What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-18 · 394 added, 380 removed, 813 unchanged (49% of the section changed)

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

Red River Bank operates from a network of 27 banking centers throughout Louisiana and two combined LDPOs, one each in Lafayette, Louisiana and New Orleans, Louisiana.

As of December 31, 2022, Red River Bank operated from a network of 28 banking centers throughout Louisiana and one combined LDPO in New Orleans, Louisiana.

Banking centers are located in the following Louisiana markets:

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the Northshore, which includes Covington;

and Acadiana, which includes the Lafayette MSA.

Acadiana, which includes the Lafayette MSA;

and New Orleans.

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

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

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

Our strategy is to expand market share in existing markets and engage in opportunistic new market de novo expansion, supplemented by strategic acquisitions of financial institutions with customer-oriented, compatible philosophies and in desirable geographic areas.

COVID-19 UPDATE

Due to the COVID-19 pandemic and executive orders by the governor of Louisiana, the residents, businesses, and non-profit organizations of Louisiana have been subject to the following limitations during 2021:

• Louisiana began 2021 in modified Phase Two restrictions.

During this phase, which lasted until March 2, 2021, most non-essential businesses, including restaurants, were limited to 50% occupancy, although places of worship were allowed to continue to operate at 75% occupancy.

Other businesses remained closed.

• Effective March 3, 2021, Louisiana moved to modified Phase Three restriction status.

Most non-essential businesses, including restaurants, were permitted to operate at 75% occupancy.

Other businesses were permitted to operate at 50% occupancy, with certain other restrictions.

• Effective March 31, 2021, certain Phase Three restrictions were lifted.

Most non-essential businesses, including restaurants, were allowed to operate at 100% capacity.

The statewide mask mandate remained in place.

• Effective April 28, 2021, the statewide mask mandate was lifted.

• On May 26, 2021, remaining limits on occupancy restrictions for businesses were lifted.

• In the first quarter of 2021, COVID-19 vaccinations became widely available.

As of December 31, 2021, approximately 50.3% of Louisiana’s population was fully vaccinated.

• During the third quarter of 2021, Louisiana experienced a significant increase in COVID-19 pandemic cases and hospitalizations, resulting in the reinstatement of some pandemic-related restrictions such as mask mandates and vaccination requirements for certain activities.

Capacity restrictions were not reinstated.

Effective August 4, 2021, a temporary statewide indoor mask mandate was instated and later extended until October 27, 2021, when it was lifted in all settings except for K-12 schools.

Schools are permitted to opt out of the mask mandate as long as they comply with existing quarantine guidelines recommended by the U.S.

Department of Health and Human Services, Centers for Disease Control and Prevention.

• The fourth quarter of 2021 began with a declining trend of COVID-19 cases and hospitalizations in the Louisiana markets served by Red River Bank.

However, as a result of the emergence of the Omicron variant in December 2021, the number of cases and hospitalizations increased toward the end of the quarter.

• Economic activity in Louisiana improved during 2021, although the economy is still impacted by supply chain disruptions and labor shortages.

As an essential business and to support our customers, Red River Bank has provided full banking services throughout the pandemic.

2021 was a year of continued organic expansion, operational improvements, and solid financial results.

During 2021, we participated in the SBA PPP program, coordinated the forgiveness of most PPP loans, opened a new banking center, entered the New Orleans market, improved our digital banking systems, had executive management changes, repurchased stock, and had strong balance sheet growth and earnings.

2022 FINANCIAL AND OPERATIONAL HIGHLIGHTS

2022 was a year of unusual interest rate increases and a changing economic environment.

Higher market interest rates helped us achieve net interest margin expansion and record-high earnings;

however, they also created deposit pressures.

In addition, we opened full-service banking centers in both New Orleans and Lafayette, substantially completed the SBA PPP, and achieved solid loan growth.

• Net income for the year ended December 31, 2022, was $36.9 million, or $5.13 diluted EPS, an increase of $4.0 million, or 12.0%, compared to $33.0 million, or $4.51 diluted EPS, for the year ended December 31, 2021.

• The return on average assets was 1.13% for 2021 and 1.22% for 2020.

• The return on average equity was 11.21% for 2021 and 10.39% for 2020.

• Assets increased $582.1 million, or 22.0%, to $3.22 billion as of December 31, 2021, compared to $2.64 billion as of December 31, 2020.

This increase was driven by a $570.0 million, or 24.4%, increase in deposits for the same period.

The deposit growth in 2021 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.

• The return on assets was 1.18% for 2022 and 1.13% for 2021.

• The return on equity was 13.98% for 2022 and 11.21% for 2021.

• Assets decreased $142.0 million, or 4.4%, to $3.08 billion as of December 31, 2022, compared to $3.22 billion as of December 31, 2021.

This decrease was primarily driven by a $111.4 million, or 3.8%, decrease in deposits for the same period due to customer deposit activity in response to the changing interest rate environment.

• Non-PPP loans HFI (non-GAAP) increased $250.0 million, or 15.0%, to $1.92 billion as of December 31, 2022, compared to $1.67 billion as of December 31, 2021.

The increase in loans was mainly due to increased loan activity across all of our markets with our newer markets experiencing the most growth.

The increase in loans was due to loan activity in various markets across Louisiana.

For additional information on non-GAAP financial measures, see “-Non-GAAP Financial Measures” in this Report.

• Red River Bank is participating in the SBA PPP.

During 2021, forgiveness payments on PPP loans exceeded the origination of PPP2 loans which resulted in a $100.9 million, or 85.2%, decrease in PPP loans.

• As of December 31, 2022, our participation in the SBA PPP was materially complete, and PPP loans were $14,000, which was less than 0.1% of loans HFI.

As of December 31, 2021, PPP loans were $17.6 million, net of $626,000 of deferred income, or 1.0% of loans HFI.

PPP loan income for 2021 was $5.8 million, compared to $5.6 million for 2020.

• The Company had a high level of liquidity in 2021.

Average short-term liquid assets totaled $619.4 million, or 22.2% of average earning assets for 2021.

• The net interest margin FTE for 2021 was 2.60%, compared to 3.14% for the prior year.

The net interest margin FTE for 2021 was negatively impacted by the higher level of low-yielding short-term liquid assets, combined with the impact of a full year of low interest rates.

The high level of low-yielding short-term liquid assets, on a standalone basis, had a 70 bp dilutive impact to the net interest margin FTE in 2021.

• Mortgage loan production and income in 2021 were at record high levels for the Company.

Mortgage loan income was $8.7 million for 2021, compared to $8.4 million for 2020.

• NPAs decreased $3.2 million in 2021 and were $979,000, or 0.03% of assets as of December 31, 2021.

As of December 31, 2021, the allowance for loan losses was $19.2 million, or 1.14% of loans HFI and 1.15% of non-PPP loans HFI (non-GAAP).

Due to improved economic activity in Louisiana and the Bank’s favorable asset quality metrics, the provision for loan losses for 2021 was $1.9 million, compared to $6.3 million for 2020.

For additional information on non-GAAP financial measures, see “ -Non-GAAP Financial Measures” in this Report.

PPP loan income for 2022 was $670,000, compared to $5.8 million for 2021.

• The net interest income and net interest margin FTE increased in 2022 compared to 2021.

Net interest income for 2022 was $86.6 million compared to $71.7 million for 2021.

Net interest margin FTE for 2022 was 2.86% compared to 2.60% for the prior year.

The net interest income and net interest margin FTE for 2022 were positively impacted by the higher interest rate environment in 2022 and an improved asset mix.

• As of December 31, 2022, total securities were $776.1 million, or 25.2% of assets, compared to $667.0 million, or 20.7% of assets, as of December 31, 2021.

During the first and second quarters of 2022, we restructured the securities portfolio, which resulted in higher interest income and an improved securities yield.

• During the second quarter of 2022, management reclassified 20.5% of the securities portfolio from AFS to HTM.

• NPAs were $2.4 million, or 0.08% of assets as of December 31, 2022.

As of December 31, 2022, the ALL was $20.6 million, or 1.08% of loans HFI.

• The board of directors approved changes to the 401(k) Plan.

Effective April 1, 2022, employees have the opportunity to invest a portion of their 401(k) Plan funds in our common stock through a unitized fund.

• We expanded organically throughout Louisiana with the following events:

◦ In our Southwest market, renovations were completed on a new banking center location that we purchased in 2020.

This property was remodeled and opened as a full-service banking center in Lake Charles, Louisiana in the third quarter of 2021.

Red River Bank has three banking center locations in the Southwest market.

◦ We began operations in our newest market, New Orleans, Louisiana.

In the third quarter of 2021, we hired a New Orleans market president.

In the fourth quarter, we hired seven additional bankers and opened a combined LDPO in downtown New Orleans.

◦ In the fourth quarter of 2021, we hired an experienced commercial lender in the Northshore market.

◦ In our Acadiana market, renovations were completed on a new banking center location that we purchased in 2020.

This location opened as the first Red River Bank full-service banking center in Lafayette, Louisiana on January 26, 2022.

Red River Bank also has an LDPO in the Acadiana market.

• In 2021, we paid a quarterly cash dividend of $0.07 per share, resulting in cash dividends of $0.28 per share for 2021, compared to $0.24 per share for 2020.

• In accordance with the Company’s stock repurchase programs, during 2021, the Company repurchased 153,553 shares of its common stock at an aggregate cost of $7.9 million.

• Various management changes occurred in 2021.

Bridges Hall was appointed Chief Credit Policy Officer of the Bank, and Tammi Salazar was appointed Chief Operating Officer of the Bank.

• During 2021, the Company invested in the JAM FINTOP Banktech, L.P.

fund to strategically develop technology partnerships as we expand the Bank’s digital offerings.

Also, we selected and implemented various new, digital banking systems that are expected to improve efficiency, minimize costs, and provide our customers with up-to-date digital banking services and products.

• In August 2021, Hurricane Ida made landfall in southeast Louisiana between New Orleans and Baton Rouge.

Red River Bank did not sustain any damage to its locations, and our employees and customers had no significant issues.

◦ In our Acadiana market, in the first quarter of 2022, we opened our first Red River Bank full-service banking center in Lafayette, Louisiana.

In the second quarter of 2022, we relocated the staff and services from the Lafayette LDPO to the new banking center and closed the LDPO located there.

◦ In the first quarter of 2022, we purchased property in Metairie, Louisiana, a New Orleans suburb.

Plans to construct a full-service banking center are in process.

◦ In our New Orleans market, we remodeled and received regulatory approval on a leased banking center location in downtown New Orleans, which we opened as the Bank’s first full-service banking center in New Orleans on August 1, 2022.

◦ In the fourth quarter of 2022, we finished remodeling and opened the new Red River Bank operations center building.

This remodeled 21,000 square foot building is located adjacent to the Red River Bank headquarters building in Alexandria, Louisiana.

This building was designed to provide an efficient and modern facility for Red River Bank operations and support departments and to improve the Red River Bank business continuity plan.

• In 2022, we paid a quarterly cash dividend of $0.07 per share, resulting in cash dividends of $0.28 per share for 2022, which was consistent with 2021.

In the first quarter of 2023, we paid a quarterly cash dividend of $0.08 per share.

• In accordance with our stock repurchase program, during 2022, we repurchased 4,465 shares of our common stock at an aggregate cost of $218,000.

The 2022 stock repurchase program began February 4, 2022, and expired on December 31, 2022.

On November 4, 2022, our board of directors approved the renewal of our stock repurchase program for 2023.

The 2023 stock repurchase program authorizes us to purchase up to $5.0 million of our outstanding shares of common stock from January 1, 2023 through December 31, 2023.

• Various changes occurred in 2022 with the boards of directors of the Company and the Bank.

Simpson, Chair Emeritus, and founding director, retired from the board of directors of the Company and the Bank at the end of his term at the Company’s 2022 annual shareholder meeting on May 5, 2022.

Crowell was appointed to the boards of the Company and the Bank on February 24, 2022.

The following tables set forth selected historical consolidated financial information for each of the periods indicated.

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Interest-bearing deposits in other banks $ 240,568 $ 761,721 $ 417,664

Securities available-for-sale 659,178 498,206 335,573

Securities available-for-sale, at fair value $ 614,407 $ 659,178 $ 498,206

Securities held-to-maturity, at amortized cost $ 151,683 $ — $ —

Loans held for investment $ 1,916,267 $ 1,683,832 $ 1,588,446

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$ 36.78 $ 41.31 $ 38.76

Realized book value per share (1,3)

$ 46.90 $ 42.05 $ 38.03

Cash dividends per share

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(1) Non-GAAP financial measure.

For calculations and reconciliations to GAAP of non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.

(2) We calculate tangible book value per common share as total stockholders’ equity, less intangible assets, divided by the outstanding number of shares of our common stock at the end of the relevant period.

Calculations of this measure and reconciliations to GAAP are included in “- Non-GAAP Financial Measures” in this Report.

This measure has not been audited.

(2) We calculate tangible book value per share as total stockholders’ equity, less intangible assets, divided by the outstanding number of shares of our common stock at the end of the relevant period.

(3) We calculate realized book value per share as total stockholders’ equity, less AOCI, divided by the outstanding number of shares of our common stock at the end of the relevant period.

(4) Net interest margin FTE includes an FTE adjustment using a 21.0% federal income tax rate on tax-exempt securities and tax-exempt loans.

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Net income for the year ended December 31, 2022, was $36.9 million, or $5.13 diluted EPS, an increase of $4.0 million, or 12.0%, compared to $33.0 million, or $4.51 diluted EPS, for the year ended December 31, 2021.

The increase in net income was primarily due to a $4.4 million decrease in provision expense, a $2.7 million increase in net interest income, and a $1.3 million increase in noninterest income, partially offset by a $2.8 million increase in operating expenses.

The increase in net income was primarily due to a $14.9 million increase in net interest income, partially offset by a $5.7 million decrease in noninterest income and a $4.4 million increase in operating expenses.

The return on average assets for the year ended December 31, 2022, was 1.18%, compared to 1.13% for the prior year.

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

Since March 2020, we have been in a low interest rate environment that has impacted both the net interest income and net interest margin FTE.

In March 2020, the target federal funds rate decreased 150 bps to 0.25% and has remained at this rate through December 31, 2021.

Beginning March 2020, we were in a low interest rate environment that impacted both the net interest income and net interest margin FTE.

In March 2020, the target federal funds rate decreased 150 bps to a range of 0.00% to 0.25% and remained at that rate until March 2022, when the FOMC began increasing the target federal funds rate.

The FOMC increased the target federal funds rate by 25 bps in March 2022;

50 bps in May 2022;

75 bps in each of June, July, September, and November 2022;

and 50 bps in December 2022, resulting in a range of 4.25% to 4.50% as of December 31, 2022.

The average effective federal funds rate was 1.68% for 2022 and 0.08% for 2021.

Net interest income for the year ended December 31, 2021, totaled $71.7 million, a $2.7 million, or 3.9%, increase from the year ended December 31, 2020.

Net interest income increased due to a $2.8 million decrease in interest expense, partially offset by a $39,000 decrease in interest and dividend income.

Interest expense decreased as deposits continued to price downward as we adjusted rates on interest-bearing deposits since the start of the COVID-19 pandemic.

This decrease was partially offset by higher interest-bearing deposit balances.

For the year ended December 31, 2021, average interest-bearing deposits increased $341.4 million, or 28.2%, compared to the year ended December 31, 2020.

Interest and dividend income decreased primarily due to a $1.5 million decrease in non-PPP loan income, partially offset by a $1.2 million increase in tax-exempt securities income and a $211,000 increase in PPP loan income.

The decrease in non-PPP loan income was driven mainly by the lower rate environment.

Tax-exempt securities income increased due to a $73.8 million, or 57.5%, growth in average tax-exempt securities compared to 2020, partially offset by the impact of lower yields compared to the prior year.

PPP loan income increased primarily due to the forgiveness of PPP loans by the SBA and the resulting acceleration of loan origination fees.

Net interest margin FTE decreased 54 bps to 2.60% for the year ended December 31, 2021, compared to 3.14% for the year ended December 31, 2020, mainly due to a higher level of low-yielding short-term liquid assets maintained during 2021 and the Federal Reserve lowering interest rates 150 bps in March 2020.

Because deposit growth exceeded loan growth during 2021, excess liquidity was deployed into short-term liquid assets and securities.

For the year ended December 31, 2021, average short-term liquid assets totaled $619.4 million, which was 215.4% higher than the prior year and were 22.2% of average earning assets.

For the year ended December 31, 2021, on a stand-alone basis, this level of liquidity had a 70 bp dilutive impact to the net interest margin FTE.

The yield on interest-bearing balances due from banks and the yield on federal funds sold decreased 13 bps and 17 bps, respectively, due to the Federal Reserve lowering interest rates in March 2020.

For the year ended December 31, 2021, the yield on taxable securities decreased 30 bps to 1.30%, compared to 1.60% for the year ended December 31, 2020.

The yield on tax-exempt securities decreased 28 bps to 2.06%, compared to 2.34% for the prior year.

The decrease in yield, for both taxable and tax-exempt securities, was due to the securities purchased during 2021 having lower yields than the portfolio yield as of December 31, 2020, as a result of the low rate environment.

The yield on loans decreased 16 bps to 4.14% for the year ended December 31, 2021, compared to the prior year, due to the impact of the lower interest rate environment on new, renewed, and floating rate non-PPP loans, partially offset by a higher yield on PPP loans.

As of December 31, 2021, floating rate loans were 15.0% of loans HFI.

The resulting yield on interest-earning assets was 2.74% for the year ended December 31, 2021, a decrease of 73 bps, compared to 3.47%, for the year ended December 31, 2020.

The cost of deposits was 0.22% for the year ended December 31, 2021, a decrease of 19 bps, compared to 0.41% for the year ended December 31, 2020.

The cost of deposits was lower for 2021 due to a 33 bp decrease in the rate on interest-bearing deposits when compared to 2020 as a

result of our adjustments to deposit rates, combined with average noninterest-bearing deposits increasing $233.7 million, or 28.9%.

The 2022 net interest income and net interest margin FTE were positively impacted by the higher interest rate environment in 2022 and an improved asset mix.

Net interest income for the year ended December 31, 2022, was $86.6 million, which was $14.9 million, or 20.8%, higher than $71.7 million for the year ended December 31, 2021.

Net interest income increased due to a $17.0 million increase in interest and dividend income, partially offset by a $2.1 million increase in interest expense.

The increase in interest and dividend income for 2022 when compared to 2021 was primarily due to an increase in non-PPP loan income, an increase in taxable securities income, and an increase in income on short-term liquid assets, partially offset by a decrease in PPP loan income.

Non-PPP loan income increased $13.0 million in 2022 primarily due to a $267.8 million, or 17.3%, increase in the average balance of non-PPP loans, when compared to 2021.

Taxable securities income increased $5.0 million primarily due to a $292.3 million, or 84.8%, increase in the average balance of taxable securities to $637.2 million in 2022 from $344.9 million in 2021, due to our deployment of lower-yielding short-term liquid assets into higher-yielding taxable securities during the first half of 2022.

Income on short-term liquid assets increased $4.0 million due to the FOMC’s increases to the target federal funds rate in 2022.

PPP loan income decreased $5.1 million due to lower average PPP loan balances outstanding and lower fees recognized to income on PPP loans.

Interest expense increased in 2022 when compared to 2021, primarily due to an increase in the rates on interest-bearing transaction deposits.

However, interest expense on time deposits decreased due to time deposits being priced downward as we adjusted rates on new and renewed time deposits in 2021.

Net interest margin FTE increased 26 bps to 2.86% for the year ended December 31, 2022, from 2.60% for the year ended December 31, 2021, primarily due to the higher interest rate environment and an improved asset mix.

The FOMC’s increases to the target federal funds rate during 2022 increased the yield on short-term liquid assets by 110 bps when compared to 2021.

Our deployment of lower-yielding short-term liquid assets into higher-yielding non-PPP loans and securities in 2022 also benefited the net interest margin FTE.

The yield on non-PPP loans increased 12 bps due to higher loan rates on new, renewed, and floating rate loans during 2022 when compared to 2021.

The yield on taxable securities also benefited from higher market interest rates on securities purchased during 2022, compared to the interest rate on taxable securities during 2021.

The yield on taxable securities increased 19 bps for the year ended December 31, 2022, when compared to the year ended December 31, 2021.

These increases were partially offset by a decrease in PPP loan income and a ten bp increase in the rate on interest-bearing deposits.

PPP loan income decreased $5.1 million due to lower fees recognized to income on PPP loans and a lower average balance of PPP loans outstanding.

The rate on interest-bearing transaction deposits increased due to rate competition for deposits that began in the second half of 2022.

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

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Federal funds sold 56,958 1,091 1.89 % 66,934 88 0.13 %

Interest-bearing balances due from banks 552,501 658 0.12 % 129,090 322 0.25 %

Interest-bearing deposits in other banks 329,096 3,682 1.11 % 552,501 658 0.12 %

Nonmarketable equity securities 3,453 40 1.16 % 3,448 10 0.28 %

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(3) Net interest margin FTE includes an FTE adjustment using a 21.0% federal income tax rate on tax-exempt securities and tax-exempt loans.

In 2020 and 2021, Red River Bank participated in the SBA PPP and originated 1,888 PPP loans totaling $260.8 million.

Under the terms of the PPP, we receive loan origination fees from the SBA ranging from 1.0% to 5.0% of the initial principal amount of the loans, and PPP loans have a 1.0% interest rate.

PPP origination fees totaled $9.8 million, or 3.76%, of originated PPP loans and are recorded to interest income over the 24- or 60-month loan term or until the loans are forgiven by the SBA or repaid by the borrower.

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

For 2021, PPP loan income totaled $5.8 million, resulting in a 7.46% yield, compared to PPP loan income of $5.6 million, resulting in a 4.35% yield for 2020.

Excluding PPP loan income, net interest income (non-GAAP) for the year ended December 31, 2022, was $86.0 million, which was $20.0 million, or 30.4%, higher than the prior year.

Also, with PPP loans excluded for the year ended December 31, 2022, the yield on non-PPP loans (non-GAAP) was 4.09%, and the net interest margin FTE (non-GAAP) was 2.84%.

For the year ended December 31, 2021, PPP loans had a 17 bp accretive impact to the yield on loans and a

14 bp accretive impact to the net interest margin FTE.

For the year ended December 31, 2022, PPP loans had a three bp accretive impact to the yield on loans and a two bp accretive impact to the net interest margin FTE.

For further information on non-GAAP financial measures, see “- Non-GAAP Financial Measures” in this Report.

The following table presents interest income for total loans, PPP loans, total non-PPP loans (non-GAAP), as well as net interest income and net interest ratios excluding PPP loans (non-GAAP) for the years ended December 31, 2021 and 2020.

For the Years Ended December 31,

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(4) Net interest margin FTE includes an FTE adjustment using a 21.0% federal income tax rate on tax-exempt securities and tax-exempt loans.

The Federal Reserve is expected to raise the target federal funds rate several times in 2022.

Our balance sheet is asset sensitive, and historically, our deposit interest rates have adjusted more slowly than the change in the federal funds rate.

Dependent upon balance sheet activity and excluding PPP loans, we expect an increasing rate environment to have a positive effect on our net interest income and net interest margin FTE in 2022.

The Federal Reserve is expected to raise the target federal funds rate several more times in the first half of 2023.

Our balance sheet is asset sensitive and interest income on earning assets generally improves in a higher rate environment.

However, we also expect additional pressure on deposit rates due to the higher rate environment and competition for deposits.

As of December 31, 2022, floating rate loans were 14.5% of loans HFI, and floating rate transaction deposits were 2.6% of interest-bearing transaction deposits.

In the first half of 2023, dependent upon balance sheet activity and deposit rate pressure, we expect the net interest margin and net interest income to decrease slightly.

Rate/Volume Analysis

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Securities - tax-exempt

1,727 (563) 1,164

Federal funds sold

(13) 1,016 1,003

Interest-bearing balances due from banks

Interest-bearing deposits in other banks

(262) 3,286 3,024

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

The provision expense for the year ended December 31, 2021, was $1.9 million, a decrease of $4.4 million from $6.3 million for the year ended December 31, 2020.

The provision for loan losses was lower in 2021 since the economic activity in Louisiana and our asset quality metrics improved during the year.

The provision for loan losses was higher in 2020 due to economic pressures relating to the COVID-19 pandemic.

The provision expense for the year ended December 31, 2022, was $1.8 million, a decrease of $150,000 from $1.9 million for the year ended December 31, 2021.

The provision for loan losses for 2022 was due to the current inflationary environment, changing monetary policy, and loan growth.

The provision for loan losses in 2021 was due to the anticipated adverse effects of the COVID-19 pandemic at that time.

Noninterest Income

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

Noninterest income increased $1.3 million to $24.5 million for the year ended December 31, 2021, compared to $23.2 million for the prior year.

The increase in noninterest income was mainly due to higher brokerage income, net debit card income, service charges on deposit accounts, mortgage loan income, and gains on sales of properties.

These increases were partially offset by a lower gain on sale and call of securities, a loss on equity securities, and reduced income from an SBIC limited partnership of which Red River Bank is a member.

Noninterest income decreased $5.7 million to $18.7 million for the year ended December 31, 2022, compared to $24.5 million for the prior year.

The decrease in noninterest income was due to lower mortgage loan income, lower net debit card income, higher losses on equity securities, and the loss on sale and call of securities.

These decreases were partially offset by an increase in service charges on deposit accounts and brokerage income.

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

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(468) (175) (293) (167.4) %

Gain (Loss) on sale of securities

Gain (Loss) on sale and call of securities

(59) 194 (253) (130.4) %

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$ 18,747 $ 24,493 $ (5,746) (23.5) %

Brokerage income increased $973,000 to $3.3 million for 2021, when compared to 2020.

This increase was primarily due to the growth in assets under management combined with beneficial changes resulting from the investment broker-dealer partner conversion in the second quarter of 2020.

Mortgage loan income decreased $5.6 million to $3.1 million for 2022, compared to $8.7 million for 2021 due to rising mortgage interest rates and home prices, as well as limited housing stock available for purchase in 2022.

In 2021, mortgage loan activity and income benefited from a low mortgage interest rate environment and adjusted mortgage loan fees.

Debit card income, net, decreased $518,000 to $3.9 million for 2022, compared to $4.4 million for 2021.

The decrease was primarily related to higher debit card expense as a result of upgrading our debit card stock in the first quarter of 2022 and higher debit card processing expenses.

Equity securities are an investment in a CRA mutual fund consisting primarily of bonds.

The gain or loss on equity securities is a fair value adjustment primarily driven by changes in the interest rate environment.

Due to fluctuations in market rates between periods, equity securities had a loss of $468,000 in 2022, compared to a $175,000 loss in 2021.

The loss on the sale and call of securities was $59,000 for 2022.

This consisted of a net loss of $114,000 as a result of portfolio restructuring transactions to improve the structure and yield of the portfolio, offset by a $55,000 gain from municipal securities being called in 2022.

In 2021, the gain on the sale and call of securities was $194,000, as a result of portfolio restructuring transactions to improve the structure and yield of the portfolio.

Service charges on deposit accounts increased $790,000 to $5.6 million for 2022, compared to $4.8 million for 2021.

The increase was due to a larger number of non-sufficient fund transactions and related fee income in 2022.

Brokerage income increased $252,000 to $3.5 million for 2022, compared to $3.3 million for 2021.

The increase was primarily due to funds invested by new clients.

Assets under management were $915.1 million and $787.1 million as of December 31, 2022 and 2021, respectively.

Debit card income, net, increased $774,000 to $4.4 million for 2021, when compared to 2020 due to an increase in the number of debit card transactions.

Service charges on deposit accounts increased $667,000 to $4.8 million for 2021, when compared to 2020.

This increase was due to higher customer transaction activity in 2021 as the economy reopened and customer spending habits returned to pre-COVID-19 levels.

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

Mortgage loan income increased $278,000 to $8.7 million for 2021, compared to $8.4 million for 2020.

In 2021, mortgage loan activity and income benefited from a continued low mortgage interest rate environment and adjusted mortgage loan fees.

Other income was $271,000 for 2021, when compared to $126,000 for 2020.

In 2021, OREO properties and a bank property were sold, resulting in a nonrecurring $219,000 net gain on sale.

The gain on the sale and call of securities was $194,000 for 2021 as a result of portfolio restructuring transactions to improve the structure and yield of the portfolio.

In 2020, the gain on the sale and call of securities was $1.4 million, a result of proactive portfolio restructuring transactions in response to the changed and lower interest rate environment.

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

Due to fluctuations in market rates between periods, equity securities had a mark-to-market loss of $175,000 in 2021, compared to an $85,000 gain in 2020.

An additional $4.0 million investment into equity securities in the third quarter of 2021 also affected the amount of mark-to-market adjustment in 2021.

SBIC income decreased $121,000 to $654,000 for 2021, compared to $775,000 for 2020.

This decrease was a result of lower operating income being distributed by the SBIC in 2021, partially offset by a dividend received in the second quarter of 2021.

Operating Expenses

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Operating expenses increased $4.4 million to $58.7 million for the year ended December 31, 2022, compared to $54.3 million for the year ended December 31, 2021.

The increase in operating expenses was mainly due to higher personnel expenses, other operating expenses, regulatory assessment expense, other taxes, occupancy and equipment expenses, and technology expenses.

These increases were partially offset by lower legal and professional expenses.

The increase in operating expenses was mainly due to higher personnel expenses, occupancy and equipment expenses, other taxes, other business development expenses, and legal and professional expenses.

These increases were partially offset by lower loan and deposit expenses.

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

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Personnel expenses are the largest component of operating expenses and include payroll expenses, incentive compensation, benefit plans, health insurance, and payroll taxes.

Personnel expenses were $32.4 million for 2021, an increase of $1.3 million compared to 2020.

As of December 31, 2021 and 2020, we had 358 and 335 employees, respectively.

The increase in personnel expenses was primarily related to additional staff resulting from our expansion in the New Orleans, Southwest, and Acadiana markets.

Other operating expenses increased $491,000 to $3.8 million for 2021 compared to the prior year.

This increase was primarily the result of a $311,000 nonrecurring expense reduction related to the dissolution of an acquired subsidiary in the first quarter of 2020.

Regulatory assessment expense increased $395,000 to $933,000 for 2021 compared to 2020.

The Bank was notified by the FDIC that it did not have an FDIC insurance assessment for the first quarter of 2020;

however, it would have an assessment starting in the second quarter of 2020.

Since the second quarter of 2020, the FDIC insurance assessment has increased as a result of increasing deposit account balances.

Therefore, the FDIC insurance assessment expense increased $361,000 for 2021 compared to the prior year.

Other taxes increased $349,000 to $2.1 million for 2021 compared to 2020.

This increase was due to an increase in State of Louisiana bank stock tax resulting from higher deposit account balances and higher net income for the applicable tax years.

Occupancy and equipment expenses increased $337,000 to $5.4 million for 2021 compared to 2020.

This increase was primarily a result of our expansion in our newer markets throughout 2020 and the second half of 2021, partially offset by a reduction in COVID-19 pandemic occupancy-related expenses in 2021.

Technology expenses increased $268,000 to $2.8 million for 2021 compared to the prior year.

This increase was attributed to new computer hardware and communication systems to support the expansion in our newer markets and for business continuity planning purposes.

The increase was also due to the implementation of a new loan processing system and additional technology support services.

Legal and professional expenses decreased $458,000 to $1.7 million for 2021 compared to 2020.

This decrease was due to lower attorney fees as a result of the completion of various legal matters in late 2020.

Personnel expenses increased $2.1 million to $34.6 million for 2022 compared to $32.4 million for 2021.

This increase was primarily due to having a full year of expenses for new staff added in the fourth quarter of 2021 in our New Orleans market, as well as additional staff in our existing markets.

This increase was partially offset by lower commission compensation in 2022 due to lower mortgage loan activity, when compared to 2021.

Due to an increase in open positions in late 2022, we had 351 and 358 total employees as of December 31, 2022 and 2021, respectively.

Occupancy and equipment expenses increased $666,000 to $6.1 million for 2022 compared to $5.4 million for 2021.

This increase was primarily the result of expansion in our newer markets in the second half of 2021 and throughout 2022.

Other taxes increased $632,000 to $2.7 million for 2022 compared to $2.1 million for 2021.

This increase was due to a $635,000 increase in the State of Louisiana’s bank stock tax resulting from higher deposit account balances, higher net income for the applicable tax years, and a higher tax rate.

This new rate will also be applicable for 2023.

Other business development expenses increased $476,000 to $1.6 million for 2022 compared to $1.2 million for 2021.

This increase was primarily the result of higher CRA related contributions and community sponsorships combined with a full year of business development expense in our New Orleans market.

Legal and professional expenses increased $314,000 to $2.0 million for 2022 compared to $1.7 million for 2021.

This increase was primarily due to higher professional fees, auditing fees, and public company expenses due to organizational growth, partially offset by lower attorney fees as a result of the completion of various legal matters.

Loan and deposit expenses decreased $357,000 to $659,000 for 2022 compared to $1.0 million for 2021.

The decrease in loan expenses was primarily due to lower mortgage loan activity as well as lower loan expenses, which were impacted by the higher interest rate environment in 2022.

Deposit expenses decreased due to receipt of a $122,000 negotiated, variable rebate from a vendor in the first quarter of 2022.

Income Tax Expense

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

The CARES Act and Families First Coronavirus Response Act passed in March of 2020 did not have a material impact on our income tax expense or our effective tax rate for the years ended December 31, 2021 and 2020.

The CARES Act passed in March of 2020, with certain provisions expiring in 2021 and 2022, did not have a material impact on our income tax expense or our effective tax rate for the years ended December 31, 2022 and 2021.

For the years ended December 31, 2022 and 2021, income tax expense totaled $8.1 million and $7.1 million, respectively.

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FINANCIAL CONDITION

As of December 31, 2021, total assets were $3.22 billion, which was $582.1 million, or 22.0%, higher than total assets of $2.64 billion as of December 31, 2020.

Within total assets, compared to December 31, 2020, interest-bearing deposits in other banks increased by $344.1 million, securities AFS increased by $161.0 million, and loans HFI increased by $95.4 million.

For liabilities, compared to December 31, 2020, interest-bearing deposits increased by $363.9 million, and noninterest-bearing deposits increased by $206.1 million.

As of December 31, 2022, assets were $3.08 billion, which was $142.0 million, or 4.4%, lower than assets of $3.22 billion as of December 31, 2021, primarily due to a decrease in deposits.

Total deposits decreased $111.4 million, or 3.8%, to $2.80 billion as of December 31, 2022, from $2.91 billion as of December 31, 2021.

During 2022, we made several changes to the asset mix, including deploying short-term liquid assets into loans and the securities portfolio, as well as restructuring the securities portfolio.

Loans HFI increased $232.4 million, or 13.8%, which included a $250.0 million, or 15.0%, increase in non-PPP loans compared to December 31, 2021.

Due to securities purchased in the first half of 2022, total securities increased $109.0 million, or 16.3%, to $776.1 million, and were 25.2% of assets as of December 31, 2022.

As a result of the increase in loans and securities, interest-bearing deposits in other banks decreased $521.2 million, or 68.4%, to $240.6 million and were 7.8% of assets as of December 31, 2022.

Stockholders’ equity decreased $32.4 million during 2022 to $265.8 million as of December 31, 2022, primarily due to a $67.4 million decrease in AOCI related to securities partially offset by $36.9 million of net income.

As of December 31, 2022, the loans HFI to deposits ratio was 68.46%, compared to 57.86% as of December 31, 2021, and the noninterest-bearing deposits to total deposits ratio was 38.96%, compared to 39.50% as of December 31, 2021.

Stockholders’ equity increased $12.7 million during 2021 to $298.2 million as of December 31, 2021.

Interest-Bearing Deposits in Other Banks

Interest-bearing deposits in other banks are the second largest component of earning assets.

As of December 31, 2021, interest-bearing deposits in other banks were 23.6% of total assets.

Historically, interest-bearing deposits in other banks were a much smaller portion of our total assets.

Interest-bearing deposits in other banks were the third-largest component of earning assets as of December 31, 2022.

Excess liquidity that is not being deployed into loans or securities is placed in these accounts.

Interest-bearing deposits in other banks increased $344.1 million, or 82.4%, in 2021 to $761.7 million as of December 31, 2021.

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.

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

As of December 31, 2021, our securities portfolio was 20.7% of total assets.

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

Starting during the COVID-19 pandemic, which began in the first quarter of 2020, and continuing into the first quarter of 2022, interest-bearing deposits in other banks had become the second-largest component of earning assets as deposit growth exceeded loan growth.

During 2022, we deployed excess liquidity into loans and securities, with most securities purchases and sales occurring during the first half of 2022.

As of December 31, 2022, interest-bearing deposits in other banks were $240.6 million and were 7.8% of assets, a decrease of $521.2 million, or 68.4%, compared to $761.7 million and 23.6% of assets as of December 31, 2021.

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

Securities are classified as AFS, HTM, and equity securities.

As of December 31, 2022, our total securities portfolio was 25.2% of assets.

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

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

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

Securities AFS

Securities AFS were $659.2 million as of December 31, 2021, an increase of $161.0 million, or 32.3%, from $498.2 million as of December 31, 2020.

Securities AFS and Securities HTM

Securities AFS and securities HTM are debt securities.

Total debt securities were $766.1 million as of December 31, 2022, an increase of $106.9 million, or 16.2%, from $659.2 million as of December 31, 2021.

Securities AFS are held for indefinite periods of time and are carried at estimated fair value.

As of December 31, 2022, the estimated fair value of securities AFS was $614.4 million.

The net unrealized loss on securities AFS increased $69.4 million for the year ended December 31, 2022, resulting in a net unrealized loss of $74.1 million as of December 31, 2022.

Over the past year, due to the increase in our securities portfolio size, the current and projected balance sheet mix and growth, cash flows, and available liquidity sources, we evaluated transferring selected securities from AFS to HTM.

In the second quarter of 2022, we reclassified $166.3 million, net of $17.9 million of unrealized loss, or 20.5% of the securities portfolio, from AFS to HTM.

Securities HTM, which we have the intent and ability to hold until maturity, are carried at amortized cost.

As of December 31, 2022, the amortized cost of securities HTM was $151.7 million.

Investment activity for the year ended December 31, 2022, included $313.5 million of securities purchased, partially offset by $31.8 million in sales and $87.1 million in maturities, principal repayments, and calls.

The unrealized gain/loss of the securities AFS portfolio decreased $13.5 million for the year ended December 31, 2021.

In 2021, we sold $113.5 million of securities AFS as part of restructuring transactions.

A large portion of the securities sold were mortgage-backed securities that had accelerated prepayment speeds and were owned at higher book prices.

Due to these accelerated prepayment speeds, the yields had declined.

We reinvested the proceeds into securities with improved structure, which rebalanced the cash flows for the portfolio, reduced amortization expense for the mortgage-backed sector, reduced extension risk, and improved the portfolio yield.

In 2021, due to the low interest rate environment, we also reallocated $222.9 million from overnight funds yielding 0.12% to securities AFS yielding 1.15%.

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

There were no purchases or sales of securities HTM for the same period.

Securities AFS purchased for the year ended December 31, 2022, primarily consisted of $159.8 million in U.S.

Treasury securities and $139.1 million in mortgage-backed securities.

Treasury securities purchased had a yield of 1.78% and an average life of 1.85 years, and the mortgage-backed securities had a yield of 1.78% and an average life of 3.63 years.

As of December 31, 2022, the overall price risk of the securities AFS and securities HTM portfolio in the applicable scenario decreased 190 bps, compared to December 31, 2021, primarily due to the short-term U.S.

Treasury securities purchased in the first and second quarters of 2022.

During the first six months of 2022, we reallocated $260.5 million from overnight funds yielding 0.39% to securities AFS yielding 1.80% and purchased $53.0 million of securities yielding 1.91% as we reinvested cash flows from the securities

In the third and fourth quarters of 2022, we did not engage in any purchases or sales transactions;

however, we will continue to evaluate future transactions.

The securities AFS portfolio tax-equivalent yield was 1.75% for the year ended December 31, 2022, compared to 1.79% for the year ended December 31, 2021.

The decrease in yield for 2021, compared to 2020, was due to purchasing a significant amount of securities during 2021 with lower yields than the portfolio yield as of December 31, 2020, as a result of the low rate environment.

The yield remained fairly consistent due to the timing of purchases in 2022.

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

Mortgage-backed

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

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

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

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

As of December 31, 2021, the average life of our securities portfolio was 4.9 years with an estimated modified duration of 4.5 years.

As of December 31, 2022, the average life of our securities portfolio was 6.8 years with an estimated effective duration of 5.0 years.

As of December 31, 2021, the average life of our securities portfolio was 4.9 years with an estimated effective duration of 4.1 years.

Both the average life and the effective duration increased due to the increase in market rates and the resulting impact on mortgage-backed securities and our callable municipal securities.

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

As of December 31, 2021, the unrealized loss of the securities AFS portfolio was $4.8 million, a decrease of $13.5 million, compared to an unrealized gain of $8.8 million as of December 31, 2020.

This change is attributed to an increase in market rates, which resulted in lower prices on securities and, therefore, an overall lower market value of the portfolio.

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

As of December 31, 2022, the net unrealized loss of the securities AFS portfolio was $74.1 million, an increase of $69.4 million, compared to a net unrealized loss of $4.8 million as of December 31, 2021.

This change is attributed to a significant increase in market rates, which resulted in lower prices on securities and therefore an overall lower market value of the portfolio.

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

As of December 31, 2022, other than securities issued by U.S.

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$ 688,539 $ 6 $ (74,138) $ 614,407

Securities HTM:

Mortgage-backed securities

$ 150,771 $ — $ (19,142) $ 131,629

agency securities

912 — (134) 778

Total Securities HTM

$ 151,683 $ — $ (19,276) $ 132,407

December 31, 2021

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Treasury securities

41,770 — (154) 41,616

agency securities

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$ 663,954 $ 4,838 $ (9,614) $ 659,178

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

Securities HTM:

Mortgage-backed securities

$ — $ — $ — $ —

agency securities

Total Securities HTM

$ — $ — $ — $ —

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

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

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(1) Tax equivalent projected book yield as of December 31, 2022.

The following table shows the amortized cost of securities HTM that mature during each of the periods indicated.

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

Yields are weighted-average tax equivalent yields that are calculated by dividing projected annual income by the average amortized cost of the applicable securities while using a 21.0% federal income tax rate, when applicable.

Contractual Maturity as of December 31, 2022

One Year After One Year

Five Years After Five Years

Ten Years After

Ten Years Total

(dollars in thousands) Amount Yield (1)

Amount Yield (1)

Securities HTM:

Mortgage-backed securities

$ — — % $ — — % $ — — % $ 150,771 2.51 % $ 150,771 2.51 %

agency securities — — % — — % 912 2.61 % — — % 912 2.61 %

Total Securities HTM

$ — — % $ — — % $ 912 2.61 % $ 150,771 2.51 % $ 151,683 2.51 %

Equity Securities

Equity securities are an investment in a CRA mutual fund.

Equity securities are an investment in a CRA mutual fund, consisting primarily of bonds.

We invest in the mutual fund as part of our strategy to meet our obligations described within the CRA, which encourages financial institutions to help meet the credit needs of their entire market area, including low and moderate income neighborhoods, consistent with safe and sound banking principles.

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

The fair value of our equity securities was $7.8 million as of December 31, 2021, with a recognized loss of $175,000 for the year ended December 31, 2021, compared to a fair value of $4.0 million as of December 31, 2020, with a recognized gain of $85,000 for the year ended December 31, 2020.

In the third quarter of 2021, we invested an additional $4.0 million into the CRA mutual fund.

This additional investment was allocated to the assessment areas in our markets, including our newer markets, and other areas of Louisiana to further strengthen our efforts to meet our CRA obligations.

There were no sales of equity securities for the year ended December 31, 2021.

As of December 31, 2021, equity securities had a fair value of $7.8 million with a recognized loss of $175,000 for the year ended December 31, 2021.

In April 2022, we liquidated all shares invested in this fund and recorded a loss of $447,000 from January 1, 2022, through the date of liquidation.

In December 2022, we purchased shares in this fund.

As of December 31, 2022, equity securities had a fair value of $10.0 million with a recognized loss of $468,000 for the year ended December 31, 2022.

Loan Portfolio

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As of December 31, 2022, loans HFI were $1.92 billion, an increase of $232.4 million, or 13.8%, compared to $1.68 billion as of December 31, 2021.

Red River Bank began participating in the SBA PPP in the second quarter of 2020.

Through December 31, 2021, we had received $198.6 million in SBA forgiveness and borrower payments on 99.9% of the PPP1 loans originated.

In 2021, we originated 488 PPP2 loans totaling $58.3 million with an average size of $119,000.

PPP2 loan origination fees totaled $2.7 million, or 4.65% of PPP2 loans.

Through December 31, 2021, we had received $40.6 million in SBA forgiveness and borrower payments on 78.7% of the PPP2 loans originated.

As of December 31, 2021, PPP loans totaled $17.6 million, net of $626,000 of deferred income, or 1.0% of loans HFI.

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

As of December 31, 2022, our participation in the SBA PPP was materially complete, and PPP loans totaled $14,000.

As of December 31, 2022, non-PPP loans HFI (non-GAAP) were $1.92 billion, an increase of $250.0 million, or 15.0%, from December 31, 2021.

The increase in non-PPP loans HFI (non-GAAP) was due to increased loan activity across all of our markets with our newer markets experiencing the most growth.

The increase in non-PPP loans HFI (non-GAAP) was due to loan activity in various markets across Louisiana.

For calculations and reconciliations to GAAP of non-GAAP financial measures, see “- Non-GAAP Financial Measures” in this Report.

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Commercial real estate loans are primarily made for commercial property that is owner occupied as well as commercial property owned by real estate investors.

Real estate securing these loans includes many

property types, such as retail centers, nursing homes, offices and office buildings, medical facilities, warehouses, churches and related facilities, production facilities, and multifamily properties.

Real estate securing these loans includes many property types, such as retail centers, nursing homes, offices and office buildings, medical facilities, warehouses, churches and related facilities, production facilities, and multifamily properties.

Commercial real estate loans increased $124.4 million, or 18.6%, to $794.7 million as of December 31, 2022, from $670.3 million as of December 31, 2021.

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

Construction and development loans decreased $21.0 million, or 16.5%, to $106.3 million as of December 31, 2021, compared to $127.3 million as of December 31, 2020.

Construction and development loans increased $51.0 million, or 48.0%, to $157.4 million as of December 31, 2022, compared to $106.3 million as of December 31, 2021.

Commercial and Industrial Loans.

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

Commercial and industrial loans increased $60.9 million, or 24.3%, to $311.4 million as of December 31, 2021, from $250.4 million as of December 31, 2020.

Commercial and industrial loans decreased $1.3 million, or 0.4%, to $310.1 million as of December 31, 2022, from $311.4 million as of December 31, 2021.

SBA PPP, Net of Deferred Income.

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

These loans are guaranteed by the SBA, have a 24- or 60-month term at an interest rate of 1.0%, and are subject to forgiveness by the SBA dependent upon meeting eligibility requirements.

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

These loans were guaranteed by the SBA, had a 24-

or 60-month term at an interest rate of 1.0%, and were subject to forgiveness by the SBA dependent upon meeting eligibility requirements.

Tax-Exempt Loans.

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Industry Concentrations

The North American Industry Classification System (“NAICS”) is an industry classification system used to categorize loans by the borrower’s type of business.

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

The North American Industry Classification System is an industry classification system used to categorize loans by the borrower’s type of business.

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

December 31, 2022

Health care 8.4 %

Construction 4.6 %

Investor one-to-four family and multifamily 4.8 %

Hospitality services 4.1 %

Retail trade 4.0 %

Construction 3.8 %

Hospitality services 3.4 %

Public administration 2.8 %

Finance and insurance 2.2 %

Religious and other nonprofit 1.5 %

Manufacturing 1.2 %

Finance and insurance 1.6 %

All other 66.0 %

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

Total loans HFI by industry concentration 100.0 %

Health care loans are our largest loan industry concentration and are made up of a diversified portfolio of health care providers.

As of December 31, 2021, health care loans were $138.1 million, or 8.3% of non-PPP loans HFI (non-GAAP), compared to $149.4 million, or 10.2% of non-PPP loans HFI (non-GAAP) as of December 31, 2020.

As of December 31, 2022, health care loans were $160.3 million, or 8.4% of loans HFI, compared to $141.0 million, or 8.4% of loans HFI, as of December 31, 2021.

The average health care loan size was $338,000 as of December 31, 2022, and $288,000 as of December 31, 2021.

Within the health care sector, loans to physician and dental practices were 4.6% of non-PPP loans HFI (non-GAAP) as of December 31, 2021, and 5.7% as of December 31, 2020.

Nursing and residential care loans were 3.6% of non-PPP loans HFI (non-GAAP) as of December 31, 2021, and 4.4% as of December 31, 2020.

For further information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.

Within the health care sector, loans to nursing and residential care facilities were 4.4% of loans HFI as of December 31, 2022, and 3.6% as of December 31, 2021.

Loans to physician and dental practices were 3.9% of loans HFI as of December 31, 2022, and 4.7% as of December 31, 2021.

Geographic Markets

As of December 31, 2021, Red River Bank currently operates in seven geographic markets throughout the state of Louisiana.

We entered the Acadiana market in the fourth quarter of 2020 and the New Orleans market in the fourth quarter of 2021.

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

As of December 31, 2022, Red River Bank operated in seven geographic markets throughout the state of Louisiana.

The following table summarizes loans HFI by market of origin:

December 31, 2022

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

(dollars in thousands) Amount Percent of Loans HFI

Central $ 608,040 31.7 %

Northwest 343,505 20.6 %

Capital 520,029 27.1 %

Northwest 371,716 19.4 %

Southwest 149,549 7.8 %

Northshore 133,195 7.0 %

Acadiana 28,629 1.7 %

New Orleans 79,096 4.1 %

Total non-PPP loans HFI (non-GAAP) $ 1,666,282 100.0 %

For further information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.

Acadiana 54,642 2.9 %

Total loans HFI $ 1,916,267 100.0 %

Loan Portfolio Maturity Analysis

The maturity distribution for non-PPP loans HFI (non-GAAP) are summarized below:

The maturity distribution for loans HFI are summarized below:

December 31, 2022

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Commercial and industrial 105,126 160,149 44,705 73 310,053

SBA PPP, net of deferred income — 14 — — 14

Tax-exempt 1,047 14,826 49,032 18,261 83,166

Consumer 8,516 18,060 712 148 27,436

Total non-PPP loans HFI (non-GAAP) $ 289,239 $ 616,735 $ 673,615 $ 86,693 $ 1,666,282

For further information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.

Total loans HFI $ 284,103 $ 728,865 $ 813,200 $ 90,099 $ 1,916,267

Fixed and Floating Rate Loans

The dollar amount, as of December 31, 2021, of fixed and floating rate non-PPP loans HFI (non-GAAP) that mature after December 31, 2022, are presented in the following table:

The dollar amount, as of December 31, 2022, of fixed and floating rate loans HFI that mature after December 31, 2023, are presented in the following table:

December 31, 2022

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Commercial and industrial 133,133 71,794 204,927

SBA PPP, net of deferred income 14 — 14

Tax-exempt 82,119 — 82,119

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Total $ 1,491,439 $ 140,725 $ 1,632,164

For further information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.

In July 2017, the United Kingdom Financial Conduct Authority, the authority that regulates LIBOR, announced its intent to stop compelling banks to submit rates for the calculation of LIBOR after 2021.

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Dollar LIBOR rates would cease to be published after June 30, 2023.

As of December 31, 2021, 3.6% of our non-PPP loans HFI (non-GAAP) were LIBOR-based with a setting that expires June 30, 2023.

As of December 31, 2022, 2.1% of our loans HFI were LIBOR-based with a setting that expires June 30, 2023.

Alternative rate language is present in each credit agreement with a LIBOR-based rate.

We do not anticipate any issue with transitioning each loan to a non-LIBOR-based rate.

For further information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.

Nonperforming Assets

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

NPAs totaled $979,000 as of December 31, 2021, down $3.2 million, or 76.7%, from $4.2 million as of December 31, 2020.

Our ratio of NPAs to total assets was 0.03% as of December 31, 2021, compared to 0.16% as of December 31, 2020.

These improvements were primarily due to the payoff and charge-off of nonaccrual loans and the sale of OREO during 2021.

NPAs totaled $2.4 million as of December 31, 2022, an increase of $1.4 million, or 141.7%, from $979,000 as of December 31, 2021.

The increase was primarily due to additional loans placed on nonaccrual status, offset by payments on nonaccrual loans, the sale of foreclosed assets during the year, and a loan that returned to accrual status.

The ratio of NPAs to assets was 0.08% as of December 31, 2022, compared to 0.03% as of December 31, 2021.

Nonperforming loan and asset information is summarized below:

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0.12 % 0.02 %

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

NPAs to total assets 0.03 % 0.16 %

NPAs to assets 0.08 % 0.03 %

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

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

(3) Non-GAAP financial measure.

For calculations and reconciliations to GAAP of non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.

Nonaccrual loans are summarized below by category:

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Commercial and industrial 1,291 13

SBA PPP, net of deferred income — —

Tax-exempt — —

Consumer 101 —

Total nonaccrual loans $ 2,364 $ 280

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Commercial and industrial 297,152 11,428 1,473 — — 310,053

SBA PPP 17,550 — — — — 17,550

SBA PPP, net of deferred income 14 — — — — 14

Tax-exempt 83,166 — — — — 83,166

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and the financial resources of the guarantor(s), if any.

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

When effective, the CECL allowance model, prescribed by ASU No.

2016-13 , will require measurement of expected credit losses based on historical experience, current conditions, and reasonable and supportable forecasts.

This model will replace the existing incurred loss model.

Refer to “Item 8.

Financial Statements and

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

As of December 31, 2021, the allowance for loan losses totaled $19.2 million, or 1.14%, of loans HFI, and 1.15% of non-PPP loans HFI (non-GAAP).

As of December 31, 2020, the allowance for loan losses totaled $18.0 million, or 1.13%, of loans HFI.

As of December 31, 2022, the allowance for loan losses was $20.6 million, or 1.08%, of loans HFI.

As of December 31, 2021, the allowance for loan losses was $19.2 million, or 1.14%, of loans HFI.

The $1.5 million increase in the allowance for loan losses for the year ended December 31, 2022, was due to $1.8 million from the provision for loan losses, partially offset by $298,000 of net charge-offs.

For further information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.

The provision for loan losses for the year ended December 31, 2021, was $1.9 million, a decrease of $4.4 million from $6.3 million for the year ended December 31, 2020.

The provision for loan losses was lower in 2021 since the economic activity in Louisiana and our asset quality metrics improved during the year.

The provision for loan losses was higher in 2020 due to economic pressures relating to the COVID-19 pandemic.

Net charge-offs for the year ended December 31, 2021, were $675,000, a decrease of $1.6 million from $2.3 million for the year ended December 31, 2020.

The ratio of net charge-offs to average loans was 0.04% and 0.14% for the years ended December 31, 2021 and December 31, 2020, respectively.

The provision for loan losses for the year ended December 31, 2022, was $1.8 million, a decrease of $150,000 from $1.9 million for the year ended December 31, 2021.

The provision for loan losses for 2022 was due to the current inflationary environment, changing monetary policy, and loan growth.

The provision for loan losses in 2021 was due to the anticipated adverse effects of the COVID-19 pandemic at that time.

Net charge-offs for the year ended December 31, 2022, were $298,000, a decrease of $377,000 from $675,000 for the year ended December 31, 2021.

The ratio of net charge-offs to average loans HFI was 0.02% and 0.04% for the years ended December 31, 2022 and 2021, respectively.

The 2022 results were primarily due to the charge-off of $433,000 of consumer overdrafts.

The 2021 results were primarily due to the charge-off of $515,000 of nonaccrual loans.

The 2020 results were primarily due to the charge-off of $1.7 million in energy related loans.

CECL was effective for us on January 1, 2023.

The CECL allowance model, prescribed by ASU No.

2016-13 , requires measurement of expected credit losses based on historical experience, current conditions, and reasonable and supportable forecasts.

This model replaced the incurred loss model.

We expect the adoption of CECL on January 1, 2023, to result in a combined 3.5% increase in our allowance for credit losses and allowance for unfunded commitments.

Refer to “Item 8.

Financial Statements and Supplementary Data - Note 1 - Significant Accounting Policies - Recent Accounting Pronouncements” for more information on ASU No.

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

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Loans HFI $ 1,916,267 $ 1,683,832

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

$ 1,666,282 $ 1,469,999

Nonaccrual loans $ 2,364 $ 280

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1.08 % 1.14 %

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

1.15 % 1.22 %

Allowance for loan losses to nonaccrual loans 872.59 % 6,848.57%

(1) Non-GAAP financial measure.

For calculations and reconciliations to GAAP and non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.

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

Future provisions for loan losses are subject to ongoing evaluations of the factors and loan portfolio risks described above, including economic pressures related to the COVID-19 pandemic, inflation, labor market and supply chain constraints, and natural disasters affecting the state of Louisiana.

Future provisions for loan losses are subject to ongoing evaluations of the factors and loan portfolio risks described above, including economic pressures related to inflation, labor market and supply chain constraints, and natural disasters affecting the state of Louisiana.

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

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

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

The allocations shown below should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in the future will necessarily occur in these amounts or in the indicated proportions.

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Commercial and industrial 4,350 21.1 % 4,440 23.2 %

SBA PPP 25 0.1 % 318 1.8 %

SBA PPP, net of deferred income — 0.0 % 25 0.1 %

Tax-exempt 751 3.6 % 749 3.9 %

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$ 20,628 100.0 % $ 19,176 100.0 %

The following table displays the ratio of net charge-offs to average loans outstanding for loans HFI by category for the periods shown:

As of December 31,

The following table displays the ratio of net charge-offs to average loans HFI outstanding by category for the periods shown:

For the Years Ended December 31,

Commercial real estate —% 0.03%

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Commercial and industrial —% —%

SBA PPP —% —%

SBA PPP, net of deferred income —% —%

Tax-exempt —% —%

Consumer 0.02% 0.01%

Total 0.04% 0.14%

Total net charge-offs to average loans HFI 0.02% 0.04%

Deposits are the primary funding source for loans and investments.

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

Total deposits increased $570.0 million, or 24.4%, to $2.91 billion as of December 31, 2021, from $2.34 billion as of December 31, 2020.

Noninterest-bearing deposits increased $206.1 million, or 21.8%, during 2021 to $1.15 billion as of December 31, 2021.

Total deposits decreased $111.4 million, or 3.8%, to $2.80 billion as of December 31, 2022, from $2.91 billion as of December 31, 2021.

The decrease in deposits was primarily a result of expected customer deposit account activity and customer response to the changing interest rate environment.

Noninterest-bearing deposits decreased $59.1 million, or 5.1%, during 2022 to $1.09 billion as of December 31, 2022.

Noninterest-bearing deposits as a percentage of total deposits were 38.96% as of December 31, 2022, compared to 39.50% as of December 31, 2021.

Interest-bearing deposits increased $363.9 million, or 26.1%, during 2021 to $1.76 billion as of December 31, 2021, with the largest increase in money market accounts.

The increase in deposits 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.

Interest-bearing deposits decreased $52.3 million, or 3.0%, during 2022 to $1.71 billion as of December 31, 2022, with the largest decrease in money market accounts.

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

December 31, 2021 December 31, 2020

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

December 31, 2022 December 31, 2021 Change from

December 31, 2021 to December 31, 2022

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

Noninterest-bearing demand deposits $ 1,090,539 39.0 % $ 1,149,672 39.5 % $ (59,133) (5.1) %

Interest-bearing deposits:

Interest-bearing demand deposits 89,144 3.2 % — — % 89,144 100.0 %

NOW accounts 503,308 18.0 % 503,383 17.3 % (75) — %

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

December 31, 2021 December 31, 2020

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

December 31, 2022 December 31, 2021 Change from

December 31, 2021 to December 31, 2022

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

Consumer $ 1,341,312 47.9 % $ 1,400,369 48.1 % $ (59,057) (4.2 %)

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Total deposits $ 2,798,936 100.0 % $ 2,910,348 100.0 % $ (111,412) (3.8 %)

$ 2,910,348 100.0 % $ 2,340,360 100.0 %

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

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For 2022, average public entity deposits were 6.5% of average total deposits.

The average cost of interest-bearing deposits and total deposits for 2021 was 0.36% and 0.22% compared to 0.69% and 0.41% for 2020.

The decrease in the average cost of interest-bearing deposits and total deposits in 2021 as compared to 2020 was a result of lowering deposit rates in 2021 due to the low interest rate environment and our liquidity position.

The average cost of interest-bearing deposits and total deposits for 2022 was 0.46% and 0.27%, respectively, compared to 0.36% and 0.22% for 2021, respectively.

The increase in the average cost of interest-bearing deposits and total deposits in 2022 as compared to 2021 was due to rate competition for deposits that began in the second half of 2022.

Also, as of December 31, 2022, 2.6% of interest-bearing transaction deposits had floating rates, which adjust with market rates.

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Interest-bearing deposits:

Interest-bearing demand deposits 10,579 2.93 % — 0.00 %

NOW accounts 464,699 0.26 % 398,620 0.07 %

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Total average deposits $ 2,852,087 0.27 % $ 2,593,780 0.22 %

Our uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000), were approximately $1.22 billion and $855.6 million at December 31, 2021 and 2020, respectively.

Our uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000), were approximately $975.1 million and $1.22 billion at December 31, 2022 and 2021, respectively.

These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.

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

We had no outstanding borrowings as of December 31, 2021 and 2020.

We had no outstanding borrowings as of December 31, 2022 or 2021.

Federal Home Loan Bank Advances.

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As of December 31, 2022 and 2021, we had $95.0 million in federal funds lines available from these funding sources.

We had no outstanding balances on these lines during 2021 and 2020.

We had no outstanding balances on these lines during 2022 or 2021.

Hancock Whitney Bank Line of Credit.

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As of December 31, 2022 and 2021, total borrowing capacity was $6.0 million under this arrangement.

The Company had no outstanding balances on this line during 2021 and 2020.

We had no outstanding balances on this line during 2022 or 2021.

Stockholders’ Equity

Total stockholders’ equity as of December 31, 2021, was $298.2 million, compared to $285.5 million as of December 31, 2020, an increase of $12.7 million, or 4.4%.

This increase was attributable to $33.0 million of net income and $325,000 of stock compensation, partially offset by a $10.7 million, net of tax, market adjustment to AOCI related to securities AFS, $7.9 million for the repurchase of shares, and $2.0 million in cash dividends.

Taking into consideration our 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, 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, resulting in $0.24 per share in cash dividends for the year ended December 31, 2020.

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, our Board of Directors approved the renewal of the stock repurchase program.

The renewed repurchase program authorized us to purchase up to $5.0 million of our 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, we 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, we repurchased 153,553 shares of our common stock at an aggregate cost of $7.9 million.

On February 4, 2022, our Board of Directors approved the renewal of the stock repurchase program.

The renewed repurchase program authorizes us to purchase up to $5.0 million of our outstanding shares of common stock from February 4, 2022 through December 31, 2022.

Total stockholders’ equity as of December 31, 2022, was $265.8 million, compared to $298.2 million as of December 31, 2021, a decrease of $32.4 million, or 10.9%.

This decrease was attributable to a $67.4 million, net of tax, market adjustment to AOCI related to securities, $2.0 million in cash dividends, and the repurchase of 4,465 shares of common stock for $218,000, partially offset by $36.9 million of net income for the year ended December 31, 2022, and $274,000 of stock compensation.

During the second quarter of 2022, we reclassified certain securities from AFS to HTM.

Such transfers are made at fair value on the date of transfer.

The net unrealized holding loss on the date of transfer is retained, net of tax, in AOCI, with no immediate change to the total balance in AOCI.

The unrealized holding loss will be amortized over the remaining life of the securities.

At the date of transfer, the net unamortized, unrealized loss on the transferred securities included in the consolidated balance sheets totaled $17.9 million, of which $14.2 million, net of tax, was included in AOCI.

As of December 31, 2022, the net unamortized, unrealized loss remaining on the transferred securities included in the consolidated balance sheets totaled $16.0 million, of which $12.6 million, net of tax, was included in AOCI.

On February 4, 2022, our board of directors approved the renewal of the stock repurchase program that was completed in the fourth quarter of 2021 after reaching the purchase limit.

The renewed repurchase program, the 2022 Program, authorized us to purchase up to $5.0 million of our outstanding shares of common stock from February 4, 2022 through December 31, 2022.

For the year ended December 31, 2022, we repurchased 4,465 shares of our common stock at an aggregate cost of $218,000.

Repurchases were made from time to time in the open market at prevailing prices and based on market conditions.

On November 4, 2022, our board of directors approved the renewal of the 2022 Program that expired on December 31, 2022.

The renewed repurchase program, the 2023 Program, authorizes us to purchase up to $5.0 million of our outstanding shares of common stock from January 1, 2023 through December 31, 2023.

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

Repurchases may be subject to a nondeductible excise tax under the Inflation Reduction Act of 2022 equal

to 1.0% of the fair market value of the shares repurchased, subject to certain limitations.

While we may complete transactions subject to the new excise tax, we do not expect a material impact to our financial condition or results of operations.

Regulatory Capital Requirements

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Banking regulators view capital levels as important indicators of an institution’s financial soundness.

As a general matter, FDIC-insured depository institutions are required to maintain minimum capital relative to the amount and types of assets they hold.

As a general matter, bank holding companies and FDIC-insured depository institutions are required to maintain minimum capital relative to the amount and types of assets they hold.

For additional information on regulatory capital guidelines and limits for Red River Bank and Red River Bancshares, Inc., see “Item 8.

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

It is management’s belief that, as of December 31, 2021 and December 31, 2020, the Bank met all capital adequacy requirements.

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

Because we had less than $3.0 billion in assets as of June 30, 2020, the last applicable measurement date, we were not subject to capital adequacy guidelines on a consolidated basis as of December 31, 2021.

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

It is management’s belief that, as of December 31, 2022 and 2021, the Bank met all capital adequacy requirements.

The Economic Growth Act, which was signed into law in May 2018, provides, among other items, certain targeted modifications to prior financial services reform regulatory requirements.

One of the Economic Growth Act’s highlights, with implications for us, was the asset threshold under the Policy Statement being increased from $1.0 billion to $3.0 billion, which benefits bank holding companies by, among various other items, allowing for an 18-month safety and soundness examination cycle as opposed to a 12-month examination cycle, changing to scaled biannual regulatory reporting requirements as opposed to quarterly regulatory reporting requirements, and not subjecting bank holding companies to capital adequacy guidelines on a consolidated basis.

Because we had less than $3.0 billion in assets as of each of the June 30 th measurement dates starting with the Economic Growth Act’s enactment and going through June 30, 2021, we have received benefits under the Policy Statement through 2022, except with regard to the timing of the Red River Bank safety and soundness exam by the FDIC and the OFI.

Due to the timing of the asset balance determination for the Red River Bank safety and soundness examination, a 12-month examination cycle began in the second half of 2022.

As of June 30, 2022, the last applicable measurement date, we had more than $3.0 billion in assets.

Therefore, effective January 1, 2023, we expect to no longer receive any benefits under the Policy Statement and will be subject to the same Basel III minimum capital requirements on a consolidated basis that Red River Bank is subject to.

As we deploy our capital and continue to grow our operations, our capital levels may decrease depending on our level of earnings.

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Tier I Leverage Capital $ 324,239 10.35 % $ 286,595 9.23 %

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.

Another significant provision of the Economic Growth Act was the directive that federal bank regulatory agencies adopt a threshold for a CBLR framework.

As part of the directive under the Economic Growth Act, in September 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.

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

For the years ended December 31, 2021 and December 31, 2020, liquidity needs were primarily met by core deposits, security and loan maturities, and cash flows from amortizing security and loan portfolios.

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

For the years ended December 31, 2022 and 2021, liquidity needs were primarily met by core deposits, security and loan maturities, and cash flows from amortizing security and loan portfolios.

therefore, these cash flows are monitored regularly.

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

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

Access to purchased funds from correspondent banks and overnight advances from the FHLB of

Dallas and the Federal Reserve Bank of Atlanta are also available.

Purchased funds from correspondent banks and overnight advances have been utilized on occasion to meet funding obligations, although we do not generally rely on these external funding sources.

Access to purchased funds from correspondent banks and overnight advances from the FHLB of Dallas and the Federal Reserve Bank of Atlanta are also available.

Purchased funds from correspondent banks and overnight advances can be utilized to meet funding obligations, although we do not generally rely on these external funding sources.

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

1 unchanged sentence

Our average deposits increased $258.3 million, or 10.0%, for the year ended December 31, 2022, compared to the average deposits for the year ended December 31, 2021.

The increase in average total deposits 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.

Our average total loans increased $34.3 million, or 2.2%, for the year ended December 31, 2021, compared to the average total loans for the year ended December 31, 2020.

As of December 31, 2021, our cash and cash equivalents were our second largest component of earning assets.

Cash and cash equivalents were $784.9 million as of December 31, 2021, compared to $447.2 million as of December 31, 2020.

The increase of $337.7 million, or 75.5%, was a result of deposit growth exceeding loan growth that created additional liquidity, which was primarily deployed into interest-bearing deposits in other banks.

Our average total loans increased $194.9 million, or 12.0%, for the year ended December 31, 2022, compared to average total loans for the year ended December 31, 2021.

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

Maintaining the ability to acquire these funds as needed in each of our markets is vital to assuring our liquidity.

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

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

As of December 31, 2021, securities AFS were $659.2 million compared to $498.2 million as of December 31, 2020.

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

As of December 31, 2021 , securities with a carrying value of $118.6 million, or 18.0% of the securities AFS portfolio, were pledged to secure public entity deposits as compared to securities with a carrying value of $105.1 million, or 21.1% of the securities AFS portfolio, similarly pledged as of December 31, 2020.

This increase of $13.5 million, or 12.8%, was primarily due to several large public entity deposit accounts having higher balances as of December 31, 2021 compared to December 31, 2020.

Public entity account balances generally fluctuate throughout the year.

Our securities AFS portfolio is an alternative source for meeting liquidity needs and was our second-largest component of assets as of December 31, 2022.

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

As of December 31, 2022, securities AFS totaled $614.4 million, or 19.9% of assets, compared to $659.2 million, or 20.4% of assets as of December 31, 2021.

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

As of December 31, 2022, securities AFS with a carrying value of $156.7 million, or 25.5% of the securities AFS portfolio, were pledged to secure public entity deposits as compared to securities AFS with a carrying value of $118.6 million, or 18.0% of the securities AFS portfolio, similarly pledged as of December 31, 2021.

This increase of $38.1 million, or 32.1%, was primarily the result of utilizing securities to replace FHLB of Dallas letters of credit as pledged collateral, combined with an increase in several public entity deposit accounts that occurred during 2022.

During the second quarter of 2022, we reclassified $166.3 million, or 20.5% of the securities portfolio, from AFS to HTM.

Significant limitations exist for selling debt securities classified as HTM;

therefore, they are excluded from liquidity sources.

For additional information, see “Item 8.

Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2.

Securities - Securities AFS and Securities HTM.”

Interest-bearing deposits in other banks are our main source of meeting daily liquidity needs and were our third-largest component of assets as of December 31, 2022.

Interest-bearing deposits in other banks were $240.6 million, or 7.8% of assets, as of December 31, 2022, compared to $761.7 million, or 23.6% of assets, as of December 31, 2021.

The decrease of $521.2 million, or 68.4%, was primarily a result of deploying funds into securities and loans, combined with an outflow of deposits, during 2022.

We also utilize the FHLB of Dallas as needed as a viable funding source.

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

As of December 31, 2021 and 2020, we held unfunded letters of credit from the FHLB of Dallas in the amount of $143.8 million and $169.7 million, respectively.

As of December 31, 2022 and 2021, we held unfunded letters of credit in the amount of $100.9 million and $143.8 million, respectively.

As of December 31, 2022 and 2021, our net borrowing capacity from the FHLB of Dallas was $774.9 million and $604.8 million, respectively.

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We also maintain an additional $6.0 million revolving line of credit at one of our correspondent banks.

As of December 31, 2021 and 2020, we had total borrowing capacity of $101.0 million through these combined funding sources.

We had no outstanding balances from either of these funding sources as of December 31, 2021 and 2020.

As of December 31, 2022 and 2021, we had total

borrowing capacity of $101.0 million through these combined funding sources.

We had no outstanding balances from either of these funding sources as of December 31, 2022 or 2021.

Off-Balance Sheet Items

4 unchanged sentences

Financial Statements and Supplementary Data - Note 3.

Loans and Asset Quality - Commitments to Extend Credit.” For more information about our financial commitments with time deposits;

operating lease obligations;

and limited partnership investments, purchase commitments, and construction commitments, see “Item 8.

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

Financial Statements and Supplementary Data - Note 5.

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Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits, and consumer and commercial deposit activity.

We employ methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, as well as an interest rate shock simulation model.

We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity and the impact of changes in interest rates on other financial metrics.

We employ methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, as well as an interest rate simulation model and shock analysis.

We use an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity and the impact of changes in interest rates on other financial metrics.

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

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

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

Actual results will differ from the model’s simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various management strategies.

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

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

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

The average life of non-maturity deposit accounts are based on assumptions developed from a non-maturity deposit decay study, which calculates average lives using historic closure rates.

In conjunction with our interest rate risk management process, on a quarterly basis, we run various simulations within a static balance sheet.

This model tests the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios.

Rates are shocked instantaneously and ramped rates change over a 12-month and 24-month horizon based upon parallel yield curve shifts.

Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario.

Our nonparallel rate shock model involves analysis of interest income and expense under various changes in the shape of the yield curve.

Our nonparallel rate shock model simulation involves analysis of interest income and expense under various changes in the shape of the yield curve.

Bank policy regarding interest rate risk simulations performed by our risk model currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 10.0% for a 100 bp shift and 15.0% for a 200 bp shift.

Bank policy regarding economic value at risk simulations performed by our risk model currently specifies that for instantaneous parallel shifts of the yield curve, estimated fair value of equity for the subsequent one-year period should not decline by more than 20.0% for a 100 bp shift and 25.0% for a 200 bp shift.

Bank policy regarding economic value at risk

simulations performed by our risk model currently specifies that for instantaneous parallel shifts of the yield curve, estimated fair value of equity for the subsequent one-year period should not decline by more than 20.0% for a 100 bp shift and 25.0% for a 200 bp shift.

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

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The results above, as of December 31, 2022 and 2021, demonstrate that our balance sheet is asset sensitive, which means our assets have the opportunity to reprice at a faster pace than our liabilities, over the 12-month horizon.

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

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

The percentage of change in the fair value of equity exceeds the policy threshold in the down 200 bp scenario as of December 31, 2021, due to the very low interest rate environment and current yield curve shapes.

These values will be reported at the next quarterly Asset-Liability Committee meeting, and these metrics will continue to be monitored.

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

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

As of December 31, 2022, the reported percentage of changes in net interest income and fair value of equity remained within the policy thresholds.

These values are reported at each quarterly Asset-Liability Committee meeting.

The net interest income at risk and the fair value of equity will continue to be monitored, and appropriate mitigating action will be taken if needed.

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

As of December 31, 2021, floating rate loans were 15.0% of the loans HFI and floating rate transaction deposits were 4.4% of the interest-bearing transaction deposits.

As of December 31, 2022, floating rate loans were 14.5% of loans HFI, and floating rate transaction deposits were 2.6% of interest-bearing transaction deposits.

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

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GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

The primary effect of inflation on our operations is reflected in increased operating costs.

Changes in interest rates affect the financial condition of a financial institution to a much greater degree than changes in the inflation rate.

While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or by the same level as the inflation rate.

The primary effect of inflation on our operations is our ability to manage the impact of changes in interest rates.

In addition, inflation could also increase our operating costs related to our products and services.

NON-GAAP FINANCIAL MEASURES

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

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

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

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

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

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

measures similar to the non-GAAP financial measures discussed in this Report when comparing such non-GAAP financial measures.

Tangible Assets, Tangible Equity, and Tangible Book Value

Tangible Book Value Per Common Share .

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

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

We calculate tangible book value per common share as total stockholders’ equity, less intangible assets, divided by the outstanding number of shares of our common stock at the end of the relevant period.

Moreover, the manner that

we calculate the non-GAAP financial measures that are discussed in this Report may differ from that of other companies’ reporting measures with similar names.

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

Tangible Assets, Tangible Equity, Tangible Book Value, and Realized Book Value

Tangible Book Value Per Share .

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

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

We calculate tangible book value per share as total stockholders’ equity, less intangible assets, divided by the outstanding number of shares of our common stock at the end of the relevant period.

Intangible assets have the effect of increasing total book value while not increasing tangible book value.

The most directly comparable GAAP financial measure for tangible book value per common share is book value per common share.

The most directly comparable GAAP financial measure for tangible book value per share is book value per share.

Tangible Common Equity to Tangible Assets .

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As of December 31, 2022, total intangible assets were $1.5 million, which is less than 1.0% of total assets.

The following table reconciles, as of the dates set forth below, stockholders’ equity to tangible common equity, and assets to tangible assets, and presents related resulting ratios.

Realized Book Value Per Share.

Realized book value per share is a non-GAAP measure that we use to evaluate our operating performance.

We believe that this measure is important because it allows us to monitor changes from period to period in book value per share exclusive of changes in AOCI.

Our AOCI is impacted primarily by the unrealized gains and losses on securities AFS.

These unrealized gains or losses on securities AFS are driven by market factors and may also be temporary and vary greatly from period to period.

Due to the possibly temporary and greatly variable nature of these changes, we find it useful to monitor realized book value per share.

We calculate realized book value per share as total stockholders’ equity less AOCI, divided by the outstanding number of shares of our common stock at the end of the relevant period.

AOCI has the effect of increasing or decreasing total book value while not increasing or decreasing realized book value.

The most directly comparable GAAP financial measure for realized book value per share is book value per share.

The following table reconciles, as of the dates set forth below, stockholders’ equity to tangible common equity, stockholders’ equity to realized common equity, and assets to tangible assets, and presents related resulting ratios:

(dollars in thousands, except per share data) 2022 2021 2020

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$ 264,207 $ 296,604 $ 283,932

Realized common equity

Total stockholders’ equity

$ 265,753 $ 298,150 $ 285,478

Accumulated other comprehensive (income) loss

71,166 3,773 (6,921)

Total realized common equity (non-GAAP)

$ 336,919 $ 301,923 $ 278,557

Common shares outstanding 7,183,915 7,180,155 7,325,333

Book value per common share $ 41.52 $ 38.97 $ 34.48

Tangible book value per common share (non-GAAP) $ 41.31 $ 38.76 $ 34.27

Book value per share $ 36.99 $ 41.52 $ 38.97

Tangible book value per share (non-GAAP) $ 36.78 $ 41.31 $ 38.76

Realized book value per share (non-GAAP) $ 46.90 $ 42.05 $ 38.03

Tangible assets

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$ 3,081,140 $ 3,223,164 $ 2,641,088

Total stockholder’s equity to assets 9.25 % 10.80 % 12.67 %

Total stockholders’ equity to assets 8.62 % 9.25 % 10.80 %

Tangible common equity to tangible assets (non-GAAP) 8.57 % 9.20 % 10.75 %

PPP-Adjusted Metrics

In 2020 and 2021, Red River Bank participated in the SBA PPP and originated 1,888 PPP loans totaling $260.8 million.

Red River Bank participated in the SBA PPP and originated 1,888 PPP loans totaling $260.8 million.

PPP loan originations were concluded in the second quarter of 2021.

Through December 31, 2021, we had received $242.7 million in SBA forgiveness and borrower payments on 94.4% of the PPP loans originated.

As of December 31, 2021, PPP loans totaled $17.6 million, net of $626,000 of deferred income, and were 1.0% of loans HFI.

PPP loans were implemented as a response to the COVID-19 pandemic and have characteristics that are different than the rest of our loan portfolio, including being short-term in nature (24 or 60 months or less depending on loan forgiveness timing), having a lower than market interest rate, and only being originated during specified time periods during the COVID-19 pandemic.

Because of these factors, management believes that PPP-adjusted metrics provide a more accurate

portrayal of certain aspects of the Company’s financial condition and performance.

Through December 31, 2022, we had received SBA forgiveness or borrower payments on all of the PPP loans originated except for $14,000.

As of December 31, 2022, PPP loans totaled $14,000 and were less than 0.1% of loans HFI.

PPP loans were implemented as a response to the COVID-19 pandemic and had characteristics that were different than the rest of our loan portfolio, including being short-term in nature (24 or 60 months or less depending on loan forgiveness timing), having a lower than market interest rate, and only being originated during specified time periods during the COVID-19 pandemic.

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

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

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

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

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

(dollars in thousands) 2022 2021 2020

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Non-PPP loans HFI (non-GAAP) $ 1,916,253 $ 1,666,282 $ 1,469,999

Assets excluding PPP loans, net

Assets $ 3,224,710 $ 2,642,634 $ 1,988,225

PPP loans, net (17,550) (118,447) —

Assets excluding PPP loans, net (non-GAAP) $ 3,207,160 $ 2,524,187 $ 1,988,225

Deposits $ 2,910,348 $ 2,340,360 $ 1,721,120

Allowance for loan losses $ 19,176 $ 17,951 $ 13,937

Nonperforming loans $ 319 $ 3,310 $ 5,319

Loans HFI to deposits ratio 57.86 % 67.87 % 83.60 %

Non-PPP loans HFI to deposits ratio (non-GAAP) 57.25 % 62.81 % 83.60 %

Allowance for loan losses to loans HFI 1.14 % 1.13 % 0.97 %

Allowance for loan losses to non-PPP loans HFI (non-GAAP) 1.15 % 1.22 % 0.97 %

Nonperforming loans to loans HFI 0.02 % 0.21 % 0.37 %

Nonperforming loans to non-PPP loans HFI (non-GAAP) 0.02 % 0.23 % 0.37 %

CRITICAL ACCOUNTING ESTIMATES

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Financial Statements and Supplementary Data - Note 1.

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

Significant Accounting Policies” for details on the significant accounting principles and practices we follow.

Allowance for Loan Losses

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

Red River Bank currently utilizes the

incurred loss methodology to estimate the allowance for loan losses.

The CECL model is effective for Red River Bank on January 1, 2023.

Through December 31, 2022, Red River Bank utilized the incurred loss methodology to estimate the allowance for loan losses.

The CECL model was effective for Red River Bank on January 1, 2023.

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

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For purposes of determining the general reserves, the loan portfolio, less cash secured loans and impaired loans, is multiplied by our historical loss rates adjusted for qualitative risk factors.

The qualitative component of the allowance for loan losses reflects the stress in the economy related to the COVID-19 pandemic.

The determination of the allowance for loan losses is, in a large part, based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

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Financial Statements and Supplementary Data - Note 1.

Business and Summary of Significant Accounting Policies - Accounting Standards Adopted in 2021” and “ - Issued but Not Adopted Accounting Standards.”

Significant Accounting Policies - Accounting Standards Adopted in 2022” and “- Recent Accounting Pronouncements.”

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis