2019 ANNUAL REPORT New Relationships New Opportunities · and surrounding communities, and employed more than 60 team members. The acquisition closed on February 28, 2019 and Fidelity

New RelationshipsNew Opportunities

2 0 1 9 A N N U A L R E P O R T

A Message from Ken Burgess

In this Annual Report to Shareholders, we are excited to showcase the amazing work our FirstCapital team performs in each of the markets we serve. Whether it be the Ronald McDonald House, Sheppard Military Affairs Committee, public school mentoring or the many other areas of our communities that we serve, our team members spend many hours working to help others and to make our communities better.

2019 was a significant year for First Bancshares. In February of 2019, First Bancshares completed the purchase of Fidelity Bank, expanding our Texas footprint and adding six branches in the Wichita Falls area. It has been an exciting year for our team as we worked to merge the accounting, operations and data systems of the two banks. We gained an outstanding group of people from the transaction who have been invaluable in the transition to a $1.7 billion institution.

We also expanded our loan production office in Dallas into a full-service branch in February 2019. Our exceptional team in that market has been extremely successful in a short period of time. At the close of 2019, the Dallas market boasted outstanding loan balances exceeding $80 million and deposits surpassing $16 million. Their performance greatly exceeded our expectations.

We continue to explore new opportunities for growth through acquisitions and organically. The financial services industry has changed dramatically since the financial crisis in 2007 and 2008 and asset size is now critical for financial and operational efficiency. We continue to evaluate acquisition opportunities and capital strategies to facilitate our continued growth, which could include an IPO in the future. However, many variables could affect these initiatives and the timing of any capital raises, including current market volatility and global and national economic conditions. Nonetheless, we believe that identifying and executing a successful acquisition will ultimately better position us to take advantage of strategic growth and capital opportunities, so we are working hard to execute that plan.

I hope you enjoy reading the stories about our team members in the following pages. A high-performing banking organization is built on its people. We are very proud of ours and our communities are better for the work they do.

Sincerely,

Kenneth L. Burgess Jr.Chairman

S H A R E H O L D E R L E T T E R

First Bancshares of Texas, Inc., is the holding company for FirstCapital Bank of Texas, N.A., an independent community bank with two offices each in Amarillo and Lubbock, three in Midland and Wichita Falls and one each in Dallas, Horseshoe Bay, Marble Falls, Fredericksburg, Henrietta, Byers and Burkburnett. FirstCapital Bank was chartered in November 1998 and First Bancshares was formed on February 1, 2002. FirstCapital Bank presently employs more than 290 team members across the six markets it serves. We also have an accomplished and well-respected board of directors and officers who provide expertise in fields such as oil and gas, real estate and medicine. An employer of choice, FirstCapital Bank of Texas has been recognized for five consecutive years by American Banker as a Best Bank to Work For.

In November 2018, FBOT signed a definitive agreement to acquire FB Bancshares, the holding company that owned Wichita Falls-based Fidelity Bank, which operated six branches in Wichita Falls, Texas, and surrounding communities, and employed more than 60 team members. The acquisition closed on February 28, 2019 and Fidelity Bank became FirstCapital Bank of Texas in July 2019.

Working toward a common vision of “Making Every Customer’s Dream a Reality,” FirstCapital Bank and our team members exemplify that vision in every interaction we have with our customers by honoring our promise, “You above all.” We focus primarily on providing a broad range of financial services to small and medium-size businesses and retail financial services to the owners and employees of those businesses. We also have a strong mortgage lending presence in all of the markets we serve.

Wichita Falls’ Fidelity Bank Becomes FirstCapital Bank of Texas

In 2019, we finalized our merger with Fidelity Bank, which added six branches in Wichita Falls, Burkburnett, Byers and Henrietta to the growing FirstCapital Bank of Texas network.

The merger not only expanded our footprint, it strengthened our culture of caring and commitment to putting our customers and communities first. As the two employee teams became one, it was clear we shared a mutual dedication to providing superior service. From our February 28 merger through the July 22 system conversion, we worked together to make the transition for Fidelity customers as smooth and seamless as possible.

With Wichita Falls banking veterans Brent Hillery as market president and Tommy McCulloch as vice chairman, and an expanded suite of products and growing employee team, FCB is now well positioned to build upon the foundation built by the former Fidelity Bank and strengthen our relationships with consumers and businesses in the region.

Pictured here: Wichita Falls market president Brent Hillery (center with plaque) and Wichita Falls Chamber of Commerce president Henry Florsheim (left of Brent) carry on Fidelity’s legacy of community partnership at our Wichita Falls ribbon-cutting ceremony.

This year, FirstCapital Bank of Texas expanded our footprint into new markets while strengthening our relationships in existing ones. We’re

putting people first in more ways and in more locations than ever before.

A Year of New Relationships and

New Opportunities

2

2019:

FCB celebrated the grand opening of our Dallas market in April 2019. While we previously had a loan production office in Addison, the new FCB branch on LBJ Freeway is our first full-service branch in a major metropolitan market. It enables us to not only provide additional services to our Dallas customers, but to also provide them with an elevated customer experience – including TellerConnect video banking, which allows them to bank with a teller from 6 a.m. to midnight, seven days a week. Pictured here: FCB team members and North Dallas Chamber of Commerce chief operating officer Jeff Kitner (far right) celebrate the April 2019 opening of our first full-service Dallas branch at its ribbon-cutting ceremony.

FCB Opens First Full-Service Branch in Dallas

The FCB Dallas team packed 120 snack packs for PediPlace, a nonprofit pediatric clinic that provides primary care services to those in North Texas with limited access to care. Pictured here: FCB team members Mohammad Jilani, Josh Mitchell, Allen Jackson, Melissa Parham, Holly Fleckenstein, Garry Grier and Bryson Fowlkes and North Dallas United Way coordinator Erica Flores.

3

4

Healthier Livestock, a Healthier EconomyFCB was named a Trailblazing Donor of Texas Tech University’s School of Veterinary Medicine in Amarillo, supporting its innovative strategy to address our state’s shortage of veterinarians, particularly in rural areas. Focused on improving access to affordable education and increasing veterinary care in underserved rural communities, the school is critical to the economy of Texas, which leads the nation in cattle, sheep, goat and mohair production and has the highest number of food and fiber animals in the U.S.

Educating Banking’s Future LeadersFCB is a founding partner of the new undergraduate Excellence in Banking program at Texas Tech Rawls College of Business. The innovative, hands-on program is designed to produce top-notch bankers by giving students a comprehensive understanding of modern banking operations and practices. In the program, students will complete their finance curriculum and new courses on advanced banking topics. In addition to helping fund the program, we are also serving on its advisory board and participating in its internship and mentorship programs.

Financing Lubbock’s Cultural RenaissanceWe’re one of a consortium of local banks and title companies that came together in 2019 to create a $160 million financing package to enable the Lubbock Entertainment/Performing Arts Association to open The Buddy Holly Hall of Performing Arts and Sciences in 2020. Future home of Ballet Lubbock, the Lubbock Symphony Orchestra, and Lubbock ISD Visual and Performing Arts, the Center will be the city’s cultural hub and the cornerstone of downtown revitalization, in addition to fueling the local economy.

Since our founding in 1998, FCB has been a passionate contributor to our communities – and a resource our neighbors can count on. In 2019,

we showed that commitment in new and innovative ways.

Creating New Opportunities in

Our Communities

A M A R I L L OThe FCB Amarillo market donated $25,000 to the capital campaign for Ronald McDonald House, which is building a new temporary residence for families with children seeking lifesaving medical treatment in the city. Pictured here: (left) Brad Stuteville, FCB branch president, and (back) Mark Hodges, FCB Amarillo market president, with RMH’s Luke Oliver, Donna Littlejohn, Shelley Cunningham, Jan Plequette, and Becky James.

M I D L A N DWe’re a long-standing partner of Midland’s West Texas Food Bank and most recently packed 160 care boxes for seniors in need and donated $3,000 to provide 12,000 holiday meals for children, families and seniors across a 19-county region. Pictured here: (Front to back) FCB branch president, Brock Fitch, Midland market president Jeremy Bishop, and FCB branch president, Paul Strouhal lend a helping hand.

L U B B O C KAs a longtime supporter of the Alzheimer’s Association, FCB Lubbock participated in the local Walk to End Alzheimer’s, and was named a top team sponsor. FCB loan document preparation specialist Laura Sexton (second from left) joined her mother and two sisters at the Walk to End Alzheimer’s.

H I L L C O U N T R YWe’re proud to sponsor the Highland Lakes Service League Golf Tournament, one of several ways we help the organization support other community nonprofits in providing assistance to individuals and families in need. Pictured here: FCB team members Charlotte Choquette, Linda Harrison, Tami Randolph and FCB guest Wendy Gruen (second from right).

W I C H I T A F A L L SWe donated $5,000 again this year to the Sheppard Military Affairs Committee (SMAC) in support of the Sheppard Air Force Base, which plays a critical role in the lives of Wichita County residents and businesses. Here, Danny Cremeens (second from right), branch president, who has served as vice chair of SMAC for 15 years, is pictured with (from left to right) treasurer Randy Catlin, board member Jim Smith, chair Kay Yeager, Texas U.S. senator Ted Cruz, president Glenn Barham, mayor of Hinton Shelly Newton and board member Darrell Coleman.

$1.733 billionTotal Assets

89.94%Loan-to-Deposit Ratio

1.15%Return on Average Assets

4.80% YTDAverage Net Interest Margin

$18.056 millionNet Income

6Number of branches in our new Wichita Falls market

10.06%Return on Equity

3Awards & Accolades

$1.285 billionGross Loans

F I N A N C I A L H I G H L I G H T S

6

Best Banks to Work ForFifth Consecutive Year

American Banker Magazine

Financial Education Award“Reverse Junior Achievement in a Day” Event

Texas Bankers Association

Best of Community Banking AwardMarketing Category

Independent Bankers Association of Texas

A Few Highlights from a Very Good Year

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F I N A N C I A L O V E R V I E W

7

First Bancshares of Texas, Inc. (FBOT) and its wholly owned subsidiary, FirstCapital Bank of Texas (“the Bank”) (collectively known as the Company) reported net income of $18.1 million for the year ended December 31, 2019 compared to net income of $12.1 for December 31, 2018. Basic earnings per share of $1.14 are reported for the year ended December 31, 2019 compared to $0.96 for the year ended December 31, 2018. On February 28, 2019, the Company acquired FB Bancshares, Inc. (FBB) and its wholly owned subsidiary Fidelity Bank. Fidelity Bank operated six branches in the Wichita Falls, Texas region, further expanding the Company’s Texas footprint. The acquisition has proven beneficial to the Company, contributing to increased net income and earnings per share. Further details of the acquisition are included in Note 2: Business Combinations.

The Company posted increases in return on average assets (ROA) and return on common shareholders average tangible equity (ROE) for 2019. ROA and ROE was 1.15% and 10.06%, respectively, for the year ended December 31, 2019 compared to 1.08% and 8.08% for the year ended December 31, 2018.

Gross loans at December 31, 2019 were $1.285 billion, a 51% increase over $848 million for December 31, 2018. Loans purchased in the FBB transaction were $412 million. Loan to deposit ratio (net of loans held for sale) for the Company was 89.9% at both December 31, 2019 and 2018.

Total deposits increased during 2019, ending December 31, 2019 at $1.429 billion compared to $943 million at December 31, 2018. Deposit liabilities assumed in connection with the FBB transaction were $407 million. Noninterest-bearing deposits rose 51% to $480 million at December 31, 2019 from $317 million at December 31, 2018. Noninterest-bearing deposits comprised 34% of total deposits for both 2019 and 2018.

Total assets were $1.733 billion at December 31, 2019 compared to $1.124 billion at December 31, 2018.

The acquisition of FBB included issuance of common stock of $79.1 million. Stockholders’ equity increased by 62%, to $249 million at December 31, 2019 from $154 million at December 31, 2018. Subsidiary bank, FirstCapital Bank of Texas is well capitalized under regulatory guidelines. At December 31, 2019, the Bank’s Tier 1 Leverage Ratio was 10.92%.

F I N A N C I A L O V E R V I E W

8

Net interest income was $69 million for the year ended December 31, 2019, a 47% increase over $47 million for year ended December 31, 2018. Operational results include ten months of earnings for the Wichita Falls branches. Net interest margin was 4.80% and 4.46% for December 31, 2019 and 2018 respectively.

The Company recorded a $3 million provision for credit losses for the year ended December 31, 2019 compared to $1.3 million for the year ended December 31, 2018. The allowance for credit losses at December 31, 2019 was 1.18% of total loans compared to 1.60% at December 31, 2018, the decrease being attributable to the acquired Fidelity Bank loans being recorded at fair value with no carryover of their allowance for loan losses. In management’s opinion, the allowance is appropriate and is derived from consistent application of the methodology for establishing reserves for the loan portfolio.

Noninterest income was $6.2 million and $5.6 million for the years ended December 31, 2019 and 2018, respectively, an increase of 10%. 2019 increases were centered in a gain on sale of available for sale securities and incremental revenue generation from the Wichita Falls branches. December 31, 2018 noninterest income was bolstered by income from bank owned life insurance and a gain on sale of a drive-thru location.

Noninterest expense was $49 million and $36 million for the years ended December 31, 2019 and 2018, respectively, an increase of 36%. Increases were centered in salary and benefits and occupancy reflecting an increase in branches (Wichita Falls). Acquisition related expenses were $2.7 million for the year ended December 31, 2019 increased from $.5 million for the same period in 2018.

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First Bancshares of Texas, Inc.Consolidated Financial Statementsand Report of Independent AuditorsDecember 31, 2019 and 2018

(Dollar amounts in thousands except share and per share data)

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Crowe LLP Independent Member Crowe Global

Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors of First Bancshares of Texas, Inc. Midland, Texas

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of First Bancshares of Texas, Inc. (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited in accordance with auditing standards generally accepted in the United States of America, First Bancshares of Texas, Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) relevant to reporting objectives for the express purpose of meeting the regulatory requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) and our report dated April 10, 2020 expressed an unmodified opinion.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the auditing standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Crowe LLP

We have served as the Company's auditor since 2017.

Dallas, Texas April 10, 2020

First Bancshares of Texas, Inc.Consolidated Statements of Financial Condition

December 31, 2019 and 2018 (Dollar amounts in thousands except share and per share data)

Assets 2019 2018

Cash and due from banks $ 33,632 $ 17,839Federal funds sold 10,000 5,369Interest-bearing deposits in banks 158,443 62,917

Cash and cash equivalents 202,075 86,125

Securities available for sale 47,936 61,121Securities held to maturity (fair value is $59,171 and $76,075 at December 31,

2019 and 2018, respectively) 58,520 77,701Restricted investments carried at cost 3,629 2,253Loans held for sale 368 1,407Loans, net of allowance for loan losses of $15,196 and $13,614 at December

31, 2019 and 2018, respectively 1,269,873 834,662Premises and equipment, net 26,436 22,062Right of use asset, net 7,351 —Deferred tax asset, net 4,791 3,654Cash surrender value of life insurance 36,217 24,688Goodwill 54,913 —Core deposit intangible 7,279 345Other assets 13,954 9,714

Total assets $ 1,733,342 $ 1,123,732

Liabilities and Shareholders' EquityLiabilities

Noninterest-bearing 480,454 317,302Interest-bearing 948,311 625,687

Total deposits 1,428,765 942,989

Securities sold under agreements to repurchase 32,778 13,517Advances from Federal Home Loan Bank 677 4,475Subordinated debentures 3,093 3,093Lease liability 7,753 —Accrued expenses and other liabilities 11,072 5,749

Total liabilities 1,484,138 969,823

Shareholders' EquityPreferred stock, $1 par value; 5,000,000 shares authorized; 0 shares issued

and outstanding in 2019 and 2018, respectively — —Common stock, $1 par value; 35,000,000 shares authorized; 16,819,019 and

12,621,789 shares issued in 2019 and 2018, respectively 16,819 12,622Capital surplus 149,530 73,711Retained earnings 83,426 68,723Treasury stock, at cost, 54,944 and 0 shares in 2019 and 2018, respectively (1,044) —

Accumulated other comprehensive income (loss), net of tax 473 (1,147)

Total shareholders' equity 249,204 153,909

Total liabilities and shareholders' equity $ 1,733,342 $ 1,123,732

See Notes to Consolidated Financial Statements

2

First Bancshares of Texas, Inc.Consolidated Statements of Income

For the Years Ended December 31, 2019 and 2018 (Dollar amounts in thousands except share and per share data)

2019 2018

Interest IncomeLoans, including fees $ 76,467 $ 46,514Debt securities:

Taxable 2,296 2,758

Tax-exempt 864 1,145

Deposits in other banks 1,529 1,626Federal funds sold 174 149Other 264 133

Total interest income 81,594 52,325

Interest Expense

Deposits 11,685 5,325Subordinated debentures 166 157Securities sold under agreements to repurchase 377 92Advances from Federal Home Loan Bank 569 67

Total interest expense 12,797 5,641

Net Interest Income 68,797 46,684

Provision for Loan Losses 3,006 1,265

Net Interest Income After Provision for Loan Losses 65,791 45,419

Noninterest IncomeService charges on deposit accounts 1,589 1,252Other service charges and fees 1,804 1,182Gain on sales of loans 522 1,022Trust department income 573 550Gain on sales of securities 293 —Other income 1,426 1,603

Total noninterest income 6,207 5,609

Noninterest ExpenseSalaries and employee benefits 27,259 21,424

Occupancy and equipment 6,589 5,150

Professional Fees 3,681 2,843

IT and data processing 2,885 1,175

Advertising 1,275 893

FDIC assessment 352 488

Other expenses 7,301 4,292

Total noninterest expense 49,342 36,265

Income Before Income Taxes 22,656 14,763

Provision for Income Taxes 4,600 2,710

Net Income $ 18,056 $ 12,053


3

First Bancshares of Texas, Inc.Consolidated Statements of Income (Continued)

For the Years Ended December 31, 2019 and 2018(Dollar amounts in thousands except share and per share data)

2019 2018Per Share Data:Basic earnings per common share 1.14 0.96Diluted earnings per common share 1.13 0.95


4

First Bancshares of Texas, Inc.Consolidated Statements of Comprehensive IncomeFor the Years Ended December 31, 2019 and 2018

(Dollar amounts in thousands)

2019 2018

Net Income $ 18,056 $ 12,053

Other Comprehensive Income (Loss)Change in unrealized gains on investment securities available

for sale, before tax 2,051 (468)

Tax effect (431) 99

Other comprehensive income (loss) 1,620 (369)

Comprehensive Income $ 19,676 $ 11,684


5

First Bancshares of Texas, Inc.Consolidated Statements of Shareholders’ EquityFor the Years Ended December 31, 2019 and 2018

(Dollar amounts in thousands except share and per share data)

CommonStock

PreferredStock

CapitalSurplus

Balance, January 1, 2018 $ 12,599 $ — $ 73,198Comprehensive income:Net income — — —

Net change in other comprehensive loss — — —Exercise of stock options 10 — 48Sales of treasury stock — — 2

Shares issued in employee stock purchase plan 13 — 223Stock-based compensation — — 240

Balance, December 31, 2018 12,622 — 73,711Comprehensive income:Net income — — —

Net change in other comprehensive loss — — —Dividends declared — — —Exercise of stock options 24 — 15

Purchases of treasury stock, 79,376 shares — — —Sales of treasury stock — — —

Shares issued in employee stock purchase plan 10 — 175

Stock consideration for Fidelity purchase 4,163 — 74,936Stock-based compensation — — 693

Balance, December 31, 2019 $ 16,819 $ — $ 149,530


6

RetainedEarnings

TreasuryStock,at Cost

AccumulatedOther

ComprehensiveIncome (Loss)

TotalShareholders'

Equity

$ 56,670 $ (19) $ (778) $ 141,670

12,053 — — 12,053

— — (369) (369)— — — 58— 19 — 21

— — — 236— — — 240

68,723 — (1,147) 153,909

18,056 — — 18,056

— — 1,620 1,620(3,353) — — (3,353)

— 390 — 429

— (1,509) — (1,509)— — — —

— 75 — 260

— — — 79,099— — — 693

$ 83,426 $ (1,044) $ 473 $ 249,204


7

First Bancshares of Texas, Inc.Consolidated Statements of Cash Flows

For the Years Ended December 31, 2019 and 2018 (Dollar amounts in thousands)

2019 2018

Cash flows from operating activities:

Net income $ 18,056 $ 12,053

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation 2,728 2,267

Net accretion on loans (2,875) (47)

Provision for loan losses 3,006 1,265

Net amortization of securities (75) 382

Gain on sales of loans (522) (1,022)

Appreciation in cash surrender value life insurance (1,790) (707)

Net OREO (gains) losses on sales and valuation adjustments (23) —

Loss (gain) on disposition of fixed assets (17) (571)

Deferred income taxes (120) (351)

Stock-based compensation 693 240

Amortization of intangible assets 999 61

Origination of loans held for sale (23,300) (34,935)

Proceeds from sale of loans originated for sale 24,862 35,378

Net (gains) losses on sale of securities (293) —

Net change in operating leases 402 —

(Increase) decrease in other assets 3,168 (3,126)

(Increase) decrease in accrued expenses and other liabilities (861) 2,637

Net cash provided by (used in) operating activities 24,038 13,524

Cash flows from investing activities:

Proceeds from maturities, calls and pay downs of securities available for sale 609,828 392,025

Proceeds from sales of securities available for sale 13,884 —

Purchases of securities available for sale (600,515) (384,980)

Proceeds from maturities, calls and pay downs of securities held-to-maturity 19,162 18,672

Net change in loans (25,054) (72,014)

Net change in restricted investments carried at cost (1,376) (51)

Purchases and acquisitions of premises and equipment, net (1,501) (1,028)

Proceeds from sales of fixed assets 13 —

Proceeds from sales of foreclosed assets (426) 228

Acquisitions, net of cash received 27,684 —

Net cash provided by (used in) investing activities 41,699 (47,148)

8

First Bancshares of Texas, Inc.Consolidated Statements of Cash Flows

For the Years Ended December 31, 2019 and 2018(Dollar amounts in thousands except share and per share data)

2019 2018

Cash flows from financing activities:

Net increase in deposits $ 82,570 $ 3,468

Increase (decrease) in securities sold under agreements to repurchase 19,261 (4,097)

Increase (decrease) in Federal Home Loan Bank advances (50,798) (54)

Exercise of stock options 429 58

Purchases of treasury stock (1,509) —

Proceeds from sales of treasury stock — 22

Proceeds from employee stock purchase plan 260 236

Net cash provided by (used in) financing activities 50,213 (367)

Increase (decrease) in Cash and Cash Equivalents 115,950 (33,991)

Cash and Cash Equivalents, Beginning of Year 86,125 120,116

Cash and Cash Equivalents, End of Year $ 202,075 $ 86,125

Supplemental Information

Interest paid $ 13,455 $ 5,980

Income taxes paid 4,125 3,150

Non-cash Supplemental Information

Transfers from loans to foreclosed assets $ 137 $ 221

Dividends accrued 3,353 —

Shares issued in connection with acquisition 4,163,084 0


9

Note 1: Nature of Operation and Summary of Significant Accounting Policies

Nature of Operation

First Bancshares of Texas, Inc. (the Company) is a bank holding company whose principal activityis the ownership and management of its wholly owned subsidiary, FirstCapital Bank of Texas,N.A. (the Bank). The Bank's primary source of revenue is providing a variety of financial servicesto individuals and businesses primarily in the Texas cities of Amarillo, Burkburnett, Byers, Dallas,Fredericksburg, Henrietta, Horseshoe Bay, Lubbock, Marble Falls, Midland and Wichita Falls, andtheir respective surrounding areas. The Bank is subject to the regulation of certain federal andstate agencies and undergoes periodic examinations by those regulatory authorities.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and the Bank. Allsignificant intercompany transactions and balances have been eliminated in consolidation.

Uses of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates.

Cash Flows

Cash and cash equivalents include cash, balances due from banks and federal funds sold, all ofwhich mature within 90 days. Net cash flows are reported for customer loan and deposittransactions, interest-bearing deposits in other financial institutions, federal funds purchased andrepurchase agreements.

The Company may be required to maintain average balances on hand or with the FederalReserve Bank. The Company was not required to maintain a reserve as of December 31, 2019and 2018.

Interest-Bearing Deposits in Banks

Interest-bearing deposits in banks mature within three months and are carried at cost.

Securities

Debt securities that management has the positive intent and ability to hold to maturity areclassified as "held to maturity" and recorded at amortized cost. Securities not classified as held tomaturity are classified as "available for sale" and recorded at fair value, with unrealized gains andlosses excluded from earnings and reported in other comprehensive income, net of tax.Purchase premiums and discounts are recognized in interest income using the interest method.Gains and losses on the sale of securities are recorded on the trade date and are determinedusing the specific identification method.

First Bancshares of Texas, IncNotes to Consolidated Financial Statements

December 31, 2019 and 2018(Dollar amounts in thousands)

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Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least aquarterly basis, and more frequently when economic or market conditions warrant suchevaluation. For securities in an unrealized loss position, management considers the extent andduration of the unrealized loss, and the financial condition and near-term prospects of the issuer.Management also assesses whether it intends to sell, or it is more likely than not that it will berequested to sell, a security in an unrealized loss position before recovery of its amortized costbasis. If either of the criteria regarding intent or requirement to sell is met, the entire differencebetween amortized cost and fair value is recognized as impairment through earnings, For debtsecurities that do not meet the aforementioned criteria, the amount of impairment is split into twocomponents as follows: 1) OTTI related to credit loss, which must be recognized in the incomestatement and 2) OTTI related to other factors, which is recognized in other comprehensiveincome. The credit loss is defined as the difference between the present value of the cash flowsexpected to be collected and the amortized cost basis.

Investment in Partnerships

The Company accounts for the investment in partnerships based on the cost method ofaccounting, and amounts are presented in Other Assets on the Statement of Financial Condition.The total remaining commitment is $2,553 at December 31, 2019.

In 2016, the Company purchased a partnership interest in Valesco Fund II, L.P. for $126 andcommitted to purchase a total of $3,000. At December 31, 2019 and 2018, the carrying value ofthe investment in the partnership was $1,200, and $833, respectively.

In 2014, the Company purchased a partnership interest in Independent Bankers Capital Fund III,L.P. for $458 and committed to purchase a total of $1,500. At December 31, 2019 and 2018, thecarrying value of the investment in the partnership was $1,262, and $1,262, respectively.

In 2012, the Company committed to purchase a partnership interest in Pharos III, L.P. for a totalof $1,500. At December 31, 2019 and 2018, the carrying value of the investment in thepartnership was $1,163 and $878, respectively.

In 2011, the Company purchased a partnership interest in Valesco Commerce Street Capital, L.P.for $59 and committed to purchase a total of $500. At December 31, 2019 and 2018, the carryingvalue of the investment in the partnership was $76 and $76, respectively.

In 2009, the Company purchased a partnership interest in Independent Bankers Capital Fund II,L.P. for $37 and committed to purchase a total of $250. At December 31, 2019 and 2018, thecarrying value of the investment in the partnership was $0 and $28, respectively.

The above investments are reviewed periodically for impairment.

Restricted Investments Carried at Cost

Federal Home Loan Bank (FHLB), Federal Reserve Bank (FRB) and TIB-The IndependentBankersBank (TIB) stock are required investments for institutions that are members of the FHLB,FRB and TIB systems. The required investments in the common stock are based onpredetermined formulas, carried at cost and evaluated for impairment.



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Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost orfair value, as determined by outstanding commitments by investors. Net unrealized losses, if any,are recognized through a valuation allowance by charges to noninterest income. Gains andlosses on loan sales are recorded in noninterest income, and direct loan origination costs andfees are deferred at loan origination of the loan and are recognized in noninterest income uponsale of the loan. Loans are generally sold servicing released.

Loans

The Company grants mortgage, commercial and consumer loans to customers. A substantialportion of the loan portfolio is represented by commercial loans throughout the Texas cities ofAmarillo, Burkburnett, Byers, Dallas, Fredericksburg, Henrietta, Horseshoe Bay, Lubbock, MarbleFalls, Midland and Wichita Falls and their respective surrounding areas. The Company acquiredloans with a fair value of $410,231. Of those $30,938 were identified to be purchased creditimpaired. The ability of the Company's debtors to honor their contracts is dependent upon thegeneral economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or untilmaturity or payoff are reported at their outstanding principal balances adjusted for unearnedincome, charge offs, the allowance for loan losses, any unamortized deferred fees or costs onoriginated loans and unamortized premiums or discounts on purchased loans. For loansamortized at cost, interest income is accrued based on the unpaid principal balance.

The accrual of interest on all loans is generally discontinued at the time the loan is 90 days pastdue unless the credit is well secured and in process of collection. Past due status is based oncontractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at anearlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off arereversed against interest income. The interest on these loans is accounted for on the cash basisor cost recovery method, until qualifying for return to accrual. Loans are returned to accrualstatus when all the principal and interest amounts contractually due are brought current andfuture payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loanlosses are charged against the allowance when management believes the uncollectibility of aloan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Theallowance for loan losses is evaluated on a regular basis by management and is based uponmanagement's periodic review of the collectibility of the loans in light of historical experience, thenature and volume of the loan portfolio, adverse situations that may affect the borrower's ability torepay, estimated value of any underlying collateral and prevailing economic conditions.Allocations of the allowance may be made for specific loans, but the entire allowance is availablefor any loan that, in management’s judgment should be charged off.

The allowance consists of specific and general components. The specific component relates toloans that are individually classified as impaired. Commercial and commercial real estate loansare individually evaluated for impairment on a quarterly basis. For those loans that are classifiedas impaired, an allowance is established when the discounted cash flows (or collateral value or



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observable market price) of the impaired loan is lower than the carrying value of that loan. Thegeneral component is based on historical charge off experience and expected loss given defaultderived from the Company's internal risk rating process. Other adjustments may be made to theallowance for pools of loans after an assessment of internal or external influences on creditquality that are not fully reflected in the historical loss or risk rating data. Factors include thefollowing: levels of and trends in delinquencies and impaired loans; levels of and trends in chargeoffs and recoveries; migrations of loans to the classification of special mention, substandard ordoubtful; trends in volume and terms of loans; effects of any changes in risk selection andunderwriting standards; other changes in lending policies, procedures, and practices; experience,ability, and depth of lending management and other relevant staff; national and local economictrends and conditions; industry conditions; and effects of changes in credit concentration.

A loan is considered impaired when, based on current information and events, it is probable thatthe Company will be unable to collect the scheduled payments of principal or interest when dueaccording to the contractual terms of the loan agreement. Factors considered by management indetermining impairment include payment status, collateral value and the probability of collectingscheduled principal and interest payments when due. Loans that experience insignificantpayment delays and payment shortfalls generally are not classified as impaired. Managementdetermines the significance of payment delays and payment shortfalls on a case-by-case basis,taking into consideration all of the circumstances surrounding the loan and the borrower, includingthe length of the delay, the reasons for the delay, the borrower's prior payment record and theamount of the shortfall in relation to the principal and interest owed. Impairment is measured ona loan-by-loan basis for commercial and construction loans by either the present value ofexpected future cash flows discounted at the loan's effective interest rate, the loan's obtainablemarket price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment basedon the group's historical loss experience adjusted for changes in trends, conditions and otherrelevant factors that affect repayment of the loans. Accordingly, the Company does notseparately identify individual consumer and residential loans for impairment measurements,unless such loans are the subject of a restructuring agreement due to financial difficulties of theborrower.

A troubled debt restructured loan is a loan, which the Company, for reasons related to aborrower's financial difficulties, grants a concession to the borrower that the Company would nototherwise consider. The loan terms which have been modified or restructured due to a borrower'sfinancial difficulty include, but are not limited to, a reduction in the stated interest rate; anextension of the maturity at an interest rate below current market; a reduction in the face amountof the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals, renewals andrewrites. A troubled debt restructured loan would generally be considered impaired in the year ofmodification and will be assessed periodically for continued impairment.

Acquired loan portfolios are recorded net of a discount for the expected credit loss. Therefore noallowance is generally recorded on acquired loans unless the incurred losses are estimated to bemore than the remaining discount.

Premises and Equipment

Land is carried at cost. Buildings and equipment are carried at cost, less accumulateddepreciation computed on the straight-line method over the estimated useful lives of the assets orthe expected terms of the leases, if shorter.



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The estimated useful lives for each major depreciable classification of premises and equipmentare as follows:

Buildings and improvements 35-40 yearsLeasehold improvements 5-10 yearsEquipment 3-5 years

The Company leases certain properties and equipment under operating leases. For leases ineffect upon adoption of Accounting Standards Update 2016-02, “Leases (Topic 842)” at January1, 2019 and for any leases commencing thereafter, the Company recognizes a liability to makelease payments, the “lease liability”, and an asset representing the right to use the underlyingasset during the lease term, the “right-of-use asset”. The lease liability is measured at the presentvalue of the remaining lease payments, discounted at the Company’s incremental borrowing rate.The right-of-use asset is measured at the amount of the lease liability adjusted for the remainingbalance of any lease incentives received, any cumulative prepaid or accrued rent if the leasepayments are uneven throughout the lease term, any unamortized initial direct costs, and anyimpairment of the right-of-use-asset. Operating lease expense consists of a single lease costcalculated so that the remaining cost of the lease is allocated over the remaining lease term on astraight line basis.

Certain of the Company’s leases contain options to renew the lease; however, these renewaloptions are not included in the calculation of the lease liabilities as they are not reasonably certainto be exercised. The Company has made an accounting policy election to not apply therecognition requirements in Topic 842 to short-term leases. The Company has also elected tomake an accounting policy election for property leases to not include nonlease components suchas CAM charges ad property taxes when accounting for its leases. The Company’s leases are notcomplex; therefore there were no significant assumptions or judgements made in applying therequirements of Topic 842, including the determination of whether the contracts contained alease, the allocation of consideration in the contracts between lease and nonlease components,and the determination of the discount rates for the leases.

Cash Surrender Value of Life Insurance

The Company has purchased life insurance policies on certain key executives. Company ownedlife insurance is recorded at the amount that can be realized under the insurance contract at thebalance sheet date, which is the cash surrender value adjusted for other charges or otheramounts due that are probable at settlement.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase generally mature within one year from thetransaction date and are presented at the amount of cash received in connection with thetransaction. The Company may be required to provide additional collateral based on the fairvalue of the underlying securities.

Treasury Stock

Treasury stock is accounted for on the cost method, and consisted of 54,944 shares at December31, 2019. There was no treasury stock at December 31, 2018.



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Stock Based Compensation

At December 31, 2019 and 2018, the Company recognizes the fair value (calculated value) ofstock-based awards to employees as compensation cost over the requisite service period.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the asset has beensurrendered. Control over transferred assets is deemed to be surrendered when (1) the assetshave been isolated from the Company – put presumptively beyond the reach of the transferor andits creditors, even in bankruptcy or other receivership, (2) the transferee obtains the rights (free ofconditions that constrain it from taking advantage of that right) to pledge or exchange thetransferred assets, and (3) the Company does not maintain effective control over the transferredassets through an agreement to repurchase them before their maturity or the ability to unilaterallycause the holder to return specific assets.

Income Taxes

The Company accounts for income taxes in accordance with income tax accounting guidance(ASC 740, Income Taxes). The income tax accounting guidance results in two components ofincome tax expense: current and deferred. Current income tax expense reflects taxes to be paidor refunded for the current period by applying the provisions of the enacted tax law to the taxableincome or excess of deductions over revenues. The Company determines deferred income taxesusing the liability (or balance sheet) method. Under this method, the net deferred tax asset orliability is based on the tax effects of the differences between the book and tax bases of assetsand liabilities, and enacted changes in tax rates and laws are recognized in the period in whichthey occur. Deferred income tax expense results from changes in deferred tax assets andliabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based onthe weight of evidence available, it is more likely than not that some portion or all of a deferred taxasset will not be realized.

Tax positions are recognized if it is more likely than not, based on the technical merits, that thetax position will be realized or sustained upon examination. The term more likely than not meansa likelihood of more than 50 percent; the terms examined and, upon examination, also includeresolution of the related appeals or litigation processes, if any. A tax position that meets themore-likely-than-not recognition threshold is initially and subsequently measured as the largestamount of tax benefit that has a greater than 50 percent likelihood of being realized uponsettlement with a taxing authority that has full knowledge of all relevant information. Thedetermination of whether or not a tax position has met the more-likely-than-not recognitionthreshold considers the facts, circumstances and information available at the reporting date andis subject to management's judgment.

The Company recognizes interest and penalties on income taxes as a component of income taxexpense. There were no interest or penalties recorded during the years ended December 31,2019 and 2018. The Company files consolidated income tax returns with its subsidiary. With fewexceptions, the Company is no longer subject to U.S. federal or state income tax examinations bytax authorities for years before 2016.

Loan Commitments and Related Financial Instruments

Financial instruments include off-balance sheet credit instruments, such as commitments to makeloans and commercial letters of credit, issued to meet customer financing needs. The face



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amount for these items represents the exposure to loss, before considering customer collateral orability to repay. Such financial instruments are recorded when they are funded.

Earnings per Common Share

Basic earnings per common share is net income divided by the weighted average number ofcommon shares outstanding during the period. Employee Stock Purchase Plan (“ESPP”) sharesare considered outstanding for this calculation unless unearned. Diluted earnings per commonshare includes the dilutive effect of additional potential common shares issuable under stockoptions.

Dividend Restriction

Banking regulations require maintaining certain capital levels and may limit the dividends paid bythe bank to the holding company or by the holding company to shareholders.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business,are recorded as liabilities when the likelihood of loss is probable and an amount or range of losscan be reasonably estimated. Management does not believe there now are such matters that willhave a material effect on the financial statements.

Operating Segments

While the chief decision-makers monitor the revenue streams of the various products andservices, operations are managed, and financial performance is evaluated on a Company-widebasis. Operating segments are aggregated into one as operating results for all segments that aresimilar. Accordingly, all of the financial service operations are considered by management to beaggregated in one reportable operating segment.

Retirement Plans

Employee 401(k) and profit sharing plan expense is the amount of matching contributions.Deferred compensation and supplemental retirement plan expense allocates the benefits overyears of service.

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and otherassumptions, as more fully disclosed in a separate note. Fair value estimates involveuncertainties and matters of significant judgment regarding interest rates, credit risk,prepayments, and other factors, especially in the absence of broad markets for particular items.Changes in assumptions or in market conditions could significantly affect these estimates.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income, net ofapplicable income taxes. Other comprehensive income includes unrealized gains or losses onavailable for sale securities.



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Transfers between Fair Value Hierarchy Levels

Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observableinputs) and Level 3 (significant unobservable inputs) are recognized on the period ending date.

Other Intangible Assets

Intangible assets, such as core deposit intangibles, acquired in a purchase business combinationwith definite useful lives are amortized over their estimated useful lives to their estimated residualvalues. The core deposit intangible is amortized on a double-declining balance method over itsestimated useful life of 7 to 10 years.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.These reclassifications had no effect on prior year net income or total stockholders’ equity.

Adoption of New Accounting Standards

ASU 2016-02, Leases (Topic 842) - In February 2016, the FASB amended guidance thatrequires lessees recognize the following for all leases (with the exception of short-term leases) atthe commencement date (1) A lease liability, which is a lessee’s obligation to make leasepayments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset,which is an asset for the lease term. Under the new guidance, lessor accounting is largelyunchanged. Certain targeted improvements were made to align, when necessary, lessoraccounting with the lessee accounting model and Topic 606, Revenue from Contracts withCustomers. The new guidance also requires enhanced disclosure about an entity’s leasingarrangements.

The Company adopted Topic 842 in the first quarter of 2019, for which early adoption waspermitted. There was no cumulative effect adjustment required and prior period amounts continueto be reported in accordance with legacy GAAP.

The new guidance includes a number of optional transition-related practical expedients. Thepractical expedients relate to the identification and classification of leases that commenced beforethe effective date, initial direct costs for leases that commenced before the effective date, and theability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchasethe underlying asset. The company elected to apply these practical expedients and will, in effect,continue to account for leases that commence before the effective date in accordance withprevious GAAP unless the lease is modified, except that lessees are required to recognize aright-of-use asset and a lease liability for all operating leases at each reporting date based on thepresent value of the remaining minimum rental payments that were tracked and disclosed underprevious GAAP.

The adoption of this standard did not have a material effect on the Company’s operating results orfinancial condition. The effect of adopting this standard was an increase in assets of $7,351 andan increase in liabilities of $7,753 on our consolidated balance sheet. See Note 5 - Premises andEquipment for additional disclosures related to leases.

ASU 2016-01, Fair Value Measurement - In January 2016, the FASB issued ASU No. 2016-01,“Financial Instruments – Overall: Recognition and Measurement of Financial Assets and FinancialLiabilities” (“ASU 2016-01”). The guidance affects the accounting for equity investments, financial



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liabilities under the fair value option and the presentation and disclosure requirements of financialinstruments. ASU 2016-01 was effective for the Company on January 1, 2019 and resulted inseparate classification of equity securities previously included in available for sale securities onthe consolidated balance sheets with changes in the fair value of the equity securities captured inthe consolidated statements of income. See Note 3 – Securities for disclosures related to equitysecurities. Adoption of the standard also resulted in the use of an exit price rather than anentrance price to determine the fair value of loans not measured at fair value on a non-recurringbasis in the consolidated balance sheets. See Note 15 – Fair Value Disclosures for furtherinformation regarding the valuation of these loans.

Note 2: Business Combinations and Divestitures

The acquisition of FB Bancshares Holding Company and its subsidiary Fidelity Bank closedFebruary 28, 2019 after being initially announced on November 14, 2018 and receiving regulatoryapprovals on January 29, 2019. Fidelity Bank is a Texas chartered commercial bank, with anemphasis on commercial real estate. The merger agreement provided that Fidelity Bank wouldmerge with and into FirstCapital Bank of Texas. Fidelity Bank is headquartered in Wichita Falls,TX and operates six branches in Wichita Falls and surrounding communities. The acquisitionfurther diversified the Company's loan, customer, and deposit base. The total consideration paidwas $114,100 and included cash consideration of $35,001 and common stock issued of $79,099.

A summary of the fair values of assets acquired, liabilities assumed, consideration transferred,and the resulting goodwill is as follows:

Assets acquired:Cash and cash equivalents $ 62,685Securities 7,868Loans 410,231Premises and equipment 5,597Intangible assets (core deposit intangible) 7,933Other real estate 1,411Deferred tax asset 1,768Other 15,358

$ 512,851

Liabilities assumed:Deposits $ 403,205FHLB advances 47,000Other 3,459

$ 453,664

Fair value of net assets acquired $ 59,187Consideration Transferred 114,100Goodwill $ 54,913



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The acquisition was accounted for under the acquisition method of accounting in accordance withASC Topic 805, Business Combinations. The Company recognized goodwill on this acquisition of$54,913, which is nondeductible for tax purposes as this acquisition is a nontaxable transaction.The goodwill is calculated based on the fair values of assets acquired and liabilities assumed asof the acquisition date. The accounting for the acquisition has been finalized.

In connection with the acquisition, the Company acquired loans both with and without evidence ofcredit quality deterioration since origination. The acquired loans were initially recorded at fairvalue with no carry over of any allowance for loan and lease losses. Acquired loans weresegregated between those considered to be purchased credit impaired ("PCI") loans and thosewithout credit impairment at acquisition. The following table presents details of the estimated fairvalue of acquired loans at the acquisition date:

Loans, Excluding PCI Loans PCI Loans Total Loans

Real Estate1-4 Family Real Estate $ 62,225 $ 2,568 $ 64,793Commercial Real Estate 170,826 14,257 185,083Construction 12,014 213 12,227Land Development 21,973 — 21,973Consumer 7,524 103 7,627Commercial 85,439 8,006 93,445Other Loans 19,292 5,791 25,083

$ 379,293 $ 30,938 $ 410,231

The following presents information at the acquisition date for non-PCI loans acquired in the transaction:

Contractually required principal and interest payments $ 433,093Book balance at acquisition 384,725Contractual cash flows not expected to be collected 5,656Fair value at acquisition $ 379,293

The following presents information at the acquisition date for PCI loans acquired in thetransaction:

Contractually required principal and interest payments $ 37,535Contractual cash flows not expected to be collected (nonaccretable difference) 5,224Expected cash flows at acquisition 32,311Interest component of expected cash flows (accretable yield) 1,373Fair value of loans acquired with deterioration of credit quality $ 30,938



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Revenue and earnings of Fidelity, since the acquisition date, have not been disclosed as theacquired company was merged into the Company and separate financial information is not readilyavailable.

Expenses related to the acquisition, including professional fees and other transaction costs,totaling $2,952 were recorded in noninterest expense in the consolidated statements of incomeduring the year ended December 31, 2019.

Note 3: Securities

The amortized cost and appropriate fair value of the Company's available for sale securities, withgross unrealized gains and losses, are presented below.

December 31, 2019

Amortized Cost

Gross Unrealized

Gains

Gross Unrealized

Losses Fair ValueAvailable for Sale Securities

Debt securities:Mortgage-backed $ 41,897 $ 458 $ (15) $ 42,340Municipal bonds 5,440 156 — 5,596

Total available for sale securities $ 47,337 $ 614 $ (15) $ 47,936

Held to Maturity SecuritiesDebt securities:

Mortgage-backed $ 38,010 $ 199 $ (152) $ 38,057Municipal bonds 18,013 587 — 18,600U.S. Government and agency 2,497 17 — 2,514

Total held to maturity securities $ 58,520 $ 803 $ (152) $ 59,171

December 31, 2018

Amortized Cost

Gross Unrealized

Gains

Gross Unrealized

Losses Fair ValueAvailable for Sale Securities

Debt securities:Mortgage-backed $ 48,360 $ 175 $ (1,431) $ 47,104Municipal bonds 14,213 35 (231) 14,017

Total available for sale securities $ 62,573 $ 210 $ (1,662) $ 61,121

Held to Maturity SecuritiesDebt securities:

Mortgage-backed $ 48,559 $ 19 $ (1,640) $ 46,938Municipal bonds 24,163 83 (83) 24,163U.S. Government and agency 4,979 2 (7) 4,974

Total held to maturity securities $ 77,701 $ 104 $ (1,730) $ 76,075



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The amortized cost and fair value of available for sale securities and held to maturity securities atDecember 31, 2019 by contractual maturity, are shown below. Expected maturities will differ fromcontractual maturities because issuers may have the right to call or prepay obligations with orwithout call or prepayment penalties.

Available for Sale Held to MaturityAmortized

CostFair

ValueAmortized

CostFair

ValueWithin one year or less $ — $ — $ 5,638 $ 5,662Due from one to five years 2,043 2,084 8,061 8,224Due from five to ten years 2,898 3,005 5,180 5,502Due after ten years 499 507 1,631 1,726Mortgage-backed securities 41,897 42,340 38,010 38,057Totals $ 47,337 $ 47,936 $ 58,520 $ 59,171

There were no sales of securities available for sale in 2018. Proceeds from sales of debtsecurities and the associated gross gains and losses in 2019 are as follows:

2019 2018Proceeds $ 13,884 $ —Gross gains 293 —Gross losses — —

At December 31, 2019 and 2018, securities with carrying values of $56,885 and $55,710,respectively, were pledged to secure public deposits and for other purposes required or permittedby law.

The following tables show the gross unrealized losses and fair value of the Company'sinvestments with unrealized losses that are not deemed to be other-than-temporary impaired,aggregated by investment category and length of time that individual securities have been in acontinuous unrealized loss position at December 31, 2019 and 2018.

December 31, 2019Less than 12 Months 12 Months or More Total

Category Fair ValueUnrealized

Losses Fair ValueUnrealized


LossesHTM Municipal Bonds $ — $ — $ — $ — $ — $ —AFS Municipal Bonds — — — — — —HTM U.S. Government and agency — — — — — —HTM Mortgage-backed securities 4,117 (9) 14,150 (143) 18,267 (152)AFS Mortgage-backed securities 2,072 (15) 17 — 2,089 (15)Total $ 6,189 $ (24) $ 14,167 $ (143) $ 20,356 $ (167)



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December 31, 2018Less than 12 Months 12 Months or More Total

Category Fair ValueUnrealized



LossesHTM Municipal Bonds $ 7,617 $ (29) $ 3,491 $ (54) $ 11,108 $ (83)AFS Municipal Bonds 2,577 (17) 10,569 (213) 13,146 (230)HTM U.S. Government and agency 2,479 (7) — — 2,479 (7)HTM Mortgage-backed securities 33 — 46,293 (1,640) 46,326 (1,640)AFS Mortgage-backed securities 78 — 43,012 (1,432) 43,090 (1,432)Total $ 12,784 $ (53) $ 103,365 $ (3,339) $ 116,149 $ (3,392)

Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2019 and December 31, 2018, was $20,356 and $116,149, which is approximately 19 percent and 85 percent, respectively, of the Company's available for sale and held to maturity investment portfolio.

Mortgage-backed, U.S. Government and Agency, and Municipal Bonds

The unrealized losses on the Company's investment in mortgage-backed, U.S. Government,Agency and Municipal securities were caused by interest rate increases and increases inprepayment speeds. Accordingly, it is expected that the securities would not be settled at a priceless than the amortized cost basis of the Company's investments. Because the decline in marketvalue is attributable to changes in interest rates and increases in prepayment speeds and notcredit quality, and because the Company does not intend to sell the investments and it is notmore likely than not that the Company will be required to sell the investments before recovery oftheir amortized cost basis, which may be maturity, the Company does not consider thoseinvestments to be other-than-temporarily impaired at December 31, 2019 and 2018, respectively.



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Note 4: Loans and Allowances for Loan Losses

Portfolio segments of loans as of December 31 are as follows.

2019 2018Real Estate

1-4 Family Real Estate $ 261,178 $ 185,394Commercial Real Estate 490,098 318,991Construction 98,623 82,013Land Development 85,566 47,783

Consumer 14,601 7,655Commercial 288,001 176,951Leases Receivable 65 —Other Loans 46,937 29,489

Gross loans $ 1,285,069 $ 848,276Less Allowance for loan losses (15,196) (13,614)Loans, net $ 1,269,873 $ 834,662

The following tables present the balance in the allowance for loan losses and the recordedinvestment in loans based on portfolio segment and evaluation method as of December 31, 2019and 2018:

December 31, 2019

Beginning Balance

Provision (credit) for loan losses Charge-offs Recoveries

Ending Balance

1-4 Family Real Estate $ 2,119 $ 373 $ (35) $ — $ 2,457

Commercial Real Estate 5,795 582 (132) (33) 6,212

Construction 1,078 88 — 2 1,168

Land Development 950 427 — — 1,377

Consumer 191 187 (111) — 267

Commercial 3,076 1,284 (1,159) 92 3,293

Leases Receivable — — — — —Other Loans 405 65 (48) — 422

$ 13,614 $ 3,006 $ (1,485) $ 61 $ 15,196



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December 31, 2018

Beginning Balance

Provision (credit) for loan losses Charge-offs Recoveries

Ending Balance

1-4 Family Real Estate $ 2,750 $ (631) $ — $ — $ 2,119Commercial Real Estate 4,824 971 — — 5,795Construction 858 272 (52) — 1,078Land Development 754 196 — — 950Consumer 210 275 (307) 13 191Commercial 3,069 111 (150) 46 3,076Leases Receivable — — — — —Other Loans 334 71 — — 405

$ 12,799 $ 1,265 $ (509) $ 59 $ 13,614

The following tables present the balance in allowance for loan losses and the recordedinvestment in loans by portfolio segment and based on impairment method as of December 31,2019 and 2018:

December 31, 2019

ALLL Allocations Loan Evaluations

Current Year Individual Pooled PCI Total Individual Pooled PCI Total1-4 Family Real Estate $ — $ 2,457 $ — $ 2,457 $ 1,702 $ 257,513 $ 1,963 $ 261,178Commercial Real Estate — 6,212 — 6,212 6,948 469,404 13,746 490,098

Construction — 1,168 — 1,168 285 98,133 205 98,623

Land Development — 1,377 — 1,377 — 85,566 — 85,566

Consumer — 267 — 267 22 14,537 42 14,601

Commercial 119 3,174 — 3,293 9,419 271,565 7,017 288,001

Leases Receivable — — — — — 65 — 65

Other Loans — 422 — 422 — 43,440 3,497 46,937

$ 119 $ 15,077 $ — $ 15,196 $ 18,376 $1,240,223 $ 26,470 $1,285,069



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December 31, 2018

ALLL Allocations Loan Evaluations

Prior Year Individual Pooled PCI Total Individual Pooled PCI Total1-4 Family Real Estate $ 2 $ 2,117 $ — $ 2,119 $ 1,587 $ 183,807 $ — $ 185,394Commercial Real Estate — 5,795 — 5,795 5,726 313,265 — 318,991

Construction — 1,078 — 1,078 1,273 80,740 — 82,013

Land Development — 950 — 950 18 47,765 — 47,783

Consumer — 191 — 191 — 7,655 — 7,655

Commercial 739 2,337 — 3,076 20,533 156,418 — 176,951

Leases Receivable — — — — — — — —

Other Loans — 405 — 405 — 29,489 — 29,489

$ 741 $ 12,873 $ — $ 13,614 $ 29,137 $ 819,139 $ — $ 848,276

Internal Risk Categories

The Company monitors credit quality within its portfolio segments based on primary credit qualityindicators. All of the Company's loans are evaluated using pass rated or reservable criticized asthe primary credit quality indicator. The term reservable criticized refers to those loans that areinternally classified or listed by the Company as special mention, substandard, doubtful or loss.These assets pose an elevated risk and may have a high probability of default or total loss. In2019, the bank commissioned external loan review who reviewed approximately 60% of its loanportfolio, a combination of external loan review, and internal loan review.

The classifications of loans reflect a judgment about the risks of default and loss associated withthe loan. The Company reviews the ratings on credits on at least a quarterly basis. Ratings canbe changed at any time based on a change in inherent risk. Ratings are adjusted to reflect thedegree of risk and loss that is felt to be inherent in each credit as of each monthly reportingperiod. The methodology is structured so that specific allocations are increased in accordancewith deterioration in credit quality (and a corresponding increase in risk and loss) or decreased inaccordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Credits rated special mention show clear signs of financial weaknesses or deterioration in creditworthiness, however, such concerns are not so pronounced that the Company generally expectsto experience significant loss within the short-term. Such credits typically maintain the ability toperform within standard credit terms and credit exposure is not as prominent as credits ratedmore harshly.

Credits rated substandard are those in which the normal repayment of principal and interest maybe, or has been, jeopardized by reason of adverse trends or developments of a financial,managerial, economic or political nature, or important weaknesses exist in collateral. A protractedworkout on these credits is a distinct possibility. Prompt corrective action is therefore required tostrengthen the Company's position, and/or to reduce exposure and to assure that adequateremedial measures are taken by the borrower. Credit exposure becomes more likely in suchcredits and a serious evaluation of the secondary support to the credit is performed.

Credits rated doubtful are those in which full collection of principal appears highly questionable,and which some degree of loss is anticipated, even though the ultimate amount of loss may notyet be certain and/or other factors exist which could affect collection of debt. Based upon



25

available information, positive action by the Company is required to avert or minimize loss.Credits rated doubtful are generally also placed on nonaccrual.

Pass rated refers to loans that are not considered criticized. In addition to this primary creditquality indicator, the Company uses other credit quality indicators for certain types of loans.

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Real Estate: The Company's real estate portfolio is comprised primarily of homogenous loanssecured by residential and commercial real estate. Repayment of these loans is primarilydependent on the personal income and credit rating of the borrowers and successful operationsof the property securing the loan or the business conducted on the property securing the loan.Credit risk in residential loans can be impacted by economic conditions within the Company'smarket areas that might impact either property values or a borrower's personal income. Risk ismitigated by the fact that the loans are of smaller individual amounts and spread over a largenumber of borrowers. Commercial real estate loans are viewed primarily as cash flow loans andsecondarily as loans secured by real estate. Credit risk in these loans may be impacted by thecreditworthiness of a borrower, property values and the local economies in the Company's marketareas.

Consumer: The consumer loan portfolio consists of various term and line of credit loans such asautomobile loans and loans for other personal purposes. Repayment for these types of loans willcome from a borrower's income sources that are typically independent of the loan purpose.Credit risk is driven by consumer economic factors (such as unemployment and generaleconomic conditions in the Company's market area) and the creditworthiness of a borrower.

Commercial: The commercial portfolio includes loans to commercial customers for use infinancing working capital needs, equipment purchases and expansions. The loans in thiscategory are repaid primarily from the cash flow of a borrower's principal business operation.Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditionsthat impact the cash flow stability from business operations.

Other: Other loans are subject to underwriting standards and processes similar to commercialloans. These loans are based primarily on the identified cash flows of the borrower andsecondarily on the underlying collateral provided by the borrower. Most loans are secured by theassets being financed and may include personal guarantees.



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The following tables set forth information regarding the internal classes of the loan portfolio byprimary credit quality indicator as of December 31, 2019 and 2018:

December 31, 2019Internal Loan Grade

PassSpecial Mention Substandard Doubtful Loss PCI Total

Real Estate

1-4 Family Real Estate $ 248,575 $ 3,276 $ 7,364 $ — $ — $ 1,963 $ 261,178

Commercial Real Estate 471,572 513 4,267 — — 13,746 490,098

Construction 98,133 — 285 — — 205 98,623

Land Development 84,529 — 1,037 — — — 85,566

Consumer 14,015 10 534 — — 42 14,601

Commercial 269,995 713 10,157 119 — 7,017 288,001

Leases Receivable 65 — — — — — 65

Other Loans 43,036 — 404 — — 3,497 46,937

Total $1,229,920 $ 4,512 $ 24,048 $ 119 $ — $ 26,470 $1,285,069

December 31, 2018Internal Loan Grade

PassSpecial Mention Substandard Doubtful Loss PCI Total

Real Estate

1-4 Family Real Estate $ 181,755 $ 1,218 $ 2,421 $ — $ — $ — $ 185,394

Commercial Real Estate 309,839 6,939 2,213 — — — 318,991

Construction 80,345 395 1,273 — — — 82,013

Land Development 47,577 — 206 — — — 47,783

Consumer 6,601 — 1,054 — — — 7,655

Commercial 152,922 534 23,285 — — — 176,741

Leases Receivable — — — — — — —

Other Loans 29,646 10 43 — — — 29,699

Total $ 808,685 $ 9,096 $ 30,495 $ — $ — $ — $ 848,276

The Company evaluates the loan risk grading system definitions and allowance for loan lossmethodology on an ongoing basis. No significant changes were made to either during the yearsended December 31, 2019 and 2018.



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The following tables present the Company's loan portfolio aging analysis of the recordedinvestment in loans as of December 31, 2019 and 2018.

December 31, 2019

30-89 DaysPast Due

Still Accruing

90 Daysand Greater

Still Accruing

Nonaccrual Current Total Loans

Real Estate

1-4 Family Real Estate $ 1,980 $ — $ 1,337 $ 255,898 $ 259,215

Commercial Real Estate 1,851 — 66 474,435 476,352

Construction 275 — 285 97,859 98,419

Land Development 513 — — 85,053 85,566

Consumer 410 — 22 14,127 14,559

Commercial 1,372 — 5,890 269,207 276,469

Leases Receivable 280 — — 47,674 47,954

Other Loans — — — 65 65

PCI 277 — 1,489 24,704 $ 26,470

Total $ 6,958 $ — $ 9,089 $ 1,269,022 $ 1,285,069

December 31, 2018

30-89 DaysPast Due

Still Accruing

90 Daysand Greater

Still Accruing

Nonaccrual Current Total Loans

Real Estate

1-4 Family Real Estate $ 263 $ — $ 1,501 $ 183,630 $ 185,394

Commercial Real Estate 504 — — 318,487 318,991

Construction 220 — 1,273 80,520 82,013

Land Development 271 — 18 47,494 47,783

Consumer 356 — — 7,299 7,655

Commercial 1,359 439 11,889 163,264 176,951

Leases Receivable — — — — —

Other Loans 39 — — 29,450 29,489

PCI — — — — $ —

Total $ 3,012 $ 439 $ 14,681 $ 830,144 $ 848,276

A loan is considered impaired, in accordance with the impairment accounting guidance(ASC 310-10-35-16), when based on current information and events, it is probable that theCompany will be unable to collect all amounts due from the borrower in accordance with thecontractual terms of the loan. Impaired loans include nonperforming commercial loans but alsoinclude loans modified in troubled debt restructurings when concessions have been granted to



28

borrowers experiencing financial difficulties. These concessions could include a reduction in theinterest rate on the loan, payment extensions, forgiveness of principal, forbearance or otheractions intended to maximize collection.

The following tables present impaired loans by class of loans for the years ended December 31,2019 and 2018:

December 31, 2019Unpaid

Principal Balance

Recorded Investment

Related Allowance

Average Recorded Investment

Interest Income

RecognizedWith no related allowance:

Real Estate:

1-4 Family Real Estate $ 1,702 $ 1,702 $ — $ 1,951 $ 16

Commercial Real Estate 6,948 6,948 — 7,056 320

Construction 285 285 — 262 —

Land development — — — — —

Consumer 22 22 — 53 —

Commercial 9,299 9,243 — 12,923 187


Other loans — — — — —

Total: $ 18,256 $ 18,200 $ — $ 22,245 $ 523

With a related allowance:

Real Estate:

1-4 Family Real Estate $ — $ — $ — $ — $ —

Commercial Real Estate — — — — —

Construction — — — — —


Consumer — — — — —

Commercial 119 119 119 124 8



Total: $ 119 $ 119 $ 119 $ 124 $ 8

Totals $ 18,375 $ 18,319 $ 119 $ 22,369 $ 531



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December 31, 2018Unpaid

Principal Balance

Recorded Investment

Related Allowance

Average Recorded Investment

Interest Income

RecognizedWith no related allowance:

Real Estate:

1-4 Family Real Estate $ 1,501 $ 1,501 $ — $ 1,697 $ 39

Commercial Real Estate 5,725 5,725 — 5,776 348

Construction 1,273 1,273 — 1,340 39

Land development 18 18 — 46 —


Commercial 11,297 11,297 — 13,489 1,333



Total: $ 19,814 $ 19,814 $ — $ 22,348 $ 1,759

With a related allowance:

Real Estate:

1-4 Family Real Estate $ 86 $ 86 $ 2 $ 88 $ 3

Commercial Real Estate — — — —

Construction — — — — —



Commercial 9,237 9,237 739 9,976 362



Total: $ 9,323 $ 9,323 $ 741 $ 10,064 $ 365

Totals $ 29,137 $ 29,137 $ 741 $ 32,412 $ 2,124

At December 31, 2019 and 2018, the Company had a number of loans that were modified introubled debt restructurings, some of which still may be impaired. The modification of terms ofsuch loans included one or a combination of the following: an extension of maturity, a reductionof the stated interest rate or a permanent reduction of the recorded investment in the loan.



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The following table presents information regarding newly designated troubled debt restructuringsby class as of December 31, 2019 and 2018. Newly classified troubled debt restructurings:

December 31, 2019

Numberof Loans

Pre-modification

Recorded Balance

Post-modification

Recorded Balance

Real Estate:

1-4 Family Real Estate 1 $ 71 $ 71

Commercial Real Estate 3 5,578 5,486

Construction — — —

Land development — — —

Consumer 1 65 14

Commercial 3 2,732 2,685

Leases Receivable — — —

Other loans — — —

8 $ 8,446 $ 8,256

December 31, 2018

Numberof Loans

Pre-modification

Recorded Balance

Post-modification

Recorded Balance

Real Estate:

1-4 Family Real Estate — $ — $ —

Commercial Real Estate 2 920 810



Consumer — — —

Commercial 4 3,212 2,995

Leases Receivable — — —

Other loans — — —

6 $ 4,132 $ 3,805

In 2019, one Commercial loan had a partial loss and one Commercial loan had a full loss within12 months of renegotiation. These loans have a carrying balance of $24 and $0, respectively. In2018, there were no loans that had a loss within 12 months of renegotiation. The Bank has nocommitments to loan additional funds to borrowers whose loans have been modified.



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The following table presents information regarding all troubled debt restructurings with reserves,by class, for the years ended December 31, 2019 and 2018.

December 31, 2019

Numberof Loans

UnpaidPrincipal Balance Reserve

Real Estate:

1-4 Family Real Estate 4 $ 349 $ —

Commercial Real Estate 6 6,338 —



Consumer 2 30 —

Commercial 11 3,819 41

Leases Receivable — — —Other loans 3 101 —

26 $ 10,637 $ 41

December 31, 2018

Numberof Loans

UnpaidPrincipal Balance Reserve

Real Estate:

1-4 Family Real Estate 1 $ 157 $ —

Commercial Real Estate 3 5,097 —


Land development 1 18 —

Consumer — — —

Commercial 10 8,286 51

Leases Receivable — — —Other loans — — —

15 $ 13,558 $ 51

Purchase Credit Impaired Loans

The Company has loans that were acquired for which there was, at acquisition, evidence ofdeterioration of credit quality since origination and for which it was probable, at acquisition, that allcontractually required payments would not be collected. The outstanding contractually required



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principal and interest and the carrying amount of these loans included in the balance sheetamounts of loans receivable are as follows:

2019Contractually required principal and interest payments

Real Estate1-4 Family Real Estate $ 2,382Commercial Real Estate 15,454Construction 219Land Development —

Consumer 99Commercial 8,189Other Loans 4,545

Outstanding contractually required principal and interest $ 30,888Gross carrying amount included in loans receivable $ 26,470

The changes in accretable yield in regard to loans transferred at acquisition for which it was probable that all contractually required payments would not be collected are as follows:

2019Accretable yield, beginning balance $ —

Additions 1,373Accretion (845)Reclassification from nonaccretable to accretable yield 359Disposals (119)

Accretable yield, ending balance $ 768

Note 5: Premises and Equipment

A summary of the cost and accumulated depreciation of premises and equipment is presentedbelow:

2019 2018Land $ 4,047 $ 3,049Projects and Construction in Progress 358 298Bank Premises 27,133 22,582Furniture, software and equipment 11,497 10,050Premises and equipment, at cost 43,035 35,979Accumulated depreciation (16,599) (13,917)Net premises and equipment $ 26,436 $ 22,062



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Depreciation expense was $2,728 and $2,267 for the years ended December 31, 2019 and 2018, respectively.

The company leases certain premises and equipment under operating leases. At December 31,2019, the Company had lease liabilities totaling $7,753 and right-of-use assets totaling $7,351related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilitiesand other assets, respectively. For the year ended December 31, 2019, the weighted averageremaining lease term for operating leases was 7.1 years and the weighted average discount rateused in the measurement of operating lease liabilities was 3.25%.

Lease costs were as follows:

December 31, 2019Operating Lease Cost 1,221Short-term Lease Cost 129Variable Lease Cost —

Total Lease Cost 1,350

Rent expense for the year ended December 31, 2018, prior to the adoption of ASU 2016-02, was$1,214. At December 31, 2019, the Company had leases that had not yet commenced, but willcreate approximately $956 of additional lease liabilities and right-of-use assets for the Company.

Pursuant to the terms of noncancellable lease agreements in effect at December 31, 2019,pertaining to banking premises and equipment, future minimum rent commitments under variousoperating leases and reconciliation of the undiscounted cash flows to the total operating leaseliability is as follows:

Lease Payments Due: December 31, 20192020 $ 1,3812021 1,3752022 1,3432023 1,1732024 1,075Thereafter 2,691

Total Undiscounted Cash Flows $ 9,038Discount on Cash flows (1,285)

Total Lease Liability $ 7,753

Total rent expense for the years ended December 31, 2019 and 2018 was $1,602 and $1,214, respectively.

The Company maintains two lease transactions with related parties. Both of these related partiesare not considered variable interest entities.



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Note 6: Deposits

The aggregate amount of time deposits in denominations of $250 or more at December 31, 2019and 2018 were $157,764 and $86,379, respectively. At December 31, 2019, the scheduledmaturities of time deposits were as follows:

2020 $ 473,8272021 17,1292022 16,1062023 2,6372024 and thereafter 902

$ 510,601

During 2019, the Company issued a callable CD for $10,000, with a maturity of 3 years, and thisCD is included in the table above. Including this callable CD in 2019, the Company had brokereddeposits of $30,002 and $0 at December 31, 2019 and 2018 respectively.

Note 7: Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase amounted to $32,778 and $13,517 atDecember 31, 2019 and 2018, respectively. Such agreements mature on a daily basis and aresecured by U.S. government securities with a fair value of $43,299 and $38,748 as of 2019 and2018, respectively.

Note 8: Advances from Federal Home Loan Bank

At year-end, advances from the Federal Home Loan Bank were as follows:

2019 2018Maturities 12/16/2021 through 12/16/2026 at the end of 2019, at fixed rates from 1.971% to 2.695%, averaging 2.317% $ 677

Maturities 03/07/2019 through 12/16/2026 at the end of 2018, at fixed rates from 1.338% to 2.695%, averaging 2.059% $ 4,475

The advances were collateralized by $448,678 and $284,882 of first lien mortgage loans under a blanket line arrangement at year-end 2019 and 2018.



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Maturities of FHLB advances as of December 31, 2019 are as follows:

2020 $ —2021 992022 —2023 —2024 160Thereafter 418

$ 677

Note 9: Subordinated Debentures

On December 30, 2003, the Company completed the placement of $3,093 in subordinateddebentures to First Bancshares of Texas Statutory Trust I (the Trust). The Trust funded thepurchase of the subordinated debentures through the sale of trust preferred securities to FirstTennessee Bank National Association with a liquidation value of $3,093.

Using interest payments made by the Company on the debentures, the Trust began payingquarterly dividends to preferred security holders on June 17, 2004. The annual percentage rateof the interest payable on the subordinated debentures and distributions payable on the preferredsecurities is 3-Month LIBOR plus 2.85 percent (4.75 percent and 5.64 percent at December 31,2019 and 2018, respectively). Also, the interest rate cannot exceed the maximum rate permittedby New York law.

Dividends on the preferred securities are cumulative and the Trust may defer the payments for upto five years. The preferred securities mature in March 2034.

Subordinated debt may be included in regulatory Tier I capital subject to a limitation that suchamounts do not exceed 25 percent of Tier I capital. The remainder of subordinated debt isincluded in Tier II capital. There is no limitation for inclusion of subordinated debt in total risk-based capital and, as such, all subordinated debt was included in total risk-based capital.

For the years ended December 31, 2019 and 2018, interest expense on the subordinateddebentures was $166 and $157, respectively.

Note 10: Lines of Credit

The Bank has a line of credit with a correspondent bank totaling $15,000 at a variable interestrate quoted on the day any advances are drawn. The terms provide for the unsecured purchaseof federal funds. The agreement does not contain a stated expiration date, but may beterminated at any time at the discretion of the correspondent bank. As of December 31, 2019 and2018, no advances were outstanding under this agreement.

The Bank has a second line of credit with a correspondent bank totaling $10,000 at a variableinterest rate quoted on the day any advances are drawn. The terms provide for the unsecuredpurchase of federal funds for the first ten (10) days and on the eleventh (11) day, the Companymust furnish collateral in the form of marketable securities. The agreement expires August 1,2020. As of December 31, 2019 and 2018, no advances were outstanding under this agreement.



36

The Bank has a third line of credit with a correspondent bank totaling $20,000 at a variableinterest rate quoted on the day any advances are drawn. The terms provide for the unsecuredpurchase of federal funds for the first ten (10) days and on the eleventh (11) day, the Companymust furnish collateral in the form of government securities. The agreement expires April 25,2020. As of December 31, 2019 and 2018, no advances were outstanding under this agreement.

Note 11: Income Taxes

Income tax expense for the years ended December 31, 2019, and 2018 consisted of thefollowing:

2019 2018Income tax expense:Current federal income tax $ 4,613 $ 3,033Current state income tax 107 28Deferred federal income tax (120) (351)Income tax expense $ 4,600 $ 2,710

A reconciliation of income tax expense at the statutory rate of the Company's actual income tax expense is shown below.

2019 2018Income tax expense at the statutory rate $ 4,758 $ 3,094State income taxes 107 28Nontaxable earnings (388) (461)Nondeductible expenses 153 165Other (30) (116)Provision for income tax $ 4,600 $ 2,710



37

The tax effects of temporary differences related to deferred taxes shown on the consolidated statements of financial condition were:

2019 2018Deferred tax assets:

Allowance for loan losses $ 3,191 $ 2,859Fair market value on loans 1,535 17Benefits payable 674 303Self insurance 205 167Other Real Estate 86 —Unrealized loss on available-for-sale securities — 305Lease Liability 1,628 —Other 655 84

$ 7,974 $ 3,735Deferred tax liabilities:

Premises and equipment $ 60 $ 81Unrealized gain on available-for-sale securities 126 —Lease Right to use asset 1,544 —Core Deposit Intangible 1,453 —

$ 3,183 $ 81

Net deferred tax asset $ 4,791 $ 3,654

The company is subject to U.S. federal income tax and state income tax. The company is no longer subject to examination by taxing authorities for years prior to 2016. The company does not have any material uncertain tax positions and does not have any interest and penalties recorded in the statement of operations or balance sheet for the years ended December 31, 2019 and 2018.

Note 12: Restrictions on Dividends & Minimum Regulatory Capital Requirements

Restrictions on Dividends

Federal and state banking regulations place certain restrictions on dividends paid by the Bank tothe Company. Such regulations generally restrict cash dividends to the Bank's available currentyear earnings plus remaining earnings not paid to the Company in dividends from the past twoyears. In addition, dividends paid by the Bank would be prohibited if the effect thereof wouldcause the Bank's capital to be reduced below applicable minimum capital requirements. As ofDecember 31, 2019, $18,572 of retained earnings is available to pay dividends.

Minimum Regulatory Capital Requirements

Our capital management consists of providing equity to support our current and future operations.We are subject to various regulatory capital requirements administered by federal and statebanking agencies. Failure to meet minimum capital requirements can initiate certain mandatoryand possible additional discretionary actions by regulators that, if undertaken, could have a direct



38

material effect on the Company’s or FirstCapital Bank’s financial statements. Under capitaladequacy guidelines and the regulatory framework for prompt corrective action, the Companyand the Bank each must meet specific capital guidelines that involve quantitative measures oftheir assets, liabilities and certain off balance sheet items as calculated under regulatoryaccounting practices. The capital amounts and classification are also subject to qualitativejudgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulations to ensure capital adequacy require theCompany and the Bank to maintain minimum amounts and ratios of total, Tier 1, and commonequity Tier 1 capital to risk weighted assets, and of Tier 1 capital to average assets. Managementbelieves, as of December 31, 2019, the Company and the Bank meet all capital adequacyrequirements to which they are subject.

As of December 31, 2019, the Bank’s capital ratios exceeded those levels necessary to becategorized as “well capitalized” under the regulatory framework for prompt corrective action. Tobe categorized as “well capitalized”, FirstCapital Bank must maintain minimum total risk based,common equity Tier 1 risk based, Tier 1 risk based, and Tier 1 leverage ratios. There are noconditions or events since December 31, 2019 that management believes would have changedFirstCapital Bank’s category.

Basel III Capital Rules

In July 2013, the three federal bank regulatory agencies jointly published final rules (the Basel IIICapital Rules) establishing a new comprehensive capital framework for U.S. bankingorganizations. The rules implement the Basel Committee's December 2010 framework known as"Basel III" for strengthening international capital standards as well as certain provisions of theDodd Frank Act. These rules substantially revise the risk based capital requirements applicableto bank holding companies and depository institutions, compared to the current U.S. risk basedcapital rules. The Basel III Capital Rules define the components of capital and address otherissues affecting the numerator in banking institutions' regulatory capital ratios. These rules alsoaddress risk weights and other issues affecting the denominator in banking institutions' regulatorycapital ratios and replace the existing risk weighting approach with a more risk sensitiveapproach. The Basel III Capital Rules were effective for the Company on January 1, 2015(subject to a four year phase in period).

The Basel III Capital Rules, among other things, (i) introduce a new capital measure called"Common Equity Tier 1" (CET1), (ii) specify that Tier 1 capital consist of CET1 and "AdditionalTier 1 Capital" instruments meeting specified requirements, (iii) define CET1 narrowly by requiringthat most deductions/adjustments to regulatory capital measures be made to CET1 and not to theother components of capital and (iv) expand the scope of the deductions/adjustments ascompared to existing regulations.

Under the Basel III Capital Rules, the minimum capital ratios as of December 31, 2019, are asfollows:

4.5 percent CET1 to risk weighted assets6.0 percent Tier 1 capital to risk weighted assets8.0 percent Total capital to risk weighted assets4.0 percent Minimum leverage ratio



39

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015, andphased in over a four year period (beginning at 40 percent on January 1, 2015, and an additional20 percent per year thereafter). Under the new rule, in order to avoid limitations on capitaldistributions, including dividend payments and certain discretionary bonus payments to executiveofficers, a banking organization must hold a capital conservation buffer composed of CET1 capitalabove its minimum risk based capital requirements. The implementation of the capitalconservation buffer began on January 1, 2016, at the 0.625 percent level and phased in over afour year period (increasing by that amount on each subsequent January 1 until it reached 2.500percent on January 1, 2019). The capital conservation buffer was 2.500% as of December 31,2019.

The Bank's actual capital amounts and ratios are also presented in the following table. The capitalconservation buffer is not included in the table below. It is no longer applicable to disclose theconsolidated capital requirements due to the Federal Reserve policy statement issued in August2018, for $1B-$3B banks.



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ActualMinimum capitalRequirement

Minimum to be WellCapitalized Under

PromptCorrective Action

ProvisionsAmount Ratio Amount Ratio Amount Ratio

As of December 31, 2019Total capital (to risk-weight assets):

Consolidated $ 204,927 14.2 % $ 151,130 N/A % $ N/A N/A %Bank 191,854 13.3 151,083 10.5 143,888 10.0

Tier I Capital (to risk-weighted assets):

Consolidated 189,539 13.2 122,343 N/A N/A N/ABank 176,466 12.3 122,305 8.5 115,111 8.0

Common Equity Tier I (to risk-weighted assets):


Tier I Capital (to average assets):


As of December 31, 2018Total capital (to risk-weight assets):

Consolidated $ 169,358 18.2 % $ 74,367 N/A % $ N/A N/A %Bank 128,732 13.9 74,351 8.0 92,938 10.0

Tier I Capital (to risk-weighted assets):


Common Equity Tier I (to risk-weighted assets):


Tier I Capital (to average assets):




41

Note 13: Employee Benefit Plans

401(k) Plan

The Company has a 401(k) plan in which substantially all employees may participate. TheCompany matches employees' contributions based on a percentage of salary contributed byparticipants. The Company's expense for the plan was $929 and $712 for the years endedDecember 31, 2019 and 2018, respectively.

Employee Stock Purchase Plan

The Company designated 500,000 shares for an employee stock purchase plan effective August1, 2011, allowing all employees of the Company an opportunity to purchase shares of commonstock of the Company through an after-tax payroll deduction withheld from each paycheck.Payroll deductions are transferred into an escrow account until they have enough to purchase250 shares, which is the minimum number of shares that can be purchased through this program.The Company matches 25 percent of employees' contributions each payroll period up to onehundred twenty-five dollars per payroll period. The Company's expense for the plan was $57 and$48 for the years ended December 31, 2019 and 2018, respectively.

Stock Option Plan

A summary of changes in the Company’s non-vested stock options under the 2007 stock optionplan for the year ended December 31, 2019 were as follows:

Number ofShares

Weighted-Average Grant

Date ValueNon-vested options, December 31, 2018 233,000 $ 5.48Granted 419,000 4.74Vested (57,500) 5.16Cancelled (7,900) 5.94Non-vested options, December 31, 2019 586,600 $ 4.79

The Company's 2007 stock option plan was updated in 2018.The Company may grant options to purchase its common stock to its directors, officers and employees for up to 1,300,000 shares of common stock. These stock option grants are primarily incentive-based in order to attract and retain qualified and highly productive employees. The exercise price of each stock option is determined on the date of the grant. The Company's stock option agreements are for a maximum term of ten years. The options vest over a period of three to five years following the date of the grant.

In accordance with authoritative accounting guidance, the Company recognizes compensation cost relating to share-based payment transactions in the consolidated financial statements with measurement based upon the fair value of the equity or liability instruments issued. For the years ended December 31, 2019 and 2018, the Company recognized $693 and $263, respectively, in compensation expense for stock options, which is included as a part of salaries and employee benefits on the consolidated statements of income.



42

A summary of changes in the Company’s stock options under the 2007 stock option plan for theyears ended December 31, 2019 and December 2018, were as follows:

December 31,2019 2018

Shares

Weighted-averageExercise

Price

Weighted-average

RemainingContractual

Term(In Years)

Weighted-average


Price

Weighted-average


Term(In Years)

Outstanding,January 1 384,250 $ 13.86 267,500 $ 11.83Granted 419,000 18.97 131,000 17.28Exercised (44,850) 9.51 (10,250) 5.61Cancelled (7,900) 13.47 (4,000) 11.30Outstanding,December 31 750,500 $ 16.97 8.10 384,250 $ 13.86 6.11

Exercisable,December 31 163,900 $ 12.74 5.38 151,250 $ 10.73 4.80

December 31,2019 2018

Aggregate intrinsic value of options exercised $ 423 $ 115Cash received from option exercises 429 58Tax benefit realized from option exercises 89 24Weighted average fair value of options granted 4.74 4.73

The fair value of each option award is estimated on the date of grant using a Black-Scholesoption valuation model that uses the assumptions noted in the following table. Expected volatilityis based on a combination of historical volatility of the Company's stock, and indices of otherfinancial institutions. The Company uses historical data to estimate option exercise andemployee termination within the valuation model; separate groups of employees that have similarhistorical exercise behavior are considered separately for valuation purposes. The expected termof options granted represents the period of time that options are expected to be outstanding; therange given below results from certain groups of employees exhibiting different behavior. Therisk-free rate for periods within the contractual life of the option is based on the U.S. Treasuryyield curve in effect at the time of grant. The dividend yield assumption is based on theCompany's history and expectation of dividend payouts.



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The fair value of the stock options granted was determined using the following weighted averageassumptions:

2019 2018Dividend yield — —Expected life 9.2 years 9.7 yearsExpected volatility 15.26 % 16.24 %Risk-free interest rate 2.54 % 2.84 %

The following table summarizes information concerning outstanding and vested stock options as of December 31, 2019:

Options Outstanding Options Exercisable

Ranges ofExercise Prices Shares

Weighted-average


Life(In Years)


PriceShares

Exercisable


Price$9.00-$10.00 7,000 2.78 9.61 7,000 9.61$10.00-$11.00 65,000 3.20 10.10 65,000 10.10$11 00-$12.00 12,500 5.06 11.92 10,300 11.92$13.00-$14.00 37,000 6.06 13.09 22,200 13.09$14.00-$15.00 30,000 7.22 14.49 12,000 14.49$15.00-$16.00 50,000 7.59 15.03 20,000 15.03$16.00-$17.00 5,000 8.03 16.82 1,000 16.82$17.00-$18.00 125,000 8.45 17.30 25,000 17.30$18.00-$19.00 419,000 9.24 18.97 1,400 19.00

750,500 8.10 $ 16.97 163,900 $ 12.74

As of December 31, 2019, the remaining compensation expense to be recognized for outstandingstock options was $2,107. This compensation expense is to be fully recognized by the yearending December 31, 2023. The cost is expected to be recognized over a remaining weightedaverage period of 2.02 years.



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Note 14: Related-party Transactions

In the ordinary course of business, the Company has granted loans to principal officers anddirectors and their affiliates. Annual activity consisted of the following:

December 31,2019 2018

Beginning balance $ 21,156 $ 28,013New loans and advances 2,090 2,031New loans (due to acquisition) 1,644 —Effects of changes in composition of related parties (3,104) —Repayments (7,733) (8,888)Ending balance $ 14,053 $ 21,156

Deposits from related parties held by the Bank at 2019 and 2018, amounted to $41,087 and$8,788, respectively.

Note 15: Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability(exit price) in the principal or most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date. There are three levels ofinputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active marketsthat the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quotedprices for similar assets or liabilities; quoted prices in markets that are not active; or otherinputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptionsabout the assumptions that market participants would use in pricing an asset or liability.



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Assets measured at fair value on a recurring basis are summarized in the table below.

December 31, 2019

Level 1 Level 2 Level 3Total

Fair ValueAssets measured at fair value on a recurring basis

Securities, available for sale

Mortgage-backed $ — $ 42,340 $ — $ 42,340

Municipal bonds — 5,596 — 5,596

Total securities, available for sale $ — $ 47,936 $ — $ 47,936

Loans held for sale $ — $ 368 $ — $ 368

December 31, 2018

Level 1 Level 2 Level 3Total

Fair ValueAssets measured at fair value on a recurring basis

Securities, available for sale

Mortgage-backed $ — $ 47,104 $ — $ 47,104

Municipal bonds — 14,017 — 14,017

Total securities, available for sale $ — $ 61,121 $ — $ 61,121

Loans held for sale $ — $ 1,407 $ — $ 1,407

The Company used the following methods and assumptions to estimate fair value of financial instruments that are measured at fair value on a recurring basis:

Securities, Available for Sale - Where quoted market prices are available in an active market,securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are notavailable, then fair values are estimated by using quoted prices of securities with similarcharacteristics or independent asset pricing services and pricing models, the inputs of which aremarket-based or independently sourced market parameters, including, but not limited to, yieldcurves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cashflows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases whereLevel 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Loans Held for Sale - Loans held for sale represent mortgage loan originations intended to besold in the secondary market. The fair value of loans held for sale is determined usingcommitments on hand from investors or prevailing market prices and are classified in Level 2 ofthe valuation hierarchy.



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Assets measured at fair value on a non-recurring basis are summarized in the table below. There were no liabilities measured at fair value on a non-recurring basis at December 31, 2019 and 2018:

December 31, 2019Level 1Inputs

Level 2Inputs

Level 3Inputs

TotalFair Value

Impaired Loans1-4 Family Real Estate $ — $ — $ — $ —Commercial Real Estate — — — —Construction — — — —Land Development — — — —Commercial — — 150 150Other Loans — — — —PCI — — 40 40

Other Real Estate OwnedCommercial Real Estate — — 1,205 1,205

Total $ — $ — $ 1,395 $ 1,395

December 31, 2018Level 1Inputs

Level 2Inputs

Level 3Inputs

TotalFair Value

Impaired Loans1-4 Family Real Estate $ — $ — $ 241 $ 241Commercial Real Estate — — — —Construction — — 30 30Land Development — — — —Commercial — — 8,613 8,613Other Loans — — — —

Total $ — $ — $ 8,884 $ 8,884



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Impaired Loans, Net of ALLL - A loan is considered impaired when, based on currentinformation and events, it is probable that the Company will be unable to collect all amounts duepursuant to the contractual terms of the loan agreement. Impairment is measured by estimatingthe fair value of the loan based on the present value of expected cash flows, the market price ofthe loan, or the underlying fair value of the loan’s collateral. For real estate loans, fair value of theimpaired loan’s collateral is determined by third party appraisals, or internal evaluations, whichare then adjusted for the estimated selling and closing costs related to liquidation of the collateral.For this asset class, the actual valuation methods (income, sales comparable, or cost) vary basedon the status of the project or property. The Company reviews the third party appraisal forappropriateness and adjusts the value downward to consider selling and closing costs, and otherfactors developed by management's comparison to historical results, such as lack ofmarketability. For non-real estate loans, fair value of the impaired loan’s collateral may bedetermined using an appraisal, net book value per the borrower’s financial statements, or agingreports, adjusted or discounted based on management’s historical knowledge, changes in marketconditions from the time of the valuation, and management’s expertise and knowledge of theclient and client’s business.

Other Real Estate Owned (OREO) - OREO is primarily comprised of real estate acquired inpartial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimatedselling and closing costs at the date of transfer, with any excess of the related loan balance overthe fair value less expected selling costs charged to the ALLL. Subsequent changes in fair valueare reported as adjustments to the carrying amount and are recorded against earnings. TheCompany outsources the valuation of OREO with material balances to third party appraisers. Forthis asset class, the actual valuation methods (income, sales comparable, or cost) vary based onthe status of the project or property. For example, land is generally based on the salescomparable method while construction is based on the income and/or sales comparablemethods. The unobservable inputs may vary depending on the individual assets with no one ofthe three methods being the predominant approach. The Company reviews the third partyappraisal for appropriateness and adjusts the value downward to consider selling and closingcosts.

The estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis were as follows:



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2019CarryingAmount Level 1 Level 2 Level 3

Financial assets:

Cash and cash equivalents $ 202,075 $ 202,075 $ — $ —Securities held-to-maturity 58,520 — 59,171 —Securities available-for-sale 47,936 — 47,936 —Federal Home Loan Bank stock 1,742 N/A N/A N/AFederal Reserve Bank stock 1,414 N/A N/A N/ALoans held for sale, at fair value 368 — 368 —Loans not previously presented, gross 1,284,758 — — 1,260,091Accrued interest receivable 6,263 6,263 — —

Financial liabilities:Deposits $1,428,765 $ — $1,449,625 $ —Accrued interest payable 1,418 1,418 — —

Other Borrowings:Securities sold under agreements to repurchase 32,778 32,778 — —Advances from FHLB 677 — 677 —Subordinated debentures 3,093 — 3,093 —

2018CarryingAmount Level 1 Level 2 Level 3

Financial assets:Cash and cash equivalents $ 86,125 $ 86,125 $ — $ —Securities held-to-maturity 77,701 — 76,074 —Securities available-for-sale 61,121 — 61,121 —Federal Home Loan Bank stock 639 N/A N/A N/AFederal Reserve Bank stock 1,414 N/A N/A N/ALoans held for sale, at fair value 1,407 — 1,407 —Loans not previously presented, net 825,778 — — 825,983Accrued interest receivable 4,172 4,172 — —

Financial liabilities:Deposits $ 942,989 $ — $ 942,615 $ —Accrued interest payable 760 760 — —

Other Borrowings:Securities sold under agreements to repurchase 13,517 13,517 — —Advances from FHLB 4,475 — 4,475 —Subordinated debentures 3,093 — 3,093 —



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The following methods and assumptions were used by the Company in estimating the fair valueof the above classes of financial instruments.

Cash and Cash Equivalents - For financial instruments with a shorter term or with no statedmaturity, prevailing market rates, and limited credit risk, the carrying amounts approximate fairvalue and are considered a Level 1 classification.

Securities, Held to Maturity - Fair value estimates are based on quoted market prices, ifavailable, resulting in a Level 1 classification. If a quoted market price is not available, fair valueis estimated using quoted market prices for similar instruments and is considered a Level 2classification.

FHLB Stock, and FRB Stock - FHLB and FRB stock is restricted to member banks and there arerestrictions placed on its transferability. As a result, the fair value of the stock was not practicableto determine.

Loans - Loans include loans held for investment and loans included in assets held for sale.Loans exclude impaired loans previously described above. Fair values are estimated byaveraging exit pricing on comparable acquisitions from the past two years, and applying a liquiditypremium adjustment, that is supported by a memo from a third party securities firm.

For mortgage loans, the Company uses the secondary market rates in effect for loans that havesimilar characteristics. The fair value of other fixed rate loans is calculated by discountingscheduled cash flows through the anticipated maturities adjusted for prepayment estimates.Adjustable interest rate loans are assumed to approximate fair value because they generallyreprice within the short term.

Accrued Interest Receivable and Accrued Interest Payable - The carrying amounts of accruedinterest receivable and accrued interest payable approximate their fair values given the short termnature of the receivables and are considered a Level 1 classification.

Deposits - Fair values for deposits are estimated by averaging pricing on deposits acquired overthe past two years, resulting in a Level 2 classification.

Securities Sold Under the Agreement to Repurchase - For financial instruments with a shorterterm or with no stated maturity, prevailing market rates, and limited credit risk, the carryingamounts approximate fair value and are considered a Level 1 classification.

Advances from FHLB - The Company's FHLB advances have relatively short term maturities,and therefore materially approximates carrying value and is considered a Level 2 classification.

Subordinated Debentures - The subordinated notes were valued based on quoted marketprices, but due to limited trading activity for the subordinated notes in these markets, thesubordinated notes are considered a Level 2 classification.

Note 16: Commitments and Credit Risk

The Company is a party to credit related financial instruments with off-balance sheet risk in thenormal course of business to meet the financing needs of its customers. These financialinstruments include commitments to extend credit and standby letters of credit. Suchcommitments involve, to varying degrees, elements of credit and interest rate risk in excess of theamount recognized in the consolidated statements of financial condition.



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2019Variable Rate Fixed Rate Total

Commitments to extend credit $ 165,541 $ 73,212 $ 238,754Standby letters of credit — 13,035 13,035

2018Variable Rate Fixed Rate Total

Commitments to extend credit $ 109,236 $ 37,704 $ 146,940Standby letters of credit — 6,864 6,864

Commitments to extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract. Commitments generally have fixedexpiration dates or other termination clauses and may require payment of a fee. Thecommitments for equity lines of credit may expire without being drawn upon. Therefore, the totalcommitment amounts do not necessarily represent future cash requirements. The amount ofcollateral obtained, if it is deemed necessary by the Company, is based on management's creditevaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to guarantee theperformance of a customer to a third party. Those letters of credit are primarily issued to supportpublic and private borrowing arrangements. Essentially all letters of credit issued have expirationdates within one year. The credit risk involved in issuing letters of credit is essentially the sameas that involved in extending loan facilities to customers. The Company generally holds collateralsupporting those commitments if deemed necessary.

The Company has no other off-balance sheet arrangements or transactions with unconsolidated,special purpose entities that would expose the Company to liability that is not reflected on theface of the consolidated financial statements.

Note 17: Goodwill and Intangible Assets

The intangible asset consists of the following:

2019 2018

Beginning balance $ 345 $ 406Acquired core deposit intangible 7,933 —Amortization of intangible (999) (61)Ending Balance $ 7,279 $ 345



51

Generally, material acquired intangible assets are being amortized utilizing an acceleratedmethod over their estimated useful lives, which range from 7 to 10 years. The future amortizationschedule for the Company’s intangible assets is as follows:

2020 $ 1,0412021 9042022 7862023 7722024 752

Thereafter 3,024

Goodwill consists of the following:

2019 2018Beginning balance $ — $ —Acquired goodwill 54,913 —Ending Balance $ 54,913 $ —

Note 18: Earnings per Share

The factors used in the earnings per share computation follow:

2019 2018Basic

Net income to common stockholders $ 18,056 $ 12,053

Average shares outstanding net of treasury stock 15,901,355 12,614,801

Basic earnings per common share $ 1.14 $ 0.96

DilutedNet income to common stockholders $ 18,056 $ 12,053

Weighted average common shares outstanding for basic earnings per common share 15,901,355 12,614,801

Dilutive effects of:Assumed exercises of stock options 58,098 51,640

Average shares and dilutive potential common shares 15,959,453 12,666,441

Diluted earnings per common share $ 1.13 $ 0.95

For the years ended December 31, 2019 and 2018, there were 737,252 and 325,860 stock optionshares, respectively, that were not considered in computing dilutive earnings per share becausethey were antidilutive.


December 31, 2019 and 2018(Dollar amounts in thousands except share and per share data)

52

Note 19: Revenue from Contracts with Customers

All of the Company's revenue from contracts with customers in the scope of ASC 606 isrecognized within Noninterest Income.

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers fortransaction-based, account maintenance, and overdraft services. Transaction-based fees, whichinclude services such as ATM use fees, stop payment charges, statement rendering, and ACHfees, are recognized at the time the transaction is executed as that is the point in time theCompany fulfills the customer’s request. Account maintenance fees, which relate primarily tomonthly maintenance, are earned over the course of a month, representing the period over whichthe Company satisfies the performance obligation. Overdraft fees are recognized at the point intime that the overdraft occurs. Service charges on deposits are withdrawn from the customer’saccount balance. Service charges on deposit accounts was $1,589 and $1,252 for the yearsended December 31, 2019 and 2018, respectively.

Interchange Income: The Company earns interchange fees from debit cardholder transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange income was $1,060 and $628 for the years ended December 31, 2019 and 2018, respectively.

Wealth Management Fees (Gross): The Company earns wealth management fees from itscontracts with trust customers to manage assets for investment, and/or to transact on theiraccounts. These fees are primarily earned over time as the Company provides the contractedmonthly or quarterly services and are generally assessed based on a tiered scale of the marketvalue of assets under management (AUM) at month-end. Fees that are transaction based,including trade execution services, are recognized at the point in time that the transaction isexecuted, i.e., the trade date. Wealth management fees were $573 and $550 for the years endedDecember 31, 2019 and 2018, respectively.

Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREOwhen control of the property transfers to the buyer, which generally occurs at the time of anexecuted deed. When the Company finances the sale of OREO to the buyer, the Companyassesses whether the buyer is committed to perform their obligations under the contract andwhether collectability of the transaction price is probable. Once these criteria are met, the OREOasset is derecognized and the gain or loss on sale is recorded upon the transfer of control of theproperty to the buyer. In determining the gain or loss on the sale, the Company adjusts thetransaction price and related gain (loss) on sale if a significant financing component is present.Gains/losses on sales of OREO were $34 and $0 for the years ended December 31, 2019 and2018, respectively.



53

Note 20: Other Income2019 2018

Bank-owned life insurance $ 996 $ 1,043Gain on sale of bank premises & fixed assets 17 571Post acquisition loan recoveries 272 —Office rental income 110 —Other income or losses 31 (11)Total other income $ 1,426 $ 1,603

Note 21: Other Expenses2019 2018

Software maintenance $ 1,203 $ 662CDI amortization 999 61Other 5,099 3,569Total other expenses $ 7,301 $ 4,292

Note 22: Subsequent Event

The Company evaluated its December 31, 2019 consolidated financial statements for subsequentevents through the date the consolidated financial statements were issued. As a result of therecent spread of the Coronavirus (COVID-19), economic uncertainties have arisen. This publichealth concern could pose a risk to our employees, our customers, our vendors and thecommunities in which we operate, which could have a material negative impact to our business.The extent to which the COVID-19 may impact our business will depend on future developments,which are highly uncertain and cannot be predicted at this time. We may experience an impactfrom customer shutdowns to prevent spread of the virus, employee impacts from illness, schoolclosures and other community response measures, all of which could have a material negativeimpact to our business. We continue to monitor the situation and may adjust our current policiesand practices as more information and guidance become available.

The spread of COVID-19 to the US has contributed to economic volatility in the financial marketsand stock valuations have been significantly impacted. In response, on March 3, 2020, theFederal Open Market Committee reduced the target federal funds rate by 50 basis points to1.00% to 1.25%. This rate was further reduced by 100 basis points to 0% to 0.25% on March 16,2020. These reductions in interest rates and other effects of the COVID-19 outbreak may have amaterial adverse affect on the Company’s results of operations. Additionally, the recent actionstaken by OPEC have had material negative impact on crude oil prices. Although located inseveral geographic and economically diverse markets, the Company does operate branches intwo communities with sizable oil and gas production. The Company is closely monitoring thesituation and its effects on customers.

First Bancshares of Texas, Inc.Notes to Consolidated Financial Statements


54

Note 23: Litigation

The Company is a defendant in a case in the United States Bankruptcy Court in the NorthernDistrict of Texas. The case is brought by the bankruptcy trustee evolved from the collapse of aregional auto dealership. The Company believes that the claims are without merit and intends tovigorously defend its position. The ultimate outcome of this litigation cannot presently bedetermined. Adjustments, if any, that might result from the resolution of this matter have not beenreflected in the financial statements.

First Bancshares of Texas, Inc.Notes to Consolidated Financial Statements


55



Jerry D. Rohane Tony Scavuzzo

W. Allen Pruitt James W. Ramsey George H. Reeves

James B. Welsh, M.D. Terry D. Wilkinson

John D. Bergman Jim J. BrewerDick Bundy

Kenneth L. Burgess Jr.

Tracy Bacon J. Greg BurgessCary N. Billingsley Brad D. Burgess

James F. Deutsch

Breck ColquettStephen N. CastleMichael J. Canon Don E. Cosby

B O A R D O F D I R E C T O R S

B O A R D A D V I S O R Y D I R E C T O R S

Subodh I. Patel

Chris MatthewsH. Tevis Herd Jay W. Isaacs

Tommy L. McCulloch Jr.

*�First�Bancshares�of�Texas��Directors�only.

Warren Ayres*

Jeff Dillard*

Jeff Chesnut Caven Crosnoe J. Gaut Reno Gustafson

George H. ReevesChief Deposit & Technology Officer

Scott StreitMarket President, Hill Country

Rob SchuetzChief Technology Officer

Scott NelsonChief Lending Officer

Brad StutevilleExecutive Vice President, Branch President

Michael J. CanonGeneral Counsel

Brent HilleryMarket President, Wichita Falls

Kenneth L. Burgess Jr.Chairman

Bethany EtheredgeExecutive Vice President, Private Banking

Don E. CosbyExecutive Vice President

J. Greg BurgessChief Credit Officer

Tracy BaconChief Operating Officer

Phyllis BechnerChief Financial Officer

Jeremy BishopMarket President, Midland

Brad D. BurgessChief Executive Officer

E X E C U T I V E O F F I C E R S

Elaine LeeChief Risk & Compliance Officer

Lacie McDowellExecutive Vice President, Cash & Treasury Management

Tommy L. McCulloch Jr.Vice Chairman

Jay W. IsaacsPresident

Mark HodgesMarket President, Amarillo

310 West Wall Street Suite 100 Midland, Texas 79701 844.FCBTEXAS

FCBTexas.com

Documents

2019 ANNUAL REPORT New Relationships New Opportunities · and surrounding communities, and employed more than 60 team members. The acquisition closed on February 28, 2019 and Fidelity