RED RIVER BANCSHARES INC 10-K

Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Red River Bancshares, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Red River Bancshares, Inc. and its subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Postlethwaite & Netterville We have served as the Company’s auditor since 1998. Baton Rouge, Louisiana March 16, 2023 65 Table of Contents RED RIVER BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) December 31, 2022 2021 ASSETS Cash and due from banks $ 37,824 $ 23,143 Interest-bearing deposits in other banks 240,568 761,721 Total Cash and Cash Equivalents 278,392 784,864 Securities available-for-sale, at fair value 614,407 659,178 Securities held-to-maturity, at amortized cost 151,683 — Equity securities, at fair value 9,979 7,846 Nonmarketable equity securities 3,478 3,450 Loans held for sale 518 4,290 Loans held for investment 1,916,267 1,683,832 Allowance for loan losses ( 20,628 ) ( 19,176 ) Premises and equipment, net 54,383 48,056 Accrued interest receivable 8,830 6,245 Bank-owned life insurance 28,775 28,061 Intangible assets 1,546 1,546 Right-of-use assets 4,137 3,743 Other assets 30,919 12,775 Total Assets $ 3,082,686 $ 3,224,710 LIABILITIES Noninterest-bearing deposits $ 1,090,539 $ 1,149,672 Interest-bearing deposits 1,708,397 1,760,676 Total Deposits 2,798,936 2,910,348 Accrued interest payable 1,563 1,310 Lease liabilities 4,258 3,842 Accrued expenses and other liabilities 12,176 11,060 Total Liabilities 2,816,933 2,926,560 COMMITMENTS AND CONTINGENCIES — — STOCKHOLDERS’ EQUITY Preferred stock, no par value: Authorized - 1,000,000 shares; None Issued and Outstanding — — Common stock, no par value: Authorized - 30,000,000 shares; Issued and Outstanding - 7,183,915 and 7,180,155 shares, respectively 60,050 60,233 Additional paid-in capital 2,088 1,814 Retained earnings 274,781 239,876 Accumulated other comprehensive income (loss) ( 71,166 ) ( 3,773 ) Total Stockholders’ Equity 265,753 298,150 Total Liabilities and Stockholders’ Equity $ 3,082,686 $ 3,224,710 The accompanying notes are an integral part of these consolidated financial statements. 66 Table of Contents RED RIVER BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Years Ended December 31, 2022 2021 INTEREST AND DIVIDEND INCOME Interest and fees on loans $ 75,827 $ 67,923 Interest on securities 13,735 8,660 Interest on federal funds sold 1,091 88 Interest on deposits in other banks 3,682 658 Dividends on stock 40 10 Total Interest and Dividend Income 94,375 77,339 INTEREST EXPENSE Interest on deposits 7,736 5,617 Total Interest Expense 7,736 5,617 Net Interest Income 86,639 71,722 Provision for loan losses 1,750 1,900 Net Interest Income After Provision for Loan Losses 84,889 69,822 NONINTEREST INCOME Service charges on deposit accounts 5,565 4,775 Debit card income, net 3,897 4,415 Mortgage loan income 3,096 8,676 Brokerage income 3,549 3,297 Loan and deposit income 1,723 1,738 Bank-owned life insurance income 713 648 Gain (Loss) on equity securities ( 468 ) ( 175 ) Gain (Loss) on sale and call of securities ( 59 ) 194 SBIC income 563 654 Other income (loss) 168 271 Total Noninterest Income 18,747 24,493 OPERATING EXPENSES Personnel expenses 34,560 32,449 Occupancy and equipment expenses 6,109 5,443 Technology expenses 2,763 2,810 Advertising 1,134 921 Other business development expenses 1,645 1,169 Data processing expense 2,093 1,982 Other taxes 2,714 2,082 Loan and deposit expenses 659 1,016 Legal and professional expenses 1,997 1,683 Regulatory assessment expenses 1,058 933 Other operating expenses 3,923 3,767 Total Operating Expenses 58,655 54,255 Income Before Income Tax Expense 44,981 40,060 Income tax expense 8,065 7,108 Net Income $ 36,916 $ 32,952 EARNINGS PER SHARE Basic $ 5.14 $ 4.53 Diluted $ 5.13 $ 4.51 The accompanying notes are an integral part of these consolidated financial statements. 67 Table of Contents RED RIVER BANCSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Years Ended December 31, 2022 2021 Net income $ 36,916 $ 32,952 Other comprehensive income (loss): Unrealized net gain (loss) on securities arising during period ( 87,342 ) ( 13,343 ) Tax effect 18,342 2,802 (Gain) Loss on sale and call of securities included in net income 59 ( 194 ) Tax effect ( 13 ) 41 Change in unrealized net loss on securities transferred to held-to-maturity 1,975 — Tax effect ( 414 ) — Total other comprehensive income (loss) ( 67,393 ) ( 10,694 ) Comprehensive Income (Loss) $ ( 30,477 ) $ 22,258 The accompanying notes are an integral part of these consolidated financial statements. 68 Table of Contents RED RIVER BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (dollars in thousands, except per share amounts) Common Shares Issued Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Balance as of December 31, 2020 7,325,333 $ 68,055 $ 1,545 $ 208,957 $ 6,921 $ 285,478 Net income — — — 32,952 — 32,952 Stock incentive plan — — 269 — — 269 Issuance of restricted shares of common stock through stock incentive plan, net 7,400 — — — — — Forfeiture of restricted shares of common stock ( 100 ) — — — — — Issuance of shares of common stock as board compensation 1,075 56 — — — 56 Repurchase of common stock under stock repurchase program ( 153,553 ) ( 7,878 ) — — — ( 7,878 ) Cash dividend - $ 0.28 per share — — — ( 2,033 ) — ( 2,033 ) Other comprehensive income (loss) — — — — ( 10,694 ) ( 10,694 ) Balance as of December 31, 2021 7,180,155 $ 60,233 $ 1,814 $ 239,876 $ ( 3,773 ) $ 298,150 Net income — — — 36,916 — 36,916 Stock incentive plan — — 274 — — 274 Issuance of restricted shares of common stock through stock incentive plan, net 7,550 — — — — — Issuance of shares of common stock as board compensation 675 35 — — — 35 Repurchase of common stock under stock repurchase program ( 4,465 ) ( 218 ) — — — ( 218 ) Cash dividend - $ 0.28 per share — — — ( 2,011 ) — ( 2,011 ) Other comprehensive income (loss) — — — — ( 67,393 ) ( 67,393 ) Balance as of December 31, 2022 7,183,915 $ 60,050 $ 2,088 $ 274,781 $ ( 71,166 ) $ 265,753 The accompanying notes are an integral part of these consolidated financial statements. 69 Table of Contents RED RIVER BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 36,916 $ 32,952 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 2,076 1,906 Amortization 533 646 Share-based compensation earned 274 269 Share-based board compensation earned 85 50 (Gain) Loss on other assets owned 60 ( 184 ) Net (accretion) amortization on securities AFS 2,339 2,479 Net (accretion) amortization on securities HTM ( 1,953 ) — (Gain) Loss on sale and call of securities 59 ( 194 ) (Gain) Loss on equity securities 468 175 Provision for loan losses 1,750 1,900 Deferred income tax (benefit) expense 313 ( 773 ) Net (increase) decrease in loans HFS 3,772 24,826 Net (increase) decrease in accrued interest receivable ( 2,585 ) 635 Net (increase) decrease in BOLI ( 714 ) ( 648 ) Net increase (decrease) in accrued interest payable 253 ( 464 ) Net increase (decrease) in accrued income taxes payable 374 ( 70 ) Other operating activities, net 1,847 ( 1,241 ) Net cash provided by (used in) operating activities 45,867 62,264 CASH FLOWS FROM INVESTING ACTIVITIES Activity in securities AFS: Sales 31,762 113,524 Maturities, principal repayments, and calls 70,531 99,175 Purchases ( 313,514 ) ( 389,493 ) Activity in securities HTM: Maturities, principal repayments, and calls 16,580 — Sale of equity securities 7,399 — Purchase of equity securities ( 10,000 ) ( 4,000 ) Purchase of nonmarketable equity securities ( 28 ) ( 3 ) Capital contribution in partnerships ( 892 ) ( 173 ) Net (increase) decrease in loans HFI ( 232,733 ) ( 96,327 ) Purchase of bank owned life insurance — ( 5,000 ) Proceeds from sales of foreclosed assets 641 563 Proceeds from sales of premises and equipment — 483 Purchases of premises and equipment ( 8,444 ) ( 3,427 ) Net cash provided by (used in) investing activities ( 438,698 ) ( 284,678 ) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits ( 111,412 ) 569,988 Repurchase of common stock ( 218 ) ( 7,878 ) Cash dividends ( 2,011 ) ( 2,033 ) Net cash provided by (used in) financing activities ( 113,641 ) 560,077 Net change in cash and cash equivalents ( 506,472 ) 337,663 Cash and cash equivalents - beginning of year 784,864 447,201 Cash and cash equivalents - end of year $ 278,392 $ 784,864 The accompanying notes are an integral part of these consolidated financial statements. 70 Table of Contents RED RIVER BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (in thousands) Years Ended December 31, 2022 2021 SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest $ 7,483 $ 6,080 Income taxes $ 7,351 $ 7,989 SUPPLEMENTAL INFORMATION FOR NON-CASH INVESTING AND FINANCING ACTIVITIES Assets acquired in settlement of loans $ — $ 266 Transfers of investment securities from AFS to HTM, prior to market value adjustment $ 184,238 $ — The accompanying notes are an integral part of these consolidated financial statements. 71 Table of Contents RED RIVER BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Significant Accounting Policies Nature of Operations The Company is a bank holding company headquartered in Alexandria, Louisiana. The Company’s wholly owned bank subsidiary, Red River Bank, is a Louisiana state-chartered bank that provides a fully integrated suite of banking products and services tailored to the needs of commercial and retail customers. 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: Central, which includes the Alexandria MSA; Northwest, which includes the Shreveport-Bossier City MSA; Capital, which includes the Baton Rouge MSA; Southwest, which includes the Lake Charles MSA; the Northshore, which includes Covington; Acadiana, which includes the Lafayette MSA; and New Orleans. Basis of Presentation The consolidated financial statements include the accounts of the Company and all other entities in which the Company has controlling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to GAAP and the prevailing practices within the banking industry. Operating Segments While the chief operating decision-maker monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment. Use of Estimates The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Acquisition Accounting The Company accounts for its acquisitions under ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. Purchased assets, including loans, and assumed liabilities are recorded at their respective acquisition date fair values. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Cash and Cash Equivalents Cash and cash equivalents consist of cash and due from banks and interest-bearing deposits in other banks. Interest-bearing deposits in other banks consist of money market and checking accounts and are carried at cost. Securities All debt securities of the Company as of December 31, 2022 and 2021, were classified either as AFS or HTM. Securities AFS are held for indefinite periods of time and are carried at estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of tax. Securities HTM, which the Company has the intent and ability to hold until maturity, are carried at amortized cost. Realized gains and losses on the sale and call of securities are determined using the specific-identification method. Purchased premiums and discounts are recognized in interest income using the interest method over the term of the securities. Equity securities include a CRA mutual fund owned by the Company, which is carried at fair value with any periodic changes in value recorded through the statements of income. Declines in the fair value of HTM and AFS debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the losses are credit related. FASB issued accounting guidance related to the recognition and presentation of OTTI. The accounting guidance specifies that if (1) a company does not have the intent to sell a debt security prior to recovery; and (2) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, the entity will recognize the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive income (loss). For HTM debt securities, the amount of OTTI recorded in other comprehensive income (loss) for the noncredit portion of an OTTI should be amortized over the remaining life of the security based on the timing of its future estimated cash flows. 72 Table of Contents Nonmarketable Equity Securities Nonmarketable equity securities, which include investments in the FHLB of Dallas and First National Banker’s Bank, are carried at cost. Loans Held for Sale Residential mortgage loans originated and intended for sale are carried at the lower of cost or estimated fair value on an individual basis. These mortgage loans are pre-sold prior to funding. Loans Held for Investment Loans that management has the intent and ability to hold, for the foreseeable future or until maturity or payoff, are HFI and carried at their principal amount outstanding, net of deferred loan fees. Interest income on loans is accrued on the principal amount outstanding except for those loans that are classified as nonaccrual. Loan origination fees, net of certain direct costs, are deferred and recognized over the estimated lives of the related loans as an adjustment to the loans’ effective yield. Loans are placed on nonaccrual when management determines that a borrower may be unable to meet future contractual payments as they become due or when such loans become 90 days past due, unless they are well secured and in the process of collection. When a loan is placed on nonaccrual, uncollected accrued interest is reversed, reducing interest income, and future income accrual is discontinued. Subsequent payments, if any, of interest and fees are applied as reductions to the loan’s outstanding principal balance. Once the principal balance of a loan placed on nonaccrual has been fully recovered, subsequent payments received are recognized as income on a cash basis. Loans are returned to accrual status when the principal and interest amounts contractually due are brought current and future payments are reasonably assured. A loan is charged-off to the allowance for loan losses in full when management is relatively certain that principal and interest will be uncollectible. Management may elect to partially charge-off a loan to adjust the principal balance to the net realizable value of the collateral that secures the loan. When a partial charge-off is made, the remaining balance of the loan is placed on nonaccrual. Recoveries of amounts previously charged-off, if any, are credited to the allowance for loan losses until the principal balance of the loan is fully recovered. Any subsequent payments are recognized as income. Acquired Loans Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, Fair Value Measurements and Disclosures. The fair value estimates associated with acquired loans include estimates related to expected prepayments and the amount and timing of expected principal, interest, and other cash flows. Acquired loans, for which all contractual cash flows are expected to be received, are accounted for under the accounting guidance found in ASC Topic 310-20, Receivables - Nonrefundable Fees and Other Costs. Acquired loans, with evidence of credit deterioration, are accounted for under the accounting guidance found in ASC Topic 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality. There is no carryover of related allowance for loan losses at the acquisition date as assumptions regarding credit risk are incorporated in the valuation process. However, subsequent to acquisition, the acquired loan portfolio is reviewed, and an allowance for loan losses is established for probable losses incurred after the acquisition date. Allowance for Loan Losses The allowance for loan losses is established for known and inherent losses in the loan portfolio based upon management’s best assessment of the loan portfolio at each balance sheet date. It is maintained at a level estimated to be adequate to absorb potential losses through periodic changes to loan losses. The allowance for loan losses consists of specific and general reserves. Specific reserves relate to loans classified as impaired. Loans are considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due in accordance with the contractual terms of the loan. Impaired loans include TDRs and performing and nonperforming loans. Impaired loans are reviewed individually, and a specific allowance is allocated, if necessary, based on evaluation of either the fair value of the collateral underlying the loan or the present value of future cash flows calculated using the loan’s existing interest rate. General reserves relate to the remainder of the loan portfolio, including overdrawn deposit accounts, and are based on an evaluation of a number of factors, such as current economic conditions, the quality and composition of the loan portfolio, loss history, and other relevant factors. The Bank’s loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Bank has a diversified loan portfolio, a substantial portion of its borrowers’ ability to honor their contractual repayment obligations is dependent on changing economic conditions. Because of the uncertainties associated with economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of loan losses in the loan portfolio and the amount of the allowance needed may change in the future. The determination of the allowance for loan losses is, in a large part, based on estimates that are particularly 73 Table of Contents susceptible to significant changes in the economic environment and market conditions. In situations where the repayment of a loan is dependent on the value of the underlying collateral, an independent appraisal of the collateral’s current market value is customarily obtained and used in the determination of the allowance for loan losses. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in economic conditions. Also, regulatory agencies, as an integral part of their examination process, periodically review management’s assessments of the adequacy of the allowance for loan losses. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Foreclosed Assets Assets acquired through, or in lieu of, loan foreclosure are HFS and are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell. Foreclosed assets are included in other assets on the consolidated balance sheets. As of December 31, 2022, the Company had no foreclosed assets. As of December 31, 2021, the balance of foreclosed assets was $ 660,000 . Credit Related Financial Information In the ordinary course of business, the Bank has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded. Premises and Equipment, Net Premises and equipment are stated at cost less accumulated depreciation, which is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 40 years. Bank-Owned Life Insurance The Bank has purchased life insurance policies on certain key employees. The Bank is the beneficiary of the BOLI policies, which may be on past or present employees. BOLI policies have death benefits as well as a cash surrender value component, which is carried as an asset on the consolidated balance sheets. Intangible Assets Intangible assets consist of goodwill. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. Goodwill is not amortized but rather evaluated for impairment annually. The Company performed its annual impairment test of goodwill for 2022 and 2021 as required by ASC 350, Intangibles - Goodwill and Other. The evaluation indicated no impairment of the Company’s goodwill. Treasury Stock On January 1, 2015, the LBCA became effective. Under provisions of the LBCA, there is no concept of “Treasury Shares.” Rather, shares purchased by the Company constitute authorized but unissued shares. Accordingly, the Company’s consolidated balance sheets reflect the cost of shares purchased by the Company within common stock. Comprehensive Income Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes the after tax effect of unrealized net gains and losses on securities AFS and the amortization of the unrealized net loss on securities transferred to HTM. Stock-Based Compensation Plans The Company has adopted stock incentive plans that provide for the granting of stock-based awards to key employees, directors, and consultants. The Company accounts for the stock incentive plans in accordance with applicable accounting guidance. Under the fair value recognition provisions of this guidance, stock-based compensation cost is measured at the grant date based on the fair value of the award and recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The restricted stock granted under these plans provides common stock to recipients at the grant date. The restrictions vest in twenty percent increments on the first through fifth anniversaries of the grant date. The Company recognizes forfeitures as they occur. The Company has a Director Compensation Program, which allows directors the option of receiving their board attendance fees in Company stock in lieu of cash. Board compensation expense is recorded when board service is rendered. Advertising Cost Advertising costs are expensed as incurred. 74 Table of Contents Income Tax The provision for income tax is based on taxes payable or receivable for the current year and deferred taxes on temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company has adopted the provisions of accounting guidance related to accounting for uncertainty in income taxes. This interpretation clarifies that the benefit of a position taken or expected to be taken in a tax return should be recognized in a company’s financial statements when it is more likely than not that the position will be sustained based on technical merits. The Company recognizes interest and penalties on income taxes as a component of income tax expense. The effect on deferred tax assets of a change in tax rate is recognized in income as part of income tax expense for the period that includes the enactment date. Deferred tax assets and liabilities have been measured as of December 31, 2022 and 2021, using the 21.0% corporate tax rate. For more information, see “Note 8. Income Tax Expense.” Earnings per Common Share Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits. Diluted EPS includes accrued but unissued shares relating to the Director Compensation Program, stock options, and restricted stock determined using the treasury stock method. A reconciliation of the weighted-average shares used in calculating basic EPS and diluted EPS for the reported periods is provided in “Note 16. Earnings Per Common Share.” Revenue Recognition The Company has identified certain recurring revenue streams related to noninterest income, which are within the scope of Topic 606, Revenue from Contracts with Customers . In-scope revenue streams are summarized based on the timing of revenue recognition as follows: • Revenue earned at a point in time - Fee income (including wire transfer, check ordering, and other transactional fees), NSF/OD charges, ATM/Card fee income (including ATM transaction fees and credit and debit card interchange income), and brokerage transaction income. Revenue is recorded as transactions occur or services are provided to customers. Revenue recognized under these contracts totaled approximately $ 16.5 million and $ 15.4 million for the years ended December 31, 2022 and 2021, respectively. The Company is the principal in each of these contracts with the exception of credit and debit card interchange fees, online transaction interchange fees, sweep income, and brokerage services income, in which case the Company is acting as the agent and records revenue net of expenses paid. • Revenue earned over time (generally under a monthly contract) - Debit card agreement, safe deposit box fees, and brokerage agreement income. Revenue is recorded in the period transactions occur or services are rendered to the customer. The Company is the principal in each of these contracts. Revenue recognized under these contracts totaled approximately $ 771,000 and $ 765,000 for the years ended December 31, 2022 and 2021, respectively. There are no significant judgments relating to the amount and timing of revenue recognition for revenue streams within the scope of Topic 606, Revenue from Contracts with Customers . Due to the nature of the services the Company provides to its customers, it does not incur costs to obtain contracts, and there are no material incremental costs to fulfill these contracts that should be capitalized. Additionally, there are no material contract assets or receivables as the Company does not typically enter into long-term revenue contracts with customers. As of December 31, 2022 and 2021, the Bank had $ 1.4 million and $ 2.0 million, respectively, of contract liabilities, which are reported in accrued expenses and other liabilities on the consolidated balance sheets. During the years ended December 31, 2022 and 2021, the Bank recognized $ 605,000 each year, of revenue relating to these contract liabilities and expects to recognize the remaining liabilities as revenue ratably through June 2025. Accounting Standards Adopted in 2022 ASU No. 2021-05, Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments . The guidance issued in this update addressed lessors’ concerns by amending the lease classification requirements. The amendments in this update address an issue related to a lessor’s accounting for certain leases with variable lease payments. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if two criteria are met. Those criteria are that the lease would have been classified as a sales-type lease or a direct financing lease in accordance with GAAP, and that the lessor would have otherwise recognized a day-one loss. ASU 2021-05 was adopted as of January 1, 2022, and did not have a material impact on the Company’s consolidated financial statements. 75 Table of Contents ASU No. 2022-06, Reference Rate Reform (Topic 848) Deferral of the Sunset Date of Topic 848 . The amendments in this update defer the sunset date for temporary relief during the LIBOR transition period of Topic 848 from December 31, 2022 to December 31, 2024. This amendment was adopted upon issuance in December 2022. The Company has several loans that are LIBOR-based with a setting that expires June 30, 2023. Alternative rate language is present in each credit agreement with a LIBOR-based rate. Transition is expected to be complete by June 30, 2023. Adoption of this ASU did not have an impact on the Company’s consolidated financial statements. Recent Accounting Pronouncements ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 sets forth the CECL model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses. The Company adopted this guidance effective January 1, 2023. The adoption of this standard has required significant changes to the processes and procedures required to calculate the allowance for credit losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The Company expects the adoption of this standard to result in a combined 3.5 % increase in its allowance for credit losses and allowance for unfunded commitments. In addition, ASU 2016-13 amends the accounting for credit losses on securities AFS and requires an allowance for expected credit losses for certain securities HTM, including municipal securities HTM. The Company does not hold any municipal securities HTM. As of January 1, 2023, there was no impact to the allowance for credit losses from the Company’s securities AFS and securities HTM. In the first quarter of 2023, there may be additional adjustments to the allowance for credit losses when the Company finalizes its first quarter of 2023 financial statements. For additional information on the allowance for loan losses, see “Note 3. Loans and Asset Quality - Allowance for Loan Losses.” ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this update address how to determine whether a contract liability is recognized by the acquirer in a business combination. The amendment also resolves the inconsistency of post-acquisition revenue recognition by providing specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This standard was adopted by the Company on January 1, 2023. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements. ASU No. 2022-02 Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . The guidance issued in this update eliminates the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors , but also enhances the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The guidance requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost . This standard was adopted by the Company on January 1, 2023. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements. Reclassification Certain amounts in the 2021 consolidated financial statements have been reclassified to conform to the 2022 presentation. These changes in presentation did not have a material impact on the Company’s financial condition or results of operations. 2. Securities Securities are classified as AFS, HTM, and equity securities. Total securities were $ 776.1 million as of December 31, 2022. Securities AFS and Securities HTM Securities AFS and securities HTM are debt securities. 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. During the second quarter of 2022, the Company reclassified $ 166.3 million, net of $ 17.9 million of unrealized loss, or 20.5 % of the securities portfolio, from AFS to HTM. The securities were transferred at fair value, which became the cost basis for the securities HTM. The net unrealized loss will be amortized over the remaining life of the securities as a yield 76 Table of Contents adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. There were no gains or losses recognized as a result of the transfer. Securities HTM, which the Company has 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 amortized cost and estimated fair value of securities AFS and securities HTM are summarized in the following tables: December 31, 2022 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Securities AFS: Mortgage-backed securities $ 272,253 $ — $ ( 31,272 ) $ 240,981 Municipal bonds 219,305 6 ( 35,219 ) 184,092 U.S. Treasury securities 176,380 — ( 5,902 ) 170,478 U.S. agency securities 20,601 — ( 1,745 ) 18,856 Total Securities AFS $ 688,539 $ 6 $ ( 74,138 ) $ 614,407 Securities HTM: Mortgage-backed securities $ 150,771 $ — $ ( 19,142 ) $ 131,629 U.S. agency securities 912 — ( 134 ) 778 Total Securities HTM $ 151,683 $ — $ ( 19,276 ) $ 132,407 December 31, 2021 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Securities AFS: Mortgage-backed securities $ 386,874 $ 1,112 $ ( 8,460 ) $ 379,526 Municipal bonds 227,248 3,665 ( 942 ) 229,971 U.S. Treasury securities 41,770 — ( 154 ) 41,616 U.S. agency securities 8,062 61 ( 58 ) 8,065 Total Securities AFS $ 663,954 $ 4,838 $ ( 9,614 ) $ 659,178 Securities HTM: Mortgage-backed securities $ — $ — $ — $ — U.S. agency securities — — — — Total Securities HTM $ — $ — $ — $ — 77 Table of Contents The amortized cost and estimated fair value of securities AFS and securities HTM as of December 31, 2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers have the right to call or repay obligations with or without call or prepayment penalties. December 31, 2022 (in thousands) Amortized Cost Fair Value Securities AFS: Within one year $ 92,145 $ 90,267 After one year but within five years 116,609 111,218 After five years but within ten years 84,843 77,988 After ten years 394,942 334,934 Total Securities AFS $ 688,539 $ 614,407 Securities HTM: Within one year $ — $ — After one year but within five years — — After five years but within ten years 912 778 After ten years 150,771 131,629 Total Securities HTM $ 151,683 $ 132,407 78 Table of Contents Information pertaining to securities AFS and securities HTM with gross unrealized losses as of December 31, 2022 and 2021, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is described as follows: December 31, 2022 Less than twelve months Twelve months or more (in thousands) Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Securities AFS: Mortgage-backed securities $ ( 10,214 ) $ 105,030 $ ( 21,058 ) $ 135,607 Municipal bonds ( 11,340 ) 84,691 ( 23,879 ) 98,607 U.S. Treasury securities ( 3,852 ) 131,107 ( 2,050 ) 39,371 U.S. agency securities ( 608 ) 10,289 ( 1,137 ) 8,564 Total Securities AFS $ ( 26,014 ) $ 331,117 $ ( 48,124 ) $ 282,149 Securities HTM: Mortgage-backed securities $ ( 19,142 ) $ 131,629 $ — $ — U.S. agency securities ( 134 ) 778 — — Total Securities HTM $ ( 19,276 ) $ 132,407 $ — $ — December 31, 2021 Less than twelve months Twelve months or more Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Securities AFS: Mortgage-backed securities $ ( 6,627 ) $ 282,705 $ ( 1,833 ) $ 47,171 Municipal bonds ( 918 ) 51,333 ( 24 ) 2,577 U.S. Treasury securities ( 154 ) 41,616 — — U.S. agency securities ( 58 ) 4,913 — — Total Securities AFS $ ( 7,757 ) $ 380,567 $ ( 1,857 ) $ 49,748 Securities HTM: Mortgage-backed securities $ — $ — $ — $ — U.S. agency securities — — — — Total Securities HTM $ — $ — $ — $ — As of December 31, 2022, the Company held 574 securities AFS and securities HTM that were in unrealized loss positions. The aggregate unrealized loss of these securities as of December 31, 2022, was 11.12 % of the amortized cost basis of total debt securities. Management and the Asset-Liability Management Committee continually monitor the securities portfolio and are able to effectively measure and monitor the unrealized loss positions on these securities. Management does not intend to sell these securities prior to recovery, and it is more likely than not that the Company will have the ability to hold them, primarily due to adequate liquidity, until each security has recovered its cost basis. The unrealized losses on these securities have been determined by management to be a function of the movement of interest rates since the time of purchase. Based on a review of available information, including recent changes in interest rates and credit rating information, management believes the decline in fair value of these securities is temporary. The Company does not consider these securities to have OTTI. Management evaluates securities for OTTI on at least a quarterly basis and more frequently if economic or market concerns merit such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; and (3) whether the Company intends to, and it is more likely than not that it will be able to, retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Additionally, the Company annually performs a detailed credit review of the municipal securities owned to identify any potential credit concerns. There were no OTTI losses on debt securities related to credit losses recognized during the years ended December 31, 2022 and 2021. 79 Table of Contents The proceeds from sales and calls of debt securities and their gross gain (loss) for the years ended December 31, 2022 and 2021, are shown below: Years Ended December 31, (in thousands) 2022 2021 Proceeds (1) $ 41,234 $ 120,374 Gross gain 64 859 Gross loss ( 123 ) ( 665 ) (1) The proceeds include the gross gain and loss. Equity Securities Equity securities are an investment in a CRA mutual fund, consisting primarily of bonds. Equity securities are carried at fair value on the consolidated balance sheets with periodic changes in value recorded through the consolidated statements of income. 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, the Company 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, the Company 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. Pledged Securities Securities with carrying values of approximately $ 168.2 million and $ 118.6 million were pledged to secure public entity deposits as of December 31, 2022 and 2021, respectively. 3. Loans and Asset Quality Loans Loans HFI by category and loans HFS are summarized below: December 31, (in thousands) 2022 2021 Real estate: Commercial real estate $ 794,723 $ 670,293 One-to-four family residential 543,511 474,420 Construction and development 157,364 106,339 Commercial and industrial 310,053 311,373 SBA PPP, net of deferred income 14 17,550 Tax-exempt 83,166 80,726 Consumer 27,436 23,131 Total loans HFI $ 1,916,267 $ 1,683,832 Total loans HFS $ 518 $ 4,290 Deferred loan origination fees, including PPP loan fees, net of certain direct costs, were $ 1.4 million and $ 1.6 million as of December 31, 2022 and 2021, respectively. There were no deferred PPP loan fees as of December 31, 2022. Deferred PPP loan fees were $ 626,000 as of December 31, 2021. Related Party Transactions In the ordinary course of business, certain officers, directors, and principal shareholders, as well as their immediate family members and their affiliates, maintain a variety of banking relationships with the Company. An analysis of loan activity to these related parties is as follows: Years Ended December 31, (in thousands) 2022 2021 Balance - beginning of period $ 23,792 $ 33,191 New loans/changes in relationships 21,463 12,493 Repayments/changes in relationships ( 12,607 ) ( 21,892 ) Balance - end of period $ 32,648 $ 23,792 80 Table of Contents Concentrations of Credit Risk The majority of the lending activity occurs within the Bank’s Louisiana markets. The Bank maintains a diversified loan portfolio with a focus on commercial real estate, one-to-four family residential real estate, and commercial and industrial loans. Substantially all of the Bank’s real estate loans are secured by properties located within Louisiana. Allowance for Loan Losses The following table summarizes the activity in the allowance for loan losses by category for the year ended December 31, 2022: (in thousands) Beginning Balance Provision for Loan Losses Charge-offs Recoveries Ending Balance Real estate: Commercial real estate $ 6,749 $ 970 $ — $ 1 $ 7,720 One-to-four family residential 5,375 296 — 11 5,682 Construction and development 1,326 328 ( 18 ) 18 1,654 Commercial and industrial 4,440 ( 137 ) ( 39 ) 86 4,350 SBA PPP, net of deferred income 25 ( 25 ) — — — Tax-exempt 749 2 — — 751 Consumer 512 316 ( 490 ) 133 471 Total allowance for loan losses $ 19,176 $ 1,750 $ ( 547 ) $ 249 $ 20,628 The following table summarizes the activity in the allowance for loan losses by category for the year ended December 31, 2021: (in thousands) Beginning Balance Provision for Loan Losses Charge-offs Recoveries Ending Balance Real estate: Commercial real estate $ 5,798 $ 1,401 $ ( 450 ) $ — $ 6,749 One-to-four family residential 5,390 ( 23 ) ( 10 ) 18 5,375 Construction and development 1,699 ( 375 ) — 2 1,326 Commercial and industrial 3,631 856 ( 74 ) 27 4,440 SBA PPP, net of deferred income 318 ( 293 ) — — 25 Tax-exempt 680 69 — — 749 Consumer 435 265 ( 351 ) 163 512 Total allowance for loan losses $ 17,951 $ 1,900 $ ( 885 ) $ 210 $ 19,176 81 Table of Contents The balance in the allowance for loan losses and the related recorded investment in loans by category as of December 31, 2022, are as follows: (in thousands) Individually Evaluated for Impairment Collectively Evaluated for Impairment Acquired with Deteriorated Credit Quality Total Allowance for loan losses: Real estate: Commercial real estate $ 15 $ 7,705 $ — $ 7,720 One-to-four family residential 16 5,666 — 5,682 Construction and development — 1,654 — 1,654 Commercial and industrial 172 4,178 — 4,350 SBA PPP, net of deferred income — — — — Tax-exempt — 751 — 751 Consumer 111 360 — 471 Total allowance for loan losses $ 314 $ 20,314 $ — $ 20,628 Loans: Real estate: Commercial real estate $ 4,513 $ 790,210 $ — $ 794,723 One-to-four family residential 1,507 542,004 — 543,511 Construction and development 9 157,355 — 157,364 Commercial and industrial 1,402 308,651 — 310,053 SBA PPP, net of deferred income — 14 — 14 Tax-exempt — 83,166 — 83,166 Consumer 137 27,299 — 27,436 Total loans HFI $ 7,568 $ 1,908,699 $ — $ 1,916,267 The balance in the allowance for loan losses and the related recorded investment in loans by category as of December 31, 2021, are as follows: (in thousands) Individually Evaluated for Impairment Collectively Evaluated for Impairment Acquired with Deteriorated Credit Quality Total Allowance for loan losses: Real estate: Commercial real estate $ 68 $ 6,681 $ — $ 6,749 One-to-four family residential — 5,375 — 5,375 Construction and development — 1,326 — 1,326 Commercial and industrial 40 4,400 — 4,440 SBA PPP, net of deferred income — 25 — 25 Tax-exempt — 749 — 749 Consumer 118 394 — 512 Total allowance for loan losses $ 226 $ 18,950 $ — $ 19,176 Loans: Real estate: Commercial real estate $ 5,011 $ 665,282 $ — $ 670,293 One-to-four family residential 434 473,986 — 474,420 Construction and development 501 105,838 — 106,339 Commercial and industrial 77 311,296 — 311,373 SBA PPP, net of deferred income — 17,550 — 17,550 Tax-exempt — 80,726 — 80,726 Consumer 126 23,005 — 23,131 Total loans HFI $ 6,149 $ 1,677,683 $ — $ 1,683,832 82 Table of Contents Past Due and Nonaccrual Loans A summary of current, past due, and nonaccrual loans as of December 31, 2022, is as follows: Accruing (in thousands) Current 30-89 Days Past Due 90 Days or More Past Due Nonaccrual Total Loans Real estate: Commercial real estate $ 793,540 $ 463 $ — $ 720 $ 794,723 One-to-four family residential 542,666 602 — 243 543,511 Construction and development 157,355 — — 9 157,364 Commercial and industrial 308,597 165 — 1,291 310,053 SBA PPP, net of deferred income 14 — — — 14 Tax-exempt 83,166 — — — 83,166 Consumer 27,291 42 2 101 27,436 Total loans HFI $ 1,912,629 $ 1,272 $ 2 $ 2,364 $ 1,916,267 A summary of current, past due, and nonaccrual loans as of December 31, 2021, is as follows: Accruing (in thousands) Current 30-89 Days Past Due 90 Days or More Past Due Nonaccrual Total Loans Real estate: Commercial real estate $ 669,781 $ 461 $ — $ 51 $ 670,293 One-to-four family residential 473,658 546 — 216 474,420 Construction and development 106,300 — 39 — 106,339 Commercial and industrial 311,321 39 — 13 311,373 SBA PPP, net of deferred income 17,550 — — — 17,550 Tax-exempt 80,726 — — — 80,726 Consumer 23,121 10 — — 23,131 Total loans HFI $ 1,682,457 $ 1,056 $ 39 $ 280 $ 1,683,832 83 Table of Contents Impaired Loans Impaired loans include TDRs and performing and nonperforming loans. Information pertaining to impaired loans as of and for the year ended December 31, 2022, is as follows: (in thousands) Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Real estate: Commercial real estate $ 3,804 $ 3,796 $ — $ 3,194 $ 135 One-to-four family residential 1,458 1,387 — 797 68 Construction and development 9 9 — 104 — Commercial and industrial 51 51 — 58 4 SBA PPP, net of deferred income — — — — — Tax-exempt — — — — — Consumer 26 26 — 9 1 Total with no related allowance 5,348 5,269 — 4,162 208 With allowance recorded: Real estate: Commercial real estate 717 717 15 1,264 33 One-to-four family residential 120 120 16 48 6 Construction and development — — — — — Commercial and industrial 1,360 1,351 172 623 4 SBA PPP, net of deferred income — — — — — Tax-exempt — — — — — Consumer 113 111 111 122 1 Total with related allowance 2,310 2,299 314 2,057 44 Total impaired loans $ 7,658 $ 7,568 $ 314 $ 6,219 $ 252 Information pertaining to impaired loans as of and for the year ended December 31, 2021, is as follows: (in thousands) Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Real estate: Commercial real estate $ 1,599 $ 1,595 $ — $ 1,969 $ 78 One-to-four family residential 483 434 — 539 19 Construction and development 501 501 — 400 32 Commercial and industrial — — — 355 — SBA PPP, net of deferred income — — — — — Tax-exempt — — — — — Consumer 8 8 — 4 1 Total with no related allowance 2,591 2,538 — 3,267 130 With allowance recorded: Real estate: Commercial real estate 3,416 3,416 68 2,111 64 One-to-four family residential — — — 145 — Construction and development — — — — — Commercial and industrial 85 77 40 1,570 5 SBA PPP, net of deferred income — — — — — Tax-exempt — — — — — Consumer 118 118 118 112 5 Total with related allowance 3,619 3,611 226 3,938 74 Total impaired loans $ 6,210 $ 6,149 $ 226 $ 7,205 $ 204 84 Table of Contents Troubled Debt Restructurings The restructuring of a loan is considered a TDR if the borrower is experiencing financial difficulties and the Bank has granted a concession. Concessions grant terms to the borrower that would not be offered for new debt with similar risk characteristics. Concessions typically include interest rate reductions or below market interest rates, revising amortization schedules to defer principal and interest payments, and other changes necessary to provide payment relief to the borrower and minimize the risk of loss. There were no unfunded commitments to extend credit related to these loans as of December 31, 2022 or 2021. A summary of current, past due, and nonaccrual TDR loans as of December 31, 2022, is as follows: (dollars in thousands) Current 30-89 Days Past Due 90 Days or More Past Due Nonaccrual Total TDRs Real estate: Commercial real estate $ 3,197 $ — $ — $ 42 $ 3,239 One-to-four family residential 797 151 — 22 970 Construction and development — — — — — Commercial and industrial — — — — — SBA PPP, net of deferred income — — — — — Tax-exempt — — — — — Consumer 10 — — 101 111 Total $ 4,004 $ 151 $ — $ 165 $ 4,320 Number of TDR loans 11 2 — 3 16 A summary of current, past due, and nonaccrual TDR loans as of December 31, 2021, is as follows: (dollars in thousands) Current 30-89 Days Past Due 90 Days or More Past Due Nonaccrual (1) Total TDRs Real estate: Commercial real estate $ 3,634 $ — $ — $ — $ 3,634 One-to-four family residential 289 — — — 289 Construction and development — — — — — Commercial and industrial — — — — — SBA PPP, net of deferred income — — — — — Tax-exempt — — — — — Consumer 21 — — — 21 Total $ 3,944 $ — $ — $ — $ 3,944 Number of TDR loans 11 — — 1 12 (1) This loan has a contractual obligation to the Company despite carrying a zero balance. 85 Table of Contents A summary of loans modified as TDRs that occurred during the years ended December 31, 2022 and 2021, is as follows: December 31, 2022 December 31, 2021 Recorded Investment Recorded Investment (dollars in thousands) Loan Count Pre Modification Post Modification Loan Count Pre Modification Post Modification Real estate: Commercial real estate 1 $ 50 $ 50 1 $ 2,174 $ 2,184 One-to-four family residential 5 696 699 — — — Construction and development — — — — — — Commercial and industrial — — — — — — SBA PPP, net of deferred income — — — — — — Tax-exempt — — — — — — Consumer 1 104 104 2 20 27 Total 7 $ 850 $ 853 3 $ 2,194 $ 2,211 The TDRs described above increased the allowance for loan losses by $ 101,000 and $ 14,000 during the years ended December 31, 2022 and 2021, respectively. Additionally, there were no charge-offs of TDRs in 2022 or 2021. There were no TDRs that subsequently defaulted in 2022 or 2021. Credit Quality Indicators Loans are categorized based on the degree of risk inherent in the credit and the ability of the borrower to service the debt. A description of the general characteristics of the Bank’s risk rating grades follows: Pass - These loans are of satisfactory quality and do not require a more severe classification. Special Mention - This category includes loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan. However, the loss potential does not warrant substandard classification. Substandard - Loans in this category have well-defined weaknesses that jeopardize normal repayment of principal and interest. Prompt corrective action is required to reduce exposure and to assure adequate remedial actions are taken by the borrower. If these weaknesses do not improve, loss is possible. Doubtful - Loans in this category have well-defined weaknesses that make full collection improbable. Loss - Loans classified in this category are considered uncollectible and charged-off to the allowance for loan losses. The following table summarizes loans by risk rating as of December 31, 2022: (in thousands) Pass Special Mention Substandard Doubtful Loss Total Real estate: Commercial real estate $ 786,394 $ 5,759 $ 2,570 $ — $ — $ 794,723 One-to-four family residential 542,112 62 1,337 — — 543,511 Construction and development 157,355 — 9 — — 157,364 Commercial and industrial 297,152 11,428 1,473 — — 310,053 SBA PPP, net of deferred income 14 — — — — 14 Tax-exempt 83,166 — — — — 83,166 Consumer 27,298 — 138 — — 27,436 Total loans HFI $ 1,893,491 $ 17,249 $ 5,527 $ — $ — $ 1,916,267 86 Table of Contents The following table summarizes loans by risk rating as of December 31, 2021: (in thousands) Pass Special Mention Substandard Doubtful Loss Total Real estate: Commercial real estate $ 666,838 $ 499 $ 2,956 $ — $ — $ 670,293 One-to-four family residential 473,638 321 461 — — 474,420 Construction and development 105,838 — 501 — — 106,339 Commercial and industrial 306,925 1,551 2,897 — — 311,373 SBA PPP, net of deferred income 17,550 — — — — 17,550 Tax-exempt 80,726 — — — — 80,726 Consumer 23,003 21 107 — — 23,131 Total loans HFI $ 1,674,518 $ 2,392 $ 6,922 $ — $ — $ 1,683,832 Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer if all conditions of the commitment have been met. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s evaluation of the customer’s ability to repay. Unfunded loan commitments totaled approximately $ 377.6 million and $ 357.9 million as of December 31, 2022 and 2021, respectively. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Commitments under standby letters of credit totaled approximately $ 14.6 million and $ 12.5 million as of December 31, 2022 and 2021, respectively. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. 4. Premises and Equipment, Net Components of premises and equipment were as follows: December 31, (in thousands) 2022 2021 Land $ 20,190 $ 17,210 Buildings 33,049 31,573 Leasehold improvements 2,815 2,732 Furniture and equipment 13,729 13,136 Vehicles 380 377 Computer equipment 3,564 3,578 Projects in process 6,424 4,130 Total premises and equipment 80,151 72,736 Less: Accumulated depreciation ( 25,768 ) ( 24,680 ) Premises and equipment, net $ 54,383 $ 48,056 Depreciation expense amounted to approximately $ 2.1 million and $ 1.9 million for the years ended December 31, 2022 and 2021 , respectively. 87 Table of Contents 5. Deposits Deposits were $ 2.80 billion and $ 2.91 billion as of December 31, 2022 and 2021, respectively. This decrease was primarily a result of expected customer deposit account activity and customer response to the changing interest rate environment. D eposits are summarized below: December 31, (in thousands) 2022 2021 Noninterest-bearing demand deposits $ 1,090,539 $ 1,149,672 Interest-bearing deposits: Interest-bearing demand deposits 89,144 — NOW accounts 503,308 503,383 Money market accounts 578,161 733,044 Savings accounts 195,479 191,076 Time deposits less than or equal to $250,000 250,875 243,596 Time deposits greater than $250,000 91,430 89,577 Total interest-bearing deposits 1,708,397 1,760,676 Total deposits $ 2,798,936 $ 2,910,348 As of December 31, 2022, the scheduled maturities of all outstanding time deposits were as follows: Years ending December 31, Amount (in thousands) 2023 $ 215,401 2024 80,360 2025 17,747 2026 10,682 2027 9,636 Thereafter 8,479 $ 342,305 As of December 31, 2022 and 2021, deposits from directors, executive officers, their immediate family members, and their affiliates totaled approximately $ 67.3 million and $ 71.8 million, respectively. 6. Other Borrowed Funds The Company has established various lines of credit with the FHLB of Dallas and other correspondent banks to provide additional sources of operating funds. As of December 31, 2022, total borrowing capacity from these sources was $ 976.8 million. As of December 31, 2022 and 2021, the Company had no borrowings under these agreements. 7. Leases The Company determines if an arrangement is a lease at inception of the contract and assesses the appropriate classification as operating or financing. Operating leases with terms greater than one year are included in right-of-use assets and lease liabilities on the Company’s consolidated balance sheets. Agreements with both lease and non-lease components are accounted for separately, with only the lease component capitalized. Operating right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the term using the interest rate implicit in the contract, when available, or the Company’s incremental collateralized borrowing rate with similar terms. As of December 31, 2022, the Company maintained seven operating leases on land and buildings for banking center facilities under long-term leases. These operating leases contain renewal options for periods ranging from one to five years that expire at various dates through October 31, 2033, with no residual value guarantees. Future obligations relating to the exercise of renewal options are included in the measurement if, based on the judgment of management, the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of the renewal rate compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. Management reasonably plans to exercise all options, and as such, all renewal options are included in the measurement of the right-of-use assets and operating lease liabilities. 88 Table of Contents The Company elects to recognize the lease payments on leases with terms of one year or less in its consolidated statements of income on a straight-line basis over the lease term. For the years ended December 31, 2022 and 2021, operating lease expenses were $ 628,000 and $ 549,000 , respectively. Operating lease expenses are included as a component of occupancy and equipment expenses within the accompanying consolidated statements of income. Cash paid for amounts included in the measurement of lease liabilities for operating leases totaled $ 606,000 and $ 530,000 for the years ended December 31, 2022 and 2021, respectively. The table below summarizes other information related to the Company’s operating leases as of and for the year ended December 31, 2022: As of and for the Year Ended December 31, 2022 Weighted average remaining operating lease term 8.97 years Weighted average operating lease discount rate 3.3 % Future obligations over the primary and renewal option terms of the Company’s long-term operating leases as of December 31, 2022, were as follows: Years Ending December 31, Amount (in thousands) 2023 $ 625 2024 631 2025 657 2026 603 2027 547 Thereafter 1,848 Total lease payments 4,911 Less: Imputed interest ( 653 ) Present value of lease liabilities $ 4,258 The Company’s obligations under financing leases are not material and have not been included in assets and liabilities in the financial statements. 8. Income Tax Expense The components of income tax expense for the years ended December 31, 2022 and 2021, were as follows: Years Ended December 31, (in thousands) 2022 2021 Current tax expense $ 7,752 $ 7,881 Deferred tax expense (benefit) 313 ( 773 ) Income tax expense $ 8,065 $ 7,108 89 Table of Contents The source and tax effect of items reconciling income tax expense to the amount computed by applying the federal income tax rates in effect to income before income tax expense for the years ended December 31, 2022 and 2021, are as follows: December 31, 2022 2021 (dollars in thousands) Amount Percent Amount Percent Income before income tax expense $ 44,981 100.0 % $ 40,060 100.0 % U.S. federal income tax expense 9,446 21.0 % 8,413 21.0 % Nontaxable income ( 1,338 ) ( 3.0 ) % ( 1,347 ) ( 3.4 ) % Nondeductible expenses 50 0.1 % 38 0.1 % Other ( 93 ) ( 0.2 ) % 4 — % Income tax expense $ 8,065 17.9 % $ 7,108 17.7 % The Company records deferred income taxes on the tax effect of changes in temporary differences. Deferred tax assets (liabilities) are subject to a valuation allowance unless their realization is more likely than not. The deferred tax assets (liabilities) were comprised of the following as of December 31, 2022 and 2021: December 31, (in thousands) 2022 2021 Depreciation $ ( 2,435 ) $ ( 1,964 ) FHLB of Dallas stock dividends ( 22 ) ( 20 ) Gross deferred tax liability ( 2,457 ) ( 1,984 ) Allowance for loan losses 4,190 4,025 Allowance for operational losses 34 57 Health insurance self fund 52 94 Deferred compensation 620 554 Net unrealized loss on securities 18,917 1,003 Equity security valuation 4 33 Advance payment 325 350 Accrued bonus 448 368 Other 40 100 Gross deferred tax asset 24,630 6,584 Net deferred tax asset (liability) $ 22,173 $ 4,600 9. Employee Benefits The Company adopted a contributory retirement plan for employees of Red River Bank effective March 1, 1999, and most recently amended effective January 1, 2022. Beginning April 1, 2022, employees have the opportunity to invest a portion of their plan funds in the Company’s common stock through a unitized fund. The contributory retirement plan covers all employees who meet the length of service and the number of hours worked requirements and elect to participate. Discretionary employer contributions during the years ended December 31, 2022 and 2021, totaled approximately $ 742,000 and $ 721,000 , respectively. The Bank has purchased life insurance policies on certain key employees. The Bank is the beneficiary of the BOLI policies, which have cash surrender value and death benefit components. The Bank uses a portion of the income generated from the BOLI policies to fund the expenses for nonqualified, noncontributory supplemental executive retirement agreements with certain employees. The supplemental executive retirement agreements provide post-retirement benefit payments to those employees. The liability related to these agreements was $ 3.0 million and $ 2.7 million as of December 31, 2022 and 2021, respectively, and is recorded in accrued expenses and other liabilities on the consolidated balance sheets. 10. Stock-Based Compensation Plans Equity Incentive Plans On April 17, 2008, the Company adopted its 2008 Plan, which provided for the grant of stock-based awards for key employees and non-employee members of the Company’s board of directors. The 2008 Plan expired on December 31, 90 Table of Contents 2018, and no new awards were granted under this plan after that date. As of December 31, 2020, all granted stock options under the 2008 Plan had been exercised although there were nonvested restricted stock awards outstanding. On October 25, 2018, the Company adopted its 2018 Plan, which was approved by the Company’s shareholders in April of 2019. The 2018 Plan was adopted in anticipation of the expiration of the 2008 Plan and provides for the granting of stock-based awards to key employees, directors, and consultants. Similar to the 2008 Plan, the Compensation Committee administers the 2018 Plan, makes determinations with respect to participation, and authorizes stock-based awards under the plan. The maximum number of shares of the Company’s common stock available for issuance under the 2018 Plan was 200,000 shares . The status of the Company’s 2018 Plan is presented below: 2018 Plan Number of Shares Awards available for issuance- December 31, 2020 188,400 Awards granted ( 7,400 ) Awards forfeited 100 Awards available for issuance - December 31, 2021 181,100 Awards granted ( 7,550 ) Awards available for issuance - December 31, 2022 173,550 All disclosures for restricted stock shown below relate to outstanding awards under the 2008 and 2018 Plans. Restricted Stock Awards The restricted stock awards issued under the 2008 and 2018 Plans provide common stock to recipients at the grant date. The restrictions vest in twenty percent increments on the first through fifth anniversaries of the grant date. Compensation expense for these grants is recognized ratably over the vesting period of the awards based on the fair value of the stock at the grant date. During 2022, the Compensation Committee granted 7,550 restricted stock awards with a weighted average fair value of $ 53.40 . For the year ended December 31, 2022, the compensation expense for the vested restricted stock was $ 274,000 . As of December 31, 2022, there was approximately $ 835,000 of total unrecognized compensation cost related to restricted stock awards. That cost is expected to be recognized over a weighted average period of 4.5 years. During 2021, the Compensation Committee granted 7,400 restricted stock awards with a weighted average fair value of $ 50.55 , and 100 restricted stock awards with a weighted average fair value of $ 42.35 were forfeited. For the year ended December 31, 2021, the compensation expense for the vested restricted stock was $ 269,000 . As of December 31, 2021, there was approximately $ 705,000 of total unrecognized compensation cost related to restricted stock awards. That cost was expected to be recognized over a weighted average period of 4.5 years. The Company funds the restricted stock from authorized, but unissued, shares. The status of the Company’s nonvested restricted stock is presented below: Nonvested Restricted Stock Number of Shares Weighted Average Grant Date Fair Value Nonvested - December 31, 2020 17,655 $ 40.73 Granted 7,400 $ 50.55 Vested ( 6,820 ) $ 38.40 Forfeited ( 100 ) $ 42.35 Nonvested - December 31, 2021 18,135 $ 45.61 Granted 7,550 $ 53.40 Vested ( 5,830 ) $ 43.03 Nonvested - December 31, 2022 19,855 $ 49.33 Director Compensation Program The Company has a Director Compensation Program. This program allows directors the option of receiving their board attendance fees in Company stock in lieu of cash. Under the program, director fees are earned and expensed in the year board services are rendered, and the related stock is issued the following year. 91 Table of Contents The Director Compensation Program stock earned and the issuance of shares as board compensation for the years ended December 31, 2022 and 2021, are as follows: Years Ended December 31, (dollars in thousands) 2022 2021 Share-based board compensation earned $ 85 $ 50 Issuance of shares of common stock as board compensation: Number of shares issued 675 1,075 Equity impact of shares issued $ 35 $ 56 11. Self-Insurance The Company is self-insured for group health insurance. The Company’s liability is limited to the aggregate policy deductible of $ 135,000 per individual with a maximum of approximately $ 4.1 million for the group. The Company has reflected its estimated liability for known and incurred but not reported claims in the accompanying financial statements. 12. Off-Balance Sheet Contractual Obligations and Contingencies The Company is a party to financial instruments with off-balance sheet risk in the normal course of business. The contract or notional amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments. The Company’s exposure is represented by the contractual amount of these commitments. Investment Commitments In 2014, the Company committed to an investment into an SBIC limited partnership. As of December 31, 2022, there was a $ 226,000 outstanding commitment to this partnership. In 2020, the Company committed to an additional investment into an SBIC limited partnership. As of December 31, 2022, there was a $ 4.3 million outstanding commitment to this partnership. In 2021, the Company committed to an investment into a bank technology limited partnership. As of December 31, 2022, there was a $ 652,000 outstanding commitment to this partnership. Construction Commitment The Company has two committed construction contracts totaling approximately $ 1.1 million as of December 31, 2022. Contingencies The Company and the Bank are involved, from time to time, in various legal matters arising in the ordinary course of business. While the outcome of these claims or litigation cannot be determined at this time, in the opinion of management, neither the Company nor the Bank are involved in such legal proceedings that the resolution is expected to have a material adverse effect on the consolidated results of operations, financial condition, or cash flows. 13. Fair Value The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair Value Disclosure Securities AFS, loans HFS, and equity securities are recorded at fair value on a recurring basis. Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, foreclosed assets, and other certain assets. The nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. ASC 820, Fair Value Measurements and Disclosures indicates that assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels: • Level 1 pricing represents quotes on the exact financial instrument that is traded in active markets. Quoted prices on actively traded equities, for example, are in this category. • Level 2 pricing is derived from observable data including market spreads, current and projected rates, prepayment data, and credit quality. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. 92 Table of Contents • Level 3 pricing is derived without the use of observable data. In such case, mark-to-model strategies are typically employed. Often, these types of instruments have no active market, possess unique characteristics, and are thinly traded. The Company used the following methods and significant assumptions to estimate fair value: Securities AFS and Equity Securities: The fair values for securities AFS are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Loans HFS: Residential mortgage loans originated and held for sale are carried at the lower of cost or estimated fair value on an individual basis. The fair values of mortgage loans HFS are based on commitments on hand from investors within the secondary market for loans with similar characteristics. As such, the fair value adjustments for mortgage loans HFS are recurring Level 2. Loans HFI: The Company does not record loans HFI at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using estimated fair value methodologies. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company considers the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the impaired loan as nonrecurring Level 3. Foreclosed Assets: Foreclosed assets, consisting of properties obtained through foreclosure or in satisfaction of loans, are reported at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). However, foreclosed assets are considered Level 3 in the fair value hierarchy because management has qualitatively applied a discount due to the size, supply of inventory, and the incremental discounts applied to the appraisals. Management also considers other factors, including changes in absorption rates, length of time the property has been on the market, and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals. Fair Value of Assets Measured on a Recurring Basis The table below presents the recorded amount of assets measured at fair value on a recurring basis: (in thousands) Fair Value Level 1 Level 2 Level 3 December 31, 2022 Loans HFS $ 518 $ — $ 518 $ — Securities AFS: Mortgage-backed securities $ 240,981 $ — $ 240,981 $ — Municipal bonds $ 184,092 $ — $ 184,092 $ — U.S. Treasury securities $ 170,478 $ — $ 170,478 $ — U.S. agency securities $ 18,856 $ — $ 18,856 $ — Equity securities $ 9,979 $ 9,979 $ — $ — December 31, 2021 Loans HFS $ 4,290 $ — $ 4,290 $ — Securities AFS: Mortgage-backed securities $ 379,526 $ — $ 379,526 $ — Municipal bonds $ 229,971 $ — $ 229,971 $ — U.S. Treasury securities $ 41,616 $ — $ 41,616 $ — U.S. agency securities $ 8,065 $ — $ 8,065 $ — Equity securities $ 7,846 $ 7,846 $ — $ — There were no transfers between Level 1, 2, or 3 during the years ended December 31, 2022 or 2021. 93 Table of Contents Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis Financial Assets and Financial Liabilities : Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances. Financial assets measured at fair value on a nonrecurring basis include certain impaired collateral dependent loans reported at fair value of the underlying collateral if repayment is expected solely from the collateral. Prior to foreclosure of these loans, fair value of the collateral is estimated using Level 3 inputs based on customized discounting criteria. The table below presents certain impaired loans that were remeasured and reported at fair value through the allowance for loan losses based upon the fair value of the underlying collateral during the reported periods: Years Ended December 31, (in thousands) 2022 2021 Carrying value of impaired loans before allowance for loan losses $ 3,149 $ 4,114 Specific allowance for loan losses ( 306 ) ( 79 ) Fair value of impaired loans $ 2,843 $ 4,035 The Company had no financial liabilities measured at fair value on a nonrecurring basis during the years ended December 31, 2022 and 2021. Nonfinancial Assets and Liabilities : Certain nonfinancial assets and nonfinancial liabilities are measured at fair value on a nonrecurring basis. These include certain foreclosed assets, which are remeasured and reported at fair value through a charge-off to the allowance for loan losses upon initial recognition as a foreclosed asset. Subsequent to their initial recognition, certain foreclosed assets are remeasured at fair value through an adjustment included in other noninterest income. The fair value of foreclosed assets is estimated using Level 3 inputs based on customized discounting criteria less estimated selling costs. The following table presents foreclosed assets that were remeasured and reported at fair value during the reported periods: Years Ended December 31, (in thousands) 2022 2021 Foreclosed assets remeasured at initial recognition: Carrying value of foreclosed assets prior to remeasurement $ — $ 266 Charge-offs — — Fair value of foreclosed assets $ — $ 266 The following table presents foreclosed assets that were remeasured subsequent to initial recognition and reported at fair value during the reported periods: Years Ended December 31, (in thousands) 2022 2021 Foreclosed assets remeasured subsequent to initial recognition: Carrying value of foreclosed assets prior to remeasurement $ — $ 133 Write-downs — ( 34 ) Fair value of foreclosed assets $ — $ 99 The Company had no nonfinancial liabilities measured at fair value on a nonrecurring basis during the years ended December 31, 2022 and 2021. 94 Table of Contents The unobservable inputs used for the Level 3 fair value measurements on a nonrecurring basis were as follows: (dollars in thousands) Fair Value Valuation Technique Unobservable Input Discount Ranges Weighted Average Discount December 31, 2022 Impaired loans $ 7,254 Discounted appraisals Collateral discounts and costs to sell 0 % - 100 % 4.16 % Foreclosed assets $ — Discounted appraisals Collateral discounts and costs to sell N/A N/A December 31, 2021 Impaired loans $ 5,923 Discounted appraisals Collateral discounts and costs to sell 0 % - 100 % 3.67 % Foreclosed assets $ 660 Discounted appraisals Collateral discounts and costs to sell N/A N/A Fair Value of Financial Instruments The carrying amounts and estimated fair values of financial instruments as of December 31, 2022 and 2021, were as follows: (in thousands) Carrying Amount Fair Value Level 1 Level 2 Level 3 December 31, 2022 Financial assets: Cash and due from banks $ 37,824 $ 37,824 $ 37,824 $ — $ — Interest-bearing deposits in other banks $ 240,568 $ 240,568 $ 240,568 $ — $ — Securities AFS $ 614,407 $ 614,407 $ — $ 614,407 $ — Securities HTM $ 151,683 $ 132,407 $ — $ 132,407 $ — Equity securities $ 9,979 $ 9,979 $ 9,979 $ — $ — Nonmarketable equity securities $ 3,478 $ 3,478 $ — $ 3,478 $ — Loans HFS $ 518 $ 518 $ — $ 518 $ — Loans HFI, net of allowance $ 1,895,639 $ 1,807,772 $ — $ — $ 1,807,772 Accrued interest receivable $ 8,830 $ 8,830 $ — $ — $ 8,830 Financial liabilities: Deposits $ 2,798,936 $ 2,787,198 $ — $ 2,787,198 $ — Accrued interest payable $ 1,563 $ 1,563 $ — $ 1,563 $ — December 31, 2021 Financial assets: Cash and due from banks $ 23,143 $ 23,143 $ 23,143 $ — $ — Interest-bearing deposits in other banks $ 761,721 $ 761,721 $ 761,721 $ — $ — Securities AFS $ 659,178 $ 659,178 $ — $ 659,178 $ — Equity securities $ 7,846 $ 7,846 $ 7,846 $ — $ — Nonmarketable equity securities $ 3,450 $ 3,450 $ — $ 3,450 $ — Loans HFS $ 4,290 $ 4,290 $ — $ 4,290 $ — Loans HFI, net of allowance $ 1,664,656 $ 1,674,900 $ — $ — $ 1,674,900 Accrued interest receivable $ 6,245 $ 6,245 $ — $ — $ 6,245 Financial liabilities: Deposits $ 2,910,348 $ 2,911,118 $ — $ 2,911,118 $ — Accrued interest payable $ 1,310 $ 1,310 $ — $ 1,310 $ — 95 Table of Contents 14. Regulatory Capital Requirements Red River Bank The Bank is subject to various regulatory capital requirements administered by the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s and the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Bank is subject to Basel III capital guidelines. Basel III requires the Bank to maintain certain minimum ratios to meet capital adequacy requirements. In addition, a CCB was established above the minimum regulatory capital requirements. Effective January 1, 2019, the final CCB was fully phased in at 2.50% of total risk weighted assets. It is management’s belief that, as of December 31, 2022, the Bank met all capital adequacy requirements under Basel III. Management expects that the capital ratios for the Bank under Basel III will continue to exceed capital adequacy requirements. The most recent notification from the FDIC (as of September 30, 2022) categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. Capital amounts and ratios for Red River Bank as of December 31, 2022 and 2021, are presented in the following table, including the minimum Basel III requirements: Regulatory Requirements Actual Minimum Minimum Plus CCB (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio December 31, 2022 Total Risk-Based Capital $ 344,867 16.85 % $ 163,745 8.00 % $ 214,915 10.50 % Tier I Risk-Based Capital $ 324,239 15.84 % $ 122,809 6.00 % $ 173,979 8.50 % Common Equity Tier I Capital $ 324,239 15.84 % $ 92,107 4.50 % $ 143,277 7.00 % Tier I Leverage Capital $ 324,239 10.35 % $ 125,252 4.00 % $ 125,252 4.00 % December 31, 2021 Total Risk-Based Capital $ 305,771 17.06 % $ 143,372 8.00 % $ 188,176 10.50 % Tier I Risk-Based Capital $ 286,595 15.99 % $ 107,529 6.00 % $ 152,333 8.50 % Common Equity Tier I Capital $ 286,595 15.99 % $ 80,647 4.50 % $ 125,451 7.00 % Tier I Leverage Capital $ 286,595 9.23 % $ 124,241 4.00 % $ 124,241 4.00 % Red River Bancshares, Inc. As a general matter, bank holding companies are subject to Basel III capital adequacy requirements under applicable Federal Reserve regulations on a consolidated basis. However, bank holding companies that qualify as “small bank holding companies” under the Policy Statement are exempt from the Federal Reserve’s consolidated capital adequacy ratios at the holding company level and instead are evaluated at the bank level. In May 2018, the Economic Growth Act was enacted. 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 the Company had less than $3.0 billion in assets as of each of the June 30th measurement dates starting with the Economic Growth Act’s enactment and going through June 30, 2021, the Company has 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, the Company had more than $3.0 billion in assets. Therefore, effective January 1, 2023, the Company expects to no longer receive any benefits under the Policy Statement. Although the minimum regulatory capital requirements were not applicable to the Company in 2021 or 2022, the Company calculated these ratios for its own planning and monitoring purposes. 96 Table of Contents Capital amounts and ratios for Red River Bancshares, Inc. as of December 31, 2022 and 2021, are presented in the following table: Actual (dollars in thousands) Amount Ratio December 31, 2022 Total Risk-Based Capital $ 356,001 17.39 % Tier I Risk-Based Capital $ 335,373 16.38 % Common Equity Tier I Capital $ 335,373 16.38 % Tier I Leverage Capital $ 335,373 10.71 % December 31, 2021 Total Risk-Based Capital $ 319,553 17.83 % Tier I Risk-Based Capital $ 300,377 16.76 % Common Equity Tier I Capital $ 300,377 16.76 % Tier I Leverage Capital $ 300,377 9.67 % Community Bank Leverage Ratio 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 to the Company and the Bank as an alternative to the Basel III risk-based capital framework. The CBLR framework provides for a simple measure of capital adequacy for certain community banking organizations. Specifically, depository institutions and depository institution holding companies that have less than $10.0 billion in total consolidated assets and meet other qualifying criteria, including a Tier I leverage ratio of greater than 9.00% (subsequently temporarily reduced to 8.00% for 2020 and 8.50% for 2021 as a COVID-19 relief measure), are considered qualifying community banking organizations and are eligible to opt into the CBLR framework, and replace the applicable Basel III risk-based capital requirements. As of December 31, 2022, the Company and the Bank qualify for the CBLR framework. Management does not intend to utilize the CBLR framework. 15. Equity Events Cash Dividends As a Louisiana corporation, the Company is subject to certain restrictions on dividends under the Louisiana Business Corporation Act. Generally, a Louisiana corporation may pay dividends to its shareholders unless, after giving effect to the dividend, either: (1) the corporation would not be able to pay its debts as they come due in the usual course of business; or (2) the corporation’s total assets would be less than the sum of its total liabilities and the amount that would be needed, if the corporation were to be dissolved at the time of the payment of the dividend, to satisfy the preferential rights of shareholders whose preferential rights are superior to those receiving the dividend. The Company’s status as a bank holding company also affects its ability to pay dividends in two additional ways. First, since the Company is a holding company with no material business activities of its own, its ability to pay dividends could become dependent upon the ability of Red River Bank to transfer funds to it in the form of dividends, loans, and advances. The Bank’s ability to pay dividends and make other distributions and payments to the Company is itself subject to various legal, regulatory, and other restrictions, and the present and future dividend policy of Red River Bank is subject to the discretion of its board of directors. Second, as a bank holding company, the Company’s payment of dividends must comply with the laws, regulations, and policies of the Federal Reserve. The Federal Reserve has issued a supervisory letter on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that: (1) the holding company’s net income for the past four quarters, net of any dividends previously paid during that period, is sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is consistent with the bank holding company’s capital needs, asset quality, and overall financial condition; and (3) the bank holding company will continue to meet, and is not in danger of failing to meet, minimum regulatory capital adequacy ratios. The ability of Red River Bank to pay dividends on its common stock is restricted by Louisiana Banking Law, the FDIA, and FDIC regulations. In general, the board of directors of a Louisiana state bank may, quarterly, semiannually, or annually, declare or pay dividends on its outstanding capital stock, provided that the bank has surplus at least equal to 50.0% of its capital stock and such surplus will not be reduced below 50.0% following payment of the dividend. Prior approval of the OFI is required for a Louisiana state bank to pay any dividend that would exceed its net profits earned during the current year combined with its retained net profits of the immediately preceding year. In general terms, the FDIA and FDIC 97 Table of Contents regulations restrict the payment of dividends when a bank is undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding a bank. The Bank and the Company have internal policies regarding dividends. Neither entity would ordinarily pay dividends if following the payment, the entity would not meet minimum capital adequacy plus the CCB requirements. The exception to this policy is in situations where the payment of a dividend from the Bank to the Company is necessary for the Company to be able to meet its obligations, and as long as, after such payment the Bank would still meet minimum capital adequacy requirements. Also, the Company’s internal policy requires that the Company maintain a common stockholders’ equity to total assets ratio of greater than 7.0 % and that trust preferred securities are less than 25.0 % of capital. Taking into consideration the Company’s performance and capital levels, dividends were paid in both 2022 and 2021. During 2022 and 2021 respectively, a quarterly cash dividend of $ 0.07 per share was paid each quarter, resulting in $ 0.28 per share in cash dividends for the years ended December 31, 2022 and 2021. Stock Repurchase Programs On February 4, 2022, the Company’s board of directors approved the renewal of its stock repurchase program that was completed in the fourth quarter of 2021 after reaching its purchase limit. The renewed repurchase program, the 2022 Program, authorized the Company to purchase up to $ 5.0 million of its outstanding shares of common stock from February 4, 2022 through December 31, 2022. For the year ended December 31, 2022, the Company repurchased 4,465 shares of its 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, the Company’s board of directors approved the renewal of the 2022 Program that expired on December 31, 2022. The renewed repurchase program, the 2023 Program, has similar terms to the 2022 Program and authorizes the Company to purchase up to $ 5.0 million of its 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. AOCI - Transfer of Unrealized Gain (Loss) of Securities AFS and HTM During the second quarter of 2022, the Company 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. 16. Earnings Per Common Share Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits. Diluted EPS includes accrued but unissued shares relating to the Director Compensation Program, stock options, and restricted stock determined using the treasury stock method. The dilutive EPS calculation assumes all outstanding stock options to purchase common stock have been exercised at the beginning of the year, and the pro forma proceeds from the exercised options and restricted stock are used to purchase common stock at the average fair market valuation price. 98 Table of Contents The computations of basic and diluted earnings per common share for the Company were as follows: Years Ended December 31, (in thousands, except share amounts) 2022 2021 Numerator: Net income - basic $ 36,916 $ 32,952 Net income - diluted $ 36,916 $ 32,952 Denominator: Weighted average shares outstanding - basic 7,180,975 7,281,136 Plus: Effect of Director Compensation Program 1,655 923 Plus: Effect of restricted stock 14,823 17,661 Weighted average shares outstanding - diluted 7,197,453 7,299,720 Earnings per common share: Basic $ 5.14 $ 4.53 Diluted $ 5.13 $ 4.51 99 Table of Contents 17. Quarterly Results of Operations (Unaudited) The following tables present certain unaudited consolidated quarterly financial information regarding the Company’s results of operations for each of the eight consecutive quarters in the fiscal years of 2022 and 2021. This information is derived from unaudited consolidated financial statements that include, in the Company’s opinion, all adjustments necessary for a fair presentation when read in conjunction with the Company’s consolidated financial statements and notes thereto as of and for the years ended December 31, 2022 and 2021. 2022 (in thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter Interest and dividend income $ 26,982 $ 24,886 $ 22,498 $ 20,009 Interest expense 3,308 1,798 1,349 1,281 Net interest income 23,674 23,088 21,149 18,728 Provision for loan losses 750 600 250 150 Net interest income after provision for loan losses 22,924 22,488 20,899 18,578 Noninterest income 4,619 4,867 4,860 4,402 Operating expenses 15,082 15,041 14,471 14,062 Income tax expense 2,270 2,128 2,141 1,526 Net income $ 10,191 $ 10,186 $ 9,147 $ 7,392 Earnings per share Basic $ 1.42 $ 1.42 $ 1.27 $ 1.03 Diluted $ 1.42 $ 1.42 $ 1.27 $ 1.03 2021 (in thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter Interest and dividend income $ 20,075 $ 19,442 $ 18,644 $ 19,178 Interest expense 1,300 1,333 1,397 1,587 Net interest income 18,775 18,109 17,247 17,591 Provision for loan losses 150 150 150 1,450 Net interest income after provision for loan losses 18,625 17,959 17,097 16,141 Noninterest income 5,672 5,643 6,403 6,775 Operating expenses 14,016 13,684 13,392 13,163 Income tax expense 1,771 1,780 1,869 1,688 Net income $ 8,510 $ 8,138 $ 8,239 $ 8,065 Earnings per share Basic $ 1.18 $ 1.12 $ 1.13 $ 1.10 Diluted $ 1.17 $ 1.12 $ 1.13 $ 1.10 18. Subsequent Events Management has evaluated subsequent events and transactions through March 16, 2023, the date that the financial statements were available to be issued. On March 7, 2023, the Company liquidated $ 6.0 million of equity securities, which are an investment in a CRA mutual fund. As of the date of liquidation, the fair value of the Company’s remaining equity securities was $ 3.9 million. 100 Table of Contents 19. Parent Company Financial Statements PARENT COMPANY BALANCE SHEETS (dollars in thousands, except share amounts) December 31, 2022 2021 ASSETS Cash and cash equivalents $ 10,795 $ 13,605 Investment in subsidiary bank 254,619 284,368 Other assets 370 188 Total Assets $ 265,784 $ 298,161 LIABILITIES Accrued expenses and other liabilities 31 11 Total Liabilities $ 31 $ 11 STOCKHOLDERS’ EQUITY Preferred stock, no par value: Authorized - 1,000,000 shares; None Issued and Outstanding — — Common stock, no par value: Authorized - 30,000,000 shares; Issued and Outstanding - 7,183,915 and 7,180,155 shares, respectively 60,050 60,233 Additional paid-in capital 2,088 1,814 Retained earnings 274,781 239,876 Accumulated other comprehensive income (loss) ( 71,166 ) ( 3,773 ) Total Stockholders’ Equity 265,753 298,150 Total Liabilities and Stockholders’ Equity $ 265,784 $ 298,161 101 Table of Contents PARENT COMPANY STATEMENTS OF INCOME (in thousands) Years ended December 31, 2022 2021 INTEREST AND DIVIDEND INCOME Interest and dividend income from subsidiaries $ 1 $ — Total Interest and Dividend Income 1 — OPERATING EXPENSES Technology expenses 52 88 Legal and professional expenses 837 571 Advertising 2 2 Other operating expenses 32 15 Total Operating Expenses 923 676 Income (Loss) Before Income Tax Expense (Benefit) ( 922 ) ( 676 ) Income tax expense (benefit) ( 194 ) ( 143 ) Income (Loss) Before Equity in Undistributed Earnings of Subsidiaries ( 728 ) ( 533 ) Equity in undistributed earnings of subsidiaries 37,644 33,485 Net Income $ 36,916 $ 32,952 102 Table of Contents PARENT COMPANY STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 36,916 $ 32,952 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Undistributed earnings of subsidiaries ( 37,644 ) ( 33,485 ) Other operating activities, net 322 354 Net cash provided by (used in) operating activities ( 406 ) ( 179 ) CASH FLOWS FROM INVESTING ACTIVITIES Capital contribution in partnerships ( 175 ) ( 173 ) Net cash provided by (used in) investing activities ( 175 ) ( 173 ) CASH FLOWS FROM FINANCING ACTIVITIES Repurchase of common stock ( 218 ) ( 7,878 ) Cash dividends ( 2,011 ) ( 2,033 ) Net cash provided by (used in) financing activities ( 2,229 ) ( 9,911 ) Net change in cash and cash equivalents ( 2,810 ) ( 10,263 ) Cash and cash equivalents - beginning of year 13,605 23,868 Cash and cash equivalents - end of year $ 10,795 $ 13,605 103 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.