Investar Holding Corp 10-K

Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock is listed on the Nasdaq Global Market (the “Nasdaq”) under the symbol “ISTR.” As of March 4, 2024, there were approximately 712 holders of record of our common stock including participants in security position listings. Dividend Policy The Company has paid a quarterly dividend since 2011 and intends to continue to declare dividends on a quarterly basis. The declaration of dividends is at the discretion of our board of directors and will depend on our financial performance, future prospects, regulatory requirements and other factors deemed relevant by the board of directors. Since we are a holding company with no material business activities, our ability to pay dividends is substantially dependent upon the ability of Investar Bank to transfer funds to us in the form of dividends, loans and advances. The Bank’s ability to pay dividends and make other distributions and payments to us depends upon the Bank’s earnings, financial condition, general economic conditions, compliance with regulatory requirements and other factors. In addition, the Bank’s ability to pay dividends to us is itself subject to various legal, regulatory and other restrictions. See Item 1. Business – Supervision and Regulation – Dividends , above for a discussion of the restrictions on dividends under federal banking laws and regulations. In addition, as a Louisiana corporation, we are subject to certain restrictions on dividends under the Louisiana Business Corporation Act. Generally, a Louisiana corporation may pay dividends to its shareholders unless, after giving effect to the dividend, either (1) the corporation would not be able to pay its debts as they come due in the usual course of business or (2) the corporations’ total assets are less than the sum of its total liabilities and the amount that would be needed, if the corporation were to be dissolved at the time of the payment of the dividend, to satisfy the preferential rights of shareholders whose preferential rights are superior to those receiving the dividend. In addition, our existing and future debt agreements limit, or may limit, our ability to pay dividends. Under the terms of our 5.125% Fixed-to-Floating Rate Subordinated Notes due 2029, we may not pay a dividend if either our parent company or the Bank, both immediately prior to the declaration of the dividend and after giving effect to the payment of the dividend, would not maintain regulatory capital ratios that are at “well capitalized” levels for regulatory capital purposes. We are also prohibited from paying dividends upon and during the continuance of any Event of Default under such notes. Under the terms of our 5.125% Fixed-to-Floating Rate Subordinated Notes due 2032, we are prohibited from paying dividends upon and during the continuance of any Event of Default under such notes. Finally, our ability to pay dividends may be limited on account of the junior subordinated debentures that we assumed through acquisitions. We must make payments on the junior subordinated debentures before any dividends can be paid on our common stock. These restrictions do not, and are not expected in the future to, materially limit the Company’s ability to pay dividends to its shareholders in an amount consistent with the Company’s history of paying dividends. 29 Table of Contents Stock Performance Graph The above graph compares the cumulative total shareholder return on the Company’s common stock over a measurement period beginning at the market close on the last trading day of 2018, with (i) the cumulative total return on the stocks included in the Russell 3000 Index and (ii) the cumulative total return on the stocks included in the S&P United States SmallCap Banks Index, which includes banks with market capitalizations of $250 million to $1 billion. The performance graph assumes that the value of the investment in our common stock, the Russell 3000 Index and the S&P United States SmallCap Banks Index was $100 at December 31, 2018 and that all dividends were reinvested. Index 12/31/2018 6/30/2019 12/31/2019 6/30/2020 Investar Holding Corporation $ 100.00 $ 96.39 $ 97.72 $ 59.36 Russell 3000 100.00 118.71 131.02 126.47 S&P US SmallCap Banks 100.00 114.88 125.46 85.84 12/31/2020 6/30/2021 12/31/2021 6/30/2022 Investar Holding Corporation $ 68.61 $ 95.61 $ 77.51 $ 93.00 Russell 3000 158.39 182.32 199.03 157.04 S&P US SmallCap Banks 113.94 144.29 158.62 133.49 12/31/2022 6/30/2023 12/31/2023 Investar Holding Corporation $ 92.27 $ 52.68 $ 65.91 Russell 3000 160.80 186.80 202.54 S&P US SmallCap Banks 139.85 108.62 140.55 There can be no assurance that our common stock performance will continue in the future with the same or similar trends depicted in the performance graph above. We will not make or endorse any predictions as to future stock performance. The information provided under the heading “ Stock Performance Graph ” shall not be deemed to be “ soliciting material ” or to be “ filed ” with the SEC or subject to its proxy regulations or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, other than as provided in Item 201 of Regulation S-K. The information provided in this section shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. 30 Table of Contents Unregistered Sales of Equity Securities Not applicable. Issuer Purchases of Equity Securities Period (a) Total Number of Shares (or Units) Purchased (1) (b) Average Price Paid per Share (or Unit)(2) (c ) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Be Purchased Under the Plans or Programs(3) October 1, 2023 to October 31, 2023 22,000 $ 10.67 22,000 524,032 November 1, 2023 to November 30, 2023 9,794 9.89 9,766 514,266 December 1, 2023 to December 31, 2023 — — — 514,266 31,794 $ 10.43 31,766 514,266 (1) Includes 28 shares surrendered to cover the payroll taxes due upon the vesting of restricted stock. (2) The average price paid per share does not include the effect of excise tax expense incurred on net stock repurchases. (3) The Company has had a stock repurchase program since 2015. On July 19, 2023, the Company announced that its board of directors authorized the repurchase of an additional 350,000 shares of the Company’s common stock under its stock repurchase plan. As of December 31, 2023, the Company had 514,266 shares remaining available under the program. Securities Authorized for Issuance under Equity Compensation Plans Please refer to the information under the heading “ Securities Authorized for Issuance under Equity Compensation Plans ” in Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters , for a discussion of the securities authorized for issuance under the Company’s equity compensation plans. Item 6. [Reserved] 31 Table of Contents Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations This section presents management’s perspective on the financial condition and results of operations of Investar Holding Corporation and its wholly-owned subsidiary, Investar Bank, National Association (the “Bank,” together with Investar Holding Corporation, the “Company,” “we,” “our,” or “us”). The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes and other supplemental information included herein. Certain risks, uncertainties and other factors, including those set forth under Item 1A. Risk Factors in Part I, and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected results discussed in the forward-looking statement appearing in this discussion and analysis. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This annual report on Form 10-K, both in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere, contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include statements relating to our projected growth, anticipated future financial performance, changes in our allowance for credit losses including due to the adoption of ASU 2016-13, anticipated future credit quality and our potential ability to achieve performance and strategic goals, as well as statements relating to the anticipated effects of these factors on our business, financial condition and results of operations. These statements can typically be identified through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “think,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. Our forward-looking statements contained herein are based on assumptions and estimates that management believes to be reasonable in light of the information available at this time. However, many of these statements are inherently uncertain and beyond our control and could be affected by many factors. Factors that could have a material effect on our business, financial condition, results of operations, cash flows and future growth prospects can be found in Item 1A. Risk Factors . These factors include, but are not limited to, the following, any one or more of which could materially affect the outcome of future events: • the significant risks and uncertainties for our business, results of operations and financial condition, as well as our regulatory capital and liquidity ratios and other regulatory requirements caused by business and economic conditions generally and in the financial services industry in particular, whether nationally, regionally or in the markets in which we operate; • changes in inflation, interest rates, yield curves and interest rate spread relationships that affect our loan and deposit pricing; • our ability to continue to successfully execute the pivot of our near-term strategy from primarily a growth strategy to a strategy primarily focused on consistent, quality earnings through the optimization of our balance sheet, and our ability to successfully execute a long-term growth strategy; • our ability to achieve organic loan and deposit growth, and the composition of that growth; • a reduction in liquidity, including as a result of a reduction in the amount of deposits we hold or other sources of liquidity, which may be caused by, among other things, disruptions in the banking industry similar to those that occurred in early 2023 that caused bank depositors to move uninsured deposits to other banks or alternative investments outside the banking industry; • our ability to identify and enter into agreements to combine with attractive acquisition partners, finance acquisitions, complete acquisitions after definitive agreements are entered into, and successfully integrate and grow acquired operations; • our adoption on January 1, 2023 of ASU 2016-13, and inaccuracy of the assumptions and estimates we make in establishing reserves for credit losses and other estimates; • changes in the quality or composition of our loan portfolio, including adverse developments in borrower industries or in the repayment ability of individual borrowers; • changes in the quality and composition of, and changes in unrealized losses in, our investment portfolio, including whether we may have to sell securities before their recovery of amortized cost basis and realize losses; • the extent of continuing client demand for the high level of personalized service that is a key element of our banking approach as well as our ability to execute our strategy generally; • our dependence on our management team, and our ability to attract and retain qualified personnel; • the concentration of our business within our geographic areas of operation in Louisiana, Texas and Alabama; 32 Table of Contents • increasing costs of complying with new and potential future regulations; • new or increasing geopolitical tensions, including resulting from wars in Ukraine and Israel and surrounding areas; • the emergence or worsening of widespread public health challenges or pandemics including COVID-19; • concentration of credit exposure; • any deterioration in asset quality and higher loan charge-offs, and the time and effort necessary to resolve problem assets; • fluctuations in the price of oil and natural gas; • data processing system failures and errors; • risks associated with our digital transformation process, including increased risks of cyberattacks and other security breaches and challenges associated with addressing the increased prevalence of artificial intelligence; • risks of losses resulting from increased fraud attacks against us and others in the financial services industry; • potential impairment of our goodwill and other intangible assets; • our potential growth, including our entrance or expansion into new markets, and the need for sufficient capital to support that growth; • the impact of litigation and other legal proceedings to which we become subject; • competitive pressures in the commercial finance, retail banking, mortgage lending and consumer finance industries, as well as the financial resources of, and products offered by, competitors; • the impact of changes in laws and regulations applicable to us, including banking, securities and tax laws and regulations and accounting standards, as well as changes in the interpretation of such laws and regulations by our regulators; • changes in the scope and costs of FDIC insurance and other coverages; • governmental monetary and fiscal policies; • hurricanes, tropical storms, tropical depressions, floods, winter storms, droughts and other adverse weather events, all of which have affected our market areas from time to time; other natural disasters; oil spills and other man-made disasters; acts of terrorism; other international or domestic calamities; acts of God; and other matters beyond our control; and • other circumstances, many of which are beyond our control. The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included herein. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements. 33 Table of Contents Overview Through our wholly-owned subsidiary Investar Bank, National Association, we provide full banking services, excluding trust services, tailored primarily to meet the needs of individuals, professionals, and small to medium-sized businesses. Our primary areas of operation are south Louisiana (approximat ely 80% of our tota l deposits as of December 31, 2023), including Baton Rouge, New Orleans, Lafayette, Lake Charles, and their surrounding areas; southeast Texas, primarily Houston and its surrounding area and Alabama, including York and Oxford and their surrounding areas. As of March 7, 2024 , we operated 28 fu ll service bran ches comprised of 20 full service branches in Louisiana, two full service branches in Texas, and six full service branches in Alabama. Our Bank commenced operations in 2006 and we completed our initial public offering in July 2014. On July 1, 2019, the Bank changed from a Louisiana state bank charter to a national bank charter and its name changed to Investar Bank, National Association. During 2023, we pivoted our near-term strategy from primarily a growth strategy to primarily a focus on consistent, quality earnings through the optimization of our balance sheet. Our long-term strategy includes organic growth through high quality loans and growth through acquisitions, including whole-bank acquisitions, strategic branch acquisitions and asset acquisitions. We have completed seven whole-bank acquisitions since 2011 and regularly review acquisition opportunities. Our most recent whole bank acquisition was completed in April 2021. During our last three fiscal years, we have not opened any de novo branch locations; however, in the third quarter of 2023, we converted an existing loan and deposit production office in Tuscaloosa, Alabama to a cashless branch designed to provide a digital banking experience. During the third and fourth quarters of 2023, we purchased commercial and industrial revolving lines of credit with an unpaid principal balance of $162.7 million in two tranches. We have continued to evaluate opportunities to improve our branch network efficiency, leverage our digital initiatives, and further reduce costs. We closed five branches during our last three fiscal years, and one in Alabama during the first quarter of 2024. Three of the branches had been acquired, and the closures involved anticipated synergies that resulted in significant cost savings. In 2022, we sold five former branch locations and three tracts of land that were being held for future branch locations. On January 27, 2023, we completed the sale of certain assets, deposits and other liabilities associated with our Alice, Texas and Victoria, Texas branch locations to First Community Bank in order to focus more on our core markets. Of the Bank’s entire branch network, these two locations were geographically the most distant from our Louisiana headquarters. During the third quarter of 2023, we ceased operation of 14 ATMs. In an effort to focus more on our core business and optimize profitability, in the third quarter of 2023, we made the strategic decision to exit the consumer mortgage origination business. Consumer mortgage loan products are typically long-term and fixed-rate and generally require a higher relative allowance for credit losses than other loan products. Consumer mortgage volumes have decreased to historical lows due to the combination of rising housing prices and interest rates and constriction of housing supply. As a result of this decision, we further optimized our workforce and will continue to dedicate resources to our more profitable business lines. Related severance expense was $0.1 million. Substantially all of the consumer mortgage portfolio is included in the 1-4 family loan category. Our principal business is lending to and accepting deposits from individuals and small to medium-sized businesses in our areas of operation. As a financial holding company operating through one reportable segment, we g enerate our income principally from interest on loans and, to a lesser extent, our securities investments, as well as from fees charged in connection with our various loan and deposit services. Our principal expenses are interest expense on interest-bearing customer deposits and borrowings, salaries and employee benefits, occupancy costs, data processing and other operating expenses. We measure our performance through our net interest margin, return on average assets, and return on average equity, among other metrics, while seeking to maintain appropriate regulatory leverage and risk-based capital ratios. 34 Table of Contents For certain GAAP performance measures, see “ Certain Performance Indicators ” below. We also monitor changes in our tangible equity, tangible assets, tangible book value per share, and our efficiency ratio, shown in the section “ Certain Performance Indicators: Non-GAAP Financial Measures ” below. Certain Performance Indicators As of and for the years ended December 31, (In thousands, except share data) 2023 (1) 2022 2021 (2) 2020 (2) 2019 (2) Financial Information Total assets $ 2,815,155 $ 2,753,807 $ 2,513,203 $ 2,321,181 $ 2,148,916 Total stockholders' equity 226,768 215,782 242,598 243,284 241,976 Net interest income 74,520 89,785 83,814 73,534 64,818 Net income 16,678 35,709 8,000 13,889 16,839 Diluted earnings per share 1.69 3.50 0.76 1.27 1.66 Performance Ratios Return on average assets 0.60 % 1.37 % 0.31 % 0.61 % 0.85 % Return on average equity 7.63 15.63 3.22 5.77 8.21 Net interest margin 2.83 3.67 3.53 3.49 3.51 Dividend payout ratio 23.37 10.31 40.26 19.69 13.55 Capital Ratios Total equity to total assets 8.06 % 7.84 % 9.65 % 10.48 % 11.26 % Tangible equity to tangible assets (3) 6.65 6.37 8.04 9.22 9.96 (1) During 2023 we purchased commercial and industrial lines of credit with an unpaid principal balance of $162.7 million. We also sold certain assets, deposits, and other liabilities associated with two branches in Texas previously acquired from PlainsCapital Bank. (2) The following acquisitions are included from the date of each acquisition: On March 1, 2019, the Company acquired Mainland Bank, by merger with and into the Bank. On November 1, 2019, the Company acquired Bank of York, by merger with and into the Bank. On February 21, 2020, the Bank acquired two branches from PlainsCapital Bank. On April 1, 2021, the Company acquired Cheaha Financial Group, Inc. and its wholly-owned subsidiary Cheaha Bank, by merger with and into the Company and Bank, respectively. (3) Non-GAAP financial measure. See reconciliation below. Certain Performance Indicators: Non-GAAP Financial Measures Our accounting and reporting policies conform to accounting principles generally accepted in the United States, or GAAP, and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional metrics. The efficiency ratio, tangible book value per share, and the ratio of tangible equity to tangible assets are not financial measures recognized under GAAP and, therefore, are considered non-GAAP financial measures. 35 Table of Contents Our management, banking regulators, financial analysts and investors use these non-GAAP financial measures to compare the capital adequacy of banking organizations with significant amounts of preferred equity and/or goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. Tangible equity, tangible assets, tangible book value per share or related measures should not be considered in isolation or as a substitute for total stockholders’ equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate tangible equity, tangible assets, tangible book value per share and any other related measures may differ from that of other companies reporting measures with similar names. The following table reconciles, as of the dates set forth below, stockholders’ equity (on a GAAP basis) to tangible equity and total assets (on a GAAP basis) to tangible assets and calculates both our tangible book value per share and efficiency ratio (dollars in thousands). As of and for the years ended December 31, 2023 2022 2021 2020 2019 Total stockholders’ equity - GAAP $ 226,768 $ 215,782 $ 242,598 $ 243,284 $ 241,976 Adjustments: Goodwill 40,088 40,088 40,088 28,144 26,132 Core deposit intangible 2,132 2,959 3,848 3,988 4,803 Trademark intangible 100 100 100 100 100 Tangible equity $ 184,448 $ 172,635 $ 198,562 $ 211,052 $ 210,941 Total assets - GAAP $ 2,815,155 $ 2,753,807 $ 2,513,203 $ 2,321,181 $ 2,148,916 Adjustments: Goodwill 40,088 40,088 40,088 28,144 26,132 Core deposit intangible 2,132 2,959 3,848 3,988 4,803 Trademark intangible 100 100 100 100 100 Tangible assets $ 2,772,835 $ 2,710,660 $ 2,469,167 $ 2,288,949 $ 2,117,881 Total shares outstanding 9,748,067 9,901,847 10,343,494 10,608,869 11,228,775 Book value per share $ 23.26 $ 21.79 $ 23.45 $ 22.93 $ 21.55 Effect of adjustments (4.34 ) (4.36 ) (4.25 ) (3.04 ) (2.76 ) Tangible book value per share $ 18.92 $ 17.43 $ 19.20 $ 19.89 $ 18.79 Total equity to total assets 8.06 % 7.84 % 9.65 % 10.48 % 11.26 % Effect of adjustments (1.41 ) (1.47 ) (1.61 ) (1.26 ) (1.30 ) Tangible equity to tangible assets 6.65 % 6.37 % 8.04 % 9.22 % 9.96 % Efficiency ratio (1) Noninterest expense $ 62,630 $ 60,865 $ 63,062 $ 57,131 $ 48,168 Net interest income 74,520 89,785 83,814 73,534 64,818 Noninterest income 6,538 18,350 12,042 12,096 6,216 Efficiency ratio 77.26 % 56.29 % 65.79 % 66.72 % 67.81 % (1) Calculated as noninterest expense divided by the sum of net interest income (before provision for credit losses) and noninterest income. Critical Accounting Estimates The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. Although independent third parties are often engaged to assist us in the estimation process, management evaluates the results, challenges assumptions used and considers other factors which could impact these estimates. Actual results may differ from these estimates under different assumptions or conditions. For more detailed information about our accounting policies, please refer to Note 1. Summary of Significant Accounting Policies. The following discussion presents our critical accounting estimates, which are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We believe that the judgments, estimates and assumptions that we use in the preparation of our consolidated financial statements are appropriate. Allowance for Credit Losses . In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard (Accounting Standards Update “ASU” 2016-13), referred to as the Current Expected Credit Loss (“CECL”) standard, which became effective for us, as a smaller reporting company, on January 1, 2023. The CECL methodology requires that lifetime expected credit losses be recorded at the time the financial asset is originated or acquired, and be adjusted each period for changes in expected lifetime credit losses. The CECL methodology replaces multiple prior impairment models under U.S. GAAP that generally required that a loss be “incurred” before it was recognized, and represents a significant change from prior U.S. GAAP. Results for reporting periods beginning prior to January 1, 2023 are presented in accordance with ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. For reporting periods beginning on and after January 1, 2023, reflecting the adoption of ASU 2016-13: On January 1, 2023, we adopted Accounting Standards Codification (“ASC”) Topic 326, “ Financial Instruments—Credit Losses ,” commonly referred to as Current Expected Credit Losses (“CECL”), on a modified retrospective basis. The provisions of this guidance required a material change to the manner in which the Company estimates and reports losses on financial instruments, including loans and unfunded lending commitments, select investment securities, and other assets carried at amortized cost. The allowance is sensitive to external factors including the general health of the economy, as evidenced by changes in interest rates, gross domestic product, unemployment rates, and changes in real estate demand and values. Management considers these variables and all other available information when establishing the final level of the allowance. These variables and others have the ability to result in actual loan losses that differ from the originally estimated amounts. Changes in the factors used by management to determine the appropriateness of the allowance or the availability of new information could cause the allowance to be increased or decreased in future periods. The Company’s management considers available forecasts, current events not captured and our specific portfolio characteristics and applies weights to the scenario output based on a best estimate of likely outcomes. Changing economic conditions have introduced enhanced estimation uncertainty in the forecasts used to estimate expected credit loss. Our credit loss models were built using historical data that may not correlate to existing economic conditions. Such forecasted information is inherently uncertain, therefore, actual results may differ significantly from management’s estimates. The quantitative loss rate analysis is supplemented by a review of qualitative factors that considers whether conditions differ from those existing during the historical periods used in the development of the credit loss models. Such factors include, but are not limited to, changes in current and expected future economic conditions, changes in the nature and volume of the portfolio, changes in levels of concentrations, changes in the volume and severity of past due loans, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry. While quantitative data for these factors is used where available, there is significant judgment applied in these processes. For credits that are individually evaluated, a specific allowance is calculated as the shortfall between the credit’s value and the Bank’s exposure. The loan’s value is measured by either the fair value of the collateral of the loan based on third-party appraisals if it is collateral dependent, or based on a discounted cash flow methodology. Collatera l on impaired loans may include, but is not limited to, commercial and residential real estate and accounts receivable. Values for impaired credits are highly subjective and based on information available at the time of valuation and the current resolution strategy. These values are difficult to assess and have heightened uncertainty resulting from current market conditions. Actual results could differ from these estimates. Management considers the appropriateness of these critical assumptions as part of its allowance review and believes the allowance for credit loss level is appropriate based on information available through the financial statement date. Please refer to Note 3. Loans and Allowance for Credit Losses, and Note 1. Summary of Significant Accounting Policies – Allowance for Credit Losses and – Accounting Standards Adopted in 2023, for additional discussion. For reporting periods prior to January 1, 2023, prior to the adoption of ASU 2016-13: The allowance for loan losses was established as losses were estimated through a provision for loan losses charged to earnings. Through December 31, 2022, the allowance for loan losses was based on the amount that management believed would be adequate to absorb probable losses inherent in the loan portfolio based on, among other things, evaluations of the collectability of loans and prior loan loss experience. The evaluations took into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect borrowers’ ability to pay. Another component of the allowance was losses on loans assessed as impaired under FASB Accounting Standards Codification (“ASC”) Topic 310,“ Receivables ” (“ASC 310”). The balance of the loans determined to be impaired under ASC 310 and the related allowance was included in management’s estimation and analysis of the allowance for loan losses. Allowances for impaired loans were generally determined based on collateral values or the present value of estimated cash flows. 36 Table of Contents The determination of the appropriate level of the allowance was inherently subjective as it requires estimates that are susceptible to significant revision as more information became available. We had an established methodology to determine the adequacy of the allowance for loan losses that assessed the risks and losses inherent in our portfolio and portfolio segments. We have an internally developed model that required significant judgment to determine the estimation method that fit the credit risk characteristics of the loans in our portfolio and portfolio segments. Qualitative and environmental factors that may not be directly reflected in quantitative estimates include: asset quality trends, changes in loan concentrations, new products and process changes, changes and pressures from competition, changes in lending policies and underwriting practices, trends in the nature and volume of the loan portfolio, and national and regional economic trends. Changes in these factors were considered in determining changes in the allowance for loan losses. The impact of these factors on our qualitative assessment of the allowance for loan losses could change from period to period based on management’s assessment of the extent to which these factors were already reflected in historic loss rates. The uncertainty inherent in the estimation process was also considered in evaluating the allowance for loan losses. Acquisition Accounting . We account for our acquisitions under ASC Topic 805, “ Business Combinations ” (“ASC 805”), which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value (which is discussed below). The excess purchase price over the fair value of net assets acquired is recorded as goodwill. If the fair value of the net assets acquired exceeds the purchase price, a bargain purchase gain is recognized. For reporting periods beginning on and after January 1, 2023, reflecting the adoption of ASU 2016-13: ASU 2016-13 amended the accounting model for purchased financial assets and replaced the guidance for purchased credit impaired (“PCI”) financial assets with the concept of purchased credit deteriorated (“PCD”) assets. For PCD assets, the CECL estimate is recognized through the allowance for credit losses with an offset to the amortized cost basis of the PCD asset at the date of acquisition. Subsequent changes in the allowance for credit losses for PCD assets are recognized through a provision for credit losses on loans. We used the prospective transition approach for PCD loans that were previously classified as PCI and accounted for under ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). As permitted under ASU 2016-13, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. Please refer to Note 1. Summary of Significant Accounting Policies – Acquisition Accounting and – Accounting Standards Adopted in 2023 , for additional discussion. For reporting periods prior to January 1, 2023, prior to the adoption of ASU 2016-13: Because the fair value measurements incorporated assumptions regarding credit risk, no allowance for loan losses related to acquired loans was recorded on the acquisition date. The fair value measurements of acquired loans were based on estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. The fair value adjustment was amortized over the life of the loan using the effective interest method. Through December 31, 2022, we accounted for acquired impaired loans under ASC Topic 310-30 . An acquired loan was considered impaired when there was evidence of credit deterioration since origination and it was probable at the date of acquisition that we would be unable to collect all contractually required payments. ASC 310-30 prohibited the carryover of an allowance for loan losses for acquired impaired loans. Over the life of the acquired loans, we continually estimated the cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. As of the end of each fiscal quarter, we evaluated the present value of the acquired loans using the effective interest rates. For any increases in cash flows expected to be collected, we adjusted the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life, while we recognized a provision for loan loss in the consolidated statement of operations if the cash flows expected to be collected had decreased. Overview of Financial Condition and Results of Operations Net income for the year ended December 31, 2023 totaled $16.7 million, or $1.69 per diluted share, compared to $35.7 million, or $3.50 per diluted share, for the year ended December 31, 2022. This represents a $19.0 million, or a 53.3%, decrease in net income. Net income decreased primarily due to a $15.3 million decrease in net interest income and an $11.8 million decrease in noninterest income, partially offset by a $2.0 million negative provision for credit losses in 2023 compared to a provision for credit losses of $2.9 million in 2022. The decrease in net interest income was a result of a $43.9 million increase in interest expense partially offset by a $28.6 million increase in interest income, as the Bank experienced margin compression due to rising market interest rates. The decrease in noninterest income is mainly attributable to $8.1 million of swap termination fees and $1.4 million of income from insurance proceeds recorded during the year ended December 31, 2022 and the loss on sale or disposition of fixed assets of $1.3 million during the year ended December 31, 2023, primarily resulting from the sale of the Alice and Victoria, Texas branches, compared to a loss on sale or disposition of fixed assets of $0.3 million for the year ended December 31, 2022. The negative provision for credit losses of $2.0 million for the year ended December 31, 2023 was primarily due to net recoveries of $2.3 million in 2023. At December 31, 2023, the Company and the Bank each were in compliance with all regulatory capital requirements, and the Bank was considered “well-capitalized” under prompt corrective action regulations. Additional key components of the Company’s performance during the year ended December 31, 2023 are summarized below. • Credit quality metrics improved as nonperforming loans were 0.26% of total loans at December 31, 2023 compared to 0.54% at December 31, 2022. • We recognized net recoveries of $2.3 million in the loan portfolio during the year ended December 31, 2023 primarily attributable to recoveries on one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. • We recognized interest recoveries of $1.5 million during the year ended December 31, 2023, $1.1 million of which are attributable to one commercial and industrial oil and gas loan relationship. • Total deposits were $2.3 billion at December 31, 2023, an increase of $173.4 million, or 8.3%, compared to deposits of $2.1 billion at December 31, 2022. Noninterest-bearing deposits decreased $132.0 million, or 22.7%, to $448.8 million compared to $580.7 million at December 31, 2022. Time deposits and brokered time deposits increased, and other deposit categories decreased. At December 31, 2023, estimated uninsured deposits represented approximately 32% of our total deposits. • Total loans increased $105.9 million, or 5.0% to $2.2 billion at December 31, 2023, compared to $2.1 billion at December 31, 2022. Excluding approximately $13.9 million in loans associated with the Alice and Victoria, Texas branches sold in January 2023 and approximately $162.7 million in revolving lines of credit purchased during 2023, total loans decreased $43.0 million, or 2.1%, to $2.05 billion at December 31, 2023, compared to $2.09 billion at December 31, 2022. • On January 1, 2023, Investar adopted ASU 2016-13. Also referred to as the CECL standard, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Upon adoption, we recorded a one-time, cumulative effect adjustment to increase the allowance for credit losses by $5.9 million and reduce retained earnings, net of tax, by $4.3 million. Our allowance for credit losses to total loans was 1.38% at December 31, 2023. • N et interest income for the year ended December 31, 2023 was $74.5 million, a decrease of $15.3 million, or 17.0% , compared to $89.8 million for the year ended December 31, 2022 , driven primarily by an increase in the rates paid on interest-bearing liabilities, partially offset by increase s in the volume and yield earned on interest-earning assets. • We experienced pressure on our net interest margin as interest rates rose rapidly during 2022 and 2023, and we raised rates offered on deposits and incurred higher costs on our borrowings. For the year ended December 31, 2023 our net interest margin was 2.83% , compared to 3.67% for the year ended December 31, 2022 • Return on average assets decreased to 0.60% for the year ended December 31, 2023, compared to 1.37% for the year ended December 31, 2022. Return on average equity was 7.63% for the year ended December 31, 2023 compared to 15.63% for the year ended December 31, 2022. • We repurchased 222,448 shares of our common stock at an average price of $13.47 per share during 2023 and repurchased 518,978 shares of our common stock at an average price of $20.27 per share during 2022. We increased dividends by 8% to $0.395 per share for 2023 from $0.365 per share for 2022. • Stockholders’ equity increased 5.1% to $226.8 million at December 31, 2023, compared to December 31, 2022, due to net income for 2023 and a decrease in accumulated other comprehensive loss due to an increase in the fair value of the Bank’s AFS securities portfolio, partially offset by the cumulative effect adjustment as a result of the adoption of ASU 2016-13 reflected in retained earnings. 37 Table of Contents Certain Events That Affect Year-over-Year Comparability Rising Inflation and Interest Rates . During the entirety of 2021, the federal funds target rate was 0% to 0.25%, and it remained at that rate until March 2022. Inflation increased rapidly during 2021 through June 2022. Since June 2022, the rate of inflation generally has declined; however, it has remained at high levels compared to recent historical periods. In response, the Federal Reserve raised the federal funds target rate multiple times from March 2022 through July 2023. Through these incremental increases to the target rate, the Federal Reserve has raised, on a cumulative basis, the target rate from 0% to 0.25% by 525 basis points to 5.25% to 5.50%. Disruptions in the Banking Industry in 2023 . Between March 10, 2023 and March 12, 2023, state banking supervisors closed Silicon Valley Bank (“SVB”) and Signature Bank and named the FDIC as receiver. At the time of closure, they were among the 30 largest U.S. banks. Reports indicated that, among other things, both banks had grown in asset size in recent periods at a faster rate than their peers, had large proportions of uninsured deposits (approximately 87.5% and 89.7% of total deposits, respectively) and high unrealized losses on investment securities. SVB’s business strategy focused on serving the technology and venture capital sectors, and Signature Bank had significant exposure to deposits from the digital asset industry. Prior to their closure, both banks experienced sudden and rapid deposit withdrawals. These events caused bank deposit customers, particularly those with uninsured deposits, to become concerned regarding the safety of their deposits, and in some cases caused customers to withdraw deposits. In response to the disruptions, among other things, the Federal Reserve announced a new Bank Term Funding Program (“BTFP”) to provide eligible banks with loans of up to one-year maturity backed by collateral pledged at par value. On April 24, 2023, San Francisco-based First Republic Bank, also among the 30 largest U.S. banks, reported a large deposit outflow and substantially reduced net income. First Republic Bank also had a large proportion of uninsured deposits (67% as of December 31, 2022). On May 1, 2023, regulators seized First Republic Bank and sold all of its deposits and most of its assets to JPMorgan Chase Bank. In response to the disruptions and related publicity, we formed an internal task force that included members of our Asset/Liability Committee (“ALCO”). The task force met frequently to review our liquidity position and liquidity sources, and oversaw the Bank’s process to qualify for the BTFP. In addition, we took steps to inform our customers about our financial position, liquidity and insured deposit products. During the second quarter of 2023, we utilized the BTFP and reduced Federal Home Loan Bank (“FHLB”) advances. The Bank utilized this source of funding due to its lower rate, the ability to prepay the obligations without penalty, and as a means to lock in funding. During the fourth quarter of 2023 and again in the first quarter of 2024, the Bank refinanced its BTFP borrowings with new borrowings under the program due to more favorable rates. In January 2024, the Federal Reserve announced that it will cease making new loans under the BTFP on March 11, 2024. As of December 31, 2023, estimated uninsured deposits represented approximately 32% of our total deposits. For additional information, see “Discussion and Analysis of Financial Condition – Deposits, Borrowings, Liquidity and Capital Resources” and Part I. Item 1A. Risk Factors. Hurricane Ida. On August 29, 2021, Hurricane Ida hit the Louisiana coast as a category 4 hurricane. Though Hurricane Ida did not cause significant physical damage to our branch locations, the storm devastated some of our market areas. The Company set up programs to help employees and customers experiencing financial difficulty as a result of the hurricane, including a deferral program. Additionally, the Company recorded an impairment charge of $21.6 million in the third quarter of 2021 related to a lending relationship with related borrowers (collectively, the “Borrower”) consisting of multiple loans secured by various types of collateral, including real estate, inventory, and equipment. As a result of Hurricane Ida’s impact on the Borrower’s business operations, some of the collateral securing the loan relationship, including real estate, inventory, and equipment, experienced a significant reduction in value. Since the third quarter of 2021, as of December 31, 2023, we have recorded net recoveries related to this loan relationship of $2.5 million, substantially all of which were in 2023. COVID-19 Pandemic. In March 2020, COVID-19 was declared a pandemic by the World Health Organization. Our business remained open through the pandemic, although it was significantly disrupted in the early stages of the pandemic as we adjusted to various and changing government and voluntary restrictions on activities. The pandemic generally slowed business lending activity from the level we would otherwise have expected, particularly in 2020, except for our participation in the Paycheck Protection Program (“PPP”) under which we made loans to qualified borrowers that under specified conditions were subject to forgiveness and repayment by the federal government. We began participating in the PPP in the second quarter of 2020 and made loans totaling $178.0 million, almost all of which had been repaid by the end of 2022. The pandemic and the PPP created excess liquidity in the market, contributing to increases in our noninterest and interest-bearing demand deposits, and in money market deposit accounts and savings accounts in 2021. We took actions to protect our customers and employees throughout the pandemic, including increasing our remote banking and working options. We recorded an increased provision for loan losses during 2020 as a result of the impact of the pandemic. Market conditions generally improved during 2021 and 2022 compared to 2020, as vaccines became available and government restrictions lessened. The federal government declared an end to the COVID-19 public health emergency in May 2023. Acquisitions. On April 1, 2021, the Company completed its acquisition of Cheaha Financial Group, Inc. (“Cheaha”) and its wholly-owned subsidiary, Cheaha Bank, an Alabama state bank headquartered in Oxford, Alabama that served the residents of Calhoun Country, Alabama through four branch locations. All of the issued and outstanding shares of Cheaha were converted into aggregate cash merger consideration of $41.1 million. On the date of the acquisition, Cheaha had total assets with a fair value of $240.8 million, including $120.4 million in loans, and we assumed $207.0 million in deposits. The Company recorded a core deposit intangible and goodwill of $0.8 million and $11.9 million, respectively, related to the acquisition of Cheaha. Adoption of ASU 2016-13. As discussed throughout this report, we adopted ASU 2016-13 on January 1, 2023, and recorded a one-time, cumulative effect adjustment that increased the allowance for credit losses by $5.9 million and decreased retained earnings, net of tax, by $4.3 million. Loan Purchase Agreement. In August 2023, we entered into a loan purchase agreement to acquire commercial and industrial revolving lines of credit, and related accrued interest, with an unpaid principal balance of $162.7 million and total commitments of $237.8 million in two tranches. The first and second tranches consist of unpaid principal balances of $35.8 million and $127.0 million, respectively, and total commitments of $61.1 million and $176.7 million, respectively. The purchase of the first tranche was completed on September 15, 2023, and the purchase of the second tranche was completed on October 3, 2023. The revolving lines of credit are variable-rate and shorter-term in nature with varying renewal terms. The loans are to consumer finance lending companies that possess a history of high credit quality and that we believe provide us with opportunities to deepen the relationships through our services such as treasury management. We also hired two individuals with significant experience in lending in this area. Sale of Two Branches to First Community Bank. On January 27, 2023, we completed the sale of certain assets, deposits and other liabilities associated with the Alice and Victoria, Texas locations to First Community Bank, a Texas state bank located in Corpus Christi, Texas. We sold approximately $13.9 million in loans and $14.5 million in deposits. Exit from Consumer Mortgage Origination Busines s . In the third quarter of 2023, we made the strategic decision to exit the consumer mortgage origination business. For additional discussion, see “Overview.” Branch Closures. We closed one branch location in Prairieville, Louisiana in April 2021 and one branch location in Dickinson, Texas in October 2021. We closed one branch location in Baton Rouge, Louisiana and one branch location in Westlake, Louisiana in May 2022. We closed one branch location in Central, Louisiana in March 2023. We sold the land and buildings relating to five locations during 2022. During 2022, we also sold three tracts of land that were held for future branch locations. In the first quarter of 2024, we closed one branch in Alabama. We continue to evaluate opportunities to reduce our physical branch footprint and further improve efficiency through digital initiatives. Subordinated Debt Issuance and Redemption. In April 2022, we completed a private placement of $20.0 million in aggregate principal amount of our 5.125% Fixed-to-Floating Subordinated Notes due 2032 (the “2032 Notes”). In June 2022, we used the majority of the proceeds to redeem $18.6 million of our 2017 issuance of 6.00% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “2027 Notes”). We utilized the remaining proceeds for share repurchases and for general corporate purposes. Discussion and Analysis of Financial Condition Total assets were $2.82 billion at December 31, 2023, an increase of $61.3 million, or 2.2%, compared to total assets of $2.75 billion at December 31, 2022. The growth experienced since December 31, 2022 can mainly be attributed to growth in loans of $105.9 million primarily due to the purchase of commercial and industrial revolving lines of credit, partially offset by a decrease of $43.2 million in the available for sale securities portfolio . 38 Table of Contents Loans General . Loans, constitute our most significant asset, comprising 79% and 76%, of our total assets at December 31, 2023 and 2022, respectively. Loans increased $105.9 million, or 5.0%, to $2.2 billion at December 31, 2023 from $2.1 billion at December 31, 2022. The increase in loans was primarily the result of the purchase of approximately $162.7 million in revolving lines of credit during 2023 as described in Certain Events that Affect Year-Over-Year Comparability – Loan Purchase Agreement , partially offset by lower demand and the sale of approximately $13.9 million in loans associated with the sale of the Alice and Victoria, Texas branches. Given the elevated interest rate environment, we are emphasizing origination of high margin loans that promote long-term profitability and proactively exiting credit relationships that do not fit this strategy. The table below sets forth the balance of loans outstanding by loan type as of the dates presented, and the percentage of each loan type to total loans (dollars in thousands). December 31, 2023 2022 Amount Percentage of Total Loans Amount Percentage of Total Loans Mortgage loans on real estate Construction and development $ 190,371 8.6 % $ 201,633 9.6 % 1-4 Family 413,786 18.7 401,377 19.1 Multifamily 105,946 4.8 81,812 3.9 Farmland 7,651 0.4 12,877 0.6 Commercial real estate Owner-occupied 449,610 20.3 445,148 21.1 Nonowner-occupied 488,098 22.1 513,095 24.4 Commercial and industrial 543,421 24.6 435,093 20.7 Consumer 11,736 0.5 13,732 0.6 Total loans $ 2,210,619 100 % $ 2,104,767 100 % At December 31, 2023, the Company’s total business lending portfolio, which consists of loans secured by owner-occupied commercial real estate properties and commercial and industrial loans, was $993.0 million, an increase of $112.8 million, or 12.8%, compared to the business lending portfolio of $880.2 million at December 31, 2022. The increase in the business lending portfolio as of December 31, 2023 is primarily driven by the purchase of commercial and industrial revolving lines of credit described above, partially offset by lower loan demand due to higher rates. Largely as a result of the loan portfolio purchase, our variable-rate loans as a percentage of total loans increased to 27% at December 31, 2023 compared to 22% at December 31, 2022. We continue to focus on a relationship-driven banking strategy and have increased our emphasis on originating higher margin commercial and industrial and owner-occupied commercial real estate loans. Nonowner-occupied loans totaled $488.1 million at December 31, 2023, a decrease of $25.0 million, or 4.9% compared to $513.1 million at December 31, 2022, primarily due to a reclassification of approximately $24.1 million nonowner-occupied loans to multifamily loans due to a change to the primary use of the property. As discussed above under “Overview,” during the third quarter of 2023 we exited the consumer mortgage loan origination business to transition into shorter duration, higher risk-adjusted return asset classes, in an effort to focus more on our core business and optimize profitability. The consumer mortgage portfolio was approximately $261.6 million at December 31, 2023 , substantially all of which is included in the 1-4 family category. The remaining loans in the category consisted primarily of second mortgages, home equity loans, home equity lines of credit, and business purpose loans secured by 1-4 family residential real estate. Loan Concentrations . Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2023 and December 31, 2022, we had no concentrations of loans exceeding 10% of total loans other than loans in the categories listed in the table above. 39 Table of Contents The following table sets forth loans outstanding at December 31, 2023, which, based on remaining scheduled repayments of principal, a re due in the periods indicated, as well as the amount of loans with fixed and variable rates in each maturity range. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported below as due in one year or less. (dollars in thousands) One Year or Less After One Year Through Five Years After Five Years Through Ten Years After Ten Years Through Fifteen Years After Fifteen Years Total Mortgage loans on real estate: Construction and development $ 104,701 $ 51,251 $ 17,390 $ 9,106 $ 7,923 $ 190,371 1-4 Family 51,591 85,021 38,047 21,224 217,903 413,786 Multifamily 5,386 82,147 16,780 522 1,111 105,946 Farmland 1,496 4,552 1,603 — — 7,651 Commercial real estate Owner-occupied 35,807 100,426 196,837 107,946 8,594 449,610 Nonowner-occupied 34,408 250,717 161,603 41,159 211 488,098 Commercial and industrial 300,972 84,165 91,887 64,944 1,453 543,421 Consumer 2,794 7,558 910 384 90 11,736 Total loans $ 537,155 $ 665,837 $ 525,057 $ 245,285 $ 237,285 $ 2,210,619 Loans with fixed rates: Mortgage loans on real estate: Construction and development $ 13,752 $ 50,801 $ 17,390 $ 9,106 $ 7,923 $ 98,972 1-4 Family 13,875 79,989 38,047 21,224 217,903 371,038 Multifamily 3,786 79,151 6,472 522 1,111 91,042 Farmland 592 3,994 1,603 — — 6,189 Commercial real estate Owner-occupied 16,882 96,894 159,033 88,321 2,136 363,266 Nonowner-occupied 30,242 226,060 137,006 23,408 211 416,927 Commercial and industrial 28,637 73,257 91,887 64,944 1,453 260,178 Consumer 2,108 7,558 910 384 90 11,050 Total loans with fixed rates $ 109,874 $ 617,704 $ 452,348 $ 207,909 $ 230,827 $ 1,618,662 Loans with variable rates: Mortgage loans on real estate: Construction and development $ 90,949 $ 450 $ — $ — $ — $ 91,399 1-4 Family 37,716 5,032 — — — 42,748 Multifamily 1,600 2,996 10,308 — — 14,904 Farmland 904 558 — — — 1,462 Commercial real estate Owner-occupied 18,925 3,532 37,804 19,625 6,458 86,344 Nonowner-occupied 4,166 24,657 24,597 17,751 — 71,171 Commercial and industrial 272,335 10,908 — — — 283,243 Consumer 686 — — — — 686 Total loans with variable rates $ 427,281 $ 48,133 $ 72,709 $ 37,376 $ 6,458 $ 591,957 40 Table of Contents Investment Securities We purchase investment securities primarily to provide a source for meeting liquidity needs, with return on investment as a secondary consideration. We also use investment securities as collateral for certain deposits and other types of borrowings. Investment securities represented 14% of our total assets and totaled $382.4 million at December 31, 2023, a decrease of $31.1 million, or 7.5%, from $413.5 million at December 31, 2022. The decrease in investment securities at December 31, 2023 compared to December 31, 2022 was driven primarily by a $20.3 million decrease in residential mortgage-backed securities, a $9.8 million decrease in obligations of the U.S. Treasury and U.S. government agencies and corporations, and an $8.4 million decrease in commercial mortgage-backed securities, partially offset by an $11.0 million increase in obligations of state and political subdivisions. Due in large part to higher interest rates and market volatility, net unrealized losses in our investment portfolio totaled $57.3 million at December 31, 2023 and $62.1 million at December 31, 2022. The table below shows the carrying value of our investment securities portfolio by investment type and the percentage that such investment type comprises of our entire portfolio as of the dates indicated (dollars in thousands). December 31, 2023 2022 Balance Percentage of Portfolio Balance Percentage of Portfolio Obligations of the U.S. Treasury and U.S. government agencies and corporations $ 20,043 5.2 % $ 29,805 7.2 % Obligations of state and political subdivisions 34,866 9.1 23,916 5.8 Corporate bonds 26,356 6.9 29,942 7.2 Residential mortgage-backed securities 234,354 61.3 254,618 61.6 Commercial mortgage-backed securities 66,771 17.5 75,191 18.2 Total investment securities $ 382,390 100 % $ 413,472 100 % The investment portfolio consists of available for sale (“AFS”) and held to maturity (“HTM”) securities. We do not hold any investments classified as trading. We classify debt securities as HTM if management has the positive intent and ability to hold the securities to maturity. HTM securities are stated at amortized cost. Securities not classified as HTM are classified as AFS and are stated at fair value. At December 31, 2023, AFS securities comprised 95% of our total investment portfolio. We adopted ASU 2016-13 effective January 1, 2023. Due to the nature of the investments, current market prices, and the current interest rate environment, we determined that the declines in the fair values of the AFS and HTM securities portfolio were not attributable to credit losses. Accordingly, there was no adjustment made to the amortized cost basis upon adoption. The carrying values of our AFS securities are adjusted for unrealized gains or losses not attributable to credit losses as valuation allowances, and any gains or losses are reported on an after-tax basis as a component of other comprehensive income (loss). For additional information regarding accounting for our investment securities upon the adoption of ASU 2016-13, see Note 1. Summary of Significant Accounting Policies – Accounting Standards Adopted in 2023. During the year ended December 31, 2023, we purchased $14.1 million of HTM securities classified as obligations of state and political subdivisions. There were no purchases of HTM securities during the year ended December 31, 2022. During the year ended December 31, 2023, we purchased $107.9 million of AFS investment securities, compared to $181.6 million during the year ended December 31, 2022. Proceeds from maturities, prepayments and calls of AFS investment securities were $140.7 million in 2023 compared to $60.2 million in 2022, and we sold $15.0 million of AFS investment securities in 2023 compared to none in 2022. U.S. Treasury and U.S. government agencies and corporations securities represented 96% and 9% of the AFS securities we purchased in 2023 and 2022 , respectively. We utilized excess funds in the third quarter of 2023 to purchase $40.0 million in obligations of the U.S. Treasury and U.S. government agencies and corporations, which matured in October 2023. Mortgage-backed securities represente d 4% and 84% of the AFS securities we purchased in 2023 and 2022 , respectively. We did not purchase any other investment type in 2023. Of the remaining AFS securities purchased in 2022 , 5% were corporate bonds and 2% were municipal securities. We only purchase corporate bonds that are investment grade securities issued by seasoned corporations. 41 Table of Contents The table below sets forth the stated maturities and weighted average yields of our investment debt securities based on the amortized cost of our investment portfolio as of December 31, 2023 (dollars in thousands). One Year or Less After One Year Through Five Years After Five Years Through Ten Years After Ten Years Amount Yield Amount Yield Amount Yield Amount Yield Held to maturity: Obligations of states and political subdivisions $ 960 4.90 % $ 2,556 5.31 % $ 4,647 4.62 % $ 10,000 5.82 % Residential mortgage-backed securities — — — — — — 2,309 3.09 Available for sale: Obligations of the U.S. Treasury and U.S. government agencies and corporations 605 2.88 9,942 5.44 9,836 6.28 — — Obligations of states and political subdivisions 27 2.92 1,412 2.37 9,459 2.57 7,870 2.63 Corporate bonds 350 3.55 12,439 3.98 14,558 4.38 2,750 2.80 Residential mortgage-backed securities — — — — 6,692 2.93 268,258 2.24 Commercial mortgage-backed securities 52 4.00 4,827 4.11 3,089 3.25 67,117 3.62 $ 1,994 $ 31,176 $ 48,281 $ 358,304 The maturity of mortgage-backed securities reflects scheduled repayments based upon the contractual maturities of the securities. Weighted average yields on tax-exempt obligations have been computed on a fully tax equivalent basis assuming a federal tax rate of 21%. Premises and Equipment Bank premises and equipment decreased $5.4 million, or 10.9%, to $44.2 million at December 31, 2023 from $49.6 million at December 31, 2022. The decrease was primarily attributable to the sale of the Alice and Victoria, Texas locations and the closure of one branch and one stand-alone ATM in Louisiana, which decreased bank premises and equipment by $1.4 million and $1.7 million, respectively. The remaining decrease was primarily attributable to depreciation. Deferred Tax Asset At December 31, 2023, the net deferred tax asset was $16.9 million, compared to $16.4 million at December 31, 2022. The increase in the deferred tax asset at December 31, 2023 compared to December 31, 2022 was primarily driven by the adoption of ASU 2016-13, partially offset by a decrease in the net unrealized losses of the Bank’s AFS securities portfolio. The Bank acquired net operating loss carryforwards as a result of acquisitions. At December 31, 2023, we held ap proximately $4,000 and $0.3 million in net operating loss carryforwards that expire in 2033 and 2039, respectively. U.S. tax law imposes annual limitations under Internal Revenue Code Section 382 on the amount of net operating loss carryforwards that may be used to offset federal taxable income. Under these laws, we may apply up to approximately $0.6 million to offset our taxable income each year. In addition to this limitation, our ability to utilize net operating loss carryforwards depends upon the Company generating taxable income. Given the substantial amount of time before our net operating loss carryforwards begin to expire, we currently expect to utilize these net operating loss carryforwards in full before their expiration. 42 Table of Contents Deposits The following table sets forth the composition of our deposits and the percentage of each deposit type to total deposits at December 31, 2023 and 2022 (dollars in thousands). December 31, 2023 2022 Amount Percentage of Total Deposits Amount Percentage of Total Deposits Noninterest-bearing demand deposits $ 448,752 19.9 % $ 580,741 27.9 % Interest-bearing demand deposits 489,604 21.7 565,598 27.1 Money market deposit accounts 179,366 8.0 208,596 10.0 Savings accounts 137,606 6.1 155,176 7.5 Brokered time deposits 269,102 11.9 9,990 0.5 Time deposits 731,297 32.4 562,264 27.0 Total deposits $ 2,255,727 100 % $ 2,082,365 100 % Total deposits were $2.26 billion at December 31, 2023, an increase of $173.4 million, or 8.3%, from total deposits of $2.08 billion at December 31, 2022. Time deposits and brokered time deposits increased, and other deposit categories decreased. The majority of the increase in time deposits at December 31, 2023 compared to December 31, 2022 is due to organic growth and existing customer funds migrating from other deposit categories as a result of rising interest rates. Brokered time deposits increased to $269.1 million at December 31, 2023 from $10.0 million December 31, 2022. We utilize brokered time deposits, entirely in denominations of less than $250,000, to secure fixed cost funding and reduce short-term borrowings. We utilized shorter term brokered time deposits, which were laddered in duration to provide flexibility, to fund a portion of the purchase of commercial and industrial revolving lines of credit in 2023. At December 31, 2023, the balance of brokered time deposits remained below 10% of total assets, and the remaining weighted average duration was approximately 12 months with a weighted average rate of 5.18%. The Company had no brokered demand deposits at December 31, 2023 and 2022 or at December 31, 2021. Prior to December 31, 2021, the Bank utilized brokered demand deposits to satisfy the borrowings under its interest rate swap agreements due to more favorable pricing. In the third quarter of 2021, we voluntarily terminated multiple swap agreements, the borrowings for which matured in October 2021. During 2022, we voluntarily terminated our remaining interest rate swap agreements. Estimated uninsured deposits were $720.1 million and $701.1 m illion at December 31, 2023 and 2022, respectively. The estimates are based on the same methodologies and assumptions used for our regulatory reporting requirements. The insured deposit data for 2023 and 2022 does not reflect an evaluation of all of the account ownership category distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations. The following table shows scheduled maturities of time deposits in excess of the FDIC insurance limit of $250,000 at December 31, 2023 and 2022 (dollars in thousands). December 31, Time remaining until maturity: 2023 2022 Three months or less $ 68,638 $ 63,006 Over three months through six months 27,536 13,610 Over six months through twelve months 77,471 58,672 Over twelve months 20,793 14,228 Total $ 194,438 $ 149,516 Borrowings Total borrowings include securities sold under agreements to repurchase, federal funds purchased, advances from the Federal Home Loan Bank (“FHLB”), borrowings under the BTFP, subordinated debt issued in 2019 and 2022, and junior subordinated debentures assumed through acquisitions. We also maintain unsecured lines of credit with First National Bankers Bank (“FNBB”) and The Independent Bankers Bank (“TIB”) totaling $60.0 million, which are federal funds lines of credit used for overnight borrowing only. We had no outstanding balances drawn on the unsecured lines of credit at December 31, 2023 or 2022. Our advances from the FHLB were $23.5 million at December 31, 2023 , a decrease of $363.5 million from FHLB advances of $387.0 million at December 31, 2022 . FHLB advances are used to fund increased loan and investment activity that is not funded by deposits or other borrowings. Based on original maturities, at December 31, 2023, all of our $23.5 million of FHLB advances were long-term, compared to $333.5 million short-term and $53.5 million long-term FHLB advances at December 31, 2022. We utilized federal funds purchased during 2023 and 2022 although none were outstanding at year-end. We had $8.6 million of securities sold under agreements to repurchase at December 31, 2023 compared to none at December 31, 2022 . The carrying value of the subordinated debt was $44.3 million and $44.2 million at December 31, 2023 and December 31, 2022, respectively. Junior subordinated debt of $8.6 million and $8.5 million at December 31, 2023 and 2022 , respect ively, represents the junior subordinated debentures that we assumed in connection with our acquisitions of Cheaha in 2021, BOJ Bancshares, Inc. in 2017 (“BOJ”), and First Community Bank in 2013. On March 12, 2023, the Federal Reserve established the BTFP. The BTFP is a one-year program which provides additional liquidity through borrowings for a term of up to one year secured by the pledging of certain qualifying securities and other assets valued at par. Beginning in the second quarter, we utilized the BTFP to secure fixed rate funding for a one-year term and reduce short-term FHLB advances, which are priced daily. We utilized this source of funding due to its lower rate and the ability to prepay the obligations without penalty. The rates on the borrowings under the BTFP are fixed for one year from the day each borrowing is made. During the fourth quarter of 2023 and again in the first quarter of 2024, we refinanced all of our borrowings under the BTFP with new loans under the BTFP with a one-year term due to more favorable rates. At December 31, 2023, outstanding borrowings under the BTFP were $212.5 million with a weighted average rate of 4.83%. Typically, the main source of our short-term borrowings are advances from the FHLB; however, during 2023, our primary source of short-term borrowings were borrowings under the BTFP due to more favorable rates. The rate charged for advances from the FHLB is directly tied to the Federal Reserve’s federal funds target rate. As previously discussed, the Federal Reserve raised the federal funds target rate multiple times in 2022 and 2023. As of December 31, 2023, the federal funds target rate was 5.25% to 5.50%. 43 Table of Contents The average balances and cost of short-term borrowings for the years ended December 31, 2023, 2022 and 2021 are summarized in the table below (dollars in thousands). Average Balances Cost of Short-term Borrowings December 31, December 31, 2023 2022 2021 2023 2022 2021 Federal funds purchased, short-term FHLB advances and other short-term borrowings $ 124,191 $ 132,703 $ 3,242 4.93 % 3.08 % 0.20 % Borrowings under BTFP 131,952 — — 5.09 — — Securities sold under agreements to repurchase 4,587 1,489 6,081 0.13 0.15 0.21 Total short-term borrowings $ 260,730 $ 134,192 $ 9,323 4.93 % 3.05 % 0.20 % 2032 Notes. On April 6, 2022, we entered into a Subordinated Note Purchase Agreement with certain institutional accredited investors and qualified institutional buyers (the “Purchasers”) under which we issued $20.0 million in aggregate principal amount of our 2032 Notes to the Purchasers at a price equal to 100% of the aggregate principal amount of the 2032 Notes. The 2032 Notes were issued under an indenture, dated April 6, 2022 (the “Indenture”), by and among the Company and UMB Bank, National Association, as trustee. The 2032 Notes have a stated maturity date of April 15, 2032 and will bear interest at a fixed rate of 5.125% per year from and including April 6, 2022 to but excluding April 15, 2027 or earlier redemption date. From April 15, 2027 to but excluding the stated maturity date or earlier redemption date, the 2032 Notes will bear interest a floating rate equal to the then current three-month term secured overnight financing rate (“SOFR”), plus 277 basis points. As provided in the 2032 Notes, the interest rate on the 2032 Notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR. The 2032 Notes may be redeemed, in whole or in part, on or after April 15, 2027 or, in whole but not in part, under certain other limited circumstances set forth in the Indenture. Any redemption we made would be at a redemption price equal to 100% of the principal balance being redeemed, together with any accrued and unpaid interest to the date of redemption. Principal and interest on the 2032 Notes are subject to acceleration only in limited circumstances in the case of certain bankruptcy and insolvency-related events. The 2032 Notes are the unsecured, subordinated obligations of the Company and rank junior in right of payment to our current and future senior indebtedness and to our obligations to our general creditors. The 2032 Notes are intended to qualify as Tier 2 capital for regulatory purposes. We used the majority of the net proceeds to redeem our 2027 Notes in June 2022, and utilized the remaining proceeds for share repurchases and for general corporate purposes. 2029 Notes . On November 12, 2019, the Company issued $25.0 million in aggregate principal amount of its 5.125% Fixed-to-Floating Rate Subordinated 2029 Notes due 2029 (“2029 Notes”) at 100% of their face amount in a private placement to certain institutional and other accredited investors. The 2029 Notes have a maturity date of December 30, 2029. From and including the date of issuance to, but excluding December 30, 2024, the 2029 Notes will bear interest at an initial fixed rate of 5.125% per annum, payable semi-annually in arrears. From and including December 30, 2024 and thereafter, the 2029 Notes will bear interest at a floating rate equal to the then-current three-month LIBOR as calculated on each applicable date of determination, or an alternative rate determined in accordance with the terms of the 2029 Notes if the three-month LIBOR cannot be determined, plus 3.490%, payable quarterly in arrears. The Company may redeem the 2029 Notes, in whole or in part, on or after December 30, 2024 or, in whole but not in part, under certain limited circumstances set forth in the 2029 Notes. Any redemption by the Company would be at a redemption price equal to 100% of the principal balance being redeemed, together with any accrued and unpaid interest to the date of redemption. Principal and interest on the 2029 Notes are not subject to acceleration, except upon certain bankruptcy-related events. The 2029 Notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s current and future senior indebtedness and to the Company’s obligations to its general creditors. The 2029 Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of the Company’s subsidiaries. The 2029 Notes are intended to qualify as Tier 2 capital for regulatory capital purposes. 2027 Notes. On March 24, 2017, the Company issued $18.6 million in aggregate principal amount of its 2027 Notes due March 20, 2027 at 100% of the aggregate principal amount. From and including the date of issuance, but excluding March 30, 2022, the 2027 Notes bore interest at an initial fixed rate of 6.00% per annum, payable semi-annually. From and including March 30, 2022 and thereafter, the 2027 Notes bore interest at a floating rate equal to the then-current three-month LIBOR (but not less than zero) as calculated on each applicable date of determination, plus 3.945%, payable quarterly. The Company could, beginning with the interest payment date of March 30, 2022, and on any interest payment date thereafter, redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2027 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The 2027 Notes were intended to qualify as Tier 2 capital for regulatory capital purposes. In June 2022, we redeemed the 2027 Notes in full in accordance with their terms at a redemption price equal to 100% of the outstanding principal balance plus accrued and unpaid interest up to but excluding the June 30, 2022 redemption date (“Redemption Date”). The aggregate redemption price, excluding accrued interest, totaled $18.6 million. Interest on the 2027 Notes no longer accrued on or after the Redemption Date. Stockholders ’ Equity Stockholders’ equity was $226.8 million at December 31, 2023, an increase of $11.0 million, or 5.1%, compared to December 31, 2022. The increase in stockholders’ equity is primarily attributable to net income for fiscal year 2023 and a decrease in accumulated other comprehensive loss due to an increase in the fair value of the Bank’s AFS securities portfolio, partially offset by the cumulative effect adjustment as a result of the adoption of ASU 2016-13, reflected in retained earnings. 44 Table of Contents Results of Operations Performance Summary 2023 vs. 2022. For the year ended December 31, 2023, net income was $16.7 million, or $1.69 per basic and diluted common share, compared to net income of $35.7 million, or $3.54 per basic common share and $3.50 per diluted common share, for the year ended December 31, 2022. The primary drivers of the decrease in net income are a $15.3 million decrease in net interest income and an $11.8 million decrease in noninterest income, partially offset by a $2.0 million negative provision for credit losses in 2023 compared to a provision for credit losses of $2.9 million in 2022. The decrease in net interest income was a result of a $43.9 million increase in interest expense partially offset by a $28.6 million increase in interest income, as the Bank experienced margin compression due to rising market interest rates. The decrease in noninterest income is mainly attributable to $8.1 million of swap termination fees and $1.4 million of income from insurance proceeds recorded during the year ended December 31, 2022 and the loss on sale or disposition of fixed assets of $1.3 million during the year ended December 31, 2023, primarily resulting from the sale of the Alice and Victoria, Texas branches, compared to a loss on sale or disposition of fixed assets of $0.3 million for the year ended December 31, 2022. The negative provision for credit losses of $2.0 million for the year ended December 31, 2023 was primarily due to net recoveries of $2.3 million in 2023 primarily attributable to recoveries on one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. Return on average assets decreased to 0.60% for the year ended December 31, 2023 from 1.37% for the year ended December 31, 2022. Return on average equity was 7.63% for the year ended December 31, 2023 compared to 15.63% for the year ended December 31, 2022. The decrease in both return on average assets and return on average equity is mainly attributable to the $19.0 million decrease in net income. 2022 vs. 2021. For the year ended December 31, 2022, net income was $35.7 million, or $3.54 per basic common share and $3.50 per diluted common share, compared to net income of $8.0 million, or $0.77 per basic common share and $0.76 per diluted common share, for the year ended December 31, 2021. The primary driver of the increase in net income is related to a decrease in provision for loan losses due to the $21.6 million impairment charge recorded during the third quarter of 2021 as a result of Hurricane Ida. As shown on the consolidated statement of income for the year ended December 31, 2022, a provision for loan losses of $2.9 million was recorded, compared to a provision for loan losses of $22.9 million for the year ended December 31, 2021. We had record annual net income in 2022 primarily as a result of increases in interest income and noninterest income as well as a decrease in noninterest expense compared to 2021. Return on average assets increased to 1.37% for the year ended December 31, 2022 from 0.31% for the year ended December 31, 2021. Return on average equity was 15.63% for the year ended December 31, 2022 compared to 3.22% for the year ended December 31, 2021. The increase in both return on average assets and return on average equity is mainly attributable to the $27.7 million increase in net income. Net Interest Income and Net Interest Margin Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments and rates paid on deposits and other borrowings, the level of nonperforming loans, the amount of noninterest-bearing liabilities supporting earning assets, and the interest rate environment. Net interest margin is the ratio of net interest income to average interest-earning assets. The primary factors affecting net interest margin are changes in interest rates, competition, and the shape of the interest rate yield curve. The Federal Reserve Board sets various benchmark rates, including the federal funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. On March 3, 2020, the Federal Reserve lowered the federal funds target rate to 1.00% to 1.25%, which the Federal Reserve stated was in response to the evolving risks to economic activity posed by the coronavirus. In a measure aimed at lessening the economic impact of COVID-19, the Federal Reserve reduced the federal funds target rate to 0% to 0.25% on March 16, 2020, where it remained until March 2022 when the Federal Reserve began increasing the federal funds target rate a total of seven times during 2022 and four times during 2023 to 5.25% to 5.50% as discussed in Certain Events That Affect Year-over-Year Comparability – Rising Inflation and Interest Rates. 2023 vs. 2022. Net interest income decreased 17.0% to $74.5 million for the year ended December 31, 2023 from $89.8 million for the same period in 2022. Net interest margin was 2.83% for the year ended December 31, 2023, a decrease of 84 basis points from 3.67% for the year ended December 31, 2022. The decrease in net interest income resulted primarily from an increase in the rates paid on interest-bearing deposits and short-term borrowings partially offset primarily by an increase in the yield earned on loans. Average time deposits increased $272.2 million primarily due to organic growth and customer funds migrating from other deposit categories due to higher rates offered, which along with higher rates paid, resulted in a $20.6 million increase in interest expense compared to the year ended December 31, 2022. Average short-term borrowings increased $126.5 million, as we utilized advances from the FHLB and borrowings under the BTFP to fund loan growth and investment activity, which along with higher rates paid, resulted in an $8.8 million increase in interest expense compared to the year ended December 31, 2022. Average interest-bearing demand deposits decreased $211.6million but increases in rates led to a $6.5 million increase in interest expense compared to the year ended December 31, 2022. Average brokered time deposits were $163.9 million during the year ended December 31, 2023 compared to $0.1 million during the year ended December 31, 2022, which along with higher rates paid added $8.2 million to interest expense. Average noninterest-bearing deposits decreased $111.1 million. Average loans increased $186.0 million primarily due to organic growth and the purchase of commercial and industrial revolving lines of credit which, in addition to higher loan yields, resulted in a $24.5 million increase in interest income compared to the year ended December 31, 2022. Our yield on interest-earning assets increased as did our rate paid on interest-bearing liabilities primarily as a result of the overall increase in prevailing interest rates. We experienced margin pressure beginning late in 2022, which continued in 2023. We raised rates offered on deposits and incurred higher costs on our borrowings, compared to the year ended December 31, 2022. We may experience additional pressure on our net interest margin during 2024 if our cost of funds increases faster than the yield on our interest-earning assets. 45 Table of Contents Interest income was $133.2 million for the year ended December 31, 2023 compared to $104.6 million for the same period in 2022. Loan interest income made up substantially all of our interest income for the years ended December 31, 2023 and 2022, although interest on investment securities contributed 9.8% of interest income for the years ended December 31, 2023 and 2022. Interest on our commercial real estate loans, commercial and industrial loans, and 1-4 family residential real estate loans constituted the three largest components of our loan interest income for both of the years ended December 31, 2023 and 2022 at 84% total interest income on loans. The overall yield on interest-earning assets increased 78 basis points to 5.06% for the year ended December 31, 2023 compared to 4.28% for the same period in 2022. The loan portfolio yielded 5.55% for the year ended December 31, 2023 compared to 4.82% for the year ended December 31, 2022. The increase in yield on our loan portfolio was driven primarily by higher yields on commercial real estate loans and commercial and industrial loans. In addition, the yield on the investment portfolio was 2.78% for the year ended December 31, 2023 compared to 2.23% for the year ended December 31, 2022. Interest expense was $58.7 million for the year ended December 31, 2023, an increase of $43.9 million compared to interest expense of $14.8 million for the year ended December 31, 2022. The increase in interest expense is primarily attributable to the increase in the rates paid for interest-bearing liabilities, primarily interest-bearing deposits, and to a lesser extent the increase in the volume of interest-bearing liabilities for the year ended December 31, 2023 compared to December 31, 2022. For the year ended December 31, 2023, the cost of interest-bearing deposits increased 207 basis points to 2.49% and the cost of short-term borrowings increased 188 basis points to 4.93% primarily due to increases in the federal funds target rate. As previously discussed, the federal funds target rate increased from 0% to 0.25% to 4.25% to 4.50% during 2022 and to 5.25% to 5.50% during 2023, which affects the rate the Company pays for deposits, immediately available overnight funds, borrowings under the BTFP, and long-term borrowings. For the year ended December 31, 2023, the cost of interest-bearing liabilities increased 205 basis points to 2.89% compared to the same period in 2022. 2022 vs. 2021 . For a detailed discussion of our net interest income and net interest margin performance for 2022 compared to 2021, see our annual report on Form 10-K for the year ended December 31, 2022, Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Performance Summary and – Net Interest Income and Net Interest Margin –2022 vs. 2021, and – Volume/Rate Analysis . Average Balances and Yields . The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or paid and the average yield or rate paid on each such category as of and for the years ended December 31, 2023, 2022 and 2021. Averages presented below are daily averages (dollars in thousands). As of and for the year ended December 31, 2023 2022 2021 Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense (1) Rate (1) Balance Expense (1) Rate (1) Balance Expense (1) Rate (1) Assets Interest-earning assets: Loans $ 2,123,234 $ 117,892 5.55 % $ 1,937,255 $ 93,373 4.82 % $ 1,902,070 $ 90,230 4.74 % Securities: Taxable 447,442 12,372 2.76 442,767 9,796 2.21 275,963 3,948 1.43 Tax-exempt 22,051 693 3.14 18,746 482 2.57 20,259 552 2.73 Interest-earning balances with banks 38,561 2,244 5.82 45,542 918 2.02 176,349 812 0.46 Total interest-earning assets 2,631,288 133,201 5.06 2,444,310 104,569 4.28 2,374,641 95,542 4.02 Cash and due from banks 29,142 34,327 39,262 Intangible assets 42,695 43,588 41,299 Other assets 86,712 103,711 138,096 Allowance for credit losses (30,242 ) (22,093 ) (20,704 ) Total assets $ 2,759,595 $ 2,603,843 $ 2,572,594 Liabilities and stockholders’ equity Interest-bearing liabilities: Deposits: Interest-bearing demand deposits $ 688,786 $ 8,941 1.30 % $ 900,405 $ 2,411 0.27 % $ 858,660 $ 2,398 0.28 % Brokered demand deposits — — — 1,773 7 0.42 77,432 715 0.92 Savings deposits 134,817 534 0.40 173,460 79 0.05 168,194 247 0.15 Brokered time deposits 163,873 8,224 5.02 82 4 4.80 — — — Time deposits 699,648 24,373 3.48 427,416 3,749 0.88 508,954 4,127 0.81 Total interest-bearing deposits 1,687,124 42,072 2.49 1,503,136 6,250 0.42 1,613,240 7,487 0.46 Short-term borrowings (2) 260,730 12,845 4.93 134,192 4,093 3.05 9,323 19 0.20 Long-term debt 82,844 3,764 4.54 127,288 4,441 3.49 129,318 4,222 3.26 Total interest-bearing liabilities 2,030,698 58,681 2.89 1,764,616 14,784 0.84 1,751,881 11,728 0.67 Noninterest-bearing demand deposits 489,175 600,286 553,083 Other liabilities 21,220 10,425 18,852 Stockholders’ equity 218,502 228,516 248,778 Total liabilities and stockholders’ equity $ 2,759,595 $ 2,603,843 $ 2,572,594 Net interest income/net interest margin $ 74,520 2.83 % $ 89,785 3.67 % $ 83,814 3.53 % (1) Interest income and net interest margin are expressed as a percentage of average interest-earning assets outstanding for the indicated periods. Interest expense is expressed as a percentage of average interest-bearing liabilities for the indicated periods. (2) For additional information, see Discussion and Analysis of Financial Condition – Borrowings . Nonaccrual loans were included in the computation of average loan balances but carry a zero yield. The yields include the effect of loan fees of $2.0 million , $3.6 million and $3.0 million for the years ended December 31, 2023, 2022 and 2021, respectively, and discounts and premiums that are amortized or accreted to interest income or expense. 46 Table of Contents Volume/Rate Analysis . The following tables set forth a summary of the changes in interest earned and interest paid resulting from changes in volume and rates for the year ended December 31, 2023 compared to the year ended December 31, 2022 and the year ended December 31, 2022 compared to the year ended December 31, 2021 (dollars in thousands). Year ended December 31, 2023 vs. Year ended December 31, 2022 Volume Rate Net (1) Interest income: Loans $ 8,964 $ 15,555 $ 24,519 Securities: Taxable 103 2,473 2,576 Tax-exempt 85 126 211 Interest-earning balances with banks (140 ) 1,466 1,326 Total interest-earning assets 9,012 19,620 28,632 Interest expense: Interest-bearing demand deposits (567 ) 7,097 6,530 Brokered demand deposits (7 ) — (7 ) Savings deposits (18 ) 473 455 Brokered time deposits 7,870 350 8,220 Time deposits 2,388 18,236 20,624 Short-term borrowings 3,860 4,892 8,752 Long-term debt (1,551 ) 874 (677 ) Total interest-bearing liabilities 11,975 31,922 43,897 Change in net interest income $ (2,963 ) $ (12,302 ) $ (15,265 ) Year ended December 31, 2022 vs. Year ended December 31, 2021 Volume Rate Net (1) Interest income: Loans $ 1,669 $ 1,474 $ 3,143 Securities: Taxable 2,386 3,462 5,848 Tax-exempt (41 ) (29 ) (70 ) Interest-earning balances with banks (602 ) 708 106 Total interest-earning assets 3,412 5,615 9,027 Interest expense: Interest-bearing demand deposits 117 (104 ) 13 Brokered demand deposits (699 ) (9 ) (708 ) Savings deposits 8 (176 ) (168 ) Brokered time deposits 4 — 4 Time deposits (665 ) 287 (378 ) Short-term borrowings 255 3,819 4,074 Long-term debt (66 ) 285 219 Total interest-bearing liabilities (1,046 ) 4,102 3,056 Change in net interest income $ 4,458 $ 1,513 $ 5,971 (1) Changes in interest due to both volume and rate have been allocated entirely to rate. Noninterest Income Noninterest income includes, among other things, service charges on deposit accounts, gains and losses on call or sale of investment securities, gains and losses on sales or dispositions of fixed assets and other real estate owned, swap termination fee income, gain on sale of loans, servicing fees and fee income on serviced loans, intercha nge fees, income from bank owned life insurance, changes in the fair value of equity securities, and income from insurance proceeds. We expect to continue to develop new products that generate noninterest income, and enhance our existing products, in order to diversify our revenue sources. 2023 vs. 2022. Total noninterest income decreased $11.8 million, or 64.4%, to $6.5 million for the year ended December 31, 2023 compared to $18.4 million for the year ended December 31, 2022. The decrease is mainly attributable to $8.1 million of swap termination fees and $1.4 million of income from insurance proceeds recorded during the year ended December 31, 2022 and the loss on sale or disposition of fixed assets of $1.3 million during the year ended December 31, 2023, primarily resulting from the sale of the Alice and Victoria, Texas branches, compared to a loss on sale or disposition of fixed assets of $0.3 million for the year ended December 31, 2022. Service charges on deposit accounts include maintenance fees on accounts, account enhancement charges for additional deposit account features, per item charges, overdraft fees, and treasury management charges. Service charges on deposit accounts were $3.1 million for both of the years ended December 31, 2023 and 2022. There was a $0.3 million loss on call or sale of investment securities for the year ended December 31, 2023 compared to a de minimis gain for the year ended December 31, 2022. We sold approximately $15.0 million of securities during the year ended December 31, 2023 compared to no sales and de minimis calls during the year ended December 31, 2022. Loss on sale or disposition of fixed assets for the year ended December 31, 2023 increased to $1.3 million from $0.3 million for the year ended December 31, 2022. During 2023, a loss on sale or disposition of fixed assets of $1.3 million was recorded as a result of the sale of the Alice and Victoria, Texas branches, the disposition of ATMs, and a reclassification of bank premises and equipment to other real estate owned. During 2022, a loss on sale or disposition of fixed assets of $0.5 million was recorded as a result of the Bank closing two branches in Louisiana, which was partially offset by a gain on sale or disposition of fixed assets as a result of the sale of three tracts of land that were being held for future branch locations. There was a $0.1 million loss on sale of other real estate owned for the year ended December 31, 2023 compared to a de minimis gain for the year ended December 31, 2022. We sold approximately $1.5 million of other real estate owned during the year ended December 31, 2023 compared to $5.8 million of sales during the year ended December 31, 2022. No swap termination fee income was recorded during the year ended December 31, 2023. Swap termination fee income of $8.1 million was recorded for the year ended December 31, 2022 when we voluntarily terminated a number of our interest rate swap agreements during the first and second quarters of 2022 in response to market conditions. 47 Table of Contents There was a $0.1 million gain on sale of loans for the year ended December 31, 2023 as a result of the sale of the Alice and Victoria, Texas branches, compared to no gain or loss for the year ended December 31, 2022. Servicing fees and fee income on serviced loans decreased $60,000, or 81.1%, to $14,000 for the year ended December 31, 2023. This decrease is a result of the Bank exiting the indirect auto loan origination business at the end of 2015. Since the Bank did not originate auto loans for sale during the years ended December 31, 2023 and 2022, the servicing portfolio, which experienced regularly scheduled paydowns, was not replaced with new loans. We expect servicing fees and fee income on serviced loans to decrease over time until all serviced loans are paid off. Interchange fees, which are fees earned on the usage of the Bank’s credit and debit cards, decreased $0.3 million, or 16.7%, to $1.7 million for year ended December 31, 2023 from $2.0 million for the year ended December 31, 2022. The decrease in interchange fees can primarily be attributed to the decrease in the volume of debit and credit card transactions. Income from bank owned life insurance increased $0.1 million to $1.4 million for the year ended December 31, 2023 from $1.3 million for the year ended December 31, 2022. This increase reflects increased interest earned on the Company’s bank owned life insurance policies. No income from insurance proceeds was recorded for the year ended December 31, 2023. Income from insurance proceeds totaled $1.4 million for the year ended December 31, 2022 . Nontaxable income related to an insurance policy for the former Chief Financial Officer of the Company and the Bank of $1.4 million was recorded during the fourth quarter of 2022. Other operating income includes, among other things, credit card, ATM and wire fees, derivative fee income, changes in the net asset value of other investments and rental income. The $0.6 million decrease in other operating income for the year ended December 31, 2023 is primarily attributable to a $0.5 million decrease in derivative fee income compared to the year ended December 31, 2022. 2022 vs. 2021. For a detailed discussion of our noninterest income for 2022 compared to 2021, see Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Noninterest Income – 2022 vs. 2021 in our annual report on Form 10-K for the year ended December 31, 2022 . Noninterest Expense Noninterest expense includes salaries and employee benefits and other cos ts associated with the conduct of our operations. Our goal is to manage our costs within the framework of our near-term operating strategy of generating consistent, quality earnings. 2023 vs. 2022. Total noninterest expense was $62.6 million for the year ended December 31, 2023, an increase of $1.8 million, or 2.9%, from $60.9 million for the year ended December 31, 2022. This increase was primarily driven by the increases in salaries and employee benefits and other operating expenses, partially offset by a decrease in depreciation and amortization. Salaries and employee benefits increased $2.2 million, or 6.2%, to $37.1 million for the year ended December 31, 2023, compared to $35.0 million for the year ended December 31, 2022. Included in salaries and employee benefits for the year ended December 31, 2022 is a $2.3 million employee retention credit (“ERC”) recognized as a credit to payroll taxes, which decreased salaries and employee benefits reported for 2022. The increase in salaries and employee benefits is mainly attributable to increases in health insurance claims and payroll taxes, partially offset by decreases in incentive-based compensation and severance. Salaries and employee benefits for 2022 also included $0.6 million of severance due to the separation agreement with the former Chief Financial Officer of the Company and the Bank. Please refer to Note 1. Summary of Significant Accounting Policies – Employee Retention Credit, for additional discussion regarding the ERCs. As of December 31, 2023, we had 320 full-time and 11 part-time employees, compared to 331 full-time and seven part-time employees as of December 31, 2022. Depreciation and amortization decreased $0.7 million, or 14.8%, to $3.8 million for the year ended December 31, 2023, compared to $4.4 million for the year ended December 31, 2022. The decrease in depreciation and amortization is primarily driven by the sale of the Alice and Victoria, Texas branches and the closure of one branch during the first quarter of 2023 and two branches during 2022. Data processing decreased $0.1 million, or 3.3%, to $3.5 million for the year ended December 31, 2023 from $3.6 million for the same period in 2022. We did not complete any acquisitions, which typically drive higher data processing expenses, during the years ended December 31, 2023 and 2022. We regularly review existing contracts with the goal of negotiating favorable terms to offset the increased variable cost components of our data processing costs, such as new accounts and increased transaction volume. Occupancy expense increased $0.1 million, or 2.7%, to $3.0 million for the year ended December 31, 2023 from $2.9 million for the year ended December 31, 2022. This increase is primarily attributable to $0.4 million in occupancy expense recorded primarily to terminate remaining contractually obligated lease payments due under non-cancelable operating leases, partially offset by a decrease in building rent, both as a result of the sale the Alice and Victoria, Texas branches in January 2023. 48 Table of Contents Other operating expenses include security, business development, FDIC and OCC assessments, bank shares and property taxes, collection and repossession, charitable contributions, repair and maintenance costs, personnel training and development, filing fees, and other costs related to the operation of our business. Other operating expenses increased $0.3 million, or 2.5%, to $13.0 million for the year ended December 31, 2023 from $12.7 million for the year ended December 31, 2022. The increase in other operating expenses was primarily due to increases in FDIC assessments, other real estate expense, and bank shares taxes, partially offset by a decrease in collection and repossession expenses, the majority of which was related to one impaired loan relationship impacted by Hurricane Ida. 2022 vs. 2021. For a detailed discussion of our noninterest expense for 2022 compared to 2021, see Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Noninterest Expense – 2022 vs. 2021 in our annual report on Form 10-K for the year ended December 31, 2022 . Income Tax Expense Income tax expense for the years ended December 31, 2023, 2022 and 2021 was $3.8 million, $8.6 million, and $1.9 million, respectively. The effective tax rates for the years ended December 31, 2023, 2022 and 2021 were 18.4%, 19.5%, and 19.3%, respectively. For the years ended December 31, 2023 and 2021, the effective tax rate differs from the statutory rate of 21% primarily due to tax-exempt interest income earned on certain loans and investment securities and income from bank owned life insurance. For the year ended December 31, 2022, the effective tax rate differs from the statutory rate of 21% primarily due to nontaxable income from insurance proceeds and tax-exempt interest income earned on certain loans and investment securities and income from bank owned life insurance. Risk Management The primary risks associated with our operations are credit, interest rate and liquidity risk. Higher inflation also presents risks. Credit, inflation and interest rate risk are discussed below, while liquidity risk is discussed in this section under the heading Liquidity and Capital Resources below. Credit Risk and the Allowance for Credit Losses General . The risk of loss should a borrower default on a loan is inherent in any lending activity. Our portfolio and related credit risk are monitored and managed on an ongoing basis by our risk management department, the board of directors’ loan committee and the full board of directors. We utilize a ten point risk-rating system, which assigns a risk grade to each borrower based on a number of quantitative and qualitative factors associated with a loan transaction. The risk grade categorizes the loan into one of five risk categories, based on information about the ability of borrowers to service the debt. The information includes, among other factors, current financial information about the borrower, historical payment experience, credit documentation, public information and current economic trends. These categories assist management in monitoring our credit quality. The risk categories, which are consistent with the definitions used in guidance promulgated by federal banking regulators are Pass (grades 1-6), Special Mention (grade 7), Substandard (grade 8), Doubtful (grade 9) and Loss (grade 10). For additional information, see Note 3. Loans and Allowance for Credit Losses – Credit Quality Indicators . 49 Table of Contents At December 31, 2023 and December 31, 2022, there were no loans classified as loss, while there were no loans and $0.2 million of loans, respectively, classified as doubtful, $12.0 million and $15.0 million, respectively, of loans classified as substandard, and $10.8 million and $12.8 million, respectively, of loans classified as special mention as of such dates. Of our aggregate $22.9 million and $28.0 million doubtful, substandard and special mention loans at December 31, 2023 and December 31, 2022, respectively, $2.3 million and $4.7 million, respectively, were acquired and marked to fair value at the time of their acquisition. An independent loan review is conducted annually, whether internally or externally, on at least 40% of commercial loans utilizing a risk-based approach designed to maximize the effectiveness of the review. Internal loan review is independent of the loan underwriting and approval process. In addition, credit analysts periodically review certain commercial loans to identify negative financial trends related to any one borrower, any related groups of borrowers or an industry. All loans not categorized as pass are put on an internal watch list, with quarterly reports to the board of directors. In addition, a written status report is maintained by our special assets division for all commercial loans categorized as substandard or worse. We use this information in connection with our collection efforts. If our collection efforts are unsuccessful, collateral securing loans may be repossessed and sold or, for loans secured by real estate, foreclosure proceedings initiated. The collateral is sold at public auction for fair market value (based upon recent appraisals), with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. If the loan balance is greater than the sales proceeds, the deficient balance is charged-off. Allowance for Credit Losses . Effective January 1, 2023, we adopted ASU 2016-13, which uses the CECL accounting methodology for the allowance for credit losses. Upon adoption, we recorded a one-time, cumulative effect adjustment to increase the allowance for credit losses by $5.9 million. The allowance for credit losses was $30.5 million at December 31, 2023, an increase compared to $24.4 million at December 31, 2022 and $20.9 million at December 31, 2021, respectively. The CECL methodology requires that lifetime expected credit losses be recorded at the time the financial asset is originated or acquired and be adjusted each period through a provision for credit losses for changes in the expected lifetime credit losses. For the years ended December 31, 2023, 2022 and 2021, the provision for credit losses on loans was negative $2.0 million, $2.9 million, and $22.9 million, respectively. The negative provision for credit losses for the year ended December 31, 2023 was primarily driven by net recoveries of $2.3 million in the loan portfolio primarily attributable to recoveries on one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. The provision for loan losses for the year ended December 31, 2022 reflects provisioning related to our organic loan growth. The provision for loan losses for the year ended December 31, 2021 includes a $21.6 million impairment charge related to one loan relationship impacted by Hurricane Ida, as discussed in Certain Events That Affect Year-over-Year Comparability – Hurricane Ida . Refer to Note 1. Summary of Significant Accounting Policies – Allowance for Credit Losses and – Accounting Standards Adopted in 2023, for information regarding our adoption of ASU 2016-13. Results for reporting periods beginning after December 31, 2022 are presented in accordance with ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” for further discussion. 50 Table of Contents The following table presents the allocation of the allowance for credit losses by loan category as of the dates indicated (dollars in thousands). December 31, 2023 2022 2021 Allowance for Credit Losses % of Loans in each Category to Total Loans Allowance for Credit Losses % of Loans in each Category to Total Loans Allowance for Credit Losses % of Loans in each Category to Total Loans Mortgage loans on real estate: Construction and development $ 2,471 8.6 % $ 2,555 9.6 % $ 2,347 10.9 % 1-4 Family 9,129 18.7 3,917 19.1 3,337 19.4 Multifamily 1,124 4.8 999 3.9 673 3.2 Farmland 2 0.4 113 0.6 383 1.1 Commercial real estate 10,691 42.4 10,718 45.5 9,354 47.9 Commercial and industrial 6,920 24.6 5,743 20.7 4,411 16.6 Consumer 203 0.5 319 0.6 354 0.9 Total $ 30,540 100 % $ 24,364 100 % $ 20,859 100 % The following table presents the amount of the allowance for credit losses allocated to each loan category as a percentage of total loans as of the dates indicated. December 31, 2023 2022 2021 Mortgage loans on real estate: Construction and development 0.11 % 0.12 % 0.12 % 1-4 Family 0.41 0.18 0.18 Multifamily 0.05 0.05 0.04 Farmland — 0.01 0.02 Commercial real estate 0.49 0.51 0.50 Commercial and industrial 0.31 0.27 0.23 Consumer 0.01 0.02 0.02 Total 1.38 % 1.16 % 1.11 % 51 Table of Contents As discussed above, the balance in the allowance for credit losses is principally influenced by the provision for credit losses and by net loan loss experience. Additions to the allowance are charged to the provision for credit losses. Losses are charged to the allowance as incurred and recoveries on losses previously charged to the allowance are credited to the allowance at the time recovery is collected. The table below reflects the activity in the allowance for credit losses and key ratios for the periods indicated (dollars in thousands). Year ended December 31, 2023 2022 2021 Allowance for credit losses at beginning of period $ 24,364 $ 20,859 $ 20,363 ASU 2016-13 adoption impact 5,865 — — Provision for credit losses on loans (1) (1,964 ) 2,922 22,885 Net recoveries (charge-offs) (2) 2,275 583 (22,389 ) Allowance for credit losses at end of period $ 30,540 $ 24,364 $ 20,859 Total loans - period end 2,210,619 2,104,767 1,872,012 Nonaccrual loans - period end 5,770 9,986 29,495 Key Ratios: Allowance for credit losses to total loans - period end 1.38 % 1.16 % 1.11 % Allowance for credit losses to nonaccrual loans - period end 529 % 244 % 71 % Nonaccrual loans to total loans - period end 0.26 % 0.47 % 1.58 % (1) For the year ended December 31, 2023, the negative provision for credit losses of $2.0 million on the consolidated statement of income includes a negative provision for loan losses of $2.0 million and a negative provision for unfunded loan commitments of $36,000. (2) We recognized net recoveries of $2.4 million and net charge-offs of $21.6 million in the loan portfolio during the years ended December 31, 2023 and 2021, respectively, attributable to one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. The allowance for credit losses to total loans increased to 1.38% at December 31, 2023 compared to 1.16% at December 31, 2022 while the allowance for credit losses to nonaccrual loans ratio increased to 529% at December 31, 2023 from 244% at December 31, 2022. The increase in the allowance for credit losses to total loans at December 31, 2023 compared to December 31, 2022 is primarily due to the one-time, cumulative effect adjustment to increase the allowance for credit losses by $5.9 million recorded upon adoption of ASU 2016-13 on January 1, 2023. The increase in the allowance for credit losses to nonaccrual loans and the decrease in nonaccrual loans to total loans are due to the decrease in nonaccrual loans primarily due to large paydowns on one loan relationship impacted by Hurricane Ida. Nonaccrual loans were $5.8 million, or 0.26% of total loans, at December 31, 2023, a decrease of $4.2 million compared to $10.0 million, or 0.47% of total loans, at December 31, 2022. Many of the loans comprising the total relationship were placed on nonaccrual following the impairment in the third quarter of 2021. The following table presents the allocation of net (charge offs) recoveries by loan category for the periods indicated (dollars in thousands). Year ended December 31, 2023 2022 2021 Net (Charge-offs) Recoveries Average balance Ratio of Net Charge-offs to Average Loans Net (Charge-offs) Recoveries Average balance Ratio of Net Charge-offs to Average Loans Net (Charge-offs) Recoveries Average balance Ratio of Net Charge-offs to Average Loans Mortgage loans on real estate: Construction and development $ 75 $ 200,691 (0.04 )% $ 48 $ 210,160 (0.02 )% $ (247 ) $ 211,230 0.12 % 1-4 Family (24 ) 410,320 0.01 103 380,481 (0.03 ) (156 ) 354,748 0.04 Multifamily — 86,668 — — 56,665 — — 60,327 — Farmland — 9,206 — 13 15,837 (0.08 ) (13 ) 23,128 0.06 Commercial real estate 2,219 961,617 (0.23 ) 33 901,422 (0.00 ) (10,274 ) 869,098 1.18 Commercial and industrial 171 442,299 (0.04 ) 535 357,837 (0.15 ) (11,641 ) 362,483 3.21 Consumer (166 ) 12,433 1.34 (149 ) 14,853 1.00 (58 ) 21,056 0.28 Total $ 2,275 $ 2,123,234 (0.11 )% $ 583 $ 1,937,255 (0.03 )% $ (22,389 ) $ 1,902,070 1.18 % Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for credit losses. Net charge-offs include recoveries of amounts previously charged off. Net recoveries for the years ended December 31, 2023 and 2022 were $2.3 million and $0.6 million, respectively, equal to 0.11% and 0.03% of the average loan balance for the respective periods. Net charge-offs for the year ended December 31, 2021 were $22.4 million, or 1.18%, of the average loan balance. Net recoveries for the year ended December 31, 2023 were primarily attributable to recoveries on one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. Net recoveries for the year ended December 31, 2022 were primarily driven by one $0.9 million recovery on a commercial and industrial loan relationship. Net charge-offs for the year ended December 31, 2021 were primarily due to charge-offs of $21.6 million in the third quarter of 2021 due to the impairment charge related to one loan relationship impacted by Hurricane Ida. Commercial and industrial loans and commercial real estate loans were the categories affected. 52 Table of Contents Management believes the allowance for credit losses at December 31, 2023 is sufficient to provide adequate protection against losses in our loan portfolio. However, there can be no assurance that this allowance will prove to be adequate over time to cover ultimate losses in connection with our loans. This allowance may prove to be inadequate due to higher inflation and interest rates than anticipated, other unanticipated adverse changes in the economy, unanticipated effects of the current geopolitical and domestic political conflicts, a resurgence of COVID-19, or discrete events adversely affecting specific customers or industries. Our results of operations and financial condition could be materially adversely affected to the extent that the allowance is insufficient to cover such changes or events. Nonperforming assets . Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Loans are ordinarily placed on nonaccrual when a loan is specifically determined to be impaired or when principal and interest is delinquent for 90 days or more. Additionally, management may elect to continue the accrual when the estimated net available value of collateral is sufficient to cover the principal balance and accrued interest. It is our policy to discontinue the accrual of interest income on any loan for which we have reasonable doubt as to the payment of interest or principal. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period of repayment performance by the borrower. Restructured loans. Effective January 1, 2023, we adopted ASU 2022-02, “ Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ”, which eliminated the accounting guidance for troubled debt restructurings (“TDRs”). Prior to our adoption of ASU 2022-02, we accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as a TDR. Occasionally, we modify loans to borrowers in financial distress by providing certain concessions, such as principal forgiveness, term extension, an other-than-insignificant payment delay, an interest rate reduction, or a combination of such concessions. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses. Upon our determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off. 53 Table of Contents Other Real Estate Owned . Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure, as well as any properties owned by the Company that are not intended to be used to carry out its operations. These properties are initially recorded at the lower of cost or fair market value based on appraisal at the time of foreclosure, less estimated selling cost. Losses arising at the time of foreclosure of properties are charged to the allowance for credit losses. For the year ended December 31, 2023, additions to other real estate owned were $3.9 million, which were primarily driven by transfers of properties related to one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. During the year ended December 31, 2023, we closed one branch and one stand-alone ATM and transferred the associated land and buildings from bank premises and equipment to other real estate owned, as we did not intend to use the properties for banking operations. Other real estate owned with a cost basis of $1.5 million and $5.8 million was sold during the years ended December 31, 2023 and 2022, respectively, resulting in a net loss of $0.1 million and a net gain of $9,000 for the respective periods, compared to a cost basis of $0.9 million and a net loss of $5,000 for the year ended December 31, 2021. The following table provides details of our other real estate owned as of the dates indicated (dollars in thousands). December 31, 2023 December 31, 2022 1-4 Family $ — $ 682 Commercial real estate 4,323 — Commercial and industrial 115 — Total other real estate owned $ 4,438 $ 682 Changes in our other real estate owned are summarized in the table below for the periods indicated (dollars in thousands). Year ended Year ended December 31, 2023 December 31, 2022 Balance, beginning of period $ 682 $ 2,653 Additions 3,930 3,327 Transfers from bank premises and equipment 1,425 525 Sales of other real estate owned (1,599 ) (5,823 ) Balance, end of period $ 4,438 $ 682 Please refer to Note 4. Other Real Estate Owned, for additional information. Impact of Inflation. Inflation reached a near 40-year high in late 2021 primarily due to effects of the COVID-19 pandemic, and continued rising through June 2022. Since June 2022, the rate of inflation has generally declined; however, it has remained above the Federal Reserve’s target inflation rate of two percent through March 7, 2024. In response to higher inflation, the Federal Reserve increased the federal funds target rate during 2022 and 2023 as discussed in Certain Events That Affect Year-over-Year Comparability – Rising Inflation and Interest Rates , which generally increased the amount we earn on our interest-earning assets but also increased the amount we pay on our interest-bearing liabilities as discussed throughout this report. We believe that higher rates resulting from inflation and related factors led to constrained loan demand during 2023. When the rate of inflation accelerates, there is an erosion of consumer and customer purchasing power. Accordingly, if the rate of inflation accelerates in the future, this could impact our business by reducing our tolerance for extending credit, and our customer’s desire to obtain credit, or causing us to incur additional provisions for credit losses resulting from a possible increased default rate. Inflation and related higher rates have led and may continue to lead to lower loan re-financings. Inflation has also increased and may continue to increase the costs of goods and services we purchase, including the costs of salaries and benefits. In January 2024, the Federal Reserve decided not to change the federal funds target rate. Many economists expect the Federal Reserve to decrease the federal funds target rate one or more times during the remainder of 2024. For additional information, see Interest Rate Risk below, and Item 1A. Risk Factors – Risks Related to our Business – Increasing and high interest rates in 2022 and 2023 caused interest expense on both deposits and borrowings to increase significantly in 2023; further increases in interest rates could continue to have an adverse effect on our profitability and – Inflation and rising prices may continue to adversely affect our results of operations and financial condition. Interest Rate Risk Market risk is the risk of loss from adverse changes in market prices and rates. Since the majority of our assets and liabilities are monetary in nature, our market risk arises primarily from interest rate risk inherent in our lending and deposit activities. A sudden and substantial change in interest rates may adversely impact our earnings and profitability because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. Accordingly, our ability to proactively structure the volume and mix of our assets and liabilities to address anticipated changes in interest rates, as well as to react quickly to such fluctuations, can significantly impact our financial results. To that end, management actively monitors and manages our interest rate risk exposure. The ALCO has been authorized by the board of directors to implement our asset/liability management policy, which establishes guidelines with respect to our exposure to interest rate fluctuations, liquidity, loan limits as a percentage of funding sources, exposure to correspondent banks and brokers and reliance on non-core deposits. The goal of the policy is to enable us to maximize our interest income and maintain our net interest margin without exposing the Bank to excessive interest rate risk, credit risk and liquidity risk. Within that framework, the ALCO monitors our interest rate sensitivity and makes decisions relating to our asset/liability composition. Net interest income simulation is the Bank’s primary tool for benchmarking near term earnings exposure. Given the ALCO’s objective to understand the potential risk/volatility embedded within the current mix of assets and liabilities, standard rate scenario simulations assume total assets remain static (i.e. no growth). The Bank may also use a standard gap report in its interest rate risk management process. The primary use for the gap report is to provide supporting detailed information to the ALCO’s discussion. The Bank has particular concerns with the utility of the gap report as a risk management tool because of difficulties in relating gap directly to changes in net interest income. Hence, the income simulation is the key indicator for earnings-at-risk since it expressly measures what the gap report attempts to estimate. Short term interest rate risk management tactics are decided by the ALCO where risk exposures exist out into the 1 to 2-year horizon. Tactics are formulated and presented to the ALCO for discussion, modification, and/or approval. Such tactics may include asset and liability acquisitions of appropriate maturities in the cash market, loan and deposit product/pricing strategy modification, and derivatives hedging activities to the extent such activity is authorized by the board of directors. 54 Table of Contents Since the impact of rate changes due to mismatched balance sheet positions in the short-term can quickly and materially affect the current year’s income statement, they require constant monitoring and management. Within the gap position that management directs, we attempt to structure our assets and liabilities to minimize the risk of either a rising or falling interest rate environment. We manage our gap position for time horizons of one month, two months, three months, four to six months, seven to twelve months, 13-24 months, 25-36 months, 37-60 months and more than 60 months. The goal of our asset/liability management is for the Bank to maintain a net interest income at risk in an up or down 100 basis point environment at less than (5)%. At December 31, 2023, the Bank was within the policy guidelines for asset/liability management. The following table depicts the estimated impact on net interest income of immediate changes in interest rates at the specified levels for the periods presented. As of December 31, 2023 Estimated Changes in Interest Rates Increase/Decrease in (in basis points) Net Interest Income (1) +300 (7.4 )% +200 (5.4 )% +100 (2.4 )% -100 2.8 % -200 6.8 % -300 9.7 % (1) The percentage change in this column represents the projected net interest income for 12 months on a flat balance sheet in a stable interest rate environment versus the projected net interest income in the various rate scenarios. The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business assumptions are based upon our experience, business plans and published industry experience. Key assumptions include asset prepayment speeds, competitive factors, the relative price sensitivity of certain assets and liabilities, and the expected life of non-maturity deposits. However, there are a number of factors that influence the effect of interest rate fluctuations on us which are difficult to measure and predict. For example, a rapid drop in interest rates might cause our loans to repay at a more rapid pace and certain mortgage-related investments to prepay more quickly than projected. This could mitigate some of the benefits of falling rates as are expected when we are in a negatively-gapped position. Conversely, a rapid rise in rates could give us an opportunity to increase our margins and slow the rate of repayment on our mortgage-related loans which would increase our returns, bu t can also increase our costs of interest-bearing liabilities faster than we expect and faster than an increase in our yield on interest-earning assets which would decrease our returns. As a result, because these assumptions are inherently uncertain, actual results will differ from simulated results. Liquidity and Capital Resources Liquidity . Liquidity is a measure of the ability to fund loan commitments and meet deposit maturities and withdrawals in a timely and cost-effective way. Cash flow requirements can be met by generating net income, attracting new deposits, converting assets to cash or borrowing funds. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, loan prepayments, and borrowings are greatly influenced by general interest rates, economic conditions, and the competitive environment in which we operate. To minimize funding risks, we closely monitor our liquidity position through periodic reviews of maturity profiles, yield and rate behaviors, and loan and deposit forecasts. Excess short-term liquidity is usually invested in overnight federal funds sold. Our core deposits, which are deposits excluding time deposits greater than $250,000 and deposits of municipalities and other political entities, are our most stable source of liquidity to meet our cash flow needs due to the nature of the long-term relationships generally established with our customers. Maintaining the ability to acquire these funds as needed in a variety of markets, and within ALCO compliance targets, is essential to ensuring our liquidity. At December 31, 2023 and 2022, 64% a nd 70% of our total assets, respectively, were funded by core deposits. Our investment portfolio is another alternative for meeting our cash flow requirements. Investment securities generate cash flow through principal payments and maturities, and they generally have readily available markets that allow for their conversion to cash. At December 31, 2023, 95% of our investment securities portfolio was classified as AFS, and we had gross unrealized losses in our AFS investment securities portfolio of $57.7 million and gross unrealized gains of $0.3 million. The sale of securities in a loss position would cause us to record a loss on sale of investment securities in noninterest income in the period during which the securities were sold. Some securities are pledged to secure certain deposit types or short-term borrowings, such as FHLB advances and borrowings under the BTFP, which impacts their liquidity. At December 31, 2023, securities with a carrying value of $296.2 million were pledged to secure certain deposits, borrowings, and other liabilities compared to $165.7 million in pledged securities at December 31, 2022 with the increase due primarily to the pledge of securities to secure borrowings under the BTFP. 55 Table of Contents Other sources available for meeting liquidity needs include advances from the FHLB, repurchase agreements and other borrowings. FHLB advances may be used to meet day to day liquidity needs, particularly if the prevailing interest rate on an FHLB advance compares favorably to the rates that we would be required to pay to attract deposits. At December 31, 2023, the balance of our outstanding advances with the FHLB was $23.5 million, all long-term advances based on original maturity, a decrease from $387.0 million at December 31, 2022, consisting of $333.5 million short-term and $53.5 million long-term advances; we decreased our use of FHLB advances as we utilized the BTFP. The total amount of the remaining credit available to us from the FHLB at December 31, 2023 was $919.5 million. At December 31, 2023, our FHLB borrowings were collateralized by a blanket pledge of certain loans totaling approximately $975.4 million. Beginning in March 2023, we became eligible to borrow from the BTFP, which provides additional liquidity through borrowings secured by the pledging of certain qualifying securities and other assets valued at par. The BTFP is a one-year program ending March 11, 2024, and we can borrow any time during the term and can repay the obligation at any time without penalty. During the second quarter, we utilized the BTFP to secure fixed rate funding for a one-year term and reduce short-term FHLB advances, which are priced daily. During the fourth quarter of 2023 and again in the first quarter of 2024, we refinanced all of our borrowings under the BTFP with new borrowings under the BTFP with a one-year term due to more favorable rates. At December 31, 2023, borrowings outstanding under the BTFP were $212.5 million, and our remaining borrowing capacity under the BTFP was $58.5 million based on the value of securities available to be used as collateral, valued at par value as permitted under the program. Repurchase agreements are contracts for the sale of securities which we own with a corresponding agreement to repurchase those securities at an agreed upon price and date. Our policies limit the use of repurchase agreements to those collateralized by certain investment securities. We had $8.6 million of repurchase agreements outstanding at December 31, 2023, and none at December 31, 2022. We maintain unsecured lines of credit with FNBB and TIB totalin g $60.0 million. The se lines of credit are federal funds lines of credit and are used for overnight borrowing only. There w ere no outstandi ng balances on our unsecured lines of credit at December 31, 2023 or 2022. At December 31, 2023, we held $32.0 million of cash and cash equivalents and maintained approximately $1.04 billion of available funding from FHLB advances, the BTFP, and unsecured lines of credit with correspondent banks. Cash and cash equivalents and available funding represent 149% of uninsured deposits of $720.1 million at December 31, 2023. In addition, at both December 31, 2023 and 2022 we had $45.0 million in aggregate principal amount of subordinated debt outstanding. In April 2022, we completed a private placement of $20.0 million in aggregate principal amount of our 2032 Notes, and used the majority of the proceeds to redeem $18.6 million of our 2027 Notes in June 2022. For additional information, see Note 10. Subordinated Debt Securities and see Discussion and Analysis of Financial Condition – Borrowings above. Our liquidity strategy is focused on using the least costly funds available to us in the context of our balance sheet composition and interest rate risk position. Accordingly, we target growth of noninterest-bearing deposits. Although we cannot directly control the types of deposit instruments our customers choose, we can influence those choices with the interest rates and deposit specials we offer. In recent periods, the proportion of our deposits represented by noninterest-bearing deposits has declined primarily due to rising market interest rates as customers have migrated to higher yielding alternatives. At December 31, 2023, we held $269.1 million of brokered time deposits and no brokered demand deposits, as defined for federal regulatory purposes, to secure fixed cost funding and reduce FHLB advances. At December 31, 2022, we held $10.0 million of brokered time deposits and no brokered demand deposits, as defined for federal regulatory purposes. We have historically utilized brokered demand deposits, due to more favorable pricing, to satisfy the required borrowings under interest rate swap agreements. We also hold QwickRate® deposits, included in our time deposit balances, which we obtain through a qualified network, to address liquidity needs when rates on such deposits compare favorably with deposit rates in our markets. At December 31, 2023, we held $17.0 million o f QwickRate® deposits, a decrease com pared to $26.5 million at December 31, 2022. The following table presents, by type, our funding sources, which consist of total average deposits and borrowed funds, as a percentage of total funds and the total cost of each funding source for the years ended December 31, 2023 and 2022. Percentage of Total Average Deposits and Borrowed Funds Cost of Funds Year ended December 31, Year ended December 31, 2023 2022 2023 2022 Noninterest-bearing demand 20 % 26 % — % — % Interest-bearing demand 27 38 1.30 0.27 Brokered demand deposits — — — 0.42 Savings deposits 5 7 0.40 0.05 Brokered time deposits 7 — 5.02 4.80 Time deposits 28 18 3.48 0.88 Short-term borrowings 10 6 4.93 3.05 Borrowed funds 3 5 4.54 3.49 Total deposits and borrowed funds 100 % 100 % 2.33 % 0.63 % Capital Resources . Our primary sources of capital include retained earnings, capital obtained through acquisitions and proceeds from the sale of our capital stock and subordinated debt. We may issue capital stock and debt securities from time to time to fund acquisitions and support our organic growth. In April 2022, we completed a private placement of $20.0 million in aggregate principal amount of our 2032 Notes, which are intended to quality as Tier 2 capital for regulatory purposes, and used the majority of the proceeds to redeem $18.6 million of our 2027 Notes in June 2022. During 2019, we issued $25.0 million of our 2029 Notes, which are intended to qualify as Tier 2 capital for regulatory capital purposes. For additional information see Discussion and Analysis of Financial Condition – Borrowings . 56 Table of Contents During 2023, we paid $3.8 million in dividends, compared to $3.6 million in 2022 and $3.1 million in 2021. Our board of directors has authorized a share repurchase program and during 2023 we paid $3.0 million to repurchase our shares, compared to $10.5 million in 2022 and $6.9 million in 2021 . The aggregate purchase price does not include the effect of excise tax expense incurred on net share repurchases. On July 19, 2023 and September 21, 2022, the board of directors approved an additional 350,000 shares and 300,000 shares, respectively, of the Company’s common stock for repurchase. At December 31, 2023 , we had 514,266 shares of our common stock remaining authorized for repurchase under the program. For additional information, see Note 10. Subordinated Debt Securities and Note 13. Stockholders' Equity. We are subject to restrictions on dividends under applicable banking laws and regulations. Please refer to the discussion under the heading “ Supervision and Regulation – Dividends ” in Item 1. Business , for more information. We are also subject to additional legal and contractual restrictions on dividends. Please refer to the discussion under the heading “ Dividend Policy ” in Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities and under the heading “ Common Stock – Dividend Restrictions ” in Note 13. Stockholders' Equity . We are subject to various regulatory capital requirements administered by the Federal Reserve and the OCC. These requirements are described in greater detail under the heading “Supervision and Regulation – Regulatory Capital Requirements” of Item 1. Business . Those guidelines specify capital tiers, which include the following classifications: Capital Tiers (1) Tier 1 Leverage Ratio Common Equity Tier 1 Capital Ratio Tier 1 Capital Ratio Total Capital Ratio Ratio of Tangible Equity to Total Assets Well capitalized 5% or above 6.5% or above 8% or above 10% or above Adequately capitalized 4% or above 4.5% or above 6% or above 8% or above Undercapitalized Less than 4% Less than 4.5% Less than 6% Less than 8% Significantly undercapitalized Less than 3% Less than 3% Less than 4% Less than 6% Critically undercapitalized 2% or less (1) In order to be well capitalized or adequately capitalized, a bank must satisfy each of the required ratios in the table. In order to be undercapitalized or significantly undercapitalized, a bank would need to fall below just one of the relevant ratio thresholds in the table. In order to be well capitalized, the Bank cannot be subject to any written agreement or order requiring it to maintain a specific level of capital for any capital measure. The Company and the Bank each were in compliance with all regulatory capital requirements as of December 31, 2023, 2022 and 2021. The Bank also was considered “well-capitalized” under the OCC’s prompt corrective action regulations as of these dates. 57 Table of Contents The following table presents the actual capital amounts and regulatory capital ratios for the Company and the Bank as of the dates presented (dollars in thousands). Actual Minimum Capital Requirement to be Well Capitalized Amount Ratio Amount Ratio December 31, 2023 Investar Holding Corporation: Tier 1 capital to average assets (leverage) $ 239,095 8.35 % $ — — % Tier 1 common equity to risk-weighted assets 229,595 9.51 — — Tier 1 capital to risk-weighted assets 239,095 9.90 — — Total capital to risk-weighted assets 313,574 12.99 — — Investar Bank: Tier 1 capital to average assets (leverage) 280,687 9.81 143,085 5.00 Tier 1 common equity to risk-weighted assets 280,687 11.64 156,805 6.50 Tier 1 capital to risk-weighted assets 280,687 11.64 192,990 8.00 Total capital to risk-weighted assets 310,846 12.89 241,238 10.00 December 31, 2022 Investar Holding Corporation: Tier 1 capital to average assets (leverage) $ 231,048 8.53 % $ — — % Tier 1 common equity to risk-weighted assets 221,548 9.79 — — Tier 1 capital to risk-weighted assets 231,048 10.21 — — Total capital to risk-weighted assets 300,009 13.25 — — Investar Bank: Tier 1 capital to average assets (leverage) 267,603 9.89 135,344 5.00 Tier 1 common equity to risk-weighted assets 267,603 11.83 147,044 6.50 Tier 1 capital to risk-weighted assets 267,603 11.83 180,977 8.00 Total capital to risk-weighted assets 292,339 12.92 226,221 10.00 Off-Balance Sheet Transactions and Lease Obligations Swap Contracts. The Bank historically has entered into interest rate swap contracts, some of which are forward starting, to manage exposure against the variability in the expected future cash flows (future interest payments) attributable to changes in the 1-month LIBOR associated with the forecasted issuances of 1-month fixed rate debt arising from a rollover strategy. An interest rate swap is an agreement whereby one party agrees to pay a fixed rate of interest on a notional principal amount in exchange for receiving a floating rate of interest on the same notional amount for a predetermined period of time, from a second party. At December 31, 2023 and December 31, 2022, the Company had no current or forward starting interest rate swap agreements. For additional information, see Note 12. Derivative Financial Instruments. During the year ended December 31, 2022, we voluntarily terminated our remaining interest rate swap agreements with a total notional amount of $115.0 million in response to market conditions. During year ended December 31, 2021, we voluntarily terminated interest rate swap agreements with a total notional amount of $150.0 million in response to market conditions and as a result of excess liquidity. For years ended December 31, 2022 and December 31, 2021, unrealized gains of $6.4 million and $1.4 million, respectively, net of tax expenses of $1.7 million and $0.4 million, respectively, were reclassified from “Accumulated other comprehensive (loss) income” and recorded as “Swap termination fee income” in noninterest income in the accompanying consolidated statements of income. For the years ended December 31, 2022 and December 31, 2021, a gain of $4.3 million, net of a $1.2 million tax expense, and a gain of $5.3 million, net of a $1.4 million tax expense, respectively, was recognized in “Other comprehensive income (loss)” in the accompanying consolidated statements of comprehensive (loss) income for the change in fair value of the interest rate swap contracts. 58 Table of Contents The Company also enters into interest rate swap contracts that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreemen t. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC Topic 815, “ Derivatives and Hedging, ” and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, “ Fair Value Measurement. ” The Company did not recognize any gains or losses in other income resulting from fair value adjustments during the years ended December 31, 2023 , 2022 , and 2021 . At December 31, 2023 , we had notional amounts of $174.9 million in interest rate swap contracts with customers and $174.9 million in offsetting interest rate swap contracts with other financial institutions. The fair value of the swap contracts consisted of gross assets of $17.3 million and gross liabilities of $17.3 million recorded in “Other assets” and “Accrued taxes and other liabilities”, respectively, in the accompanying consolidated balance sheet. Unfunded Commitments. The Bank enters into loan commitments and standby letters of credit in the normal course of its business. Loan commitments are made to meet the financing needs of our customers, while standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. The credit risks associated with loan commitments and standby letters of credit are essentially the same as those involved in making loans to our customers. Accordingly, our normal credit policies apply to these arrangements. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the customer. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for credit losses. The reserve for unfunded loan commitments is included in “Accrued taxes and other liabilities” in the accompanying consolidated balance sheets. At December 31, 2023 and 2022, the reserve for unfunded loan commitments was $0.3 million and $0.4 million, respectively. Loan commitments and standby letters of credit do not necessarily represent future cash requirements, in that while the customer typically has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon in full or at all. Virtually all of our standby letters of credit expire within one year. Our unfunded loan commitments and standby letters of credit outstanding are summarized below as of the dates indicated (dollars in thousands). December 31, 2023 December 31, 2022 Commitments to extend credit: Loan commitments $ 413,019 $ 333,040 Standby letters of credit 17,844 11,379 The Company closely monitors the amount of remaining future commitments to borrowers in light of prevailing economic conditions and adjusts these commitments as necessary. The Company will continue this process as new commitments are entered into or existing commitments are renewed. Additionally, at December 31, 2023, the Company had unfunded commitments of $1.3 million for its investment in Small Business Investment Company qualified funds. For each of the years ended December 31, 2023 and 2022, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations, or cash flows currently or in the future. 59 Table of Contents Lease Obligations . The Company’s primary leasing activities relate to certain real estate leases entered into in support of the Company’s branch operations. The Company’s branch locations operated under lease agreements have all been designated as operating leases. The Company does not lease equipment under operating leases, nor does it have leases designated as finance leases. The following table presents, as of December 31, 2023, contractually obligated lease payments due under non-cancelable operating leases by payment date (dollars in thousands). Less than one year $ 381 One to three years 727 Three to five years 682 Over five years 671 Total $ 2,461 On January 27, 2023, we completed the previously announced sale of certain assets, deposits and other liabilities associated with the Alice and Victoria, Texas branch locations. Upon the completion of the sale, we recorded $0.3 million of occupancy expense to terminate the remaining contractually obligated lease payments due under non-cancelable operating leases. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The information contained in Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management hereof is incorporated herein by reference. 60 Table of Contents