# Business First Bancshares, Inc.: Form 10-Q for the period ended Jun 30, 2021

- Company: [Business First Bancshares, Inc.](/companies/bfst.md) (CIK 1624322)
- Form: 10-Q
- Filed: 2021-08-05
- Accepted by EDGAR: Aug 5, 2021, 10:00 ET
- Period: 2021-06-30
- Accession: 0001437749-21-018641
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1624322/000143774921018641/bfbi20210630_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1624322/000143774921018641/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-04-01 to 2021-06-30 | $1.7m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 6 months, 2021-01-01 to 2021-06-30 | $3.3m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Interest expense | 3 months, 2021-04-01 to 2021-06-30 | $4.4m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2021-01-01 to 2021-06-30 | $8.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2021-04-01 to 2021-06-30 | $4.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2021-01-01 to 2021-06-30 | $7.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-04-01 to 2021-06-30 | $17.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2021-01-01 to 2021-06-30 | $29.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-04-01 to 2021-06-30 | $0.84 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2021-01-01 to 2021-06-30 | $1.43 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-04-01 to 2021-06-30 | $0.84 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2021-01-01 to 2021-06-30 | $1.44 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-04-01 to 2021-06-30 | 20,827,786 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2021-01-01 to 2021-06-30 | 20,783,135 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2021-01-01 to 2021-06-30 | $29.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2021-01-01 to 2021-06-30 | $969.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2021-01-01 to 2021-06-30 | $4.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2021-01-01 to 2021-06-30 | $2.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2021-06-30 | $130.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2021-06-30 | $4.32bn | us-gaap:Assets |
| Total liabilities | at 2021-06-30 | $3.89bn | us-gaap:Liabilities |
| Shareholders' equity | at 2021-06-30 | $431.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 105,060 characters.

### FORWARD-LOOKING STATEMENTS

When we refer in this Form 10-Q to “we,” “our,” “us,” the “Company” and “Business First,” we are referring to Business First Bancshares, Inc. and its consolidated subsidiaries, including b1BANK, which we sometimes refer to as “the Bank,” unless the context indicates otherwise.

The information contained in this Form 10-Q is accurate only as of the date of this form and the dates specified herein.

All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q (this “Report”) and other periodic reports filed by the Company, and other written or oral statements made by us or on our behalf, are “forward-looking statements,” as defined by (and subject to the “safe harbor” protections under) the federal securities laws. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and the banking industry in general. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions of a future or forward-looking nature. These statements involve estimates, assumptions, and risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements.

We believe these factors include, but are not limited to, the following:

- the effects of the ongoing COVID-19 pandemic, including, among other effects: the emergence of multiple COVID-19 variants and their potential impact on the ongoing public health crisis; the extent and duration of closures of businesses, including our branches, vendors and customers; the operation of financial markets; employment levels; market liquidity; the impact of various actions taken in response by the United States (“U.S.”) federal government, the Federal Reserve, other banking regulators, state and local governments; the adequacy of our allowance for loan losses in relation to potential losses in our loan portfolio; and the impact that all of these factors have on our borrowers, other customers, vendors and counterparties;
- risks related to the integration of any acquired businesses, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms, procedures and personnel, the need for additional capital to finance such transactions, and possible failures in realizing the anticipated benefits from acquisitions;
- changes in the strength of the U.S. economy in general and the local economy in our local market areas adversely affecting our customers and their ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral;
- economic risks posed by our geographic concentration in Louisiana and the Dallas/Fort Worth metroplex;
- the ability to sustain and continue our organic loan and deposit growth, and manage that growth effectively;
- market declines in industries to which we have exposure, such as the volatility in oil prices and downturn in the energy industry that impact certain of our borrowers and investments that operate within, or are backed by collateral associated with, the energy industry;
- volatility and direction of interest rates and market prices, which could reduce our net interest margins, asset valuations and expense expectations;
- interest rate risk associated with our business;
- changes in the levels of loan prepayments and the resulting effects on the value of our loan portfolio;
- increased competition in the financial services industry, particularly from regional and national institutions;
- increased credit risk in our assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of our total loan portfolio;
- changes in the value of collateral securing our loans;
- deteriorating asset quality and higher loan charge-offs, and the time and effort required to resolve problem assets;
- the failure of assumptions underlying the establishment of and provisions made to our allowance for credit losses;
- changes in the availability of funds resulting in increased costs or reduced liquidity;
- our ability to maintain important deposit customer relationships and our reputation;
- a determination or downgrade in the credit quality and credit agency ratings of the securities in our securities portfolio;
- increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios;
- our ability to prudently manage our growth and execute our strategy;
- risks associated with our acquisition and de novo branching strategy;
- the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels;
- legislative or regulatory developments, including changes in the laws, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters;
- government intervention in the U.S. financial system;
- changes in statutes and government regulations or their interpretations applicable to us, including changes in tax requirements and tax rates;
- natural disasters and adverse weather, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, epidemics and pandemics such as coronavirus, and other matters beyond our control; and
- other risks and uncertainties listed from time to time in our reports and documents filed with the U.S. Securities and Exchange Commission (“SEC”).

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report. Additional information on these and other risk factors can be found in Item 1A. “Risk Factors” of this Report and in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC.

In the event that one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

### FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BUSINESS FIRST

*The following discussion and analysis focuses on significant changes in the financial condition of Business First and its subsidiaries from December 31, 2020 to June 30, 2021, and its results of operations for the three and six months ended June 30, 2021. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this report and should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and the notes thereto (the “Notes”) and (ii) our Annual Report on Form 10-K for the year ended December 31, 2020, including the audited consolidated financial statements and notes thereto, management’s discussion and analysis, and the risk factor disclosures contained therein. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that Business First believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Forward-Looking Statements,” “Risk Factors” and elsewhere in this report, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. Business First assumes no obligation to update any of these forward-looking statements.*

### Overview

We are a registered financial holding company headquartered in Baton Rouge, Louisiana. Through our wholly-owned subsidiary, b1BANK, a Louisiana state chartered bank, we provide a broad range of financial services tailored to meet the needs of small-to-midsized businesses and professionals. Since our inception in 2006, our priority has been and continues to be creating shareholder value through the establishment of an attractive commercial banking franchise in Louisiana and across our region. We consider our primary market to include the State of Louisiana and the Dallas/Fort Worth metroplex. We currently operate out of 43 banking centers in markets across Louisiana and Texas. As of June 30, 2021, we had total assets of $4.3 billion, total loans of $2.9 billion, total deposits of $3.7 billion, and total shareholders’ equity of $431.0 million.

As a financial holding company operating through one market segment, community banking, we generate most of our revenues from interest income on loans, customer service and loan fees, and interest income from securities. We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest-earning assets and expense of our liabilities through our net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets.

Changes in the market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions, and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in our markets and across our region, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our markets.

### Other Developments

### Pedestal Merger

On January 22, 2020, we entered into an agreement and plan of reorganization to acquire Pedestal Bancshares, Inc. (“Pedestal”), and its banking subsidiary Pedestal Bank. The acquisition of Pedestal was consummated on May 1, 2020. At April 30, 2020, Pedestal had fair values of approximately $1.3 billion in total assets, $893.3 million in net loans, $1.2 billion in total deposits, and $93.3 million in total shareholders’ equity.

***Smith Shellnut Wilson, LLC (“SSW”) Acquisition***

On March 22, 2021, we, through b1BANK, entered into a definitive agreement to acquire SSW, a registered investment advisor with approximately $3.5 billion in assets under management, specializing in managing investment portfolios for corporations, foundations and individuals. The acquisition of SSW was consummated on April 1, 2021. At March 31, 2021, SSW reported $3.6 million in total assets and $2.3 million in total liabilities.

### COVID-19

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

We have taken a number of actions in response to the COVID-19 pandemic:

- In anticipation of credit losses expected as a result of the COVID-19 pandemic, we recorded an additional provision for loan losses during the year ended December 31, 2020;
- In sensitivity to our customers, we waived certain service fees, such as late fees, excessive withdrawal fees, etc. and increased daily limits on ATM withdrawals during the year ended December 31, 2020;
- We continue to monitor borrowers who have deferred payments on loans under our COVID-19 Deferral Assistance Program, described in further detail below;
- We participated in the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), as described in further detail below, including participation in round 2 of the PPP during the six months ended June 30, 2021;
- We continue to monitor those sectors particularly impacted by the pandemic—such as energy, hotels, restaurants, 1-4 family and retail—and have flagged those sectors for additional monitoring;

### COVID-19 Deferral Assistance Program

Beginning on March 25, 2020, we have taken proactive measures to help customers by deferring principal and/or interest payments. Through June 30, 2021, we had agreed to deferrals on approximately 2,000 loans with an aggregate outstanding balance of $720.5 million, of which the majority of modifications occurred in 2020. As of June 30, 2021, we had 16 loans with outstanding principal balances of $29.9 million that remain in their respective deferral periods, although $19.9 million were qualifying interest-only modifications to seasoned, highly rated clients.

In accordance with FASB and interagency regulatory guidance issued in March 2020, loans that are modified under the terms of our COVID-19 Deferral Assistance Program will not be considered as troubled debt restructurings to the extent that they meet the terms of such guidance under Section 4013 of the CARES Act, as extended by the Consolidated Appropriations Act of 2021.

#### SBA PPP Participation

As of June 30, 2021, we held 92 PPP loans (including both round 1 and round 2 PPP loans) with an aggregate balance of $25.7 million and an average loan balance of approximately $280,000. In June 2021, we sold approximately 2,000 PPP loans with an aggregate balance of $243.6 million at a gain of $9.2 million.

### Financial Highlights

The financial highlights as of and for the three and six months ended June 30, 2021 include:

- **Total assets** of $4.3 billion, a $163.6 million, or 3.9%, increase from December 31, 2020.
- **Total loans held for investment** of $2.9 billion, a $136.5 million, or 4.6%, decrease from December 31, 2020.
- **Total deposits** of $3.7 billion, a $107.5 million, or 3.0%, increase from December 31, 2020.
- **Net income** of $17.4 million, a $15.4 million, or 749.3%, increase from the three months ended June 30, 2020.
- **Net interest income** of $37.9 million, an increase of $7.0 million, or 22.7%, from the three months ended June 30, 2020.
- **Allowance for loan and lease losses** of 0.94% of total loans held for investment, compared to 0.74% as of December 31, 2020, and a ratio of nonperforming loans to total loans held for investment of 0.40%, compared to 0.35% as of December 31, 2020.
- **Earnings per share** for the first six months of 2021 of $1.44 per basic share and $1.43 per diluted share, compared to $0.42 per basic and diluted share for the first six months of 2020.
- **Return on average assets** of 1.37% over the first six months of 2021, compared to 0.46% for the first six months of 2020.
- **Return on average equity** of 14.23% over the first six months of 2021, compared to 4.13% for the first six months of 2020.
- **Capital ratios** for Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 8.23%, 9.99%, 10.14% and 13.24%, respectively. During the year ended December 31, 2020, we elected the Community Bank Leverage Ratio (“CBLR”) and had a ratio of 8.79% at December 31, 2020. We have since elected to return to risk-based regulatory capital reporting for 2021.
- **Book value per share** of $20.78, an increase of 4.53% from $19.88 at December 31, 2020.

### Results of Operations for the Three and Six Months Ended June 30, 2021 and 2020

### Performance Summary

Our performance for the three and six months ended June 30, 2021 was significantly impacted by the recognition of a gain of $9.2 million from the PPP portfolio sale that closed during the quarter ended June 30, 2021.

For the three months ended June 30, 2021, net income was $17.4 million, or $0.84 per basic and diluted share, compared to net income of $2.1 million, or $0.11 per basic and diluted share, for the three months ended June 30, 2020. Return on average assets, on an annualized basis, increased to 1.58% for the three months ended June 30, 2021, from 0.23% for the three months ended June 30, 2020. Return on average equity, on an annualized basis, increased to 16.57% for the three months ended June 30, 2021, as compared to 2.35% for the three months ended June 30, 2020.

For the six months ended June 30, 2021, net income was $29.8 million, or $1.44 per basic share and $1.43 per diluted share, compared to net income of $6.6 million, or $0.42 per basic and diluted share, for the six months ended June 30, 2020. Return on average assets, on an annualized basis, increased to 1.37% for the six months ended June 30, 2021, from 0.46% for the six months ended June 30, 2020. Return on average equity, on an annualized basis, increased to 14.23% for the six months ended June 30, 2021, as compared to 4.13% for the six months ended June 30, 2020.

### Net Interest Income

Our operating results depend primarily on our net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Fluctuations in market interest rates impact the yield and rates paid on interest sensitive assets and liabilities. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact net interest income. The variance driven by the changes in the amount and mix of interest-earning assets and interest-bearing liabilities is referred to as a “volume change.” Changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds are referred to as a “rate change.”

To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. We calculate average assets, liabilities, and equity using a monthly average, and average yield/rate utilizing a 30/360 day count convention.

For the three months ended June 30, 2021, net interest income totaled $37.9 million, and net interest margin and net interest spread were 3.87% and 3.68%, respectively, compared to $30.9 million, 3.89%, and 3.59%, respectively, for the three months ended June 30, 2020. The average yield on the loan portfolio (excluding SBA PPP loans) was 5.13% for the three months ended June 30, 2021, compared to 5.61% for the three months ended June 30, 2020, and the average yield on total interest-earning assets was 4.32% for the three months ended June 30, 2021, compared to 4.65% for the three months ended June 30, 2020. For the three months ended June 30, 2021, overall cost of funds (which includes noninterest-bearing deposits) decreased 32 basis points compared to the three months ended June 30, 2020, primarily due to the maturing of higher yielding deposits, increased lower yielding deposits along with deposit and borrowing accretion recognized from the Pedestal acquisition. While we experienced significant loan growth in average loan balances, we anticipate continued pressure on our net interest margin and net interest spread in future periods based on the current yield curve.

For the six months ended June 30, 2021, net interest income totaled $78.2 million, and net interest margin and net interest spread were 4.05% and 3.87%, respectively, compared to $51.1 million, 3.91%, and 3.57%, respectively, for the six months ended June 30, 2020. The average yield on the loan portfolio (excluding SBA PPP loans) was 5.32% for the six months ended June 30, 2021, compared to 5.58% for the six months ended June 30, 2020, and the average yield on total interest-earning assets was 4.48% for the six months ended June 30, 2021, compared to 4.81% for the six months ended June 30, 2020. For the six months ended June 30, 2021, overall cost of funds (which includes noninterest-bearing deposits) decreased 50 basis points compared to the six months ended June 30, 2020, primarily due to the federal funds rate cuts during the second half of 2019 and first quarter of 2020, along with the maturing of higher yielding deposits, increased lower yielding deposits and the deposit and borrowing accretion recognized from the Pedestal acquisition. While we experienced significant loan growth in average loan balances, we anticipate continued pressure on our net interest margin and net interest spread in future periods based on the current yield curve.

The following tables present, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however the balances are reflected in average outstanding balances for the period. For the three and six months ended June 30, 2021 and 2020, interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield. The average total loans reflected below is net of deferred loan fees and discounts. Acquired loans were recorded at fair value at acquisition and accrete interest income either over the remaining lives of the respective loans or expected cash flows. Averages presented in the tables below, and throughout this report, are month-end averages.

| Assets Interest-earning assets: | For the Three Months Ended June 30, 2021 Average Outstanding Balance (Dollars in thousands) (Unaudited) | Interest Earned/ Interest Paid | Average Yield/ Rate | 2020 Average Outstanding Balance | Interest Earned/ Interest Paid | Average Yield/ Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Total loans (excluding SBA PPP loans) | $2,814,593 | $36,116 | 5.13% | $2,304,438 | $32,306 | 5.61% |
| SBA PPP loans | 242,015 | 3,019 | 4.99 | 321,127 | 2,330 | 2.90 |
| Securities available for sale | 801,268 | 3,189 | 1.59 | 481,422 | 2,175 | 1.81 |
| Interest-bearing deposits in other banks | 62,693 | 27 | 0.17 | 69,169 | 80 | 0.46 |
| Total interest-earning assets | 3,920,569 | 42,351 | 4.32 | 3,176,156 | 36,891 | 4.65 |
| Allowance for loan losses | (26,032) |  |  | (13,606) |  |  |
| Noninterest-earning assets | 505,374 |  |  | 333,524 |  |  |
| Total assets | $4,399,911 | $42,351 |  | $3,496,074 | $36,891 |  |
| Liabilities and Shareholders’ Equity |  |  |  |  |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Interest-bearing deposits | $2,615,241 | $3,235 | 0.49% | $1,994,680 | $4,795 | 0.96% |
| Subordinated debt | 81,427 | 1,015 | 4.99 | 25,000 | 422 | 6.75 |
| Subordinated debt – trust preferred securities | 5,000 | 43 | 3.44 | 3,333 | 8 | 0.96 |
| Advances from Federal Home Loan Bank (“FHLB”) | 32,887 | 108 | 1.31 | 129,441 | 526 | 1.63 |
| Paycheck protection program liquidity facility (“PPPLF”) | — | — | — | 76,902 | 72 | 0.37 |
| Other borrowings | 24,909 | 5 | 0.08 | 32,975 | 149 | 1.81 |
| Total interest-bearing liabilities | 2,759,464 | 4,406 | 0.64 | 2,262,331 | 5,972 | 1.06 |
| **Noninterest-bearing liabilities:** |  |  |  |  |  |  |
| Noninterest-bearing deposits | 1,191,900 |  |  | 852,608 |  |  |
| Other liabilities | 27,907 |  |  | 31,501 |  |  |
| Total noninterest-bearing liabilities | 1,219,807 |  |  | 884,109 |  |  |
| Shareholders’ equity | 420,640 |  |  | 349,634 |  |  |
| Total liabilities and shareholders’ equity | $4,399,911 |  |  | $3,496,074 |  |  |
| Net interest rate spread(1) |  |  | 3.68% |  |  | 3.59% |
| Net interest income |  | $37,945 |  |  | $30,919 |  |
| Net interest margin(2) |  |  | 3.87% |  |  | 3.89% |
| Overall cost of funds |  |  | 0.45% |  |  | 0.77% |

(1) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

(2) Net interest margin is equal to net interest income divided by average interest-earning assets.

| Assets Interest-earning assets: | For the Six Months Ended June 30, 2021 Average Outstanding Balance (Dollars in thousands) (Unaudited) | Interest Earned/ Interest Paid | Average Yield/ Rate | 2020 Average Outstanding Balance | Interest Earned/ Interest Paid | Average Yield/ Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Total loans (excluding SBA PPP loans) | $2,729,130 | $72,654 | 5.32% | $2,022,312 | $56,449 | 5.58% |
| SBA PPP loans | 308,487 | 7,900 | 5.12 | 160,564 | 2,330 | 2.90 |
| Securities available for sale | 746,372 | 5,991 | 1.61 | 384,041 | 3,906 | 2.03 |
| Interest-bearing deposits in other banks | 81,963 | 68 | 0.17 | 48,962 | 222 | 0.91 |
| Total interest-earning assets | 3,865,952 | 86,613 | 4.48 | 2,615,879 | 62,907 | 4.81 |
| Allowance for loan losses | (24,371) |  |  | (12,905) |  |  |
| Noninterest-earning assets | 496,589 |  |  | 267,355 |  |  |
| Total assets | $4,338,170 | $86,613 |  | $2,870,329 | $62,907 |  |
| Liabilities and Shareholders’ Equity |  |  |  |  |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Interest-bearing deposits | $2,599,751 | $6,478 | 0.50% | $1,668,446 | $9,481 | 1.14% |
| Subordinated debt | 54,939 | 1,474 | 5.37 | 25,000 | 844 | 6.75 |
| Subordinated debt – trust preferred securities | 5,000 | 85 | 3.40 | 1,667 | 8 | 0.96 |
| Advances from FHLB | 34,954 | 219 | 1.25 | 113,882 | 1,023 | 1.80 |
| PPPLF | — | — | — | 38,451 | 72 | 0.37 |
| Other borrowings | 28,302 | 111 | 0.78 | 50,050 | 349 | 1.39 |
| Total interest-bearing liabilities | 2,722,946 | 8,367 | 0.61 | 1,897,496 | 11,777 | 1.24 |
| **Noninterest-bearing liabilities:** |  |  |  |  |  |  |
| Noninterest-bearing deposits | 1,169,425 |  |  | 629,321 |  |  |
| Other liabilities | 27,532 |  |  | 26,026 |  |  |
| Total noninterest-bearing liabilities | 1,196,957 |  |  | 655,347 |  |  |
| Shareholders’ equity | 418,267 |  |  | 317,486 |  |  |
| Total liabilities and shareholders’ equity | $4,338,170 |  |  | $2,870,329 |  |  |
| Net interest rate spread(1) |  |  | 3.87% |  |  | 3.57% |
| Net interest income |  | $78,246 |  |  | $51,130 |  |
| Net interest margin(2) |  |  | 4.05% |  |  | 3.91% |
| Overall cost of funds |  |  | 0.43% |  |  | 0.93% |

(1) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

(2) Net interest margin is equal to net interest income divided by average interest-earning assets.

The following tables present information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities, and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of these tables, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

| Interest-earning assets: | For the Three Months Ended June 30, 2021 compared to the Three Months Ended June 30, 2020 Increase (Decrease) due to change in Volume (Dollars in thousands) (Unaudited) | Rate | Total |
| --- | ---: | ---: | ---: |
| Total loans (excluding SBA PPP loans) | $6,546 | $(2,736) | $3,810 |
| SBA PPP loans | (987) | 1,676 | 689 |
| Securities available for sale | 1,273 | (259) | 1,014 |
| Interest-earning deposits in other banks | (3) | (50) | (53) |
| Total increase (decrease) in interest income | $6,829 | $(1,369) | $5,460 |
| Interest-bearing liabilities: |  |  |  |
| Interest-bearing deposits | $768 | $(2,328) | $(1,560) |
| Subordinated debt | 703 | (110) | 593 |
| Subordinated debt – trust preferred securities | 14 | 21 | 35 |
| Advances from FHLB | (317) | (101) | (418) |
| PPPLF | — | (72) | (72) |
| Other borrowings | (2) | (142) | (144) |
| Total increase (decrease) in interest expense | 1,166 | (2,732) | (1,566) |
| Increase in net interest income | $5,663 | $1,363 | $7,026 |

| Interest-earning assets: | For the Six Months Ended June 30, 2021 compared to the Six Months Ended June 30, 2020 Increase (Decrease) due to change in Volume (Dollars in thousands) (Unaudited) | Rate | Total |
| --- | ---: | ---: | ---: |
| Total loans (excluding SBA PPP) | $18,817 | $(2,612) | $16,205 |
| SBA PPP loans | 3,788 | 1,782 | 5,570 |
| Securities available for sale | 2,908 | (823) | 2,085 |
| Interest-earning deposits in other banks | 27 | (181) | (154) |
| Total increase (decrease) in interest income | $25,540 | $(1,834) | $23,706 |
| Interest-bearing liabilities: |  |  |  |
| Interest-bearing deposits | $2,321 | $(5,324) | $(3,003) |
| Subordinated debt | 803 | (173) | 630 |
| Subordinated debt – trust preferred securities | 57 | 20 | 77 |
| Advances from FHLB | (495) | (309) | (804) |
| PPPLF | — | (72) | (72) |
| Other borrowings | (85) | (153) | (238) |
| Total increase (decrease) in interest expense | 2,601 | (6,011) | (3,410) |
| Increase (decrease) in net interest income | $22,939 | $4,177 | $27,116 |

41

### Provision for Loan Losses

Our provision for loan losses is a charge to income in order to bring our allowance for loan losses to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the allowance for loan losses see “—*Financial Condition—Allowance for Loan Losses.”* The provision for loan losses was $2.2 million for the three months ended June 30, 2021 and $5.4 million for the same period in 2020. For the six months ended June 30, 2021 and 2020, the provision for loan losses was $5.6 million and $6.8 million, respectively. The lower provision for the three and six months ended June 30, 2021 compared to the same period in 2020 relates primarily to a downward adjustment of the qualitative economic factor for the COVID-19 pandemic, and partially offset by additional reserves of $1.4 million required on a $1.9 million outstanding principal balance energy loan which was transferred to nonaccrual during the first quarter of 2021.

### Noninterest Income

Our primary sources of noninterest income are service charges on deposit accounts, debit card and automated teller machine (“ATM”) fee income, income from bank-owned life insurance, fees and brokerage commissions and pass-through income from small business investment company (“SBIC”) partnerships. The following tables present, for the periods indicated, the major categories of noninterest income:

| Noninterest income: | For the Three Months Ended June 30, 2021 (Dollars in thousands) (Unaudited) | 2020 | Increase (Decrease) |
| --- | ---: | ---: | ---: |
| Service charges on deposit accounts | $1,683 | $1,163 | $520 |
| Debit card and ATM fee income | 1,777 | 959 | 818 |
| Bank-owned life insurance income | 355 | 255 | 100 |
| Gain on sales of loans | 10,042 | 7 | 10,035 |
| Loss on sales of investment securities | (50) | — | (50) |
| Fees and brokerage commission | 1,416 | 236 | 1,180 |
| Mortgage origination income | 241 | 126 | 115 |
| Correspondent bank income | 123 | 32 | 91 |
| Participation fee income | 240 | 46 | 194 |
| Loss on sales of other real estate owned | (575) | (19) | (556) |
| Loss on sales of other assets | (9) | — | (9) |
| Pass-through income from SBIC partnerships | 1,602 | 1,624 | (22) |
| Other | 531 | 567 | (36) |
| Total noninterest income | $17,376 | $4,996 | $12,380 |

42

| Noninterest income: | For the Six Months Ended June 30, 2021 (Dollars in thousands) (Unaudited) | 2020 | Increase (Decrease) |
| --- | ---: | ---: | ---: |
| Service charges on deposit accounts | $3,250 | $2,094 | $1,156 |
| Debit card and ATM fee income | 3,113 | 1,366 | 1,747 |
| Bank-owned life insurance income | 673 | 452 | 221 |
| Gain on sales of loans | 10,021 | 184 | 9,837 |
| Gain (loss) on sales of investment securities | (55) | 25 | (80) |
| Fees and brokerage commission | 1,959 | 256 | 1,703 |
| Mortgage origination income | 470 | 241 | 229 |
| Correspondent bank income | 266 | 141 | 125 |
| Participation fee income | 487 | 113 | 374 |
| Gain (loss) on sales of other real estate owned | (529) | 132 | (661) |
| Gain on sales of other assets | 108 | — | 108 |
| Pass-through income from SBIC partnerships | 1,655 | 2,004 | (349) |
| Other | 1,041 | 792 | 249 |
| Total noninterest income | $22,459 | $7,800 | $14,659 |

Total noninterest income increased $12.4 million, or 247.8%, from the three months ended June 30, 2020. The increase was primarily due to the increases in services charges of $520,000, or 44.7%, and debit card and ATM fee income of $818,000, or 85.3%, due to increased activity from the Pedestal acquisition and organic growth, gain on sale of loans of $10.0 million, due primarily to the sale of the majority of our SBA PPP loans, and the increase in fees and brokerage commission income of $1.2 million, due to the acquisition of Pedestal’s brokerage customers and SSW, offset by an increase in losses on the sales of other real estate owned of $556,000.

Total noninterest income increased $14.7 million, or 187.9%, from the six months ended June 30, 2020. The increase was primarily due to the increases in services charges of $1.2 million, or 55.2%, and debit card and ATM fee income of $1.7 million, or 127.9%, due to increased activity from the Pedestal acquisition and organic growth, gain on sale of loans of $9.8 million, due primarily to the sale of the majority of our SBA PPP loans, and the increase in fees and brokerage commission income of $1.7 million, due to the acquisition of Pedestal’s brokerage customers and SSW, offset by an increase in losses on the sales of other real estate owned of $661,000.

### Noninterest Expense

Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships, and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization, professional and regulatory fees, including Federal Deposit Insurance Corporation (“FDIC”) assessments, data processing expenses, and advertising and promotion expenses, among others.

The following tables present, for the periods indicated, the major categories of noninterest expense:

|  | For the Three Months Ended June 30, 2021 (Dollars in thousands) (Unaudited) | 2020 | Increase (Decrease) |
| --- | ---: | ---: | ---: |
| Salaries and employee benefits | $16,753 | $17,621 | $(868) |
| Non-staff expenses: |  |  |  |
| Occupancy of bank premises | 2,276 | 1,370 | 906 |
| Depreciation and amortization | 1,686 | 1,073 | 613 |
| Data processing | 2,288 | 1,055 | 1,233 |
| FDIC assessment fees | 436 | 272 | 164 |
| Legal and other professional fees | 905 | 543 | 362 |
| Advertising and promotions | 624 | 334 | 290 |
| Utilities and communications | 636 | 645 | (9) |
| Ad valorem shares tax | 675 | 450 | 225 |
| Directors’ fees | 194 | 100 | 94 |
| Other real estate owned expenses and write-downs | 178 | 51 | 127 |
| Merger and conversion related expenses | 94 | 1,726 | (1,632) |
| Other | 4,371 | 2,557 | 1,814 |
| Total noninterest expense | $31,116 | $27,797 | $3,319 |

|  | For the Six Months Ended June 30, 2021 (Dollars in thousands) (Unaudited) | 2020 | Increase (Decrease) |
| --- | ---: | ---: | ---: |
| Salaries and employee benefits | $31,679 | $27,056 | $4,623 |
| Non-staff expenses: |  |  |  |
| Occupancy of bank premises | 4,087 | 2,430 | 1,657 |
| Depreciation and amortization | 3,279 | 1,674 | 1,605 |
| Data processing | 4,111 | 1,707 | 2,404 |
| FDIC assessment fees | 945 | 419 | 526 |
| Legal and other professional fees | 1,646 | 937 | 709 |
| Advertising and promotions | 1,101 | 640 | 461 |
| Utilities and communications | 1,211 | 962 | 249 |
| Ad valorem shares tax | 1,375 | 825 | 550 |
| Directors’ fees | 382 | 174 | 208 |
| Other real estate owned expenses and write-downs | 557 | 304 | 253 |
| Merger and conversion related expenses | 104 | 2,874 | (2,770) |
| Other | 7,602 | 4,438 | 3,164 |
| Total noninterest expense | $58,079 | $44,440 | $13,639 |

Total noninterest expense increased $3.3 million, or 11.9%, from the three months ended June 30, 2020, due primarily to the acquisition of Pedestal on May 1, 2020 and the associated increases in branches and employees. The increase in noninterest expense was partially offset by lower merger and conversion related expenses in the current period, as compared to the three months ended June 30, 2020. Merger related expenses in the prior year period primarily related to employee retention, severance and conversion expenses for the Pedestal acquisition.

Total noninterest expense increased $13.6 million, or 30.7%, from the six months ended June 30, 2020, due primarily to the acquisition of Pedestal on May 1, 2020 and the associated increases in branches and employees. The increase in noninterest expense was partially offset with lower merger and conversion related expenses, compared to the six months ended June 30, 2020, due to the acquisition of Pedestal during the prior year period.

### Income Tax Expense

The amount of income tax expense is influenced by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

For the three months ended June 30, 2021, income tax expense totaled $4.5 million, an increase of $3.9 million, or 628.1%, compared to $623,000 for the same period in 2020. For the six months ended June 30, 2021, income tax expense totaled $7.3 million, an increase of $6.1 million, or 543.8%, compared to $1.1 million for the same period in 2020. Our effective tax rates for the three months ended June 30, 2021 and 2020 were 20.7% and 23.3%, respectively. For the six months ended June 30, 2021 and 2020, our effective tax rates were 19.6% and 14.7%, respectively. The increase in our effective tax rate for the six months ended June 30, 2021 is primarily due to founder’s stock option exercises that occurred in 2020. Our effective tax rate for both periods was affected by tax-exempt income generated by municipal securities, bank-owned life insurance and by other nondeductible expenses (including acquisition-related expenses).

### Financial Condition

Our total assets increased $163.6 million, or 3.9%, from December 31, 2020 to June 30, 2021, due primarily from the increases in cash and cash equivalents and our investment portfolio attributed to the activity associated with the second round of SBA PPP.

### Loan Portfolio

Our primary source of income is interest on loans to individuals, professionals and small-to-midsized businesses located in our markets. Our loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our earning asset base.

As of June 30, 2021, total loans held for investment were $2.9 billion, a decrease of $136.5 million, or 4.6%, compared to $3.0 billion as of December 31, 2020. The decrease was primarily due to the sale of the majority of our SBA PPP loans totaling $243.6 million. Additionally, $1.8 million and $969,000 in mortgage loans were classified as loans held for sale as of June 30, 2021 and December 31, 2020, respectively.

Total loans held for investment as a percentage of total deposits were 76.7% and 82.7% as of June 30, 2021 and December 31, 2020, respectively. Total loans held for investment as a percentage of total assets were 66.0% and 71.9% as of June 30, 2021 and December 31, 2020, respectively.

The following table summarizes our loan portfolio by type of loan as of the dates indicated:

*(Dollars in thousands)*

|  | As of June 30, 2021 (Unaudited) Amount | Percent | As of December 31, 2020 Amount | Percent |
| --- | ---: | ---: | ---: | ---: |
| Commercial | $660,691 | 23.1% | $886,325 | 29.6% |
| Real estate: |  |  |  |  |
| Construction and land | 454,055 | 15.9 | 403,065 | 13.5 |
| Farmland | 77,133 | 2.7 | 55,883 | 1.8 |
| 1-4 family residential | 459,037 | 16.1 | 468,650 | 15.7 |
| Multi-family residential | 89,796 | 3.2 | 95,707 | 3.2 |
| Nonfarm nonresidential | 1,002,707 | 35.1 | 971,603 | 32.5 |
| Consumer | 111,467 | 3.9 | 110,122 | 3.7 |
| Total loans held for investment | $2,854,886 | 100.0% | $2,991,355 | 100.0% |

SBA PPP loans accounted for $25.7 million of the commercial portfolio as of June 30, 2021 and $313.9 million and $1.6 million of the commercial and consumer portfolios, respectively, as of December 31, 2020.

*Commercial loans.* Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. These loans are made based primarily on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and generally include personal guarantees.

Commercial loans decreased $225.6 million, or 25.5%, to $660.7 million as of June 30, 2021 from $886.3 million as of December 31, 2020, primarily due to the sale of the majority of our SBA PPP loans, offset by new originations in the Dallas/Fort Worth metroplex.

*Construction and land.* Construction and land development loans are comprised of loans to fund construction, land acquisition and land development construction. The properties securing the portfolio are located primarily throughout Louisiana and the Dallas/Fort Worth metroplex, and are generally diverse in terms of type.

Construction and land loans increased $51.0 million, or 12.7%, to $454.1 million as of June 30, 2021 from $403.1 million as of December 31, 2020.

*1-4 family residential.* Our 1-4 family residential loan portfolio is comprised of loans secured by single family homes, which are both owner-occupied and investor owned. Our 1-4 family residential loans have a relatively small average balance spread between many individual borrowers and are generally offered as accommodations to existing customers.

1-4 family residential loans decreased $9.6 million, or 2.1%, to $459.0 million as of June 30, 2021 from $468.7 million as of December 31, 2020.

*Nonfarm nonresidential.* Nonfarm nonresidential loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate. These loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the portfolio are located throughout Louisiana and Texas and are generally diverse in terms of type. This diversity helps reduce the exposure to adverse economic events that affect any single industry.

Nonfarm nonresidential loans increased $31.1 million, or 3.2%, to $1.0 billion as of June 30, 2021 from $971.6 million as of December 31, 2020.

*Other loan categories.* Other categories of loans included in our loan portfolio include farmland and agricultural loans made to farmers and ranchers relating to their operations, multi-family residential loans, and consumer loans. None of these categories of loans represent a significant portion of our total loan portfolio.

The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range as of the date indicated are summarized in the following tables:

|  | As of June 30, 2021 One Year or Less (Dollars in thousands) (Unaudited) | One Through Five Years | After Five Years | Total |
| --- | ---: | ---: | ---: | ---: |
| Commercial | $253,972 | $281,036 | $125,683 | $660,691 |
| Real estate: |  |  |  |  |
| Construction and land | 163,061 | 231,962 | 59,032 | 454,055 |
| Farmland | 9,089 | 50,140 | 17,904 | 77,133 |
| 1-4 family residential | 72,113 | 247,705 | 139,219 | 459,037 |
| Multi-family residential | 2,415 | 39,024 | 48,357 | 89,796 |
| Nonfarm nonresidential | 123,909 | 523,993 | 354,805 | 1,002,707 |
| Consumer | 47,599 | 53,073 | 10,795 | 111,467 |
| Total loans held for investment | $672,158 | $1,426,933 | $755,795 | $2,854,886 |
| Amounts with fixed rates | $343,544 | $1,037,077 | $442,811 | $1,823,432 |
| Amounts with floating rates | 328,614 | 389,856 | 312,984 | 1,031,454 |

*(Dollars in thousands)*

|  | As of December 31, 2020 One Year or Less | One Through Five Years | After Five Years | Total |
| --- | ---: | ---: | ---: | ---: |
| Commercial | $218,443 | $586,675 | $81,207 | $886,325 |
| Real estate: |  |  |  |  |
| Construction and land | 180,735 | 176,863 | 45,467 | 403,065 |
| Farmland | 10,802 | 31,489 | 13,592 | 55,883 |
| 1-4 family residential | 78,087 | 246,550 | 144,013 | 468,650 |
| Multi-family residential | 21,292 | 25,863 | 48,552 | 95,707 |
| Nonfarm nonresidential | 123,708 | 521,687 | 326,208 | 971,603 |
| Consumer | 44,819 | 56,057 | 9,246 | 110,122 |
| Total loans held for investment | $677,886 | $1,645,184 | $668,285 | $2,991,355 |
| Amounts with fixed rates | $344,021 | $1,297,988 | $353,314 | $1,995,323 |
| Amounts with floating rates | 333,865 | 347,196 | 314,971 | 996,032 |

### Nonperforming Assets

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is generally reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due, or interest may be recognized on a cash basis as long as the remaining book balance of the loan is deemed collectible. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

We have several procedures in place to assist in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our bankers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

We believe our conservative lending approach and focused management of nonperforming assets has resulted in sound asset quality and the timely resolution of problem assets. We had $18.0 million and $20.0 million in nonperforming assets as of June 30, 2021 and December 31, 2020, respectively. We had $11.5 million in nonperforming loans as of June 30, 2021 compared to $10.6 million as of December 31, 2020. The decrease in nonperforming assets from December 31, 2020 to June 30, 2021 is primarily due to the sale of other real estate owned.

The following tables present information regarding nonperforming assets at the dates indicated:

*(Dollars in thousands)*

|  | As of June 30, 2021 (Unaudited) | As of December 31, 2020 |
| --- | ---: | ---: |
| Nonaccrual loans | $10,568 | $9,063 |
| Accruing loans 90 or more days past due | 893 | 1,523 |
| Total nonperforming loans | 11,461 | 10,586 |
| Other nonperforming assets | 665 | 402 |
| Other real estate owned: |  |  |
| Commercial real estate, construction, land and land development | 5,271 | 8,567 |
| Residential real estate | 619 | 484 |
| Total other real estate owned | 5,890 | 9,051 |
| Total nonperforming assets | $18,016 | $20,039 |
| Restructured loans-nonaccrual | $3,352 | $4,206 |
| Restructured loans-accruing | 694 | 4,315 |
| Ratio of nonperforming loans to total loans held for investment | 0.40% | 0.35% |
| Ratio of nonperforming assets to total assets | 0.42 | 0.48 |

*(Dollars in thousands)*

| Nonaccrual loans by category: Real estate: | As of June 30, 2021 (Unaudited) | As of December 31, 2020 |
| --- | ---: | ---: |
| Construction and land | $912 | $924 |
| Farmland | 213 | 367 |
| 1-4 family residential | 2,617 | 2,603 |
| Multi-family residential | — | — |
| Nonfarm nonresidential | 3,321 | 3,119 |
| Commercial | 3,323 | 1,753 |
| Consumer | 182 | 297 |
| Total | $10,568 | $9,063 |

Through June 30, 2021, we had agreed to deferrals on approximately 2,000 loans with outstanding balances totaling $720.5 million by granting temporary payment deferrals of principal and/or interest. The payment deferrals were granted due to the effects of the COVID-19 pandemic. In accordance with FASB and interagency regulatory guidance issued in March 2020, loans that are modified under the terms of our COVID-19 Deferral Assistance Program will not be considered as troubled debt restructurings to the extent that they meet the terms of such guidance under Section 4013 of the CARES Act. Loans under these deferrals remain in their current risk rating and / or past due status through the deferral period.

### Potential Problem Loans

From a credit risk standpoint, we classify loans in one of four categories: pass, special mention, substandard or doubtful. Loans classified as loss are charged-off. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. Ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk of loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk of loss).

Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

Credits rated doubtful have all the weaknesses inherent in those rated substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following tables summarize our internal ratings of loans held for investment as of the dates indicated.

| Real estate: | As of June 30, 2021 Pass (Dollars in thousands) (Unaudited) | Special Mention | Substandard | Doubtful | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Construction and land | $449,238 | $964 | $2,941 | $912 | $454,055 |
| Farmland | 74,330 | 2,590 | — | 213 | 77,133 |
| 1-4 family residential | 440,561 | 9,592 | 4,714 | 4,170 | 459,037 |
| Multi-family residential | 89,475 | 296 | 25 | — | 89,796 |
| Nonfarm nonresidential | 979,559 | 13,677 | 3,317 | 6,154 | 1,002,707 |
| Commercial | 637,722 | 14,090 | 4,990 | 3,889 | 660,691 |
| Consumer | 109,329 | 1,105 | 698 | 335 | 111,467 |
| Total | $2,780,214 | $42,314 | $16,685 | $15,673 | $2,854,886 |

*(Dollars in thousands)*

| Real estate: | As of December 31, 2020 Pass | Special Mention | Substandard | Doubtful | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Construction and land | $400,027 | $912 | $1,202 | $924 | $403,065 |
| Farmland | 53,874 | 1,642 | — | 367 | 55,883 |
| 1-4 family residential | 450,702 | 9,290 | 4,913 | 3,745 | 468,650 |
| Multi-family residential | 95,359 | 320 | 28 | — | 95,707 |
| Nonfarm nonresidential | 949,245 | 12,810 | 3,473 | 6,075 | 971,603 |
| Commercial | 859,851 | 16,832 | 7,325 | 2,317 | 886,325 |
| Consumer | 107,449 | 1,970 | 229 | 474 | 110,122 |
| Total | $2,916,507 | $43,776 | $17,170 | $13,902 | $2,991,355 |

### Allowance for Loan Losses

We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in the loan portfolio. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. For additional information, see Note 6 to the consolidated financial statements.

In connection with our review of the loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include:

- for commercial and industrial loans, the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category, and the value, nature and marketability of collateral;
- for commercial mortgage loans and multi-family residential loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral, and the volatility of income, property value and future operating results typical for properties of that type;
- for 1-4 family residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan to value ratio, and the age, condition and marketability of the collateral; and
- for construction, land development and other land loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, the experience and ability of the developer, and the loan to value ratio.

As of June 30, 2021, the allowance for loan losses totaled $26.7 million, or 0.94%, of total loans held for investment. As of December 31, 2020, the allowance for loan losses totaled $22.0 million, or 0.74%, of total loans held for investment.

The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:

*(Dollars in thousands)*

|  | As of and For the Six Months Ended June 30, 2021 (Unaudited) | As of and For the Year Ended December 31, 2020 |
| --- | ---: | ---: |
| Average loans outstanding(1) | $3,037,617 | $2,613,422 |
| Gross loans held for investment outstanding at end of period | $2,854,886 | $2,991,355 |
| Allowance for loan losses at beginning of period | $22,024 | $12,124 |
| Provision for loan losses | 5,600 | 11,435 |
| Charge-offs: |  |  |
| Real estate: |  |  |
| Construction, land and farmland | 1 | 28 |
| Residential | 135 | 387 |
| Nonfarm nonresidential | 141 | 232 |
| Commercial | 680 | 849 |
| Consumer | 213 | 467 |
| Total charge-offs | 1,170 | 1,963 |
| Recoveries: |  |  |
| Real estate: |  |  |
| Construction, land and farmland | 2 | 10 |
| Residential | 27 | 53 |
| Nonfarm nonresidential | 99 | 12 |
| Commercial | 45 | 203 |
| Consumer | 75 | 150 |
| Total recoveries | 248 | 428 |
| Net charge-offs | 922 | 1,535 |
| Allowance for loan losses at end of period | $26,702 | $22,024 |
| Ratio of allowance to end of period loans held for investment | 0.94% | 0.74% |
| Ratio of net charge-offs to average loans | 0.03 | 0.06 |

(1) Excluding loans held for sale.

Although we believe that we have established our allowance for loan losses in accordance with U.S. generally accepted accounting principles (“GAAP”) and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions will be subject to ongoing evaluations of the risks in our loan portfolio. If we experience economic declines or if asset quality deteriorates, material additional provisions could be required.

The following table shows the allocation of the allowance for loan losses among loan categories and certain other information as of the dates indicated. The allocation of the allowance for loan losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The total allowance is available to absorb losses from any loan category.

*(Dollars in thousands)*

| Real estate: | As of June 30, 2021 (Unaudited) Amount | Percent to Total | As of December 31, 2020 Amount | Percent to Total |
| --- | ---: | ---: | ---: | ---: |
| Construction and land | $4,289 | 16.1% | $3,584 | 16.3% |
| Farmland | 686 | 2.5 | 600 | 2.7 |
| 1-4 family residential | 3,837 | 14.4 | 3,453 | 15.7 |
| Multi-family residential | 759 | 2.8 | 818 | 3.7 |
| Nonfarm nonresidential | 7,999 | 30.0 | 7,369 | 33.5 |
| Total real estate | 17,570 | 65.8 | 15,824 | 71.9 |
| Commercial | 8,066 | 30.2 | 5,018 | 22.8 |
| Consumer | 1,066 | 4.0 | 1,182 | 5.3 |
| Total allowance for loan losses | $26,702 | 100.0% | $22,024 | 100.0% |

### Securities

We use our securities portfolio to provide a source of liquidity, an appropriate return on funds invested, manage interest rate risk, meet collateral requirements, and meet regulatory capital requirements. As of June 30, 2021, the carrying amount of investment securities totaled $882.8 million, an increase of $242.2 million, or 37.8%, compared to $640.6 million as of December 31, 2020. The increase was primarily due to the deployment of excess cash related to the SBA PPP forgiveness. Securities represented 20.4% and 15.4% of total assets as of June 30, 2021 and December 31, 2020, respectively.

Our investment portfolio consists entirely of securities classified as available for sale. As a result, the carrying values of our investment securities are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity. The following tables summarize the amortized cost and estimated fair value of investment securities as of the dates shown:

|  | As of June 30, 2021 Amortized Cost (Dollars in thousands) (Unaudited) | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| U.S. treasury securities | $7,399 | $— | $17 | $7,382 |
| U.S. government agencies | 27,930 | 4 | 22 | 27,912 |
| Corporate bonds | 41,788 | 1,161 | 79 | 42,870 |
| Mortgage-backed securities | 467,955 | 5,445 | 2,078 | 471,322 |
| Municipal securities | 328,239 | 4,718 | 1,136 | 331,821 |
| Other securities | 1,167 | 328 | — | 1,495 |
| Total | $874,478 | $11,656 | $3,332 | $882,802 |

*(Dollars in thousands)*

|  | As of December 31, 2020 Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| U.S. government agencies | $2,567 | $5 | $— | $2,572 |
| Corporate bonds | 38,738 | 380 | 5 | 39,113 |
| Mortgage-backed securities | 288,373 | 6,893 | 247 | 295,019 |
| Municipal securities | 296,262 | 6,097 | 106 | 302,253 |
| Other securities | 1,440 | 208 | — | 1,648 |
| Total | $627,380 | $13,583 | $358 | $640,605 |

All of our mortgage-backed securities are agency securities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio. As of June 30, 2021, the investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages.

Management evaluates securities for other-than-temporary impairment, at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

The following tables set forth the fair value, maturities and approximated weighted average yield based on estimated annual income divided by the average amortized cost of the securities portfolio as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures.

|  | As of June 30, 2021 Within One Year Amount (Dollars in thousands) (Unaudited) | Yield | After One Year but Within Five Years Amount | Yield | After Five Years but Within Ten Years Amount | Yield | After Ten Years Amount | Yield | Total Total | Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| U.S. treasury securities | $— | —% | $7,382 | 0.79% | $— | —% | $— | —% | $7,382 | 0.79% |
| U.S. government agencies | 2,544 | 0.23% | 14,885 | 0.65% | 10,483 | 0.92% | — | —% | 27,912 | 0.71% |
| Corporate bonds | — | —% | — | —% | 41,773 | 4.47% | 1,097 | 7.34% | 42,870 | 4.54% |
| Mortgage-backed securities | 4,123 | 1.17% | 41,091 | 1.19% | 188,169 | 1.45% | 237,939 | 1.25% | 471,322 | 1.32% |
| Municipal securities | 19,398 | 2.05% | 90,444 | 1.48% | 136,111 | 1.77% | 85,868 | 1.93% | 331,821 | 1.75% |
| Other securities | — | —% | — | —% | — | —% | 1,495 | 0.51% | 1,495 | 0.51% |
| Total | $26,065 | 1.74% | $153,802 | 1.29% | $376,536 | 1.88% | $326,399 | 1.45% | $882,802 | 1.61% |

*(Dollars in thousands)*

|  | As of December 31, 2020 Within One Year Amount | Yield | After One Year but Within Five Years Amount | Yield | After Five Years but Within Ten Years Amount | Yield | After Ten Years Amount | Yield | Total Total | Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| U.S. government agencies | $— | —% | $2,572 | 0.23% | $— | —% | $— | —% | $2,572 | 0.23% |
| Corporate bonds | — | —% | — | —% | 38,089 | 4.41% | 1,024 | 7.35% | 39,113 | 4.49% |
| Mortgage-backed securities | 1,647 | 1.22% | 46,881 | 1.17% | 144,427 | 1.64% | 102,064 | 1.34% | 295,019 | 1.46% |
| Municipal securities | 17,167 | 2.39% | 75,597 | 1.70% | 118,381 | 1.78% | 91,108 | 1.95% | 302,253 | 1.84% |
| Other securities | — | —% | — | —% | — | —% | 1,648 | 0.59% | 1,648 | 0.59% |
| Total | $18,814 | 2.29% | $125,050 | 1.47% | $300,897 | 2.04% | $195,844 | 1.65% | $640,605 | 1.82% |

The contractual maturity of mortgage-backed securities, collateralized mortgage obligations and asset-backed securities is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and asset-backed securities are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay. Monthly paydowns on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was 6.14 years with an estimated effective duration of 54.61 months as of June 30, 2021.

As of June 30, 2021 and December 31, 2020, we did not own securities of any one issuer for which aggregate adjusted cost exceeded 10% of our consolidated shareholders’ equity as of such respective dates.

As of June 30, 2021 and December 31, 2020, the Company held other equity securities of $14.0 million and $12.7 million, respectively, comprised mainly of FHLB stock and small business investment companies (“SBICs”).

### Deposits

We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations and personalized service to attract and retain these deposits.

Total deposits as of June 30, 2021 were $3.7 billion, an increase of $107.5 million, or 3.0%, compared to $3.6 billion as of December 31, 2020, primarily due to the SBA PPP originations.

Noninterest-bearing deposits as of June 30, 2021 were $1.2 billion, compared to $1.2 billion as of December 31, 2020, an increase of $11.5 million, or 1.0%.

Average deposits for the six months ended June 30, 2021 were $3.8 billion, an increase of $978.5 million, or 35.1%, over the full year average for the year ended December 31, 2020 of $2.8 billion. The average rate paid on total interest-bearing deposits decreased over this period from 0.89% for the year ended December 31, 2020 to 0.50% for the six months ended June 30, 2021. The decrease in average rates during the six months ended June 30, 2021 over the average for the year ended December 31, 2020 was primarily due to the federal funds rate cuts that occurred in the three months ended March 31, 2020 and the maturing of higher yielding deposits, along with the accretion of deposit premium from the Pedestal acquisition. In addition, the stability and continued growth of noninterest-bearing demand accounts served to reduce the cost of deposits to 0.34% for the six months ended June 30, 2021 compared to 0.63% for the year ended December 31, 2020.

The following table presents the monthly average balances and weighted average rates paid on deposits for the periods indicated:

*(Dollars in thousands)*

|  | For the Six Months Ended June 30, 2021 (Unaudited) Average Balance | Average Rate | For the Year Ended December 31, 2020 Average Balance | Average Rate |
| --- | ---: | ---: | ---: | ---: |
| Interest-bearing demand accounts | $176,044 | 0.56% | $121,612 | 0.75% |
| Negotiable order of withdrawal (“NOW”) accounts | 519,873 | 0.14% | 383,695 | 0.31% |
| Limited access money market accounts and savings | 1,129,336 | 0.31% | 682,611 | 0.43% |
| Certificates and other time deposits \> $250k | 210,655 | 1.28% | 215,416 | 1.90% |
| Certificates and other time deposits \< $250k | 563,843 | 0.90% | 574,961 | 1.47% |
| Total interest-bearing deposits | 2,599,751 | 0.50% | 1,978,295 | 0.89% |
| Noninterest-bearing demand accounts | 1,169,425 | — | 812,332 | —% |
| Total deposits | $3,769,176 | 0.34% | $2,790,627 | 0.63% |

The ratio of average noninterest-bearing deposits to average total deposits for the six months ended June 30, 2021 and the year ended December 31, 2020 was 31.0% and 29.1%, respectively.

The following table sets forth the contractual maturities of certain certificates of deposit at June 30, 2021:

*(Dollars in thousands)*

|  | Certificates of Deposit More Than $250,000 | Certificates of Deposit of $100,000 Through $250,000 |
| --- | ---: | ---: |
| 3 months or less | $50,659 | $90,928 |
| More than 3 months but less than 6 months | 33,326 | 84,407 |
| More than 6 months but less than 12 months | 79,668 | 122,623 |
| 12 months or more | 34,595 | 62,187 |
| Total | $198,248 | $360,145 |

53

### Correspondent Bank Federal Funds Purchased Relationships

We maintain Federal Funds Purchased Relationships with the following financial institutions and limits as of June 30, 2021:

*(Dollars in Thousands)*

|  | Fed Funds Purchase Limits |
| --- | ---: |
| Compass Bank | $38,000 |
| First National Bankers Bank (“FNBB”) | 35,000 |
| The Independent Bankers Bank | 25,000 |
| First Horizon Bank | 17,000 |
| ServisFirst Bank | 10,000 |
| South State Bank | 9,000 |
| Total | $134,000 |

We had no outstanding balances as of June 30, 2021 and December 31, 2020, respectively.

### Liquidity and Capital Resources

### Liquidity

Liquidity involves our ability to utilize funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the six months ended June 30, 2021 and the year ended December 31, 2020, liquidity needs were primarily met by core deposits, security and loan maturities, and amortizing investment and loan portfolios. Although access to brokered deposits, purchased funds from correspondent banks and overnight advances from the FHLB have been utilized on occasion to take advantage of investment opportunities, we do not generally rely on these external funding sources. As of June 30, 2021 and December 31, 2020, we maintained six lines of credit with commercial banks which provided for extensions of credit with an availability to borrow up to an aggregate of $134.0 million and $126.0 million, respectively. There were no funds under these lines of credit outstanding as of June 30, 2021 or December 31, 2020.

The following table illustrates, during the periods presented, the mix of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the periods indicated. Average total assets equaled $4.3 billion and $3.4 billion for the six months ended June 30, 2021 and the year ended December 31, 2020, respectively.

*(Unaudited)*

| Sources of Funds: Deposits: | For the Six Months Ended June 30, 2021 | For the Year Ended December 31, 2020 |
| --- | ---: | ---: |
| Noninterest-bearing | 27.0% | 23.7% |
| Interest-bearing | 59.9 | 57.8 |
| Subordinated debt (excluding trust preferred securities) | 1.3 | 0.7 |
| Advances from FHLB | 0.8 | 3.3 |
| Borrowings from the PPPLF | — | 1.9 |
| Other borrowings | 0.8 | 1.4 |
| Other liabilities | 0.6 | 0.8 |
| Shareholders’ equity | 9.6 | 10.4 |
| Total | 100.0% | 100.0% |
| Uses of Funds: |  |  |
| Loans, net of allowance for loan losses | 69.5% | 75.8% |
| Securities available for sale | 17.2 | 14.1 |
| Interest-bearing deposits in other banks | 1.9 | 1.4 |
| Other noninterest-earning assets | 11.4 | 8.7 |
| Total | 100.0% | 100.0% |
| Average noninterest-bearing deposits to average deposits | 31.3% | 29.1% |
| Average loans to average deposits | 80.6 | 93.7 |

Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average net loans increased 38.9% for the six months ended June 30, 2021 compared to the same period in 2020, primarily due to the acquisition of Pedestal and our participation in the SBA PPP. We predominantly invest excess deposits in overnight deposits with the Federal Reserve, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth. Our securities portfolio had a weighted average life of 6.14 years and an effective duration of 54.61 months as of June 30, 2021. As of December 31, 2020, our securities portfolio had a weighted average life of 5.93 years and an effective duration of 45.79 months.

As of June 30, 2021, we had outstanding $814.5 million in commitments to extend credit and $35.4 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2020, we had outstanding $621.1 million in commitments to extend credit and $23.9 million in commitments associated with outstanding standby and commercial letters of credit. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. See “*Off Balance Sheet Items”* below for additional information. The increase is largely attributable to a newly formed financial institutions group.

As of June 30, 2021 and December 31, 2020 we had cash and cash equivalents, including federal funds sold, of $363.2 million and $323.3 million, respectively. We had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature for either period.

### Capital Resources

Total shareholders’ equity increased to $431.0 million as of June 30, 2021, compared to $410.0 million as of December 31, 2020, an increase of $21.0 million, or 5.1%. This increase was primarily due to net income of $29.8 million, offset with other comprehensive losses of $3.8 million and dividends paid of $4.5 million.

On July 22, 2021, our Board of Directors (the “Board”) declared a quarterly dividend based upon our financial performance for the three months ended June 30, 2021 in the amount of $0.12 per share to the common shareholders of record as of August 15, 2021. The dividend is to be paid on August 31, 2021, or as soon as practicable thereafter.

The declaration and payment of dividends to our shareholders, as well as the amounts thereof, are subject to the discretion of the Board and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board. As a holding company, our ability to pay dividends is largely dependent upon the receipt of dividends from our subsidiary, b1BANK. There can be no assurance that we will declare and pay any dividends to our shareholders.

Capital management consists of providing equity to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the holding company and bank levels. As of June 30, 2021 and December 31, 2020, we and b1BANK were in compliance with all applicable regulatory capital requirements, and b1BANK was classified as “well-capitalized,” for purposes of prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all applicable regulatory capital standards applicable to us. For the year ended December 31, 2020, we elected to opt in to the CBLR framework. Pursuant to section 201(b) of EGRRCPA, the federal bank regulatory agencies adopted a final rule in 2019 imposing a minimum community bank leverage ratio requirement of 9.0%. On April 6, 2020, as mandated under the CARES Act, the federal bank regulatory agencies adopted an interim final rule that temporarily reduced the minimum community bank leverage ratio requirement to 8.0% and provided a two quarter grace period for banks with a leverage ratio between 7.0% and 8.0%. A transition interim final rule also adopted by the federal bank regulatory agencies on April 6, 2020 provides a graduated transition from the temporary 8.0% community bank leverage ratio requirement, to the 9.0% community bank leverage ratio requirement as established under the 2019 final rule. Specifically, the transition interim final rule provides that the community bank leverage ratio was 8.0% in the second quarter through fourth quarter of calendar year 2020, is 8.5% in calendar year 2021, and will be 9.0% thereafter. During the first quarter of 2021, we elected to revert to the risk weighted ratios detailed below.

The following table presents the actual capital amounts and regulatory capital ratios for us and b1BANK as of the dates indicated.

*(Dollars in thousands)*

| Business First | As of June 30, 2021 (Unaudited) Amount | Ratio | As of December 31, 2020 Amount | Ratio |
| --- | ---: | ---: | --- | --- |
| Total capital (to risk weighted assets) | $464,665 | 13.24% | N/A | N/A |
| Tier 1 capital (to risk weighted assets) | 355,783 | 10.14% | N/A | N/A |
| Common Equity Tier 1 capital (to risk weighted assets) | 350,783 | 9.99% | N/A | N/A |
| Tier 1 Leverage capital and/or CBLR (to average assets) | 355,783 | 8.23% | $340,715 | 8.79% |
| **b1BANK** |  |  |  |  |
| Total capital (to risk weighted assets) | $452,640 | 12.90% | N/A | N/A |
| Tier 1 capital (to risk weighted assets) | 425,185 | 12.12% | N/A | N/A |
| Common Equity Tier 1 capital (to risk weighted assets) | 425,185 | 12.12% | N/A | N/A |
| Tier 1 Leverage capital and/or CBLR (to average assets) | 425,185 | 9.84% | $358,083 | 9.24% |

### Long Term Debt

During the six months ended June 30, 2021, we issued $56.4 million in subordinated debt, and paid off $11.0 million in long term borrowings.

### Contractual Obligations

The following tables summarize contractual obligations and other commitments to make future payments as of June 30, 2021 and December 31, 2020 (other than non-maturity deposit obligations), which consist of future cash payments associated with our contractual obligations pursuant to our FHLB advances, subordinated debt, revolving line of credit, notes payable, and non-cancelable future operating leases. Payments related to leases are based on actual payments specified in underlying contracts. Advances from the FHLB totaled approximately $28.0 million and $43.1 million (both of which include remaining purchase premium) at June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021 and December 31, 2020, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 1.67% and 2.01%, respectively, and maturing within three years. The subordinated debt totaled $81.4 million and $25.0 million at June 30, 2021 and December 31, 2020, respectively. Of this subordinated debt, $25.0 million bears interest at a fixed rate of 6.75% through December 31, 2028 and a floating rate, based on a benchmark rate plus 369 basis points, thereafter through maturity in 2033, $52.5 million of this subordinated debt bears interest at a fixed rate of 4.25% through March 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031. The remaining $3.9 million of this subordinated debt bears interest at a fixed rate of 4.75% through April 1, 2026 and a floating rate, based on a benchmark rate plus 442 basis points, thereafter through maturity in 2031. We had a revolving line of credit with FNBB with a balance of $5.0 million at December 31, 2020 which was paid off during the first quarter of 2021. We acquired a note payable to FNBB in the Pedestal transaction in the amount of $7.0 million, of which $6.0 million was outstanding at December 31, 2020. This note was paid off during the first quarter of 2021.

|  | As of June 30, 2021 1 year or less (Dollars in thousands) (Unaudited) | More than 1 year but less than 3 years | 3 years or more but less than 5 years | 5 years or more | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Non-cancelable future operating leases | $1,773 | $3,539 | $3,121 | $4,351 | $12,784 |
| Time deposits | 593,272 | 119,592 | 23,237 | 24 | 736,125 |
| Subordinated debt | — | — | — | 81,427 | 81,427 |
| Advances from FHLB | 5,000 | 23,000 | — | — | 28,000 |
| Purchase premium on advances from FHLB | 23 | — | — | — | 23 |
| Subordinated debt - trust preferred securities | — | — | — | 5,000 | 5,000 |
| Securities sold under agreements to repurchase | 25,837 | — | — | — | 25,837 |
| Standby and commercial letters of credit | 11,592 | 23,643 | 158 | — | 35,393 |
| Commitments to extend credit | 408,587 | 272,678 | 52,191 | 81,054 | 814,510 |
| Total | $1,046,084 | $442,452 | $78,707 | $171,856 | $1,739,099 |

*(Dollars in thousands)*

|  | As of December 31, 2020 1 year or less | More than 1 year but less than 3 years | 3 years or more but less than 5 years | 5 years or more | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Non-cancelable future operating leases | $1,808 | $3,294 | $2,845 | $4,985 | $12,932 |
| Time deposits | 589,908 | 201,599 | 18,724 | — | 810,231 |
| Subordinated debt | — | — | — | 25,000 | 25,000 |
| Advances from FHLB | 20,000 | — | 23,000 | — | 43,000 |
| Purchase premium on advances from FHLB | 145 | — | — | — | 145 |
| Subordinated debt - trust preferred securities | — | — | — | 5,000 | 5,000 |
| FNBB revolving line of credit | 5,000 | — | — | — | 5,000 |
| FNBB note payable | 1,000 | 2,000 | 2,000 | 1,000 | 6,000 |
| Securities sold under agreements to repurchase | 21,825 | — | — | — | 21,825 |
| Standby and commercial letters of credit | 9,069 | 14,815 | 20 | — | 23,904 |
| Commitments to extend credit | 423,206 | 133,121 | 17,856 | 46,928 | 621,111 |
| Total | $1,071,961 | $354,829 | $64,445 | $82,913 | $1,574,148 |

### Off-Balance Sheet Items

In the normal course of business, we enter into various transactions which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of the date indicated are summarized in the tables above. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. The credit risk to us in issuing letters of credit is essentially the same as that involved in extending loan facilities to our customers.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer.

### Interest Rate Sensitivity and Market Risk

As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, financial options, financial futures contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk.

Our exposure to interest rate risk is reviewed by the asset-liability committee of b1BANK, in accordance with policies approved by our board of directors. In analyzing the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.

We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio. Average lives of non-maturity deposit accounts are based on standard regulatory decay assumptions and are also incorporated into the model. Model assumptions are revised and updated as more accurate information becomes available. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various management strategies.

On at least a quarterly basis, we run two simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Internal policy regarding interest rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 5% for a 100 basis point shift, 10% for a 200 basis point shift, and 12.5% for a 300 basis point shift. Internal policy regarding interest rate simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated fair value of equity at risk for the subsequent one-year period should not decline by more than 10% for a 100 basis point shift, 15% for a 200 basis point shift, and 25% for a 300 basis point shift.

The following table summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated:

| Change in Interest Rates (Basis Points) | As of June 30, 2021 Percent Change in Net Interest Income | Percent Change in Fair Value of Equity | As of December 31, 2020 Percent Change in Net Interest Income | Percent Change in Fair Value of Equity |
| --- | ---: | ---: | ---: | ---: |
| +300 | 0.90% | (4.65%) | 2.50% | 3.76% |
| +200 | 1.60% | (3.70%) | 2.80% | 2.51% |
| +100 | 1.70% | (1.07%) | 2.60% | 2.30% |
| Base | 0.00% | 0.00% | 0.00% | 0.00% |
| -100 | (2.00%) | 6.20% | (1.30%) | 10.63% |

The results are primarily due to the balance sheet mix and behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various strategies.

### Impact of Inflation

Our consolidated financial statements and related notes included elsewhere in this statement have been prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.

### Non-GAAP Financial Measures

Our accounting and reporting policies conform to GAAP, and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

This discussion and analysis section includes certain non-GAAP financial measures (e.g., referenced as “core” or “tangible”) intended to supplement, not substitute for, comparable GAAP measures. These measures typically adjust income available to common shareholders for certain significant activities or transactions that in management’s opinion can distort period-to-period comparisons of Business First’s performance. Transactions that are typically excluded from non-GAAP measures include realized and unrealized gains/losses on former bank premises and equipment, gains / losses on sales of securities, and acquisition-related expenses (including, but not limited to, legal costs, system conversion costs, severance and retention payments, etc.). The measures also typically adjust goodwill and certain intangible assets from book value and shareholders’ equity.

Management believes presentations of these non-GAAP financial measures provide useful supplemental information that is essential to a proper understanding of the operating results of the Company’s core business. These non-GAAP disclosures are not necessarily comparable to non-GAAP measures that may be presented by other companies. You should understand how such other banking organizations calculate their financial metrics or with names similar to the non-GAAP financial measures we have discussed in this statement when comparing such non-GAAP financial measures.

*Core Net Income.* Core net income, which excludes certain income and expenses, for the three months ended June 30, 2021, was $18.7 million, or $0.90 per diluted share, compared to core net income of $7.4 million, or $0.41 per diluted share, for the three months ended June 30, 2020. Notable noncore events impacting earnings for the three months ended June 30, 2021, included the incurrence of $938,000 in occupancy and bank premises expenses attributable to hurricane damage, and $540,000 in losses on the sales of former premises and equipment within other income, compared to the incurrence of $6.6 million in acquisition-related expenses during the three months ended June 30, 2020. For the six months ended June 30, 2021, core net income was $31.3 million, or $1.51 per diluted share, compared to core net income of $12.3 million, or $0.78 per diluted share, for the six months ended June 30, 2020. Notable noncore events impacting earnings for the six months ended June 30, 2021, included the incurrence of $1.3 million in occupancy and bank premises expenses attributable to hurricane damage, and $540,000 in losses on the sales of former premises and equipment within other income, compared to the incurrence of $7.8 million in acquisition-related expenses and gains of $126,000 associated with the disposal of former bank premises and equipment within other income, during the six months ended June 30, 2020.

| Interest Income: | For the Three Months Ended June 30, 2021 (Dollars in thousands, except per share data) (Unaudited) | 2020 | For the Six Months Ended June 30, 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: |
| Interest income | $42,351 | $36,891 | $86,613 | $62,907 |
| Core interest income | 42,351 | 36,891 | 86,613 | 62,907 |
| **Interest Expense:** |  |  |  |  |
| Interest expense | 4,406 | 5,972 | 8,367 | 11,777 |
| Core interest expense | 4,406 | 5,972 | 8,367 | 11,777 |
| Provision for Loan Losses: (b) |  |  |  |  |
| Provision for loan losses | 2,241 | 5,443 | 5,600 | 6,810 |
| Core provision expense | 2,241 | 5,443 | 5,600 | 6,810 |
| **Other Income:** |  |  |  |  |
| Other income | 17,376 | 4,996 | 22,459 | 7,800 |
| (Gains) 1osses on former bank premises and equipment | 540 | - | 540 | (126) |
| (Gains) 1osses on sale of securities | 50 | - | 55 | (25) |
| Core other income | 17,966 | 4,996 | 23,054 | 7,649 |
| **Other Expense:** |  |  |  |  |
| Other expense | 31,116 | 27,797 | 58,079 | 44,440 |
| Acquisition-related expenses (2) | (94) | (6,573) | (104) | (7,785) |
| Stock option exercises - excess taxes (founder's grants) | - | - | - | (71) |
| Occupancy and bank premises - hurricane repair | (938) | - | (1,288) | - |
| Core other expense | 30,084 | 21,224 | 56,687 | 36,584 |
| Pre-Tax Income: (a) |  |  |  |  |
| Pre-tax income | 21,964 | 2,675 | 37,026 | 7,680 |
| (Gains) 1osses on former bank premises and equipment | 540 | - | 540 | (126) |
| (Gains) 1osses on sale of securities | 50 | - | 55 | (25) |
| Acquisition-related expenses (2) | 94 | 6,573 | 104 | 7,785 |
| Stock option exercises - excess taxes (founder's grants) | - | - | - | 71 |
| Occupancy and bank premises - hurricane repair | 938 | - | 1,288 | - |
| Core pre-tax income | 23,586 | 9,248 | 39,013 | 15,385 |
| Provision for Income Taxes: (1) |  |  |  |  |
| Provision for income taxes | 4,536 | 623 | 7,269 | 1,129 |
| Tax on (gains) losses on former bank premises and equipment | 113 | - | 113 | (26) |
| Tax on (gains) losses on sale of securities | 11 | - | 12 | (5) |
| Tax on acquisition-related expenses (2) | 20 | 1,275 | 22 | 1,366 |
| Tax on stock option exercises (founder's grants) | - | - | - | 601 |
| Tax on occupancy and bank premises - hurricane repair | 197 | - | 271 | - |
| Core provision for income taxes | 4,877 | 1,898 | 7,687 | 3,065 |
| **Net Income:** |  |  |  |  |
| Net income | 17,428 | 2,052 | 29,757 | 6,551 |
| (Gains) losses on former bank premises and equipment , net of tax | 427 | - | 427 | (100) |
| (Gains) losses on sale of securities, net of tax | 39 | - | 43 | (20) |
| Acquisition-related expenses (2), net of tax | 74 | 5,298 | 82 | 6,419 |
| Stock option exercises, net of tax (founder's grants) | - | - | - | (530) |
| Occupancy and bank premises - hurricane repair, net of tax | 741 | - | 1,018 | - |
| Core net income | 18,709 | 7,350 | 31,327 | 12,320 |
| **Diluted Earnings Per Share:** |  |  |  |  |
| Diluted earnings per share | 0.84 | 0.11 | 1.43 | 0.42 |
| (Gains) losses on former bank premises and equipment , net of tax | 0.02 | - | 0.02 | (0.01) |
| (Gains) losses on sale of securities, net of tax | - | - | - | - |
| Acquisition-related expenses (2), net of tax | - | 0.30 | - | 0.40 |
| Stock option exercises (founder's grants) | - | - | - | (0.03) |
| Occupancy and bank premises - hurricane repair, net of tax | 0.04 | - | 0.06 | - |
| Core diluted earnings per share | $0.90 | $0.41 | $1.51 | $0.78 |

(1) Tax rates, exclusive of certain nondeductible acquisition-related expenses and goodwill, utilized were 21% for both 2021 and 2020. These rates approximated the marginal tax rates for the applicable periods.

(2) Includes merger and conversion-related expenses and salary and employee benefits.

*Tangible Book Value Per Common Share.* Tangible book value per common share is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (1) tangible common equity as shareholders’ equity less goodwill and core deposit and customer intangible assets, net of accumulated amortization, and (2) tangible book value per common share as tangible common equity divided by shares of common stock outstanding. The most directly comparable GAAP financial measure for tangible book value per common share is book value per common share.

The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and presents tangible book value per common share compared to book value per common share:

| Tangible Common Equity | As of June 30, 2021 (Dollars in thousands, except per share data) (Unaudited) | As of December 31, 2020 |
| --- | ---: | ---: |
| Total shareholders’ equity | $431,006 | $409,963 |
| Adjustments: |  |  |
| Goodwill | (60,062) | (53,862) |
| Core deposit and customer intangibles | (13,271) | (9,734) |
| Total tangible common equity | $357,673 | $346,367 |
| Common shares outstanding(1) | 20,740,759 | 20,621,437 |
| **Book value per common share(1)** | $20.78 | $19.88 |
| **Tangible book value per common share(1)** | 17.24 | 16.80 |

(1) Excludes the dilutive effect, if any, of 118,278 and 73,846 shares of common stock issuable upon exercise of outstanding stock options and restricted stock awards as of June 30, 2021 and December 31, 2020, respectively.

*Tangible Common Equity to Tangible Assets.* Tangible common equity to tangible assets is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit and customer intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common shareholders’ equity to total assets.

The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and total assets to tangible assets:

| Tangible Common Equity | As of June 30, 2021 (Dollars in thousands, except per share data) (Unaudited) | As of December 31, 2020 |
| --- | ---: | ---: |
| Total shareholders’ equity | $431,006 | $409,963 |
| Adjustments: |  |  |
| Goodwill | (60,062) | (53,862) |
| Core deposit and customer intangibles | (13,271) | (9,734) |
| Total tangible common equity | $357,673 | $346,367 |
| **Tangible Assets** |  |  |
| Total assets | $4,323,959 | $4,160,360 |
| Adjustments: |  |  |
| Goodwill | (60,062) | (53,862) |
| Core deposit and customer intangibles | (13,271) | (9,734) |
| Total tangible assets | $4,250,626 | $4,096,764 |
| **Common Equity to Total Assets** | 10.0% | 9.9% |
| **Tangible Common Equity to Tangible Assets** | 8.4 | 8.5 |

61

## Market risk

As filed, 2,021 characters.

Risk identification and management are essential elements for the successful management of our business. In the normal course of business, we are subject to various types of risk, including interest rate, credit, and liquidity risk. We control and monitor these risks with policies, procedures, and various levels of managerial and board oversight. Our objective is to optimize profitability while managing and controlling risk within board approved policy limits. Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets and liabilities. We use our asset liability management policy to control and manage interest rate risk. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensibility and Market Risk” for additional discussion of interest rate risk.

Liquidity risk represents the inability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers, as well as, the obligations to depositors. We use our asset liability management policy and contingency funding plan to control and manage liquidity risk.

Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from extending credit to customers, purchasing securities, and entering into certain off-balance sheet loan funding commitments. Our primary credit risk is directly related to our loan portfolio. We use our credit policy and disciplined approach to evaluate the adequacy of our allowance for loan losses to control and manage credit risk. Our investment policy limits the degree of the amount of credit risk that we may assume in our investment portfolio. Our principal financial market risks are liquidity risks and exposures to interest rate movements.

## Controls and procedures

As filed, 1,852 characters.

### Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on such evaluation, our principal executive officer and principal financial officer concluded our disclosure controls and procedures were effective as of the end of the period covered by this Report to provide reasonable assurance that the information we are required to disclose in reports that are filed or furnished under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, including to ensure that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The effectiveness of our, or any, system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, we cannot assure you that our disclosure controls and procedures will detect all errors or fraud.

### Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 301 characters.

In addition to the other information set forth in this Report, we refer you to Item 1A. “Risk Factors” of our Annual Report on Form 10-K for December 31, 2020 filed with the SEC. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for December 31, 2020.

Filed Aug 5, 2021.
Source: SEC EDGAR, the filing index for accession 0001437749-21-018641. Last ingested by Listed: Nov 3, 2026, 17:20 ET. No prices; not investment advice.