Business First Bancshares, Inc. 10-K

ITEM 5. Market for Registrant ’ s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities. Common Stock Our common stock is traded on the Nasdaq Global Select Market under the symbol “BFST”. Our common shares have been traded on the Nasdaq Global Select Market since April 11, 2018. Prior to that date, there was no public trading market for our common stock. As of February 20, 2024, there were 25,356,393 issued and outstanding shares of our common stock held of record by approximately 937 shareholders. We also had outstanding 120,608 options to purchase shares of our common stock issued under our equity compensation plans, as described below. Dividends In 2016, our board of directors made the determination to begin paying regular quarterly dividends on our common stock; however, we are not obligated to pay dividends on either our common or preferred stock. Dividends on our common stock are not payable if we have not paid the full dividends on our Series A preferred stock for the most recently completed quarterly dividend period. The payment of future dividends and our dividend policy will depend on our earnings, capital requirements and financial condition, as well as other factors that our board of directors deems relevant. For additional discussion of legal and regulatory restrictions on the payment of dividends, see “ PART I - ITEM 1. Business – Supervision and Regulation – Business First Bancshares, Inc. – Regulatory Restrictions on Dividends. ” Securities Authorized for Issuance under Equity Compensation Plans In 2006, our board of directors adopted the 2006 Stock Option Plan pursuant to which we were permitted to issue stock options to purchase up to 1,500,000 shares of our common stock, all of which could be issued as either incentive stock options under Section 422A of the Internal Revenue Code of 1986, as amended, or non-qualified stock options. Although our 2006 Stock Option Plan expired on December 22, 2016 and we are no longer permitted to issue additional stock options under this plan, as of December 31, 2023, we had 120,608 outstanding and unexercised stock options that have been issued to our executive officers and key personnel and remain subject to the terms and conditions of the 2006 Stock Option Plan until they are exercised or forfeited. On June 29, 2017, our shareholders approved the 2017 Equity Incentive Plan, or the Plan, and the shareholders approved additional shares under the Plan during 2022. The Plan provides for the grant of various types of equity grants and awards, including incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares and other stock-based awards to eligible participants, which includes our employees, directors and consultants. The Plan has reserved 1,043,908 shares of common stock for grant, award or issuance to eligible participants, all of which may be subject to incentive stock option treatment. As of December 31, 2023, there were 745,620 common shares issued under this Plan to our employees, directors or consultants. The following table summarizes information as of December 31, 2023 relating to the number of securities to be issued upon the exercise of the outstanding options and warrants and their weighted-average exercise price. Number of Securities to Be Issued Upon Exercise of Outstanding Options Weighted-Average Exercise Price of Outstanding Options Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans Equity compensations plans approved by security holders 120,608 $ 18.59 298,288 Equity compensation plans not approved by security holders — — — Total equity compensation plans 120,608 $ 18.59 298,288 42 Table of Contents Recent Sales of Unregistered Securities None Purchases of Equity Securities by the Issuer and Affiliated Purchasers On May 23, 2023, the Company’s board of directors approved a resolution authorizing management to repurchase shares of its common stock with an aggregate purchase price of up to $30.0 million from time to time, subject to certain limitations and conditions. This 2023 stock repurchase program was effective until December 31, 2023. The 2023 stock repurchase program did not obligate the Company to repurchase any shares of its common stock. The Company did not repurchase any shares under this plan. Stock Performance Graph The following table and graph compares the cumulative total shareholder return on our common stock to the cumulative total return of the S&P 500 Index and the KBW Nasdaq Regional Bank Index (“KRX”) for the period beginning on January 1, 2019 through December 31, 2023. The following assumes $100 invested on January 1, 2019 in our common stock at the closing price of $24.23 per common share, otherwise reflects our stock and the S&P 500 and KRX values as of close of trading, and assumes the reinvestment of dividends, if any. The historical stock price performance for our common stock shown on the graph below is not necessarily indicative of future stock performance. 43 Table of Contents Date BFST S&P 500 KRX 12/31/2018 $ 100.00 $ 100.00 $ 100.00 3/31/2019 101.61 113.65 109.35 6/30/2019 105.79 118.54 113.62 9/30/2019 101.84 120.55 112.87 12/31/2019 104.47 131.49 123.81 3/31/2020 56.99 105.72 73.82 6/30/2020 65.22 127.44 84.57 9/30/2020 64.16 138.81 75.90 12/31/2020 87.52 155.68 113.03 3/31/2021 103.29 165.29 146.61 6/30/2021 99.58 179.42 144.53 9/30/2021 102.01 180.47 149.17 12/31/2021 123.99 200.37 154.45 3/31/2022 107.09 191.15 151.08 6/30/2022 94.32 160.37 132.98 9/30/2022 95.83 152.54 138.21 12/31/2022 99.08 164.08 143.75 3/31/2023 77.19 176.38 117.94 6/30/2023 68.45 191.80 111.16 9/30/2023 85.76 185.52 113.81 12/31/2023 113.32 207.21 143.17 ITEM 6. Selected Financial Data. [RESERVED] ITEM 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations. This discussion presents management’s analysis of our results of operations and financial condition over each of the last two most recent fiscal years. The discussion should be read in conjunction with our financial statements and the notes related thereto which appear elsewhere in this Report. The following discussion and analysis is to focus on significant changes in the financial condition of Business First and its subsidiaries from December 31, 2022 to December 31, 2023 and its results of operations for the year ended December 31, 2023. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this Report, particularly the consolidated financial statements and related notes appearing in Item 8. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that Business First believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “ Forward-Looking Statements, ” “ Risk Factors ” and elsewhere in this statement, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. Business First assumes no obligation to update any of these forward-looking statements. A discussion regarding significant changes in the financial condition of Business First and its subsidiaries from December 31, 2021 to December 31, 2022 and its results of operations for the year ended December 31, 2022 can be found under “ Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations ” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 2, 2023, as amended, which is available on the SEC ’ s website at www.sec.gov and on the Company ’ s website, www.b1bank.com. 44 Table of Contents Overview We are a registered financial holding company headquartered in Baton Rouge, Louisiana. Through our wholly-owned subsidiary, b1BANK, a Louisiana state chartered bank, we provide a broad range of financial services tailored to meet the needs of small-to-midsized businesses and professionals. Since our inception in 2006, our priority has been and continues to be creating shareholder value through the establishment of an attractive commercial banking franchise in Louisiana and across our region. We consider our primary market to include the State of Louisiana, the Dallas/Fort Worth metroplex and Houston. We currently operate out of banking centers and loan production offices in markets across Louisiana and Texas. As of December 31, 2023, we had total assets of $6.6 billion, total loans of $5.0 billion, total deposits of $5.2 billion, and total shareholders’ equity of $644.3 million. As a financial holding company operating through one reportable operating segment, community banking, we generate most of our revenues from interest income on loans, customer service and loan fees, and interest income from securities. We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest-earning assets and expense of our liabilities through our net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Changes in the market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions, and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in our markets and across our region, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our markets. While we continue to prioritize organic growth, we also seek to capitalize upon other opportunities as they arise. Below is a summary of recent transactions that have contributed to our growth. For additional information about these transactions, See “ Note 3 – Mergers and Acquisitions ” in our audited consolidated financial statements included in Item 8 of this Report. Acquisition of Texas Citizens Bancorp, Inc. On October 20, 2021, we entered into a definitive agreement to acquire Texas Citizens Bancshares, Inc. (“TCBI”), the parent bank holding company for Texas Citizens Bank, National Association, headquartered in Pasadena, Texas. The acquisition was consummated on March 1, 2022. At February 28, 2022, TCBI reported $534.2 million in total assets, $349.5 million in loans and $477.2 million in total deposits. Preferred Stock Issuance On September 1, 2022, we entered into a securities purchase agreement with certain investors pursuant to which we offered and sold shares of our 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, with no par value, for an aggregate purchase price of $72.0 million. The preferred stock was structured to qualify as additional Tier 1 capital under applicable regulatory capital guidelines. Holders of the preferred stock will be entitled to receive, if, when, and as declared by our board of directors (the “Board”), non-cumulative cash dividends at a rate of 7.50% for the first five years following issuance and thereafter at a variable rate equal to the then current 3-month secured overnight financing rate (“SOFR”), reset quarterly, plus 470 basis points. The preferred stock has a perpetual term and may not be redeemed, except under certain circumstances, under the first five years of issuance. We intend to use the net proceeds from the preferred stock issuance to provide additional capital support to the Bank, to support growth, to better position us to take advantage of strategic opportunities that may arise from time to time, repayment of existing debt, and for general corporate purposes. Public Offering On October 12, 2022, we entered into an underwriting agreement with Stephens, Inc., a representative of several underwriters, to issue and sell 2,500,000 shares of our common stock, $1.00 par value per share, in an underwritten public offering and a public offering price of $20.00 per share. After deducting underwriting discounts, commissions and offering expenses, the net proceeds of the offering was $47.2 million. 45 Table of Contents Bank Term Funding Program ( “ BTFP ” ) On March 12, 2023, the Federal Reserve developed the BTFP, which offers loans to banks with a term of up to one year. The loans are secured by pledging participating banks’ U.S. treasuries, agency securities, agency mortgage-backed securities, and other qualifying assets. These pledged securities are valued at par for collateral purposes. The Bank participated in the BTFP and pledged securities with a remaining par value of $333.3 million as of December 31, 2023. The Bank had outstanding BTFP debt of $300.0 million at December 31, 2023. These loans bear a fixed rate of 4.38% and mature on March 22, 2024. Federal Reserve Bank ’ s Discount Window On April 11, 2023, the Bank opened two new lines of credit for additional contingent liquidity, totaling $1.0 billion as of December 31, 2023, through the Federal Reserve discount window. The Bank has not yet drawn on either of the lines of credit as of the date of this report. Sale of Leesville Banking Center On August 31, 2023, we sold the Leesville banking center, located in Leesville, Louisiana, to Merchants & Farmers Bank & Trust Company headquartered in Leesville, Louisiana, in accordance with the Branch Purchase and Assumption Agreement dated May 11, 2023. We maintained the loan portfolio and transferred those loans to other nearby banking centers. The sale included total deposits of $16.3 million and a pre-tax gain of $945,000. Loan Deferrals Beginning on March 25, 2020, we took proactive measures to help customers impacted by COVID-19 by deferring principal and/or interest payments. As of December 31, 2023, we had deferrals remaining on 930 loans with an aggregate outstanding balance of $341.4 million, although all loans were outside their deferral periods. In accordance with FASB and interagency regulatory guidance issued in March 2020, loans that are modified under the terms of our COVID-19 Deferral Assistance Program will not be considered as troubled debt restructurings to the extent that they meet the terms of such guidance under Section 4013 of the CARES Act, as extended by the Consolidated Appropriations Act of 2021. Financial Highlights The financial highlights as of and for the year ended December 31, 2023 include: • Total assets of $6.6 billion, a $594.1 million, or 9.9%, increase from December 31, 2022. • Total loans held for investment of $5.0 billion, a $386.6 million, or 8.4%, increase from December 31, 2022. • Total deposits of $5.2 billion, a $428.4 million, or 8.9%, increase from December 31, 2022. • Net income available to common shareholders of $65.6 million, a $12.8 million, or 24.1%, increase from the year ended December 31, 2022. • Net interest income of $215.1 million, a $15.6 million, or 7.8%, increase from the year ended December 31, 2022. • An allowance for credit losses of 0.88% of total loans held for investment, compared to 0.84% as of December 31, 2022, and a ratio of nonperforming loans to total loans held for investment of 0.34%, compared to 0.25% as of December 31, 2022. • Earnings per common share for the year ended December 31, 2023 of $2.62 per basic common share and $2.59 per diluted common share, compared to $2.34 per basic common share and $2.32 per diluted common share for the year ended December 31, 2022. • Return to common shareholders on average assets of 1.04% compared to 0.97% for the year ended December 31, 2022. • Return to common shareholders on average common equity of 12.36% compared to 11.59% for the year ended December 31, 2022. • Capital Ratios included Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 9.52%, 9.15%, 10.46% and 12.85%, respectively, compared to Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 9.49%, 8.68%, 10.07% and 12.75% for the year ended December 31, 2022. 46 Table of Contents • Book value per common share of $22.58, an increase of 11.5% from $20.25 at December 31, 2022. Results of Operations for the Years Ended December 31, 2023 and 2022 Performance Summary For the year ended December 31, 2023, net income available to common shareholders was $65.6 million, or $2.62 per basic common share and $2.59 per diluted common share, compared to net income available to common shareholders of $52.9 million, or $2.34 per basic common share and $2.32 per diluted common share, for the year ended December 31, 2022. Return to common shareholders on average assets increased to 1.04% for the year ended December 31, 2023 from 0.97% for the year ended December 31, 2022. Return to common shareholders on average common equity increased to 12.36% for the year ended December 31, 2023, as compared to 11.59% for the year ended December 31, 2022. Net Interest Income Our operating results depend primarily on our net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Fluctuations in market interest rates impact the yield and rates paid on interest sensitive assets and liabilities. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact net interest income. The variance driven by the changes in the amount and mix of interest-earning assets and interest-bearing liabilities is referred to as a “volume change.” Changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds are referred to as a “rate change.” To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. We calculate average assets, liabilities, and equity using a monthly average, and average yield/rate utilizing an actual 365 day count convention. For the year ended December 31, 2023, net interest income totaled $215.1 million, and net interest margin and net interest spread were 3.62% and 2.72%, respectively. For the year ended December 31, 2022 net interest income totaled $199.6 million and net interest margin and net interest spread were 3.92% and 3.57%, respectively. The average yield on the loan portfolio was 6.65%, for the year ended December 31, 2023, compared to 5.42% for the year ended December 31, 2022, and the average yield on total interest-earning assets was 5.95% for the year ended December 31, 2023, compared to 4.64% for the year ended December 31, 2022. For the year ended December 31, 2023, overall cost of funds (which includes noninterest-bearing deposits) increased 169 basis points compared to the year ended December 31, 2022, primarily due to the federal reserve continuing to increase rates during the first part of 2023 and full impact of the 2022 increases. 47 Table of Contents The following table presents, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the years ended December 31, 2023, 2022 and 2021, interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield. The average total loans reflected below is net of deferred loan fees and discounts. Acquired loans were recorded at fair value at acquisition and accrete interest income over the remaining lives of the respective loans or expected cash flows. Averages presented in the table below, and throughout this report, are month-end averages. For the Years Ended December 31, 2023 2022 2021 Average Outstanding Balance Interest Earned/Interest Paid Average Yield/Rate Average Outstanding Balance Interest Earned/Interest Paid Average Yield/Rate Average Outstanding Balance Interest Earned/Interest Paid Average Yield/Rate (Dollars in thousands) Assets Interest-earning assets: Total loans $ 4,859,637 $ 323,327 6.65 % $ 4,020,436 $ 218,032 5.42 % $ 3,037,020 $ 156,791 5.16 % Securities 898,771 20,125 2.24 956,232 16,503 1.73 870,282 13,520 1.55 Interest-bearing deposits in other banks 180,997 9,875 5.46 115,016 1,579 1.37 104,471 127 0.12 Total interest-earning assets 5,939,405 353,327 5.95 5,091,684 236,114 4.64 4,011,773 170,438 4.25 Allowance for loan losses (41,665 ) (32,093 ) (26,132 ) Noninterest-earning assets 444,140 413,917 418,029 Total assets $ 6,341,880 $ 353,327 $ 5,473,508 $ 236,114 $ 4,403,670 $ 170,438 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing deposits $ 3,566,216 $ 106,908 3.00 % $ 3,007,882 $ 24,413 0.81 % $ 2,604,825 $ 12,183 0.47 % Subordinated debt 105,369 5,323 5.05 106,054 5,108 4.82 68,183 3,526 5.17 Subordinated debt - trust preferred securities 5,000 430 8.60 5,000 247 4.94 5,000 168 3.36 Bank Term Funding Program 253,706 11,313 4.46 - - - - - - Advances from FHLB 329,726 13,702 4.16 271,025 6,479 2.39 47,325 554 1.17 First National Bankers Bank ("FNBB") Line of Credit - - - 2,500 121 4.84 - - - Other borrowings 21,825 522 2.39 23,197 169 0.73 27,182 123 0.45 Total interest-bearing liabilities 4,281,842 138,198 3.23 3,415,658 36,537 1.07 2,752,515 16,554 0.60 Noninterest-bearing liabilities: Noninterest-bearing deposits 1,412,979 1,539,938 1,196,970 Other liabilities 44,173 37,533 28,493 Total noninterest-bearing liabilities 1,457,152 1,577,471 1,225,463 Shareholders' equity: Common shareholders' equity 530,956 456,388 425,692 Preferred equity 71,930 23,991 - Total shareholders' equity 602,886 480,379 425,692 Total liabilities and shareholders' equity $ 6,341,880 $ 5,473,508 $ 4,403,670 Net interest rate spread (1) 2.72 % 3.57 % 3.65 % Net interest income $ 215,129 $ 199,577 $ 153,884 Net interest margin (2) 3.62 % 3.92 % 3.84 % Overall cost of funds 2.43 % 0.74 % 0.42 % (1) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities. (2) Net interest margin is equal to net interest income divided by average interest-earning assets. 48 Table of Contents The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities, and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate. For the Year Ended December 31, 2023 compared to the Year Ended December 31, 2022 Increase (Decrease) due to change in Volume Rate Total (Dollars in thousands) Interest-earning assets: Total loans $ 55,835 $ 49,460 $ 105,295 Securities (1,287 ) 4,909 3,622 Interest-bearing deposits in other banks 3,600 4,696 8,296 Total increase in interest income $ 58,148 $ 59,065 $ 117,213 Interest-bearing liabilities: Interest-bearing deposits $ 16,738 $ 65,757 $ 82,495 Subordinated debt (35 ) 250 215 Subordinated debt - trust preferred securities - 183 183 Bank Term Funding Program 11,313 - 11,313 Advances from FHLB 2,439 4,784 7,223 FNBB Line of Credit - (121 ) (121 ) Other borrowings (33 ) 386 353 Total increase in interest expense 30,422 71,239 101,661 Increase (decrease) in net interest income $ 27,726 $ (12,174 ) $ 15,552 For the Year Ended December 31, 2022 compared to the Year Ended December 31, 2021 Increase (Decrease) due to change in Volume Rate Total (Dollars in thousands) Interest-earning assets: Total loans $ 60,236 $ 1,005 $ 61,241 Securities 1,483 1,500 2,983 Interest-bearing deposits in other banks 145 1,307 1,452 Total increase in interest income $ 61,864 $ 3,812 $ 65,676 Interest-bearing liabilities: Interest-bearing deposits $ 3,271 $ 8,959 $ 12,230 Subordinated debt 1,824 (241 ) 1,583 Subordinated debt - trust preferred securities - 80 80 Advances from FHLB 5,347 577 5,924 FNBB Line of Credit 120 - 120 Other borrowings (29 ) 75 46 Total increase in interest expense 10,533 9,450 19,983 Increase (decrease) in net interest income $ 51,331 $ (5,638 ) $ 45,693 Provision for Credit Losses Our provision for credit losses is a charge to income in order to bring our allowance for credit losses to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the allowance for credit losses see “— Financial Condition — Allowance for Credit Losses .” The provision for credit losses was $4.5 million and $10.9 million for the years ended December 31, 2023 and 2022, respectively. The lower provision during the year ended December 31, 2023 compared to 2022 relates primarily to lower loan growth in 2023, as well as improvements in the macroeconomic environment and continued resolution of acquired PCD loans in our portfolio. 49 Table of Contents Noninterest Income ( “ Other Income ” ) Our primary sources of noninterest income are service charges on deposit accounts, debit card and automated teller machine (“ATM”) fee income, income from bank-owned life insurance, fees and brokerage commissions, and pass-through income from other investments (small business investment company (“SBIC”) partnerships and fintech technology (“Fintech”) funds). The following table presents, for the periods indicated, the major categories of noninterest income: For the Years Ended December 31, 2023 2022 Increase (Decrease) (Dollars in thousands) Noninterest income: Service charges on deposit accounts $ 9,704 $ 8,272 $ 1,432 Debit card and ATM fee income 6,590 6,407 183 Bank-owned life insurance income 2,247 1,931 316 Gain on sales of loans 1,972 574 1,398 Loss on sales of investment securities (2,565 ) (48 ) (2,517 ) Fees and brokerage commissions 7,247 6,964 283 Mortgage origination income 285 532 (247 ) Correspondent bank income 456 113 343 Gain on sales of other real estate owned 646 33 613 Loss on sales of other assets (15 ) (717 ) 702 Gain on sale of banking center 945 - 945 Gain on extinguishment of debt 1,458 - 1,458 Swap Fee Income 964 - 964 Pass-through income from other investments 1,946 1,347 599 Other 4,762 3,902 860 Total noninterest income $ 36,642 $ 29,310 $ 7,332 Noninterest income for the year ended December 31, 2023 increased $7.3 million, or 25.0%, to $36.6 million compared to noninterest income of $29.3 million for the same period in 2022. The components of noninterest income with significant fluctuations compared to the prior year period were as follows: Service charges on deposit accounts . We earn fees from our customers for deposit-related services, and these fees constitute a significant and predictable component of our noninterest income. Service charges on deposit accounts were $9.7 million for the year ended December 31, 2023, compared to $8.3 million for the 2022, an increase of $1.4 million, or 17.3%. Gain on sales of loans. We had gains on sales of loans of $2.0 million in 2023, compared to $574,000 in 2022, an increase of $1.4 million, or 243.6%, primarily due to increased SBA loan sale activity. Loss on sales of investment securities. We had losses on the sales of investment securities of $2.6 million in 2023, compared to $48,000 in 2022, an additional loss of $2.5 million. During the fourth quarter of 2023, we sold $71.5 million in securities at a loss, with a weighted average book yield of 1.98% and reinvested the funds into high yielding investments with an average book yield of 5.17%, locking in higher yields and keeping consistent, the duration and overall portfolio weighted average life. As of December 31, 2023, we expect to recoup our losses within 1.1 years. Gain on sales of other real estate owned. We had net gains on the sales or other real estate owned of $646,000 in 2023, compared to $33,000 in 2022, an increase of $613,000. The majority of the gains on sale of other real estate in 2023 resulted from the sale of two properties at a total gain of $511,000. Loss on sales / disposals of other assets. We had a disposal of former bank premises during 2022 which resulted in a loss of $717,000. 50 Table of Contents Gain on sale of banking center. We sold a banking center located in Leesville, Louisiana that resulted in a gain of $945,000 during 2023. Gain on extinguishment of debt. We extinguished $8.9 million in subordinated debt resulting in a gain on the extinguishment of debt of $1.5 million during 2023. Swap fee income. We had swap fee income from back-to-back interest rate swaps in the amount of $964,000 during 2023. Other. This category includes a variety of other income producing activities, including wire transfer fees, insurance commissions and credit card income. Other income increased $860,000, or 22.0%, for the year ended December 31, 2023, compared to the same period in 2022. Noninterest Expense ( “ Other Expense ” ) Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization, professional and regulatory fees, including Federal Deposit Insurance Corporation (“FDIC”) assessments, data processing expenses, and advertising and promotion expenses, among others. The following table presents, for the periods indicated, the major categories of noninterest expense: For the Years Ended December 31, 2023 2022 Increase (Decrease) (Dollars in thousands) Salaries and employee benefits $ 90,611 $ 85,222 $ 5,389 Non-staff expenses: Occupancy of bank premises 9,518 9,244 274 Depreciation and amortization 6,767 6,853 (86 ) Data processing 9,034 8,358 676 FDIC assessment fees 3,645 2,854 791 Legal and professional fees 3,173 2,359 814 Advertising and promotions 4,628 3,949 679 Utilities and communications 2,899 3,193 (294 ) Ad valorem shares tax 3,160 3,400 (240 ) Directors' fees 1,079 972 107 Other real estate owned expenses and write-downs 687 193 494 Merger and conversion related expenses 236 4,808 (4,572 ) Other 21,265 18,004 3,261 Total noninterest expense $ 156,702 $ 149,409 $ 7,293 Noninterest expense for the year ended December 31, 2023 increased $7.3 million, or 4.9%, to $156.7 million compared to noninterest expense of $149.4 million for the same period in 2022. The components of noninterest expense with significant fluctuations compared to the prior year period were as follows: Salaries and employee benefits . Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $90.6 million for the year ended December 31, 2023, an increase of $5.4 million, or 6.3%, compared to the same period in 2022. The increase was primarily due to additional hires for new positions and our merit increase cycle. As of December 31, 2023, we had 761 full-time equivalent employees, compared to 742 full-time equivalents as of December 31, 2022. Salaries and employee benefits included stock-based compensation expense of $4.4 million and $4.0 million for the years ended December 31, 2023 and 2022, respectively. Data processing . Data processing fees were $9.0 million and $8.4 million for the years ended December 31, 2023 and 2022, respectively, an increase of $676,000, or 8.1%. 51 Table of Contents FDIC assessment fees . FDIC assessment fees were $3.6 million and $2.9 million for the years ended December 31, 2023 and 2022, respectively, an increase of $791,000, or 27.7%, mainly due to the increased regulatory rates by the FDIC. Other real estate owned expenses and write-downs. Other real estate owned expenses and write-downs increased to $687,000 compared to $193,000 for the years ended December 31, 2023 and 2022, respectively. An increase of $494,000, or 256.0%, resulted mainly from the write-down of $432,000 on one property that we were holding for future expansion. Merger and conversion related expenses. Merger and conversion related expenses for the years ended December 31, 2022 was primarily to the acquisition of TCBI in 2022. Other . This category includes various operating and administrative expenses including business development expenses (i.e. travel and entertainment, donations and club dues), insurance, supplies and printing, equipment rent, and software support and maintenance. Other noninterest expense increased $3.3 million, or 18.1%, for the year ended December 31, 2023 compared to the same period in 2022. Income Tax Expense The amount of income tax expense is influenced by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. For the year ended December 31, 2023, income tax expense totaled $19.5 million, an increase of $5.2 million, or 36.3%, compared to $14.3 million for the same period in 2022. For the years ended December 31, 2023 and 2022, our effective tax rates were 21.6% and 20.9%, respectively. Our income tax rate expense increased in 2023 largely due to the Section 291 of the Tax Equity an Fiscal Responsibility Act of 1982 (“TEFRA”) disallowance calculation. Financial Condition Our total assets increased $594.1 million, or 9.9%, from $6.0 billion as of December 31, 2022 to $6.6 billion as of December 31, 2023, due primarily from the increases in our loan portfolio, as well as our cash and cash equivalents due to our increase in deposits. Loan Portfolio Our primary source of income is interest on loans to individuals, professionals and small-to-midsized businesses in our markets. Our loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our earning asset base. As of December 31, 2023, total loans, excluding mortgage loans held for sale, were $5.0 billion, an increase of $386.6 million or 8.4%, compared to $4.6 billion as of December 31, 2022. The increase was primarily due to the growth in our Dallas/Fort Worth metroplex, North Louisiana and New Orleans regions, offset by a reduction in the Bayou region. Additionally, $835,000 and $304,000 in mortgage loans were classified as loans held for sale as of December 31, 2023 and 2022, respectively. Total loans held for investment as a percentage of deposits were 95.1% and 95.6% as of December 31, 2023 and 2022, respectively. Total loans held for investment as a percentage of assets were 75.8% and 76.9% as of December 31, 2023 and 2022, respectively. 52 Table of Contents The following table summarizes our loan portfolio by type of loan as of the dates indicated: As of December 31, 2023 As of December 31, 2022 Amount Percent Amount Percent (Dollars in thousands) Real Estate Loans: Commercial $ 2,217,928 44.4 % $ 2,020,406 43.9 % Construction 669,798 13.4 722,074 15.7 Residential 682,394 13.7 656,378 14.2 Total Real Estate Loans 3,570,120 71.5 3,398,858 73.8 Commercial 1,358,838 27.2 1,153,873 25.0 Consumer and Other 63,827 1.3 53,445 1.2 Total loans held for investment $ 4,992,785 100.0 % $ 4,606,176 100.0 % Real Estate: Commercial loans are extensions of credit secured by owner-occupied and non-owner-occupied collateral. Repayment is generally dependent on the successful operations of the property. General economic conditions may impact the performance of these types of loans, including fluctuations in the value of real estate, vacancy rates, and unemployment trends. Real estate commercial loans also include farmland loans that can be, or are, used for agricultural purposes. These loans are usually repaid through refinancing, cash flow from the borrower’s ongoing operations, development of the property, or sale of the property. Real Estate: Commercial loans increased $197.5 million, or 9.8%, to $2.2 billion as of December 31, 2023, from $2.0 billion as of December 31, 2022. Real Estate: Construction loans include loans to small-to-midsized businesses to construct owner-occupied properties, loans to developers of commercial real estate investment properties and residential developments and, to a lesser extent, loans to individual clients for construction of single-family homes in our market areas. Risks associated with these loans include fluctuations in the value of real estate, project completion risk and changes in market trends. We are also exposed to risk based on the ability of the construction loan borrower to finance the loan or sell the property upon completion of the project, which may be affected by changes in secondary market terms and criteria for permanent financing since the time we funded the loan. Real Estate: Construction loans decreased $52.3 million, or 7.2%, to $669.8 million as of December 31, 2023, from $722.1 million as of December 31, 2022. Real Estate: Residential loans include first and second lien 1-4 family mortgage loans, as well as home equity lines of credit, in each case primarily on owner-occupied primary residences. The Company is exposed to risk based on fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness, or other personal hardship. Real estate residential loans also include multi-family residential loans originated to provide permanent financing for multi-family residential income producing properties. Repayment of these loans primarily relies on successful rental and management of the property. Real Estate: Residential loans increased $26.0 million, or 4.0%, to $682.4 million as of December 31, 2023, from $656.4 million as of December 31, 2022. Commercial loans include general commercial and industrial, or C&I, loans, including commercial lines of credit, working capital loans, term loans, equipment financing, asset acquisition, expansion, and development loans, borrowing base loans, letters of credit and other loan products, primarily in the Company’s target markets that are underwritten based on the borrower’s ability to service the debt from income. Commercial loan risk is derived from the expectation that such loans generally are serviced principally from the operations of the business, and those operations may not be successful. Any interruption or discontinuance of operating cash flows from the business, which may be influenced by events not under the control of the borrower such as economic events and changes in governmental regulations, could materially affect the ability of the borrower to repay the loan. Commercial loans increased $205.0 million, or 17.8%, to $1.4 billion as of December 31, 2023, from $1.2 billion as of December 31, 2022. 53 Table of Contents Consumer and other loans include a variety of loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans. The risk is based on changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness or other personal hardship, and fluctuations in the value of the real estate or personal property securing the consumer loan, if any. Consumer and other loans increased $10.4 million, or 19.4%, to $63.8 million as of December 31, 2023, from $53.4 million as of December 31, 2022. The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range as of date indicated are summarized in the following tables: As of December 31, 2023 One Year or Less One Through Five Years Five Through Fifteen Years After Fifteen Years Total (Dollars in thousands) Real Estate Loans: Commercial $ 251,365 $ 1,256,655 $ 620,029 $ 89,879 $ 2,217,928 Construction 325,883 278,039 45,910 19,966 669,798 Residential 79,357 401,852 137,283 63,902 682,394 Total Real Estate Loans 656,605 1,936,546 803,222 173,747 3,570,120 Commercial 520,058 594,274 243,744 762 1,358,838 Consumer and Other 35,971 23,520 4,134 202 63,827 Total loans held for investment $ 1,212,634 $ 2,554,340 $ 1,051,100 $ 174,711 $ 4,992,785 Fixed rate loans: Real Estate Loans: Commercial $ 156,227 $ 1,067,124 $ 450,884 $ 17,470 $ 1,691,705 Construction 96,020 187,970 16,388 13,866 314,244 Residential 49,434 344,549 85,731 14,952 494,666 Total Real Estate Loans 301,681 1,599,643 553,003 46,288 2,500,615 Commercial 134,242 331,029 147,388 - 612,659 Consumer and Other 26,867 17,373 3,260 159 47,659 Total fixed rate loans $ 462,790 $ 1,948,045 $ 703,651 $ 46,447 $ 3,160,933 Floating rate loans: Real Estate Loans: Commercial $ 95,138 $ 189,531 $ 169,145 $ 72,409 $ 526,223 Construction 229,863 90,069 29,522 6,100 355,554 Residential 29,923 57,303 51,552 48,950 187,728 Total Real Estate Loans 354,924 336,903 250,219 127,459 1,069,505 Commercial 385,816 263,245 96,356 762 746,179 Consumer and Other 9,104 6,147 874 43 16,168 Total floating rate loans $ 749,844 $ 606,295 $ 347,449 $ 128,264 $ 1,831,852 54 Table of Contents As of December 31, 2022 One Year or Less One Through Five Years Five Through Fifteen Years After Fifteen Years Total (Dollars in thousands) Real Estate Loans: Commercial $ 229,679 $ 1,024,273 $ 645,257 $ 121,197 $ 2,020,406 Construction 274,027 381,218 59,813 7,016 722,074 Residential 69,444 370,483 157,849 58,602 656,378 Total Real Estate Loans 573,150 1,775,974 862,919 186,815 3,398,858 Commercial 455,809 462,414 235,333 317 1,153,873 Consumer and Other 23,391 24,823 5,021 210 53,445 Total loans held for investment $ 1,052,350 $ 2,263,211 $ 1,103,273 $ 187,342 $ 4,606,176 Fixed rate loans: Real Estate Loans: Commercial $ 124,261 $ 885,532 $ 508,455 $ 9,339 $ 1,527,587 Construction 95,358 242,554 35,137 3,674 376,723 Residential 41,512 321,796 96,648 12,341 472,297 Total Real Estate Loans 261,131 1,449,882 640,240 25,354 2,376,607 Commercial 146,321 286,908 164,383 - 597,612 Consumer and Other 15,113 19,147 3,884 164 38,308 Total fixed rate loans $ 422,565 $ 1,755,937 $ 808,507 $ 25,518 $ 3,012,527 Floating rate loans: Real Estate Loans: Commercial $ 105,418 $ 138,741 $ 136,802 $ 111,858 $ 492,819 Construction 178,669 138,664 24,676 3,342 345,351 Residential 27,932 48,687 61,201 46,261 184,081 Total Real Estate Loans 312,019 326,092 222,679 161,461 1,022,251 Commercial 309,488 175,506 70,950 317 556,261 Consumer and Other 8,278 5,676 1,137 46 15,137 Total floating rate loans $ 629,785 $ 507,274 $ 294,766 $ 161,824 $ 1,593,649 Nonperforming Assets Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is generally reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due, or interest may be recognized on a cash basis as long as the remaining book balance of the loan is deemed collectible. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. We have several procedures in place to assist in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our bankers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions. We believe our conservative lending approach and focused management of nonperforming assets has resulted in sound asset quality and the timely resolution of problem assets. We had $18.8 million and $12.8 million in nonperforming assets as of December 31, 2023 and 2022, respectively. We had $17.1 million in nonperforming loans as of December 31, 2023 compared to $11.4 million as of December 31, 2022. The increase in nonperforming assets from December 31, 2022 to December 31, 2023 is primarily due to the adoption of CECL and the elimination of ASC 310-30 which excluded purchased impaired loans accreting interest income from nonperforming loans. 55 Table of Contents The following tables present information regarding nonperforming loans at the dates indicated: As of December 31, 2023 2022 2021 (Dollars in thousands) Nonaccrual loans $ 16,943 $ 11,054 $ 12,868 Accruing loans 90 or more days past due 127 335 222 Total nonperforming loans 17,070 11,389 13,090 Other nonperforming assets - 62 - Other real estate owned: Commercial real estate, construction, land and land development 1,326 1,199 1,348 Residential real estate 359 173 79 Total other real estate owned 1,685 1,372 1,427 Total nonperforming assets $ 18,755 $ 12,823 $ 14,517 Ratio of nonperforming loans to total loans held for investment 0.34 % 0.25 % 0.41 % Ratio of nonperforming assets to total assets 0.28 0.21 0.31 Ratio of nonaccrual loans to total loans held for investment 0.34 0.24 0.40 As of December 31, 2023 2022 2021 (Dollars in thousands) Nonaccrual loans by category: Real Estate Loans: Commercial $ 3,280 $ 2,644 $ 2,690 Construction 3,543 992 1,341 Residential 7,352 4,080 3,601 Total Real Estate Loans 14,175 7,716 7,632 Commercial 2,395 3,150 5,127 Consumer and Other 373 188 109 Total $ 16,943 $ 11,054 $ 12,868 As of December 31, 2023, our loan portfolio included 930 loans with an aggregate outstanding balance of $341.4 million that had previously been granted temporary payment deferrals of principal and/or interest due to the effect of the COVID-19 pandemic. As of December 31, 2022, our loan portfolio included 1,164 loans with an aggregate outstanding balance of $425.2 million that had previously been granted temporary payment deferrals. In accordance with FASB and interagency regulatory guidance issued in March 2020, loans that were modified under the terms of our COVID-19 Deferral Assistance Program are not to be considered as troubled debt restructurings to the extent that they meet the terms of such guidance under Section 4013 of the CARES Act. Loans under these deferrals remain in their current risk rating and/or past due status through the deferral period. None of these loans are currently in their deferral period at December 31, 2023 and 2022, respectively. Potential Problem Loans From a credit risk standpoint, we classify loans in one of four categories: pass, special mention, substandard or doubtful. Loans classified as loss are charged-off. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. Ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk of loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk of loss). Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating. Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed. 56 Table of Contents Credits rated doubtful have all the weaknesses inherent in those rated substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The following tables summarize our internal ratings of loans held for investment as of the dates indicated. See Note 7 of the consolidated financial statements for the presentation of loans in their credit quality categories that is in compliance with the CECL standard. As of December 31, 2023 Pass Special Mention Substandard Doubtful Total (Dollars in thousands) Real Estate Loans: Commercial $ 2,188,840 $ 18,658 $ 9,163 $ 1,267 $ 2,217,928 Construction 661,796 4,087 3,570 345 669,798 Residential 669,391 3,161 9,353 489 682,394 Total Real Estate Loans 3,520,027 25,906 22,086 2,101 3,570,120 Commercial 1,338,339 14,623 5,308 568 1,358,838 Consumer and Other 63,265 100 462 - 63,827 Total $ 4,921,631 $ 40,629 $ 27,856 $ 2,669 $ 4,992,785 As of December 31, 2022 Pass Special Mention Substandard Doubtful Total (Dollars in thousands) Real Estate Loans: Commercial $ 1,972,611 $ 35,054 $ 10,478 $ 2,263 $ 2,020,406 Construction 716,071 3,496 2,157 350 722,074 Residential 643,763 3,780 7,925 910 656,378 Total Real Estate Loans 3,332,445 42,330 20,560 3,523 3,398,858 Commercial 1,137,555 6,646 6,960 2,712 1,153,873 Consumer and Other 53,041 - 404 - 53,445 Total $ 4,523,041 $ 48,976 $ 27,924 $ 6,235 $ 4,606,176 Allowance for Credit Losses We maintain an allowance for credit losses, which includes both our allowance for loan losses and reserves for unfunded commitments, that represents management’s best estimate of the credit losses and risks inherent in the loan portfolio. In determining the allowance for credit losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for credit losses is based on internally assigned risk classifications of loans, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical credit loss rates. For additional discussion of our methodology, please refer to “— Critical Accounting Estimates — Allowance for Credit Losses. ” In connection with our review of the loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include: • for Real Estate: Commercial loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral, and the volatility of income, property value and future operating results typical for properties of that type; • for Real Estate: Construction loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, the experience and ability of the developer, and the loan to value ratio; 57 Table of Contents • for Real Estate: Residential real estate loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan to value ratio, and the age, condition and marketability of the collateral; and • for Commercial loans, the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category, and the value, nature and marketability of collateral; As of December 31, 2023, the allowance for credit losses totaled $43.7 million, or 0.88%, of total loans held for investment. As of December 31, 2022, the allowance for credit losses totaled $38.8 million, or 0.84%, of total loans held for investment. As of December 31, 2021, the allowance for credit losses totaled $29.9 million, or 0.94%, of total loans held for investment. 58 Table of Contents The following tables present, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data: For the Years Ended December 31, 2023 2022 2021 (Dollars in thousands) Average loans outstanding $ 4,859,637 $ 4,020,436 $ 3,037,020 Gross loans held for investment outstanding end of period $ 4,992,785 $ 4,606,176 $ 3,189,608 Allowance for credit losses at beginning of period $ 38,783 $ 29,936 $ 22,336 Adoption of ASU 2016-13 5,857 - - Provision for credit losses 4,483 10,667 8,559 Charge-offs: Real Estate: Commercial 2,049 51 139 Construction 36 16 29 Residential 42 191 169 Total Real Estate 2,127 258 337 Commercial 2,813 2,139 830 Consumer and other 1,489 424 469 Total charge-offs 6,429 2,821 1,636 Recoveries: Real Estate: Commercial 26 50 99 Construction 1 25 3 Residential 18 20 39 Total Real Estate 45 95 141 Commercial 672 739 423 Consumer and other 327 167 113 Total recoveries 1,044 1,001 677 Net charge-offs 5,385 1,820 959 Allowance for credit losses at end of period $ 43,738 $ 38,783 $ 29,936 Ratio of allowance for credit losses to end of period loans held for investment 0.88 % 0.84 % 0.94 % Ratio of net charge-offs to average loans 0.11 0.05 0.03 Ratio of allowance for credit losses to nonaccrual loans 258.15 350.85 232.64 For the Years Ended December 31, 2023 2022 2021 Net Charge-offs (Recoveries) Percent of Average Loans Net Charge-offs (Recoveries) Percent of Average Loans Net Charge-offs (Recoveries) Percent of Average Loans (Dollars in thousands) Real estate: Commercial $ 2,023 0.04 % $ 1 0.00 % $ 40 0.00 % Construction 35 0.00 % (9 ) 0.00 % 26 0.00 % Residential 24 0.00 % 171 0.00 % 130 0.01 % Total Real Estate Loans 2,082 0.04 % 163 0.00 % 196 0.01 % Commercial 2,141 0.05 % 1,400 0.04 % 407 0.01 % Consumer and Other 1,162 0.02 % 257 0.01 % 356 0.01 % Total net charge-offs (recoveries) $ 5,385 0.11 % $ 1,820 0.05 % $ 959 0.03 % 59 Table of Contents Although we believe that we have established our allowance for loan losses in accordance with GAAP and that the allowance for loan losses was adequate to provide for known and estimated losses in the portfolio at all times shown above, future provisions will be subject to ongoing evaluations of the risks in our loan portfolio. If we experience economic declines or if asset quality deteriorates, material additional provisions could be required. The following table shows the allocation of the allowance for credit losses among loan categories and certain other information as of the dates indicated. The allocation of the allowance for credit losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The total allowance is available to absorb losses from any loan category. For the Years Ended December 31, 2023 2022 2021 Amount Percent to Total Amount Percent to Total Amount Percent to Total (Dollars in thousands) Real estate: Commercial $ 17,882 40.9 % $ 14,922 38.5 % $ 10,841 36.2 % Construction 8,142 18.6 5,905 15.2 4,772 16.0 Residential 5,662 12.9 5,367 13.8 4,592 15.3 Total real estate 31,686 72.4 26,194 67.5 20,205 67.5 Commercial 11,796 27.0 11,950 30.8 9,077 30.3 Consumer and Other 256 0.6 639 1.7 654 2.2 Total allowance for credit losses $ 43,738 100.0 % $ 38,783 100.0 % $ 29,936 100.0 % Securities We use our securities portfolio to provide a source of liquidity, an appropriate return on funds invested, manage interest rate risk, meet collateral requirements, and meet regulatory capital requirements. As of December 31, 2023, the carrying amount of investment securities totaled $879.6 million, a decrease of $11.2 million, or 1.3%, compared to $890.8 million as of December 31, 2022. Securities represented 13.4% and 14.9% of total assets as of December 31, 2023 and 2022, respectively. Our investment portfolio consists entirely of securities classified as available for sale. As a result, the carrying values of our investment securities are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity. The following tables summarize the amortized cost and estimated fair value of investment securities as of the dates shown: As of December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (Dollars in thousands) U.S. treasury securities $ 17,690 $ - $ 1,451 $ 16,239 U.S. government agencies 10,258 - 848 9,410 Corporate bonds 49,609 - 5,770 43,839 Mortgage-backed securities 555,148 976 49,814 506,310 Municipal securities 331,273 298 27,798 303,773 Total $ 963,978 $ 1,274 $ 85,681 $ 879,571 60 Table of Contents As of December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (Dollars in thousands) U.S. treasury securities $ 32,783 $ - $ 2,668 $ 30,115 U.S. government agencies 50,288 - 2,916 47,372 Corporate bonds 48,475 25 2,496 46,004 Mortgage-backed securities 506,671 267 55,213 451,725 Municipal securities 347,382 11 31,858 315,535 Total $ 985,599 $ 303 $ 95,151 $ 890,751 All of our mortgage-backed securities are agency securities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio as of December 31, 2023. The allowance for credit losses encompasses potential expected credit losses related to the securities portfolio for credit losses. The assessment includes reviewing historical loss data for both our portfolio and similar types of investment securities to develop an estimate for the current securities portfolio. Additionally, our review of the securities portfolio for expected credit losses includes an evaluation of factors including the security issuer bond ratings, delinquency status, insurance or other available credit support, as well as our expectations of the forecasted economic outlook relevant to these securities. The results of the analysis are evaluated quarterly to confirm that credit loss estimates are appropriate for the securities portfolio. Based on our assessments, expected credit losses on the investment securities portfolio as of December 31, 2023, was negligible and therefore, no allowance for credit loss was recorded related to our investment securities. Prior to the adoption of ASU 2016-13, declines in the fair value of available-for-sale securities below their cost that were deemed to be other than temporary were reflected in earnings as realized losses. In estimating other-than-temporary impairment losses prior to January 1, 2023, management considered, among other things, (i) the length of time and the extent to which the fair value had been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The following tables set forth the fair value, maturities and approximated weighted average yield based on estimated annual income divided by the average amortized cost of the securities portfolio as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures. As of December 31, 2023 Within One Year After One Year but Within Five Years After Five Years but Within Ten Years After Ten Years Total Amount Yield Amount Yield Amount Yield Amount Yield Total Yield (Dollars in thousands) U.S. treasury securities $ - - % $ 16,239 0.80 % $ - - % $ - - % $ 16,239 0.80 % U.S. government agencies - - % 9,410 0.92 % - - % - - % 9,410 0.92 % Corporate bonds 213 - % 2,390 4.78 % 41,236 4.61 % - - % 43,839 4.60 % Mortgage-backed securities 147 1.28 % 46,339 2.06 % 191,332 2.68 % 268,492 2.73 % 506,310 2.65 % Municipal securities 16,766 1.56 % 96,739 1.55 % 117,092 1.91 % 73,176 2.38 % 303,773 1.89 % Total $ 17,126 1.54 % $ 171,117 1.63 % $ 349,660 2.65 % $ 341,668 2.66 % $ 879,571 2.43 % 61 Table of Contents As of December 31, 2022 Within One Year After One Year but Within Five Years After Five Years but Within Ten Years After Ten Years Total Amount Yield Amount Yield Amount Yield Amount Yield Total Yield (Dollars in thousands) U.S. treasury securities $ - - % $ 30,115 1.00 % $ - - % $ - - % $ 30,115 1.00 % U.S. government agencies - - % 47,372 1.63 % - - % - - % 47,372 1.63 % Corporate bonds 151 - % 2,500 4.08 % 43,353 4.49 % - - % 46,004 4.45 % Mortgage-backed securities 2,458 0.97 % 41,738 1.65 % 172,301 1.69 % 235,228 1.94 % 451,725 1.81 % Municipal securities 15,299 1.76 % 97,064 1.44 % 120,905 1.79 % 82,267 2.13 % 315,535 1.77 % Total $ 17,908 1.64 % $ 218,789 1.49 % $ 336,559 2.08 % $ 317,495 1.99 % $ 890,751 1.90 % The contractual maturity of mortgage-backed securities, collateralized mortgage obligations and asset-backed securities is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and asset-backed securities are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay. Monthly paydowns on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was 4.57 years with an estimated effective duration of 3.81 years as of December 31, 2023. As of December 31, 2023 and 2022, we did not own securities of any one issuer for which aggregate adjusted cost exceeded 10% of the consolidated shareholders’ equity as of such respective dates. As of December 31, 2023 and 2022, the Company held other equity securities of $33.9 million and $37.5 million, respectively, comprised mainly of FHLB stock, SBIC’s and financial technology (“Fintech”) fund investments. Deposits We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations and personalized service to attract and retain these deposits. Total deposits as of December 31, 2023 were $5.2 billion, an increase of $428.4 million, or 8.9%, compared to $4.8 billion as of December 31, 2022. Total uninsured deposits were $2.0 billion, or 38.9% of deposits as of December 31, 2023 compared to $1.5 billion, or 31.9%, or total deposits as of December 31, 2022. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts are estimated and are based on the same methodologies and assumptions that are used for regulatory reporting requirements for the call report. Noninterest-bearing deposits as of December 31, 2023 were $1.3 billion compared to $1.5 billion as of December 31, 2022, a decrease of $250.3 million, or 16.2%. Average deposits for the year ended December 31, 2023 were $5.0 billion, an increase of $431.4 million, or 9.5%, compared to the year ended December 31, 2022 of $4.5 billion. The average rate paid on total interest-bearing deposits increased over this period from 0.81% for the year ended December 31, 2022 to 3.00% for the year ended December 31, 2023. The increase in average rates was driven by the federal reserve raising interest rates during the years ended December 31, 2023 and 2022. In addition, the stability and the continued growth of noninterest-bearing demand accounts served to reduce the cost of deposits to 2.15% for the year ended December 31, 2023 and 0.54% for the year ended December 31, 2022. 62 Table of Contents The following table presents the monthly average balances and weighted average rates paid on deposits for the periods indicated: For the Years Ended December 31 2023 2022 Average Balance Average Rate Average Balance Average Rate (Dollars in thousands) Interest-bearing demand accounts $ 507,782 3.40 % $ 298,845 1.31 % Negotiable order of withdrawal ("NOW") accounts 468,094 1.33 % 536,742 0.30 % Limited access money market accounts and savings 1,441,836 2.77 % 1,483,763 0.81 % Certificates and other time deposits > $250k 498,054 4.01 % 208,661 1.03 % Certificates and other time deposits < $250k 650,450 3.61 % 479,871 0.98 % Total interest-bearing deposits 3,566,216 3.00 % 3,007,882 0.81 % Noninterest-bearing demand accounts 1,412,979 - % 1,539,938 - % Total deposits $ 4,979,195 2.15 % $ 4,547,820 0.54 % The ratio of average noninterest-bearing deposits to average total deposits for the years ended December 31, 2023 and 2022 was 28.4% and 33.9%, respectively. The following table sets forth the contractual maturities of certain certificates of deposit at December 31, 2023: Certificates of Deposit More Than $250,000 Certificates of Deposit of $100,000 Through $250,000 (Dollars in thousands) 3 months or less $ 119,176 $ 194,474 More than 3 months but less than 6 months 96,520 61,216 More than 6 months but less than 12 months 214,937 167,749 12 months or more 192,703 43,702 Total $ 623,336 $ 467,141 Borrowings We utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities. In addition, we use short-term borrowings to periodically repurchase outstanding shares of our common stock and for general corporate purposes. Each of these relationships are discussed below. FHLB advances . The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of December 31, 2023 and 2022, total borrowing capacity of $1.8 billion, for both periods, was available under this arrangement and $211.2 million and $410.1 million, respectively, was outstanding with a weighted average stated interest rate of 3.65% as of December 31, 2023 and 3.88% as of December 31, 2022. Our current longest dated FHLB advance matures within ten years. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio. 63 Table of Contents The following table presents our FHLB borrowings at the dates indicated. FHLB Advances (Dollars in Thousands) December 31, 2023 Amount outstanding at year-end $ 211,198 Weighted average stated interest rate at year-end 3.65 % Maximum month-end balance during the year $ 517,112 Average balance outstanding during the year $ 329,726 Weighted average interest rate during the year 4.16 % December 31, 2022 Amount outstanding at year-end $ 410,100 Weighted average stated interest rate at year-end 3.88 % Maximum month-end balance during the year $ 534,059 Average balance outstanding during the year $ 271,025 Weighted average interest rate during the year 2.39 % Bank Term Funding Program ( “ BTFP ” ) . On March 12, 2023, the Federal Reserve launched the BTFP, which offers loans to banks with a term of up to one year. The loans are secured by pledging participating banks’ U.S. treasuries, agency securities, agency mortgage-backed securities, and any other qualifying assets. These pledged securities will be valued at par for collateral purposes. The Bank participated in the BTFP and had outstanding debt of $300.0 million at December 31, 2023. These loans bear a fixed interest rate of 4.38% and mature on March 22, 2024. The following table presents our Bank Term Funding Program borrowings at the date indicated. BTFP (Dollars in Thousands) December 31, 2023 Amount outstanding at year-end $ 300,000 Weighted average stated interest rate at year-end 4.38 % Maximum month-end balance during the year $ 428,000 Average balance outstanding during the year $ 253,706 Weighted average interest rate during the year 4.46 % Subordinated Note Purchase Agreement ( “ Subordinated Debt ” ) . In December 2018 we issued subordinated notes in the amount of $25.0 million. The subordinated notes bear a fixed rate of interest at 6.75% until December 31, 2028 and a floating rate thereafter through maturity in 2033. The balance outstanding at both December 31, 2023 and 2022 was $25.0 million. These subordinated notes were issued for the purpose of paying off our long term advance and line of credit with FNBB, for general corporate purposes and to provide Tier 2 capital. The subordinated notes are redeemable by the Company at its option beginning in 2028. On March 26, 2021, we issued $52.5 million in subordinated notes. These subordinated notes bear interest at a fixed rate of 4.25% through March 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031. The balance outstanding at both December 31, 2023 and 2022 was $52.5 million. The subordinated notes are redeemable by the Company at its option beginning in 2026. On April 1, 2021, we consummated the acquisition of SSW. Under the terms of the acquisition, we issued $3.9 million in subordinated debt to the former owners of SSW. This subordinated debt bears interest at a fixed rate of 4.75% through April 1, 2026 and a floating rate, based on a benchmark rate plus 442 basis points, thereafter through maturity in 2031. The balance outstanding at both December 31, 2023 and 2022 was $3.9 million. The subordinated notes are redeemable by the Company at its option beginning in 2026. On March 1, 2022, we consummated the acquisition of TCBI. As part of the acquisition, we assumed $26.4 million in subordinated debt. Of those notes, $10.0 million bears an adjustable interest rate plus 350 basis points, based on a benchmark rate, adjusting quarterly until maturity on April 11, 2028, and was callable beginning April 11, 2023, $7.5 million bears an adjustable interest rate plus 350 basis points, based on a benchmark rate, adjusting quarterly, until maturity on December 13, 2028, and was callable beginning December 13, 2023, $8.9 million was called on May 1, 2023 and ceased bearing interest as of such date. This $8.9 million note was fully extinguished during the year ended December 31, 2023. As part of valuing these three subordinated notes from TCBI, we incurred a fair value adjustment premium of $3.4 million that will accrete over five-to-seven years, with $1.1 million and $2.9 million remaining at December 31, 2023 and December 31, 2022, respectively. We recognized $1.5 million in gains on the extinguishment of this debt during the year ended December 31, 2023. 64 Table of Contents The following table presents the Subordinated Debt at the dates indicated. Subordinated Debt (Dollars in Thousands) December 31, 2023 Amount outstanding at year-end $ 99,990 Weighted average stated interest rate at year-end 5.72 % Maximum month-end balance during the year $ 110,698 Average balance outstanding during the year $ 105,369 Weighted average interest rate during the year 5.05 % December 31, 2022 Amount outstanding at year-end $ 110,749 Weighted average stated interest rate at year-end 5.57 % Maximum month-end balance during the year $ 111,209 Average balance outstanding during the year $ 106,054 Weighted average interest rate during the year 4.82 % FNBB revolving advances . FNBB allowed us to borrow on a revolving basis up to $5.0 million. This line of credit, established on September 12, 2016, was secured by a pledge of and security interest in the common stock of our wholly-owned subsidiary, b1BANK. This line of credit carried a variable interest rate equal to the Wall Street Journal Prime rate. This FNBB line was established for the purpose of repurchasing shares of our common stock from certain of our shareholders and for general corporate purposes. This line of credit was paid in full in March 2021. This line of credit was re-established on November 3, 2021. This line of credit did not have a balance at December 31, 2021. In May 2022, we utilized the full amount of this line of $5.0 million. This line of credit carried a variable interest rate equal to the Wall Street Journal Prime rate not to be less than 3.50%. This line of credit was paid in full, and not renewed, in November 2022. Trust preferred securities . In the Pedestal acquisition, we assumed their obligations of $5.2 million in junior subordinated debentures, which are associated with $5.0 million in trust preferred securities issued by a trust. Interest on the junior subordinated debentures is accrued at an annual rate equal to the 3-month LIBOR, as determined in the agreement, plus 3.05%. Interest is payable quarterly. The agreement indenture governing the debentures allows us to defer interest payments for up to 20 consecutive quarterly periods. The trust preferred securities do not have a stated maturity date, however, they are subject to mandatory redemption on September 17, 2033, or upon earlier redemption. We have guaranteed, on a subordinated basis, distributions and other payments due on the trust preferred securities subject to the guarantee agreement and the indenture. Principal and interest payments on the junior subordinated debentures are in a superior position to the liquidation rights of holders of common stock. 65 Table of Contents Federal Funds Purchased Lines of Credit Relationships We maintain Federal Funds Purchased Lines of Credit Relationships with the following correspondent banks and limits as of December 31, 2023: Fed Funds Purchase Limits (Dollars in thousands) TIB National Association $ 45,000 PNC Bank 38,000 FNBB 35,000 First Horizon Bank 17,000 ServisFirst Bank 10,000 Total $ 145,000 The following table represents combined Federal Funds Purchased Lines of Credit for all relationships at the dates indicated. Fed Funds Purchased (Dollars in Thousands) December 31, 2023 Amount outstanding at year-end $ - Weighted average stated interest rate at year-end 0.00 % Maximum month-end balance during the year $ 14,622 Average balance outstanding during the year $ 474 Weighted average interest rate during the year 1.96 % December 31, 2022 Amount outstanding at year-end $ 14,057 Weighted average stated interest rate at year-end 4.50 % Maximum month-end balance during the year $ 14,057 Average balance outstanding during the year $ 1,970 Weighted average interest rate during the year 1.06 % Liquidity and Capital Resources Liquidity Liquidity involves our ability to utilize funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the years ended December 31, 2023 and 2022, liquidity needs were primarily met by core deposits, security and loan maturities, and amortizing investment and loan portfolios. In addition, we utilize, or have available, brokered deposits, purchased funds from correspondent banks, the Bank Term Funding Program (while available), the Federal Reserve discount window, and overnight advances from the FHLB. As of December 31, 2023 and 2022, we maintained five and six lines of credit, respectively, with correspondent banks which provided for extensions of credit with an availability to borrow up to an aggregate of $145.0 million and $154.0 million as of December 31, 2023 and 2022, respectively. At December 31, 2022, we had $14.1 million outstanding under these lines of credit. There were no funds under these lines of credit outstanding as of December 31, 2023. 66 Table of Contents The following table illustrates, during the periods presented, the mix of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the period indicated. Average assets totaled $6.3 billion and $5.5 billion for the years ended December 31, 2023 and 2022, respectively. For the Years Ended December 31, 2023 2022 Source of Funds: Deposits: Noninterest-bearing 22.3 % 28.1 % Interest-bearing 56.2 55.0 Subordinated debt (excluding trust preferred securities) 1.7 1.9 Advances from FHLB 5.2 4.9 Other borrowings 0.4 0.6 Bank Term Funding Program 4.0 - Other liabilities 0.7 0.7 Shareholders' equity 9.5 8.8 Total 100.0 % 100.0 % Uses of Funds: Loans, net of allowance for loan losses 76.0 % 72.9 % Securities available for sale 14.2 17.5 Interest-bearing deposits in other banks 2.8 2.1 Other noninterest-earning assets 7.0 7.5 Total 100.0 % 100.0 % Average noninterest-bearing deposits to average deposits 28.4 % 33.9 % Average loans to average deposits 97.6 88.4 Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average loans increased 20.9% for the year ended December 31, 2023 compared to the same period in 2022. We predominantly invest excess funds in overnight deposits with the Federal Reserve, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth. Our securities portfolio had a weighted average life of 4.57 years and an effective duration of 3.81 years as of December 31, 2023 and a weighted average life of 4.88 years and an effective duration of 4.09 years as of December 31, 2022. As of December 31, 2023, we had outstanding $1.2 billion in commitments to extend credit and $45.2 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2022, we had outstanding $1.3 billion in commitments to extend credit and $45.6 million in commitments associated with outstanding standby and commercial letters of credit. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. See “ -Off Balance Sheet Items ” below for additional information. As of December 31, 2023, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature. We had cash and cash equivalents, including federal funds sold, of $377.2 million and $168.3 million as of December 31, 2023 and 2022, respectively. Capital Resources Total shareholders’ equity increased to $644.3 million as of December 31, 2023, compared to $580.5 million as of December 31, 2022, an increase of $63.8 million, or 11.0%. This increase was primarily due to net income available to common shareholders of $65.6 million, other comprehensive income of $7.6 million resulting from the after tax effect of unrealized gains in our investment securities portfolio, and offset by dividends paid on common shares of $12.7 million. On January 23, 2024, our board of directors declared a quarterly dividend in the amount of $18.75 per preferred share to the preferred shareholders of record as of February 15, 2024. The dividend was paid on February 28, 2024. On January 23, 2024, our board of directors declared a quarterly dividend based upon our financial performance for the three months ended December 31, 2023 in the amount of $0.14 per common share to the common shareholders of record as of February 15, 2024. The dividend was paid on February 28, 2024. 67 Table of Contents The declaration and payment of dividends to our shareholders, as well as the amounts thereof, are subject to the discretion of the Board and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board. As a holding company, our ability to pay dividends is largely dependent upon the receipt of dividends from our subsidiary, b1BANK. There can be no assurance that we will declare and pay any dividends to our shareholders. Capital management consists of providing equity to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the holding company and bank levels. As of December 31, 2023 and December 31, 2022, we and b1BANK were in compliance with all applicable regulatory capital requirements, and b1BANK was classified as “well-capitalized,” for purposes of prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all applicable regulatory capital standards applicable to us. The following table presents the actual capital amounts and regulatory capital ratios for us and b1BANK as of the dates indicated. As of December 31, 2023 2022 Amount Ratio Amount Ratio (Dollars in thousands) Business First Total capital (to risk weighted assets) $ 754,990 12.85 % $ 704,840 12.75 % Tier 1 capital (to risk weighted assets) 614,975 10.46 % 557,088 10.07 % Common Equity Tier 1 capital (to risk weighted assets) 538,045 9.15 % 480,158 8.68 % Tier 1 Leverage capital (to average assets) 614,975 9.52 % 557,088 9.49 % b1BANK Total capital (to risk weighted assets) $ 730,117 12.43 % $ 657,588 11.91 % Tier 1 capital (to risk weighted assets) 686,379 11.69 % 618,805 11.20 % Common Equity Tier 1 capital (to risk weighted assets) 686,379 11.69 % 618,805 11.20 % Tier 1 Leverage capital (to average assets) 686,379 10.63 % 618,805 10.55 % Preferred Stock On September 1, 2022, we entered into a securities purchase agreement with certain investors pursuant to which we offered and sold shares of our 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, with no par value, for an aggregate purchase price of $72.0 million. The preferred stock was structured to qualify as additional Tier 1 capital under applicable regulatory capital guidelines. Holders of the preferred stock will be entitled to receive, if, when, and as declared by our board of directors, non-cumulative cash dividends at a rate of 7.50% for the first five years following issuance and thereafter at a variable rate equal to the then current 3-month secured overnight financing rate (“SOFR”), reset quarterly, plus 470 basis points. The preferred stock has a perpetual term and may not be redeemed, except under certain circumstances, under the first five years of issuance. Long Term Debt For information on our subordinated debt, please refer to “Borrowings”. FHLB Advances Advances from the FHLB totaled approximately $211.2 million and $410.1 million at December 31, 2023 and 2022, respectively. As of December 31, 2023, and 2022, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 3.65% and 3.88%, respectively, and mature within ten years. At December 31, 2022, $262.0 million in advances were short term with a rate of 4.55% and none at December 31, 2023. 68 Table of Contents Bank Term Funding Program ( “ BTFP ” ) On March 12, 2023, the Federal Reserve launched the BTFP, which offers loans to banks with a term of up to one year. The loans are secured by pledging participating banks’ U.S. treasuries, agency securities, agency mortgage-backed securities, and any other qualifying assets. These pledged securities will be valued at par for collateral purposes. The Bank participated in the BTFP and had outstanding debt of $300.0 million at December 31, 2023. These loans bear a fixed interest rate of 4.38% and mature on March 22, 2024. Contractual Obligations The following tables summarize contractual obligations and other commitments to make future payments as of December 31, 2023 and 2022 (other than non-maturity deposit obligations), which consist of future cash payments associated with our contractual obligations pursuant to our FHLB advances, subordinated debt, revolving line of credit, and non-cancelable future operating leases. Payments related to leases are based on actual payments specified in underlying contracts. Advances from the FHLB totaled approximately $211.2 million and $410.1 million as of December 31, 2023 and 2022, respectively. As of December 31, 2023 and 2022, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 3.65% and 3.88%, respectively, and maturing within ten years. We participated in the BTFP in March 2023 and as of December 31, 2023, had outstanding debt of $300.0 million, at a fixed rate of 4.38% and set to mature on March 22, 2024. We expect to either refinance the debt or pay it off with additional funding sources of which we have sufficient borrowing capacity as of December 31, 2023. The subordinated debt totaled $100.0 million and $110.7 million as of December 31, 2023 and 2022. Of this subordinated debt, $25.0 million bears interest at a fixed rate of 6.75% through December 31, 2028 and a floating rate, based on a benchmark rate plus 369 basis points, thereafter through maturity in 2033, $52.5 million of this subordinated debt bears interest at a fixed rate of 4.25% through March 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031, $3.9 million of this subordinated debt bears interest at a fixed rate of 4.75% through April 1, 2026 and a floating rate, based on a benchmark rate plus 442 basis points, thereafter through maturity in 2031. We acquired three separate notes as part of the TCBI acquisition totaling $26.4 million. Of those notes, $10.0 million bears an adjustable interest rate plus 350 basis points, based on a benchmark rate, adjusting quarterly until maturity on April 11, 2028, and callable beginning April 11, 2023, $7.5 million bears an adjustable interest rate plus 350 basis points, based on a benchmark rate, adjusting quarterly, until maturity on December 13, 2028, and callable beginning December 13, 2023, $8.9 million was called on May 1, 2023 and ceased bearing interest as of such date. This $8.9 million note was fully extinguished during the year ended December 31, 2023. As part of valuing these three subordinated notes from TCBI, we incurred a fair value adjustment premium of $3.4 million that will accrete over five-to-seven years, with $1.1 million and $2.9 million remaining at December 31, 2023 and December 31, 2022, respectively. We recognized $1.5 million in gains on the extinguishment of this debt during the year ended December 31, 2023. As of December 31, 2023 1 year or less More than 1 year but less than 3 years 3 years or more but less than 5 years 5 years or more Total (Dollars in thousands) Non-cancelable future operating leases $ 4,429 $ 7,166 $ 6,426 $ 5,617 $ 23,638 Time deposits 1,027,366 238,222 35,490 21 1,301,099 Subordinated debt - - 17,500 81,427 98,927 Advances from FHLB - 111,198 25,000 75,000 211,198 BTFP 300,000 - - - 300,000 Subordinated debt - trust preferred securities - - - 5,000 5,000 Securities sold under agreements to repurchase 18,885 - - - 18,885 Standby and commercial letters of credit 43,704 927 546 - 45,177 Commitments to extend credit 625,521 330,138 106,171 112,477 1,174,307 Total $ 2,019,905 $ 687,651 $ 191,133 $ 279,542 $ 3,178,231 69 Table of Contents As of December 31, 2022 1 year or less More than 1 year but less than 3 years 3 years or more but less than 5 years 5 years or more Total (Dollars in thousands) Non-cancelable future operating leases $ 4,135 $ 6,496 $ 4,247 $ 4,298 $ 19,176 Time deposits 601,980 145,606 38,971 20 786,577 Subordinated debt - - 8,900 98,927 107,827 Advances from FHLB 262,000 875 147,225 - 410,100 Subordinated debt - trust preferred securities - - - 5,000 5,000 Securities sold under agreements to repurchase 20,208 - - - 20,208 Standby and commercial letters of credit 18,706 26,468 377 - 45,551 Commitments to extend credit 654,067 342,844 200,971 147,288 1,345,170 Total $ 1,561,096 $ 522,289 $ 400,691 $ 255,533 $ 2,739,609 Off-Balance Sheet Items In the normal course of business, we enter into various transactions which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of the date indicated are summarized in the tables above. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. The credit risk to us in issuing letters of credit is essentially the same as that involved in extending loan facilities to our customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer. 70 Table of Contents Interest Rate Sensitivity and Market Risk As a financial institution, our primary component of market risk is sensitivity to movement in interest rates. Our asset and liability management policy provides management with the guidelines for effective interest rate risk management, and we have established a measurement system for monitoring our interest rate sensitivity position. We manage our sensitivity position within our established guidelines. Fluctuations in interest rates will ultimately impact the level of income and expense recorded on many of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities. Interest rate risk is the potential of economic losses due to interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of the current fair market value of our equity. The objective of interest rate risk management is to measure the effect on net interest income and economic value of equity and to position the balance sheet to minimize the risk of losses and maximize the amount of income without taking on unnecessary earning volatility. We seek to manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business however we may enter into derivatives contracts to hedge interest rate risk if it is appropriate given our risk profile and policy guidelines. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets. Our exposure to interest rate risk is managed by the asset-liability committee (“ALCO”) of b1BANK, in accordance with policies approved by our board of directors. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model. We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated into the model as are prepayment assumptions, maturity data and optionality. Deposit assumptions such as repricing betas and non-maturity balance decay rates are also incorporated into the model. Model assumptions are revised and updated on a regular basis as directed by policy, and more frequently if conditions merit. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions, customer behavior, and the application and timing of various management strategies. On at least a quarterly basis, we run simulation models to calculate potential impacts to net interest income and the economic value of equity. Specific details of the simulations are reflected in policy as directed by ALCO. The following table summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated: As of December 31, 2023 2022 Change in Interest Rates (Basis Points) Percent Change in Net Interest Income Percent Change in Fair Value of Equity Percent Change in Net Interest Income Percent Change in Fair Value of Equity +300 (5.50 %) (5.59 %) (8.60 %) (5.55 %) +200 (3.20 %) (3.47 %) (5.90 %) (3.65 %) +100 (1.10 %) (1.39 %) (3.50 %) (1.94 %) Base - % - % - % - % -100 0.30 % 1.40 % (0.70 %) 1.76 % -200 0.50 % 2.67 % (2.30 %) 3.38 % 71 Table of Contents The results of the simulations are primarily driven by the contractual characteristics of all balance sheet instruments and customer behavior. Impact of Inflation Our consolidated financial statements and related notes included elsewhere in this statement have been prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession. Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation. Non-GAAP Financial Measures Our accounting and reporting policies conform to GAAP, and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both. This discussion and analysis section includes certain non-GAAP financial measures (e.g., referenced as “core” or “tangible”) intended to supplement, not substitute for, comparable GAAP measures. These measures typically adjust income available to common shareholders for certain significant activities or transactions that in management’s opinion can distort period-to-period comparisons of Business First’s performance. Transactions that are typically excluded from non-GAAP measures include realized and unrealized gains/losses on former bank premises and equipment, gain/losses on sales of securities, and acquisition-related expenses (including, but not limited to, legal costs, system conversion costs, severance and retention payments, etc.). The measures also typically adjust goodwill and certain intangible assets from book value and shareholders’ equity. Management believes presentations of these non-GAAP financial measures provide useful supplemental information that is essential to a proper understanding of the operating results of the Company’s core business. These non-GAAP disclosures are not necessarily comparable to non-GAAP measures that may be presented by other companies. You should understand how such other banking organizations calculate their financial metrics or with names similar to the non-GAAP financial measures we have discussed in this statement when comparing such non-GAAP financial measures. Core Net Income. Core net income available to common shareholders for the year ended December 31, 2023 was $66.3 million, or $2.62 per diluted common share, compared to core net income available to common shareholders of $57.6 million, or $2.52 per diluted common share, for the year ended December 31, 2022. Core net income available to common shareholders for the year ended December 31, 2023 included an adjustment for $2.5 million in losses on sales of securities, $945,000 in a gain on the sale of our Leesville, Louisiana banking center, $1.5 million in a gain on the extinguishment of debt associated with the TCBI acquisition in 2022, which was attributed to the $8.9 million subordinated debt redemption, $236,000 in acquisition-related expenses, and a $432,000 write-down on former bank premises, compared to $48,000 in losses on the sales of securities, $687,000 in insurance reimbursements from storm expenditures, the incurrence of $717,000 in losses attributed to former bank premises and equipment, $5.2 million in acquisition-related expenses and $501,000 million in hurricane repair expenses for the year ended December 31, 2022. 72 Table of Contents For the Years Ended December 31, 2023 2022 2021 (Dollars in thousands, except per share data) (Unaudited) Interest Income: Interest income $ 353,327 $ 236,114 $ 170,438 Core interest income 353,327 236,114 170,438 Interest Expense: Interest expense 138,198 36,537 16,554 Core interest expense 138,198 36,537 16,554 Provision for Credit Losses: Provision for credit losses 4,483 10,886 8,047 Core provision expense 4,483 10,886 8,047 Other Income: Other income 36,642 29,310 35,782 Losses on former bank premises and equipment - 717 1,010 (Gains) losses on sale of securities 2,565 48 (378 ) Insurance reimbursement of storm expenditures - (687 ) - Gain on sale of branch (945 ) - (492 ) Gain on extinguishment of debt (1,458 ) - - Core other income 36,804 29,388 35,922 Other Expense: Other expense 156,702 149,409 117,061 Acquisition-related expenses (2) (236 ) (5,178 ) (515 ) Write-down of former bank premises (432 ) - - Occupancy and bank premises - storm repair - (501 ) (1,556 ) Core other expense 156,034 143,730 114,990 Pre-Tax Income: Pre-tax income 90,586 68,592 64,558 Losses on former bank premises and equipment - 717 1,010 (Gains) losses on sale of securities 2,565 48 (378 ) Insurance reimbursement of storm expenditures - (687 ) - Gain on sale of branch (945 ) - (492 ) Gain on extinguishment of debt (1,458 ) - - Acquisition-related expenses (2) 236 5,178 515 Write-down of former bank premises 432 - - Occupancy and bank premises - storm repair - 501 1,556 Core pre-tax income 91,416 74,349 66,769 Provision for Income Taxes: (1) Provision for income taxes 19,543 14,337 12,422 Tax on losses on former bank premises and equipment - 151 211 Tax on (gains) losses on sale of securities 542 10 (79 ) Tax on insurance reimbursement of storm expenditures - (144 ) - Tax on gain on sale of branch (200 ) - (138 ) Tax on gain on extinguishment of debt (308 ) - - Tax on acquisition-related expenses (2) 21 942 108 Tax on write-down of former bank premises 91 - - Tax on occupancy and bank premises - storm repair - 106 326 Core provision for income taxes 19,689 15,402 12,850 Preferred Dividends Preferred dividends 5,401 1,350 - Core preferred dividends 5,401 1,350 - Net Income Available to Common Shareholders: Net income available to common shareholders 65,642 52,905 52,136 Losses on former bank premises and equipment , net of tax - 566 799 (Gains) losses on sale of securities, net of tax 2,023 38 (299 ) Insurance reimbursement of storm expenditures, net of tax - (543 ) - Gain on sale of branch, net of tax (745 ) - (354 ) Gain on extinguishment of debt, net of tax (1,150 ) - - Acquisition-related expenses (2), net of tax 215 4,236 407 Write-down of former bank premises, net of tax 341 - - Occupancy and bank premises - storm repair, net of tax - 395 1,230 Core net income available to common shareholders $ 66,326 $ 57,597 $ 53,919 Diluted Earnings Per Common Share: Diluted earnings per common share $ 2.59 $ 2.32 $ 2.53 Losses on former bank premises and equipment , net of tax - 0.02 0.04 (Gains) losses on sale of securities, net of tax 0.08 - (0.02 ) Insurance reimbursement of storm expenditures, net of tax - (0.02 ) - Gain on sale of branch, net of tax (0.03 ) - (0.02 ) Gain on extinguishment of debt, net of tax (0.04 ) - - Acquisition-related expenses (2), net of tax 0.01 0.18 0.02 Write-down of former bank premises, net of tax 0.01 - - Occupancy and bank premises - storm repair, net of tax - 0.02 0.06 Core diluted earnings per common share $ 2.62 $ 2.52 $ 2.61 (1) Tax rates, exclusive of certain nondeductible acquisition-related expenses and goodwill, utilized were 21% for both 2023 and 2022. These rates approximate the marginal tax rates for the applicable periods. (2) Includes merger and conversion-related expenses and salary and employee benefits. 73 Table of Contents Tangible Book Value Per Common Share. Tangible book value per common share is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (1) tangible common equity as shareholders’ equity less preferred stock, goodwill, and core deposit and customer intangible assets, net of accumulated amortization, and (2) tangible book value per common share as tangible common equity divided by shares of common stock outstanding. The most directly comparable GAAP financial measure for tangible book value per common share is book value per common share. The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and presents tangible book value per common share compared to book value per common share: As of December 31, 2023 2022 (Dollars in thousands, except per share data) (Unaudited) Tangible Common Equity Total shareholders' equity $ 644,259 $ 580,481 Preferred stock (71,930 ) (71,930 ) Total common shareholders' equity 572,329 508,551 Adjustments: Goodwill (88,391 ) (88,543 ) Core deposit and customer intangibles (11,895 ) (14,042 ) Total tangible common equity $ 472,043 $ 405,966 Common shares outstanding (1) 25,351,809 25,110,313 Book value per common shares (1) $ 22.58 $ 20.25 Tangible book value per common shares (1) 18.62 16.17 (1) Excludes the dilutive effect, if any, of 217,094 and 184,015 shares of common stock issuable upon exercise of outstanding stock options and restricted stock awards as of December 31, 2023 and 2022, respectively. 74 Table of Contents Tangible Common Equity to Tangible Assets . Tangible common equity to tangible assets is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit and customer intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common shareholders’ equity to total assets. The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and total assets to tangible assets: As of December 31, 2023 2022 (Dollars in thousands, except per share data) (Unaudited) Tangible Common Equity Total shareholders' equity $ 644,259 $ 580,481 Preferred stock (71,930 ) (71,930 ) Total common shareholders' equity 572,329 508,551 Adjustments: Goodwill (88,391 ) (88,543 ) Core deposit and customer intangibles (11,895 ) (14,042 ) Total tangible common equity $ 472,043 $ 405,966 Tangible Assets Total Assets $ 6,584,550 $ 5,990,460 Adjustments: Goodwill (88,391 ) (88,543 ) Core deposit and customer intangibles (11,895 ) (14,042 ) Total tangible assets $ 6,484,264 $ 5,887,875 Common Equity to Total Assets 8.7 % 8.5 % Tangible Common Equity to Tangible Assets 7.3 6.9 Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates. We have identified the following critical accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of our financial statements to those judgments and assumptions, are critical to an understanding of our financial condition and results of operations. We believe that the judgments, estimates and assumptions used in the preparation of our financial statements are appropriate. Acquired Loans Loans acquired in business combinations are initially recorded at fair value which includes an estimate of credit losses expected to be realized over the remaining lives of the loans. Acquired loans are accounted for based upon a determination of whether they were purchased with more-than insignificant amount of credit deterioration (“PCD” loans) or an insignificant amount of credit deterioration (“non-PCD” loans), in either case as compared to origination. In either case, the difference between the estimated fair value of the acquired loan related to non-credit deterioration is treated as an adjustment to the contractual yield and accreted into interest income over the remaining life of the loan. 75 Table of Contents Allowance for Credit Losses on Loans and Unfunded Commitments The allowance for credit losses is established for current expected credit losses on the Company’s loan portfolio, including unfunded credit commitments. The allowance for credit losses is recorded against outstanding loan balances and unfunded credit commitments and represents an estimate of the expected losses within the portfolio at the end of the relevant reporting period. As further discussed in the consolidated financial statements in Note 1 – Summary of Significant Accounting Policies, our policies for the allowance for credit losses were modified on January 1, 2023, to reflect the adoption of Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments – Credit Losses. Management estimates the allowance for credit losses by considering forecast macroeconomic conditions, trends in the portfolio, credit management and underwriting practices and economic conditions affecting our operating footprint. After the forecast period, the Company reverts to long-term historical loss experience on a straight-line basis over a one-year period, adjusted for the composition of the current loan portfolio, to estimate losses over the remaining lives of the portfolio. Development of the estimate is dependent on reported peer losses. Individual loan loss estimates are generally dependent on the fair value of collateral, as well as estimates of the cost to market and sell collateral associated with an individual loan. These estimates are sensitive specific individual collateral markets and can change significantly based on the specific collateral. To a lesser extent, individual reserve estimates reflect specific loan cash flow amounts, which are dependent on borrower specific repayment expectations. The results of our estimated allowance for credit losses also incorporate the reserve for unfunded lending commitments. This reserve methodology is similar to the methodology for loans, however, an added estimate of the expected use of unfunded credit commitments is included in the estimate. Overall, the allowance for credit losses is based upon management’s best estimate using available information at the time. The estimate can be significantly impacted by unexpected changes in the macroeconomic environment, borrower behavior, credit management practices or other relevant credit information. Purchase Accounting Adjustments (other than loans) The Company accounts for acquisitions using the acquisition method of accounting. Under this method, the Company records the assets acquired, including identified intangible assets, and liabilities assumed, at their respective fair values, which generally involves estimates based on third party valuations, such as appraisals, discounted cash flow analyses or other valuation techniques, as well as internal valuations for certain instruments. Core deposit intangibles, deposit premiums, securities, properties, and borrowings are some of the more subjective instruments which are generally fair valued by the Company during acquisitions. Further, the determination of the useful lives as well as the appropriate amortization method of other intangible assets is also subjective. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk. Reference is made to the subheading entitled “Interest Rate Sensitivity and Market Risk” of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this report.