net interest income was $77.9 million for the year ended December 31, 2019, compared to $47.0 million for the year ended December 31, 2018, representing an increase of $30.9 million, or 65.7%. The increase in net interest income was primarily due to an increase in interest income of $37.9 million partially offset by an increase in interest expense of $7.0 million. Interest income on loans increased by $32.5 million for the year ended December 31, 2019. The growth in average loans of $466.8 million, including loans held for sale, for the year ended December 31, 2019 was the primary driver of the increase in interest income on loans while an increase in the average rate on loans of 37 basis points over the same period as contributed.

Interest expense was $17.4 million for the year ended December 31, 2019, compared to $10.3 million for the year ended December 31, 2018, representing an increase of $7.1 million, or 68.2%. This increase was mainly due to an increase in interest expense on deposits. Interest expense on deposits totaled $15.5 million for the year ended December 31, 2019, compared to $8.5 million for the year ended December 31, 2018, representing an increase of $7.0 million, resulting primarily from an increase in average deposits of $476.5 million. The average cost of deposits for the year ended December 31, 2019 was 1.01% compared to the average cost of deposits of 0.95% for the year ended December 31, 2018. The increase in cost of deposits was primarily attributable to the increase in interest rates by the Federal Open Market Committee during 2019. For the year ended December 31, 2019, the average rate paid on time deposits was 1.90% compared to 1.56% for the year ended December 31, 2018.

Interest expense on FHLB advances and other borrowings decreased by $12 thousand for the year ended December 31, 2019, compared to the year ended December 31, 2018. The decrease was primarily attributable to a decrease in the average balance of FHLB advances and other borrowings of $12.9 million for the year ended December 31, 2019 offset by an increase in the average rate paid on FHLB advances and other borrowings of 38 basis points. The increase in the average rate on borrowings was primarily attributable to the use of our line of credit with a third-party lender during the year which had and interest rate of LIBOR plus 4.00% per annum.

The net interest margin of 4.55% was unchanged for the year ended December 31, 2019 when compared to 4.55% for the year ended December 31, 2018. The tax equivalent net interest margin was 4.58% for the year ended December 31, 2019, compared to 4.60% for the year ended December 31, 2018, representing a decrease of 2 basis points. The average yield on interest-earning assets increased by 2 basis points for the year ended December 31, 2019, compared to the year ended December 31, 2018 while the average rate paid on interest-bearing liabilities increased by 8 basis points, resulting in a 6 basis point decrease in the interest rate spread.

Provision for Loan Losses

The provision for loan losses represents the amount determined by management to be necessary to maintain the allowance for loan and lease losses at a level capable of absorbing inherent losses in the loan portfolio. See the discussion under “—Critical Accounting Policies—Allowance for Loan and Lease Losses.” Our management and board of directors review the adequacy of the allowance for loan and lease losses on a quarterly basis. The allowance for loan and lease losses calculation is segregated by call report code and then further segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss. Loans are rated using a nine-point risk grade scale by loan officers that are subject to validation by a third-party loan review or our internal credit committee. Risk ratings are categorized as pass, watch, special mention, substandard, doubtful and loss, with some general allocation of reserves based on these grades. Impaired loans are reviewed specifically and separately under the FASB’s Accounting Standards Codification (“ASC”) 310, “Receivables”, to determine the appropriate reserve allocation. Management compares the investment in an impaired loan with the present value of expected future cash flow discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages assigned to non-impaired loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to absorb losses inherent in our loan portfolio, our management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and nonaccruals, economic conditions and other pertinent information. Loan segments negatively impacted by COVID-19 and deferrals granted as a result of the pandemic do not have a direct impact on the provision; however, adjustments to qualitative factors and loan downgrades within these populations have been made which do impact the provision. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan and lease losses at an appropriate level.

observable market price or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages assigned to non-impaired loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to absorb losses inherent in our loan portfolio, our management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and nonaccruals, economic conditions and other pertinent information. Loan segments negatively impacted by COVID-19 and deferrals granted to customers impacted by the COVID-19 pandemic do not have a direct impact on the provision; however, adjustments to qualitative factors and loan downgrades within these populations have been made which do impact the provision. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan and lease losses at an appropriate level.

Year ended December 31, 2021 compared to Year ended December 31, 2020

The provision for loan losses was $3.7 million for the year ended December 31, 2021 and $11.3 million for the year ended December 31, 2020. The decrease of the provision for the year ended December 31, 2021 was primarily due to decreased qualitative reserves in response to improved economic indicators. Currently, the qualitative reserve calculation is based upon ten external and internal factors. The COVID-19 pandemic did not significantly impact internal qualitative factors via changes to underwriting guidelines, staffing, and compliance; however, external factors which are developed based upon GDP growth, unemployment, and oil prices were significantly impacted. It was the rebound in these macroeconomic conditions during the year ended December 31, 2021 which translated into lower qualitative scores and thus lower reserves.

Our management maintains a proactive approach in managing nonperforming loans, which were $5.1 million, or 0.22% of loans held for investment, at December 31, 2021, and $8.6 million, or 0.36% of loans held for investment, at December 31, 2020. During the year ended December 31, 2021, we had net charged-off loans totaling $3.3 million, compared to net charged-off loans of $2.0 million for the year ended December 31, 2020. The ratio of net charged-off loans to average loans was 0.15% for 2021, compared to 0.09% for 2020. The allowance for loan and lease losses totaled $16.4 million, or 0.71% of loans held for investment, at December 31, 2021, compared to $16.0 million, or 0.67% of loans held for investment, at December 31, 2020. The ratio of allowance for loan and lease losses to nonperforming loans was 318.4% at December 31, 2021, compared to 186.4% at December 31, 2020.

Year ended December 31, 2020 compared to Year ended December 31, 2019

The provision for loan losses was $11.3 million for the year ended December 31, 2020 and $2.9 million for the year ended December 31, 2019. The increase of the provision for the year ended December 31, 2020 was primarily due to increased qualitative reserves in response to the global COVID-19 pandemic. Currently, the qualitative reserve calculation is based upon ten external and internal factors. The COVID-19 pandemic did not significantly impact internal qualitative factors via changes to underwriting guidelines, staffing, and compliance; however, external factors which are developed based upon GDP growth, unemployment, and oil prices were significantly impacted. It was the deterioration in these macroeconomic conditions which translated into higher qualitative scores and thus higher reserves.

Our management maintains a proactive approach in managing nonperforming loans, which were $8.6 million, or 0.36% of loans held for investment, at December 31, 2020, and $6.5 million, or 0.37% of loans held for investment, at December 31, 2019. During the year ended December 31, 2020, we had net charged-off loans totaling $2.0 million, compared to net charged-off loans of $2.4 million for the year ended December 31, 2019. The ratio of net charged-off loans to average loans was 0.09% for 2020, compared to 0.17% for 2019. The allowance for loan and lease losses totaled $16.0 million, or 0.67% of loans held for investment, at December 31, 2020, compared to $6.7 million, or 0.38% of loans held for investment, at December 31, 2019. The ratio of allowance for loan and lease losses to nonperforming loans was 186.4% at December 31, 2020, compared to 104.18% at December 31, 2019.

Year ended December 31, 2019 compared to Year ended December 31, 2018

The provision for loan losses was $2.9 million for the year ended December 31, 2019 and $2.2 million for the year ended December 31, 2018. The increase of the provision for the year ended December 31, 2019 was primarily due to increased charge-offs on SBA loans. These losses were anticipated and provided for as the SBA loan portfolio matures.

Nonperforming loans were $6.5 million, or 0.37% of loans held for investment, at December 31, 2019, and $5.3 million, or 0.49% of loans held for investment, at December 31, 2018. During 2019, we had net charged-off loans totaling $2.4 million, compared to net charged-off loans of $1.5 million for the year ended December 31, 2018. The ratio of net charged-off loans to average loans was 0.17% for 2019, compared to 0.16% for 2018. The allowance for

loan and lease losses totaled $6.7 million, or 0.38% of loans held for investment, at December 31, 2019, compared to $6.3 million, or 0.58% of loans held for investment, at December 31, 2018. The ratio of allowance for loan and lease losses to nonperforming loans was 104.18% at December 31, 2019, compared to 118.18% at December 31, 2018.

Noninterest Income

The following table presents a summary of noninterest income by category, including the percentage change in each category, for the periods indicated:

	Years Ended December 31, 2020 Compared to 2019							Years Ended December 31, 2019 Compared to 2018
	Years Ended December 31, 2021 Compared to 2020							Years Ended December 31, 2020 Compared to 2019
	2020		2019		Change from the Prior Year			2019		2018		Change from the Prior Year
	2021		2020		Change from the Prior Year			2020		2019		Change from the Prior Year
	(Dollars in thousands)
Noninterest income:
Service charges and fees	$	56,~~660~~264	$	35,~~710~~660		5210.67	%	$	35,~~710~~660	$	13,~~887~~710		9652.6	%
SBA loan servicing fees		1,~~192~~235		~~929~~1,192		~~28.~~3.6	%		~~929~~1,192		~~2,727~~929		~~-65~~28.93	%
Mortgage referral fees		1,~~334~~353		~~713~~1,334		~~87.~~1.4	%		~~713~~1,334		~~621~~713		1487.81	%
Gain on sales of loans, net		51,~~496~~066		45,~~014~~496		36-80.96	%		45,~~014~~496		54,~~120~~014		~~-21~~36.69	%
Gain (loss) on sales of investment securities		~~1,031~~5		41,~~582~~031		-7799.5	%		41,~~582~~031		—4,582	~~N/A~~	-77.5	%
Swap Fees		12,~~746~~701		—1,746	~~N/A~~	54.7	%		—1,746		—	N/A
Swap Referral Fees		1,~~950~~301		—1,950	~~N/A~~	-33.3	%		—1,950		—	N/A
Other noninterest income		~~467~~146		~~619~~467		-2468.67	%		~~619~~467		~~134~~619		~~361~~-24.96	%
Total noninterest income	$	1814,~~876~~071	$	1418,~~567~~876		29-25.65	%	$	1418,~~567~~876	$	1014,~~489~~567		3829.96	%

Year ended December 31, 2021 compared to Year ended December 31, 2020

For the year ended December 31, 2021, noninterest income totaled $14.1 million, a $4.8 million, or 25.5%, decrease from $18.9 million for the prior year. This decrease was primarily due to a decrease in gain on sales of loans of $4.4 million. During the year ended December 31, 2020, the Company recorded a gain on sale of Main Street loans of $3.6 million compared to only $99 thousand in the year ended December 31, 2021. Lower gain on sale of loans was partially offset by an increase in swap fees of $1.0 million. We currently expect noninterest income to show signs of strength in the coming quarters as borrowers get ready for possible rate hikes.

Service charges and fees were $6.3 million for the year ended December 31, 2021, compared to $5.7 million for the year ended December 31, 2020. The $1.6 million increase was due to increased deposit accounts associated with government lending programs.

Gain on sales of loans, net, was $1.1 million for the year ended December 31, 2021, compared to $5.5 million for the year ended December 31, 2020, a decrease of $4.4 million. The decrease was due to declines in gain on sale of SBA loans.

Year ended December 31, 2020 compared to Year ended December 31, 2019

For the year ended December 31, 2020, noninterest income totaled $18.9 million, a $4.3 million, or 29.6%, increase from $14.6 million for the prior year. This increase was primarily due to fees on two new swap products offered to commercial loan customers, increased service charges related to an increase in number of accounts, and an increase in gain on sale of loans recorded in conjunction with the Main Street Lending Program. This was partially offset by a decrease in gains on sale of investment securities of $3.6 million. We currently expect noninterest income to remain at reduced levels due to less loan sales and fewer swap agreements in response to the COVID-19 pandemic; however, these revenue streams are beginning to show signs of improvement.

Both swap fees and swap referral fees ~~represent~~represented new product offerings in 2020. The decision to offer these products was based upon customer demand and the need to structure some lending deals in a manner that is as competitive as other financial institutions in our market. Depending on the pace of the economic recovery and prevailing views regarding when interest rates might rise, demand for these products will increase or decrease accordingly.

SBA loans servicing fees were $1.2 million for the year ended December 31, 2020, compared to $929 thousand for the year ended December 31, 2019. The $263 thousand increase was primarily due to fair value market adjustments on the SBA servicing asset.

Service charges and fees were $5.7 million for the year ended December 31, 2020, compared to $3.7 million for the year ended December 31, 2019. The $2.0 million increase was due to increased deposit accounts associated with acquired institutions and accounts related to government lending programs.

Gain on sales of loans, net, was $5.5 million for the year ended December 31, 2020, compared to $4.0 million for the year ended December 31, 2019, an increase of $1.5 million. The increase was due to gain on sale of Main Street Lending Program loans of $3.7 million offset by declines in gain on sale of SBA loans.

Year ended December 31, 2019 compared to Year ended December 31, 2018

For the year ended December 31, 2019, noninterest income totaled $14.6 million, a $4.1 million, or 38.9%, increase from $10.5 million for the prior year. This increase was primarily due to a gain on sales of investment securities of $4.6 million and an increase in service charges and fees of $1.8 million, offset by a decrease in SBA loan servicing fees of $1.8 million.

SBA loans servicing fees were $929 thousand for the year ended December 31, 2019, compared to $2.7 million for the year ended December 31, 2018. The $1.8 million decrease was primarily due to fair value market adjustments on the SBA servicing asset.

Service charges and fees were $3.7 million for the year ended December 31, 2019, compared to $1.9 million for the year ended December 31, 2018. The $1.8 million increase was due to increased deposit accounts associated with acquired institutions.

Gain on sales of loans, net, was $4.0 million for the year ended December 31, 2019, compared to $5.1 million for the year ended December 31, 2018, a decrease of $1.1 million. This decrease was primarily driven by a reduction in the number of SBA loan sales throughout 2019.

Noninterest Expense

The following table presents a summary of noninterest expenses by category, including the percentage change in each category, for the periods indicated:

	Years Ended December 31, 2020 Compared to 2019							Years Ended December 31, 2019 Compared to 2018
	Years Ended December 31, 2021 Compared to 2020							Years Ended December 31, 2020 Compared to 2019
	2020		2019		Change from the Prior Year			2019		2018		Change from the Prior Year
	2021		2020		Change from the Prior Year			2020		2019		Change from the Prior Year
	(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits	$	41,~~756~~688	$	3641,~~175~~756		15-0.42	%	$	3641,~~175~~756	$	2736,~~512~~175		3115.54	%
Occupancy and equipment expenses		109,~~047~~869		610,~~884~~047		45-1.98	%		610,~~884~~047		56,~~215~~884		3245.09	%
Professional services		2,~~687~~993		42,~~054~~687		~~-33~~11.74	%		42,~~054~~687		34,~~055~~054		32-33.7	%
Data processing and network		34,~~973~~077		3,~~036~~973		302.96	%		3,~~036~~973		13,~~276~~036		~~137~~30.9	%
Regulatory assessments and insurance		1,~~847~~901		~~422~~1,847		~~337~~2.79	%		~~422~~1,847		~~1,094~~422		~~-61~~337.47	%
Amortization of intangibles		3,~~663~~067		3,~~630~~663		0-16.93	%		3,~~630~~663		~~917~~3,630		~~295~~0.9	%
Advertising		~~679~~367		~~623~~679		9-45.09	%		~~623~~679		~~381~~623		639.50	%
Marketing		~~276~~309		~~538~~276		~~-48~~12.70	%		~~538~~276		~~508~~538		5-48.97	%
Telephone expense		2,~~013~~250		~~993~~2,013		~~102~~11.78	%		~~993~~2,013		~~414~~993		~~139~~102.97	%
Conversion expenses		~~1,841~~—		1,~~992~~841		-7100.60	%		1,~~992~~841		~~160~~1,992		0-7.06	%
Other operating expenses		65,~~002~~230		46,~~697~~002		27-12.89	%		46,~~697~~002		24,~~832~~697		6527.98	%
Total noninterest expense	$	7471,~~784~~751	$	6374,~~044~~784		18-4.61	%	$	6374,~~044~~784	$	4363,~~364~~044		4518.46	%

60Year ended December 31, 2021 compared to Year ended December 31, 2020

For the year ended December 31, 2021, noninterest expense totaled $71.8 million, a $3.0 million, or 4.1%, decrease from $74.8 million for the prior year. This decrease was primarily due to lack of conversion expenses in the year ended December 31, 2021 compared to conversion expenses of $1.8 million in the year ended December 31, 2020, a decrease in other operating expenses of $772 thousand, a decrease in amortization on intangibles of 596 thousand, partially offset by increases in professional services of $306 thousand and telephone expense of $237 thousand.

Professional services increased $306 thousand to $3.0 million for the year ended December 31, 2021, compared to $2.7 million for the year ended December 31, 2020. The increase was primarily due to increase professional fees associated with the Proposed Merger with Simmons.

Telephone expense increased $237 thousand or 11.8% during the year ended December 31, 2021 primarily due to expenses related to communications upgrades at various branches. These upgrades should help to improve reliability and connectivity while lowering telephone expense in future years.

Other operating expense decreased $772 thousand for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to prepayment penalties paid on FHLB advances which were incurred as part of an overall balance sheet strategy in 2020.

Year ended December 31, 2020 compared to Year ended December 31, 2019

For the year ended December 31, 2020, noninterest expense totaled $74.8 million, an $11.7 million, or 18.6%, increase from $63.0 million for the prior year. This increase was primarily due to increases in salaries and employee benefits of $5.6 million, occupancy and equipment expenses of $3.2 million, regulatory assessments and insurance of $1.4 million, other operating expenses of $1.3 million, and telephone expense of $1.0 million.

Salaries and employee benefits totaled $41.8 million for the year ended December 31, 2020, which included $979 thousand of stock-based compensation expense. By comparison, salaries and employee benefits totaled $36.2 million for the year ended December 31, 2019, which included $665 thousand of stock-based compensation expense. During the year ended December 31, 2020, we experienced higher salary and employee benefit costs primarily due to increased employee count resulting from the Simmons branch acquisition and acquisition-related and Paycheck Protection Program bonuses paid.

Professional services decreased $1.4 million to $2.7 million for the year ended December 31, 2020, compared to $4.1 million for the year ended December 31, 2019. The decrease was primarily due to increased legal and consulting expenses in 2019 related to the Beeville and Citizens acquisitions compared to expenses in 2020 related to only the Simmons branch acquisition.

Increases in occupancy and equipment, regulatory assessments and insurance, and telephone expense are all related to a larger branch network due to our merger activity.

Other operating expense increased $1.3 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to prepayment penalties paid on FHLB advances which were incurred as part of an overall balance sheet strategy.

Year ended December 31, 2019 compared to Year ended December 31, 2018

For the year ended December 31, 2019, noninterest expense totaled $63.0 million, a $19.7 million, or 45.4%, increase from $43.4 million for the prior year. This increase was primarily due to increases in salaries and employee benefits of $8.6 million, amortization of intangibles of $2.7 million, occupancy and equipment expenses of $1.7 million, professional services of $1.0 million, data processing and network of $1.8 million, and other operating expenses of $1.9 million.

Salaries and employee benefits totaled $36.1 million for the year ended December 31, 2019, which included $665 thousand of stock-based compensation expense. By comparison, salaries and employee benefits totaled $27.5 million for the year ended December 31, 2018, which included $672 thousand of stock-based compensation expense. During 2019, we experienced higher salary and employee benefit costs primarily due to increased employee count resulting from our acquisitions and acquisition-related and conversion-related bonuses paid.

Increases in amortization of intangibles, occupancy and equipment and professional services are all related to our merger activity.

Other operating expense increased $1.9 million for the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily due to conversion expenses related to the Comanche acquisition and the Beeville acquisition.

Income Tax Expense

The provision for income taxes includes both federal and state taxes. Fluctuations in effective tax rates reflect the differences in the inclusion or deductibility of certain income and expenses for income tax purposes. Our future effective income tax rate will fluctuate based on the mix of taxable and tax-free investments we make, periodic increases in surrender value of bank-owned life insurance policies for certain former executive officers and our overall taxable income.

61Year ended December 31, 2021 compared to Year ended December 31, 2020

Income tax expense was $10.7 million, an increase of $3.2 million for the year ended December 31, 2021, compared to income tax expense of $7.5 million for the year ended December 31, 2020. Our effective tax rates for the years ended December 31, 2021 and 2020 were 20.16% and 19.24%, respectively. The effective tax rate was favorably impacted in the year ended December 31, 2020 due to the income tax benefit associated with a net operating loss carryback claim that was allowed under the CARES Act. The effective tax rate for December 31, 2021 represents a more normalized rate based on recurring permanent differences.

Year ended December 31, 2020 compared to Year ended December 31, 2019

Income tax expense was $7.5 million, an increase of $2.0 million for the year ended December 31, 2020, compared to income tax expense of $5.4 million for the year ended December 31, 2019. Our effective tax rates for the years ended December 31, 2020 and 2019 were 19.24% and 20.41%, respectively. The effective tax rate was lower at December 31, 2020 due to the income tax benefit associated with a net operating loss carryback claim that was allowed under the CARES Act. The effective tax rate atfor December 31, 2019 represents a more normalized rate based on recurring permanent differences.

~~Year ended December 31, 2019 compared to Year ended December 31, 2018~~67

Income tax expense was $5.4 million, an increase of $3.4 million for the year ended December 31, 2019, compared to income tax expense of $2.0 million for the year ended December 31, 2018. Our effective tax rates for the years ended December 31, 2019 and 2018 were 20.41% and 16.71%, respectively. The effective tax rate was lower at December 31, 2018 due to the income tax benefit associated with nonqualified stock option exercises that occurred during 2018, as well as additional tax exempt interest. The effective tax rate at December 31, 2019 represents a more normalized rate based on recurring permanent differences.

Financial Condition

Our total assets increased $~~700~~181.13 million, or 295.49%, from $23.3908 billion as of December 31, ~~2019~~2020 to $3.0827 billion as of December 31, ~~2020~~2021. Our asset growth was mainly due to ~~the~~organic ~~Simmons~~loan ~~branch acquisition and success with the PPP~~demand.

Investment Securities

We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. The securities portfolio grew to $~~236~~424.4 million during ~~2020~~the year ended December 31, 2021 as a result of deploying excess liquidity resulting from PPP loan forgiveness ~~and lack of robust loan demand~~. The average balance of the securities portfolio including FHLB, FRB and The Independent BankersBank (“TIB”) stock for the years ended December 31, ~~2020~~2021 and ~~2019~~2020 was $~~117~~429.91 million and $~~164~~117.49 million, respectively, with a pre-tax yield of 1.9848% and 21.9398%, respectively. We held 97105 securities classified as available for sale with an amortized cost of $~~211~~407.26 million as of December 31, ~~2020~~2021. Additionally, we held one equity security carried at fair value totaling $2423.7 million.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. No securities were determined to be OTTI as of December 31, ~~2020~~2021 or ~~2019~~2020.

The following table summarizes our available for sale securities portfolio as of the dates presented.

	As of December 31,
	2020							2019				2018
		2021				2020
	Amortized Cost			Fair Value				Amortized Cost		Fair Value		Amortized Cost		Fair Value
		Fair Value				Fair Value
	(Dollars in thousands)
Available for sale:
Available for sale:
State and municipal obligations		$	35,270			$	37,185
U.S. treasuries	$	—		$	—			$	60,315	$	60,371	$	—	$	—
Residential mortgage-backed securities			321,611				132,142
U.S Government agencies		—			—				—		—		2,015		1,934
Corporate bonds and other debt securities			43,867				43,093
State and municipal obligations		36,258			37,185				7,861		7,981		17,201		18,048
Total available for sale		$	400,748			$	212,420
Residential mortgage-backed securities		132,130			132,142				27,922		28,585		152,232		153,974
Corporate bonds and other debt securities		42,768			43,093				—		—		5,667		5,505
Total available for sale	$	211,156		$	212,420			$	96,098	$	96,937	$	177,115	$	179,461

The following table shows contractual maturities and the weighted average yields on our investment securities as of the date presented. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields are not presented on a taxable equivalent basis:

	Maturity as of December 31, 2020
	Maturity as of December 31, 2021
	One Year or Less					One to Five Years					Five to Ten Years					After Ten Years
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
	(Dollars in thousands)
Available for sale:
State and municipal obligations		~~1,971~~119		23.5092	%		~~271~~168		43.7689	%		8082		4.8708	%		3334,~~936~~761		21.0575	%
Residential mortgage- backed securities		—		0.00	%		—24,084		01.0008	%		10,~~184~~162		1.27	%		~~121~~295,~~946~~557		01.4711	%
Corporate bonds and other debt securities		—3,011		03.0004	%		41,~~212~~154		3.2684	%		35,~~952~~912		4.8564	%		2,~~604~~600		4.6173	%
Total available for sale	$	13,~~971~~130		23.5007	%	$	425,~~483~~406		31.3522	%	$	46,~~216~~156		43.0690	%	$	~~158~~332,~~486~~918		01.8821	%

As a member institution of the FHLB and TIB, the Bank is required to own capital stock in the FHLB and TIB. As of December 31, 2020 and 2019, the Bank held approximately $5.7 million and $8.3 million, respectively, in FHLB and TIB stock. No market exists for this stock, and the Bank’s investment can be liquidated only through repurchase by the FHLB or TIB. Such repurchases have historically been at par value. We monitor our investment in FHLB and TIB stock for impairment through review of recent financial results, dividend payment history and information from credit agencies. As of December 31, 2020 and 2019, management did not identify any indicators of impairment of FHLB or TIB stock.68

~~Equity~~As ~~investments~~a atmember ~~fair~~institution ~~value~~of ~~consist~~the ofFHLB anand ~~investment~~TIB, the Bank is required to own capital stock in the ~~CRA~~FHLB ~~Qualified~~and ~~Investment~~TIB. ~~Fund~~As of December 31, 2021 and 2020, the Bank held approximately $3.7 ~~Investment~~million and $5.7 million, respectively, in ~~the~~FHLB ~~fund~~and ~~allows~~TIB stock. No market exists for this stock, and the Bank’s toinvestment ~~earn~~can abe ~~return~~liquidated ononly ~~invested~~through ~~funds~~repurchase ~~while~~by ~~obtaining~~the ~~CRA~~FHLB or TIB. Such repurchases have historically been at par value. We monitor our investment in FHLB and TIB stock for impairment through review of recent financial results, dividend payment history and information from credit agencies. AtAs of December 31, 2021 and 2020, ~~the~~management ~~fair~~did ~~value~~not identify any indicators of ~~equity~~impairment ~~securities~~of ~~totalled~~FHLB ~~$24~~or ~~million~~TIB stock.

WeEquity ~~did~~investments ~~not~~at ~~have~~fair ~~any~~value ~~concentrations~~consist ~~where~~of an investment in the ~~total~~CRA ~~outstanding~~Qualified ~~balances~~Investment ~~issued~~Fund. byInvestment ain ~~single~~the ~~issuer~~fund ~~exceeded~~allows ~~10%~~the ofBank ~~our~~to ~~stockholders’~~earn ~~equity~~a asreturn ofon invested funds while obtaining CRA credit. At December 31, ~~2020~~2021, orthe ~~2019~~fair value of equity securities totalled $23.7 million.

Our securities portfolio had a weighted average life of 5.113 years and an effective duration of 4.587 years as of December 31, ~~2020~~2021 and a weighted average life of 25.4611 years and an effective duration of 24.0958 years as of December 31, ~~2019~~2020.

Loans Held for Sale

Loans held for sale consist of the guaranteed portion of SBA loans that we intend to sell after origination ~~and the credit card portfolio acquired in conjunction with the Citizens acquisition~~. Our loans held for sale were $13.5 million as of December 31, ~~2020~~2021 and $41.05 million as of December 31, ~~2019~~2020.

Loan Concentrations

Our primary source of income is interest on loans to individuals, professionals, small and medium-sized businesses and commercial companies located in the Houston, Dallas/Fort Worth, Bryan/College Station, San Antonio/New Braunfels, Corpus Christi, Tyler and Austin metropolitan areas. Our loan portfolio consists primarily of commercial and industrial loans, 1-4 single family residential real estate loans and loans secured by commercial real estate properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our earning asset base.

63Our loans of $2.32 billion as of December 31, 2021 represented a decrease of $66.4 million, or 2.8%, compared to $2.39 billion as of December 31, 2020. This decrease was primarily due to a reduction of PPP loans from $277.8 million at December 31, 2020 to $43.9 million at December 31, 2021 offset by organic loan growth.

Our loans ~~of $2.39 billion~~ as ofa ~~December~~percentage ~~31, 2020 represented an increase~~ of ~~$621.4 million,~~assets orwere 3571.21%, ~~compared~~and ~~to $1.~~77 ~~billion~~.4% as of December 31, ~~2019.~~2021 ~~This increase was primarily due to the acquired loan growth of $260.3 million associated with the Simmons branch acquisition~~ and ~~loans~~2020, ~~outstanding under the PPP of $277~~respectively.~~8 million.~~

Our loans as a percentage of assets were 77.4% and 74.1% as of December 31, 2020 and 2019, respectively.

The current concentrations in our loan portfolio may not be indicative of concentrations in our loan portfolio in the future. We plan to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral. The following table summarizes the allocation of loans by type as of the dates presented.

	As of December 31,
	2020					2019					2018					2017					2016
	2021					2020
	Amount		% of Total			Amount		% of Total			~~Amount~~		~~% of Total~~			~~Amount~~		~~% of Total~~			~~Amount~~		~~% of Total~~
											(Dollars in thousands)
Commercial and industrial loans(1)	$	464,697		20.0	%	$	574,986		24.1	%
Commercial and industrial loans(1)	$	574,986		24.1	%	$	282,949		16.0	%	$	173,892		15.8	%	$	135,040		15.4	%	$	117,762		15.1	%
Real estate:
Real estate:
1-4 single family residential loans		362,155		15.6	%		364,139		15.2	%
1-4 single family residential loans		364,139		15.2	%		375,743		21.3	%		279,665		25.4	%		237,753		27.1	%		208,616		26.8	%
Construction, land and development loans		400,952		17.3	%		415,488		17.4	%
Construction, land and development loans		415,488		17.4	%		259,384		14.7	%		159,734		14.5	%		139,470		15.9	%		113,316		14.6	%
Commercial real estate loans (including multifamily)		1,030,891		44.4	%		956,743		40.1	%
Commercial real estate loans (including multifamily)		956,743		40.1	%		753,812		42.7	%		403,800		36.6	%		288,282		32.9	%		254,499		32.7	%
Consumer loans and leases		6,307		0.3	%		11,738		0.5	%
Consumer loans and leases		11,738		0.5	%		22,769		1.3	%		24,378		2.2	%		22,736		2.6	%		26,676		3.4	%
Municipal and other loans		57,099		2.5	%		65,438		2.7	%
Municipal and other loans		65,438		2.7	%		72,525		4.1	%		61,339		5.6	%		53,632		6.1	%		56,596		7.3	%
Total loans held in portfolio	$	2,322,101		100.0	%	$	2,388,532		100.0	%
Total loans held in portfolio	$	2,388,532		100.0	%	$	1,767,182		100.0	%	$	1,102,808		100.0	%	$	876,913		100.0	%	$	777,465		100.0	%

(1) Balance includes $7053.85 million ~~$74.2~~and ~~million,~~ $7670.98 million, ~~$67.1 million and 58.7 million~~ of the unguaranteed portion of SBA loans as of December 31, ~~2020,~~2021 ~~2019, 2018, 2017~~ and ~~2016~~2020, respectively.

Commercial and Industrial Loans

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to repay the loan through operating profitably and effectively growing its business. Our management examines 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 credit quality and cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee to add strength to the credit and reduce the risk on a transaction to an acceptable level; however, some short-term loans may be made on an unsecured basis to the most credit worthy borrowers.

In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Due to the nature of accounts receivable and inventory secured loans, we closely monitor credit availability and collateral through the use of various tools, including but not limited to borrowing-base formulas, periodic accounts receivable agings, periodic inventory audits, and/or collateral inspections.

Commercial and industrial loans, including SBA and PPP loans discussed below, totaled $~~575~~464.07 million as of December 31, ~~2020~~2021 and represented ana ~~increase~~decrease of $~~292~~110.03 million, or ~~103~~19.2%, from $~~282~~575.90 million as of December 31, ~~2019~~2020. This ~~increase~~decrease was primarily due to loans outstanding related to the PPP ofdecreasing to $43.9 million at December 31, 2021 from $277.8 million at December 31, 2020.

SBA Loans

SBA loans are included in commercial and industrial loans. The primary focus of our SBA lending program is financing well-known national franchises for which the United States generally will guarantee between 75% and 85% of the loan. We are an SBA preferred lender, and originate SBA loans to national franchises in Texas and nationwide. We routinely sell the guaranteed portion of SBA loans to third parties for a premium and retain the servicing rights, for which we earn a 1% fee, and maintain the nonguaranteed portion in our loan portfolio.

SBA loans held in our loan portfolio totaled $7053.85 million and $7470.28 million at December 31, ~~2020~~2021 and ~~2019~~2020, respectively. We intend to continue to lend under the SBA lending program at volumes determined by market demand.

Paycheck Protection Program

In April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. These loans are included in commercial and industrial loans and may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA. Terms of the PPP loans include the following (i) maximum amount limited to the lesser of $10 million or an amount calculated using a payroll-based formula, (ii) maximum loan term of two years, (iii) interest rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no payments are required for six months following the loan disbursement date and (vi) loan forgiveness up to the full principal amount of the loan and any accrued interest, subject to certain requirements including that no more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. In return for processing and booking the loan, the SBA will pay the lender a processing fee tiered by the size of the loan (5% for loans of not more than $350 thousand; 3% for loans more than $350 thousand and less than $2 million; and 1% for loans of at least $2 million). At December 31, ~~2020~~2021, PPP loans totaled $~~277~~43.89 million which are included in commercial and industrial loans. ~~The~~compared ~~Company~~to is$277.8 ~~participating~~million inat ~~the~~December ~~new~~31, ~~round of the PPP by offering first and second draw loans~~2020.

We ~~are~~ also ~~currently~~participated ~~participating~~ in the Federal Reserve's PPPLF, which expired on July 30, ~~through~~2021. At December 31, ~~2020~~2021, ~~extended~~all ~~loans~~amounts tooutstanding ~~banks~~under ~~who~~PPPLF ~~are~~had ~~loaning~~been ~~money~~repaid compared to ~~small businesses under the PPP~~$149.8 ~~The~~million ~~amount~~ outstanding at December 31, 2020 ~~was $149~~.8 ~~million and is non-recourse and secured by the amount of the PPP loans we originate.~~ The maturity date of a borrowing under the PPPLF iswas equal to the maturity date of the PPP loan pledged to secure the borrowing and would be accelerated (i) if the underlying PPP loan goes into default and is sold to the SBA to realize on the SBA guarantee or (ii) to the extent that any PPP loan forgiveness reimbursement is received from the SBA. Borrowings under the PPPLF ~~will~~ bear interest at a rate of 0.35% and there ~~are~~were no fees to us.

Real estate loans

1-4 single family residential real estate loans (including loans to foreign nationals)

1-4 single family residential real estate loans, including foreign national loans, are subject to underwriting standards and processes similar to commercial and industrial loans. We provide mortgages for the financing of 1-4 single family residential homes for primary occupancy, vacation or rental purposes. The borrowers on these loans generally qualify for traditional market financing. We also specialize in 1-4 single family residential real estate loans to foreign national customers, in which the borrower does not qualify for traditional market financing.

We define our foreign national loans as loans to borrowers who derive more than 50% of their personal income from outside the United States. We provide mortgages for these foreign nationals in Texas for primary occupancy or secondary homes while travelling to the United States. Because more than 50 percent of the borrower’s income is derived from outside of the United States, they do not qualify for traditional market financing. We have developed an enhanced due diligence process for foreign national loans that includes larger down payments than a traditional mortgage, as well as minimum reserves equal to an amount of mortgage payments over a specified period held in the Bank and monthly escrows for taxes and insurance.

1-4 single family residential real estate loans totaled $~~364~~362.12 million as of December 31, ~~2020~~2021 and represented a decrease of $111.69 million, or 30.154%, from $~~375~~364.71 million as of December 31, ~~2019~~2020. Foreign national loans comprised $~~124~~143.63 million, or 3439.26%, of 1-4 single family residential real estate loans as of December 31, ~~2020~~2021, compared to $~~134~~124.06 million, or 3534.72%, of 1-4 single family residential real estate loans as of December 31, ~~2019~~2020. The decrease was primarily due to refinance competition in response to overall lower interest rates.

Construction, land and development loans

With respect to loans to developers and builders, we generally require the borrower to have a proven record of success and expertise in the building industry. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment primarily dependent on the success of the ultimate project.

Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from us until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. Due to the nature of the real estate industry, we evaluate the borrower’s ability to service the interest of the debt from other sources other than the sale of the constructed property.

Construction loans totaled $~~415~~401.50 million as of December 31, ~~2020~~2021 and represented ana ~~increase~~decrease of $~~156~~14.15 million, or 603.25%, from $~~259~~415.45 million as of December 31, ~~2019~~2020. The ~~increase~~decrease was primarily due tothe ~~acquired~~transition of loans ~~associated~~into ~~with~~permanent ~~the Simmons branch acquisition~~financing.

Commercial real estate loans

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.

Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria. As a general rule, we avoid financing special use projects unless strong secondary support is present to help mitigate risk.

66Commercial real estate loans consist of owner and nonowner-occupied commercial real estate loans, multifamily loans and farmland. Total commercial real estate loans of $1.03 billion as of December 31, 2021 represented an increase of $74.1 million, or 7.8%, from $956.7 million as of December 31, 2020. The increase was primarily due to strong loan demand in the second half of 2021.

Commercial real estate loans consist of owner and nonowner-occupied commercial real estate loans, multifamily loans and farmland. Total commercial real estate loans of $956.7 million as of December 31, 2020 represented an increase of $202.9 million, or 26.9%, from $753.8 million as of December 31, 2019. The increase was primarily due to acquired loans associated with the Simmons branch acquisition.

Owner and nonowner-occupied commercial real estate loans

Owner-occupied commercial real estate loans totaled $~~243~~257.10 million as of December 31, ~~2020~~2021 and $~~353~~243.31 million as of December 31, ~~2019~~2020. Owner-occupied real estate loans comprised 2524.49% and 4725.04% of total commercial real estate loans as of December 31, ~~2020~~2021 and ~~2019~~2020, respectively.

Nonowner-occupied commercial real estate loans totaled $~~600~~663.62 million as of December 31, ~~2020~~2021 and $~~326~~600.16 million as of December 31, ~~2019~~2020. Nonowner-occupied commercial real estate loans comprised 6264.83% and 4362.38% of total commercial real estate loans as of December 31, ~~2020~~2021 and ~~2019~~2020, respectively.

Multifamily loans and farmland

Multifamily loans totaled $5542.39 million at December 31, ~~2020~~2021 and $1055.63 million at December 31, ~~2019~~2020. Multifamily loans comprised 54.82% and 15.48% of total commercial real estate loans as of December 31, ~~2020~~2021 and ~~2019~~2020, respectively.

Multifamily loans are not a focus of the Bank, and we do not expect this portion of the portfolio to represent a large portion of our growth going forward. Farmland loans totaled $5768.83 million at December 31, ~~2020~~2021 and $6357.8 million at December 31, ~~2019~~2020.

Consumer loans and leases

Our non-real estate consumer loans are based on the borrower’s proven earning capacity over the term of the loan. We monitor payment performance periodically for consumer loans to identify any deterioration in the borrower’s financial strength. To monitor and manage consumer loan risk, management develops and adjusts policies and procedures as needed. This activity, coupled with a relatively small volume of consumer loans, minimizes risk.

All of our leases are related to the financing of vehicle leases to individuals. These loans are originated by a well-known third-party leasing company and subsequently purchased by us after our final credit review. We limit our exposure to individuals living in Texas, within our defined local markets. We do not intend on growing this portfolio going forward as we believe current pricing on these loans does not adequately cover the inherent risk.

Consumer loans and leases totaled $116.73 million as of December 31, ~~2020~~2021 and represented a decrease of $115.04 million, or 4846.43%, from $2211.87 million as of December 31, ~~2019~~2020. Leases comprised $~~1.8~~182 ~~million~~thousand and $61.28 million of total consumer loans and leases at December 31, ~~2020~~2021 and ~~2019~~2020, respectively.

Municipal and other loans

Municipal and other loans consist primarily of loans made to municipalities and emergency service, hospital and school districts as well as agricultural loans.

We make loans to municipalities and emergency service, hospital and school districts primarily throughout Texas. The majority of these loans have tax or revenue pledges and in some cases are additionally supported by collateral. Municipal loans made without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service. Lending money directly to these municipalities allows us to earn a higher yield for similar durations than we could if we purchased municipal securities. Total loans to municipalities and emergency service, hospital and school districts and others were $6557.41 million and $7265.54 million as of December 31, ~~2020~~2021 and ~~2019~~2020, respectively.

For a more detailed discussion of the type of loans in our loan portfolio, see “Business—Lending Activities.”

The following table summarizes the loan contractual maturity distribution by type and by related interest rate characteristics as of the date indicated:

As of December 31, 2020

As of December 31, 2021

One Year or Less

After One but Within Five Years

~~After~~ Five to Fifteen Years

~~Total~~After Fifteen Years

Total

(Dollars in thousands)

Commercial and industrial loans

81117,~~307~~589

~~414~~238,~~933~~799

7896,~~746~~175

~~574~~12,~~986~~134

464,697

Real estate:

1-4 single family residential loans

3219,~~305~~077

7779,~~591~~480

~~254~~56,~~243~~932

~~364~~206,~~139~~666

362,155

Construction, land and development loans

~~137~~153,~~987~~004

~~224~~178,~~115~~392

5352,~~386~~225

~~415~~17,~~488~~331

400,952

Commercial real estate loans (including multifamily)

~~103~~116,~~513~~126

~~442~~491,~~881~~443

~~410~~318,~~349~~623

~~956~~104,~~743~~699

1,030,891

Consumer loans and leases

52,~~032~~253

63,~~249~~758

~~457~~239

~~11,738~~57

6,307

Municipal and other loans

107,~~190~~762

1714,~~680~~482

3733,~~568~~923

~~65,438~~932

57,099

Total loans held in portfolio

~~370~~415,~~334~~811

1,~~183~~006,~~449~~354

~~834~~558,~~749~~117

2341,~~388,532~~819

2,322,101

Predetermined (fixed) interest rates

~~650~~397,~~175~~900

~~193~~113,~~682~~721

24,413

Floating interest rates

~~533~~608,~~274~~454

~~641~~444,~~067~~396

317,406

Total

1,~~183~~006,~~449~~354

~~834~~558,~~749~~117

341,819

The information in the table above is limited to contractual maturities of the underlying loans. The expected life of our loan portfolio will differ from contractual maturities because borrowers may have the right to curtail or prepay their loans with or without prepayment penalties.

Asset Quality

The following table sets forth the composition of our nonperforming assets, including nonaccrual loans, accruing loans 90 days or more days past due, other real estate owned and repossessed assets and restructured loans as of the dates indicated:

	As of December 31,
	For the Years Ended December 31,
	2020			2019			2018			2017		2016
	2021			2020			2019
	(Dollars in thousands)
Asset and Credit Quality Ratios:
Nonperforming assets
Nonaccrual loans		5,149			8,598			6,465
Nonaccrual loans:
Accruing loans 90 days or more past due		-			-			2
Commercial and industrial loans	$	4,929		$	2,579		$	3,570		$	1,927	$	1,638
Total nonperforming loans		5,149			8,598			6,467
Real estate:
Other real estate owned and repossessed assets		188			133			3,653
1-4 single family residential loans		1,508			1,901			1,090			1,135		1,296
Total nonperforming assets		5,337			8,731			10,120
Construction, land and development loans		217			214			—			—		—
Loans held for investment		2,322,101			2,388,532			1,767,182
Commercial real estate loans (including multifamily)		1,836			1,700			354			447		778
Total Assets		3,266,038			3,084,759			2,384,622
Consumer loans and leases		108			71			17			53		95
Allowance for Loan Lease		(16,395	)		(16,026	)		(6,737	)
Municipal and other loans		—			—			—			—		—
Nonperforming loans to loans held for investment(1)		0.22	%		0.36	%		0.37	%
Total nonaccrual loans		8,598			6,465			5,031			3,562		3,807
Nonperforming assets to loans plus OREO		0.23	%		0.37	%		0.57	%
Accruing loans 90 days or more past due		—			2			288			33		—
Nonperforming assets to total assets(2)		0.16	%		0.28	%		0.42	%
Total nonperforming loans		8,598			6,467			5,319			3,595		3,807
Allowance for loan and lease losses to nonperforming loans		318.41	%		186.39	%		104.18	%
Other real estate owned and repossessed assets		133			3,653			782			21		23
Allowance for loan and lease losses to loans held for investment		0.71	%		0.67	%		0.38	%
Total nonperforming assets	$	8,731		$	10,120		$	6,101		$	3,616	$	3,830
Net charge-offs (recoveries) to average loans:
Restructured loans(1)	$	231		$	209		$	210		$	270	$	261
Commercial and industrial loans		0.62	%		0.32	%		1.13	%
Net charge offs		3,369			1,788			2,361
Average loans		544,550			561,330			208,388
1-4 single family residential		0.00	%		0.01	%		-0.03	%
Net charge offs (recoveries)		12			21			(65	)
Average loans		370,741			381,374			246,447
Construction, land and development		0.00	%		0.00	%		0.00	%
Net charge offs		-			-			-
Average loans		359,050			456,970			289,927
Commercial real estate (including multifamily)		0.00	%		0.00	%		0.00	%
Net charge offs		-			-			-
Average loans		969,662			773,771			578,839
Consumer loans and leases		-0.39	%		1.19	%		0.56	%
Net charge offs (recoveries)		(33	)		165			114
Average loans		8,484			13,921			20,215
Municipal and other loans		-0.01	%		-0.01	%		-0.01	%
Net charge offs (recoveries)		(6	)		(6	)		(5	)
Average loans		61,351			66,750			67,323
Total loans held in portfolio		0.14	%		0.09	%		0.17	%
Net charge offs		3,342			1,968			2,405
Average loans		2,313,838			2,254,116			1,411,139

(1)	Performing troubled debt restructurings represent the balance at the end of the respective period for those performing loans modified in a troubled debt restructuring that are not already presented as a nonperforming loan.

(2) Nonperforming loans ~~totaled~~include ~~$8.6~~loans ~~million~~on atnonaccrual ~~December~~status ~~31,~~and ~~2020,~~accruing anloans ~~increase~~90 ~~of $2.1 million,~~ or ~~33.0%,~~more ~~from~~days ~~$6.5 million~~past ~~at December 31, 2019~~due. ~~Nonperforming assets totaled $8.7 million at December 31, 2020, a decrease of~~

68(3) Nonperforming assets include loans on nonaccrual status, accruing loans 90 days or more past due and other real estate owned and repossessed assets.

~~$1.4 million, or 13.7%, from $10.1 million at December 31, 2019. This decrease was primarily due to sales of other real estate owned during the year.~~ 74

Nonperforming loans totaled $5.1 million at December 31, 2021, a decrease of $3.5 million, or 67.0%, from $8.6 million at December 31, 2020. Nonperforming assets totaled $5.3 million at December 31, 2021, a decrease of $3.4 million, or 38.9%, from $8.7 million at December 31, 2020. This decrease was primarily due to charge offs on previously impaired loans.

We classify loans as past due when the payment of principal or interest is greater than 30 days delinquent based on the contractual next payment due date. Our policies related to when loans are placed on nonaccrual status conform to guidelines prescribed by bank regulatory authorities. Loans are placed on nonaccrual status when it is probable that principal or interest is not fully collectible, or when principal or interest becomes 90 days past due, whichever occurs first. Loans are removed from nonaccrual status when they become current as to both principal and interest and concern no longer exists as to the collectability of principal and interest.

Loans are identified for restructuring based on their delinquency status, risk rating downgrade, or at the request of the borrower. Borrowers that are 90 days delinquent and/or have a history of being delinquent, or experience a risk rating downgrade, are contacted to discuss options to bring the loan current, cure credit risk deficiencies, or other potential restructuring options that will reduce the inherent risk and improve collectability of the loan. In some instances, a borrower will initiate a request for loan restructure. We require borrowers to provide current financial information to establish the need for financial assistance and satisfy applicable prerequisite conditions required by us. We may also require the borrower to enter into a forbearance agreement.

Modification of loan terms may include the following: reduction of the stated interest rate; extension of maturity date or other payment dates; reduction of the face amount or maturity amount of the loan; reduction in accrued interest; forgiveness of past-due interest; or a combination of the foregoing.

We engage an external consulting firm to complete an independent loan review and validate our credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk ratings and credit quality assessment decisions made by lenders and credit personnel, as well as our policies and procedures.

~~Certain~~Throughout ~~borrowers~~the ~~are~~year ~~currently~~ended December 31, 2021, certain borrowers were unable to meet their contractual payment obligations because of the effects of the ongoing COVID-19 pandemic. In an effort to mitigate the adverse effects of the COVID-19 pandemic on our loan customers, we have provided ~~them~~certain customers the opportunity to defer payments, or portions thereof, for up to 90 days, should they so request. As of December 31, 2021, we had $13.9 million of loans with active COVID-related deferrals, all of which the Company expects to return to active payment status at the end of their respective deferral periods. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to the COVID-19 pandemic reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). ~~Since~~We ~~the~~continue ~~beginning~~to ofmonitor ~~the~~industries ~~Pandemic~~that inhave ~~March~~experienced ofmore ~~2020~~lasting ~~through~~effects ~~December~~from ~~31,~~the ~~2020, 1,909 qualified loans had been granted 90 day deferrals or interest~~COVID-~~only~~19 ~~payment periods of 90 days with an unpaid principal balance of $545~~pandemic.8 ~~million. From~~At ~~the date of deferment through~~ December 31, ~~2020,~~2021 ~~approximately~~no ~~84.1%~~alterations ofwere ~~loans~~made ~~had~~to ~~exited~~ the ~~deferral~~allowance ~~period. At~~for ~~December~~loan ~~31,~~loss ~~2020~~calculation ~~approximately~~specifically ~~$86.9~~for ~~million~~any ~~of loans remain in deferment with approximately $52~~industry.7 ~~million and $12.8 million in second and third deferral periods, respectively.~~

The vast majority of our loan customers continue to show signs of recovery from the COVID-19 pandemic, as demonstrated by the significant decline of loans for which we had granted deferrals. We continue to monitor industries that have experienced more lasting effects from the COVID-19 pandemic. Hospitality remains our primary focus; however, our total exposure in this segment represents only $100.6 million, or 4.2% of our total loan portfolio. At December 31, 2020, approximately $16.5 million of hospitality loans remain on deferment periods that will expire during the first quarter of 2021. Direct and indirect oil and gas exposure is an additional focal point representing $80.3 million, or 3.4% of our total loan portfolio. Restaurants and retail centers continue to show signs of improvement and should benefit from additional stimulus programs that are expected to be forthcoming in the first quarter of 2021. At December 31, 2020 no alterations were made to the allowance for loan loss calculation specifically for the industries highlighted above. Risk rate downgrades and adjustments to qualitative factors were deemed sufficient to capture any incremental losses in these industries.

These deferrals have also caused the increase in accrued interest shown on the consolidated balance sheets at December 31, 2020 compared to December 31, 2019.

The following table sets forth our asset and credit quality ratios for the periods presented:

	For the Years Ended December 31,
	2020			2019			2018			2017			2016
Asset and Credit Quality Ratios:
Nonperforming loans to loans held for investment(1)		0.36	%		0.37	%		0.49	%		0.41	%		0.49	%
Nonperforming assets to loans plus OREO		0.37	%		0.57	%		0.56	%		0.42	%		0.50	%
Nonperforming assets to total assets(2)		0.28	%		0.42	%		0.42	%		0.35	%		0.39	%
Net charge-offs to average loans		0.09	%		0.17	%		0.16	%		0.14	%		0.05	%
Allowance for loan and lease losses to nonperforming loans		186.39	%		104.18	%		118.18	%		157.22	%		114.45	%
Allowance for loan and lease losses to loans held for investment		0.67	%		0.38	%		0.58	%		0.65	%		0.56	%

(1) Nonperforming loans include loans on nonaccrual status and accruing loans 90 or more days past due.

(2) Nonperforming assets include loans on nonaccrual status, accruing loans 90 days or more past due and other real estate owned and repossessed assets.

For a more detailed discussion of nonperforming loans, see “Business—Lending Activities—Nonperforming Loans.”

Analysis of the Allowance for Loan and Lease Losses

Allowance for loan and lease losses reflects management’s estimate of probable credit losses inherent in the loan portfolio. The computation of the allowance for loan and lease losses includes elements of judgment and high levels of subjectivity.

The following tables summarize the allocation of allowance for loan and lease losses related to our loans as of the dates and for the periods presented. This allocation is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount of the allowance is available to absorb losses occurring in any category of loans:

	Allowance Rollforward
Year Ended December 31, 2020	Beginning Balance		Charge-offs			Recoveries		Provision		Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	4,078	$	(1,877	)	$	89	$	6,796	$	9,086
Real estate:
1-4 single family residential loans		31		(21	)		—		137		147
Construction, land and development loans		1,055		—			—		689		1,744
Commercial real estate loans (including multifamily)		1,451		—			—		3,392		4,843
Consumer loans and leases		68		(222	)		57		242		145
Municipal and other loans		54		—			6		1		61
Ending allowance balance	$	6,737	$	(2,120	)	$	152	$	11,257	$	16,026

	Allowance Rollforward
Year Ended December 31, 2019	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	4,453	$	(2,508	)	$	147	$	1,986		$	4,078
Real estate:
1-4 single family residential loans		59		—			65		(93	)		31
Construction, land and development loans		731		—			—		324			1,055
Commercial real estate loans (including multifamily)		960		—			—		491			1,451
Consumer loans and leases		80		(134	)		20		102			68
Municipal and other loans		3		—			5		46			54
Ending allowance balance	$	6,286	$	(2,642	)	$	237	$	2,856		$	6,737

	Allowance Rollforward
Year Ended December 31, 2018	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	3,046	$	(1,465	)	$	75	$	2,797		$	4,453
Real estate:
1-4 single family residential loans		902		(5	)		—		(838	)		59
Construction, land and development loans		441		—			—		290			731
Commercial real estate loans (including multifamily)		898		—			—		62			960
Consumer loans and leases		198		(132	)		1		13			80
Municipal and other loans		167		—			—		(164	)		3
Ending allowance balance	$	5,652	$	(1,602	)	$	76	$	2,160		$	6,286

	Allowance Rollforward
Year Ended December 31, 2017	Beginning Balance		Charge-offs			Recoveries		Provision		Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	2,347	$	(974	)	$	7	$	1,666	$	3,046
Real estate:
1-4 single family residential loans		647		(23	)		—		278		902
Construction, land and development loans		364		—			—		77		441
Commercial real estate loans (including multifamily)		667		(34	)		—		265		898
Consumer loans and leases		186		(156	)		—		168		198
Municipal and other loans		146		—			—		21		167
Ending allowance balance	$	4,357	$	(1,187	)	$	7	$	2,475	$	5,652

	Allowance Rollforward
Year Ended December 31, 2016	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	1,119	$	(282	)	$	58	$	1,452		$	2,347
Real estate:
1-4 single family residential loans		623		(3	)		—		27			647
Construction, land and development loans		398		(32	)		30		(32	)		364
Commercial real estate loans (including multifamily)		670		—			—		(3	)		667
Consumer loans and leases		89		(113	)		6		204			186
Municipal and other loans		177		—			—		(31	)		146
Ending allowance balance	$	3,076	$	(430	)	$	94	$	1,617		$	4,357

In determining the allowance for loan and lease losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan and lease losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.

During 2017, we refined our allowance for loan loss methodology based upon management’s judgment and applicable regulatory guidance. The calculation of reserves on loans collectively evaluated for impairment was altered to reflect five years of historical loss experience which more appropriately matches the weighted average life of loans in the portfolio. Additionally, the calculated historical loss experience is now allocated across the portfolio’s risk rates using a probability of default curve constructed from the Bank’s historical default data. We also updated the qualitative component of the reserve on loans collectively evaluated for impairment to allow for a greater sensitivity to current trends.75

Prior to the second quarter of 2018, we were utilizing a peer bank allowance coverage ratio in the qualitative reserve calculation, as we did not have enough historical defaults to rely on our own loss factors. Beginning in the second quarter of 2018, we had a sufficient amount of defaults over the five year lookback period to transition over to relying more on our own historical loss data versus peer data. While this did not result in a significant change to the allowance for loan and lease losses as a whole, it continues to impact the provision for certain loan categories in which we had experienced more historical defaults.

On November 14, 2018, we closed the Comanche acquisition. At the date of acquisition, Comanche had $117.2 million in loans. In accordance with ASC 805, “Business Combinations”, we utilized a third party to value the loan portfolio as of the acquisition date. Based upon the third party valuation, the fair value of the loans was approximately $116.2 million at the acquisition date. The overall discount calculated was $946 thousand and is being accreted into interest income over the life of the loans.

On April 2, 2019, we completed the acquisition of First Beeville Financial Corporation and its subsidiary, The First National Bank of Beeville. At the date of acquisition, Beeville had $298.9 million in loans. Based upon a third party valuation the fair value of the loan portfolio was approximately $296.4 million. The overall discount calculated was $2.5 million and is being accreted into interest income over the life of the loans.

On November 5, 2019, the Company completed its acquisition of Chandler Bancorp Inc. and its subsidiary, Citizens State Bank. At the date of acquisition, Citizens had $253.1 million in loans. Based upon a third party valuation the fair value of the loan portfolio was approximately $252.0 million. The overall discount calculated was $1.1 million and is being accreted into interest income over the life of the loans.

On February 28, 2020, the Company completed its acquisition of certain assets and assumption of certain liabilities associated with five branch offices of Simmons Bank. At the date of acquisition, Simmons had $260.3 million in loans. Based upon a third party valuation the fair value of the loan portfolio was approximately $255.5 million. The overall discount calculated was $4.8 million and is being accreted into interest income over the life of the loans.

72Purchased credit impaired loans related to the Comanche acquisition were insignificant, and the Bank did not identify any purchased credit impaired loans related to the Beeville acquisition or the Simmons branch acquisition. Management identified purchased credit impaired loans related to the Citizens of approximately $3.2 million and estimated that expected cash flows were equal to contractual cash flows at the acquisition date. The remaining recorded investment in purchased credit impaired loans related to the Citizens acquisition was $455 thousand at December 31, 2021 and the Company believes that all contractual principal and interest will be received.

~~Purchased~~The ~~credit~~allowance ~~impaired~~for ~~loans~~loan ~~related~~and tolease ~~the~~losses ~~Comanche~~increased ~~acquisition~~$369 ~~were~~thousand ~~insignificant,~~to ~~and~~$16.4 million ~~the~~at ~~Bank~~December 31, ~~did~~2021 ~~not~~from ~~identify~~$16.0 ~~any~~million ~~purchased~~at ~~credit~~December 31, ~~impaired~~2020, ~~loans~~primarily ~~related~~due to ~~the~~organic ~~Beeville~~loan ~~acquisition or the Simmons branch acquisition~~growth. ~~Management~~The ~~identified~~allowance ~~purchased~~for ~~credit~~loan ~~impaired~~and ~~loans~~lease ~~related~~

College Station-Bryan MSA

Own or Lease

College Station

College Station Banking and Operations Center

625 University Drive East, College Station, Texas 77840

Filing Compare · Spirit of Texas Bancshares, Inc.