What changed in this filing

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Item 1A. Risk Factors

2021-03-19 compared with 2020-03-27 · 321 added, 388 removed, 209 unchanged (77% of the section changed)

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Any of the following risks, as well as risks of which we are not now aware or currently deem immaterial, could materially and adversely affect our business, financial condition, and results of operations.

If this were to happen, the price of our common stock could decline significantly, and you could lose all or part of your investment.

Further, to the extent that any of the information in this report constitutes forward-looking statements, the risk factors below also are cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf.

Risks Related to Our Business

The geographic concentration of our markets in Louisiana makes us sensitive to adverse changes in the local economy.

We are a community banking franchise concentrated in Louisiana.

As of December 31, 2019 , 93.5% of loans HFI (by dollar amount) were made to borrowers who reside or conduct business in Louisiana, and substantially all of our real estate loans are secured by properties located in Louisiana.

A deterioration in local economic conditions or in the residential or commercial real estate markets could have an adverse effect on the quality of our loan portfolio, the demand for our products and services, the ability of borrowers to timely repay loans, and the value of the collateral securing loans.

If the population, employment, or income growth in any of our markets is negative or slower than projected, income levels, deposits, and real estate development could be adversely impacted.

These consequences of a material deterioration in economic and business conditions in our local economy could have a material adverse effect on our business, financial condition, and results of operations.

As a business operating in the financial services industry, our business and operations may be adversely affected in numerous and complex ways by weak economic conditions.

Our business and operations, which primarily consist of lending money to customers in the form of loans, borrowing money from customers in the form of deposits, and investing in securities, are sensitive to general business and economic conditions in the U.S.

economy, as a whole, has improved moderately over the past several years.

The business environment in which we operate continues to be impacted by uncertainty about the federal fiscal policymaking process.

The medium and long-term fiscal outlook of the federal government and U.S.

economy are concerns for businesses, consumers, and investors in the U.S.

In addition, economic conditions in foreign countries, including global political hostilities, could affect the stability of global financial markets, which could hinder domestic economic growth.

After a prolonged period of historically low interest rates, the past couple of years have seen a greater degree of volatility in both short and long term interest rates.

This impacts our ability to attract deposits and manage net interest margin.

All of these factors could be detrimental to our business, and the interplay between these factors can be complex and unpredictable.

Our business is also significantly affected by monetary and related policies of the U.S.

government and its agencies.

Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control.

Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our business, financial condition, and results of operations.

Interest rate shifts could reduce net interest income.

The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates.

Like most financial institutions, our earnings and cash flows depend to a great extent upon the level of our net interest income.

Net interest income represents the difference between the interest income we earn on loans, investments, and other interest-earning assets, and the interest we pay on interest-bearing liabilities, such as deposits and borrowings.

When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce net interest income.

Similarly, when interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income.

Our interest sensitivity profile was asset sensitive as of December 31, 2019 , meaning that our assets have the opportunity to reprice at a faster pace than our liabilities.

Consequently, we estimate our net interest income would increase in a rising interest rate environment and decrease in a falling interest rate environment.

As of December 31, 2019 , 15.8% of our loan portfolio and 6.6% of our interest-bearing transaction deposits had variable interest rates.

Interest rates are affected by many factors outside of our control, including governmental monetary policies, inflation, deflation, recession, changes in unemployment, the money supply, international disorder, and instability in domestic and foreign financial markets.

Changes in the level of market interest rates affect our net yield on interest-earning assets, our cost of funds, and our loan origination volume.

An increase in the general level of interest rates may, among other things, reduce the demand for loans and decrease loan repayment rates.

A decrease in the general level of interest rates may, among other things, increase prepayments within the loan portfolio and on mortgage-backed securities within the securities portfolio, and increase competition for deposits.

In light of these considerations, a failure to effectively manage our interest rate risk could have a material adverse effect on our business, financial condition, or results of operations.

Natural disasters, acts of war or terrorism, the impact of pandemics, and other external events could result in a disruption of our operations and increases in loan losses.

Natural disasters, acts of war or terrorism, pandemics or widespread outbreaks of disease, and other adverse external events could have a significant impact on our ability to conduct business or upon third parties who perform operational services for us or our customers.

A significant portion of our business is generated from Louisiana markets that have been, and may continue to be, damaged by major hurricanes, floods, tropical storms, tornadoes, and other natural disasters.

Natural disasters can

disrupt our operations, cause widespread property damage, and severely depress the local economies in which we operate.

Moreover, the value of real estate or other collateral that secures our loans could be materially and adversely affected by a natural disaster.

Additionally, our business could be adversely affected by the effects of a widespread outbreak of disease pandemics, including the recent outbreak of a novel coronavirus first identified in China which the Centers for Disease Control and Prevention has advised may spread significantly in the United States.

Any outbreak of disease pandemics and other adverse public health developments could have an adverse effect on our business operations.

The Bank may be directly and adversely impacted by quarantines, travel and workplace restrictions, and reduced employee attendance.

A significant outbreak of disease pandemics or other adverse public health developments in the population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could adversely affect our customers' businesses and results of operations.

If the economies in our primary markets experience an overall decline as a result of these types of external events, demand for loans and our other products and services could be reduced.

In addition, the rates of delinquencies, foreclosures, bankruptcies, and losses on loan portfolios may increase substantially, as uninsured property losses or sustained job interruption or loss may materially impair borrowers’ ability to repay their loans.

Such external events could, therefore, result in decreased revenue and increased loan losses.

All of these consequences could have a material adverse effect on our business, financial condition, and results of operations.

We rely heavily on our executive management team and other key employees, and we could be adversely affected by an unexpected loss of their service.

Our success depends in large part on the performance of our key personnel, as well as on our ability to attract, motivate, and retain highly qualified senior and middle management and other skilled employees.

Competition for employees is intense, and the process of locating key personnel with the combination of skills and attributes required to execute our business plan may be lengthy.

We may not be successful in retaining our key employees.

If we unexpectedly lose the services of one or more of our key personnel, we would also lose the benefit of their skills, knowledge of our primary markets, and years of industry experience.

We may not be able to identify and hire qualified replacement personnel on terms acceptable to us, or at all, which could have a material adverse effect on our business, financial condition, and results of operations.

We face significant competition to attract and retain customers, which could impair our growth, decrease our profitability, or result in loss of market share.

We operate in the highly competitive banking industry and face significant competition for customers from bank and non-bank competitors in originating loans, attracting deposits, and providing other financial services.

Our competitors are generally larger and may have significantly more resources, greater name recognition, and more extensive and established branch networks or geographic footprints.

Because of their scale, many of these competitors can be more aggressive on loan and deposit pricing.

Also, many of our non-bank competitors have fewer regulatory constraints and may have lower cost structures.

We expect competition to continue to intensify due to financial institution consolidation;

legislative, regulatory, and technological changes;

and the emergence of alternative sources for financial services, including fintech companies.

Increased competition could require us to increase the rates we pay on deposits or lower the rates we offer on loans, which could reduce our profitability.

Our failure to compete effectively in our primary markets could cause us to lose market share and could have a material adverse effect on our business, financial condition, and results of operations.

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

Liquidity is essential to our business.

We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations.

An inability to raise funds through deposits, borrowings, the sale of our investment securities, the sale of loans, and other sources could have a substantial negative effect on our liquidity.

Our most important source of funds is deposits.

As of December 31, 2019 , demand deposits were our largest deposit category with $584.9 million , or 34.0% , of total deposits.

Savings, NOW, and money market deposits were $803.0 million , or 46.6% , of total deposits, and time deposits made up the remaining $333.2 million , or 19.4% , of total deposits as of that date.

Deposits from public entities are competitive.

Their balances generally fluctuate during the year, and banks are required to collateralize these deposits.

As of December 31, 2019 , our public entity deposits were $169.0 million , or 9.8% , of total deposits.

Historically, our deposits have provided a stable source of funds.

However, deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff.

Even though a majority of our certificates of deposit renew upon maturity with what we believe are competitive rates, some of our more rate-sensitive customers may move those funds to higher-yielding alternatives.

If our customers move money out of bank

deposits and into other investments such as money market funds, we would lose a relatively low-cost source of funds, increasing our funding costs, and reducing our net interest income and net income.

Our other primary sources of liquidity consist of cash flows from operations, maturities and sales of investment securities, and proceeds from the issuance and sale of our equity to investors.

As a secondary source of liquidity, we have the ability to borrow overnight funds from other financial institutions with whom we have a correspondent relationship.

We also have the ability to borrow from the FHLB.

Historically, we have not utilized brokered or internet deposits to meet liquidity needs.

Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us, could be impaired by factors that affect us, the financial services industry, or the economy in general.

These factors may include disruptions in the financial markets or negative expectations about the industry’s prospects.

Our access to funding sources could also be affected by regulatory actions against us or by a decrease in the level of our business activity due to a downturn in the Louisiana economy or in economic conditions generally.

A decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as meeting deposit withdrawal demands or repaying our borrowings.

Any of these consequences could, in turn, have a material adverse effect on our business, financial condition, and results of operations.

We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, we may not be able to satisfy regulatory requirements or maintain adequate protection against financial stress.

Adequate levels of capital enhance the ability of a financial institution to withstand periods of financial stress.

For this reason, we are subject to significant regulatory capital requirements.

We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the possibility of financing acquisitions.

Red River Bank must satisfy ongoing regulatory capital requirements.

Regulatory capital requirements could increase from current levels, which could require us to raise additional capital or reduce our operations.

Even if we satisfy all applicable regulatory capital minimums, our regulators could ask us to maintain capital levels which are significantly in excess of those minimums.

Our ability to raise additional capital depends on a number of factors, including without limitation our financial condition and performance, conditions in the capital markets, economic conditions, investor perceptions regarding the banking industry, and governmental activities.

Many of these factors are beyond our control, and as such, there is no assurance we will be able to raise additional capital if needed or on terms acceptable to us.

If we fail to maintain capital sufficient to meet regulatory requirements, we may not be able to withstand periods of financial stress and we could be subject to enforcement actions or other regulatory consequences.

Any of these events could have a material adverse effect on our business, financial condition, and results of operations.

Because a significant portion of our loan portfolio consists of real estate loans, negative changes in the economy affecting real estate values could impair the value of collateral securing our real estate loans and result in loan and other losses.

Risks Related to the Ongoing COVID-19 Pandemic

The COVID-19 pandemic is adversely affecting our business, financial condition, and results of operations, and the ultimate impact will depend on future developments which are uncertain and cannot be predicted.

The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world.

Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief.

The pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, prompted decreases in interest rates, increased economic and market uncertainty, and disrupted trade and supply chains.

If these implications continue for a prolonged period or result in sustained economic stress, many of the risk factors identified in this Annual Report on Form 10-K could be exacerbated and such effects could have a material adverse effect on us related to credit, collateral, interest rate risk, profitability, and operations as described in the following sections.

• Credit and Collateral Risk .

The spread of COVID-19 has caused, and may continue to cause, business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability.

All of these factors could cause our customers to be unable to make scheduled loan payments.

If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures, and credit losses, particularly if the available collateral is insufficient to cover our exposure.

The effects of COVID-19 on economic activity could negatively affect collateral values and our ability to liquidate such collateral.

Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making business decisions or may result in a delay in our taking certain remedial actions, such as foreclosure.

All of these factors could cause the level of our nonperforming loans, charge-offs, and delinquencies to increase, potentially requiring significant future provisions for credit losses.

• Interest Rate Risk .

Our net interest income, lending activities, deposits, and profitability could be negatively affected by volatility in interest rates and other factors resulting from uncertainties stemming from COVID-19.

In March 2020, the Federal Reserve lowered the target federal funds rate to 0.25%, citing concerns about the impact of COVID-19 on markets and stress in the energy sector.

This low interest rate environment has and could continue to negatively impact our net interest income and net income.

Higher income volatility from changes in interest rates and spreads to benchmark indices could also cause decreases in current fair market values of our assets.

Fluctuations in interest rates may impact both the level of income and expense recorded on some of our assets and liabilities and the market value of applicable interest-earning assets and interest-bearing liabilities, which could, in turn, negatively affect our net income.

• Profitability Risk .

Our profitability has and could continue to be negatively affected by changes in interest rates as well as other aspects of the COVID-19 pandemic.

In the second quarter of 2020, we temporarily reduced or eliminated (and could reduce or eliminate again) several of our normal customer service fees, which decreased our noninterest income, and in turn, our net income.

We have also experienced (and could continue to experience) lower than normal demand for our non-PPP loans due to the economic downturn related to the COVID-19 pandemic.

• Operational Risk .

While we continue to take precautions related to COVID-19 in terms of physical separation of employees from each other and from customers, resuming all precautions implemented earlier in the pandemic could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations.

We rely on business processes and banking center activity that largely depend on people and technology, including access to information technology systems, as well as information, applications, payment

systems, and other services provided by third parties.

Technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices.

Work-from-home measures and increased electronic interaction with our customers also introduces additional operational risk, including increased cybersecurity risk.

These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation, and liability, and could seriously disrupt our operations and the operations of any affected customers.

Moreover, we rely on many third parties in our business operations, including appraisers of real property collateral;

title companies;

vendors that supply essential services such as loan servicers, providers of financial information, systems, analytical tools, and electronic payment and settlement systems;

and local, state, and federal government agencies, offices, and courthouses.

In light of the measures in responding to the pandemic, many of these entities have limited and may continue to limit the availability of and access to their services.

Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses in certain parishes, which slows the process for title work, mortgage, and Uniform Commercial Code filings in those parishes.

If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may materially and adversely affect our operations.

Because there have been no recent global pandemics of comparable global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole.

Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our social-distancing accommodation arrangements, third party providers’ ability to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic.

The uncertain future development of this crisis and the pandemic’s enhancement of the various risks described above could have a material adverse effect on our business, financial condition, and results of operations.

As a participating lender in the PPP, we are subject to risks related to the SBA program and related PPP loans.

The CARES Act in March of 2020 and the Economic Aid Act in December of 2020 include a significant loan program administered through the SBA referred to as the PPP which includes the PPP Second Draw program.

Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria.

We are participating as a lender in the PPP.

The PPP became available on April 3, 2020.

Due to how quickly each act was passed, there was and continues to be a significant amount of ambiguity and changes in the laws, rules, and guidance regarding requirements for eligibility, underwriting, origination, funding, and forgiveness of PPP loans.

This ambiguity and changes and the speed which was necessary to implement the program expose us to regulatory and legal risks relating to noncompliance with the PPP.

PPP loans are also subject to regulatory requirements that require forbearance of loan payments for a specified time and limit our ability to pursue all available remedies in the event of a loan default.

If a borrower under a PPP loan fails to qualify for loan forgiveness, our risk is heightened because we hold these loans at unfavorable interest rates.

We also have credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which the loan was originated, funded, or serviced by us, such as an issue with the eligibility of a borrower to receive a PPP loan.

In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or seek recovery from us of any loss related to the deficiency.

In addition, we have credit risk related to how forgiveness of PPP loans is handled and how the forgiveness amounts are determined.

Governmental agencies have, and may continue to change the rules, create new rules, have a very detailed review process, or require additional forms or paperwork that the borrower may not complete appropriately.

All of these items could negatively impact us.

Since the commencement of the PPP, numerous other banks have been subject to litigation regarding the process and procedures that those banks used in processing applications for the PPP.

We may be exposed to similar litigation from customers, non‑customers, and agents that approach us regarding PPP loans and regarding our procedures for processing applications, funding PPP loans, and coordinating the forgiveness of the loans.

If any such litigation is initiated against us, it may result in significant financial liability, significant litigation costs, or adversely affect our reputation.

Any of these legal, regulatory, and credit risks related to our participation in the PPP could have a material adverse effect on our business, financial condition, and results of operations.

Risks Related to Our Credit Activities

We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.

Our business depends on our ability to successfully measure and manage credit risk.

As a lender, we are exposed to the risk that our borrowers will be unable to repay their loans according to their terms, and the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment.

In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers.

The creditworthiness of a borrower is affected by many factors including local market conditions and general economic conditions.

If the overall economic climate in the U.S., generally, or in Louisiana, specifically, experiences material disruption, our borrowers may experience difficulties in repaying their loans, the collateral we hold may decrease in value or become illiquid, and the level of nonperforming loans, charge-offs, and delinquencies could rise and require significant additional provisions for credit losses.

Our risk management practices, such as monitoring the concentration of our loans within specific industries and our credit approval, review, and administrative practices may not adequately reduce credit risk.

Further, our credit administration personnel, policies, and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of our loan portfolio.

A failure to effectively measure and limit our credit risk could result in loan defaults, foreclosures, and additional charge-offs.

As a result, we may need to significantly increase our allowance for loan losses, which could adversely affect our net income.

All of these consequences could, in turn, have a material adverse effect on our business, financial condition, and results of operations.

A significant portion of our loan portfolio consists of real estate loans which subjects us to potential impairment of the collateral securing the loan if the real estate economy experiences negative changes as well as costs and potential risks associated with the ownership of the real property if we are forced to foreclose.

The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located.

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Consequently, we could be required to increase our allowance for loan losses, adversely affecting profitability.

As a result, such declines and losses could have a material adverse effect on our business, financial condition, and results of operations.

Additionally, we may have to foreclose on the collateral property to protect our investment.

We may thereafter own and operate such property, in which case we would be exposed to the risks inherent in the ownership of real estate, including potential environmental liability due to contamination of a property either during ownership or after divesting of it.

As of December 31, 2020, we held approximately $896,000 in OREO.

This amount could increase in the future, depending upon the level of our real estate foreclosures and our ability to efficiently divest of the foreclosed OREO.

The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to, general or local economic conditions, environmental cleanup liability, assessments, interest rates, real estate tax rates, operating expenses of the mortgaged properties, ability to obtain and maintain adequate occupancy of the properties, zoning laws, governmental and regulatory rules, and natural disasters.

Any of these events could have a material adverse effect on our business, financial condition, and results of operations.

Our commercial real estate loan portfolio exposes us to risks that may be greater than the risks related to other types of loans.

Our loan portfolio includes non-owner occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties, as well as real estate construction and development loans.

As of December 31, 2020, our construction and development loans, non-owner occupied commercial real estate loans, and non-real estate secured loans financing commercial real estate activities totaled $365.5 million, or 23.0%, of loans HFI.

These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service.

This projected income may be adversely affected by changes in the economy or local market conditions.

Commercial real estate loans expose us to greater credit risk than loans secured by residential real estate because there are fewer potential purchasers for the commercial real estate collateral, which can make liquidation more difficult.

Additionally, non-owner occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers.

Accordingly, charge-offs on non-owner occupied commercial real estate loans may be larger on an individual loan basis than those incurred with our residential or consumer loan portfolios.

Unexpected deterioration in the credit quality of our

commercial real estate loan portfolio would require us to increase our provision for loan losses, which would reduce our profitability.

Any of these potential consequences could have a material adverse effect on our business, financial condition, and results of operations.

Our business may be adversely affected by credit risk associated with residential property.

As of December 31, 2020, $442.9 million, or 27.9%, of our total loan portfolio was secured by first liens on one-to-four family residential loans.

One-to-four family residential loans are generally sensitive to regional and local economic conditions that significantly impact the borrowers’ ability to meet their loan payment obligations, making loss levels difficult to predict.

One-to-four family residential loans are generally sensitive to regional and local economic conditions that significantly impact the borrowers’ ability to meet their loan payment obligations.

A decline in residential real estate values resulting from a downturn in the housing market in our market areas may reduce the value of the real estate collateral securing these types of loans and increase our risk of losses due to default.

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Losses or declines in profitability as a result of these potential negative events could have a material adverse effect on our business, financial condition, and results of operations.

Unauthorized access, cyber-crime, and other threats to data security may require significant resources, harm our reputation, and otherwise cause harm to our business.

In the ordinary course of our business, we necessarily collect, use, and hold personal and financial information concerning individuals and businesses with which we have a banking relationship.

Threats to data security such as unauthorized access and cyber-attacks emerge and change rapidly.

These threats may increase our costs for protection or remediation.

They may also result in competing time constraints between applicable privacy and other requirements and our ability to secure data in accordance with customer expectations.

It is difficult or impossible to defend against every risk posed by changing technologies and criminals' intent on committing cyber-crime.

Increasing sophistication of cyber-criminals and terrorists makes it increasingly difficult to prevent a security breach.

Controls employed by our information technology department, our other employees, and our vendors could prove inadequate.

We could also experience a breach due to circumstances such as intentional or negligent conduct on the part of employees or other internal sources, software bugs, or other technical malfunctions.

Any of these threats may cause our customer accounts to become vulnerable to account takeover schemes or cyber-fraud.

A breach of our security that results in unauthorized access to our data could expose us to disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines, significant increases in compliance costs, and reputational damage.

Any of these consequences could have a material adverse effect on our business, results of operations, and financial condition.

While we have not experienced a material impact to date on our business or operations from cyber attacks or events, the ever-evolving threats mean we and our third-party service providers and vendors must continually evaluate and adapt our respective systems and processes and overall security environment, as well as those of any companies we acquire.

We are continuously enhancing our controls, processes, and practices designed to protect our networks, systems, data, and other infrastructure from attack, damage, or unauthorized access.

This continued enhancement will require us to expend additional resources, including to investigate and remediate any information security vulnerabilities that may be detected.

Despite our ongoing investments in security resources, talent, and business practices, there is no guarantee that these measures will be adequate to safeguard against all data security breaches, system compromises or misuses of data.

A significant portion of our loan portfolio is comprised of commercial and industrial loans secured by receivables, inventory, equipment, or other commercial collateral, the deterioration in value of which could expose us to credit losses.

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In addition, a portion of our customer base, including customers in the energy and real estate business, may be exposed to volatile businesses or industries which are sensitive to commodity prices or market fluctuations, such as energy prices.

Accordingly, negative changes in commodity prices and real estate values and liquidity could impair the value of the collateral securing these loans.

Accordingly, negative changes in commodity prices, real estate values, or liquidity could impair the value of the collateral securing these loans.

Significant adverse changes in the economy or local market conditions in which our commercial lending customers operate could cause rapid declines in loan collectability and the values associated with general business assets resulting in inadequate collateral coverage.

These events, in turn, may expose us to credit losses that could adversely affect our business, financial condition, and results of operations.

We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.

Our business depends on our ability to successfully measure and manage credit risk.

The creditworthiness of a borrower is affected by many factors including local market conditions and general economic conditions.

may decrease in value or become illiquid, and the level of nonperforming loans, charge-offs, and delinquencies could rise and require significant additional provisions for credit losses.

A failure to effectively measure and limit our credit risk could result in loan defaults, foreclosures, and additional charge-offs.

As a result, we may need to significantly increase our allowance for loan losses, which could adversely affect our net income.

All of these consequences could, in turn, have a material adverse effect on our business, financial condition, and results of operations.

Our allowance for loan losses may prove to be insufficient to absorb losses inherent in our loan portfolio.

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The allowance for loan losses represents our estimate of probable losses in our loan portfolio at each balance sheet date and is based upon relevant information available to us.

The allowance contains provisions for probable losses that have been identified by us relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified by us.

The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified.

Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including an analysis of our loan portfolio, historical loss experience, and an evaluation of current economic conditions in our market areas.

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FASB has adopted a new accounting standard that will be effective for us on January 1, 2023, due to our classification as an SEC registrant with smaller reporting company filing status.

This new standard, referred to as CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for loan losses.

This new standard, referred to as CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as

allowances for loan losses.

This will change the current method of providing allowances for loan losses that are probable, which could require us to increase our allowance for loan losses.

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Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses could adversely affect our business, financial condition, and results of operations.

Our ability to maintain our reputation is critical to the success of our business.

Our business plan emphasizes relationship banking.

As a result, our reputation is one of the most valuable components of our business.

If our reputation is negatively affected by the actions of our employees or otherwise, our existing relationships may be damaged.

We could lose some of our existing customers, including groups of large customers who have relationships with each other, and we may not be successful in attracting new customers.

Any of these developments could have a material adverse effect on our business, financial condition, and results of operations.

We rely on third parties to provide key components of our business infrastructure, and a failure of these parties to perform for any reason could disrupt our operations.

Third parties provide key components of our business infrastructure such as data processing, internet connections, network access, core application processing, statement production, and account analysis.

Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers.

The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations.

Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions.

Additionally, our operations could be interrupted if any of our third-party service providers experience financial difficulty, are inadvertently or intentionally negligent, are subject to cybersecurity breaches, terminate their services, or fail to comply with applicable banking regulations.

Replacing vendors or addressing other issues with our third-party service providers could entail significant delay and expense.

If we are unable to efficiently replace ineffective service providers or if we experience a significant, sustained, or repeated system failure or service denial, it could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and subject us to additional regulatory scrutiny and possible financial liability.

Any of these consequences could have a material adverse effect on our business, financial condition, and results of operations.

Our commercial real estate loan portfolio exposes us to risks that may be greater than the risks related to other types of loans.

As of December 31, 2019 , our construction and development loans, non-owner occupied commercial real estate loans, and non-real estate secured loans financing commercial real estate activities totaled $364.8 million, or approximately 25.4%, of loans HFI and represented 153.3% of the Bank’s total risk-based capital.

This projected income may be adversely affected by changes in the economy or local market conditions.

Additionally, non-owner occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers.

Accordingly, charge-offs on non-owner occupied commercial real estate loans may be larger on an individual loan basis than those incurred with our residential or consumer loan portfolios.

Unexpected deterioration in the credit quality of our commercial real estate loan portfolio would require us to increase our provision for loan losses, which would reduce our profitability.

Any of these potential consequences could have a material adverse effect on our business, financial condition, and results of operations.

We engage in lending secured by real estate and may be forced to foreclose on the collateral and own the underlying real estate, subjecting us to the costs and potential risks associated with the ownership of the real property.

Because we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment.

We may thereafter own and operate such property, in which case we would be exposed to the risks inherent in the ownership of real estate.

As of December 31, 2019 , we held approximately $1.1 million in OREO.

This amount could increase in the future, depending upon the level of our real estate foreclosures and our ability to efficiently divest of the foreclosed OREO.

Our inability to manage the amount of costs, or size of the risks, associated with the ownership of real estate or writedowns in the value of OREO could have a material adverse effect on our business, financial condition, and results of operations.

Appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property, OREO, and repossessed personal property may not accurately describe the net value of the asset.

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The amount of our nonperforming and classified assets may increase significantly, resulting in additional losses, costs, and expenses.

As of December 31, 2019 , we had a total of approximately $6.5 million of nonperforming assets, or approximately 0.33% of total assets.

Total loans classified as substandard or doubtful as of December 31, 2019 , were approximately $13.0 million, or 0.65% of total assets.

An asset is generally considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or by any pledged collateral.

Assets so classified must have well-defined weaknesses that jeopardize normal repayment of principal and interest.

Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make full collection, on the basis of currently existing facts, conditions, and values, improbable.

As of December 31, 2020, we had nonperforming assets of $4.2 million, or 0.16% of total assets.

Nonperforming assets adversely affect our net income in various ways.

We generally do not record interest income on OREO or on nonperforming loans, thereby adversely affecting our income and increasing loan administration costs.

We do not record interest income on OREO or on nonperforming loans, which adversely affects our income.

When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to market value of the collateral, which may ultimately result in a loss.

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Such losses and expenses due to any increase in nonperforming assets could have a material adverse effect on our business, financial condition, and results of operations.

Volatility in oil prices and downturns in the energy industry, particularly in Louisiana, could lead to increased credit losses in our loan portfolio.

Although we do not believe we have significant direct exposure to energy loans, we may have indirect exposure to energy prices, as some of our non-energy customers’ businesses may be affected by volatility with the oil and gas industry and energy prices.

Prolonged or further pricing pressure on oil and gas could lead to increased credit stress with respect to those borrowers.

Such a decline or general uncertainty resulting from continued volatility could have other adverse impacts such as job losses in industries tied to energy, lower borrowing needs, higher transaction deposit balances, or a number of other effects that are difficult to isolate or quantify, particularly in states with significant dependence on the energy industry like Louisiana.

All of these potential consequences could have a material adverse effect on our business, financial condition, and results of operations.

The small to medium-sized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair our borrowers’ ability to repay loans.

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If our small to medium-sized business customers are negatively impacted by general economic conditions or other adverse business developments, this, in turn, could have a material adverse effect on our business, financial condition, and results of operations.

The fair value of our investment securities can fluctuate due to factors outside of our control.

Factors beyond our control can significantly influence the fair value of securities in our investment portfolio, potentially resulting in adverse changes to the portfolio’s fair value.

These factors include, but are not limited to, rating agency actions related to the securities, defaults by the issuer or with respect to the underlying collateral, and changes in market interest rates and instability in the capital markets.

Any of these factors, among others, could cause OTTI and realized or unrealized losses in future periods and declines in OCI, which could have a material adverse effect on our business, financial condition, and results of operations.

In addition, the process for determining whether impairment of a security is other-than-temporary often requires complex, subjective judgments about whether there has been a significant deterioration in the financial condition of the issuer, whether management has the intent or ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value, the future financial performance and liquidity of the issuer and any underlying collateral, and other relevant factors.

Our failure to correctly and timely assess any impairments or losses with respect to our securities could have a material adverse effect on our business, financial condition, and results of operations.

We may not be able to implement our expansion strategy, which may adversely affect our ability to maintain our historical earnings trends.

Our expansion strategy focuses on organic growth, supplemented by strategic acquisitions and expansion of the Bank’s banking center network, or de novo expansion.

De novo expansion carries with it certain potential risks, including significant startup costs and anticipated initial operating losses;

an inability to gain regulatory approval;

an inability to secure the services of qualified senior management to operate the de novo banking center and successfully integrate and promote our corporate culture;

poor market reception for de novo banking centers established in markets where we do not have a preexisting reputation;

challenges posed by local economic conditions;

challenges associated with securing attractive locations at a reasonable cost;

and additional strain on management resources and internal systems and controls.

Failure to adequately manage these risks could have a material adverse effect on our business, financial condition, and results of operations.

Further, we may not be able to execute on more general aspects of our expansion strategy, which may impair our ability to sustain our historical rate of growth or prevent us from growing at all.

We may not be able to generate sufficient new loans

and deposits within acceptable risk and expense tolerances, obtain the personnel or funding necessary for additional growth, or find suitable acquisition candidates.

Various factors, such as economic conditions and competition with other financial institutions, may impede or prohibit the growth of our operations, the opening of new banking centers, and the consummation of acquisitions.

The success of our strategy also depends on our ability to effectively manage growth, which is dependent upon a number of factors, including our ability to adapt our credit, operational, technology, and governance infrastructure to accommodate expanded operations.

Acquisitions typically involve the payment of a premium over book and market values;

therefore, some dilution of our tangible book value and earnings per common share may occur in connection with any future acquisition.

Further, the carrying amount of any goodwill that we currently maintain or may acquire may be subject to impairment in future periods.

If we fail to implement one or more aspects of our expansion strategy, we may be unable to maintain our historical growth and earnings trends, which could have a material adverse effect on our business, financial condition, and results of operations.

New lines of business, products, product enhancements, or services may subject us to additional risks.

From time to time, we implement new lines of business or offer new products and product enhancements as well as new services within our existing lines of business.

There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed.

In implementing, developing, or marketing new lines of business, products, product enhancements, or services, we may invest significant time and resources.

At the same time, we may not allocate the appropriate level of resources or expertise necessary to make these new efforts successful or to realize their expected benefits.

Further, initial timetables for the introduction and development of new lines of business, products, product enhancements, or services may not be achieved, and price and profitability targets may not prove feasible.

External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the ultimate implementation.

Any new line of business, product, product enhancement, or service could also have a significant impact on the effectiveness of our system of internal controls.

Consequently, our failure to successfully manage these types of development and implementation risks could have a material adverse effect on our business, financial condition, or results of operations.

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

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services.

In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.

As we continue to grow, our success will be partially dependent upon our ability to address the needs of our customers and enhance operational efficiencies through the use of technology.

We may experience operational challenges as we implement these new technology products or enhancements.

As a result, we may not fully realize the anticipated benefits from our new technology, or we may incur significant costs to overcome related challenges in a timely manner.

Many of our larger competitors have substantially greater resources to invest in technological improvements.

As a result, they may be able to offer additional or superior products, which would put us at a competitive disadvantage.

Accordingly, we may lose customers seeking technology-driven products and services that we are not able to provide.

Our inability to overcome any of these technological challenges could, in turn, have a material adverse effect on our business, financial condition, and results of operations.

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

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

In deciding whether and upon what terms to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, property appraisals, title information, employment and income documentation, account information, and other financial information.

We may also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors.

Any such misrepresentation or incorrect or incomplete information, whether fraudulent or inadvertent, may not be detected prior to entering into the transaction.

Any misrepresentation or incorrect or incomplete information, whether fraudulent or inadvertent, may not be detected prior to entering into the transaction.

In addition, one or more of our employees could cause a significant breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our loan documentation, operations, or systems.

Whether a misrepresentation is made by the applicant or another third party, we generally bear the risk of loss associated with the misrepresentation.

We are often contractually required to indemnify counterparties for losses caused by a material misrepresentation, and a loan subject to a material misrepresentation is typically not marketable or, if sold, subject to repurchase.

The sources of the misrepresentations may also be difficult to locate, and we may be unable to recover any of the monetary losses we may suffer as a result.

Any of these developments could have a material adverse effect on our business, financial condition, and results of operations.

Risks Related to Interest Rates and Economic Conditions

Interest rate shifts could reduce net interest income.

The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates.

Like most financial institutions, our earnings and cash flows depend to a great extent upon the level of our net interest income.

When interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income.

Similarly, when interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce net interest income.

Our interest sensitivity profile was asset sensitive as of December 31, 2020, meaning that our assets have the opportunity to reprice at a faster pace than our liabilities.

Consequently, we estimate our net interest income would decrease in a falling interest rate environment and increase in a rising interest rate environment.

Changes in the level of market interest rates affect our net yield on interest-earning assets, our cost of funds, and our loan origination volume.

An increase in the general level of interest rates may, among other things, reduce the demand for loans and decrease loan repayment rates.

In light of these considerations, a failure to effectively manage our interest rate risk could have a material adverse effect on our business, financial condition, or results of operations.

The geographic concentration of our markets in Louisiana makes us sensitive to adverse changes in the local economy.

We are a community banking franchise concentrated in Louisiana.

As of December 31, 2020, 93.6% of loans HFI were made to borrowers who reside or conduct business in Louisiana, and substantially all of our real estate loans are secured by properties located in Louisiana.

If the population, employment, or income growth in any of our markets is negative or slower than projected, income levels, deposits, and real estate development could be adversely impacted.

Any of these consequences could have a material adverse effect on our business, financial condition, and results of operations.

Volatility in oil prices and downturns in the energy industry, particularly in Louisiana, could lead to increased credit losses in our loan portfolio.

As of December 31, 2020, we had non-PPP energy loans of $20.4 million, or 1.4%, of non-PPP loans HFI (non-GAAP).

For further information on non-GAAP financial measures, see "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures." We also may have indirect exposure to energy prices, as some of our non-energy customers’ businesses may be affected by volatility with the oil and gas industry and energy prices.

Prolonged or further pricing pressure on oil and gas could lead to increased credit stress with respect to those borrowers.

All of these potential consequences could have a material adverse effect on our business, financial condition, and results of operations.

Natural disasters, acts of war or terrorism, the impact of pandemics, civil unrest, and other external events could result in a disruption of our operations and increases in loan losses.

Natural disasters can disrupt our operations, cause widespread property damage, and severely depress the local economies in which we operate.

Moreover, the value of real estate or other collateral that secures our loans could be materially and adversely affected by a natural disaster.

Additionally, our business could be adversely affected by the effects of civil unrest or a widespread outbreak of disease pandemics, including the ongoing pandemic caused by COVID-19.

If the economies in our primary markets experience an overall decline as a result of these types of external events, demand for loans and our other products and services could be reduced.

In addition, the rate of delinquencies, foreclosures, bankruptcies, and losses on loan portfolios may increase substantially, as uninsured property losses or sustained job interruption or loss may materially impair borrowers’ ability to repay their loans.

Such external events could,

therefore, result in decreased revenue and increased loan losses.

All of these consequences could have a material adverse effect on our business, financial condition, and results of operations.

As a business operating in the financial services industry, our business and operations may be adversely affected in numerous and complex ways by weak economic conditions.

The business environment in which we operate can be impacted by uncertainty about the federal fiscal and monetary policymaking process.

Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control.

The medium and long-term fiscal outlook of the federal government and U.S.

economy are concerns for businesses, consumers, and investors in the U.S.

In addition, economic conditions in foreign countries, including global political hostilities, could affect the stability of global financial markets, which could hinder domestic economic growth.

Uncertainty regarding both short and long-term interest rates impacts our ability to attract deposits and manage net interest margin.

Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our business, financial condition, and results of operations.

The borrowing needs of our customers may increase, especially during a challenging economic environment, which could result in increased borrowing against our contractual obligations to extend credit.

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Such an inability to satisfy our obligations could have a material adverse effect on our business, financial condition, and results of operations.

Risks Related to Our Operations