SOUTHSIDE BANCSHARES INC MANAGEMENT REPORT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Form 10-Q)

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

Forward-Looking Statements

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

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

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

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

•adverse changes in the status or financial situation of the GSEs having an impact on the guarantees or the ability of the GSEs to pay or issue debt;

• unfavorable evolution of the credit portfolios of other WE financial institutions regarding the performance of some of our investment securities;

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

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

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

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

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

•increase in our non-performing assets;

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

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

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

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

•the effectiveness of our financial derivative instruments and our hedging activities in managing risk;

•unexpected results and costs associated with existing or new litigation involving us;

•changes affecting our balance sheet and debt strategy;

•the risks associated with actual prepayments of mortgage loans that deviate from forecasts;

• reality risks WE prepayments from MBS branches exceeding planned prepayment levels;

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

•our ability to monitor interest rate risk;

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

•a significant increase in competition in the banking and financial services sector;

•changes in consumption, borrowing and saving habits, notably due to rising inflation and the economic impact of COVID-19;

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

•our ability to increase our market share and control our expenses;

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

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

•the effect of compliance with legislation or regulatory changes;

•the effect of changes in accounting policies and practices;

• the credit risks of borrowers, including any increase in these risks due to changes in economic conditions;

•risks associated with loans secured by real estate, including the risk of decline in the value and negotiability of collateral;

•risks related to environmental liability resulting from certain lending activities;

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

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

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

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Critical accounting estimates

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

Critical accounting estimates include a high degree of uncertainty in the
underlying assumptions. Management bases its estimates on historical experience,
current information and other factors deemed relevant. The development,
selection and disclosure of our critical accounting estimates are reviewed with
the Audit Committee of the Company's Board of Directors. Actual results could
differ from these estimates. For additional information regarding critical
accounting policies, refer to "Part II - Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Critical Accounting
Estimates,," "Part II - Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Allowance for Credit Losses -
Loans and Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures,"
"Note 1 - Summary of Significant Accounting and Reporting Policies," "Note 5 -
Loans and Allowance for Loan Losses" and "Note 17 - Off-Balance-Sheet
Arrangements, Commitments and Contingencies" in the 2021 Form 10-K. As of
March 31, 2022, there have been no significant changes to our critical
accounting estimates.


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Non-GAAP Financial Measures

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

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

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

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

           Non-GAAP Reconciliations
                                                         Three Months Ended
                                                             March 31,
                                                       2022              2021
           Net interest income (GAAP)             $    48,906       $    46,303
           Tax equivalent adjustments:
           Loans                                          745               736
           Tax-exempt investment securities             2,464             2,211
           Net interest income (FTE) (1)          $    52,115       $    49,250

           Average earning assets                 $ 6,553,710       $

6,241,434

           Net interest margin                           3.03  %           3.01  %
           Net interest margin (FTE) (1)                 3.22  %           3.20  %

           Net interest spread                           2.89  %           2.84  %
           Net interest spread (FTE) (1)                 3.09  %           3.03  %

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

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

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OVERVIEW

COVID-19

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

COVID-19 significantly disrupted supply chains, business activity and the
overall economic and financial markets globally and in our footprint.  As of
March 31, 2022, economic conditions in Texas have returned close to pre-pandemic
levels. Commercial activity has resumed to levels close to those existing prior
to the outbreak of the pandemic. While the overall outlook has improved based on
the availability of the vaccine, the risk of further resurgence and possible
reimplementation of restrictions remains. The ongoing pandemic could continue to
adversely impact the markets in which we operate and our business, operations
and financial condition.

In response to the COVID-19 pandemic, the CARES Act was signed into law on March
27, 2020. The CARES Act provided an estimated $2.2 trillion to address the
economic impact of the COVID-19 pandemic and stimulate the economy by supporting
individuals and businesses through loans, grants, tax changes, and other types
of financial relief. The CARES Act also included provisions to encourage
financial institutions to work prudently with borrowers. As an SBA lender, we
were well positioned to assist business customers in accessing funds available
through the PPP implemented in April of 2020. On December 27, 2020, the Economic
Aid Act was signed into law. This second coronavirus relief package granted
additional funds for a new round of PPP loans. Additionally, it expanded the
eligibility for loans and allowed certain businesses to request a second loan.
The SBA began accepting applications for the second round of PPP loans on
January 13, 2021, and we accepted new applications through April 6, 2021. In
total, we originated over $420 million of PPP loans, of which $13.9 million were
still outstanding as of March 31, 2022. On March 11, 2021, the American Rescue
Plan was signed into law granting additional funds for unemployment benefits,
individuals and other types of financial relief.

Additionally, we assisted both our consumer and commercial borrowers that
experienced financial hardship due to COVID-19 related challenges. As of
March 31, 2022 and December 31, 2021, there were no remaining loans with payment
deferrals. As of March 31, 2021, we had outstanding loans with payment
deferrals, generally for up to three months, totaling $1.7 million. The decrease
in the COVID-19 modified loans are the result of the loans coming out of the
deferral periods and resuming performance.

Operating results

Net income decreased $9.1 million, or 26.7%, for the three months ended March
31, 2022, to $25.0 million compared to the same period in 2021. The decrease in
net income was primarily a result of a provision for credit losses of $294,000
for the three months ended March 31, 2022, compared to a reversal of provision
for credit losses of $10.1 million for the same period in 2021 due to the
improved economic forecast during the first quarter of 2021, and to a lesser
extent, a $2.9 million decrease in noninterest income, partially offset by the
$2.6 million increase in net interest income and the $1.6 million decrease in
income tax expense. Earnings per diluted common share decreased $0.27, or 26.0%,
to $0.77 for the three months ended March 31, 2022, compared to $1.04 for the
three months ended March 31, 2021.

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Financial condition

Our total assets decreased $140.5 million, or 1.9%, to $7.12 billion at
March 31, 2022 from $7.26 billion at December 31, 2021. Our securities portfolio
decreased by $314.8 million, or 11.0%, to $2.54 billion, compared to $2.86
billion at December 31, 2021. The decrease in the securities portfolio was due
to the increase in the unrealized loss in the portfolio, sales of securities,
and principal payments, which more than offset the securities purchased during
the quarter. Our FHLB stock decreased $10.6 million, or 73.9%, to $3.8 million
from $14.4 million at December 31, 2021, due to the decline in our FHLB
borrowings during the first quarter of 2022, reducing the amount of FHLB stock
we are required to hold.

Loans at March 31, 2022 were $3.80 billion, an increase of $155.8 million, or
4.3%, compared to $3.65 billion at December 31, 2021. Our PPP loans, a component
of the commercial loan category, decreased $17.1 million during the quarter due
to forgiveness payments received for loans funded under the CARES Act. Excluding
PPP loans, total loans increased $172.9 million, or 4.8%, due to increases of
$124.4 million in commercial real estate loans, $42.3 million in construction
loans and $12.1 million in municipal loans. The increases were partially offset
by decreases of $3.3 million in 1-4 family residential loans, $1.9 million in
loans to individuals and $706,000 in commercial loans (excluding PPP loans).
Loans held for sale decreased $108,000, or 6.4%, to $1.6 million at March 31,
2022 from $1.7 million at December 31, 2021.

Our nonperforming assets at March 31, 2022 decreased $154,000, or 1.3%, to $11.5
million and represented 0.16% of total assets, compared to $11.6 million, or
0.16% of total assets at December 31, 2021. Nonaccruing loans decreased
$179,000, or 7.1%, to $2.4 million, and the ratio of nonaccruing loans to total
loans decreased to 0.06% at March 31, 2022 compared to 0.07% at December 31,
2021. Restructured loans were $9.1 million at March 31, 2022 and December 31,
2021. There was no OREO at March 31, 2022 or December 31, 2021.

Our deposits increased $348.1 million, or 6.1%, to $6.07 billion at March 31,
2022 from $5.72 billion at December 31, 2021. The increase was primarily due to
the increase in our brokered deposits of $380.8 million, or 129.2%, associated
with funding our cash flow hedge swaps in place of the FHLB advances to obtain
lower cost funding.

Total FHLB borrowings decreased $340.2 millioni.e. 98.9%, at $3.9 million to
March 31, 2022 from $344.0 million to December 31, 2021.

Our total shareholders' equity at March 31, 2022 decreased 14.0%, or $127.9
million, to $784.2 million, or 11.0% of total assets, compared to $912.2
million, or 12.6% of total assets, at December 31, 2021. The decrease in
shareholders' equity was the result of other comprehensive loss of $140.0
million, cash dividends paid of $11.0 million, and the repurchase of $3.4
million of our common stock. These decreases were partially offset by net income
of $25.0 million, stock compensation expense of $819,000, common stock issued
under our dividend reinvestment plan of $322,000 and net issuance of common
stock under employee stock plans of $269,000.

Economic conditions in our market areas are relatively strong with economic
activity having quickly returned close to pre-pandemic levels. Worker shortages
especially in the restaurant, hospitality and retail industries combined with
supply chain disruptions impacting numerous industries has had some impact on
the level of economic growth. Overall, Texas continues to experience economic
growth due to company relocations and expansions combined with overall
population growth.

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

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Balance Sheet Strategy

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

During the first quarter of 2022, we replaced $310 million of FHLB advances with
brokered deposits as the funding source of our cash flow hedge swaps to lower
our funding cost. Over the past two years, management has used the significant
increase in non-maturity deposits, net of brokered deposits, to reduce
dependence on more interest rate sensitive wholesale funding. At March 31, 2022,
of the remaining wholesale funding, 85% is swapped at a fixed rate, providing
protection from rising interest rates. The securities portfolio is currently
funded primarily by non-maturity deposits with wholesale funding accounting for
approximately 27% of the funding source.

We utilize wholesale funding and securities to enhance overall profitability by
maximizing the use of our capital, determining acceptable levels of credit,
interest rate and liquidity risk consistent with prudent capital
management. This balance sheet strategy currently consists of borrowing funds
from the brokered funds market and the FHLB. These funds are invested primarily
in U.S. agency MBS and long-term municipal securities. Although U.S. agency MBS
often carry lower yields than loans we make, these securities generally (i)
increase the overall quality of our assets because of either the implicit or
explicit guarantees of the U.S. Government, (ii) are more liquid than individual
loans and (iii) may be used to collateralize our borrowings or other
obligations.

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

Our securities portfolio decreased from $2.86 billion at December 31, 2021 to
$2.54 billion at March 31, 2022. The decrease in the securities portfolio was
due to the increase in the unrealized loss in the portfolio, sales of
securities, and principal payments, which more than offset the securities
purchased during the quarter.

During the first quarter of 2022, the composition of the securities portfolio
continued to change as municipal and corporate bonds increased while MBS and US.
Treasury Notes decreased. The decrease in MBS was attributable to the sale of
$99 million in U.S. Agency MBS and regular principal payments, with no
additional MBS purchases during the first quarter. During the three months ended
March 31, 2022, we purchased $107.3 million in highly rated primarily Texas
municipal securities, $41.2 million of which were taxable, and $11 million in
investment grade subordinated debt and $10 million in U.S. Treasury Notes. In
March of 2022, we sold approximately $68.1 million of U.S. Treasury Notes due to
the rising rate environment. Sales of AFS securities for the three months ended
March 31, 2022, resulted in a net realized loss of $1.5 million.

In March of 2022, management transferred to HTM, long duration AFS taxable
municipal securities with fair values of approximately $385.8 million. These
transfers were made due to management's intent and ability to hold these
securities to maturity. Long duration securities experience greater fair value
volatility when interest rates either rise or fall. These transfers reduce any
future volatility resulting from unrealized gains or losses, reflected in AOCI.
These transfers were made to align the investment portfolio with the current
balance sheet strategy.

At March 31, 2022, securities as a percentage of assets totaled 35.7%, compared
to 39.3% at December 31, 2021, due to the $314.8 million, or 11.0%, decrease in
the securities portfolio, partially offset by a decrease in total assets of
$140.5 million. Our balance sheet management strategy is dynamic and is
continually evaluated as market conditions warrant.

With respect to funding sources, we primarily utilize deposits and to a lesser
extent wholesale funding to achieve our strategy of minimizing cost while
achieving overall interest rate risk objectives as well as the liability
management objectives of the ALCO. Our primary wholesale funding sources are
brokered deposits and FHLB borrowings. Our FHLB borrowings decreased 98.9%, or
$340.2 million, to $3.9 million at March 31, 2022 from $344.0 million at
December 31, 2021.

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For the three months ended March 31, 2022, our total wholesale funding as a
percentage of deposits, not including brokered deposits, increased slightly to
12.6%, from 11.8% at December 31, 2021, and decreased from 14.9% at March 31,
2021.

Our brokered deposits consist of CDs and non-maturity deposits. Our brokered CDs
increased $68.4 million, or 277.0%, from $24.7 million at December 31, 2021 to
$93.1 million at March 31, 2022. At March 31, 2022, our brokered CDs had a
weighted average cost of 25 basis points and remaining maturities of less than
11 months. Our brokered non-maturity deposits increased to $582.5 million at
March 31, 2022 from $270.1 million at December 31, 2021, with a weighted average
cost of 83 basis points and 91 basis points, respectively. Our wholesale funding
policy currently allows for maximum brokered deposits of $800 million, with an
additional $50 million of flexibility for deposits maturing within 30 days.
Potential higher interest expense and lack of customer loyalty are risks
associated with the use of brokered deposits.

In connection with most of our wholesale funds, the Bank has entered into
various variable rate agreements and fixed or variable rate short-term pay
agreements with an interest rate tied to three-month LIBOR or to one-month
LIBOR. In connection with $575.0 million and $605.0 million of the agreements
outstanding at March 31, 2022 and December 31, 2021, respectively, the Bank also
entered into various interest rate swap contracts that are treated as cash flow
hedges under ASC Topic 815, "Derivatives and Hedging" that are expected to be
effective in hedging the variability in future cash flows attributable to
fluctuations in the underlying LIBOR interest rate. The interest rate swap
contracts had an average interest rate of 0.83% with a remaining average
weighted maturity of 3.1 years at March 31, 2022. Refer to "Note 11 - Derivative
Financial Instruments and Hedging Activities" in our consolidated financial
statements included in this report for a detailed description of our hedging
policy and methodology related to derivative instruments.

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Operating results

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

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

                                                 Three Months Ended
                                                     March 31,
                                                 2022           2021
Interest income:
Loans                                        $   34,888      $ 36,038
Taxable investment securities                     4,608         2,323
Tax-exempt investment securities                 10,219         8,965
MBS                                               4,017         6,088
FHLB stock and equity investments                   113           136
Other interest earning assets                        28            15
Total interest income                            53,873        53,565
Interest expense:
Deposits                                          3,237         2,597
FHLB borrowings                                     366         1,908
Subordinated notes                                  998         2,395
Trust preferred subordinated debentures             356           351
Other borrowings                                     10            11
Total interest expense                            4,967         7,262
Net interest income                          $   48,906      $ 46,303



Net Interest Income

Net interest income is one of the principal sources of a financial institution's
earnings stream and represents the difference or spread between interest and fee
income generated from interest earning assets and the interest expense paid on
interest bearing liabilities. Fluctuations in interest rates or interest rate
yield curves, as well as repricing characteristics and volume and changes in the
mix of interest earning assets and interest bearing liabilities, materially
impact net interest income. During the first quarter of 2022, the Federal
Reserve increased the target federal funds rate by 25 basis points to 50 basis
points and has indicated it anticipates multiple additional rate increases
during 2022.

Net interest income for the three months ended March 31, 2022 increased $2.6
million, or 5.6%, compared to the same period in 2021. The increase in net
interest income for the three months ended March 31, 2022 was due to the
decrease in interest expense on our interest bearing liabilities due to the
change in the mix of our interest bearing liabilities, and to a lesser extent,
an increase in interest income, a result of an increase in the average balance
of investment securities, partially offset by a decrease in the interest income
on PPP loans. Total interest income increased $308,000, or 0.6%, to $53.9
million for the three months ended March 31, 2022, compared to $53.6 million
during the same period in 2021. Total interest expense decreased $2.3 million,
or 31.6%, to $5.0 million for the three months ended March 31, 2022, compared to
$7.3 million for the same period in 2021. Our net interest margin (FTE), a
non-GAAP measure, increased to 3.22% for the three months ended March 31, 2022,
compared to 3.20% for the same period in 2021, and our net interest spread
(FTE), also a non-GAAP measure, increased to 3.09%, compared to 3.03% for the
same period in 2021.

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Quarterly analysis of the evolution of interest income and interest expense

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

                                                                    Three 

Months ended March 31, 2022 Compared to 2021

                                                                       Change Attributable to                         Total
Fully Taxable-Equivalent Basis:                              Average Volume            Average Yield/Rate             Change
Interest income on:
Loans (1)                                                 $             697          $            (1,826)         $    (1,129)
Loans held for sale                                                     (16)                           4                  (12)
Taxable investment securities                                         2,510                         (225)               2,285
Tax-exempt investment securities (1)                                  2,154                         (647)               1,507
Mortgage-backed and related securities                               (2,605)                         534               (2,071)
FHLB stock, at cost, and equity investments                             (69)                          46                  (23)
Interest earning deposits                                                 7                            2                    9
Federal funds sold                                                        4                            -                    4
Total earning assets                                                  2,682                       (2,112)                 570
Interest expense on:
Savings accounts                                                         56                            8                   64
CDs                                                                    (247)                        (388)                (635)
Interest bearing demand accounts                                        450                          761                1,211
FHLB borrowings                                                      (1,772)                         230               (1,542)

Subordinated notes, net of unamortized debt issue costs

                                                                (1,049)                        (348)              (1,397)
Trust preferred subordinated debentures, net of
unamortized debt issuance costs                                           -                            5                    5
Repurchase agreements                                                    (1)                           -                   (1)
Other borrowings                                                          -                            -                    -
Total interest bearing liabilities                                   (2,563)                         268               (2,295)
Net change                                                $           5,245          $            (2,380)         $     2,865

(1) Interest yields on loans and securities that are not taxable for federal income tax purposes are presented on a fully equivalent to tax basis. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.

The increase in total interest income was primarily attributable to the increase
in the average interest earning assets for the three months ended March 31, 2022
compared to the same period in 2021, offset by a decrease in the average yield
on interest earning assets. The decrease in total interest expense for the three
months ended March 31, 2022 was attributable to the change in the mix of our
interest bearing liabilities when compared to the same period in 2021.

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The "Average Balances with Average Yields and Rates" table that follows shows
average earning assets and interest bearing liabilities together with the
average yield on the earning assets and the average rate of the interest bearing
liabilities (dollars in thousands) for the three months ended March 31, 2022 and
2021. The interest and related yields presented are on a fully
taxable-equivalent basis and are therefore non-GAAP measures. See "Non-GAAP
Financial Measures" for more information, and for a reconciliation to GAAP.

                                                                            

Average balances with average yields and rates (annualised)

                                                                                                    (unaudited)
                                                                                                 Three Months Ended
                                                                 March 31, 2022                                                      March 31, 2021
                                                                                           Average                                                            Average
                                            Average Balance           Interest            Yield/Rate            Average Balance          Interest            Yield/Rate

ASSETS

Loans (1)                                 $       3,703,980          $ 35,625                   3.90  %       $      3,634,053          $ 36,754                   4.10  %
Loans held for sale                                     928                 8                   3.50  %                  2,803                20                   2.89  %
Securities:
Taxable investment securities (2)                   644,706             4,608                   2.90  %                295,968             2,323                   3.18  %
Tax-exempt investment securities (2)              1,563,185            12,683                   3.29  %              1,300,991            11,176                   3.48  %
Mortgage-backed and related securities
(2)                                                 566,941             4,017                   2.87  %                940,815             6,088                   2.62  %
Total securities                                  2,774,832            21,308                   3.11  %              2,537,774            19,587                   3.13  %
FHLB stock, at cost, and equity
investments                                          20,677               113                   2.22  %                 35,635               136                   1.55  %
Interest earning deposits                            44,642                24                   0.22  %                 31,169                15                   0.20  %
Federal funds sold                                    8,651                 4                   0.19  %                      -                 -                      -
Total earning assets                              6,553,710            57,082                   3.53  %              6,241,434            56,512                   3.67  %
Cash and due from banks                             107,144                                                             86,634
Accrued interest and other assets                   607,235                                                            677,230
Less: Allowance for loan losses                     (35,636)                                                           (49,240)
Total assets                              $       7,232,453                                                   $      6,956,058
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings accounts                          $         652,394               273                   0.17  %       $        517,182               209                   0.16  %
CDs                                                 563,599               594                   0.43  %                736,099             1,229                   0.68  %
Interest bearing demand accounts                  3,097,966             2,370                   0.31  %              2,342,299             1,159                   0.20  %
Total interest bearing deposits                   4,313,959             3,237                   0.30  %              3,595,580             2,597                   0.29  %
FHLB borrowings                                     122,783               366                   1.21  %                727,513             1,908                   1.06  %
Subordinated notes, net of unamortized
debt issuance costs                                  98,552               998                   4.11  %                197,252             2,395                   4.92  %
Trust preferred subordinated debentures,
net of unamortized debt issuance costs               60,261               356                   2.40  %                 60,256               351                   2.36  %
Repurchase agreements                                21,494                10                   0.19  %                 23,522                11                   0.19  %
Other borrowings                                        467                 -                      -                         -                 -                      -
Total interest bearing liabilities                4,617,516             4,967                   0.44  %              4,604,123             7,262                   0.64  %
Noninterest bearing deposits                      1,642,973                                                          1,389,020
Accrued expenses and other liabilities               84,009                                                             89,222
Total liabilities                                 6,344,498                                                          6,082,365
Shareholders' equity                                887,955                                                            873,693
Total liabilities and shareholders'
equity                                    $       7,232,453                                                   $      6,956,058
Net interest income (FTE)                                            $ 52,115                                                           $ 49,250
Net interest margin (FTE)                                                                       3.22  %                                                            3.20  %
Net interest spread (FTE)                                                                       3.09  %                                                            3.03  %

(1) Interest on borrowings includes net commissions on borrowings, the amount of which is not significant. (2) For the purposes of calculating the average return, the average balance of securities is presented at historical cost.

Note: As of March 31, 2022 and 2021, loans totaling $2.4 million and $5.3 million, respectively, were in non-recognition status. Our policy is to write off previously accrued but unpaid interest on outstanding loans; thereafter, interest income is recognized as received, if any.



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Non-interest income

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

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

                                                            Three Months Ended                            2022
                                                                 March 31,                             Change From
                                                          2022               2021                         2021
Deposit services                                      $    6,628          $  6,125          $       503                8.2  %
Net gain (loss) on sale of securities AFS                 (1,543)            2,003               (3,546)            (177.0) %
Gain on sale of loans                                        178               593                 (415)             (70.0) %
Trust fees                                                 1,494             1,383                  111                8.0  %
BOLI                                                         691               626                   65               10.4  %
Brokerage services                                           809               780                   29                3.7  %
Other noninterest income                                   2,468             2,113                  355               16.8  %
Total noninterest income                              $   10,725          $ 13,623          $    (2,898)             (21.3) %




The 21.3% decrease in noninterest income for the three months ended March 31,
2022, when compared to the same period in 2021, was due to decreases in net gain
on sale of securities AFS and gain on sale of loans, partially offset by
increases in deposit services income, other noninterest income and trust fees.

The increase in depository services revenue for the quarter ended March 31, 2022compared to the same period in 2021, was primarily the result of higher overdraft income and service charges on commercial deposit accounts.

In the three months ended March 31, 2022we sold WE Treasury securities, MBS and municipal securities which resulted in a net loss on the sale of AFS securities of $1.5 million.

Gain on sale of loans decreased for the three months ended March 31, 2022, when
compared to the same period in 2021, due to a decrease in the volume of loans
sold.

Trust fees increased for the three months ended March 31, 2022, when compared to
the same period in 2021, primarily due to an increase in assets under
management. The market value of our wealth management and trust assets under
management, which are not reflected in our consolidated balance sheets,
increased 2.7%, and were approximately $1.63 billion at March 31, 2022, compared
to $1.59 billion at March 31, 2021.

BOLI’s revenue increase for the three months ended March 31, 2022compared to the same period in 2021, was due to $13.0 million in additional BOLI purchased during the third quarter of 2021.

Other non-interest income increased for the quarter ended March 31, 2022compared to the same period in 2021, mainly due to an increase in investment income and mortgage servicing fee income, partially offset by a decrease in swap fee income.

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Non-interest expenses

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

                                               Three Months Ended                  2022
                                                   March 31,                    Change From
                                               2022           2021                 2021
    Salaries and employee benefits         $   19,969      $ 20,044      $      (75)       (0.4) %
    Net occupancy                               3,656         3,560              96         2.7  %

    Advertising, travel & entertainment           737           437             300        68.6  %
    ATM expense                                   281           238              43        18.1  %
    Professional fees                             927           991             (64)       (6.5) %
    Software and data processing                1,631         1,312             319        24.3  %
    Communications                                503           525             (22)       (4.2) %
    FDIC insurance                                472           454              18         4.0  %
    Amortization of intangibles                   622           766            (144)      (18.8) %

    Other noninterest expense                   2,397         2,907            (510)      (17.5) %
    Total noninterest expense              $   31,195      $ 31,234      $      (39)       (0.1) %




The slight decrease in non-interest expenses for the three months ended March 31, 2022compared to the same period in 2021, was mainly the result of lower other non-interest expenses and amortization of intangible assets, partially offset by higher software and data processing costs and advertising, travel and entertainment costs.

Advertising, travel and entertainment expense increased for the three months
ended March 31, 2022, when compared to the same period in 2021, primarily due to
an increase in donations and travel related expenses. Media advertising,
included in advertising, travel and entertainment, also increased for the three
months ended March 31, 2022, when compared to the same period in 2021.

ATM fees increased for the three months ended March 31, 2022compared to the same period in 2021, mainly due to higher spending on armored vehicles.

Software and data processing costs increased for the quarter ended March 31, 2022compared to the same period in 2021, due to new software contracts and increased renewal costs for existing contracts.

Amortization of intangibles decreased for the three months ended March 31, 2022,
when compared to the same period in 2021, due primarily to a decrease in core
deposit intangible amortization which is recognized on an accelerated method
resulting in a decline in expense over the amortization period.

Other noninterest expense decreased for the three months ended March 31, 2022,
when compared to the same period in 2021, primarily due to decreases in
retirement expense related to the Retirement Plan and the Restoration Plan and
decreases in computer supplies expense and losses on retired assets.


Income taxes

Pre-tax income for the three months ended March 31, 2022 was $28.1 million, a
decrease of 27.5%, compared to $38.8 million for the same period in 2021. We
recorded income tax expense of $3.1 million, for the three months ended March
31, 2022, compared to income tax expense of $4.8 million for the same period in
2021. The ETR as a percentage of pre-tax income was 11.2% for the three months
ended March 31, 2022, compared to an ETR as a percentage of pre-tax income of
12.2% for the same period in 2021. The lower ETR for the three months ended
March 31, 2022 was primarily due to an increase in tax-exempt income as a
percentage of pre-tax income as compared to the same period in 2021. The
decrease in the income tax expense for the three months ended March 31, 2022 as
compared to the same period in 2021 is primarily due to the decrease in pre-tax
income in 2022 and the decrease in the ETR.

The ETR differs from the statutory rate of 21% primarily due to the effect of
tax-exempt income from municipal loans and securities, as well as BOLI. The net
deferred tax asset totaled $19.1 million at March 31, 2022 as compared to a net
deferred tax liability of $17.8 million at December 31, 2021. The increase in
the net deferred tax asset is primarily the result of an increase in unrealized
losses in the AFS securities portfolio.

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


Composition of loans

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

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

                                                                                                                    Compared to
                                                                                                             December 31, 2021                March 31, 2021
                                                        December 31,
                                March 31, 2022              2021               March 31, 2021                   Change (%)                      Change (%)

Real estate loans:
Construction                  $       490,166          $    447,860          $       605,677                             9.4  %                       (19.1) %
1-4 family residential                647,837               651,140                  700,430                            (0.5) %                        (7.5) %
Commercial                          1,722,577             1,598,172                1,348,551                             7.8  %                        27.7  %
Commercial loans                      401,144               418,998                  564,745                            (4.3) %                       (29.0) %
Municipal loans                       455,155               443,078                  406,377                             2.7  %                        12.0  %
Loans to individuals                   84,037                85,914                   90,818                            (2.2) %                        (7.5) %
Total loans                   $     3,800,916          $  3,645,162          $     3,716,598                             4.3  %                         2.3  %


Our total loan portfolio increased $155.8 million, or 4.3%, at March 31, 2022
compared to December 31, 2021. For the three months ended March 31, 2022, our
PPP loans experienced a decrease of $17.1 million, or 55.3%, from $31.0 million
at December 31, 2021, primarily due to forgiveness payments received from loans
funded under the CARES Act. Excluding PPP loans, total loans increased $172.9
million, or 4.8%, with increases in commercial real estate loans, construction
loans, and municipal loans, partially offset by decreases in 1-4 family
residential loans, loans to individuals and commercial loans.

Excluding a $207.0 million year-over-year decrease in PPP loans, total loans
increased $291.3 million, or 8.3%, compared to March 31, 2021, with increases in
commercial real estate loans, municipal loans and commercial loans, partially
offset by decreases in construction loans, 1-4 family residential loans and
loans to individuals.

At March 31, 2022, our real estate loans represented 75.3% of our loan portfolio
and were comprised of commercial real estate loans of 60.2%, 1-4 family
residential loans of 22.7% and construction loans of 17.1%. Commercial real
estate loans primarily include loans collateralized by retail, commercial office
buildings, multi-family residential buildings, medical facilities and offices,
senior living, assisted living and skilled nursing facilities, warehouse
facilities, hotels and churches. Our 1-4 family residential loans consist
primarily of loans secured by first mortgages on owner occupied 1-4 family
residences. Our construction loans are collateralized by property located
primarily in or near the market areas we serve. A number of our construction
loans will be owner occupied upon completion. Construction loans for non-owner
occupied projects are financed, but these typically have cash flows from leases
with tenants, secondary sources of repayment, and in some cases, additional
collateral.

Loan portfolios are most at risk due to economic strains resulting from the impact of COVID-19

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

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As of March 31, 2022, the Company's exposure to the oil and gas industry totaled
$85.9 million, or 2.26% of gross loans, an increase of $16.2 million, or 23.2%,
from December 31, 2021, and consisted primarily of (i) support/service loans of
1.52%, (ii) upstream of 0.48%, (iii) downstream of 0.14% and (iv) midstream of
0.12%. Expanded monitoring and analysis of these loans has been implemented to
address the uncertainty in oil and gas prices as needed.

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

the 31st of December,

                                                           March 31, 2022            2021             March 31, 2021
Oil and gas related loans                                 $      85,877          $   69,688          $      104,777
Oil and gas related loans as a % of loans                          2.26  %             1.91  %                 2.82  %
Classified oil and gas related loans                      $       3,755     

$4,104 $5,237
Ranking of oil and gas related loans as % of oil and gas related loans

                                              4.37  %             5.89  %                 5.00  %
Nonaccrual oil and gas related loans                      $         294          $      334          $          728
Net (recoveries) charge-offs for oil and gas
related loans                                             $           -          $       (7)         $            -
Allowance for oil and gas related loans as a % of
oil and gas loans                                                  1.16  %             1.19  %                 1.35  %



As of March 31, 2022, economic conditions in Texas have returned close to
pre-pandemic levels. Commercial activity has resumed to levels close to those
existing prior to the outbreak of the pandemic. When the pandemic occurred, in
addition to the oil and gas industry, we considered the sectors set forth in the
table below to be most vulnerable to financial risks from business disruptions
caused by the pandemic mitigation efforts based on North American Industry
Classification System categories as of March 31, 2022 (dollars in thousands). As
of March 31, 2022, our customers in these industries have not experienced
long-term business disruptions initially thought possible. We are however
continuing to monitor these customers closely.

                                                              March 31, 2022
                                                                Percent of          Percent
                                                Loans           Total Loans      Classified (1)
   Retail commercial real estate (2)       $     457,347            12.03  %                -
   Retail goods and services                      57,076             1.50  %             0.24  %
   Hotels                                         30,274             0.80  %            29.34  %
   Food services                                  47,378             1.25  %             4.02  %
   Arts, entertainment and recreation              5,947             0.15  %             2.43  %
   Total                                   $     598,022            15.73  %             1.85  %


                                                             December 31, 2021
                                                                 Percent of          Percent
                                                Loans            Total 

Classified loans (1)

  Retail commercial real estate (2)       $       384,381            10.54  %                -
  Retail goods and services                        72,650             1.99  %             0.20  %
  Hotels                                           61,992             1.70  %            14.33  %
  Food services                                    45,019             1.24  %             4.33  %
  Arts, entertainment and recreation                6,039             0.17  %             2.95  %
  Total                                   $       570,081            15.64  %             1.96  %







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                                                              March 31, 2021
                                                                Percent of          Percent
                                                Loans           Total Loans      Classified (1)
   Retail commercial real estate (2)       $     323,729             8.71  %             0.02  %
   Retail goods and services                      74,662             2.01  %             9.47  %
   Hotels                                         69,063             1.86  %                -
   Food services                                  49,729             1.34  %                -
   Arts, entertainment and recreation              8,580             0.23  %             2.73  %
   Total                                   $     525,763            14.15  %             1.40  %


(1) Loans classified by sector as a percentage of total sector loans. (2) Commercial real estate sector loans are included in our commercial real estate portfolio.

PCD loans

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

Non-performing assets

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

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

                                                                                                                          Compared to
                                                                                                                                       March 31,
                                                                                                          December 31, 2021              2021
                                            March 31,           December 31,           March 31,
                                               2022                 2021                  2021               Change (%)               Change (%)

Nonaccrual loans                          $     2,357          $      2,536          $     5,314                    (7.1) %                  (55.6) %
Accruing loans past due more than 90 days           -                     -                    -                       -                         -
TDR loans                                       9,098                 9,073                9,641                     0.3  %                   (5.6) %
OREO                                                -                     -                  412                       -                    (100.0) %
Repossessed assets                                  -                     -                    -                       -                         -
Total nonperforming assets                $    11,455          $     11,609          $    15,367                    (1.3) %                  (25.5) %

Total loans                               $ 3,800,916          $  3,645,162          $ 3,716,598
Allowance for loan losses at end of
period                                         35,524                35,273               41,454


Ratio of nonaccruing loans to:
Total loans                                          0.06  %          0.07  %       0.14  %
Ratio of nonperforming assets to:
Total assets                                         0.16  %          0.16  %       0.22  %
Total loans                                          0.30  %          0.32  %       0.41  %
Total loans and OREO                                 0.30  %          0.32  %       0.41  %
Total loans, excluding PPP loans, and OREO           0.30  %          0.32  %       0.44  %
Ratio of allowance for loan losses to:
Nonaccruing loans                                1,507.17  %      1,390.89  %     780.09  %
Nonperforming assets                               310.12  %        303.84  %     269.76  %
Total loans                                          0.93  %          0.97  %       1.12  %
Total loans, excluding PPP loans                     0.94  %          0.98  %       1.19  %
Net charge-offs to average loans outstanding            -             0.02  

% 0.02%

We actively market all OREO properties and do not hold them for investment purposes.

Allowance for Credit Losses – Loans

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

We use Moody’s Analytics economic forecast scenarios and assign a probability weight to the scenarios that best reflect management’s views on the economic forecast. The probabilistic weighting and scenarios used for the allocation estimate generally reflected an improvement in economic forecasts based on known and actionable information at the time. March 31, 2022.

When determining the appropriate allowance for credit losses on our loan portfolio, our real estate and commercial construction loans, our commercial loans and our municipal loans use the probability of default/loss given default approach. discounted cash.

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

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

As of March 31, 2022, our review of the loan portfolio indicated that an
allowance for loan losses of $35.5 million was appropriate to cover expected
losses in the portfolio. Changes in economic and other conditions, including the
application of the CECL model and the economic uncertainty related to COVID-19,
may require future adjustments to the allowance for loan losses.

In the three months ended March 31, 2022the provision for loan losses increased $251,000i.e. 0.7%, at $35.5 millioni.e. 0.93% of total loans, compared to $35.3 millioni.e. 0.97% of total loans to December 31, 2021.

For the three months ended March 31, 2022, loan charge-offs were $555,000, and
recoveries were $540,000. For the three months ended March 31, 2021, loan
charge-offs were $795,000, and recoveries were $622,000. For the three months
ended March 31, 2022 we recorded a provision for credit losses for loans of
$266,000. For the three months ended March 31, 2021, we recorded a reversal of
provision of $7.4 million.


Provision for credit losses – Off-balance sheet credit risks

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

                                                                               Three Months Ended
                                                                                    March 31,
                                                                             2022                 2021

Balance at beginning of period                                         $    2,384             $   6,386

Provision for (reversal of) off-balance-sheet credit exposures                 28                (2,770)
Balance at end of period                                               $    2,412             $   3,616


Our off-balance-sheet credit exposures include contractual commitments to extend
credit and standby letters of credit. For these credit exposures we evaluate the
expected credit losses using usage given defaults and credit conversion factors
depending on the type of commitment and based upon historical usage rates. These
assumptions are reevaluated on an annual basis and adjusted if necessary.  For
the three months ended March 31, 2022 there was a provision for credit losses
for off-balance-sheet exposures of $28,000, compared to a reversal of provision
of $2.8 million for the three months ended March 31, 2021. For additional
information regarding our methodology used to estimate the allowance for credit
losses on off-balance-sheet credit exposures, see "Note 12 - Off-Balance-Sheet
Arrangements, Commitments and Contingencies" to our consolidated financial
statements included in this report.


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Capital resources and liquidity

Our total shareholders' equity at March 31, 2022 decreased 14.0%, or $127.9
million, to $784.2 million, or 11.0% of total assets, compared to $912.2
million, or 12.6% of total assets, at December 31, 2021. The decrease in
shareholders' equity was the result of other comprehensive loss of $140.0
million, cash dividends paid of $11.0 million, and the repurchase of $3.4
million of our common stock. These decreases were partially offset by net income
of $25.0 million, stock compensation expense of $819,000, common stock issued
under our dividend reinvestment plan of $322,000 and net issuance of common
stock under employee stock plans of $269,000.

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

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

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for
both the Company and the Bank includes a permissible portion of the allowance
for credit losses on loans and off-balance sheet exposures. Tier 2 capital for
the Company also includes $98.6 million of qualified subordinated debt as of
March 31, 2022. The permissible portion of qualified subordinated notes
decreases 20% per year during the final five years of the term of the notes.

In April 2020, the FDIC, Federal Reserve, and the Office of the Comptroller of
the Currency issued supplemental instructions allowing banking organizations
that implement CECL before the end of 2020, the option to delay for two years an
estimate of the CECL methodologies' effect on regulatory capital, relative to
the incurred loss methodologies effect on capital, followed by a three-year
transition period.  We elected to adopt the five-year transition option. In
accordance with CECL guidance, a CECL transitional amount totaling $6.1 million
has been added back to CET1 as of March 31, 2022, representing 75% of the $8.2
million transitional amount at December 31, 2021.

Also in April 2020, we began originating loans to qualified small businesses
under the PPP administered by the SBA. Federal bank regulatory agencies have
issued an interim final rule that permits banks to neutralize the regulatory
capital effects of participating in the Paycheck Protection Program Lending
Facility and clarify that PPP loans have a zero percent risk weight under
applicable risk-based capital rules. Specifically, a bank may exclude all PPP
loans pledged as collateral to the PPP Facility from its average total
consolidated assets for the purposes of calculating its leverage ratio, while
PPP loans that are not pledged as collateral to the PPP Facility will be
included. Our PPP loans are included in the calculation of our leverage ratio as
of March 31, 2022, as we did not utilize the PPP Facility for funding purposes.

Management believes that, as of March 31, 2022, we met all capital adequacy
requirements to which we were subject. It is management's intention to maintain
our capital at a level acceptable to all regulatory authorities and future
dividend payments will be determined accordingly. Regulatory authorities require
that any dividend payments made by either us or the Bank not exceed earnings for
that year. Accordingly, shareholders should not anticipate a continuation of the
cash dividend payments simply because of the existence of a dividend
reinvestment program. The payment of dividends will depend upon future earnings,
our financial condition and other related factors including the discretion of
the board of directors.

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To be classified as well capitalized, we must maintain minimum Tier 1 risk-based, Tier 1 risk-based, risk-based Tier 1 total capital and Tier 1 leverage ratios as noted in the following table (in thousands of dollars):

                                                                                                                                 To Be Well Capitalized
                                                                                                                                      Under Prompt
                                                                                              For Capital                          Corrective Actions
                                                        Actual                             Adequacy Purposes                           Provisions
March 31, 2022                                Amount              Ratio               Amount               Ratio               Amount               Amount
Common Equity Tier 1 (to
Risk-Weighted Assets)
Consolidated                               $ 667,315                13.67  %       $  219,751                4.50  %                  N/A                  N/A
Bank Only                                  $ 798,983                16.36  %       $  219,730                4.50  %       $   317,387                 6.50  %

Tier 1 Capital (to Risk-Weighted
Assets)
Consolidated                               $ 725,765                14.86  %       $  293,001                6.00  %                  N/A                  N/A
Bank Only                                  $ 798,983                16.36  %       $  292,973                6.00  %       $   390,631                 8.00  %

Total Capital (to Risk-Weighted
Assets)
Consolidated                               $ 854,461                17.50  %       $  390,668                8.00  %                  N/A                  N/A
Bank Only                                  $ 829,110                16.98  %       $  390,631                8.00  %       $   488,288                10.00  %

Tier 1 Capital (to Average Assets)
(1)
Consolidated                               $ 725,765                10.39  %       $  279,321                4.00  %                  N/A                  N/A
Bank Only                                  $ 798,983                11.45  %       $  279,221                4.00  %       $   349,026                 5.00  %


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

Common Equity Tier 1 (to
Risk-Weighted Assets)
Consolidated                             $ 657,043                14.17  %       $  208,616                4.50  %                  N/A                  N/A
Bank Only                                $ 793,271                17.11  %       $  208,576                4.50  %       $   301,277                 6.50  %

Tier 1 Capital (to Risk-Weighted
Assets)
Consolidated                             $ 715,492                15.43  %       $  278,155                6.00  %                  N/A                  N/A
Bank Only                                $ 793,271                17.11  %       $  278,102                6.00  %       $   370,803                 8.00  %

Total Capital (to Risk-Weighted
Assets)
Consolidated                             $ 841,300                18.15  %       $  370,874                8.00  %                  N/A                  N/A
Bank Only                                $ 820,545                17.70  %       $  370,803                8.00  %       $   463,503                10.00  %

Tier 1 Capital (to Average Assets)
(1)
Consolidated                             $ 715,492                10.33  %       $  277,065                4.00  %                  N/A                  N/A
Bank Only                                $ 793,271                11.46  %       $  276,932                4.00  %       $   346,165                 5.00  %

(1) Refers to quarterly average assets calculated in accordance with policies established by banking regulatory bodies.

As of March 31, 2022, Southside Bancshares and Southside Bank met all capital
adequacy requirements under the Basel III Capital Rules that became fully
phased-in as of January 1, 2019. Refer to the Supervision and Regulation section
in the 2021 Form 10-K for further discussion of our capital requirements.

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The table below summarizes our main capital ratios for the periods presented:

                                                              Three Months Ended
                                                                  March 31,
                                                              2022              2021
Return on average assets                                           1.40  %      1.99  %
Return on average shareholders' equity                            11.42  %     15.82  %
Dividend payout ratio - Basic                                     44.16  %     30.77  %
Dividend payout ratio - Diluted                                   44.16  %     30.77  %
Average shareholders' equity to average total assets              12.28  %     12.56  %



Management of Liquidity

Liquidity management involves our ability to convert assets to cash with minimum
risk of loss while enabling us to meet our current and future obligations to our
customers at any time. This means addressing (1) the immediate cash withdrawal
requirements of depositors and other fund providers; (2) the funding
requirements of lines and letters of credit; and (3) the short-term credit needs
of customers. Liquidity is provided by cash, interest earning deposits and
short-term investments that can be readily liquidated with a minimum risk of
loss. At March 31, 2022, these investments were 4.4% of total assets, as
compared with 5.9% for December 31, 2021 and 6.6% for March 31, 2021. The
decrease to 4.4% at March 31, 2022 as compared to December 31, 2021, is
reflective of decreases in the short-term investment portfolio and interest
earning deposits, partially offset by the decrease in total assets while the
decrease as compared to March 31, 2021, is reflective of the decrease in the
short-term investment portfolio combined with the increase in total assets.
Liquidity is further provided through the matching, by time period, of rate
sensitive interest earning assets with rate sensitive interest bearing
liabilities. The Bank has three unsecured lines of credit for the purchase of
overnight federal funds at prevailing rates with Frost Bank, TIB - The
Independent Bankers Bank and Comerica Bank for $40.0 million, $15.0 million and
$7.5 million, respectively. There were no federal funds purchased at March 31,
2022 or December 31, 2021.  To provide more liquidity in response to the
economic impact of the COVID-19 pandemic, the Federal Reserve took steps to
encourage broader use of the discount window. At March 31, 2022, the amount of
additional funding the Bank could obtain from the FRDW, collateralized by
securities, was approximately $435.9 million. There were no borrowings from the
FRDW at March 31, 2022 or December 31, 2021. At March 31, 2022, the amount of
additional funding Southside Bank could obtain from FHLB, collateralized by
securities, FHLB stock and nonspecified loans and securities, was approximately
$1.72 billion, net of FHLB stock purchases required. The Bank has a $5.0 million
line of credit with Frost Bank to be used to issue letters of credit, and at
March 31, 2022, the line had one outstanding letter of credit for $155,000. The
Bank currently has no outstanding letters of credit from FHLB held as collateral
for its public fund deposits.

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

Management continually assesses our liquidity position and currently believes that the Company has sufficient funding to meet our financial needs.

Recent accounting pronouncements

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

Subsequent events

After March 31, 2022 and through April 26, 2022we purchased 173,005 common shares at an average price of $39.57 in accordance with the share buyback plan.

After March 31, 2022on April 1, 2022we sold tax-exempt municipal securities and WE Agency MBS with fair values ​​of approximately
$247.7 million and $28.3 million, respectively, to HTM. All transfers from AFS to HTM were made at fair market value on the date of transfer. There was no impact on the income statement following these transfers.

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