RED RIVER BANCSHARES INC 10-K

Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Red River Bancshares, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Red River Bancshares, Inc. and its subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Postlethwaite & Netterville We have served as the Company’s auditor since 1998. Baton Rouge, Louisiana March 18, 2022 66 Table of Contents RED RIVER BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) December 31, 2021 2020 ASSETS Cash and due from banks $ 23,143 $ 29,537 Interest-bearing deposits in other banks 761,721 417,664 Total Cash and Cash Equivalents 784,864 447,201 Securities available-for-sale 659,178 498,206 Equity securities 7,846 4,021 Nonmarketable equity securities 3,450 3,447 Loans held for sale 4,290 29,116 Loans held for investment 1,683,832 1,588,446 Allowance for loan losses ( 19,176 ) ( 17,951 ) Premises and equipment, net 48,056 46,924 Accrued interest receivable 6,245 6,880 Bank-owned life insurance 28,061 22,413 Intangible assets 1,546 1,546 Right-of-use assets 3,743 4,154 Other assets 12,775 8,231 Total Assets $ 3,224,710 $ 2,642,634 LIABILITIES Noninterest-bearing deposits $ 1,149,672 $ 943,615 Interest-bearing deposits 1,760,676 1,396,745 Total Deposits 2,910,348 2,340,360 Accrued interest payable 1,310 1,774 Lease liabilities 3,842 4,233 Accrued expenses and other liabilities 11,060 10,789 Total Liabilities 2,926,560 2,357,156 COMMITMENTS AND CONTINGENCIES — — STOCKHOLDERS’ EQUITY Preferred stock, no par value: Authorized - 1,000,000 shares; None Issued and Outstanding — — Common stock, no par value: Authorized - 30,000,000 shares; Issued and Outstanding - 7,180,155 and 7,325,333 shares, respectively 60,233 68,055 Additional paid-in capital 1,814 1,545 Retained earnings 239,876 208,957 Accumulated other comprehensive income (loss) ( 3,773 ) 6,921 Total Stockholders’ Equity 298,150 285,478 Total Liabilities and Stockholders’ Equity $ 3,224,710 $ 2,642,634 The accompanying notes are an integral part of these consolidated financial statements. 67 Table of Contents RED RIVER BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Years Ended December 31, 2021 2020 INTEREST AND DIVIDEND INCOME Interest and fees on loans $ 67,923 $ 69,228 Interest on securities 8,660 7,601 Interest on federal funds sold 88 207 Interest on deposits in other banks 658 322 Dividends on stock 10 20 Total Interest and Dividend Income 77,339 77,378 INTEREST EXPENSE Interest on deposits 5,617 8,362 Interest on other borrowed funds — 16 Total Interest Expense 5,617 8,378 Net Interest Income 71,722 69,000 Provision for loan losses 1,900 6,293 Net Interest Income After Provision for Loan Losses 69,822 62,707 NONINTEREST INCOME Service charges on deposit accounts 4,775 4,108 Debit card income, net 4,415 3,641 Mortgage loan income 8,676 8,398 Brokerage income 3,297 2,324 Loan and deposit income 1,738 1,701 Bank-owned life insurance income 648 568 Gain (Loss) on equity securities ( 175 ) 85 Gain (Loss) on sale and call of securities 194 1,441 SBIC income 654 775 Other income (loss) 271 126 Total Noninterest Income 24,493 23,167 OPERATING EXPENSES Personnel expenses 32,449 31,160 Occupancy and equipment expenses 5,443 5,106 Technology expenses 2,810 2,542 Advertising 921 933 Other business development expenses 1,169 1,020 Data processing expense 1,982 1,905 Other taxes 2,082 1,733 Loan and deposit expenses 1,016 1,052 Legal and professional expenses 1,683 2,141 Regulatory assessment expenses 933 538 Other operating expenses 3,767 3,276 Total Operating Expenses 54,255 51,406 Income Before Income Tax Expense 40,060 34,468 Income tax expense 7,108 6,323 Net Income $ 32,952 $ 28,145 EARNINGS PER SHARE Basic $ 4.53 $ 3.84 Diluted $ 4.51 $ 3.83 The accompanying notes are an integral part of these consolidated financial statements. 68 Table of Contents RED RIVER BANCSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Years Ended December 31, 2021 2020 Net income $ 32,952 $ 28,145 Other comprehensive income (loss): Unrealized net gain (loss) on securities arising during period ( 13,343 ) 10,232 Tax effect 2,802 ( 2,149 ) (Gain) loss on sale and call of securities included in net income ( 194 ) ( 1,441 ) Tax effect 41 303 Total other comprehensive income (loss) ( 10,694 ) 6,945 Comprehensive Income $ 22,258 $ 35,090 The accompanying notes are an integral part of these consolidated financial statements. 69 Table of Contents RED RIVER BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands, except share amounts) Common Shares Issued Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Balance as of December 31, 2019 7,306,221 $ 68,082 $ 1,269 $ 182,571 $ ( 24 ) $ 251,898 Net income — — — 28,145 — 28,145 Stock incentive plan — — 276 — — 276 Issuance of restricted shares of common stock through stock incentive plan, net 5,625 — — — — — Issuance of shares of common stock through exercise of stock options 14,720 8 — — — 8 Issuance of shares of common stock as board compensation 1,591 87 — — — 87 Repurchase of common stock under stock repurchase program ( 2,824 ) ( 122 ) — — — ( 122 ) Cash dividend - $ 0.24 per share — — — ( 1,759 ) — ( 1,759 ) Other comprehensive income (loss) — — — — 6,945 6,945 Balance as of December 31, 2020 7,325,333 $ 68,055 $ 1,545 $ 208,957 $ 6,921 $ 285,478 Net income — — — 32,952 — 32,952 Stock incentive plan — — 269 — — 269 Issuance of restricted shares of common stock through stock incentive plan, net 7,400 — — — — — Forfeiture of restricted shares of common stock ( 100 ) — — — — Issuance of shares of common stock as board compensation 1,075 56 — — — 56 Repurchase of common stock under stock repurchase program ( 153,553 ) ( 7,878 ) — — — ( 7,878 ) Cash dividend - $ 0.28 per share — — — ( 2,033 ) — ( 2,033 ) Other comprehensive income (loss) — — — — ( 10,694 ) ( 10,694 ) Balance as of December 31, 2021 7,180,155 $ 60,233 $ 1,814 $ 239,876 $ ( 3,773 ) $ 298,150 The accompanying notes are an integral part of these consolidated financial statements. 70 Table of Contents RED RIVER BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 32,952 $ 28,145 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 1,906 1,861 Amortization 646 553 Share-based compensation earned 269 276 Share-based board compensation earned 50 62 (Gain) Loss on other assets owned ( 184 ) 22 Net (accretion) amortization on securities AFS 2,479 3,144 (Gain) Loss on sale and call of securities ( 194 ) ( 1,441 ) Provision for loan losses 1,900 6,293 Deferred income tax (benefit) expense ( 773 ) 130 Net (increase) decrease in loans HFS 24,826 ( 24,027 ) Net (increase) decrease in accrued interest receivable 635 ( 1,629 ) Net (increase) decrease in BOLI ( 648 ) ( 568 ) Net increase (decrease) in accrued interest payable ( 464 ) ( 448 ) Net increase (decrease) in accrued income taxes payable ( 70 ) ( 4 ) Other operating activities, net ( 1,066 ) 429 Net cash provided by (used in) operating activities 62,264 12,798 CASH FLOWS FROM INVESTING ACTIVITIES Activity in securities AFS: Sales 113,524 151,253 Maturities, principal repayments, and calls 99,175 112,605 Purchases ( 389,493 ) ( 419,403 ) Purchase of equity securities ( 4,000 ) — Purchase of nonmarketable equity securities ( 3 ) ( 2,097 ) Capital contribution in partnerships ( 173 ) — Net (increase) decrease in loans HFI ( 96,327 ) ( 151,909 ) Purchase of bank-owned life insurance ( 5,000 ) — Proceeds from sales of foreclosed assets 563 330 Proceeds from sales of premises and equipment 483 — Purchases of premises and equipment ( 3,427 ) ( 7,035 ) Net cash provided by (used in) investing activities ( 284,678 ) ( 316,256 ) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 569,988 619,240 Proceeds from other borrowed funds — 50,000 Repayments of other borrowed funds — ( 50,000 ) Repurchase of common stock ( 7,878 ) ( 122 ) Proceeds from exercise of stock options — 8 Cash dividends ( 2,033 ) ( 1,759 ) Net cash provided by (used in) financing activities 560,077 617,367 Net change in cash and cash equivalents 337,663 313,909 Cash and cash equivalents - beginning of year 447,201 133,292 Cash and cash equivalents - end of year $ 784,864 $ 447,201 The accompanying notes are an integral part of these consolidated financial statements. 71 Table of Contents RED RIVER BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (in thousands) Years Ended December 31, 2021 2020 SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest $ 6,080 $ 8,826 Income taxes 7,989 6,182 SUPPLEMENTAL INFORMATION FOR NON-CASH INVESTING AND FINANCING ACTIVITIES Assets acquired in settlement of loans 266 108 The accompanying notes are an integral part of these consolidated financial statements. 72 Table of Contents RED RIVER BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Business and Summary of Significant Accounting Policies The accounting and reporting policies of the Company conform to GAAP and the prevailing practices within the banking industry. A summary of significant accounting policies is as follows: Business The Company is a bank holding company headquartered in Alexandria, Louisiana. The Company’s wholly owned bank subsidiary, Red River Bank, is a Louisiana state-chartered bank that provides a fully integrated suite of banking products and services tailored to the needs of commercial and retail customers. Red River Bank operates from a network of 27 banking centers throughout Louisiana and two combined LDPOs, one each in Lafayette, Louisiana, and New Orleans, Louisiana. Banking centers are located in the following Louisiana markets: 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; the Northshore, which includes Covington; and Acadiana, which includes the Lafayette MSA. Basis of Presentation The consolidated financial statements include the accounts of the Company and all other entities in which the Company has controlling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. Non-Bank Subsidiaries The Company’s consolidated financial statements include Red River Bank’s wholly owned subsidiaries Rivermark Properties, LLC and Source BIDCO. The Bank dissolved Source BIDCO in the first quarter of 2020. Operating Segments While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment. Use of Estimates The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect the 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. Actual results could differ from those estimates. Acquisition Accounting The Company accounts for its acquisitions under ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. Purchased assets, including loans, and assumed liabilities are recorded at their respective acquisition date fair values. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, Fair Value Measurements and Disclosures. The fair value estimates associated with acquired loans include estimates related to expected prepayments and the amount and timing of expected principal, interest, and other cash flows. Acquired loans, for which all contractual cash flows are expected to be received, are accounted for under the accounting guidance found in ASC Topic 310-20, Receivables - Nonrefundable Fees and Other Costs. Acquired loans, with evidence of credit deterioration, are accounted for under the accounting guidance found in ASC Topic 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality. There is no carryover of related allowance for loan losses at the acquisition date as assumptions regarding credit risk are incorporated in the valuation process. However, subsequent to acquisition, the acquired loan portfolio is reviewed, and an allowance for loan losses is established for probable losses incurred after the acquisition date. 73 Table of Contents Cash and Cash Equivalents Cash and cash equivalents consist of cash and due from banks and interest-bearing deposits in other banks. Interest-bearing deposits in other banks consist of money market and checking accounts and are carried at cost. Securities All debt securities of the Company as of December 31, 2021 and 2020, were classified as AFS and are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax. Realized gains and losses on the sale and call of securities are determined using the specific-identification method. Purchased premiums and discounts are recognized in interest income using the interest method over the term of the securities. Equity securities include a CRA mutual fund owned by the Company, which is carried at fair value with any periodic changes in value recorded through the statements of income. Declines in the fair value of HTM and AFS debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the losses are credit related. FASB issued accounting guidance related to the recognition and presentation of OTTI. The accounting guidance specifies that if (1) a company does not have the intent to sell a debt security prior to recovery; and (2) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, the entity will recognize the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive income. For HTM debt securities, the amount of OTTI recorded in other comprehensive income for the noncredit portion of an OTTI should be amortized over the remaining life of the security based on the timing of its future estimated cash flows. Nonmarketable Equity Securities Nonmarketable equity securities, which include investments in the FHLB of Dallas and First National Banker’s Bank, are carried at cost. 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. Loans Held for Investment Loans that management has the intent and ability to hold, for the foreseeable future or until maturity or payoff, are HFI 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, are 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. Allowance 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. 74 Table of Contents The allowance for loan losses consists of specific and general reserves. Specific reserves relate to loans classified as impaired. Loans are considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due in accordance with the contractual terms of the loan. 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 an 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. 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 losses. 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 HFS 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 $ 660,000 and $ 896,000 as of December 31, 2021 and 2020, respectively. Credit Related Financial Information In the ordinary course of business, the Bank has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded. Premises and Equipment, Net Premises and equipment are stated at cost less accumulated depreciation, which is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 40 years. Bank-Owned Life Insurance The Bank has purchased life insurance policies on certain key employees. The Bank is the beneficiary of the BOLI policies, which may be on past or present employees. BOLI policies have death benefits as well as a cash surrender value component, which is carried as an asset on the consolidated balance sheets. Intangible Assets Intangible assets consist of goodwill. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. Goodwill is not amortized but rather evaluated for impairment annually. The Company performed its annual impairment test of goodwill for 2021 and 2020 as required by ASC 350, Intangibles - Goodwill and Other. The evaluation indicated no impairment of the Company’s goodwill. Stock-Based Compensation Plans The Company has adopted stock incentive plans that provide for the granting of stock-based awards to key employees, directors, and consultants. The Company accounts for the stock incentive plans in accordance with applicable accounting guidance. Under the fair value recognition provisions of this guidance, stock-based compensation cost is measured at the grant date based on the fair value of the award and recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The options granted under these plans are to purchase common stock at an exercise price not less than the fair market value of the common stock at the date of the grant. The options vest and become exercisable in twenty percent increments on the first through fifth anniversaries of the grant date. No options were 75 Table of Contents outstanding as of December 31, 2021. The restricted stock granted under these plans provide common stock to recipients at the grant date. The restrictions vest in twenty percent increments on the first through fifth anniversaries of the grant date. The Company recognizes forfeitures as they occur. The Company has a Director Compensation Program which allows directors the option of receiving payment for director fees in Company stock. Board compensation expense is recorded when board service is rendered. Income Tax 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 basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the 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. The Company has 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. The Company recognizes 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. Deferred tax assets and liabilities have been measured as of December 31, 2021 and 2020, using the 21.0% corporate tax rate. For more information, see “Note 8. Income Tax Expense.” Earnings per Common Share Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits. Diluted EPS includes accrued but unissued shares relating to the Director Compensation Program, stock options, and restricted stock determined using the treasury stock method. A reconciliation of the weighted-average shares used in calculating basic EPS and diluted EPS for the reported periods is provided in “Note 16. Earnings Per Common Share.” Treasury Stock On January 1, 2015, the Louisiana Business Corporation Act (“the LBCA”) became effective. Under provisions of the LBCA, there is no concept of “Treasury Shares.” Rather, shares purchased by the Company constitute authorized but unissued shares. Accordingly, the Company’s consolidated balance sheets reflect the cost of shares purchased by the Company within common stock. Comprehensive Income Comprehensive income is the change in stockholders’ equity during the period from transactions and other events and circumstances from non-owner sources. Other comprehensive income includes net gains (losses), net of taxes, on AFS securities. Advertising Costs Advertising costs are expensed as incurred. Revenue Recognition The Company has identified certain recurring revenue streams related to noninterest income which are within the scope of Topic 606, Revenue from Contracts with Customers . In-scope revenue streams are summarized based on the timing of revenue recognition as follows: • Revenue earned at a point in time - Fee income (including wire transfer, check ordering, and other transactional fees), NSF/OD Charges, ATM/Card Fee Income (including ATM transaction fees and credit and debit card interchange income), and brokerage transaction income. Revenue is recorded as transactions occur or services are provided to customers. Revenue recognized under these contracts totaled approximately $ 15.4 million and $ 12.3 million for the years ended December 31, 2021 and 2020, respectively. The Company is the principal in each of these contracts with the exception of credit and debit card interchange fees, online transaction interchange fees, sweep income, and brokerage services income, in which case the Company is acting as the agent and records revenue net of expenses paid. • Revenue earned over time (generally under a monthly contract) - Debit card agreement, safe deposit box fees, and brokerage agreement income. Revenue is recorded in the period transactions occur or services are rendered to the customer. The Company is the principal in each of these contracts. Revenue recognized 76 Table of Contents under these contracts totaled approximately $ 765,000 and $ 542,000 for the years ended December 31, 2021 and 2020, respectively. There are no significant judgments relating to the amount and timing of revenue recognition for revenue streams within the scope of Topic 606, Revenue from Contracts with Customers . Due to the nature of the services we provide to our customers, we do not incur costs to obtain contracts, and there are no material incremental costs to fulfill these contracts that should be capitalized. Additionally, there are no material contract assets or receivables as the Company does not typically enter into long-term revenue contracts with customers. As of December 31, 2021 and 2020, the Bank had $ 2.0 million and $ 2.6 million, respectively, of contract liabilities which are reported in accrued expenses and other liabilities on the consolidated balance sheets. During the years ended December 31, 2021 and 2020, the Bank recognized $ 605,000 and $ 390,000 , respectively, of revenue relating to these contract liabilities and expects to recognize the remaining liabilities as revenue ratably through June 2025. Accounting Standards Adopted in 2021 ASU No. 2021-06, Presentation of Financial Statements (Topic 205), Financial Services - Depository and Lending (Topic 942), and Financial Services - Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The guidance in this update amends various SEC paragraphs relating to financial disclosures. This update is an alignment of SEC and GAAP reporting and was effective upon issuance. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. Issued but Not Adopted Accounting Standards ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 sets forth the CECL model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses. In addition, the update amends the accounting for credit losses on AFS securities. As an SEC registrant with smaller reporting company filing status as determined on June 30, 2019, CECL is effective for the Company January 1, 2023. The Company continues to evaluate the impact of this ASU on the consolidated financial statements and disclosures. In that regard, the Company has formed a cross-functional working group and is currently working through an implementation plan. The implementation plan includes an assessment of data, model development and documentation, documentation of processes, and implementation of a third-party vendor solution to assist in the adoption of ASU 2016-13 . ASU No. 2021-05, Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments. The guidance issued in this update addressed lessors’ concerns by amending the lease classification requirements. The amendments in this update address an issue related to a lessor’s accounting for certain leases with variable lease payments. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if two criteria are met. Those criteria are that the lease would have been classified as a sales-type lease or a direct financing lease in accordance with GAAP, and that the lessor would have otherwise recognized a day-one loss. This update is effective for fiscal years beginning after December 15, 2021, and interim periods within those annual periods. The Company adopted this standard on January 1, 2022. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements. ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this update address how to determine whether a contract liability is recognized by the acquirer in a business combination. The amendment also resolves the inconsistency of post-acquisition revenue recognition by providing specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This standard will be adopted by the Company on January 1, 2023. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements. Reclassification Certain amounts in the 2020 consolidated financial statements have been reclassified to conform to the 2021 presentation. These changes in presentation did not have a material impact on the Company’s financial condition or results of operations. 77 Table of Contents 2. Securities Securities held for indefinite periods of time are classified as AFS and carried at estimated fair value. Investment activity for the year ended December 31, 2021, included $ 389.5 million of securities purchased, partially offset by $ 113.5 million in sales and $ 99.2 million in maturities, principal repayments, and calls. The net unrealized gain on the securities AFS portfolio decreased $ 13.5 million for the year ended December 31, 2021, resulting in an unrealized loss of $ 4.8 million as of December 31, 2021. The amortized cost and estimated fair value of securities AFS are summarized in the following tables: December 31, 2021 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Securities AFS: Mortgage-backed securities $ 386,874 $ 1,112 $ ( 8,460 ) $ 379,526 Municipal bonds 227,248 3,665 ( 942 ) 229,971 U.S. Treasury securities 41,770 — ( 154 ) 41,616 U.S. agency securities 8,062 61 ( 58 ) 8,065 Total Securities AFS $ 663,954 $ 4,838 $ ( 9,614 ) $ 659,178 December 31, 2020 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Securities AFS: Mortgage-backed securities $ 271,709 $ 3,450 $ ( 332 ) $ 274,827 Municipal bonds 207,834 5,498 ( 51 ) 213,281 U.S. Treasury securities — — — — U.S. agency securities 9,902 200 ( 4 ) 10,098 Total Securities AFS $ 489,445 $ 9,148 $ ( 387 ) $ 498,206 The amortized cost and estimated fair value of debt securities as of December 31, 2021, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers have the right to call or repay obligations with or without call or prepayment penalties. (in thousands) Amortized Cost Fair Value Within one year $ 9,819 $ 9,886 After one year but within five years 71,026 71,293 After five years but within ten years 65,419 65,956 After ten years 517,690 512,043 Total $ 663,954 $ 659,178 78 Table of Contents Information pertaining to securities with gross unrealized losses as of December 31, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position is described as follows: Less than twelve months Twelve months or more (in thousands) Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value December 31, 2021 Securities AFS: Mortgage-backed securities $ ( 6,627 ) $ 282,705 $ ( 1,833 ) $ 47,171 Municipal bonds ( 918 ) 51,333 ( 24 ) 2,577 U.S. Treasury securities ( 154 ) 41,616 — — U.S. agency securities ( 58 ) 4,913 — — Total Securities AFS $ ( 7,757 ) $ 380,567 $ ( 1,857 ) $ 49,748 December 31, 2020 Securities AFS: Mortgage-backed securities $ ( 332 ) $ 72,367 $ — $ — Municipal bonds ( 51 ) 9,466 — — U.S. Treasury securities — — — — U.S. agency securities ( 4 ) 4,996 — — Total Securities AFS $ ( 387 ) $ 86,829 $ — $ — As of December 31, 2021, the Company held 185 securities that were in unrealized loss positions. The aggregate unrealized loss of these securities as of December 31, 2021, was 1.45 % of the amortized cost basis of the total securities AFS portfolio. Management and the Asset-Liability Management Committee continually monitor the securities portfolio and are able to effectively measure and monitor the unrealized loss positions on these securities. Management does not intend to sell these securities prior to recovery, and it is more likely than not that the Company will have the ability to hold them, primarily due to adequate liquidity, until each security has recovered its cost basis. The unrealized losses on these securities have been determined by management to be a function of the movement of interest rates since the time of purchase. Based on a review of available information, including recent changes in interest rates and credit rating information, management believes the decline in fair value of these securities is temporary. The Company does not consider these securities to have OTTI. Management evaluates securities for OTTI on at least a quarterly basis and more frequently if economic or market concerns merit such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; and (3) whether the Company intends to, and it is more likely than not that it will be able to, retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Additionally, the Company annually performs a detailed credit review of the municipal securities owned to identify any potential credit concerns. There were no OTTI losses on debt securities related to credit losses recognized during the years ended December 31, 2021 and December 31, 2020. The proceeds from sales and calls of securities AFS and their gross gain (loss) for the years ended December 31, 2021 and 2020, are shown below: Years Ended December 31, (in thousands) 2021 2020 Proceeds (1) $ 120,374 $ 151,253 Gross gain 859 1,723 Gross loss ( 665 ) ( 282 ) (1) The proceeds include the gross gain and loss. Pledged Securities Securities with carrying values of approximately $ 118.6 million and $ 105.1 million were pledged to secure public entity deposits, as of December 31, 2021 and December 31, 2020, respectively. 79 Table of Contents 3. Loans and Asset Quality Loans Loans HFI by category and loans HFS are summarized below: December 31, (in thousands) 2021 2020 Real estate: Commercial real estate $ 670,293 $ 556,769 One-to-four family residential 474,420 442,889 Construction and development 106,339 127,321 Commercial and industrial 311,373 250,428 SBA PPP, net of deferred income 17,550 118,447 Tax-exempt 80,726 68,666 Consumer 23,131 23,926 Total loans HFI $ 1,683,832 $ 1,588,446 Total loans HFS $ 4,290 $ 29,116 Deferred loan origination fees, including PPP loan fees, net of certain direct costs, were $ 1.6 million and $ 3.1 million as of December 31, 2021 and 2020, respectively. Deferred PPP loan fees were $ 626,000 and $ 2.8 million as of December 31, 2021 and 2020, respectively. Related Party Transactions In the ordinary course of business, certain officers, directors, and principal shareholders, as well as their immediate family members and their affiliates, maintain a variety of banking relationships with the Company. An analysis of loan activity to these related parties is as follows: Years Ended December 31, (in thousands) 2021 2020 Balance - beginning of period $ 33,191 $ 30,609 New loans/changes in relationships 12,493 23,431 Repayments/changes in relationships ( 21,892 ) ( 20,849 ) Balance - end of period $ 23,792 $ 33,191 Concentrations of Credit Risk The majority of the lending activity occurs within the Bank’s Louisiana markets. The Bank maintains a diversified loan portfolio with a focus on commercial real estate, one-to-four family residential real estate, and commercial and industrial loans. Substantially all of the Bank’s real estate loans are secured by properties located within Louisiana. 80 Table of Contents Allowance for Loan Losses The following table summarizes the activity in the allowance for loan losses by category for the year ended December 31, 2021: (in thousands) Beginning Balance Provision for Loan Losses Loans Charged-off Recoveries Ending Balance Real estate: Commercial real estate $ 5,798 $ 1,401 $ ( 450 ) $ — $ 6,749 One-to-four family residential 5,390 ( 23 ) ( 10 ) 18 5,375 Construction and development 1,699 ( 375 ) — 2 1,326 Commercial and industrial 3,631 856 ( 74 ) 27 4,440 SBA PPP, net of deferred income 318 ( 293 ) — — 25 Tax-exempt 680 69 — — 749 Consumer 435 265 ( 351 ) 163 512 Total allowance for loan losses $ 17,951 $ 1,900 $ ( 885 ) $ 210 $ 19,176 The following table summarizes the activity in the allowance for loan losses by category for the year ended December 31, 2020: (in thousands) Beginning Balance Provision for Loan Losses Loans Charged-off Recoveries Ending Balance Real estate: Commercial real estate $ 3,454 $ 2,344 $ — $ — $ 5,798 One-to-four family residential 3,323 2,057 — 10 5,390 Construction and development 1,211 501 ( 14 ) 1 1,699 Commercial and industrial 5,175 551 ( 2,184 ) 89 3,631 SBA PPP, net of deferred income — 318 — — 318 Tax-exempt 334 346 — — 680 Consumer 440 176 ( 355 ) 174 435 Total allowance for loan losses $ 13,937 $ 6,293 $ ( 2,553 ) $ 274 $ 17,951 81 Table of Contents The balance in the allowance for loan losses and the related recorded investment in loans by category as of December 31, 2021, are as follows: (in thousands) Individually Evaluated for Impairment Collectively Evaluated for Impairment Acquired with Deteriorated Credit Quality Total Allowance for loan losses: Real estate: Commercial real estate $ 68 $ 6,681 $ — $ 6,749 One-to-four family residential — 5,375 — 5,375 Construction and development — 1,326 — 1,326 Commercial and industrial 40 4,400 — 4,440 SBA PPP, net of deferred income — 25 — 25 Tax-exempt — 749 — 749 Consumer 118 394 — 512 Total allowance for loan losses $ 226 $ 18,950 $ — $ 19,176 Loans: Real estate: Commercial real estate $ 5,011 $ 665,282 $ — $ 670,293 One-to-four family residential 434 473,986 — 474,420 Construction and development 501 105,838 — 106,339 Commercial and industrial 77 311,296 — 311,373 SBA PPP, net of deferred income — 17,550 — 17,550 Tax-exempt — 80,726 — 80,726 Consumer 126 23,005 — 23,131 Total loans HFI $ 6,149 $ 1,677,683 $ — $ 1,683,832 The balance in the allowance for loan losses and the related recorded investment in loans by category as of December 31, 2020, are as follows: (in thousands) Individually Evaluated for Impairment Collectively Evaluated for Impairment Acquired with Deteriorated Credit Quality Total Allowance for loan losses: Real estate: Commercial real estate $ 268 $ 5,530 $ — $ 5,798 One-to-four family residential 45 5,345 — 5,390 Construction and development — 1,699 — 1,699 Commercial and industrial 540 3,091 — 3,631 SBA PPP, net of deferred income — 318 — 318 Tax-exempt — 680 — 680 Consumer 111 324 — 435 Total allowance for loan losses $ 964 $ 16,987 $ — $ 17,951 Loans: Real estate: Commercial real estate $ 3,617 $ 553,152 $ — $ 556,769 One-to-four family residential 1,126 441,763 — 442,889 Construction and development — 127,321 — 127,321 Commercial and industrial 3,979 246,449 — 250,428 SBA PPP, net of deferred income — 118,447 — 118,447 Tax-exempt — 68,666 — 68,666 Consumer 114 23,812 — 23,926 Total loans HFI $ 8,836 $ 1,579,610 $ — $ 1,588,446 82 Table of Contents Past Due and Nonaccrual Loans A summary of current, past due, and nonaccrual loans as of December 31, 2021, is as follows: Accruing (in thousands) Current 30-89 Days Past Due 90 Days or More Past Due Nonaccrual Total Loans Real estate: Commercial real estate $ 669,781 $ 461 $ — $ 51 $ 670,293 One-to-four family residential 473,658 546 — 216 474,420 Construction and development 106,300 — 39 — 106,339 Commercial and industrial 311,321 39 — 13 311,373 SBA PPP, net of deferred income 17,550 — — — 17,550 Tax-exempt 80,726 — — — 80,726 Consumer 23,121 10 — — 23,131 Total loans HFI $ 1,682,457 $ 1,056 $ 39 $ 280 $ 1,683,832 A summary of current, past due, and nonaccrual loans as of December 31, 2020, is as follows: Accruing (in thousands) Current 30-89 Days Past Due 90 Days or More Past Due Nonaccrual Total Loans Real estate: Commercial real estate $ 554,861 $ 62 $ — $ 1,846 $ 556,769 One-to-four family residential 442,096 219 — 574 442,889 Construction and development 127,258 63 — — 127,321 Commercial and industrial 249,453 93 — 882 250,428 SBA PPP, net of deferred income 118,447 — — — 118,447 Tax-exempt 68,666 — — — 68,666 Consumer 23,891 27 3 5 23,926 Total loans HFI $ 1,584,672 $ 464 $ 3 $ 3,307 $ 1,588,446 83 Table of Contents Impaired Loans Impaired loans include TDRs and performing and nonperforming loans. Information pertaining to impaired loans as of December 31, 2021, is as follows: (in thousands) Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Real estate: Commercial real estate $ 1,599 $ 1,595 $ — $ 1,969 $ 78 One-to-four family residential 483 434 — 539 19 Construction and development 501 501 — 400 32 Commercial and industrial — — — 355 — SBA PPP, net of deferred income — — — — — Tax-exempt — — — — — Consumer 8 8 — 4 1 Total with no related allowance 2,591 2,538 — 3,267 130 With allowance recorded: Real estate: Commercial real estate 3,416 3,416 68 2,111 64 One-to-four family residential — — — 145 — Construction and development — — — — — Commercial and industrial 85 77 40 1,570 5 SBA PPP, net of deferred income — — — — — Tax-exempt — — — — — Consumer 118 118 118 112 5 Total with related allowance 3,619 3,611 226 3,938 74 Total impaired loans $ 6,210 $ 6,149 $ 226 $ 7,205 $ 204 Information pertaining to impaired loans as of December 31, 2020, is as follows: (in thousands) Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Real estate: Commercial real estate $ 1,459 $ 1,428 $ — $ 1,417 $ 68 One-to-four family residential 891 827 — 987 33 Construction and development — — — — — Commercial and industrial 92 92 — 1,173 5 SBA PPP, net of deferred income — — — — — Tax-exempt — — — — — Consumer 1 1 — 2 — Total with no related allowance 2,443 2,348 — 3,579 106 With allowance recorded: Real estate: Commercial real estate 2,402 2,189 268 1,533 26 One-to-four family residential 306 299 45 234 1 Construction and development — — — 8 — Commercial and industrial 4,854 3,887 540 6,521 139 SBA PPP, net of deferred income — — — — — Tax-exempt — — — — — Consumer 114 113 111 103 5 Total with related allowance 7,676 6,488 964 8,399 171 Total impaired loans $ 10,119 $ 8,836 $ 964 $ 11,978 $ 277 84 Table of Contents Troubled Debt Restructurings The restructuring of a loan is considered a TDR if the borrower is experiencing financial difficulties and the bank has granted a concession. Concessions grant terms to the borrower that would not be offered for new debt with similar risk characteristics. Concessions typically include interest rate reductions or below market interest rates, revising amortization schedules to defer principal and interest payments, and other changes necessary to provide payment relief to the borrower and minimize the risk of loss. There were no unfunded commitments to extend credit related to these loans during the years ended December 31, 2021 and 2020. A summary of current, past due, and nonaccrual TDR loans as of December 31, 2021, is as follows: (dollars in thousands) Current 30-89 Days Past Due 90 Days or More Past Due Nonaccrual (1) Total TDRs Real estate: Commercial real estate $ 3,634 $ — $ — $ — $ 3,634 One-to-four family residential 289 — — — 289 Construction and development — — — — — Commercial and industrial — — — — — SBA PPP, net of deferred income — — — — — Tax-exempt — — — — — Consumer 21 — — — 21 Total $ 3,944 $ — $ — $ — $ 3,944 Number of TDR loans 11 — — 1 12 (1) This loan has a contractual obligation to the Company despite carrying a zero balance. A summary of current, past due, and nonaccrual TDR loans as of December 31, 2020, is as follows: (dollars in thousands) Current 30-89 Days Past Due 90 Days or More Past Due Nonaccrual Total TDRs Real estate: Commercial real estate $ 1,151 $ — $ — $ 1,212 $ 2,363 One-to-four family residential 303 — — — 303 Construction and development — — — — — Commercial and industrial — — — 5 5 SBA PPP, net of deferred income — — — — — Tax-exempt — — — — — Consumer — — — — — Total $ 1,454 $ — $ — $ 1,217 $ 2,671 Number of TDR loans 8 — — 4 12 85 Table of Contents A summary of loans modified as TDRs that occurred during the years ended December 31, 2021 and 2020, is as follows: December 31, 2021 December 31, 2020 Recorded Investment Recorded Investment (dollars in thousands) Loan Count Pre Modification Post Modification Loan Count Pre Modification Post Modification Real estate: Commercial real estate 1 $ 2,174 $ 2,184 — $ — $ — One-to-four family residential — — — 1 90 91 Construction and development — — — — — — Commercial and industrial — — — — — — SBA PPP, net of deferred income — — — — — — Tax-exempt — — — — — — Consumer 2 20 27 — — — Total 3 $ 2,194 $ 2,211 1 $ 90 $ 91 The TDRs described above increased the allowance for loan losses by $ 14,000 and $ 12,000 during the years ended December 31, 2021 and 2020, respectively. Additionally, there were no charge-offs of TDRs in 2021 or 2020. There were no TDRs that subsequently defaulted in 2021 or 2020. Credit Quality Indicators Loans are categorized based on the degree of risk inherent in the credit and the ability of the borrower to service the debt. A description of the general characteristics of the Bank’s risk rating grades follows: Pass - These loans are of satisfactory quality and do not require a more severe classification. Special Mention - This category includes loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan. Substandard - Loans in this category have well defined weaknesses which jeopardize normal repayment of principal and interest. Doubtful - Loans in this category have well defined weaknesses that make full collection improbable. Loss - Loans classified in this category are considered uncollectible and charged-off to the allowance for loan losses. The following table summarizes loans by risk rating as of December 31, 2021: (in thousands) Pass Special Mention Substandard Doubtful Loss Total Real estate: Commercial real estate $ 666,838 $ 499 $ 2,956 $ — $ — $ 670,293 One-to-four family residential 473,638 321 461 — — 474,420 Construction and development 105,838 — 501 — — 106,339 Commercial and industrial 306,925 1,551 2,897 — — 311,373 SBA PPP, net of deferred income 17,550 — — — — 17,550 Tax-exempt 80,726 — — — — 80,726 Consumer 23,003 21 107 — — 23,131 Total loans HFI $ 1,674,518 $ 2,392 $ 6,922 $ — $ — $ 1,683,832 86 Table of Contents The following table summarizes loans by risk rating as of December 31, 2020: (in thousands) Pass Special Mention Substandard Doubtful Loss Total Real estate: Commercial real estate $ 551,954 $ 555 $ 4,260 $ — $ — $ 556,769 One-to-four family residential 441,374 486 1,029 — — 442,889 Construction and development 126,542 — 779 — — 127,321 Commercial and industrial 245,043 1,310 4,075 — — 250,428 SBA PPP, net of deferred income 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 Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer if all conditions of the commitment have been met. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s evaluation of the customer’s ability to repay. Unfunded loan commitments totaled approximately $ 357.9 million and $ 283.3 million as of December 31, 2021 and 2020, respectively. Standby letters of credit are conditional commitments issued by the Company 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. Commitments under standby letters of credit totaled approximately $ 12.5 million and $ 10.5 million as of December 31, 2021 and 2020, respectively. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. 4. Premises and Equipment, Net Components of premises and equipment were as follows: December 31, (in thousands) 2021 2020 Land $ 17,210 $ 16,331 Buildings 31,573 29,854 Leasehold improvements 2,732 2,725 Furniture and equipment 13,136 12,541 Vehicles 377 377 Computer equipment 3,578 3,287 Projects in process 4,130 4,702 Total premises and equipment 72,736 69,817 Less: Accumulated depreciation ( 24,680 ) ( 22,893 ) Premises and equipment, net $ 48,056 $ 46,924 Depreciation expense amounted to approximately $ 1.9 million for each of the years ended December 31, 2021 and 2020 . 87 Table of Contents 5. Deposits Deposits were $ 2.91 billion and $ 2.34 billion as of December 31, 2021 and December 31, 2020, respectively. This increase was a result of customers receiving funds from government stimulus programs, customers depositing the proceeds from their PPP2 loans, and customers maintaining higher deposit balances. Deposits are summarized below: December 31, (in thousands) 2021 2020 Noninterest-bearing demand deposits $ 1,149,672 $ 943,615 Interest-bearing deposits: NOW accounts 503,383 402,572 Money market accounts 733,044 506,902 Savings accounts 191,076 146,264 Time deposits less than or equal to $250,000 243,596 247,665 Time deposits greater than $250,000 89,577 93,342 Total interest-bearing deposits 1,760,676 1,396,745 Total deposits $ 2,910,348 $ 2,340,360 As of December 31, 2021, the scheduled maturities of all outstanding time deposits were as follows: Years ending December 31, Amount (in thousands) 2022 $ 221,509 2023 56,118 2024 19,119 2025 12,044 2026 10,666 Thereafter 13,717 $ 333,173 As of December 31, 2021 and December 31, 2020, deposits from directors, executive officers, their immediate family members, and their affiliates totaled approximately $ 71.8 million and $ 81.0 million, respectively. 6. Other Borrowed Funds The Company has established various lines of credit with the FHLB of Dallas and other correspondent banks to provide additional sources of operating funds. As of December 31, 2021, total borrowing capacity from these sources was $ 849.6 million. As of December 31, 2021 and 2020, the Company had no borrowings under these agreements. 7. Leases The Company determines if an arrangement is a lease at inception of the contract and assesses the appropriate classification as operating or financing. Operating leases with terms greater than one year are included in right-of-use assets and lease liabilities on the Company’s consolidated balance sheets. Agreements with both lease and non-lease components are accounted for separately, with only the lease component capitalized. Operating right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the term using the interest rate implicit in the contract, when available, or the Company’s incremental collateralized borrowing rate with similar terms. The Company maintains six operating leases on land and buildings for banking center facilities under long-term leases. These operating leases contain renewal options for periods ranging from three to five years that expire at various dates through October 31, 2031, with no residual value guarantees. Future obligations relating to the exercise of renewal options is included in the measurement if, based on the judgment of management, the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of the renewal rate compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. Management reasonably plans to exercise all options, and as such, all renewal options are included in the measurement of the right-of-use assets and operating lease liabilities. 88 Table of Contents The Company elects to recognize the lease payments on leases with terms of one year or less in its consolidated statements of income on a straight-line basis over the lease term. For each of the years ended December 31, 2021 and 2020, operating lease expenses were $ 549,000 . Operating lease expenses are included as a component of occupancy and equipment expenses within the accompanying consolidated statements of income. Cash paid for amounts included in the measurement of lease liabilities for operating leases totaled $ 530,000 and $ 520,000 for the twelve months ended December 31, 2021 and 2020, respectively. The table below summarizes other information related to the Company’s operating leases as of and for the year ended December 31, 2021: As of and for the Year Ended December 31, 2021 Weighted average remaining operating lease term 8.2 years Weighted average operating lease discount rate 3.4 % Future obligations over the primary and renewal option terms of the Company’s long-term operating leases as of December 31, 2021, were as follows: Years Ending December 31, Amount (in thousands) 2022 $ 539 2023 541 2024 541 2025 565 2026 514 Thereafter 1,734 Total lease payments 4,434 Less: Imputed interest ( 592 ) Present value of lease liabilities $ 3,842 The Company’s obligations under financing leases are not material and have not been included in assets and liabilities in the financial statements. 8. Income Tax Expense The components of income tax expense for the years ended December 31, 2021 and 2020, were as follows: Years Ended December 31, (in thousands) 2021 2020 Current tax expense $ 7,881 $ 6,193 Deferred tax expense (benefit) ( 773 ) 130 Income tax expense $ 7,108 $ 6,323 89 Table of Contents The source and tax effect of items reconciling income tax expense to the amount computed by applying the federal income tax rates in effect to income before income tax expense for the years ended December 31, 2021 and 2020, are as follows: December 31, 2021 2020 (dollars in thousands) Amount Percent Amount Percent Income before income tax expense $ 40,060 100.0 % $ 34,468 100.0 % U.S. federal income tax expense 8,413 21.0 % 7,238 21.0 % Nontaxable income ( 1,347 ) ( 3.4 ) % ( 1,045 ) ( 3.0 ) % Nondeductible expenses 38 0.1 % 45 0.1 % Other 4 — % 85 0.2 % Income tax expense $ 7,108 17.7 % $ 6,323 18.3 % The Company records deferred income taxes on the tax effect of changes in temporary differences. Deferred tax assets (liabilities) are subject to a valuation allowance unless their realization is more likely than not. The deferred tax assets (liabilities) were comprised of the following as of December 31, 2021 and 2020: December 31, (in thousands) 2021 2020 Depreciation $ ( 1,964 ) $ ( 1,953 ) Unrealized gain on securities — ( 1,840 ) FHLB of Dallas stock dividends ( 20 ) ( 19 ) Gross deferred tax liability ( 1,984 ) ( 3,812 ) Allowance for loan losses 4,025 3,400 Allowance for operational losses 57 74 Health insurance self fund 94 211 Deferred compensation 554 570 Unrealized loss on securities 1,003 — Equity security valuation 33 ( 5 ) Advance payment 350 150 Accrued bonus 368 220 Other 100 139 Gross deferred tax asset 6,584 4,759 Net deferred tax asset (liability) $ 4,600 $ 947 9. Employee Benefits The Company adopted a contributory retirement plan for employees of Red River Bank effective March 1, 1999, and amended as of December 22, 2015. The plan covers all employees who meet the length of service and the number of hours worked requirements and elect to participate. Discretionary employer contributions during the years ended December 31, 2021 and 2020, totaled approximately $ 721,000 and $ 625,000 , respectively. The Bank has purchased life insurance policies on certain key employees. The Bank is the beneficiary of the BOLI policies, which have cash surrender value and death benefit components. The Bank uses a portion of the income generated from the BOLI policies to fund the expenses for nonqualified, noncontributory deferred compensation agreements with certain employees. The deferred compensation agreements provide post-retirement benefit payments to those employees. The liability related to the deferred compensation agreements was $ 2.7 million and $ 2.3 million as of December 31, 2021 and 2020, respectively, and is recorded in accrued expenses and other liabilities on the consolidated balance sheets. 10. Stock-Based Compensation Plans Equity Incentive Plans On April 17, 2008, the Company adopted its 2008 Equity Incentive Plan (“2008 Plan”), which provided for the grant of 90 Table of Contents stock-based arrangements for key employees and non-employee members of the Company’s Board of Directors. The Compensation Committee of the Company’s Board of Directors administers the plan, makes determinations with respect to participation, and authorizes stock-based awards under the plan. To date, the Committee has awarded stock options and restricted stock awards as detailed further below. The 2008 Plan expired on December 31, 2018, and no new awards were granted under this plan after that date. As of December 31, 2020, all granted stock options under the 2008 Plan were exercised. On October 25, 2018, the Company adopted its 2018 Equity Incentive Plan (“2018 Plan”), which was approved by the Company’s shareholders in April of 2019. The 2018 Plan was adopted in anticipation of the expiration of the 2008 Plan and provides for the granting of stock-based awards to key employees, directors, and consultants. Similar to the 2008 Plan, the Compensation Committee of the Company’s Board of Directors administers the 2018 Plan, makes determinations with respect to participation, and authorizes stock-based awards under the plan. The maximum number of shares of the Company’s common stock available for issuance under the 2018 Plan was 200,000 shares . The status of the Company’s 2018 Plan is presented below: 2018 Plan Number of Shares Awards available for issuance- December 31, 2019 194,025 Awards granted ( 5,625 ) Awards available for issuance - December 31, 2020 188,400 Awards granted ( 7,400 ) Awards forfeited 100 Awards available for issuance - December 31, 2021 181,100 All disclosures for stock options and restricted stock shown below relate to outstanding awards under the 2008 and 2018 Plans. Disclosures for stock options and restricted stock awards are shown separately due to their dissimilar characteristics. Stock Options In 2020, all outstanding options granted under the 2008 Plan were exercised. The options granted under the 2008 Plan were to purchase common stock at an exercise price not less than the fair market value of the common stock at the date of the grant. The granted options vested and became exercisable in twenty percent increments on the first through the fifth anniversaries of the date of the grant and would have expired and may not have been exercised later than ten years following the date of the grant. The options were set to expire on various dates through 2022. No options have been granted under the 2018 Plan. The fair value of options granted was estimated as of the date granted using the Black Scholes model. No options were granted in 2020 or 2021. The Company funds the stock options from authorized, but unissued, shares. The status of the Company’s stock option awards is presented below: Stock Options Number of Shares Exercise Price Range Weighted Average Price Outstanding - December 31, 2019 20,500 $ 14.31 - $ 17.33 $ 15.78 Exercised (1) ( 20,500 ) $ 14.31 - $ 17.33 $ 15.78 Outstanding - December 31, 2020 — $ — Exercised — $ — Outstanding - December 31, 2021 — $ — (1) A total of 5,780 shares of the Company’s common stock were surrendered in lieu of payment of a portion of the cash exercise price for options exercised during 2020, resulting in the net issuance upon exercise of an aggregate of 14,720 shares of the Company’s common stock. As of December 31, 2020, all options were fully vested and exercised. There were no outstanding options as of December 31, 2021 and 2020. 91 Table of Contents Restricted Stock Awards The restricted stock awards issued under the 2008 and 2018 Plans provide common stock to recipients at the grant date. The restrictions vest in twenty percent increments on the first through fifth anniversaries of the grant date. Compensation expense for these grants is recognized ratably over the vesting period of the awards based on the fair value of the stock at the grant date. During 2021, the Committee granted 7,400 restricted stock awards with a weighted average fair value of $ 50.55 , and 100 restricted stock awards with a weighted average fair value of $ 42.35 were forfeited. For the year ended December 31, 2021, the compensation expense for the vested restricted stock was $ 269,000 . As of December 31, 2021, there was approximately $ 705,000 of total unrecognized compensation cost related to restricted stock awards. That cost is expected to be recognized over a weighted average period of 4.5 years. During 2020, the Committee granted 5,625 restricted stock awards with a weighted average fair value of $ 42.35 . For the year ended December 31, 2020, the compensation expense for the vested restricted stock was $ 276,000 . As of December 31, 2020, there was approximately $ 604,000 of total unrecognized compensation cost related to restricted stock awards. That cost is expected to be recognized over a weighted average period of 4.5 years. The Company funds the restricted stock from authorized, but unissued, shares. The status of the Company’s nonvested restricted stock is presented below: Nonvested Restricted Stock Number of Shares Weighted Average Grant Date Fair Value Nonvested - December 31, 2019 20,605 $ 37.34 Granted 5,625 $ 42.35 Vested ( 8,575 ) $ 33.65 Nonvested - December 31, 2020 17,655 $ 40.73 Granted 7,400 $ 50.55 Vested ( 6,820 ) $ 38.40 Forfeited ( 100 ) $ 42.35 Nonvested - December 31, 2021 18,135 $ 45.61 Director Compensation Program The Company has a Director Compensation Program. This program allows directors the option of receiving a portion of their payment for director fees, for attendance at board meetings, in Company stock. Under the program, board fees are earned and expensed in the year board services are rendered, and the related stock is issued the following year. The Director Compensation Program stock earned and the issuance of shares as board compensation for the years ended December 31, 2021 and 2020, are as follows: Years Ended December 31, (dollars in thousands) 2021 2020 Share-based board compensation earned $ 50 $ 62 Issuance of shares of common stock as board compensation: Number of shares issued 1,075 1,591 Equity impact of shares issued $ 56 $ 87 11. Self-Insurance The Company is self-insured for group health insurance. The Company’s liability is limited to the aggregate policy deductible of $ 135,000 per individual with a maximum of approximately $ 4.2 million for the group. The Company has reflected its estimated liability for known and incurred but not reported claims in the accompanying financial statements. 92 Table of Contents 12. Off-Balance Sheet Contractual Obligations and Contingencies The Company is a party to financial instruments with off-balance sheet risk in the normal course of business. The contract or notional amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments. The Company’s exposure is represented by the contractual amount of these commitments. Investment Commitment In 2014, the Company committed to an investment into an SBIC limited partnership. As of December 31, 2021, there was a $ 226,000 outstanding commitment to this partnership. In 2020, the Company committed to an additional investment into an SBIC limited partnership. As of December 31, 2021, there was a $ 5.0 million outstanding commitment to this partnership. In the second quarter of 2021, the Company committed to an investment into a bank technology limited partnership. As of December 31, 2021, there was an $ 827,000 outstanding commitment to this partnership. Purchase Commitment The Company has committed to an agreement to buy real estate for approximately $ 2.3 million as of December 31, 2021. Construction Commitment The Company has committed to a construction contract for approximately $ 457,000 as of December 31, 2021. Contingencies The Company and the Bank are involved, from time to time, in various legal matters arising in the ordinary course of business. While the outcome of these claims or litigation cannot be determined at this time, in the opinion of management, neither the Company nor the Bank are involved in such legal proceedings that the resolution is expected to have a material adverse effect on the consolidated results of operations, financial condition, or cash flows. 13. Fair Value The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair Value Disclosure Securities AFS, loans HFS, and equity securities are recorded at fair value on a recurring basis. Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, foreclosed assets, and other certain assets. The nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. ASC 820, Fair Value Measurements and Disclosures indicates that assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels: • Level 1 pricing represents quotes on the exact financial instrument that is traded in active markets. Quoted prices on actively traded equities, for example, are in this category. • Level 2 pricing is derived from observable data including market spreads, current and projected rates, prepayment data, and credit quality. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. • Level 3 pricing is derived without the use of observable data. In such case, mark-to-model strategies are typically employed. Often, these types of instruments have no active market, possess unique characteristics, and are thinly traded. The Company used the following methods and significant assumptions to estimate fair value: Investment Securities and other Stocks: The fair values for marketable securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). 93 Table of Contents Loans HFS: Residential mortgage loans originated and held for sale are carried at the lower of cost or estimated fair value on an individual basis. The fair values of mortgage loans HFS are based on commitments on hand from investors within the secondary market for loans with similar characteristics. As such, the fair value adjustments for mortgage loans HFS are recurring Level 2. Loans HFI: The Company does not record loans HFI at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using estimated fair value methodologies. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company considers the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the impaired loan as nonrecurring Level 3. Foreclosed Assets: Foreclosed assets, consisting of properties obtained through foreclosure or in satisfaction of loans, are reported at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). However, foreclosed assets are considered Level 3 in the fair value hierarchy because management has qualitatively applied a discount due to the size, supply of inventory, and the incremental discounts applied to the appraisals. Management also considers other factors, including changes in absorption rates, length of time the property has been on the market, and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals. Fair Value of Assets Measured on a Recurring Basis The table below presents the recorded amount of assets measured at fair value on a recurring basis: (in thousands) Fair Value Level 1 Level 2 Level 3 December 31, 2021 Loans HFS $ 4,290 $ — $ 4,290 $ — Securities AFS: Mortgage-backed securities 379,526 — 379,526 — Municipal bonds 229,971 — 229,971 — U.S. agency securities 8,065 — 8,065 — U.S. Treasury securities 41,616 — 41,616 — Equity securities 7,846 7,846 — — December 31, 2020 Loans HFS $ 29,116 $ — $ 29,116 $ — Securities AFS: Mortgage-backed securities 274,827 — 274,827 — Municipal bonds 213,281 — 213,281 — U.S. agency securities 10,098 — 10,098 — U.S. Treasury securities — — — — Equity securities 4,021 4,021 — — There were no transfers between Level 1, 2, or 3 during the years ended December 31, 2021 or 2020. Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis Financial Assets and Financial Liabilities : Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances. Financial assets measured at fair value on a nonrecurring basis include certain impaired collateral dependent loans reported at fair value of the underlying collateral if repayment is expected solely from the collateral. Prior to foreclosure of these loans, fair value of the collateral is estimated using Level 3 inputs based on customized discounting criteria. 94 Table of Contents The table below presents certain impaired loans that were remeasured and reported at fair value through the allowance for loan losses based upon the fair value of the underlying collateral during the reported periods: Years Ended December 31, (in thousands) 2021 2020 Carrying value of impaired loans before allowance for loan losses $ 4,114 $ 6,776 Specific allowance for loan losses ( 79 ) ( 856 ) Fair value of impaired loans $ 4,035 $ 5,920 The Company had no financial liabilities measured at fair value on a nonrecurring basis during the years ended December 31, 2021 and 2020. Nonfinancial Assets and Liabilities : Certain nonfinancial assets and nonfinancial liabilities are measured at fair value on a nonrecurring basis. These include certain foreclosed assets, which are remeasured and reported at fair value through a charge-off to allowance for loan losses upon initial recognition as a foreclosed asset. Subsequent to their initial recognition, certain foreclosed assets are remeasured at fair value through an adjustment included in other noninterest income. The fair value of foreclosed assets is estimated using Level 3 inputs based on customized discounting criteria less estimated selling costs. The following table presents foreclosed assets that were remeasured and reported at fair value during the reported periods: Years Ended December 31, (in thousands) 2021 2020 Foreclosed assets remeasured at initial recognition: Carrying value of foreclosed assets prior to remeasurement $ 266 $ 85 Charge-offs — — Fair value of foreclosed assets $ 266 $ 85 The following table presents foreclosed assets that were remeasured subsequent to initial recognition and reported at fair value during the reported periods: Years Ended December 31, (in thousands) 2021 2020 Foreclosed assets remeasured subsequent to initial recognition: Carrying value of foreclosed assets prior to remeasurement $ 133 $ 150 Write-downs ( 34 ) ( 17 ) Fair value of foreclosed assets $ 99 $ 133 The Company had no nonfinancial liabilities measured at fair value on a nonrecurring basis during the years ended December 31, 2021 and 2020. The unobservable inputs used for the Level 3 fair value measurements on a nonrecurring basis were as follows: (dollars in thousands) Fair Value Valuation Technique Unobservable Input Discount Ranges Weighted Average Discount December 31, 2021 Impaired loans $ 5,923 Discounted appraisals Collateral discounts and costs to sell 0 % - 100 % 3.67 % Foreclosed assets $ 660 Discounted appraisals Collateral discounts and costs to sell N/A N/A December 31, 2020 Impaired loans $ 7,872 Discounted appraisals Collateral discounts and costs to sell 0 % - 100 % 10.91 % Foreclosed assets $ 896 Discounted appraisals Collateral discounts and costs to sell 0 % - 13 % 1.86 % 95 Table of Contents Fair Value of Financial Instruments The carrying amounts and estimated fair values of financial instruments as of December 31, 2021 and 2020, were as follows: (in thousands) Carrying Amount Fair Value Level 1 Level 2 Level 3 December 31, 2021 Financial assets: Cash and due from banks $ 23,143 $ 23,143 $ 23,143 $ — $ — Interest-bearing deposits in other banks 761,721 761,721 761,721 — — Securities AFS 659,178 659,178 — 659,178 — Equity securities 7,846 7,846 7,846 — — Nonmarketable equity securities 3,450 3,450 — 3,450 — Loans HFS 4,290 4,290 — 4,290 — Loans HFI, net of allowance 1,664,656 1,674,900 — — 1,674,900 Accrued interest receivable 6,245 6,245 — — 6,245 Financial liabilities: Deposits 2,910,348 2,911,118 — 2,911,118 — Accrued interest payable 1,310 1,310 — 1,310 — December 31, 2020 Financial assets: Cash and due from banks $ 29,537 $ 29,537 $ 29,537 $ — $ — Interest-bearing deposits in other banks 417,664 417,664 417,664 — — Securities AFS 498,206 498,206 — 498,206 — Equity securities 4,021 4,021 4,021 — — Nonmarketable equity securities 3,447 3,447 — 3,447 — Loans HFS 29,116 29,116 — 29,116 — Loans HFI, net of allowance 1,570,495 1,578,398 — — 1,578,398 Accrued interest receivable 6,880 6,880 — — 6,880 Financial liabilities: Deposits 2,340,360 2,344,969 — 2,344,969 — Accrued interest payable 1,774 1,774 — 1,774 — 14. Regulatory Capital Requirements Red River Bank The Bank is subject to various regulatory capital requirements administered by the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s and the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Bank is subject to Basel III capital guidelines. Basel III requires the Bank to maintain certain minimum ratios to meet capital adequacy requirements. In addition, a CCB was established above the minimum regulatory capital requirements. Effective January 1, 2019, the final CCB was fully phased in at 2.50%. It is management’s belief that, as of December 31, 2021, the Bank met all capital adequacy requirements under Basel III. Management expects that the capital ratios for the Bank under Basel III will continue to exceed capital adequacy requirements. The most recent notification from the FDIC (as of June 30, 2021) categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. 96 Table of Contents Capital amounts and ratios for Red River Bank as of December 31, 2021 and 2020, are presented in the following table: Regulatory Requirements Actual Minimum Minimum Plus CCB (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio December 31, 2021 Total Risk-Based Capital $ 305,771 17.06 % $ 143,372 8.00 % $ 188,176 10.50 % Tier I Risk-Based Capital $ 286,595 15.99 % $ 107,529 6.00 % $ 152,333 8.50 % Common Equity Tier I Capital $ 286,595 15.99 % $ 80,647 4.50 % $ 125,451 7.00 % Tier I Leverage Capital $ 286,595 9.23 % $ 124,241 4.00 % $ 124,241 4.00 % December 31, 2020 Total Risk-Based Capital $ 271,061 17.17 % $ 126,307 8.00 % $ 165,778 10.50 % Tier I Risk-Based Capital $ 253,110 16.03 % $ 94,731 6.00 % $ 134,202 8.50 % Common Equity Tier I Capital $ 253,110 16.03 % $ 71,048 4.50 % $ 110,519 7.00 % Tier I Leverage Capital $ 253,110 9.98 % $ 101,495 4.00 % $ 101,495 4.00 % Red River Bancshares, Inc. As a general matter, bank holding companies are subject to Basel III capital adequacy requirements under applicable Federal Reserve regulations on a consolidated basis. However, bank holding companies that qualify as “small bank holding companies” under the Federal Reserve’s Small Bank Holding Company Policy Statement are exempt from the Federal Reserve’s consolidated capital adequacy guidelines at the holding company level and instead are evaluated at the bank level. In May 2018, the Economic Growth Act was enacted, and it increased the asset threshold for “small bank holding companies” from $1.0 billion to $3.0 billion. Because the Company had less than $3.0 billion in assets as of June 30, 2020, the last applicable measurement date, it was not subject to capital adequacy guidelines on a consolidated basis as of December 31, 2021. Although the minimum regulatory capital requirements are not currently applicable to the Company, the Company calculates these ratios for its own planning and monitoring purposes. Capital amounts and ratios for Red River Bancshares, Inc. as of December 31, 2021 and 2020, are presented in the following table: Actual (dollars in thousands) Amount Ratio December 31, 2021 Total Risk-Based Capital $ 319,553 17.83 % Tier I Risk-Based Capital $ 300,377 16.76 % Common Equity Tier I Capital $ 300,377 16.76 % Tier I Leverage Capital $ 300,377 9.67 % December 31, 2020 Total Risk-Based Capital $ 294,962 18.68 % Tier I Risk-Based Capital $ 277,011 17.55 % Common Equity Tier I Capital $ 277,011 17.55 % Tier I Leverage Capital $ 277,011 10.92 % Community Bank Leverage Ratio Framework 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 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 I leverage ratio of greater than 9.00% (subsequently temporarily reduced to 8.00% for 2020 and 8.50% for 2021 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. 97 Table of Contents As of December 31, 2021, the Company and the Bank qualify for the CBLR framework. Management does not intend to utilize the CBLR framework. 15. Equity Events Cash Dividends As a Louisiana corporation, the Company is subject to certain restrictions on dividends under the Louisiana Business Corporation Act. Generally, a Louisiana corporation may pay dividends to its shareholders unless, after giving effect to the dividend, either: (1) the corporation would not be able to pay its debts as they come due in the usual course of business; or (2) the corporation’s total assets would be less than the sum of its total liabilities and the amount that would be needed, if the corporation were to be dissolved at the time of the payment of the dividend, to satisfy the preferential rights of shareholders whose preferential rights are superior to those receiving the dividend. The Company’s status as a bank holding company also affects its ability to pay dividends in two additional ways. First, since the Company is a holding company with no material business activities of its own, its ability to pay dividends could become dependent upon the ability of Red River Bank to transfer funds to it in the form of dividends, loans, and advances. The Bank’s ability to pay dividends and make other distributions and payments to the Company is itself subject to various legal, regulatory, and other restrictions, and the present and future dividend policy of Red River Bank is subject to the discretion of its board of directors. Second, as a bank holding company, the Company’s payment of dividends must comply with the laws, regulations, and policies of the Federal Reserve. The Federal Reserve has issued a supervisory letter on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that: (1) the holding company’s net income for the past four quarters, net of any dividends previously paid during that period, is sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is consistent with the bank holding company’s capital needs, asset quality, and overall financial condition; and (3) the bank holding company will continue to meet, and is not in danger of failing to meet, minimum regulatory capital adequacy ratios. The ability of Red River Bank to pay dividends on its common stock is restricted by Louisiana Banking Law, the FDIA, and by FDIC regulations. In general, the board of directors of a Louisiana state bank may, quarterly, semiannually, or annually, declare or pay dividends on its outstanding capital stock, provided that the bank has surplus at least equal to 50.0% of its capital stock and such surplus will not be reduced below 50.0% following payment of the dividend. Prior approval of the OFI is required for a Louisiana state bank to pay any dividend that would exceed its net profits earned during the current year combined with its retained net profits of the immediately preceding year. In general terms, the FDIA and FDIC regulations restrict the payment of dividends when a bank is undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding a bank. The Bank and the Company have internal policies regarding dividends. Neither entity would ordinarily pay dividends if following the payment, the entity would not meet minimum capital adequacy plus the CCB requirements. The exception to this policy is in situations where the payment of a dividend from the Bank to the Company is necessary for the Company to be able to meet its obligations, and as long as, after such payment the Bank would still meet minimum capital adequacy requirements. Also, the Company’s internal policy requires that the Company maintain a common stockholders’ equity to total assets ratio of greater than 7.0 % and that trust preferred securities are less than 25.0 % of capital. Taking into consideration the Company’s performance and capital levels, dividends were paid in both 2021 and 2020. During 2021, a quarterly cash dividend of $ 0.07 per share was paid each quarter, resulting in $ 0.28 per share in cash dividends for the year ended December 31, 2021. During 2020, a quarterly cash dividend of $ 0.06 per share was paid each quarter, resulting in $ 0.24 per share in cash dividends for the year ended December 31, 2020. Stock Repurchase Program In the third quarter of 2021, the $ 3.0 million stock repurchase program that was approved in August 2020 was completed after reaching the purchase limit. Also in the third quarter of 2021, the Company’s Board of Directors approved the renewal of its stock repurchase program. The renewed repurchase program authorized the Company to purchase up to $ 5.0 million of its outstanding shares of common stock between September 1, 2021 and August 31, 2022, from time to time in the open market at prevailing prices and based on market conditions, or in privately negotiated transactions. In the fourth quarter of 2021, the Company entered into a privately negotiated stock repurchase agreement and repurchased 96,245 shares of common stock for $ 4.9 million, resulting in the purchase of the full amount authorized by that repurchase program. For the year ended December 31, 2021, the Company repurchased 153,553 shares of its common stock at an aggregate cost of $ 7.9 million. 16. Earnings Per Common Share Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits. Diluted EPS includes accrued but unissued shares relating to the Director Compensation Program, stock options, and restricted stock determined using 98 Table of Contents the treasury stock method. The dilutive EPS calculation assumes all outstanding stock options to purchase common stock have been exercised at the beginning of the year and the pro forma proceeds from the exercised options and restricted stock are used to purchase common stock at the average fair market valuation price. The computations of basic and diluted earnings per common share for the Company were as follows: Years Ended December 31, (in thousands, except share amounts) 2021 2020 Numerator: Net income - basic $ 32,952 $ 28,145 Net income - diluted $ 32,952 $ 28,145 Denominator: Weighted average shares outstanding - basic 7,281,136 7,322,158 Plus: Effect of Director Compensation Program 923 1,259 Plus: Effect of stock options and restricted stock 17,661 21,628 Weighted average shares outstanding - diluted 7,299,720 7,345,045 Earnings per common share: Basic $ 4.53 $ 3.84 Diluted $ 4.51 $ 3.83 99 Table of Contents 17. Quarterly Results of Operations (Unaudited) The following tables present certain unaudited consolidated quarterly financial information regarding the Company’s results of operations for each of the eight consecutive quarters in the fiscal years of 2021 and 2020. This information is derived from unaudited consolidated financial statements that include, in the Company’s opinion, all adjustments necessary for a fair presentation when read in conjunction with the Company’s consolidated financial statements and notes thereto as of and for the years ended December 31, 2021 and 2020. 2021 (in thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter Interest and dividend income $ 20,075 $ 19,442 $ 18,644 $ 19,178 Interest expense 1,300 1,333 1,397 1,587 Net interest income 18,775 18,109 17,247 17,591 Provision for loan losses 150 150 150 1,450 Net interest income after provision for loan losses 18,625 17,959 17,097 16,141 Noninterest income 5,672 5,643 6,403 6,775 Operating expenses 14,016 13,684 13,392 13,163 Income tax expense 1,771 1,780 1,869 1,688 Net income $ 8,510 $ 8,138 $ 8,239 $ 8,065 Earnings per share Basic $ 1.18 $ 1.12 $ 1.13 $ 1.10 Diluted $ 1.17 $ 1.12 $ 1.13 $ 1.10 2020 (in thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter Interest and dividend income $ 20,526 $ 19,249 $ 19,023 $ 18,580 Interest expense 1,865 1,954 2,067 2,492 Net interest income 18,661 17,295 16,956 16,088 Provision for loan losses 2,675 1,590 1,525 503 Net interest income after provision for loan losses 15,986 15,705 15,431 15,585 Noninterest income 6,193 6,420 5,823 4,731 Operating expenses 13,336 13,251 12,869 11,950 Income tax expense 1,582 1,589 1,531 1,621 Net income $ 7,261 $ 7,285 $ 6,854 $ 6,745 Earnings per share Basic $ 0.99 $ 0.99 $ 0.94 $ 0.92 Diluted $ 0.99 $ 0.99 $ 0.93 $ 0.92 100 Table of Contents 18. Parent Company Financial Statements PARENT COMPANY BALANCE SHEETS (dollars in thousands, except share amounts) December 31, 2021 2020 ASSETS Cash and cash equivalents $ 13,605 $ 23,868 Investment in subsidiary bank 284,368 261,577 Other assets 188 33 Total Assets $ 298,161 $ 285,478 LIABILITIES Accrued expenses and other liabilities 11 — Total Liabilities $ 11 $ — STOCKHOLDERS’ EQUITY Preferred stock, no par value: Authorized - 1,000,000 shares; None Issued and Outstanding — — Common stock, no par value: Authorized - 30,000,000 shares; Issued and Outstanding - 7,180,155 and 7,325,333 shares, respectively 60,233 68,055 Additional paid-in capital 1,814 1,545 Retained earnings 239,876 208,957 Accumulated other comprehensive income (loss) ( 3,773 ) 6,921 Total Stockholders’ Equity 298,150 285,478 Total Liabilities and Stockholders’ Equity $ 298,161 $ 285,478 101 Table of Contents PARENT COMPANY STATEMENTS OF INCOME (in thousands) Years ended December 31, 2021 2020 INCOME Interest and dividend income from subsidiaries $ — $ — Total income — — EXPENSES Technology expenses 88 85 Legal and professional expenses 571 988 Other operating expenses 17 41 Total expenses 676 1,114 Income tax expense (benefit) ( 143 ) ( 233 ) Income (Loss) Before Equity in Undistributed Earnings of Subsidiaries ( 533 ) ( 881 ) Equity in undistributed earnings of subsidiaries 33,485 29,026 Net Income $ 32,952 $ 28,145 102 Table of Contents PARENT COMPANY STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 32,952 $ 28,145 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Undistributed earnings of subsidiaries ( 33,485 ) ( 29,026 ) Other operating activities, net 181 358 Net cash provided by (used in) operating activities ( 352 ) ( 523 ) CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided by (used in) investing activities — — CASH FLOWS FROM FINANCING ACTIVITIES Repurchase of common stock ( 7,878 ) ( 122 ) Proceeds from exercise of stock options — 8 Cash dividends ( 2,033 ) ( 1,759 ) Net cash provided by (used in) financing activities ( 9,911 ) ( 1,873 ) Net change in cash and cash equivalents ( 10,263 ) ( 2,396 ) Cash and cash equivalents - beginning of year 23,868 26,264 Cash and cash equivalents - end of year $ 13,605 $ 23,868 103 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.