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Item 7. Management’s Discussion and Analysis

2021-03-19 compared with 2020-03-27 · 584 added, 375 removed, 529 unchanged (64% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion and analysis is to focus on significant changes in the financial condition and results of operations of Red River Bancshares, Inc.

and our wholly owned subsidiary, Red River Bank, during the year ended December 31, 2019 and selected prior periods.

This discussion and analysis should be read in conjunction with information presented elsewhere in the report, including "Item 6.

The purpose of this discussion and analysis is to focus on significant changes in financial condition and results of operations of Red River Bancshares, Inc.

on a consolidated basis during the year ended December 31, 2020 and selected prior periods.

This discussion and analysis should be read in conjunction with information presented elsewhere in this report, including "Item 6.

Selected Financial Data" and our audited consolidated financial statements and notes thereto included in "Item 8.

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is the bank holding company for Red River Bank, a Louisiana state-chartered bank established in 1999 that provides a fully integrated suite of banking products and services tailored to the needs of our commercial and retail customers.

Red River Bank operates from a network of 25 banking centers throughout Louisiana.

Red River Bank operates from a network of 25 banking centers throughout Louisiana and one combined loan and deposit production office in Lafayette, Louisiana.

Banking centers are located in the following Louisiana markets:

Central Louisiana, which includes the Alexandria MSA;

Northwest Louisiana, which includes the Shreveport-Bossier City MSA;

Southeast Louisiana, which includes the Baton Rouge MSA;

Southwest Louisiana, which includes the Lake Charles MSA;

Central, which includes the Alexandria MSA;

Northwest, which includes the Shreveport-Bossier City MSA;

Capital, which includes the Baton Rouge MSA;

Southwest, which includes the Lake Charles MSA;

and the Northshore, which includes Covington.

Our priority is to drive shareholder value through the establishment of a market-leading commercial banking franchise in Louisiana.

We provide superior service through highly qualified, relationship-oriented bankers who are committed to their customers and the communities in which we offer our products and services.

We provide services through relationship-oriented bankers who are committed to their customers and the communities in which we offer our products and services.

Our strategy is to expand geographically through the establishment of de novo banking centers in new markets and, to a lesser extent, through the acquisition of financial institutions with customer-oriented, compatible philosophies and in desirable geographic areas.

2019 was an important year for our Company.

In January 2019, we celebrated Red River Bank's 20-year anniversary of operations.

The most important milestone of 2019 was changing our stock from being privately held and traded to being publicly traded.

We also continued to expand organically throughout Louisiana.

We are pleased with our 2019 accomplishments, growth, and financial results.

2019 Major Accomplishments

January 2019 marked the 20th anniversary of Red River Bank providing banking services in Louisiana.

In May 2019, we completed an IPO of our common stock and the stock began trading on the Nasdaq Global Select Market under the trading symbol "RRBI."

In June 2019, our stock was selected to be included in the Russell 2000 Index.

As planned, in June and August 2019, a portion of the proceeds from the May 2019 IPO were used to redeem all of our junior subordinated debentures and the associated business trusts were terminated.

We expanded organically throughout Louisiana with the following events:

Opened a new market headquarters building in the Southeast market in the first quarter of 2019.

Entered into a new market, the Northshore, located on the north shore of Lake Pontchartrain, near New Orleans, Louisiana.

In the Northshore, we operated from a temporary LPO until a full service banking center was opened in the third quarter of 2019.

Purchased a banking center location in the Southwest market in the fourth quarter of 2019.

On March 23, 2020, we opened a full-service banking center at this location in Sulphur, Louisiana.

Hired experienced and knowledgeable bankers in our Southwest and Northshore markets.

We expanded our treasury management team, products, and services.

Highlights of 2019 Financial Results

The following are financial highlights for the year ended December 31, 2019:

The year ended December 31, 2020, had many challenges and successes.

We were impacted by the global outbreak of the COVID-19 pandemic, the passage of the CARES Act, changing government orders, economic shutdowns, a low interest rate environment, and two hurricanes that impacted our markets.

Despite these challenges, we participated in the SBA PPP program, welcomed many new customers, implemented a stock buyback program, opened a new banking center, purchased two banking center locations, and had record high levels of mortgage activity, balance sheet growth, and earnings.

2020 Financial and Operational Highlights

• Net income for the year ended December 31, 2020, was $28.1 million, or $3.83 diluted EPS, an increase of $3.3 million, or 13.4%, compared to $24.8 million, or $3.49 diluted EPS, for the year ended December 31, 2019.

Assets increased 6.9% to $1.99 billion as of December 31, 2019, compared to $1.86 billion as of December 31, 2018.

• The return on average assets was 1.22% for 2020 and 1.30% for 2019.

The return on average equity decreased to 10.86% for 2019 from 12.46% for 2018.

This decrease is primarily due to the addition of $26.8 million of net proceeds from the IPO to equity.

The 2019 net interest margin FTE was impacted by the changing interest rate environment and the redemption of the junior subordinated debentures.

Net interest margin FTE increased to 3.52% for 2019 from 3.44% for 2018.

Loans HFI increased 8.3% and deposits increased 4.6% compared to December 31, 2018.

As of December 31, 2019, the loans HFI to deposits ratio was 83.60%, and the noninterest-bearing deposits to total deposits ratio was 33.98%.

The nonperforming assets to total assets ratio improved to 0.33% as of December 31, 2019, from 0.38% as of December 31, 2018.

The net charge-offs to average loans ratio for the year ended December 31, 2019 was 0.03%.

• The return on average equity was 10.39% for 2020 and 10.86% for 2019.

• Assets increased $654.4 million, or 32.9%, to $2.64 billion as of December 31, 2020, compared to $1.99 billion as of December 31, 2019.

This increase was driven by a $619.2 million, or 36.0%, increase in deposits for the same period.

The deposit growth in 2020 was due to customers receiving funds from various government stimulus programs, customers depositing the proceeds from their PPP loans, strong deposit account opening activity, and customers maintaining larger deposit balances.

• Loans HFI increased $149.5 million, or 10.4%, to $1.59 billion as of December 31, 2020, compared to $1.44 billion as of December 31, 2019.

The increase in loans was mainly due to PPP loans originated during the year.

• Red River Bank participated in the SBA PPP, supporting Louisiana businesses with PPP loans.

In the second quarter of 2020, Red River Bank originated 1,384 PPP loans totaling $199.0 million, with an average loan size of $144,000.

In the fourth quarter of 2020, the SBA began approving our initial PPP loan forgiveness applications.

As of December 31, 2020, PPP loans, net of deferred income, were $118.4 million.

• Mortgage loan production and income in 2020 were at record high levels for the Company.

• During 2020, our investment group successfully converted our registered broker-dealer relationship to LPL Financial LLC.

This conversion allows us to support future brokerage services growth, as well as provide better technology and benefits to our customers and investment group.

• We expanded organically throughout Louisiana with the following:

◦ Late in 2019, we purchased a banking center building in Sulphur, Louisiana, located in our Southwest Louisiana market.

This property was remodeled and opened as a Red River Bank banking center late in the first quarter of 2020.

◦ In the third quarter of 2020, we began operations in our newest market, Acadiana, which includes the Lafayette, Louisiana MSA.

We hired an Acadiana market president and opened a combined loan and deposit production office in Lafayette.

◦ In the fourth quarter of 2020, we purchased a banking center building in Lake Charles, Louisiana.

This location allows us to continue to expand banking services in our Southwest Louisiana market.

This property is being remodeled and is expected to open as a full-service banking center in the second quarter of 2021, pending all necessary regulatory approvals.

◦ In the fourth quarter of 2020, we purchased a banking center building in Lafayette, Louisiana.

This property is being remodeled and is expected to open as our Acadiana market's first, full-service banking center in the summer of 2021, pending all necessary regulatory approvals.

• Beginning in the first quarter of 2020, we began paying cash dividends on a quarterly basis.

Quarterly cash dividends of $0.06 per common share were paid in 2020, resulting in cash dividends of $0.24 per common share for 2020, compared to $0.20 per common share for 2019.

• In August 2020, our board approved a stock repurchase program that authorizes us to purchase up to $3.0 million of our outstanding shares through August 27, 2021.

In 2020, we repurchased 2,824 shares.

• Our Southwest and Central Louisiana markets were impacted by Hurricane Laura in August 2020 and Hurricane Delta in October 2020.

Banking center locations in the impacted areas were temporarily closed prior to and after the hurricane;

however, banking services quickly resumed.

Red River Bank did not sustain any significant damage to its locations from these hurricanes.

RESULTS OF OPERATIONS

Net income for the year ended December 31, 2019 , was $ 24.8 million, or $ 3.49 per diluted common share, an increase of $ 1.8 million, or 7.7% , compared to $ 23.1 million, or $ 3.41 per diluted common share, for the year ended December 31, 2018 .

The increase in net income is due to a $ 4.4 million increase in net interest income, a $ 1.4 million increase in noninterest income, partially offset by a $3.9 million increase in operating expenses.

The return on average assets for the year ended December 31, 2019 , was 1.30% and 1.29% for the year ended December 31, 2018 .

The return on average equity was 10.86% for the year ended December 31, 2019 , and 12.46% for the year ended December 31, 2018 .

Net income for the year ended December 31, 2020, was $28.1 million, or $3.83 diluted EPS, an increase of $3.3 million, or 13.4%, compared to $24.8 million, or $3.49 diluted EPS, for the year ended December 31, 2019.

The increase in net income was primarily due to a $7.2 million increase in noninterest income and a $5.4 million increase in net interest income, partially offset by a $4.5 million increase in provision for loan losses and a $4.1 million increase in operating expenses.

The return on average assets for the year ended December 31, 2020, was 1.22%, compared to 1.30% for the prior year.

The return on average equity was 10.39% for the year ended December 31, 2020, compared to 10.86% for the prior year.

Our efficiency ratio for the year ended December 31, 2020, was 55.77%, compared to 59.46% for the year ended December 31, 2019.

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Our net interest income and net interest margin are directly affected by these rates and their changes.

During 2018, the target federal funds rate increased 100 bps (25 bps in each of March, June, September, and December), and was 2.50% as of December 31, 2018.

During 2019, the target federal funds rate remained consistent between January and July and decreased 75 bps in the second half of the year (25 bps in each of August, September, and October), and was 1.75% as of December 31, 2019.

Due to these fluctuations, the average effective federal funds rate was 1.83% for 2018 and 2.16% for 2019, resulting in an overall, average higher interest rate environment in 2019 than 2018.

During 2019, the target federal funds rate remained consistent between January and July, decreased 75 bps in the second half of the year, and was 1.75% as of December 31, 2019.

During 2020, the target federal funds rate decreased 150 bps in March, remained consistent the rest of the year, and was 0.25% as of December 31, 2020.

Due to these fluctuations, the average effective federal funds rate was 2.16% for 2019 and 0.38% for 2020.

In 2020, the lower interest rate environment impacted yields on new, renewing, and floating rate loans, short-term liquid assets, and taxable securities.

For the year ended December 31, 2020, net interest income and net interest margin FTE were impacted by the lower interest rate environment.

Net interest income for the year ended December 31, 2020, totaled $69.0 million, a $5.4 million, or 8.4%, increase from the year ended December 31, 2019.

The increase in net interest income was a result of a $6.8 million, or 10.2%, increase in interest income, partially offset by a $2.4 million, or 31.9%, increase in interest expense.

The improvement in net interest income in 2019 was primarily due to having a larger balance sheet combined with a higher net interest margin.

When comparing average balances for 2019 to 2018, average interest-earning assets grew $101.6 million, or 6.0%, and

average deposits increased $77.2 million, or 4.9%.

The increase in the average balances was attributable to organic growth in existing and new markets.

In addition, the junior subordinated debentures were redeemed in 2019.

Net interest margin FTE increased eight bps to 3.52% for the year ended December 31, 2019 , from 3.44% for the year ended December 31, 2018 .

This increase was due to the positive impact from the higher average interest rate environment, diligent loan and deposit pricing strategies, and securities portfolio realignments.

Due to the higher average interest rate environment, the yield on all interest-earning asset categories improved in 2019.

The yield on interest-earning assets for 2019 was 4.03%, 17 bps higher than 3.86% for 2018, mainly driven by a 17 bp increase in loan yield to 4.59% for 2019.

The loan yield increased as we were able to obtain improved pricing on new and renewed loans which mitigated the impact of decreasing interest rates on variable rate loans.

On the liability side, noninterest-bearing deposits are not impacted by the interest rate environment and are a significant source of funds.

Average noninterest-bearing deposits were 34.96% of average total deposits for the year ended December 31, 2019, and 34.64% for the year ended December 31, 2018.

Due to the changing interest rate environments and competition for deposits, selected deposit rates were adjusted during 2019 and 2018.

This resulted in an increase in the cost of interest-bearing deposits of 21 bps to 0.90% in 2019 from 0.69% in 2018.

The total cost of deposits increased 14 bps to 0.59% in 2019 from 0.45% in 2018.

Net interest income increased due to a $3.7 million, or 5.0%, increase in interest and dividend income, combined with a $1.7 million, or 16.9%, decrease in interest expense.

The increase in interest and dividend income was due to $5.6 million of PPP loan income recorded during 2020 and a $360,000 increase in interest

income for total securities, partially offset by a $1.4 million decrease in interest income on short-term liquid assets and a $904,000 decrease in non-PPP loan income.

In 2020, deposit growth exceeded loan growth which created excess liquidity.

During 2020, this excess liquidity was deployed into interest-bearing deposits in other banks, as well as securities.

For the year ended December 31, 2020, compared to the year ended December 31, 2019, average short-term liquid assets increased $110.1 million, while the interest income for these liquid assets decreased $1.4 million because of the lower interest rate environment.

For the same period, average total securities increased $83.5 million resulting in an increase in interest income for total securities that was partially offset by a decrease in yield.

For the year ended December 31, 2020, average non-interest bearing deposits increased $229.8 million, or 39.8%, and average interest-bearing transaction deposits increased $138.3 million, or 18.7%, compared to the prior year.

Interest expense decreased as a result of our decision to reduce interest rates on deposits during the year ended December 31, 2020, combined with redeeming the junior subordinated debentures mid-2019 and eliminating the related interest expense.

Net interest margin FTE decreased 38 bps to 3.14% for the year ended December 31, 2020, from 3.52% for the year ended December 31, 2019, mainly due to the Federal Reserve lowering interest rates 225 bps since August 2019.

The yield on loans decreased 29 bps to 4.30% for the year ended December 31, 2020, compared to 4.59% for the prior year, due to the impact of the low interest rate environment on new, renewed, and floating rate loans.

As of December 31, 2020, floating rate loans were 14.6% of loans HFI.

For the year ended December 31, 2020, the yield on taxable securities decreased 53 bps to 1.60%, compared to 2.13% for the prior year.

The yield decreased as securities purchased throughout 2020 were at lower yields than the portfolio yield for taxable securities as of December 31, 2019, combined with an increase in amortization expense on mortage-backed securities.

For the year ended December 31, 2020, compared to the prior year, the yield on federal funds sold decreased 184 bps, and the yield on interest-bearing balances due from banks decreased 190 bps, due to the lower interest rate environment.

The resulting yield on interest-earning assets was 3.47% for the year ended December 31, 2020, a 56 bp decrease, compared to 4.03% for the prior year.

The cost of deposits was 0.41% for the year ended December 31, 2020, an 18 bp decrease, compared to 0.59% for the prior year.

The cost of deposits was lower for the year ended December 31, 2020, due to average noninterest-bearing deposits increasing $229.8 million, or 39.8%, combined with a 21 bp decrease in the rate on interest-bearing deposits for the same period as a result of our adjustments to deposit rates.

The following table presents average balance sheet information, interest income, interest expense, and the corresponding average yields earned and rates paid for the years presented:

For the Years Ended December 31,

(dollars in thousands)

2020 2019 2018

(dollars in thousands) Average

Outstanding Interest

Interest-earning assets:

$ 1,587,351 $ 69,228 4.30 % $ 1,388,702 $ 64,570 4.59 % $ 1,312,078 $ 58,747 4.42 %

Securities - taxable 287,591 4,598 1.60 % 257,090 5,466 2.13 % 277,337 5,624 2.03 %

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Interest-bearing balances due from banks

129,090 322 0.25 % 51,694 1,127 2.15 % 40,768 798 1.93 %

Nonmarketable equity securities

2,842 20 0.71 % 1,330 23 1.69 % 1,286 18 1.36 %

Investment in trusts — — — % 181 11 6.34 % 341 16 4.83 %

Total interest-earning assets

2,202,618 $ 77,378 3.47 % 1,809,019 $ 73,725 4.03 % 1,707,376 $ 66,886 3.86 %

Allowance for loan losses (15,192) (13,444) (11,713)

Noninterest earning assets 125,028 107,390 89,155

Total assets $ 2,312,454 $ 1,902,965 $ 1,784,818

Liabilities and Stockholders’ Equity

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Interest-bearing transaction deposits

$ 877,836 $ 2,824 0.32 % $ 739,554 $ 3,898 0.53 % $ 708,818 $ 2,735 0.39 %

Time deposits 333,260 5,538 1.66 % 335,024 5,803 1.73 % 320,699 4,349 1.36 %

Total interest-bearing deposits

1,211,096 8,362 0.69 % 1,074,578 9,701 0.90 % 1,029,517 7,084 0.69 %

Junior subordinated debentures

— — — % 6,017 385 6.39 % 11,341 558 4.92 %

Other borrowings

4,664 16 0.35 % 5 — 2.80 % 191 7 3.66 %

Total interest-bearing liabilities

1,215,760 $ 8,378 0.69 % 1,080,600 $ 10,086 0.93 % 1,041,049 $ 7,649 0.73 %

Noninterest-bearing liabilities:

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Accrued interest and other liabilities

18,192 16,118 13,124

Total noninterest-bearing liabilities

825,720 593,819 558,671

Stockholders’ equity 270,974 228,546 185,098

Total liabilities and stockholders’ equity

$ 2,312,454 $ 1,902,965 $ 1,784,818

Net interest income $ 69,000 $ 63,639 $59,237

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Net interest margin FTE (3)

3.14 % 3.52 % 3.44%

Cost of deposits 0.41 % 0.59 % 0.45%

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(3) Net interest margin FTE includes an FTE adjustment using a 21% federal income tax rate on tax-exempt securities and tax-exempt loans.

In 2020, Red River Bank participated in the SBA PPP and originated 1,384 PPP loans totaling $199.0 million.

For the year ended December 31, 2020, average PPP loans, net of deferred income, totaled $127.4 million at an interest rate of 1.0%.

Under the terms of the PPP, we received loan origination fees from the SBA ranging from 1.0% to 5.0% of the initial principal amount of the loans.

PPP origination fees were $7.0 million, or 3.52%, of originated PPP loans and are being recorded to interest income over the 24-month loan term or until the loans are forgiven by the SBA.

As PPP loan forgiveness payments are received, the remaining portion of origination fees are recorded to income.

In the fourth quarter of 2020, 39.4% of our PPP loans originated were forgiven by the SBA, and $77.7 million of PPP loan payments were received from the SBA and our borrowers.

For the year ended December 31, 2020, PPP loan income totaled $5.6 million, resulting in a 4.35% yield.

Excluding PPP loan income, net interest income (non-GAAP) for the year ended December 31, 2020, was $63.4 million, which was $201,000, or 0.30%, lower than the prior year.

Also, with PPP loans excluded for the year ended December 31, 2020, the yield on non-PPP loans (non-GAAP) was 4.29%, and the net interest margin FTE (non-GAAP) was 3.07%.

For the year ended December 31, 2020, PPP loans had a one bp accretive impact to the yield on loans and a seven bp accretive impact to the net interest margin FTE.

For further information on non-GAAP financial measures, see " - Non-GAAP Financial Measures" in this Annual Report on Form 10-K.

The following table presents interest income for total loans, PPP loans, total non-PPP loans (non-GAAP), and net interest ratios excluding PPP loans (non-GAAP) for the years ended December 31, 2020, 2019 and 2018.

For the Years Ended December 31,

2020 2019 2018

(dollars in thousands) Average

Outstanding Interest/Fee

Earned Average

Yield Average

Outstanding Interest/Fee

Earned Average

Yield Average

Outstanding Interest/Fee

Earned Average

$ 1,587,351 $ 69,228 4.30 % $ 1,388,702 $ 64,570 4.59 % $ 1,312,078 $ 58,747 4.42 %

PPP loans, net

Average 127,410 — —

Interest 1,351 — —

Fees 4,211 — —

Total PPP loans, net 127,410 5,562 4.35 % — — — % — — — %

Non-PPP loans (non-GAAP) (4)

$ 1,459,941 $ 63,666 4.29 % $ 1,388,702 $ 64,570 4.59 % $ 1,312,078 $ 58,747 4.42 %

Ratios excluding PPP loans, net (non-GAAP) (4)

Net interest spread 2.72 % 3.10 % 3.13 %

Net interest margin 3.01 % 3.47 % 3.42 %

Net interest margin FTE (3)

3.07 % 3.52 % 3.44 %

(1) Includes average outstanding balances of loans HFS of $14.2 million, $4.1 million, and $2.9 million for the years ended December 31, 2020, 2019, and 2018, respectively.

(2) Nonaccrual loans are included as loans carrying a zero yield.

(3) Net interest margin FTE includes an FTE adjustment using a 21% federal income tax rate on tax-exempt securities and tax-exempt loans.

(4) Non-GAAP financial measure.

See also " - Non-GAAP Financial Measures" in this Annual Report on Form 10-K.

Rate/Volume Analysis

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For the Years Ended December 31,

2020 vs 2019 For the Years Ended December 31,

Increase (Decrease)

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Due to Change in

(in thousands)

(in thousands) Volume Rate (Decrease) Volume Rate (Decrease)

Interest-earning assets:

$ 8,531 $ (3,873) $ 4,658 $ 3,311 $ 2,512 $ 5,823

Securities - taxable

648 (1,516) (868) (353) 195 (158)

Securities - tax-exempt

1,248 (20) 1,228 405 43 448

Federal funds sold

711 (1,257) (546) 332 65 397

Interest-bearing balances due from banks

1,686 (2,491) (805) 207 122 329

Nonmarketable equity securities

26 (29) (3) 1 4 5

Investment in trusts

(11) — (11) (8) 3 (5)

Total interest-earning assets

$ 12,839 $ (9,186) $ 3,653 $ 3,895 $ 2,944 $ 6,839

Interest-bearing liabilities:

Interest-bearing transaction deposits

$ 789 $ (1,863) $ (1,074) $ 101 $ 1,062 $ 1,163

Time deposits

(11) (254) (265) 209 1,245 1,454

Total interest-bearing deposits

778 (2,117) (1,339) 310 2,307 2,617

Junior subordinated debentures

(385) — (385) (262) 89 (173)

Other borrowings

16 — 16 (7) — (7)

Total interest-bearing liabilities

$ 409 $ (2,117) $ (1,708) $ 41 $ 2,396 $ 2,437

Increase (decrease) in net interest income

$ 12,430 $ (7,069) $ 5,361 $ 3,854 $ 548 $ 4,402

Provision for Loan Losses

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Factors impacting the provision include loan portfolio growth, changes in the quality and composition of the loan portfolio, the level of nonperforming loans, delinquency and charge-off trends, and current economic conditions.

The provision expense for the year ended December 31, 2019 , was $1.8 million , a decrease of $180,000 from $2.0 million for the year ended December 31, 2018 .

As of December 31, 2019 , the allowance for loan losses totaled $13.9 million , or 0.97% , of loans HFI compared to $12.5 million as of December 31, 2018 , or 0.94% , of loans HFI.

The provision expense for the year ended December 31, 2020, was $6.3 million, an increase of $4.5 million from $1.8 million for the year ended December 31, 2019.

The increase in provision for loan losses was due to expected economic pressures relating to the COVID-19 pandemic.

Due to economic uncertainties related to the pandemic shutdowns and future risks associated with the continuing COVID-19 pandemic, we are closely monitoring asset quality and will adjust provision for loan losses as needed in 2021.

Noninterest Income

Our primary sources of noninterest income are service charges on deposit accounts, debit card fees, fees related to the sale of mortgage loans, brokerage income from advisory services, and other loan and deposit fees.

Our primary sources of noninterest income are fees related to the sale of mortgage loans, service charges on deposit accounts, debit card fees, brokerage income from advisory services, and other loan and deposit fees.

Noninterest income increased $7.2 million to $23.2 million for the year ended December 31, 2020, compared to the prior year.

The increase in noninterest income was mainly due to higher mortgage loan income, higher SBIC income, a change in equity securities mark-to-market valuation, higher brokerage income, and higher loan and deposit fee income.

These increases were partially offset by decreases in BOLI income and in other income.

The increase in noninterest income was mainly due to higher mortgage loan income, a larger gain on the sale of securities, higher debit card income, and higher brokerage income.

These increases were partially offset by a decrease in service charges on deposits accounts.

The table below presents, for the periods indicated, the major categories of noninterest income:

For the Years Ended December 31,

(dollars in thousands)

Increase/(Decrease)

(dollars in thousands) 2020 2019 Increase/(Decrease)

Noninterest income:

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Debit card income, net

3,641 3,095 546 17.6 %

Mortgage loan income

8,398 3,002 5,396 179.7 %

Brokerage income

2,324 2,125 199 9.4 %

Loan and deposit income

1,701 1,521 180 11.8 %

Bank-owned life insurance income

568 544 24 4.4 %

Gain (Loss) on equity securities

85 115 (30) (26.1) %

Gain (Loss) on sale of securities

1,441 18 1,423 7,905.6 %

775 819 (44) (5.4) %

126 158 (32) (20.3) %

Total noninterest income

Mortgage loan income increased $895,000 for 2019 , compared to the prior year.

This growth was attributed to increased demand for new and refinanced mortgage loans due to a lower mortgage interest rate environment and a higher dollar amount of mortgage loans closed in 2019.

SBIC income increased $310,000 to $819,000 for 2019 , compared to the prior year due to higher income from an SBIC limited partnership of which Red River Bank is a member.

This increase was a result of an additional $214,000 dividend received from the SBIC in the second quarter of 2019 and a $96,000 increase in distributions for 2019 .

The gain or loss on equity securities is a mark-to-market adjustment primarily driven by a change in the interest rate environment.

Due to fluctuations in market rates between periods, equity securities had a mark-to-market gain of $115,000 for 2019 , compared to an $85,000 loss for 2018 .

Bank-owned life insurance income decreased $188,000 to $544,000 for 2019 , compared to $732,000 for 2018 .

This decrease was attributed to $173,000 in insurance proceeds received in 2018.

Brokerage income increased $181,000 to $2.1 million for 2019 , compared to 2018 .

This increase was due to the addition of new brokerage clients as well as additional funds invested by existing clients.

Red River Bank's investment group has experienced incremental revenue growth over the last 12 months.

Assets under management increased 28.5% to $633.1 million as of December 31, 2019 , from $492.6 million as of December 31, 2018 .

Loan and deposit income increased $162,000 for 2019 , compared to the prior year.

This increase was primarily related to higher credit card income as a result of a larger number of credit cards outstanding and higher credit card transaction volume in 2019.

Other income decreased $207,000 for 2019 , compared to 2018 .

This decrease was due to a $253,000 reduction in gain on OREO transactions, partially offset by a $24,000 increase in OREO income in 2019.

$ 23,167 $ 15,970 $ 7,197 45.1 %

Due to the lower mortgage interest rate environment in 2020, mortgage loan production and income have been at record high levels.

For 2020, mortgage loan production increased 140.2% from 2019, resulting in $8.4 million of mortgage loan income, an increase of $5.4 million from $3.0 million for the prior year.

The gain on the sale of securities was $1.4 million for 2020, compared to $18,000 for 2019.

The 2020 gain was primarily a result of proactive portfolio restructuring transactions that occurred in the first and second quarters of 2020 in response to the lower interest rate environment.

We obtained favorable pricing on the securities sold, which resulted in the gain.

Debit card income, net, increased $546,000 to $3.6 million for 2020, compared to $3.1 million for 2019.

The increase was due to increases in the number of deposit accounts, debit cards issued, and debit card transactions.

Brokerage income increased $199,000 to $2.3 million for 2020, compared to $2.1 million for 2019.

This increase is primarily due to the addition of new brokerage clients and accounts in 2020, as well as additional funds invested by existing clients.

These increases were partially offset by a temporary reduction in revenue in the second quarter of 2020 resulting from an investment group broker-dealer partner conversion.

Assets under management were $647.8 million and $633.1 million as of December 31, 2020 and 2019, respectively.

Service charges on deposit accounts decreased $465,000 to $4.1 million for 2020, compared to $4.6 million for 2019.

This decrease was partially due to fewer customer deposit non-sufficient fund transactions.

In addition, 2020 was impacted by approximately $168,000 in reduced deposit fees due to temporary fee reductions in the second quarter of 2020 in response to the COVID-19 pandemic.

Operating Expenses

Operating expenses are composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships, and providing services.

For the year ended December 31, 2019 , operating expenses totaled $47.3 million, an increase of $3.9 million, or 9.0%, compared to $43.4 million for the year ended December 31, 2018 .

The increase in operating expenses was mainly due to higher personnel expenses, data processing expense, and occupancy and equipment expenses, partially offset by the lack of an FDIC insurance assessment in the second half of 2019.

For the year ended December 31, 2020, operating expenses totaled $51.4 million, an increase of $4.1 million, compared to $47.3 million for the year ended December 31, 2019.

The increase in operating expenses was mainly due to higher personnel expenses, legal and professional expenses, technology expenses, regulatory assessment expense, other taxes, and occupancy and equipment expenses, partially offset by lower other operating expenses.

The following table presents, for the periods indicated, the major categories of operating expenses:

For the Years Ended December 31,

(dollars in thousands)

Increase (Decrease)

(dollars in thousands) 2020 2019 Increase (Decrease)

Operating expenses:

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Technology expenses 2,542 2,293 249 10.9 %

Advertising 933 1,025 (92) (9.0) %

Other business development expenses 1,020 1,107 (87) (7.9) %

Data processing expense 1,905 1,882 23 1.2 %

Other taxes 1,733 1,579 154 9.8 %

Loan and deposit expenses 1,052 1,148 (96) (8.4) %

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Personnel expenses were $31.2 million for 2020, an increase of $3.4 million compared to 2019.

The increase in personnel expenses was related to an increase in back office staff to support increasing volumes and to prepare to operate as a public company, as well as personnel for the new Northshore market.

For 2019 and 2018 , we had 325 and 320 full-time equivalent employees, respectively.

In addition, revenue-based commission compensation increased for the year ended December 31, 2019, compared to the prior year, due to higher mortgage and brokerage income.

Data processing expense increased $496,000 to $1.9 million for 2019 compared to 2018 .

This increase was due to an increase in loan and deposit account volume and activity as well as $285,000 less in refunds received from our data processing center in 2019 compared to 2018.

Occupancy and equipment expenses increased $476,000 to $5.0 million for 2019 compared to 2018 as a result of opening our market headquarters building in the Southeast market and entering the Northshore market with a temporary LPO that was closed and replaced with a new full-service banking center.

Loan and deposit expenses increased $296,000 to $1.1 million for 2019 compared to 2018 .

The increase was the result of approximately $86,000 of nonrecurring loan development expenses, a $70,000 increase in credit card expenses due to a larger number of credit cards outstanding and more transaction volume in 2019, and a $48,000 increase in collection expenses.

Additionally, 2018 benefited from the receipt of a $71,000 negotiated rebate from a vendor, resulting in lower loan and deposit expenses during that period.

Regulatory assessment expense decreased $291,000 in 2019 compared to 2018 .

The Bank was notified by the FDIC that it did not have an FDIC insurance assessment for the third and fourth quarters of 2019.

As of December 31, 2020 and 2019, we had 336 and 325 full-time equivalent employees, respectively.

The increase in personnel expenses was related to additional staff resulting from our expansion in the Northshore, Southwest, and Acadiana markets, as well as an increase in staff to support operational growth.

In addition, commission compensation increased for 2020, primarily due to significantly higher mortgage loan activity.

Legal and professional expenses increased $600,000 to $2.1 million for 2020 compared to 2019.

This increase was a result of higher attorney, audit, and compliance expenses, combined with having a full year of expenses related to operating as a public company.

Technology expenses increased $249,000 to $2.5 million for 2020 compared to the prior year.

This increase was a result of higher mortgage software expense due to increased mortgage loan activity;

additional software to enhance operational efficiency, cybersecurity, and information security infrastructure;

and COVID-19 pandemic preparation and response efforts.

Regulatory assessment expense increased $187,000 in 2020 compared to 2019.

This increase was primarily due to an increase of $159,000 in FDIC insurance assessment expense.

The Bank was notified by the FDIC that it did not have an FDIC insurance assessment for the second half of 2019 and first quarter of 2020.

Therefore, no FDIC insurance assessment expense was incurred for these periods.

The FDIC insurance assessment expense for 2020 was $409,000 compared to $250,000 in 2019.

Advertising expense increased $263,000 to $1.0 million for 2019 compared to 2018 .

The increase was primarily attributed to media campaigns and marketing events in our newer markets in 2019 .

Other taxes increased $154,000 to $1.7 million for 2020 compared to 2019.

The increase was due to a $263,000 increase in State of Louisiana bank stock tax resulting from having higher deposit account balances and higher net income for the applicable tax years.

Technology expenses increased $223,000 to $2.3 million for 2019 compared to the prior year.

This increase was primarily a result of network expansion in the new Northshore market, cybersecurity and information technology infrastructure enhancements, and new software to operate as a public company.

The increase was due to a $157,000 increase in State of Louisiana bank stock tax resulting from higher deposit account balances and higher net income for the applicable tax years.

Occupancy and equipment expenses increased $130,000 to $5.1 million for 2020 compared to 2019.

This increase was mainly due to the recent expansion in our Northshore, Southwest, and Acadiana markets, as well as increased supplies and services needed in all banking centers as a result of the COVID-19 pandemic.

Other operating expenses decreased $357,000 to $3.3 million for 2020 compared to 2019.

This decrease was primarily a result of a $311,000 nonrecurring expense reduction related to the dissolution of an acquired subsidiary in the first quarter of 2020, combined with reduced travel and event expenses due to the COVID-19 pandemic.

Income Tax Expense

The amount of income tax expense is influenced by the amounts of our pre-tax income, tax-exempt income, and other nondeductible expenses.

Deferred tax assets and liabilities are reflected at currently enacted income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled.

Deferred tax assets and liabilities are reflected at currently enacted income tax rates in effect for

the period in which the deferred tax assets and liabilities are expected to be realized or settled.

As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Our effective income tax rates have differed from the U.S.

statutory rate due to the effect of tax-exempt income from loans, securities and life insurance policies, and the income tax effects associated with stock-based compensation.

statutory rate due to the effect of tax-exempt income from loans, securities, life insurance policies, and the income tax effects associated with stock-based compensation.

The CARES Act and Families First Coronavirus Response Act passed in March of 2020 did not have a material impact on our income tax expense or our effective tax rate for the year ended December 31, 2020.

For the years ended December 31, 2020 and 2019, income tax expense totaled $6.3 million and $5.6 million, respectively.

The 2019 effective income tax rate was 18.5% compared to 18.7% for 2018.

The increase in income tax expense was primarily due to the increase in pre-tax income.

The effective income tax rate for 2020 was 18.3%, compared to 18.5% for 2019.

FINANCIAL CONDITION

As of December 31, 2020, total assets were $2.64 billion which was $654.4 million, or 32.9%, higher than total assets of $1.99 billion as of December 31, 2019.

Within total assets, compared to December 31, 2018 , loans HFI increase d by $110.5 million , AFS securities increase d by $27.7 million, and interest-bearing deposits in other banks decrease d by $10.5 million .

For liabilities, compared to December 31, 2018 , deposits increased $75.5 million and junior subordinated debentures were completely paid off and the related trusts terminated as of December 31, 2019 .

As of December 31, 2019 , the loans HFI to deposits ratio was 83.60% , and the noninterest-bearing deposits to total deposits ratio was 33.98% .

Stockholders' equity increased $58.2 million from December 31, 2018 , mainly due to the $26.8 million of proceeds from the IPO, net of expenses and underwriting commissions, and $24.8 million of net income.

Within total assets, compared to December 31, 2019, interest-bearing deposits in other banks increased by $310.3 million, securities AFS increased by $162.6 million, and loans HFI increased by $149.5 million.

For liabilities, compared to December 31, 2019, noninterest-bearing deposits increased $358.7 million, and interest-bearing deposits increased $260.5.

As of December 31, 2020, the loans HFI to deposits ratio was 67.87%, compared to 83.60% as of December 31, 2019, and the noninterest-bearing deposits to total deposits ratio was 40.32%, compared to 33.98% as of December 31, 2019.

Stockholders' equity increased $33.6 million from $251.9 million as of December 31, 2019, to $285.5 million as of December 31, 2020.

Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue.

As of December 31, 2020, our securities portfolio was 19.0% of total assets.

It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring unnecessary interest rate and credit risk, and complement our lending activities.

It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring unnecessary interest rate and credit risk, and to complement our lending activities.

We may invest in various types of liquid assets that are permissible under governing regulations and approved by our investment policy, which include U.S.

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government agency obligations, certificates of deposit of insured domestic banks, mortgage-backed and mortgage-related securities, corporate notes having an investment rating of "A" or better, municipal bonds, and certain equity securities.

Total securities were $339.5 million as of December 31, 2019 , an increase of $27.8 million, or 8.9%, from $311.7 million as of December 31, 2018.

The $339.5 million was comprised of $335.6 million in AFS securities and $3.9 million in equity securities.

Investment activity during 2019 included $145.6 million of securities purchased during the year, partially offset by $58.9 million in sales and $67.1 million in maturities, prepayments, and calls.

The market value of the investment portfolio increased $9.5 million for the year ended December 31, 2019.

As of December 31, 2019 and 2018, all securities were classified as AFS.

In the fourth quarter of 2018, all HTM securities owned were reclassified to AFS, allowing these securities to be available for liquidity purposes as needed.

In 2019, we sold $58.9 million of securities, consisting of a mix across various sectors that had short-term remaining maturities.

These transactions included mostly lower yielding securities, along with a few strategic higher yielding securities which also had short average lives.

We were able to obtain a small gain on these transactions, and the proceeds from the sales were used to purchase mortgage-backed and tax-exempt municipal securities, both at higher yields.

These realignment transactions reduced the amount of securities repricing in the short-term and partially mitigated our exposure to a decreasing rate environment.

Securities AFS were $498.2 million as of December 31, 2020, an increase of $162.6 million, or 48.5%, from $335.6 million as of December 31, 2019.

Investment activity for the twelve months ended December 31, 2020, included $419.4 million of securities purchased, partially offset by $151.3 million in sales and $112.6 million in maturities, principal repayments, and calls.

The net unrealized gain of the securities AFS portfolio increased $8.8 million for the year ended December 31, 2020.

Equity securities were $4.0 million and $3.9 million as of December 31, 2020 and 2019, respectively.

There were no purchases or sales of equity securities for the twelve months ended December 31, 2020.

In 2020, we sold $151.3 million of securities, consisting of a mix across various sectors that had lower yields and short average lives, along with a strategic group of higher yielding municipal securities which also had short average lives.

A large portion of the securities sold were mortgage-backed securities which had faster prepayment speeds or were owned at higher book prices, and due to higher amortization expense from accelerated prepayment speeds, the yields had declined.

We were able to obtain a gain of $1.4 million on these transactions due to timing and favorable pricing within the market.

We reinvested the proceeds into securities with improved structure for the current rate environment.

These transactions reduced the amount of securities repricing in the short-term, rebalanced cash flows for the portfolio, partially mitigated higher amortization expense for the mortgage-backed sector, and are expected to partially offset our exposure to a lower net interest margin and the low rate environment.

During the twelve months ended December 31, 2020, due to the low interest rate environment, we reallocated $259.9 million from federal funds sold yielding 0.30% to securities AFS yielding 1.55%.

Although this reallocation has negatively impacted the overall securities portfolio yield, we expect it to improve future interest income by moving these funds from federal funds sold to a higher yielding investment.

The securities portfolio tax-equivalent yield was 2.02% for the year ended December 31, 2020, compared to 2.32% for the year ended December 31, 2019.

The 14 bp increase in yield for 2019, compared to 2018, was primarily due to purchasing $145.6 million of securities at higher yields than the existing portfolio yield at the time of the purchases.

This decrease was due to accelerated prepayment speeds which increased amortization expense on our mortgage-backed securities, combined with the $259.9 million in funds reallocated from federal funds sold to securities with lower yields than the portfolio yield as of December 31, 2019.

The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected lives because borrowers have the right to prepay their obligations at any time.

Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities.

Mortgage-backed

securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities.

The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay.

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During a period of rising interest rates, fixed rate mortgage-backed securities are not likely to experience heavy prepayments of principal, and, consequently, the average lives of these securities are typically lengthened.

If interest rates begin to fall, prepayments

may increase, thereby shortening the estimated average lives of these securities.

As of December 31, 2019 , the average life of our securities portfolio was 3.9 years with an estimated effective duration of 3.0 years.

The carrying values of our securities classified as AFS are adjusted for unrealized gain or loss, and any unrealized gain or loss is reported on an after-tax basis as a component of other comprehensive income (loss) in stockholders’ equity.

Equity securities, consisting of a mutual fund, are carried at fair value on the consolidated balance sheet with periodic changes in value recorded through the consolidated statements of income.

As of December 31, 2019 , the net unrealized loss of the AFS securities portfolio was $30,000, as compared to a net unrealized loss of $9.5 million as of December 31, 2018.

If interest rates begin to fall, prepayments may increase, thereby shortening the estimated average lives of these securities.

As of December 31, 2020, the average life of our securities portfolio was 3.9 years with an estimated modified duration of 3.6 years.

The carrying values of our securities AFS are adjusted for unrealized gain or loss, and any unrealized gain or loss is reported on an after-tax basis as a component of accumulated other comprehensive income (loss) in stockholders’ equity.

As of December 31, 2020, the unrealized gain of the securities AFS portfolio was $8.8 million, compared to an unrealized loss of $30,000 as of December 31, 2019.

The $4.0 million in equity securities as of December 31, 2020, is an investment in the CRA Qualified Investment Fund which is managed by Community Capital Management, Inc.

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Through this fund, mortgage-backed securities are purchased according to our allocations, with their underlying collateral located in our market areas, which strengthens our efforts to meet our CRA obligations.

The fair value of our equity securities was $3.9 million as of December 31, 2019 , with a recognized gain of $115,000 for the year ended December 31, 2019 , compared to a fair value of $3.8 million as of December 31, 2018 , with a recognized loss of $85,000 for the year ended December 31, 2018 .

Prior to the 2018 adoption of ASU No.

2016-01, Financial Instruments - Overall (Subtopic 825-10), mutual fund securities were included in AFS securities.

Equity securities, consisting of a mutual fund, are carried at fair value on the consolidated balance sheets with periodic changes in value recorded through the consolidated statements of income.

The fair value of our equity securities was $4.0 million as of December 31, 2020, with a recognized gain of $85,000 for the year ended December 31, 2020, compared to a fair value of $3.9 million as of December 31, 2019, with a recognized gain of $115,000 for the year ended December 31, 2019.

The following tables summarize the amortized cost and estimated fair value of our securities by type as of the dates indicated.

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December 31, 2020

(in thousands)

(in thousands) Amortized

Securities AFS:

Mortgage-backed securities

$ 271,709 $ 3,450 $ (332) $ 274,827

Municipal bonds

207,834 5,498 (51) 213,281

agency securities

9,902 200 (4) 10,098

Total Securities AFS

$ 489,445 $ 9,148 $ (387) $ 498,206

December 31, 2019

(in thousands)

(in thousands) Amortized

Securities AFS:

Mortgage-backed securities

$ 236,572 $ 299 $ (1,200) $ 235,671

Municipal bonds

91,929 1,108 (279) 92,758

agency securities

Treasury securities

7,102 46 (4) 7,144

Total Securities AFS

$ 335,603 $ 1,453 $ (1,483) $ 335,573

December 31, 2018

(in thousands)

(in thousands) Amortized

Securities AFS:

Mortgage-backed securities

$ 221,799 $ 11 $ (7,122) $ 214,688

Municipal bonds

70,416 94 (2,235) 68,275

agency securities

23,170 6 (261) 22,915

Treasury securities

1,994 5 — 1,999

Total Securities AFS

Securities HTM:

Municipal bonds

The following table shows the fair value of AFS securities which mature during each of the periods indicated.

$ 317,379 $ 116 $ (9,618) $ 307,877

The following table shows the fair value of securities AFS which mature during each of the periods indicated.

The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures.

Contractual Maturity

After One Year

After Five Years

(dollars in thousands)

Contractual Maturity as of December 31, 2020

One Year After One Year

Five Years After Five Years

Ten Years After

Ten Years Total

(dollars in thousands) Amount Yield (1)

Amount Yield (1)

Securities AFS:

Mortgage-backed securities

$ 1,732 1.79 % $ 3,937 1.83 % $ 26,552 1.77 % $ 242,606 1.26 % $ 274,827 1.31 %

Municipal bonds 3,640 1.91 % 32,526 1.76 % 22,818 2.69 % 154,297 2.75 % 213,281 2.58 %

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Total Securities AFS

$ 5,372 1.87 % $ 42,806 1.63 % $ 53,125 2.22 % $ 396,903 1.83 % $ 498,206 1.85 %

(1) Tax equivalent projected book yield as of December 31, 2020.

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As of December 31, 2020, loans HFI were $1.59 billion, an increase of $149.5 million, or 10.4%, compared to $1.44 billion as of December 31, 2019.

New loan origination activity was steady in 2019 and spread across all of our markets, with our newer markets experiencing the most growth.

The increase in loans HFI was primarily due to the issuance of SBA PPP loans in 2020.

In the second quarter of 2020, Red River Bank originated 1,384 PPP loans totaling $199.0 million, with an average PPP loan size of $144,000.

We began accepting PPP loan forgiveness applications on September 14, 2020, and in the fourth quarter of 2020, the SBA began approving PPP loan forgiveness applications.

As of December 31, 2020, 48.0% of the 1,384 PPP loans and 39.4% of the $199.0 million originated were forgiven by the SBA, and we received SBA forgiveness and borrower payments of $77.8 million.

As of December 31, 2020, PPP loans were $118.4 million, net of $2.8 million of deferred income, or 7.5% of loans HFI.

Through February 28, 2021, 70.1% of the 1,384 PPP loans and 59.8% of the $199.0 million originated were forgiven by the SBA, and we received $118.9 million in SBA forgiveness and borrower payments.

On December 27, 2020, the SBA and U.S.

Treasury, through the Economic Aid Act, authorized a streamlined PPP loan forgiveness application process for PPP loans of $150,000 or less.

As of February 28, 2021, approximately 76.9% of the 414 remaining PPP loans and 17.5% of the $80.1 million remaining PPP loan balance may be eligible for the streamlined process.

Additionally, the Economic Aid Act allows for certain businesses, who previously received a PPP loan, to apply for a PPP Second Draw loan.

Red River Bank is participating in the PPP Second Draw program, and as of February 28, 2021, 339 borrower applications totaling $40.3 million have been approved by the SBA.

As of December 31, 2020, loans HFI excluding $118.4 million of PPP loans (non-GAAP), net of deferred income, were $1.47 billion, an increase of $31.1 million, or 2.2%, from December 31, 2019.

The increase in non-PPP loans was attributable to new loan activity in our newer markets.

For calculations and reconciliations to GAAP of non-GAAP financial measures, see " - Non-GAAP Financial Measures" in this Annual Report on Form 10-K.

Loans HFI by Category

Loans HFI by category are summarized below as of the dates indicated:

(dollars in thousands)

Loans HFI by category, non-PPP loans HFI (non-GAAP), and loans HFS are summarized below as of the dates indicated:

2020 2019 2018 2017 2016

(dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent

Commercial real estate

$ 556,769 35.0 % $ 531,990 37.0 % $ 454,689 34.2 % $ 412,355 33.0 % $ 393,351 34.3 %

One-to-four family residential

442,889 27.9 % 420,020 29.2 % 406,963 30.7 % 375,536 30.1 % 337,926 29.5 %

Construction and development

127,321 8.0 % 132,461 9.2 % 102,868 7.7 % 84,812 6.8 % 77,155 6.7 %

Commercial and industrial

250,428 15.8 % 267,940 18.6 % 275,881 20.8 % 284,035 22.8 % 248,448 21.7 %

SBA PPP, net of deferred income 118,447 7.5 % — — % — — % — — % — — %

Tax-exempt 68,666 4.3 % 56,494 3.9 % 60,104 4.5 % 62,776 5.0 % 61,819 5.4 %

Consumer 23,926 1.5 % 30,019 2.1 % 27,933 2.1 % 28,152 2.3 % 27,976 2.4 %

Total loans HFI

$ 1,588,446 100.0 % $ 1,438,924 100.0 % $ 1,328,438 100.0 % $ 1,247,666 100.0 % $ 1,146,675 100.0 %

Total non-PPP loans HFI (1)

$ 1,469,999 $ 1,438,924 $ 1,328,438 $ 1,247,666 $ 1,146,675

Total loans HFS

$29,116 $5,089 $2,904 $1,867 $3,146

(1) Non-GAAP financial measure.

For calculations and reconciliations to GAAP of non-GAAP financial measures, see " - Non-GAAP Financial Measures" in this Annual Report on Form 10-K.

Commercial Real Estate Loans.

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Commercial Real Estate

(dollars in thousands)

Owner Occupied

Non-Owner Occupied

Percent of Loans HFI

(dollars in thousands) Owner Occupied Non-Owner Occupied Total

December 31, Amount Percent of Loans HFI Amount Percent of Loans HFI Amount Percent of Loans HFI

2020 $ 319,790 20.1 % $ 236,979 14.9 % $ 556,769 35.0 %

2019 $ 300,880 20.9 % $ 231,110 16.1 % $ 531,990 37.0 %

2018 $ 270,083 20.3 % $ 184,606 13.9 % $ 454,689 34.2 %

2017 $ 241,153 19.3 % $ 171,202 13.7 % $ 412,355 33.0 %

2016 $ 223,280 19.5 % $ 170,071 14.8 % $ 393,351 34.3 %

One-to-Four Family Residential Loans.

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The construction and development portfolio includes loans to small and medium-sized businesses to construct owner occupied facilities, loans to developers of commercial real estate investment properties and residential developments and, to a lesser extent, loans to individual clients for construction of single-family homes.

Construction and development loans increased $29.6 million , or 28.8% , to $132.5 million as of December 31, 2019 , compared to $102.9 million as of December 31, 2018 .

Construction and development loans decreased $5.1 million, or 3.9%, to $127.3 million as of December 31, 2020, compared to $132.5 million as of December 31, 2019.

Commercial and Industrial Loans.

Commercial and industrial loans are made for a variety of business purposes, including, but not limited to, inventory, equipment, capital expansion, and working capital enhancement.

Collateral typically includes

a lien on general business assets including, among other things, accounts receivable, inventory, equipment, and available real estate.

Collateral typically includes a lien on general business assets including, among other things, accounts receivable, inventory, equipment, and available real estate.

A personal guaranty is generally obtained from the borrower or principal.

Commercial and industrial loans decreased $17.5 million, or 6.5%, to $250.4 million as of December 31, 2020, from $267.9 million as of December 31, 2019.

SBA PPP, Net of Deferred Income.

SBA PPP loans are made to small businesses and other entities and individuals according to the criteria set forth by the CARES Act in March 2020.

These loans are guaranteed by the SBA, have a 24 month term at an interest rate of 1.0%, and are subject to forgiveness by the SBA dependent upon meeting eligibility requirements.

Tax-Exempt Loans.

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These loans are typically secured by and paid for by ad valorem taxes.

Tax-exempt loans decreased $3.6 million , or 6.0% , to $56.5 million as of December 31, 2019 , compared to $60.1 million as of December 31, 2018 .

Tax-exempt loans increased $12.2 million, or 21.5%, to $68.7 million as of December 31, 2020, compared to $56.5 million as of December 31, 2019.

Consumer Loans.

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Consumer loans are offered as an accommodation to existing customers and are not marketed to persons without a pre-existing relationship with us.

Accordingly, this category of loans continues to comprise an insignificant portion of the total portfolio with limited growth.

Loan Payment Deferments

During 2020, we granted loan payment deferments for requesting borrowers impacted by pandemic-related economic shutdowns.

As of December 31, 2020, $12.5 million, or 0.8% of non-PPP loans HFI (non-GAAP), remained on active deferral and were deferrals of principal payments only.

For calculations and reconciliations to GAAP of non-GAAP financial measures, see " - Non-GAAP Financial Measures" in this Annual Report on Form 10-K.

In accordance with interagency regulatory guidance issued in March 2020 and revised in April 2020, these short-term deferrals are not deemed to be TDRs to the extent they meet the terms of such guidance.

Industry Concentrations

As of December 31, 2019 , there were no concentrations of loans within any single industry in excess of 10.0% of loans HFI as segregated by the North American Industry Classification System (“NAICS”).

As of December 31, 2020, the health care sector was the only concentration of loans within any single industry in excess of 10.0% of non-PPP loans HFI (non-GAAP) as segregated by the North American Industry Classification System

NAICS is an industry classification system used to categorize loans by the borrower’s type of business.

Industry concentrations stated as a percentage of loans HFI are presented below:

Industry concentrations stated as a percentage of non-PPP loans HFI (non-GAAP) are presented below:

December 31, 2020

Health care 10.2 %

Construction 4.6 %

Retail trade 3.8 %

Investor one-to-four family and multifamily 4.0 %

Accommodation and food services

Hospitality services 4.0 %

Religious and other nonprofit 2.4 %

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Manufacturing 1.7 %

Total loans HFI by industry concentration

Loans to borrowers in the health care industry were 9.3% of loans HFI as of December 31, 2019 , compared to 9.1% as of December 31, 2018 .

This group predominantly includes loans to the nursing and residential care facilities sector that were 5.3% of loans HFI as of December 31, 2019 , and 5.1% as of December 31, 2018 , as well as loans to the ambulatory health care services sector that were 3.9% of loans HFI as of December 31, 2019 , and December 31, 2018 .

Energy related credits were 2.2% of loans HFI as of December 31, 2019 , compared to 2.9% as of December 31, 2018 .

All other 63.0 %

Total non-PPP loans HFI (non-GAAP) by industry concentration 100.0 %

Our health care loans are made up of a diversified portfolio of health care providers.

As of December 31, 2020, health care credits were $149.4 million, or 10.2% of non-PPP loans HFI (non-GAAP), compared to $133.4 million, or 9.3% of non-PPP loans HFI as of December 31, 2019.

The average health care loan size was $305,000 as of December 31, 2020, and $274,000 as of December 31, 2019.

Within the health care sector, nursing and residential care loans were 4.4% of non-PPP loans HFI (non-GAAP) as of December 31, 2020, and 5.3% as of December 31, 2019.

Loans to physician and dental practices were 5.7% of non-PPP loans HFI (non-GAAP) as of December 31, 2020, and 3.9% as of December 31, 2019.

As of December 31, 2020, the health care sector had no active deferrals.

We have identified certain sectors within our loan portfolio that we believe have a heightened overall level of risk due to pandemic-related macro-economic conditions.

The following table shows non-PPP loans HFI (non-GAAP) in these sectors as of the date indicated:

December 31, 2020 December 31, 2019

(dollars in thousands) Amount Percent of Non-PPP Loans HFI (non-GAAP) Amount Percent of Non-PPP Loans HFI (non-GAAP)

Hospitality services:

Hotels and other overnight lodging $ 26,722 1.9 % $ 24,297 1.7 %

Restaurants - full service 11,901 0.8 % 11,444 0.8 %

Restaurants - limited service 12,467 0.8 % 8,123 0.6 %

Other 7,194 0.5 % 3,340 0.2 %

Total hospitality services $ 58,284 4.0 % $ 47,204 3.3 %

Retail trade:

Automobile dealers $ 35,460 2.4 % $ 39,069 2.7 %

Other retail 21,120 1.4 % 24,772 1.7 %

Total retail trade $ 56,580 3.8 % $ 63,841 4.4 %

Energy $ 20,351 1.4 % $ 31,777 2.2 %

Loan payment deferments in the hospitality services sector represents 65.0% of our active deferrals.

As of December 31, 2020, active deferrals in the hospitality services were $8.1 million, or 0.6% of non-PPP loans HFI (non-GAAP).

As of December 31, 2020, there were no active deferrals in the retail trade or energy sectors.

For calculations and reconciliations to GAAP of non-GAAP financial measures, see " - Non-GAAP Financial Measures" in this Annual Report on Form 10-K.

Other Portfolio Sectors

The following table shows non-PPP loans HFI (non-GAAP) in other non-industry specific areas that we believe may be affected by the pandemic:

December 31, 2020

(dollars in thousands) Amount Percent of Non-PPP Loans HFI (non-GAAP)

Loans collateralized by non-owner occupied properties leased to retail establishments $ 38,923 2.6 %

Credit card loans:

Commercial $ 1,499 0.1 %

Consumer 958 0.1 %

Total credit card loans $ 2,457 0.2 %

None of the markets in which we directly operate are characterized by a high degree of tourism-driven hospitality services.

Likewise, our geographic footprint is not closely aligned with the bulk of Louisiana’s energy-concentrated local economies.

We believe this provides our portfolio with some degree of insulation against the current stress in both of those segments.

The following table summarizes non-PPP loans HFI (non-GAAP) by market of origin:

December 31, 2020

(dollars in thousands) Amount Percent of Non-PPP Loans HFI (non-GAAP)

Central $ 597,656 40.7 %

Northwest 342,105 23.3 %

Capital 409,114 27.8 %

Southwest 71,741 4.9 %

Northshore 46,020 3.1 %

Acadiana 3,363 0.2 %

Total non-PPP loans HFI (non-GAAP) $ 1,469,999 100.0 %

For further information on non-GAAP financial measures, see " - Non-GAAP Financial Measures" in this Annual Report on Form 10-K.

Loan Portfolio Maturity Analysis

The maturity distribution for loans HFI and the amount of such loans with fixed and floating interest rates are summarized below:

The maturity distribution for non-PPP loans HFI (non-GAAP) and the amount of such loans with fixed and floating interest rates are summarized below:

December 31, 2020

(dollars in thousands)

(dollars in thousands) One Year

Commercial real estate $ 58,430 $ 325,930 $ 172,409 $ 556,769

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Commercial and industrial 89,214 146,394 14,820 250,428

Total loans HFI

Tax-exempt 1,622 13,680 53,364 68,666

Consumer 6,252 17,155 519 23,926

Total non-PPP loans HFI (non-GAAP) $ 282,596 $ 625,821 $ 561,582 $ 1,469,999

Fixed rate amount $ 146,824 $ 567,641 $ 522,926 $ 1,237,391

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Loans are considered past due when principal and interest payments have not been received as of the date such payments are due.

Asset quality is managed through disciplined underwriting policies, continual monitoring of loan performance, and focused management of nonperforming assets.

Asset quality is managed through disciplined underwriting policies, continual monitoring of loan performance, and focused management of NPAs.

There can be no assurance, however, that the loan portfolio will not become subject to losses due to declines in economic conditions, deterioration in the financial condition of our borrowers, or a decline in the value of collateral.

Our ratio of NPAs to total assets improved to 0.33% as of December 31, 2019 , from 0.38% as of December 31, 2018 .

NPAs totaled $6.5 million as of December 31, 2019 , down $680,000 , or 9.5% , from $7.1 million as of December 31, 2018 .

This improvement was largely due to $1.2 million in payoffs and paydowns on nonperforming loans, partially offset by $500,000 in foreclosed assets received in liquidation of loans that became nonperforming during the year.

NPAs totaled $4.2 million as of December 31, 2020, down $2.3 million, or 34.9%, from $6.5 million as of December 31, 2019.

Our ratio of NPAs to total assets was 0.16% as of December 31, 2020, compared to 0.33% as of December 31, 2019.

The change was largely due to the charge-off of nonaccrual loans and the sale of foreclosed assets.

Nonperforming loan and asset information is summarized below:

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Foreclosed assets:

Real estate 896 1,128 646 23 346

Other — 18 — — —

Total foreclosed assets 896 1,146 646 23 346

Total NPAs $ 4,206 $ 6,465 $ 7,145 $ 10,409 $ 5,968

Troubled debt restructurings:

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Performing loans

1,454 1,695 1,572 2,002 3,932

Total TDRs $ 2,671 $ 4,880 $ 5,112 $ 7,291 $ 5,056

Nonperforming loans to loans HFI (1)

0.21 % 0.37 % 0.49 % 0.83 % 0.49 %

Nonperforming loans to non-PPP loans HFI (non-GAAP) (1,3)

0.23% 0.37% 0.49% 0.83% 0.49%

NPAs to total assets 0.16 % 0.33 % 0.38 % 0.60 % 0.36 %

(1) Troubled debt restructurings – nonaccrual and accruing loans 90 or more days past due are included in the respective components of nonperforming loans.

(2) In accordance with interagency regulatory guidance issued in March 2020 and revised in April 2020, COVID-19 pandemic-related short-term deferrals are not deemed to be TDRs to the extent they meet the terms of such guidance.

(3) Non-GAAP financial measure.

For calculations and reconciliations to GAAP of non-GAAP financial measures, see " - Non-GAAP Financial Measures" in this Annual Report on Form 10-K.

Nonaccrual loans are summarized below by category:

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Commercial real estate

$ 1,846 $ 1,278 $ 1,362 $ 1,171 $ 920

One-to-four family residential

574 607 424 1,821 752

Construction and development

— 38 55 1,143 204

Commercial and industrial 882 3,370 3,675 5,288 3,698

SBA PPP — — — — —

Tax-exempt — — — — —

Consumer 5 26 44 21 34

Total nonaccrual loans $ 3,307 $ 5,319 $ 5,560 $ 9,444 $ 5,608

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The methodology is structured so that specific reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Loans classified as pass are loans with very low to acceptable risk levels based on the borrower’s financial condition, financial trends, management strength, and collateral quality.

Loans classified as pass are of satisfactory quality and do not require a more severe classification.

Loans classified as special mention have potential weaknesses that deserve management’s close attention.

If these weaknesses are not corrected, repayment possibilities for the loan may deteriorate.

However, the loss potential does not pose sufficient risk to warrant substandard classification.

However, the loss potential does not warrant substandard classification.

Loans classified as substandard have well defined weaknesses which jeopardize normal repayment of principal and interest.

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If these weaknesses do not improve, loss is possible.

Loans classified as doubtful have well defined

weaknesses that make full collection improbable.

Loans classified as doubtful have well defined weaknesses that make full collection improbable.

Loans classified as loss are considered uncollectible and charged-off to the allowance for loan losses.

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December 31, 2020

(dollars in thousands)

(dollars in thousands) Pass Special

Mention Substandard Doubtful Loss Total

Commercial real estate $ 551,954 $ 555 $ 4,260 $ — $ — $ 556,769

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Commercial and industrial 245,043 1,310 4,075 — — 250,428

SBA PPP 118,447 — — — — 118,447

Tax-exempt 68,666 — — — — 68,666

Consumer 23,813 — 113 — — 23,926

Total loans HFI $ 1,575,839 $ 2,351 $ 10,256 $ — $ — $ 1,588,446

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Allowance for Loan Losses

The allowance for loan losses provides for known and inherent losses in the loan portfolio based upon management’s best assessment of the loan portfolio at each balance sheet date.

It is maintained at a level estimated to be adequate to absorb potential losses through periodic charges to the provision for loan losses.

The allowance for loan losses is established for known and inherent losses in the loan portfolio based upon management’s best assessment of the loan portfolio at each balance sheet date.

It is maintained at a level estimated to be adequate to absorb potential losses through periodic changes to loan losses.

In connection with the review of the loan portfolio, risk elements attributable to particular loan types or categories are considered in assessing the quality of individual loans.

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This model will replace the existing incurred loss model.

As an SEC registrant with smaller reporting company filing status, CECL is effective for us on January 1, 2023.

As an SEC registrant with smaller reporting company filing status as determined on June 30, 2019, CECL is effective for us on January 1, 2023.

Refer to "Item 8.

Financial Statements and Supplementary Data - Note 1 - Business and Summary of Significant Accounting Policies - Issued but Not Adopted Accounting Standards" for more information on ASU No.

The allowance for loan losses totaled $13.9 million , or 0.97% , of loans HFI as of December 31, 2019 .

As of December 31, 2020, t he allowance for loan losses totaled $18.0 million, or 1.13%, of loans HFI, and 1.22% of non-PPP loans HFI (non-GAAP).

As of December 31, 2019, the allowance for loan losses totaled $13.9 million, or 0.97%, of loans HFI.

The ratio of net charge-offs to average loans HFI was 0.03% for each of the years ended December 31, 2019 and 2018.

The increase in commercial and industrial charge-offs and recoveries resulted from the charge off and subsequent recovery of approximately $570,000 in commercial deposit accounts in 2019.

The provision for loan losses for the year ended December 31, 2019, was $1.8 million, down $180,000, or 9.1%, from $2.0 million for the year ended December 31, 2018.

The $4.0 million increase in the allowance for loan losses for the twelve months ended December 31, 2020, was due to $6.3 million from the provision for loan losses, partially offset by $2.3 million of net charge-offs on loans.

The provision for loan losses for the year ended December 31, 2020, was $6.3 million, an increase of $4.5 million from $1.8 million for the year ended December 31, 2019.

The increase in provision for loan losses was due to expected economic pressures relating to the continuing COVID-19 pandemic.

Net charge-offs for the year ended December 31, 2020, were $2.3 million, an increase of $1.9 million from $397,000 for the year ended December 31, 2019.

The increase in charge-offs resulted from the charge-off of $1.7 million in energy related loans in 2020.

The ratio of net charge-offs to average loans was 0.14% and 0.03% for the years ended December 31, 2020 and December 31, 2019, respectively.

The following table displays activity in the allowance for loan losses for the periods shown:

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(dollars in thousands) 2020 2019 2018 2017 2016

Loans HFI $ 1,588,446 $ 1,438,924 $ 1,328,438 $ 1,247,666 $ 1,146,675

Non-PPP loans HFI (non-GAAP) (1)

$ 1,469,999 $ 1,438,924 $ 1,328,438 $ 1,247,666 $ 1,146,675

Average loans $ 1,587,351 $ 1,388,702 $ 1,312,078 $ 1,184,523 $ 1,091,605

5 unchanged sentences

Commercial and industrial (2,184) (864) (353) (824) (32)

Consumer (355) (311) (353) (353) (281)

Total charge-offs (2,553) (1,219) (737) (1,459) (785)

3 unchanged sentences

Commercial and industrial 89 585 9 60 11

Consumer 174 144 153 121 136

Total recoveries 274 822 376 255 160

2 unchanged sentences

Allowance for loan losses to loans HFI

1.13 % 0.97 % 0.94 % 0.87 % 0.92 %

Allowance for loan losses to non-PPP loans HFI (non-GAAP) (1)

1.22 % 0.97 % 0.94 % 0.87 % 0.92 %

Net charge-offs to average loans

0.14 % 0.03 % 0.03 % 0.10 % 0.06 %

(1) Non-GAAP financial measure.

For calculations and reconciliations to GAAP and non-GAAP financial measures, see " - Non-GAAP Financial Measures" in this Annual Report on Form 10-K.

We believe the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above.

Future provisions for loan losses are subject to ongoing evaluations of the factors and loan portfolio risks described above.

A decline in market area economic conditions, deterioration of asset quality, or growth in portfolio size could cause the allowance to become inadequate and material additional provisions for loan losses could be required.

Future provisions for loan losses are subject to ongoing evaluations of the factors and loan portfolio risks described above, including economic pressures related to the COVID-19 pandemic affecting the state of Louisiana.

A decline in market area economic conditions, deterioration of asset quality, or growth in portfolio size could cause the

allowance to become inadequate and material additional provisions for loan losses could be required.

The following table displays the allocation of the allowance for loan losses among the loan classifications for the dates indicated.

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The total allowance is available to absorb losses from any loan classification.

(dollars in thousands)

2020 2019 2018 2017 2016

(dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent

Commercial real estate

$ 5,798 32.3 % $ 3,454 24.8 % $ 3,081 24.6 % $ 3,270 30.0 % $ 3,133 29.7 %

One-to-four family residential

5,390 30.0 % 3,323 23.8 % 3,146 25.1 % 3,099 28.5 % 2,997 28.4 %

Construction and development

1,699 9.5 % 1,211 8.7 % 951 7.6 % 852 7.8 % 675 6.4 %

Commercial and industrial 3,631 20.2 % 5,175 37.1 % 4,604 36.8 % 2,836 26.0 % 3,005 28.5 %

SBA PPP 318 1.8 % — — % — — % — — % — — %

Tax-exempt 680 3.8 % 334 2.4 % 372 3.0 % 432 4.0 % 426 4.1 %

Consumer 435 2.4 % 440 3.2 % 370 2.9 % 406 3.7 % 308 2.9 %

Total allowance for loan losses

$ 17,951 100.0 % $ 13,937 100.0 % $ 12,524 100.0 % $ 10,895 100.0 % $ 10,544 100.0 %

Deposits are the primary funding source for loans and investments.

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We do not have any internet-sourced or brokered deposits.

Total deposits increase d $75.5 million , or 4.6% , to $1.72 billion at December 31, 2019 , from $1.65 billion at December 31, 2018 , mainly due to normal fluctuations in customer account balances and adding new accounts.

Noninterest-bearing deposits increased by $37.0 million, or 6.8%, to $584.9 million in 2019.

Total deposits increased $619.2 million, or 36.0%, to $2.34 billion as of December 31, 2020, from $1.72 billion as of December 31, 2019.

Noninterest-bearing deposits increased $358.7 million, or 61.3%, during 2020 to $943.6 million as of December 31, 2020.

Noninterest-bearing deposits as a percentage of total deposits were 40.32% as of December 31, 2020, compared to 33.98% as of December 31, 2019.

Interest-bearing deposits increased by $38.5 million, or 3.5%, to $1.14 billion in 2019.

Interest-bearing deposits increased $260.5 million, or 22.9%, during 2020 to $1.40 billion as of December 31, 2020, with the largest increase in money market accounts.

The increase in deposits was a result of customers receiving funds from various government stimulus programs, customers depositing the proceeds from their PPP loans, strong deposit account opening activity, and customers maintaining larger deposit balances.

The following table presents our deposits by account type as of the dates indicated:

December 31, 2019

December 31, 2018

December 31, 2017

(dollars in thousands)

December 31, 2020 December 31, 2019 December 31, 2018

(dollars in thousands) Balance % of Total Balance % of Total Balance % of Total

Noninterest-bearing demand deposits $ 943,615 40.3 % $ 584,915 34.0 % $ 547,880 33.3 %

Interest-bearing deposits:

Money market deposits

NOW accounts 402,572 17.2 % 331,374 19.2 % 304,545 18.5 %

Money market accounts 506,902 21.7 % 367,689 21.4 % 358,575 21.8 %

Savings accounts 146,264 6.2 % 103,984 6.0 % 104,355 6.3 %

5 unchanged sentences

The following table presents deposits by customer type as of the dates indicated:

December 31, 2019

December 31, 2018

December 31, 2017

(dollars in thousands)

December 31, 2020 December 31, 2019 December 31, 2018

(dollars in thousands) Balance % of Total Balance % of Total Balance % of Total

Consumer $ 1,091,268 46.6 % $ 895,342 52.0 % $ 869,725 52.8 %

Commercial 1,054,736 45.1 % 656,814 38.2 % 611,903 37.2 %

Public 194,356 8.3 % 168,964 9.8 % 163,955 10.0 %

Total deposits

$ 2,340,360 100.0 % $ 1,721,120 100.0 % $ 1,645,583 100.0 %

We manage our interest expense on deposits through a deposit pricing strategy that is based on competitive pricing, economic conditions, and current or anticipated funding needs.

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The average cost of interest-bearing deposits and total deposits for 2020 was 0.69% and 0.41% compared to 0.90% and 0.59% for 2019.

The increase in the average cost of interest-bearing deposits in 2019 as compared to 2018 was a result of adjusting deposit rates for the higher average interest rate environment in 2019 and competition for deposits.

The decrease in the average cost of interest-bearing deposits and total deposits in 2020 as compared to 2019 was a result of lowering deposit rates in 2020 due to the low interest rate environment and our liquidity position.

Also, 5.5% of interest-bearing transaction deposits have floating rates which adjust with market rates.

1 unchanged sentence

For the Years Ended December 31,

(dollars in thousands)

2020 2019 2018

(dollars in thousands) Average

Noninterest-bearing demand deposits $ 807,528 0.00 % $ 577,701 0.00 % $ 545,547 0.00 %

Interest-bearing deposits:

Money market deposits

NOW accounts 318,564 0.19 % 277,653 0.47 % 250,865 0.34 %

Money market accounts 433,348 0.48 % 356,951 0.70 % 355,354 0.50 %

Savings accounts 125,924 0.11 % 104,950 0.11 % 102,599 0.10 %

3 unchanged sentences

The maturity distribution of our time deposits of $100,000 or more are summarized below:

(in thousands)

December 31, 2019

(in thousands) December 31, 2020

Three months or less $ 37,347

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Although deposits are our primary source of funds, we may, from time to time, utilize borrowings as a cost-effective source of funds when such borrowings can then be invested at a positive interest rate spread for additional capacity to fund loan demand or to meet our liquidity needs.

The following table presents the outstanding balance of borrowings at the dates indicated:

The following table presents the outstanding balance of borrowings as of the dates indicated:

(in thousands) 2020 2019 2018

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We utilize the FHLB as needed as a funding source.

As of December 31, 2019 and 2018 , our total FHLB line availability was approximately $647.6 million and $537.1 million, respectively.

As of December 31, 2020 and 2019, our total FHLB line availability was $680.5 million and $647.6 million, respectively.

This line is secured by a blanket floating lien on selected Red River Bank loans which meet FHLB collateral requirements.

At various times, we may obtain letters of credit from the FHLB as collateral for our public entity deposits.

As of December 31, 2019 and 2018, we held unfunded letters of credit from the FHLB in the amount of $109.5 million.

As of December 31, 2020 and 2019, we held unfunded letters of credit from the FHLB in the amount of $169.7 million and $109.5 million, respectively.

As of December 31, 2020 and 2019, we had net borrowing capacity of $510.8 million and $538.1 million, respectively, under this arrangement.

On April 15, 2020, in order to fund PPP loans, the Company borrowed $50.0 million from the FHLB for 90 days at a rate of 0.35% under its existing line of credit.

Due to having adequate liquidity, the $50.0 million was paid off on May 19, 2020.

Other Borrowings.

2 unchanged sentences

We had no outstanding balances on these lines as of December 31, 2020 and 2019.

Junior Subordinated Debentures

We previously were the sponsor of three wholly owned business trusts that were established for the purpose of issuing trust preferred securities.

Prior to their redemption, the trust preferred securities accrued and paid distributions periodically at specified quarterly rates as provided in each trust agreement.

The trusts used the net proceeds from each of the offerings to purchase a like amount of our floating rate junior subordinated debentures.

The debentures were the sole assets of the trusts.

Our obligations under the debentures and related documents, taken together, constituted a full and unconditional guarantee by us of the obligations of the trusts.

Prior to redemption, a portion of these instruments qualified as Tier 1 capital under applicable regulatory capital rules.

The trust preferred securities were mandatorily redeemable upon maturity of the debentures, or upon earlier redemption as provided in the indentures.

We had the right to redeem the debentures in whole or in part on or after specific dates at a redemption price specified in the indentures governing the debentures plus any accrued but unpaid interest to the redemption date.

As anticipated, we used a portion of the proceeds of the IPO to fully redeem Trust II and Trust III in the second quarter of 2019, and FBT CT I in the third quarter.

On June 17, 2019, we redeemed all of our floating rate junior subordinated debentures held by Trust III at a redemption price of 100% of the outstanding principal amount of $3.1 million, plus accrued and unpaid interest thereon through the date of redemption.

On June 30, 2019, we redeemed all of our floating rate junior subordinated debentures held by Trust II at a redemption price of 100% of the outstanding principal amount of $3.1 million, plus accrued and unpaid interest thereon through the date of redemption.

On August 8, 2019, we redeemed all of our floating rate junior subordinated debentures held by FBT CT I at a redemption price of 100% of the outstanding principal amount of $5.2 million, plus accrued and unpaid interest thereon through the date of redemption.

The following table is a summary of the terms of our junior subordinated debentures as of December 31, 2019 and December 31, 2018 :

(dollars in thousands)

Redemption Date

Amount Outstanding December 31, 2019

Outstanding December 31, 2018

Interest Rate as of the Redemption Date

Rate as of December 31, 2018

June 30, 2019

April 20, 2005

June 15, 2035

June 17, 2019

September 4, 2003

August 8, 2033

August 8, 2019

On April 1, 2013, we assumed $5.2 million of floating rate junior subordinated debentures and FBT CT I in conjunction with the acquisition of Fidelity Bancorp, Inc.

The trust preferred securities had a variable rate and repriced quarterly based on the three-month LIBOR plus 3.25%, with the last reprice date on March 28, 2019.

The trust preferred securities had a variable rate and repriced quarterly based on the three-month LIBOR plus 1.97%, with the last reprice date on March 13, 2019.

The trust preferred securities had a variable rate and repriced quarterly based on the three-month LIBOR plus 3.00%, with the last reprice date on April 29, 2019.

Stockholders' Equity

Total stockholders’ equity as of December 31, 2020, was $285.5 million, compared to $251.9 million as of December 31, 2019, an increase of $33.6 million, or 13.3%.

This increase was attributable to the $26.8 million of proceeds from the IPO, net of expenses and underwriting commissions, that was completed on May 7, 2019 , net income of $24.8 million for the year ended December 31, 2019, and a $7.5 million, net of tax, market adjustment to AOCI related to AFS securities, which was partially offset by $1.3 million in cash dividends.

This increase was attributable to $28.1 million of net income, a $6.9 million, net of tax, market adjustment to accumulated other comprehensive income related to securities AFS, and $371,000 of stock compensation, partially offset by $1.8 million in cash dividends and $122,000 for the repurchase of shares.

Our common stock began trading on May 3, 2019, on the Nasdaq Global Select Market under the symbol "RRBI." On May 7, 2019, we completed an IPO of our common stock at a public offering price of $45.00 per share.

2 unchanged sentences

Taking into consideration our performance and capital levels, dividends were paid in both 2019 and 2020.

We paid our first annual cash dividend of $0.15 per share, adjusted for the 2018 2-for-1 stock split, in May 2018, our second annual cash dividend of $0.20 per share in February 2019, and our first quarterly cash dividend of $0.06 per share on March 26, 2020.

In February 2019, the Company paid our second annual cash dividend of $0.20 per share.

During 2020, a quarterly cash dividend of $0.06 per share was paid, resulting in $0.24 per share in cash dividends for the year ended December 31, 2020.

On August 27, 2020, the Company's Board of Directors approved a stock repurchase program.

The repurchase program authorizes the Company to purchase up to $3.0 million of our outstanding shares of common stock through August 27, 2021.

Repurchases may be made from time to time in the open market at prevailing prices and based on market conditions or in privately negotiated transactions.

For the year ended December 31, 2020, the Company repurchased 2,824 shares at an aggregate cost of $122,000.

Regulatory Capital Requirements

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Red River Bank is subject to various capital requirements administered by the FDIC, including Basel III capital guidelines.

It is management's belief that, as of December 31, 2019 and December 31, 2018, the Bank met all capital requirements.

It is management's belief that, as of December 31, 2020 and December 31, 2019, the Bank met all capital adequacy requirements.

In May 2018, the Economic Growth Act increased the asset threshold for "small bank holding companies" from $1.0 billion to $3.0 billion.

Because we have less than $3.0 billion in assets, we are not subject to capital requirements.

Because we have less than $3.0 billion in assets, we are not subject to capital adequacy guidelines on a consolidated basis.

However, we calculate capital ratios for planning and monitoring purposes.

1 unchanged sentence

However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us.

The following table presents our regulatory capital ratios, as well as those for Red River Bank, at the dates indicated:

December 31, 2019

December 31, 2018

(dollars in thousands)

The following table presents our regulatory capital ratios, as well as those for Red River Bank, as of the dates indicated:

December 31, 2020 December 31, 2019

(dollars in thousands) Amount Ratio Amount Ratio

Red River Bancshares, Inc.

Total Risk-Based Capital $ 294,962 18.68 % $ 264,313 18.02 %

Tier 1 Risk-Based Capital

Common Equity Tier 1 Capital

Tier 1 Leverage Capital

Tier I Risk-Based Capital 277,011 17.55 % 250,376 17.07 %

Common Equity Tier I Capital 277,011 17.55 % 250,376 17.07 %

Tier I Leverage Capital 277,011 10.92 % 250,376 12.82 %

Red River Bank

Total Risk-Based Capital $ 271,061 17.17 % $ 238,021 16.23 %

Tier 1 Risk-Based Capital

Common Equity Tier 1 Capital

Tier 1 Leverage Capital

Tier I Risk-Based Capital 253,110 16.03 % 224,084 15.28 %

Common Equity Tier I Capital 253,110 16.03 % 224,084 15.28 %

Tier I Leverage Capital 253,110 9.98 % 224,084 11.47 %

As part of the directive under the Economic Growth Act, on September 17, 2019, the FDIC and other federal bank regulatory agencies approved the CBLR framework.

This optional framework became effective January 1, 2020, and will be available as an alternative to the Basel III risk-based capital framework.

This optional framework became effective January 1, 2020, and is available as an alternative to the Basel III risk-based capital framework.

The CBLR framework provides for a simple measure of capital adequacy for certain community banking organizations.

Specifically, depository institutions and depository institution holding companies that have less than $10.0 billion in total consolidated assets and meet other qualifying criteria, including a Tier 1 leverage ratio of greater than 9.00%, are considered qualifying community banking organizations and are eligible to opt into the CBLR framework and replace the applicable Basel III risk-based capital requirements.

Specifically, depository institutions and depository institution holding companies that have less than $10.0 billion in total consolidated assets and meet other qualifying criteria, including a Tier I leverage ratio of greater than 9.00% (subsequently temporarily reduced to 8.00% as a COVID-19 relief measure), are considered qualifying community banking organizations and are eligible to opt into the CBLR framework and replace the applicable Basel III risk-based capital requirements.

As of December 31, 2020, the Company and the Bank qualify for the CBLR framework.

Management does not intend to utilize the CBLR framework effective January 1, 2020.

Management does not intend to utilize the CBLR framework.

LIQUIDITY AND ASSET-LIABILITY MANAGEMENT

Liquidity involves our ability to raise funds to support asset growth and potential acquisitions or to reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements, and otherwise to operate on an ongoing basis and manage unexpected events.

Management continually monitors our liquidity and non-core dependency ratios to ensure compliance with targets established by the Bank’s Asset-Liability Management Committee.

For the years ended December 31, 2020 and December 31, 2019, liquidity needs were primarily met by core deposits, security and loan maturities, and cash flows from amortizing security and loan portfolios.

While maturities and scheduled amortization of loans are predictable sources of funds, deposit outflows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and the competitive environment in which we operate, and therefore, these cash flows are monitored regularly.

In addition, we used a portion of the proceeds received in the IPO to redeem our junior subordinated debentures.

For more information on these redemptions, see "Financial Condition - Junior Subordinated Debentures."

Our most liquid assets are cash and short-term investments that include both interest-earning demand deposits and AFS securities.

Management continually monitors our liquidity and non-core dependency ratios to ensure compliance with targets established by the Bank’s Asset-Liability Management Committee.

Our most liquid assets are cash and short-term investments that include both interest-earning demand deposits and securities AFS.

The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

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Our primary source of funds is deposits, and our primary use of funds is the funding of loans.

We invest excess deposits in interest-earning deposits at other banks, federal funds sold, the Federal Reserve, securities, or other short-term liquid investments until the deposits are needed to fund loan growth or other obligations.

Our average loans, including average loans held for sale, increased $76.6 million, or 5.8%, for the year ended December 31, 2019 , compared to the year ended December 31, 2018 .

Our average deposits increase d $77.2 million , or 4.9% , for the year ended December 31, 2019 , compared to the year ended December 31, 2018 .

We invest excess deposits in interest-earning deposits at other banks or at the Federal Reserve, federal funds sold, securities, or other short-term liquid investments until the deposits are needed to fund loan growth or other obligations.

In 2020, deposit growth exceeded loan growth which created excess liquidity.

During 2020, this excess liquidity was deployed into interest-bearing deposits in other banks, as well as securities.

Our average total loans, including average loans held for sale, increased $198.6 million, or 14.3%, for the year ended December 31, 2020 , compared to the year ended December 31, 2019.

The increase in average total loans is primarily due to $199.0 million of PPP loans originated during the second quarter of 2020.

Our average deposits increased $366.3 million, or 22.2%, for the year ended December 31, 2020, compared to the year ended December 31, 2019.

This increase was a result of customers receiving funds from various government stimulus programs, customers depositing the proceeds from their PPP loans, strong deposit account opening activity, and customers maintaining larger deposit balances.

Core deposits, which are total deposits excluding time deposits greater than $250,000, are a major source of funds used to meet cash flow needs.

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Our securities portfolio is another alternative source for meeting liquidity needs.

Securities generate cash flow through principal payments and maturities, and they generally have readily available markets that allow for their conversion to cash.

As of December 31, 2019 , AFS securities totaled $335.6 million compared to $307.9 million as of December 31, 2018 .

However, certain investments within our securities portfolio are also used to secure specific deposit types, such as for public entities, which impacts their liquidity.

As of December 31, 2019 , securities with a carrying value of $89.8 million, or 26.8% of the AFS securities portfolio, were pledged to secure public entity deposits as compared to securities with a carrying value of $93.5 million, or 30.4% of the AFS securities portfolio, similarly pledged as of December 31, 2018 .

This decrease of $3.7 million, or 4.0%, was primarily due to the release of excess collateral during 2019 that had accumulated for several public entity accounts.

Securities generate cash flow through principal repayments, maturities, and calls, and they generally have readily available markets that allow for their conversion to cash.

As of December 31, 2020, securities AFS were $498.2 million compared to $335.6 million as of December 31, 2019.

However, certain investments within our securities portfolio are also used to secure specific deposit types, such as public entities, which impacts their liquidity.

As of December 31, 2020 , securities with a carrying value of $105.1 million, or 21.1% of the securities AFS portfolio, were pledged to secure public entity deposits as compared to securities with a carrying value of $89.8 million, or 26.8% of the securities AFS portfolio, similarly pledged as of December 31, 2019.

This increase of $15.3 million, or 17.0%, was primarily due to several large public entity deposit accounts having higher balances as of December 31, 2020 compared to December 31, 2019.

Other sources available for meeting liquidity needs include federal funds lines, FHLB advances, repurchase agreements, and other lines of credit.

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As of December 31, 2020, we had cash and cash equivalents of $447.2 million compared to $133.3 million as of December 31, 2019.

The decrease of $18.6 million, or 12.3%, was primarily due to the funding of loans and securities during the year ended December 31, 2019.

Off-Balance Sheet Items and Contractual Obligations

The increase of $313.9 million was a result of deposit growth exceeding loan growth.

Off-Balance Sheet Items

In the normal course of business, we enter into certain financial instruments, such as contractual obligations, commitments to extend credit, and letters of credit, to meet the financing needs of our customers.

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Some instruments may not be reflected in the accompanying consolidated financial statements until they are funded, although they expose us to varying degrees of credit risk and interest rate risk in much the same way as funded loans.

Contractual Obligations

The table below presents the funding requirements of our most significant financial commitments, excluding interest and purchase discounts, as of the date indicated:

December 31, 2019

(in thousands)

Less than One Year

One to Three Years

Three to Five Years

Greater than Five Years

Time deposits

Purchase commitments (1)

Limited partnership investment (2)

Operating lease obligations

Total contractual obligations

This commitment relates to real estate that the Company has committed to purchase.

This commitment represents the amount we are obligated to contribute to an investment in a small business investment company limited partnership.

The capital contributions may be required at any time, and are therefore reflected in the “Less Than One Year” category.

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to customers if all conditions of the commitment are met.

These commitments include revolving and nonrevolving credit lines and are primarily issued for commercial purposes.

Commitments to extend credit generally have fixed expiration dates or other termination clauses.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.

Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions.

As of December 31, 2019 , we had $257.0 million in outstanding commitments to extend credit and $11.1 million in commitments associated with outstanding standby letters of credit.

As of December 31, 2018 , we had $231.5 million in outstanding commitments to extend credit and $11.6 million in commitments associated with outstanding standby letters of credit.

Credit related commitments by expiration date are summarized below.

Since many of the commitments may expire unused, the amounts shown do not necessarily represent future cash requirements.

December 31, 2019

(in thousands)

Less than One Year

One to Three Years

Three to Five Years

Greater than Five Years

Commitments to extend credit

Standby letters of credit

For more information about our commitments to extend credit and standby letters of credit, see “Item 8.

Financial Statements and Supplementary Data - Note 3.

Loans and Asset Quality - Commitments to Extend Credit.” For more information about our financial commitments with time deposits, operating lease obligations, and limited partnership investments, see "Item 8.

Financial Statements and Supplementary Data - Note 5.

Deposits,” “ - Note 7.

Leases,” and “ - Note 12.

Off-Balance Sheet Contractual Obligations and Contingencies - Investment Commitment,” respectively.

Interest Rate Sensitivity and Market Risk

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Contractual maturities and repricing opportunities of loans are incorporated into the model, as are prepayment assumptions and maturity data and call options within the securities portfolio.

The average life of nonmaturity deposit accounts are based on assumptions developed from a nonmaturity deposit decay study, performed by our asset-liability management advisors, which calculates average lives using historic closure rates.

The average life of non-maturity deposit accounts are based on assumptions developed from a non-maturity deposit decay study performed by our asset-liability management advisors, which calculates average lives using historic closure rates.

The assumptions used are inherently uncertain, and as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income.

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In conjunction with our interest rate risk management process, on a quarterly basis we run various simulation models including a static balance sheet and dynamic growth balance sheet.

These models test the impact on net interest income

and fair value of equity from changes in market interest rates under various scenarios.

These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios.

Under the static and dynamic growth models, rates are shocked instantaneously and ramped rates change over a 12-month and 24-month horizon based upon parallel yield curve shifts.

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The following table shows the impact of an instantaneous and parallel change in rates, at the levels indicated, and summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated.

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Change in Interest Rates (bps)

+300 36.6 % 27.5 % 20.2 % 8.3 %

+200 25.2 % 22.3 % 13.9 % 7.0 %

+100 13.4 % 14.5 % 7.4 % 4.7 %

0.0 % 0.0 % 0.0 % 0.0 %

-100 (1.6) % (18.0) % (8.0) % (9.9) %

-200 (1.6) % (15.6) % (13.0) % (22.3) %

The results above, as of December 31, 2020 and 2019, demonstrate that our balance sheet is asset sensitive, which means our assets have the opportunity to reprice at a faster pace than our liabilities, over the 12-month horizon.

We have also found that, historically, our deposit interest rates have changed more slowly than the change in the federal funds rate.

We have also observed that, historically, our deposit interest rates have changed more slowly than the change in the federal funds rate.

This assumption is incorporated into the simulation model and is generally not reflected in a gap analysis, which is the process by which we measure the repricing gap between interest rate-sensitive assets versus interest rate-sensitive liabilities.

As of December 31, 2020, the net interest income changes in the down 100 and down 200 rate scenarios remained constant.

This was primarily because as of December 30, 2020, loan yields, most securities yields, and most deposit rates were at their effective floors within the model's down 100 rate scenario, which resulted in interest income remaining relatively stable with rates down 200 basis points.

The impact of our floating rate loans and floating rate transaction deposits are also reflected in the results shown in the above table.

As of December 31, 2019, floating rate loans were 15.8% of the loan portfolio and floating rate transaction deposits were 6.6% of the interest-bearing transaction deposits.

As of December 31, 2020, floating rate loans were 14.6% of the loan's HFI and floating rate transaction deposits were 5.5% of the interest-bearing transaction deposits.

The assumptions incorporated into the model are inherently uncertain, and as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income.

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Certain financial measures used by management to evaluate our operating performance are discussed in this Annual Report on Form 10-K as supplemental non-GAAP performance measures.

In accordance with the SEC’s rules, we classify a

financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the U.S.

Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures, or both.

Management and the board of directors review tangible book value per share and tangible common equity to tangible assets as part of managing operating performance.

However, these non-GAAP financial measure should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP.

In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the U.S.

Management and the board of directors review tangible book value per share, tangible common equity to tangible assets, and PPP-adjusted metrics as part of managing operating performance.

However, these non-GAAP financial measures that we discuss in this report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP.

Moreover, the manner in which we calculate the non-GAAP financial measures that are discussed in this Annual Report on Form 10-K may differ from that of other companies reporting measures with similar names.

It is important to understand how such other banking organizations calculate and name their financial measures similar to the non-GAAP financial measures discussed in this Annual Report on Form 10-K when comparing such non-GAAP financial measures.

It is important to understand how such other banking organizations calculate and

name their financial measures similar to the non-GAAP financial measures discussed in this Annual Report on Form 10-K when comparing such non-GAAP financial measures.

Tangible Assets, Tangible Equity, and Tangible Book Value

Tangible Book Value Per Common Share .

Tangible book value per common share is a non-GAAP measure commonly used by analysts and investors to evaluate financial institutions.

Tangible book value per common share is a non-GAAP measure commonly used by investors, financial analysts, and investment bankers to evaluate financial institutions.

We believe that this measure is important to many investors in the marketplace who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets.

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Total stockholders' equity

$ 285,478 $ 251,898 $ 193,703 $ 178,103 $ 151,823

Intangible assets

Total tangible common equity

(1,546) (1,546) (1,546) (1,546) (1,546)

Total tangible common equity (non-GAAP)

$ 283,932 $ 250,352 $ 192,157 $ 176,557 $ 150,277

Common shares outstanding 7,325,333 7,306,221 6,627,358 6,721,146 6,362,910

Book value per common share $ 38.97 $ 34.48 $ 29.23 $ 26.50 $ 23.86

Tangible book value per common share

Tangible book value per common share (non-GAAP) $ 38.76 $ 34.27 $ 28.99 $ 26.27 $ 23.62

Tangible assets

$ 2,642,634 $ 1,988,225 $ 1,860,588 $ 1,724,264 $ 1,644,877

Intangible assets

Total tangible assets

(1,546) (1,546) (1,546) (1,546) (1,546)

Total tangible assets (non-GAAP)

$ 2,641,088 $ 1,986,679 $ 1,859,042 $ 1,722,718 $ 1,643,331

Total stockholder's equity to assets 10.80 % 12.67 % 10.41 % 10.33 % 9.23 %

Tangible common equity to tangible assets

Tangible common equity to tangible assets (non-GAAP) 10.75 % 12.60 % 10.34 % 10.25 % 9.14 %

(1) Share amounts have been adjusted to give effect to the 2018 2-for-1 stock split.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

PPP-Adjusted Metrics

In the second quarter of 2020, Red River Bank originated 1,384 PPP loans totaling $199.0 million.

As of December 31, 2020, unamortized PPP origination fees were $2.8 million, resulting in $118.4 million of PPP loans, net of deferred income, or 7.5% of loans HFI.

PPP loans were implemented as a response to the COVID-19 pandemic and have characteristics that are different than the rest of our loan portfolio, including being short-term in nature (24 months or less depending on loan forgiveness) and having a lower than market interest rate.

Because of these factors, management believes that PPP-adjusted metrics provide a more accurate portrayal of certain aspects of the Company's financial condition and performance.

Accordingly, we believe it is important to investors to see certain of our metrics with PPP loans excluded.

The most directly comparable GAAP financial measure for PPP-adjusted metrics is total loans HFI.

The following table reconciles, as of the dates set forth below, non-PPP loans to total loans HFI and presents certain ratios using non-PPP loans:

(dollars in thousands) 2020 2019 2018 2017 2016

Non-PPP loans HFI

Loans HFI $ 1,588,446 $ 1,438,924 $ 1,328,438 $ 1,247,666 $ 1,146,675

PPP loans, net (118,447) — — — —

Non-PPP loans HFI (non-GAAP) $ 1,469,999 $ 1,438,924 $ 1,328,438 $ 1,247,666 $ 1,146,675

Assets excluding PPP loans, net

Assets $ 2,642,634 $1,988,225 $1,860,588 $1,724,264 $1,644,877

PPP loans, net (118,447) — — — —

Assets excluding PPP loans, net (non-GAAP) $ 2,524,187 $1,988,225 $1,860,588 $1,724,264 $1,644,877

Deposits $ 2,340,360 $ 1,721,120 $ 1,645,583 $ 1,525,985 $ 1,472,889

Allowance for loan losses $ 17,951 $ 13,937 $ 12,524 $ 10,895 $ 10,544

Nonperforming loans $ 3,310 $ 5,319 $ 6,499 $ 10,386 $ 5,622

Loans HFI to deposits ratio 67.87 % 83.60 % 80.73 % 81.76 % 77.85 %

Non-PPP loans HFI to deposits ratio (non-GAAP) 62.81 % 83.60 % 80.73 % 81.76 % 77.85 %

Allowance for loan losses to loans HFI 1.13 % 0.97 % 0.94 % 0.87 % 0.92 %

Allowance for loan losses to non-PPP loans HFI (non-GAAP) 1.22 % 0.97 % 0.94 % 0.87 % 0.92 %

Nonperforming loans to loans HFI 0.21 % 0.37 % 0.49 % 0.83 % 0.49 %

Nonperforming loans to non-PPP loans HFI (non-GAAP) 0.23 % 0.37 % 0.49 % 0.83 % 0.49 %

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP and with general practices within the financial services industry.

Application of these principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period in the consolidated financial statements and accompanying notes.

Application of these principles requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances.

These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources.

We evaluate our estimates on an ongoing basis.

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Actual results may differ from these estimates.

We have identified the following accounting policies and estimates that, due to the difficult, subjective, or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial condition and results of operations.

The following discussion presents an overview of our accounting policies that require difficult, subjective, or complex judgments and assumptions that are inherent in our policies and estimates and the potential sensitivity of the financial statements.

Due to the complexity of these judgments and assumptions, an understanding of our financial condition and results of operations is critical.

We believe that the judgments, estimates, and assumptions used in the preparation of the consolidated financial statements are appropriate.

Loans Held for Sale

Residential mortgage loans originated and intended for sale are carried at the lower of cost or estimated fair value on an individual basis.

These mortgage loans are pre-sold prior to funding.

Therefore, management believes there to be minimal risk of loss associated with these assets.

Loans Held for Investment

Loans that management has the intent and ability to hold, for the foreseeable future or until maturity or payoff, are held for investment and carried at their principal amount outstanding, net of deferred loan fees.

Interest income on loans is accrued on the principal amount outstanding except for those loans that are classified as nonaccrual.

Loan origination fees, net of certain direct costs, of $24,000 and $8,000 as of December 31, 2019 and 2018 , respectively, were deferred and recognized over the estimated lives of the related loans as an adjustment to the loans’ effective yield.

Loans are placed on nonaccrual when management determines that a borrower may be unable to meet future contractual payments as they become due or when such loans become 90 days past due, unless they are well secured and in the

process of collection.

When a loan is placed on nonaccrual, uncollected accrued interest is reversed, reducing interest income, and future income accrual is discontinued.

Subsequent payments, if any, of interest and fees are applied as reductions to the loan’s outstanding principal balance.

Once the principal balance of a loan placed on nonaccrual has been fully recovered, subsequent payments received are recognized as income on a cash basis.

Loans are returned to accrual status when the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

A loan is charged-off to the allowance for loan losses in full when management is relatively certain that principal and interest will be uncollectible.

Management may elect to partially charge-off a loan to adjust the principal balance to the net realizable value of the collateral that secures the loan.

When a partial charge-off is made, the remaining balance of the loan is placed on nonaccrual.

Recoveries of amounts previously charged-off, if any, are credited to the allowance for loan losses until the principal balance of the loan is fully recovered.

Any subsequent payments are recognized as income.

Refer to "Item 8.

Financial Statements and Supplementary Data - Note 1.

Business and Summary of Significant Accounting Policies" for details on the significant accounting principles and practices we follow.

Allowance for Loan Losses

The allowance for loan losses provides for known and inherent losses in the loan portfolio based upon management’s best assessment of the loan portfolio at each balance sheet date.

It is maintained at a level estimated to be adequate to absorb potential losses through periodic charges to the provision for loan losses.

The allowance for loan losses is established for known and inherent losses in the loan portfolio based upon management’s best assessment of the loan portfolio at each balance sheet date.

It is maintained at a level estimated to be adequate to absorb potential losses through periodic changes to loan losses.

Red River Bank currently utilizes the incurred loss methodology to estimate the allowance for loan losses.

The CECL model is not effective for Red River Bank until January 1, 2023.

The allowance for loan losses consists of specific and general reserves.

Each of these reserves undergoes a separate analysis in order to estimate the total allowance for loan losses.

Specific reserves relate to loans classified as impaired.

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Impaired loans include TDRs and performing and nonperforming loans.

Impaired loans are reviewed individually, and a specific allowance is allocated, if necessary, based on evaluation of either the fair value of the collateral underlying the loan or the present value of future cash flows calculated using the loan’s existing interest rate.

General reserves relate to the remainder of the loan portfolio, including overdrawn deposit accounts, and are based on evaluation of a number of factors, such as current economic conditions, the quality and composition of the loan portfolio, loss history, and other relevant factors.

The Bank’s loans are generally secured by specific items of collateral including real property, consumer assets, and business assets.

Although the Bank has a diversified loan portfolio, a substantial portion of its borrowers’ ability to honor their contractual repayment obligations is dependent on changing economic conditions.

Because of the uncertainties associated with economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of loan losses in the loan portfolio and the amount of the allowance needed may change in the future.

Impaired loans are reviewed individually, and a specific allowance is allocated, if necessary.

The amount of the specific allowance provided is estimated by calculating the difference between the loan value and the Bank's exposure.

The loan value is determined based on either the fair value of the collateral underlying the loan, if the loan is collateral dependent, or the present value of the loan's future cash flows calculated using the loan's existing interest rate.

Either of these determinations are highly subjective and based on information available at the time of valuation.

General reserves relate to the remainder of the loan portfolio, including overdrawn deposit accounts.

General reserves are estimated using historical loss rates adjusted for qualitative risk factors both internal and external to us.

The qualitative factors considered include changes in economic conditions that impact loan portfolio repayment and collateral values, changes in the quality and composition of the loan portfolio, changes in lending policies and procedures, and other relevant factors.

The qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in our historic loss rates.

For purposes of determining the general reserves, the loan portfolio, less cash secured loans and impaired loans, is multiplied by our historical loss rates adjusted for qualitative risk factors.

The qualitative component of the allowance for loan losses reflects the stress in the economy related to the COVID-19 pandemic.

The determination of the allowance for loan losses is, in a large part, based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

In situations where the repayment of a loan is dependent on the value of the underlying collateral, an independent appraisal of the collateral’s current market value is customarily obtained and used in the determination of the allowance for loan loss.

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in economic conditions.

Also regulatory agencies, as an integral part of their examination process, periodically review management’s assessments of the adequacy of the allowance for loan losses.

Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination.

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis.

Subsequent to foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell.

Foreclosed assets are included in other assets on the consolidated balance sheets.

The balance of foreclosed assets was $1.1 million and $646,000 as of December 31, 2019 and 2018 , respectively.

Income Tax Accounting

The provision for income tax is based on taxes payable or receivable for the current year and deferred taxes on temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements.

Deferred tax assets and liabilities are included in our financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.

As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

We have adopted the provisions of accounting guidance related to accounting for uncertainty in income taxes.

This interpretation clarifies that the benefit of a position taken or expected to be taken in a tax return should be recognized in a company’s financial statements when it is more likely than not that the position will be sustained based on technical merits.

We recognize interest and penalties on income taxes as a component of income tax expense.

The effect on deferred tax assets of a change in tax rate is recognized in income as part of income tax expense for the period that includes the

enactment date.

As a result of the enactment in 2017 of the Tax Reform Act, deferred tax assets and liabilities have been measured as of December 31, 2019 and 2018 , using the 21.0% corporate tax rate.

RECENT ACCOUNTING PRONOUNCMENTS

RECENT ACCOUNTING PRONOUNCEMENTS

Financial Statements and Supplementary Data - Note 1.

Business and Summary of Significant Accounting Policies – Accounting Standards Adopted" and " – Issued but Not Adopted Accounting Standards."

Business and Summary of Significant Accounting Policies - Accounting Standards Adopted in 2020" and " - Issued but Not Adopted Accounting Standards."

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis