Investar Holding Corp: Form 10-Q for the period ended Mar 31, 2025

Cautionary Note Regarding Forward-Looking Statements

When included in this Quarterly Report on Form 10-Q, or in other documents that Investar Holding Corporation files with the SEC or in statements made by or on behalf of the Company, words like “may,” “should,” “could,” “predict,” “potential,” “believe,” “think,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “outlook” and similar expressions or the negative version of those words are intended to identify forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a variety of risks and uncertainties that could cause actual results to differ materially from those described therein. The Company’s forward-looking statements are based on assumptions and estimates that management believes to be reasonable in light of the information available at the time such statements are made. However, many of the matters addressed by these statements are inherently uncertain and could be affected by many factors beyond management’s control. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors include, but are not limited to, the following, any one or more of which could materially affect the outcome of future events:

• the significant risks and uncertainties for our business, results of operations and financial condition, as well as our regulatory capital and liquidity ratios and other regulatory requirements caused by business and economic conditions generally and in the financial services industry in particular, whether nationally, regionally or in the markets in which we operate, including heightened uncertainties resulting from recent changing trade and tariff policies that could have an adverse impact on inflation and economic growth at least in the near term;
• changes in inflation, interest rates, yield curves and interest rate spread relationships that affect our loan and deposit pricing;
• our ability to successfully execute our near-term strategy to pivot from primarily a growth strategy to a strategy primarily focused on consistent, quality earnings through the optimization of our balance sheet, and our ability to successfully execute a long-term growth strategy;
• our ability to achieve organic loan and deposit growth, and the composition of that growth;
• a reduction in liquidity, including as a result of a reduction in the amount of deposits we hold or other sources of liquidity, which may be caused by, among other things, disruptions in the banking industry similar to those that occurred in early 2023 that caused bank depositors to move uninsured deposits to other banks or alternative investments outside the banking industry;
• our ability to identify and enter into agreements to combine with attractive acquisition candidates, finance acquisitions, complete acquisitions after definitive agreements are entered into, and successfully integrate and grow acquired operations;
• inaccuracy of the assumptions and estimates we make in establishing reserves for credit losses and other estimates;
• changes in the quality or composition of our loan portfolio, including adverse developments in borrower industries or in the repayment ability of individual borrowers;
• changes in the quality and composition of, and changes in unrealized losses in, our investment portfolio, including whether we may have to sell securities before their recovery of amortized cost basis and realize losses;
• the extent of continuing client demand for the high level of personalized service that is a key element of our banking approach as well as our ability to execute our strategy generally;
• our dependence on our management team, and our ability to attract and retain qualified personnel;
• the concentration of our business within our geographic areas of operation in Louisiana, Texas and Alabama;
• increasing costs of complying with new and potential future regulations;
• new or increasing geopolitical tensions, including resulting from wars in Ukraine and Israel and surrounding areas;
• the emergence or worsening of widespread public health challenges or pandemics;
• concentration of credit exposure;
• any deterioration in asset quality and higher loan charge-offs, and the time and effort necessary to resolve problem assets;
• fluctuations in the price of oil and natural gas;
• data processing system failures and errors;
• risks associated with our digital transformation process, including increased risks of cyberattacks and other security breaches and challenges associated with addressing the increased prevalence of artificial intelligence;
• risks of losses resulting from increased fraud attacks against us and others in the financial services industry;
• potential impairment of our goodwill and other intangible assets;
• our potential growth, including our entrance or expansion into new markets, and the need for sufficient capital to support that growth;
• the impact of litigation and other legal proceedings to which we become subject;
• competitive pressures in the commercial finance, retail banking, mortgage lending and consumer finance industries, as well as the financial resources of, and products offered by, competitors;
• the impact of changes in laws and regulations applicable to us, including banking, securities and tax laws and regulations and accounting standards, as well as changes in the interpretation of such laws and regulations by our regulators;
• changes in the scope and costs of FDIC insurance and other coverages;
• governmental monetary and fiscal policies; and
• hurricanes, tropical storms, tropical depressions, floods, winter storms, droughts and other adverse weather events, all of which have affected the Company’s market areas from time to time; other natural disasters; oil spills and other man-made disasters; acts of terrorism; other international or domestic calamities; acts of God; and other matters beyond our control.

These factors should not be construed as exhaustive. Additional information on these and other risk factors can be found in Part I. Item 1A. “Risk Factors” and Part II. Item 7. “MD&A – Cautionary Note Regarding Forward-Looking Statements” in the Company’s Annual Report and in Part II. Item 1A. “Risk Factors” of this report.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on any forward-looking statement as a prediction of future events. We expressly disclaim any obligation or undertaking to update our forward-looking statements, and we do not intend to release publicly any updates or changes in our expectations concerning the forward-looking statements or any changes in events, conditions or circumstances upon which any forward-looking statement may be based, except as required by law.

Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. Although independent third parties are often engaged to assist us in the estimation process, management evaluates the results, challenges assumptions used and considers other factors which could impact these estimates. Actual results may differ from these estimates under different assumptions or conditions.

There were no material changes or developments during the reporting period with respect to methodologies that the Company uses when applying what management believes are significant accounting policies and developing critical accounting estimates, which are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We believe that the judgments, estimates and assumptions that we use in the preparation of our consolidated financial statements are appropriate. For more detailed information about our accounting policies, please refer to Note 1. Summary of Significant Accounting Policies of our Annual Report.

Company Overview

This section presents management’s perspective on the consolidated financial condition and results of operations of the Company and its wholly-owned subsidiary, Investar Bank, National Association. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes thereto included herein, and the audited consolidated financial statements for the year ended December 31, 2024, including the notes thereto, and the related MD&A in the Annual Report. All cross-references to the “Notes” in this Form 10-Q refer to the Notes to Consolidated Financial Statements contained in Part I. Item 1. Financial Statements unless otherwise noted.

Through the Bank, we provide full banking services, excluding trust services, tailored primarily to meet the needs of individuals, professionals, and small to medium-sized businesses. Our primary areas of operation are south Louisiana, including Baton Rouge, New Orleans, Lafayette, Lake Charles, and their surrounding areas; southeast Texas, primarily Houston and its surrounding area; and Alabama, including York and Oxford and their surrounding areas. At March 31, 2025, we operated 29 full service branches comprised of 20 full service branches in Louisiana, three full service branches in Texas, and six full service branches in Alabama. The Bank commenced operations in 2006, and we completed our initial public offering in July 2014. On July 1, 2019, the Bank changed from a Louisiana state bank charter to a national bank charter and its name changed to Investar Bank, National Association.

During 2023, we pivoted our near-term strategy from primarily a growth strategy to primarily a focus on consistent, quality earnings through the optimization of our balance sheet. Our strategy includes a focus on originating and renewing high quality, primarily variable-rate, loans and allowing higher risk credit relationships to run off. We have kept duration short on our liabilities to provide flexibility to secure lower cost funding that was accretive to our net interest margin. Our near-term strategy includes continuing to consider acquisitions on an opportunistic basis. Our long-term strategy includes organic growth through high quality loans and growth through acquisitions, including whole-bank acquisitions, strategic branch acquisitions and asset acquisitions. We have completed seven whole-bank acquisitions since 2011 and regularly review acquisition opportunities. Our most recent whole bank acquisition was completed in April 2021. We opened a loan and deposit production office in our Texas market in the first quarter of 2024 and converted it to a full-service branch location in the fourth quarter of 2024. We have continued to evaluate opportunities to improve our branch network efficiency, leverage our digital initiatives, and further reduce costs. We closed one branch in our Alabama market during the first quarter of 2024.

Our principal business is lending to and accepting deposits from individuals and small to medium-sized businesses in our areas of operation. As a financial holding company operating through one reportable segment, we generate our income principally from interest on loans and, to a lesser extent, our securities investments, as well as from fees charged in connection with our various loan and deposit services. Our principal expenses are interest expense on interest-bearing customer deposits and borrowings, salaries and employee benefits, occupancy costs, data processing and other operating expenses. We measure our performance through our net interest margin, return on average assets, and return on average equity, among other metrics, while seeking to maintain appropriate regulatory leverage and risk-based capital ratios.

Certain Events That Affect Period-over-Period Comparability

Changing Inflation and Interest Rates. Inflation increased rapidly during 2021 through June 2022. After June 2022, the rate of inflation generally declined although it has remained above the Federal Reserve’s target inflation rate of 2%. In response, the Federal Reserve raised the federal funds target rate multiple times from March 2022 through July 2023. During 2023, the Federal Reserve raised the federal funds target rate four times, from 4.25% to 4.50%, to 5.25% to 5.50%. During 2024, beginning in September 2024, the Federal Reserve reduced the federal funds target rate three times by 100 basis points on a cumulative basis to 4.25% to 4.50%. Accordingly, the prevailing federal funds target rate in first quarter 2025 was 100 basis points lower than in first quarter 2024.

Disruptions in the Banking Industry. Between March 10, 2023 and March 12, 2023, state banking supervisors closed Silicon Valley Bank and Signature Bank and named the FDIC as receiver. At the time of closure, they were among the 30 largest U.S. banks. While the reasons for their failure are complex and have not been fully investigated, reports indicate that, among other things, both banks had grown in asset size in recent periods at a faster rate than their peers, had large proportions of uninsured deposits (approximately 87.5% and 89.7% of total deposits, respectively) and high unrealized losses on investment securities. Silicon Valley Bank’s business strategy focused on serving the technology and venture capital sectors, and Signature Bank had significant exposure to deposits from the digital asset industry. Prior to their closure, both banks experienced sudden and rapid deposit withdrawals. These events caused bank deposit customers, particularly those with uninsured deposits, to become concerned regarding the safety of their deposits, and in some cases caused customers to withdraw deposits. In response to the disruptions, among other things, the Federal Reserve announced a new BTFP to provide eligible banks with loans of up to one-year maturity backed by collateral pledged at par value. On April 24, 2023, San Francisco-based First Republic Bank, also among the 30 largest U.S. banks, reported a large deposit outflow and substantially reduced net income. First Republic Bank also had a large proportion of uninsured deposits (67% as of December 31, 2022). On May 1, 2023, regulators seized First Republic Bank and sold all of its deposits and most of its assets to JPMorgan Chase Bank.

In response to the disruptions and related publicity, we formed an internal task force that included members of our ALCO. The task force met frequently to review our liquidity position and liquidity sources, and oversaw the Bank’s process to qualify for the BTFP. In addition, we took steps to inform our customers about our financial position, liquidity and insured deposit products. During the second quarter of 2023, we utilized the BTFP and reduced FHLB advances. The Bank utilized this source of funding due to its lower rate, the ability to prepay the obligations without penalty, and as a means to lock in funding. During the fourth quarter of 2023 and again in the first quarter of 2024, the Bank refinanced its BTFP borrowings with new borrowings under the program due to more favorable rates. The Federal Reserve ceased making new loans under the BTFP on March 11, 2024. During the third quarter of 2024, we began paying down borrowings under the BTFP and repaid all of the remaining borrowings under the BTFP in the fourth quarter of 2024. As of March 31, 2025, estimated uninsured deposits represented approximately 34% of our total deposits. For additional information, see “Discussion and Analysis of Financial Condition – “Deposits,” “Borrowings,” “Liquidity and Capital Resources” and our Annual Report, Part II. Item 1A. Risk Factors.

Branch Closures. We closed one branch in Anniston, Alabama in January 2024.

Subordinated Debt Repurchases. During the first quarter of 2024, we repurchased $1.0 million in principal amount of our 2032 Notes. During the second quarter of 2024, we repurchased $5.0 million in principal amount of our 2029 Notes and $2.0 million in principal amount of our 2032 Notes.

Subordinated Debt Redemption. During the fourth quarter of 2024, we redeemed all of the remaining $20.0 million in principal amount of the 2029 Notes. As of March 31, 2025 and December 31, 2024 our outstanding subordinated debt consisted of $17.0 million in principal amount of our 2032 Notes.

BOLI Restructuring. During the first quarter of 2024, we surrendered approximately $8.4 million of BOLI and reinvested the proceeds in higher yielding policies.

Hurricane Ida. During the first quarter of 2025, we recorded a $3.3 million recovery of loans previously charged off as a result of a property insurance settlement related to a loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida, and we also recorded related noninterest expense of $0.2 million.

Since the third quarter of 2021 when we recorded an impairment charge of $21.6 million related to this relationship. As of March 31, 2025, we have recorded total recoveries on the relationship of approximately $7.8 million consisting of net recoveries of $6.0 million of loans previously charged off, noninterest income from a legal settlement of $1.1 million, and a gain on sale of other real estate owned of $0.7 million. At March 31, 2025, our other real estate owned related to this relationship included two remaining properties with a total cost basis of $1.7 million, which we are actively marketing for sale. Upon sale of these properties, we will have arrived at final resolution of this loan relationship.

Overview of Financial Condition and Results of Operations

For the three months ended March 31, 2025, net income was $6.3 million, or $0.63 per diluted common share, compared to net income of $4.7 million, or $0.48, per diluted common share for the three months ended March 31, 2024. Net income increased primarily due to a negative provision for credit losses of $3.6 million in the three months ended March 31, 2025 as a result of a $3.3 million recovery of loans previously charged off following a property insurance settlement related to a loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida, compared to a negative provision for credit losses of $1.4 million for the comparable prior period. Also contributing to the increase in net income was a $1.1 million increase in net interest income, which was a result of a $2.4 million decrease in interest expense partially offset by a $1.3 million decrease in interest income. We experienced margin expansion as our cost of funds decreased and our yield on interest-earning assets increased. There was also a $0.9 million increase in noninterest expense and a $0.7 million decrease in noninterest income. The increase in noninterest expense was primarily due to increases in salaries and employee benefits and other operating expenses. In addition, first quarter 2024 noninterest expense was reduced by a $0.2 million gain on early extinguishment of subordinated debt. The decrease in noninterest income is mainly attributable to a gain on sale or disposition of fixed assets of $0.4 million recorded during the three months ended March 31, 2024 primarily resulting from the closure of one branch in the Alabama market, and a decrease in other operating income.

At March 31, 2025, the Company and Bank each were in compliance with all regulatory capital requirements, and the Bank was considered “well-capitalized” under the FDIC’s prompt corrective action regulations. Other key components of our performance for the three months ended March 31, 2025 are summarized below.

• During the three months ended March 31, 2025, our net interest margin was 2.87%, compared to 2.59% for the three months ended March 31, 2024.
• Credit quality metrics improved as nonperforming loans were 0.27% of total loans at March 31, 2025 compared to 0.42% at December 31, 2024.
• Return on average assets increased to 0.94% for the three months ended March 31, 2025, compared to 0.68% for the three months ended March 31, 2024. Return on average equity was 10.31% for the three months ended March 31, 2025, compared to 8.28% for the three months ended March 31, 2024.
• Book value per common share reached a record high of $25.63 at March 31, 2025 compared to $24.55 at December 31, 2024.
• Total deposits increased $1.4 million, or 0.1%, to $2.35 billion at March 31, 2025, compared to $2.35 billion at December 31, 2024. Total deposits, excluding $47.3 million of brokered demand deposits at December 31, 2024, increased $48.7 million, or 2.1%, to $2.35 billion at March 31, 2025, compared to $2.30 billion at December 31, 2024. Noninterest-bearing deposits increased $4.6 million, or 1.1%, to $436.7 million at March 31, 2025, compared to $432.1 million at December 31, 2024. As of March 31, 2025, estimated uninsured deposits represented approximately 34% of our total deposits.
• Consistent with our strategy of optimizing the balance sheet, total loans decreased $18.5 million, or 0.9%, to $2.11 billion at March 31, 2025, compared to $2.13 billion at December 31, 2024.
• Net interest income for the three months ended March 31, 2025 was $18.3 million, an increase of $1.1 million, or 6.6%, compared to $17.2 million for the three months ended March 31, 2024, driven primarily by a decrease in the volume of short-term borrowings, partially offset by a decrease in the volume of loans.
• During the three months ended March 31, 2025, we paid $0.6 million to repurchase 34,992 shares of common stock, compared to $0.2 million to repurchase 10,525 shares of common stock during the three months ended March 31, 2024. We paid $1.0 million in cash dividends on our common stock during both the three month periods ended March 31, 2025 and 2024.
• Accumulated other comprehensive loss decreased $5.5 million, or 11.3%, to $42.9 million at March 31, 2025, compared to $48.4 million at December 31, 2024 primarily due to an increase in the fair value of our AFS securities portfolio.

Discussion and Analysis of Financial Condition

Loans

General. Loans constitute our most significant asset, comprising 77% and 78% of our total assets at March 31, 2025 and December 31, 2024, respectively. Total loans decreased $18.5 million, or 0.9%, to $2.11 billion at March 31, 2025, compared to $2.13 billion at December 31, 2024. The decrease in loans was primarily the result of lower utilization of credit lines and loan amortization. Given the high interest rate environment, we are emphasizing origination of high margin loans that promote long-term profitability and proactively exiting credit relationships that do not fit this strategy. Our variable-rate loans as a percentage of total loans was 32% at March 31, 2025 and December 31, 2024.

The table below sets forth the balance of loans outstanding by loan type as of the dates presented, and the percentage of each loan type to total loans (dollars in thousands).

(1) The Company’s business lending portfolio consists of loans secured by owner-occupied commercial real estate properties and commercial and industrial loans.

At March 31, 2025, the Company’s business lending portfolio, which consists of loans secured by owner-occupied commercial real estate properties and commercial and industrial loans, was $960.7 million, a decrease of $15.5 million, or 1.6%, compared to $976.2 million at December 31, 2024. The decrease in the business lending portfolio is primarily driven by reduced utilization of credit lines, particularly on commercial and industrial relationships.

Nonowner-occupied loans totaled $481.9 million at March 31, 2025, a decrease of $13.4 million, or 2.7%, compared to $495.3 million at December 31, 2024. The decrease in nonowner-occupied loans is primarily due to loan amortization and payoffs that aligned with our continued strategy to optimize and de-risk the mix of the portfolio.

Construction and development loans totaled $149.3 million at March 31, 2025, a decrease of $5.3 million, or 3.4%, compared to $154.6 million at December 31, 2024. The decrease in construction and development loans is primarily due to conversions to permanent loans upon completion of construction.

During the third quarter of 2023 we exited the consumer mortgage loan origination business to transition into shorter duration, higher risk-adjusted return asset classes, in an effort to focus more on our core business and optimize profitability. The consumer mortgage portfolio was approximately $237.6 million and $242.5 million at March 31, 2025 and December 31, 2024, respectively, substantially all of which is included in the 1-4 family category. The remaining loans in the 1-4 family category consisted primarily of second mortgages, home equity loans, home equity lines of credit, and business purpose loans secured by 1-4 family residential real estate.

Loan Concentrations. Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At March 31, 2025 and December 31, 2024, we had no concentrations of loans exceeding 10% of total loans other than loans in the categories listed in the table above.

The table below sets forth the balance of owner-occupied loans by industry based on NAICS code and nonowner-occupied loans by property type as of the dates presented (dollars in thousands).

(1) No individual category within “All other” represents more than 2% of total owner-occupied loans.

The following table sets forth loans outstanding at March 31, 2025 , which, based on remaining scheduled repayments of principal, are due in the periods indicated. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported below as due in one year or less (dollars in thousands).

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Investment Securities

We purchase investment securities primarily to provide a source for meeting liquidity needs, with return on investment a secondary consideration. We also use investment securities as collateral for certain deposits and other types of borrowings. Investment securities represented 14% of our total assets and totaled $388.0 million at March 31, 2025, an increase of $14.2 million, or 3.8%, from $373.8 million at December 31, 2024. The increase in investment securities at March 31, 2025 compared to December 31, 2024 was driven primarily by a $13.3 million increase in residential mortgage-backed securities, a $1.2 million increase in corporate bonds and a $1.1 million increase in commercial mortgage-backed securities, partially offset by a $1.1 million decrease in obligations of state and political subdivisions. Net unrealized losses in our AFS investment securities portfolio decreased to $54.5 million at March 31, 2025 compared to $61.4 million at December 31, 2024 primarily due to lower prevailing market interest rates. For additional information, see Note 3. Investment Securities.

The table below shows the carrying value of our investment securities portfolio by investment type and the percentage that such investment type comprises of our entire portfolio as of the dates indicated (dollars in thousands).

The investment portfolio consists of AFS and HTM securities. We do not hold any investments classified as trading. We classify debt securities as HTM if management has the positive intent and ability to hold the securities to maturity. HTM debt securities are stated at amortized cost. Securities not classified as HTM are classified as AFS and are stated at fair value. As of March 31, 2025, AFS securities comprised 89% of our total investment securities.

Due to the nature of the investments, current market prices, and the current interest rate environment, we determined that the declines in the fair values of the AFS and HTM securities portfolio were not attributable to credit losses at March 31, 2025 and December 31, 2024. Accordingly, there was no adjustment made to the amortized cost basis. The carrying values of our AFS securities are adjusted for unrealized gains or losses not attributable to credit losses as valuation allowances, and any gains or losses are reported on an after-tax basis as a component of other comprehensive income (loss).

The table below sets forth the stated maturities and weighted average yields of our investment debt securities based on the amortized cost of our investment portfolio at March 31, 2025 (dollars in thousands).

The maturity of mortgage-backed securities reflects scheduled repayments based upon the contractual maturities of the securities. Weighted average yields on tax-exempt securities are calculated based on amortized cost on a fully tax equivalent basis assuming a federal tax rate of 21%, when applicable.

Deposits

The following table sets forth the composition of our deposits and the percentage of each deposit type to total deposits at March 31, 2025 and December 31, 2024 (dollars in thousands).

Total deposits were $2.35 billion at March 31, 2025, an increase of $1.4 million, or 0.1%, compared to $2.35 billion at December 31, 2024. There were no brokered demand deposits at March 31, 2025, compared to $47.3 million at December 31, 2024. Total deposits, excluding $47.3 million of brokered demand deposits at December 31, 2024, increased $48.7 million, or 2.1%, to $2.35 billion at March 31, 2025, compared to $2.30 billion at December 31, 2024. We utilize brokered demand deposits when pricing is more favorable than other short-term borrowings.

The increase in noninterest-bearing demand deposits, interest-bearing demand deposits, money market deposits, and savings deposits at March 31, 2025 compared to December 31, 2024 is primarily the result of organic growth. The decrease in time deposits at March 31, 2025 compared to December 31, 2024 is primarily due to maturities of higher cost time deposits as a result of our strategy to keep duration short. Brokered time deposits decreased to $244.9 million at March 31, 2025 from $245.5 million at December 31, 2024. We utilize brokered time deposits with laddered maturities, entirely in denominations of less than $250,000, to secure fixed cost funding and reduce short-term borrowings. At March 31, 2025, the balance of brokered time deposits remained below 10% of total assets, and the remaining weighted average duration was approximately six months with a weighted average rate of 4.78%.

At March 31, 2025, our estimated uninsured deposits were $803.7 million, or approximately 34% of total deposits, compared to $737.6 million, or approximately 31% of our total deposits at December 31, 2024. The estimates are based on the same methodologies and assumptions used for our regulatory reporting requirements. The insured deposit data does not reflect an evaluation of all of the account ownership category distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations.

Borrowings

At March 31, 2025, total borrowings include securities sold under agreements to repurchase, FHLB advances, subordinated debt issued in 2022, and junior subordinated debentures assumed through acquisitions.

We had $11.3 million of securities sold under agreements to repurchase at March 31, 2025 and $8.4 million at December 31, 2024. Our advances from the FHLB were $60.0 million at March 31, 2025, a decrease of $7.2 million, compared to FHLB advances of $67.2 million at December 31, 2024. Based on original maturities, at March 31, 2025, all of our FHLB advances were long-term, compared to $7.2 million short-term and $60.0 million long-term FHLB advances at December 31, 2024. FHLB advances are used to fund new loan and investment activity that is not funded by deposits or other borrowings.

On March 12, 2023, the Federal Reserve established the BTFP. The BTFP was a one-year program which provided additional liquidity through borrowings for a term of up to one year secured by the pledging of certain qualifying securities and other assets valued at par. Beginning in the second quarter of 2023, we utilized the BTFP to secure fixed rate funding for a one-year term and reduce short-term FHLB advances, which are priced daily. We utilized this source of funding due to its lower rate and the ability to prepay the obligations without penalty. The rates on the borrowings under the BTFP were fixed for one year from the day each borrowing was made. During the fourth quarter of 2023 and again in the first quarter of 2024, we refinanced all of our borrowings under the BTFP with new loans under the BTFP with a one-year term due to more favorable rates. The BTFP ceased making new loans as scheduled on March 11, 2024. During the third quarter of 2024, we began paying down borrowings under the BTFP and repaid all of the remaining borrowings under the BTFP in the fourth quarter of 2024. At March 31, 2025 and December 31, 2024, we had no outstanding borrowings under the BTFP.

Typically, the main source of our short-term borrowings are advances from the FHLB; however, during the three months ended March 31, 2024, our primary source of short-term borrowings were borrowings under the BTFP due to more favorable rates. The rate charged for advances from the FHLB is directly tied to the Federal Reserve’s federal funds target rate. As previously discussed, the Federal Reserve target rate was 5.25% to 5.50% during first quarter 2024 compared to 4.25% to 4.50% during first quarter 2025.

The average balances and cost of short-term borrowings for the three months ended March 31, 2025 and 2024 are summarized in the table below (dollars in thousands).

The carrying value of the subordinated debt, which consists entirely of our 2032 Notes, was $16.7 million at March 31, 2025 and December 31, 2024. The $8.8 million and $8.7 million in junior subordinated debt at March 31, 2025 and December 31, 2024, respectively, represent the junior subordinated debentures that we assumed through acquisitions.

For a description of the 2032 Notes, see our Annual Report, Part II. Item 7. “MD&A – Discussion and Analysis of Financial Condition – Borrowings – 2032 Notes” and Note 10 to the financial statements included in such report.

Stockholders’ Equity

Stockholders’ equity was $251.7 million at March 31, 2025, an increase of $10.4 million compared to December 31, 2024. The increase is primarily attributable to $6.3 million of net income for the three months ended March 31, 2025 and a $5.5 million decrease in accumulated other comprehensive loss due to an increase in the fair value of the Bank’s AFS securities portfolio, partially offset by $1.0 million in dividends declared and $0.6 million for share repurchases.

Results of Operations

Net Interest Income and Net Interest Margin

Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments and rates paid on deposits and other borrowings, the level of nonperforming loans, the amount of noninterest-bearing liabilities supporting earning assets, and the interest rate environment. Net interest margin is the ratio of net interest income to average interest-earning assets.

The primary factors affecting net interest margin are changes in interest rates, competition, and the shape of the interest rate yield curve. The Federal Reserve Board sets various benchmark rates, including the federal funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. The Federal Reserve increased the federal funds target rate four times during 2023, from 4.25% to 4.50%, to 5.25% to 5.50%. During 2024, beginning in September, the Federal Reserve reduced the federal funds target rate three times by 100 basis points on a cumulative basis to 4.25% to 4.50%. Accordingly, the prevailing federal funds target rate in first quarter 2025 was 100 basis points lower than in first quarter 2024. For additional discussion, see Certain Events That Affect Period-over-Period Comparability – Changing Inflation and Interest Rates.

Three months ended March 31, 2025 vs. three months ended March 31, 2024. Net interest income increased 6.6% to $18.3 million for the three months ended March 31, 2025 compared to $17.2 million for the same period in 2024. The increase is primarily due to a lower average balance of short-term borrowings and a decrease in the rates paid on brokered time deposits and time deposits, partially offset by a lower average balance of, and a decrease in the yield on, loans and an increase in the average rates paid on and balance of interest-bearing demand deposits. Average short-term borrowings decreased by $186.2 million for the three months ended March 31, 2025, as we paid all remaining borrowings under the BTFP in the fourth quarter of 2024. The lower average balance of, and a decrease in rates paid on, short-term borrowings resulted in a $2.3 million decrease in interest expense compared to the same period in 2024. A lower average balance of, and a decrease in rates paid on, time deposits resulted in a $0.9 million decrease in interest expense compared to the same period in 2024. Average brokered time deposits were $252.3 million during the three months ended March 31, 2025 compared to $255.7 million during the three months ended March 31, 2024, which, combined with a decrease in rates, resulted in a $0.3 million decrease in interest expense compared to the same period in 2024. Average loans decreased by $86.6 million for the three months ended March 31, 2025 in accordance with our strategy to optimize the balance sheet, which, in addition to lower loan yields, resulted in a $1.6 million decrease in interest income on loans compared to the same period in 2024. Average interest-bearing demand deposits increased by $91.1 million, which, combined with an increase in rates, resulted in a $0.9 million increase in interest expense in the first quarter of 2025 compared to the same period in 2024. Average noninterest-bearing deposits increased by $1.9 million. Rates paid on interest-bearing liabilities decreased primarily as a result of the overall decrease in prevailing interest rates. Our yield on interest-earning assets increased primarily due to an increase in yield on the investment securities portfolio.

Interest income was $34.4 million for the three months ended March 31, 2025, compared to $35.7 million for the same period in 2024. Loan interest income made up substantially all of our interest income for the three months ended March 31, 2025 and 2024, although interest on investment securities contributed 9.7% of interest income during the first quarter of 2025 compared to 8.6% during the first quarter of 2024. Of the $1.3 million decrease in interest income, a decrease in interest income of $1.1 million can be attributed to the change in the volume of interest-earnings assets and a decrease of $0.2 million can be attributed to a decrease in the yield earned on interest-earning assets. The overall yield on interest-earning assets was 5.39% and 5.38% for the three months ended March 31, 2025 and 2024, respectively. The loan portfolio yielded 5.88% and 5.89% for the three months ended March 31, 2025 and March 31, 2024, respectively, while the yield on the investment portfolio was 3.10% for the three months ended March 31, 2025 compared to 2.81% for the three months ended March 31, 2024. The increase in the overall yield on interest-earning assets compared to the quarter ended March 31, 2024 was primarily driven by a 29 basis point increase in the yield on the investment securities portfolio, partially offset by a one basis point decrease in the yield on the loan portfolio.

Interest expense was $16.1 million for the three months ended March 31, 2025, a decrease of $2.4 million compared to interest expense of $18.5 million for the three months ended March 31, 2024. A decrease in interest expense of $1.7 million resulted from a decrease in volume of interest-bearing liabilities, primarily short-term borrowings and time deposits, partially offset by an increase in volume of interest-bearing demand deposits. A decrease of $0.7 million resulted from the decrease in the cost of interest-bearing liabilities, primarily time deposits and brokered time deposits, partially offset by an increase in the cost of interest-bearing demand deposits. Average interest-bearing liabilities decreased by $94.9 million for the three months ended March 31, 2025 compared to the same period in 2024, as average short-term borrowings decreased by $186.2 million while average interest-bearing deposits increased by $82.1 million. Average long-term borrowings increased by $9.1 million primarily due utilization of long-term FHLB advances. We reduced rates on our time deposits during the first quarter of 2025 compared to the first quarter of 2024 due to lower prevailing market interest rates. We increased rates on our interest-bearing demand deposits during the first quarter of 2025 compared to the first quarter of 2024 to attract and retain lower cost deposits relative to higher cost short-term borrowings. The cost of deposits decreased 16 basis points to 3.15% for the three months ended March 31, 2025 compared to 3.31% for the three months ended March 31, 2024 as a result of a lower average balance of, and a decrease in the cost of, time deposits and brokered time deposits, partially offset by a higher average balance of, and an increase in the cost of, interest-bearing demand deposits. The cost of interest-bearing liabilities decreased 29 basis points to 3.22% for the three months ended March 31, 2025 compared to 3.51% for the same period in 2024, primarily due to a lower average balance of, and a decrease in the cost of, short-term borrowings and a decrease in the cost of time deposits and brokered time deposits, partially offset by a higher cost and average balance of interest-bearing demand deposits.

Net interest margin was 2.87% for the three months ended March 31, 2025, an increase of 28 basis points from 2.59% for the three months ended March 31, 2024. The increase in net interest margin was primarily driven by a 29 basis point decrease in the cost of interest-bearing liabilities, partially offset by a one basis point increase in the yield on interest-earning assets.

Average Balances and Yields. The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or paid and the average yield or rate paid on each such category for the three months ended March 31, 2025 and 2024. Averages presented in the table below are daily averages (dollars in thousands).

(1) Interest income and net interest margin are expressed as a percentage of average interest-earning assets outstanding for the indicated periods and are not presented on a tax equivalent basis. Interest expense is expressed as a percentage of average interest-bearing liabilities for the indicated periods.

(2) For additional information, see Discussion and Analysis of Financial Condition – Borrowings.

(1) Changes in interest due to both volume and rate have been allocated entirely to rate.

Noninterest Income

Noninterest income includes, among other things, service charges on deposit accounts, gains and losses on sale or disposition of fixed assets, interchange fees, income from BOLI, and changes in the fair value of equity securities. We expect to continue to develop new products that generate noninterest income, and enhance our existing products, in order to diversify our revenue sources.

Three months ended March 31, 2025 vs. three months ended March 31, 2024. Total noninterest income decreased $0.7 million, or 26.8%, to $2.0 million for the three months ended March 31, 2025 compared to $2.7 million for the three months ended March 31, 2024. The decrease in noninterest income was primarily attributable to a $0.4 million decrease in gain on sale or disposition of fixed assets, a $0.2 million decrease in the change in fair value of equity securities, and a $0.2 million decrease in other operating income. During the first quarter of 2024, Investar recorded a $0.4 million gain on sale or disposition of fixed assets as a result of the closure of one branch in the Alabama market. The decrease in other operating income is primarily attributable to a $0.1 million decrease in distributions from other investments and a $0.1 million decrease in the change in net asset value of other investments.

Noninterest Expense

Noninterest expense includes salaries and employee benefits and other costs associated with the conduct of our operations. Our goal is to manage our costs within the framework of our near-term operating strategy of generating consistent, quality earnings.

Three months ended March 31, 2025 vs. three months ended March 31, 2024. Total noninterest expense was $16.2 million for the three months ended March 31, 2025, an increase of $0.9 million, or 6.2%, compared to the same period in 2024. The increase was primarily driven by a $0.4 million increase in salaries and employee benefits, a $0.2 million decrease in gain on early extinguishment of subordinated debt, a $0.2 million increase in professional fees, and a $0.2 million increase in other operating expense, partially offset by a $0.1 million decrease in depreciation and amortization. The increase in salaries and employee benefits is primarily due to investment in people with an emphasis on our Texas markets to remix and strengthen our balance sheet and an increase in health insurance claims. During the first quarter of 2024, Investar repurchased $1.0 million in principal amount of our 2032 Notes and recognized a gain on early extinguishment of subordinated debt of $0.2 million. The increase in other operating expense resulted from a $0.3 million increase in branch services expense, and a $0.2 million increase in collection and repossession expenses, partially offset by a $0.2 million decrease in write down of other real estate owned and a $0.1 million decrease in FDIC assessments. The increase in collection and repossession expenses was primarily due to the property insurance settlement related to a loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. The decrease in depreciation and amortization is primarily due to the closure of one branch location in the first quarter of 2024.

Income Tax Expense

Income tax expense for each of the three months ended March 31, 2025 and 2024 was $1.4 million. The effective tax rate for the three months ended March 31, 2025 and 2024 was 18.4% and 22.7%, respectively. During the first quarter of 2024, we surrendered approximately $8.4 million of BOLI contracts and reinvested the proceeds in higher yielding policies, which resulted in $0.3 million of income tax expense. The restructuring had an expected earn-back period of just over one year.

For the three months ended March 31, 2025, the effective tax rate differed from the statutory tax rate of 21% primarily due to tax-exempt interest income earned on certain loans and investment securities and income from BOLI. For the three months ended March 31, 2024, the effective tax rate differed from the statutory tax rate of 21% primarily due to the surrender of BOLI contracts, partially offset by tax-exempt interest income earned on certain loans and investment securities and income from BOLI.

Risk Management

The primary risks associated with our operations are credit, interest rate and liquidity risk. Changing inflation also presents risk. Credit, inflation and interest rate risk are discussed below, while liquidity risk is discussed in this section under the heading Liquidity and Capital Resources below.

Credit Risk and the Allowance for Credit Losses

General. The risk of loss should a borrower default on a loan is inherent in any lending activity. Our portfolio and related credit risk are monitored and managed on an ongoing basis by our risk management department, the Board’s loan committee and the full Board. We utilize a ten point risk-rating system, which assigns a risk grade to each borrower based on a number of quantitative and qualitative factors associated with a loan transaction. The risk grade categorizes the loan into one of five risk categories, based on information about the ability of borrowers to service the debt. The information includes, among other factors, current financial information about the borrower, historical payment experience, credit documentation, public information and current economic trends. These categories assist management in monitoring our credit quality. The risk categories, which are consistent with the definitions used in guidance promulgated by federal banking regulators, are as follows.

• Pass (grades 1-6) – Loans not falling into one of the categories below are considered pass. These loans have high credit characteristics and financial strength. The borrowers at least generate profits and cash flow that are in line with peer and industry standards and have debt service coverage ratios above loan covenants and our policy guidelines. For some of these loans, a guaranty from a financially capable party mitigates characteristics of the borrower that might otherwise result in a lower grade.
• Special Mention (grade 7) – Loans classified as special mention possess some credit deficiencies that need to be corrected to avoid a greater risk of default in the future. For example, financial ratios relating to the borrower may have deteriorated. Often, a special mention categorization is temporary while certain factors are analyzed or matters addressed before the loan is re-categorized as either pass or substandard.
• Substandard (grade 8) – Loans rated as substandard are inadequately protected by the current net worth and paying capacity of the borrower or the liquidation value of any collateral. If deficiencies are not addressed, it is likely that this category of loan will result in the Bank incurring a loss. Where a borrower has been unable to adjust to industry or general economic conditions, the borrower’s loan is often categorized as substandard.
• Doubtful (grade 9) – Doubtful loans are substandard loans with one or more additional negative factors that makes full collection of amounts outstanding, either through repayment or liquidation of collateral, highly questionable and improbable.
• Loss (grade 10) – Loans classified as loss have deteriorated to such a point that it is not practicable to defer writing off the loan. For these loans, all efforts to remediate the loan’s negative characteristics have failed and the value of the collateral, if any, has severely deteriorated relative to the amount outstanding. Although some value may be recovered on such a loan, it is not significant in relation to the amount borrowed.

At March 31, 2025 and December 31, 2024, there were no loans classified as loss or doubtful, $29.1 million and $32.7 million, respectively, of loans classified as substandard, and $11.5 million and $7.8 million, respectively, of loans classified as special mention.

An independent loan review is conducted annually, whether internally or externally, on at least 40% of commercial loans utilizing a risk-based approach designed to maximize the effectiveness of the review. Internal loan review is independent of the loan underwriting and approval process. In addition, credit analysts periodically review certain commercial loans to identify negative financial trends related to any one borrower, any related groups of borrowers or an industry. All loans not categorized as pass are put on an internal watch list, with quarterly reports to the Board. In addition, a written status report is maintained by our special assets division for all commercial loans categorized as substandard or worse. We use this information in connection with our collection efforts.

If our collection efforts are unsuccessful, collateral securing loans may be repossessed and sold or, for loans secured by real estate, foreclosure proceedings initiated. The collateral is sold at public auction for fair market value (based upon recent appraisals), with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. If the loan balance is greater than the sales proceeds, the deficient balance is charged-off.

Allowance for Credit Losses. We account for the ACL in accordance with ASC 326, which uses the CECL accounting methodology. The CECL methodology requires that lifetime expected credit losses be recorded at the time the financial asset is originated or acquired and be adjusted each period through a provision for credit losses for changes in the expected lifetime credit losses. The ACL was $26.4 million and $26.7 million at March 31, 2025 and December 31, 2024, respectively.

We maintain a separate ACL on unfunded loan commitments, which is included in “Accrued taxes and other liabilities” in the accompanying consolidated balance sheets. The ACL is generally increased by the provision for credit losses and decreased by charge-offs, net of recoveries. The negative provision for credit losses for the three months ended March 31, 2025 was primarily due to net recoveries on one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. The negative provision for credit losses for the three months ended March 31, 2024 was primarily due to a decrease in total loans, aging of existing loans, and, to a lesser extent, the completion of our annual CECL allowance model recalibration, which resulted in lower historical loss rates.

We complete our annual model recalibration process in the first quarter of each year. Our annual review includes peer group analysis, updates to our probability of default and loss-given default models, including prepayment and curtailment assumptions, and qualitative factor scorecard ranges, as needed. The changes resulting from the model recalibration reduced the ACL by approximately $0.5 million during each of the three month periods ended March 31, 2025 and 2024.

Refer to Note 1. Summary of Significant Accounting Policies – Allowance for Credit Losses in our Annual Report for further discussion of our ACL accounting policy.

The following table presents the allocation of the ACL by loan category and the percentage of loans in each loan category to total loans as of the dates indicated (dollars in thousands).

The following table presents the amount of the ACL allocated to each loan category as a percentage of total loans as of the dates indicated.

As discussed above, the balance in the ACL is principally influenced by the provision for credit losses on loans and net loan loss experience. Additions to the ACL are charged to the provision for credit losses on loans. Losses are charged to the ACL as incurred and recoveries on losses previously charged to the allowance are credited to the allowance at the time the recovery is collected.

The table below reflects the activity in the ACL and key ratios for the periods indicated (dollars in thousands).

(1) For the three months ended March 31, 2025, the $3.6 million negative provision for credit losses on the consolidated statement of income includes a $3.7 million negative provision for loan losses and a $0.1 million provision for unfunded loan commitments. For the three months ended March 31, 2024, the $1.4 million negative provision for credit losses on the consolidated statement of income includes a $1.4 million negative provision for loan losses and a $9,000 negative provision for unfunded loan commitments.

The ACL to total loans decreased to 1.25% at March 31, 2025 compared to 1.34% at March 31, 2024, and the ACL to nonaccrual loans ratio decreased to 473.3% at March 31, 2025 compared to 515.4% at March 31, 2024. The decrease in the ACL to total loans compared to March 31, 2024 is primarily due to a decrease in total loans, aging of existing loans and an improvement in the economic forecast. The decrease in ACL to nonaccrual loans compared to March 31, 2024 is primarily due to a decrease in the ACL. Nonaccrual loans were $5.6 million, or 0.27% of total loans, at March 31, 2025, a decrease of $64,000 compared to $5.6 million, or 0.26% of total loans, at March 31, 2024. The decrease in nonaccrual loans is primarily due to paydowns.

The following table presents the allocation of net (charge-offs) recoveries by loan category for the periods indicated (dollars in thousands).

Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for credit losses on loans. Net charge-offs include recoveries of amounts previously charged off. For the three months ended March 31, 2025, net recoveries were $3.4 million, or 0.16%, of the average loan balance for the period. Net recoveries during the three months ended March 31, 2025 were primarily the result of a property insurance settlement related to a loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. Net charge-offs for the three months ended March 31, 2024 were $15,000, or less than 0.01%, of the average loan balance for the period. Net charge-offs during the three months ended March 31, 2024 were primarily attributable to commercial and industrial and consumer loans.

Management believes the ACL at March 31, 2025 is sufficient to provide adequate protection against losses in our portfolio. However, there can be no assurance that this allowance will prove to be adequate over time to cover ultimate losses in connection with our loans. This allowance may prove to be inadequate due to higher inflation and interest rates than anticipated, other unanticipated adverse changes in the economy, unanticipated effects of the current geopolitical and domestic political conflicts, a public health crisis, or discrete events adversely affecting specific customers or industries. We are monitoring changes and potential changes to U.S. tariff and trade policies, particularly those occurring after the end of first quarter 2025. The current environment is dynamic and uncertain. Changing U.S. tariff and trade policies could cause higher inflation, higher interest rates and slower economic growth or recession in the U.S., at least in the near term. These changes and uncertainties regarding future changes could cause deterioration in credit quality that could lead us to increase our ACL in future periods. Our results of operations and financial condition could be materially adversely affected to the extent that the allowance is insufficient to cover such changes or events.

Nonperforming Assets. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Loans are ordinarily placed on nonaccrual when a loan is specifically determined to be impaired or when principal and interest is delinquent for 90 days or more. Additionally, management may elect to continue the accrual when the estimated net available value of collateral is sufficient to cover the principal balance and accrued interest. It is our policy to discontinue the accrual of interest income on any loan for which we have reasonable doubt as to the payment of interest or principal. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period of repayment performance by the borrower. Nonperforming loans were $5.6 million, or 0.27% of total loans, at March 31, 2025, a decrease of $3.2 million compared to $8.8 million, or 0.42% of total loans, at December 31, 2024. The decrease in nonperforming loans compared to December 31, 2024 is mainly attributable to paydowns.

Loan Modifications to Borrowers Experiencing Financial Difficulty. Occasionally, we modify loans to borrowers in financial distress by providing certain concessions, such as principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension, excluding covenant waivers and modification of contingent acceleration clauses, or a combination of such concessions. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL. Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off. During the three months ended March 31, 2025 and 2024, we did not provide any modifications under these circumstances to borrowers experiencing financial difficulty.

Other Real Estate Owned. Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure and real property no longer used in the Bank’s business operations. Real estate acquired through foreclosure is initially recorded at fair value at the time of foreclosure, less estimated selling cost, and any related write-down is charged to the ACL. Real property no longer used in the Bank’s business operations is recorded at the lower of its net book value or fair value at the date of transfer to other real estate owned.

For the three months ended March 31, 2025, additions to other real estate owned were $1.0 million, which were driven by transfers of commercial real estate loans to other real estate owned. No other real estate owned was sold during the three months ended March 31, 2025 and 2024. During the three months ended March 31, 2024, we recorded a $0.2 million write-down of other real estate owned primarily related to a former branch location based on a third-party appraisal. At March 31, 2025, approximately $1.0 million of loans secured by 1-4 family residential property were in the process of foreclosure.

The table below provides details of our other real estate owned as of the dates indicated (dollars in thousands).

Changes in our other real estate owned are summarized in the table below for the periods indicated (dollars in thousands).

Impact of Inflation. Inflation reached a near 40-year high in late 2021 primarily due to effects of the COVID-19 pandemic, and continued rising through June 2022. After June 2022, the rate of inflation generally declined; however, it has remained higher than the Federal Reserve’s target inflation rate of two percent. In response to higher inflation, the Federal Reserve increased the federal funds target rate during 2022 and 2023 as discussed in Certain Events That Affect Period-over-Period Comparability – Changing Inflation and Interest Rates, which generally increased the amount we earn on our interest-earning assets but also increased the amount we pay on our interest-bearing liabilities as discussed throughout this report. We believe that higher rates resulting from inflation and related factors led to constrained loan demand during 2023 and 2024 and through March 31, 2025. When the rate of inflation accelerates, there is an erosion of consumer and customer purchasing power. Accordingly, if the rate of inflation accelerates in the future, this could impact our business by reducing our tolerance for extending credit, and our customer’s desire to obtain credit, or causing us to incur additional provisions for credit losses resulting from a possible increased default rate. Inflation and related higher rates have led and may continue to lead to lower loan re-financings. Inflation has also increased and may continue to increase the costs of goods and services we purchase, including the costs of salaries and benefits. We are monitoring changes and potential changes to U.S. tariff and trade policies, particularly those occurring after the end of first quarter 2025. The current environment is dynamic and uncertain. Changing U.S. tariff and trade policies could cause higher inflation, higher interest rates and slower economic growth or recession in the U.S., at least in the near term.

As noted above, the rate of inflation generally declined after June 2022. In response, from September 2024 to December 2024, the Federal Reserve reduced the federal funds target rate by 100 basis points to 4.25% to 4.50%, where it remained as of May 7, 2025. As noted above, the inflationary outlook in the U.S. remains uncertain. A decrease in the general level of interest rates may lead to, among other things, prepayments on our loan and mortgage-backed securities portfolios as borrowers refinance their loans at lower rates, lower rates on new loans, lower rates on existing variable rate loans and lower yields on investment securities, which may be offset by lower costs of interest-bearing liabilities. If interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income. Significant fluctuations in interest rates makes our business and balance sheet more challenging to manage. For additional information, see Interest Rate Risk below, and Item 1A. “Risk Factors – Risks Related to our Business – Changes in interest rates could have an adverse effect on our profitability” and – “Inflation and rising prices may continue to adversely affect our results of operations and financial condition” in our Annual Report.

Interest Rate Risk

Market risk is the risk of loss from adverse changes in market prices and rates. Since the majority of our assets and liabilities are monetary in nature, our market risk arises primarily from interest rate risk inherent in our lending and deposit activities. A sudden and substantial change in interest rates may adversely impact our earnings and profitability because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. Accordingly, our ability to proactively structure the volume and mix of our assets and liabilities to address anticipated changes in interest rates, as well as to react quickly to such fluctuations, can significantly impact our financial results. To that end, management actively monitors and manages our interest rate risk exposure.

The ALCO has been authorized by the Board to implement our asset/liability management policy, which establishes guidelines with respect to our exposure to interest rate fluctuations, liquidity, loan limits as a percentage of funding sources, exposure to correspondent banks and brokers and reliance on non-core deposits. The goal of the policy is to enable us to maximize our interest income and maintain our net interest margin without exposing the Bank to excessive interest rate risk, credit risk and liquidity risk. Within that framework, the ALCO monitors our interest rate sensitivity and makes decisions relating to our asset/liability composition.

Net interest income simulation is the Bank’s primary tool for benchmarking near term earnings exposure. Given the ALCO’s objective to understand the potential risk and volatility embedded within the current mix of assets and liabilities, standard rate scenario simulations assume total assets remain static (i.e. no growth). The Bank may also use a standard gap report in its interest rate risk management process. The primary use for the gap report is to provide supporting detailed information to the ALCO’s discussion.

The Bank has particular concerns with the utility of the gap report as a risk management tool because of difficulties in relating gap directly to changes in net interest income. Hence, the income simulation is the key indicator for earnings-at-risk since it expressly measures what the gap report attempts to estimate.

Short term interest rate risk management tactics are decided by the ALCO where risk exposures exist out into the one to two-year horizon. Tactics are formulated and presented to the ALCO for discussion, modification, and/or approval. Such tactics may include asset and liability acquisitions of appropriate maturities in the cash market, loan and deposit product/pricing strategy modification, and derivatives hedging activities to the extent such activity is authorized by the Board.

Since the impact of rate changes due to mismatched balance sheet positions in the short-term can quickly and materially affect the current year’s income statement, they require constant monitoring and management.

Within the gap position that management directs, we attempt to structure our assets and liabilities to minimize the risk of either a rising or falling interest rate environment. We manage our gap position for time horizons of one month, two months, three months, four to six months, seven to twelve months, 13-24 months, 25-36 months, 37-60 months and more than 60 months. The goal of our asset/liability management is for the Bank to maintain a net interest income at risk in an up or down 100 basis point environment at less than (5)%. At March 31, 2025, the Bank was within the policy guidelines for asset/liability management.

The table below depicts the estimated impact on net interest income of immediate changes in interest rates at the specified levels.

(1) The percentage change in this column represents the projected net interest income for 12 months on a flat balance sheet in a stable interest rate environment versus the projected net interest income in the various rate scenarios.

The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business assumptions are based upon our experience, business plans and published industry experience. Key assumptions include asset prepayment speeds, competitive factors, the relative price sensitivity of certain assets and liabilities, and the expected life of non-maturity deposits. However, there are a number of factors that influence the effect of interest rate fluctuations on us which are difficult to measure and predict. For example, a rapid drop in interest rates might cause our loans to repay at a more rapid pace and certain mortgage-related investments to prepay more quickly than projected. This could mitigate some of the benefits of falling rates as are expected when we are in a negatively-gapped position. Conversely, a rapid rise in rates could give us an opportunity to increase our margins and stifle the rate of repayment on our mortgage-related loans which would increase our returns; however, we may need to increase the rates we offer to maintain or increase deposits, which would adversely impact our margins. As a result, because these assumptions are inherently uncertain, actual results will differ from simulated results.

Liquidity and Capital Resources

Liquidity. Liquidity is a measure of the ability to fund loan commitments and meet deposit maturities and withdrawals in a timely and cost-effective way. Cash flow requirements can be met by generating net income, attracting new deposits, converting assets to cash or borrowing funds. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, loan prepayments, loan sales and borrowings are greatly influenced by general interest rates, economic conditions and the competitive environment in which we operate. To minimize funding risks, we closely monitor our liquidity position through periodic reviews of maturity profiles, yield and rate behaviors, and loan and deposit forecasts. Excess short-term liquidity is usually invested in overnight federal funds sold.

Our core deposits, which are deposits excluding time deposits greater than $250,000 and deposits of municipalities and other political entities, are our most stable source of liquidity to meet our cash flow needs due to the nature of the long-term relationships generally established with our customers. Maintaining the ability to acquire these funds as needed in a variety of markets, and within ALCO compliance targets, is essential to ensuring our liquidity. At March 31, 2025 and December 31, 2024, 69% and 68%, respectively, of our total assets were funded by core deposits.

Our investment portfolio is another alternative for meeting our cash flow requirements. Investment securities generate cash flow through interest payments, principal payments and maturities, and they generally have readily available markets that allow for their conversion to cash. At March 31, 2025, 89% of our investment securities portfolio was classified as AFS, and we had gross unrealized losses in our AFS investment securities portfolio of $54.8 million and gross unrealized gains of $0.3 million. The sale of securities in a loss position would cause us to record a loss on sale of investment securities in noninterest income in the period during which the securities were sold. Some securities are pledged to secure certain deposit types or short-term borrowings, such as FHLB advances, which impacts their liquidity. At March 31, 2025, securities with a carrying value of $67.4 million were pledged to secure certain deposits, borrowings, and other liabilities, compared to $68.1 million in pledged securities at December 31, 2024.

Other sources available for meeting liquidity needs include advances from the FHLB, repurchase agreements and other borrowings. FHLB advances may be used to meet day to day liquidity needs, particularly if the prevailing interest rate on an FHLB advance compares favorably to the rates that we would be required to pay to attract deposits. At March 31, 2025, the balance of our outstanding advances with the FHLB was $60.0 million, all of which were long-term advances based on original maturity, a decrease of $7.2 million, compared to $67.2 million, consisting of $7.2 million short-term and $60.0 million long-term advances based on original maturities, at December 31, 2024. The total amount of remaining credit available to us from the FHLB at March 31, 2025 was $712.5 million. At March 31, 2025, our FHLB borrowings were collateralized by a blanket pledge of certain loans totaling approximately $951.7 million.

Repurchase agreements are contracts for the sale of securities which we own with a corresponding agreement to repurchase those securities at an agreed upon price and date. Our policies limit the use of repurchase agreements to those collateralized by investment securities. We had $11.3 million of repurchase agreements outstanding at March 31, 2025 and $8.4 million at December 31, 2024.

We maintain unsecured lines of credit with First National Bankers Bank and The Independent Bankers Bank totaling $60.0 million. These lines of credit are federal funds lines of credit and are used for overnight borrowing only. The lines of credit mature at various times within the next year. There were no outstanding balances on our unsecured lines of credit at March 31, 2025 and December 31, 2024.

At March 31, 2025, we held $43.5 million of cash and cash equivalents and maintained approximately $712.5 million of available funding from FHLB advances and maintained $60.0 million in unsecured lines of credit with correspondent banks. Cash and cash equivalents and available funding represent 102% of uninsured deposits of $803.7 million at March 31, 2025.

In addition, at March 31, 2025 and December 31, 2024, we had $17.0 million in aggregate principal amount of subordinated debt outstanding, consisting entirely of our 2032 Notes. For additional information on our 2032 Notes, see our Annual Report, Part II. Item 7. “MD&A – Discussion and Analysis of Financial Condition – Borrowings” and Note 10 to the financial statements included in such report.

Our liquidity strategy is focused on using the least costly funds available to us in the context of our balance sheet composition and interest rate risk position. Accordingly, we target growth of noninterest-bearing deposits. Although we cannot directly control the types of deposit instruments our customers choose, we can influence those choices with the interest rates and deposit specials we offer. In recent years, the proportion of our deposits represented by noninterest-bearing deposits has declined primarily due to rising market interest rates as customers have migrated to higher yielding alternatives, although such proportion increased as of the end of first quarter 2025 as rates declined in the latter part of 2024. At March 31, 2025, we held $244.9 million of brokered time deposits and no brokered demand deposits as defined for federal regulatory purposes. At December 31, 2024, we held $245.5 million of brokered time deposits and $47.3 million of brokered demand deposits as defined for federal regulatory purposes. We utilize brokered time deposits to secure fixed cost funding and reduce short-term borrowings. We utilize brokered demand deposits when pricing is more favorable than other short-term borrowings. We hold QwickRate® deposits, included in our time deposit balances, which we obtain through a qualified network, to address liquidity needs when rates on such deposits compare favorably with deposit rates in our markets. At March 31, 2025, we held $7.7 million of QwickRate® deposits, a decrease of $5.2 million compared to $12.9 million at December 31, 2024.

The following table presents, by type, our funding sources, which consist of total average deposits and borrowed funds, as a percentage of total funds and the total cost of each funding source for the three months ended March 31, 2025 and 2024.

Capital Resources. Our primary sources of capital include retained earnings, capital obtained through acquisitions, and proceeds from the sale of our capital stock and subordinated debt. We may issue additional common stock and debt securities from time to time to fund acquisitions and support our organic growth.

During the three months ended March 31, 2025 and 2024, we paid $1.0 million in dividends. We declared dividends on our common stock of $0.105 per share during the three months ended March 31, 2025 compared to dividends of $0.10 per share during the three months ended March 31, 2024. Our Board has authorized a share repurchase program, and at March 31, 2025, we had 460,653 shares of our common stock remaining authorized for repurchase under the program. During the three months ended March 31, 2025, we paid $0.6 million to repurchase 34,992 shares of our common stock, compared to paying $0.2 million to repurchase 10,525 shares of our common stock during the three months ended March 31, 2024. The aggregate purchase price does not include the effect of excise tax expense incurred on net share repurchases.

We are subject to various regulatory capital requirements administered by the Federal Reserve and the OCC which specify capital tiers, including the following classifications for the Bank under the OCC’s prompt corrective action regulations.

(1) In order to be well capitalized or adequately capitalized, a bank must satisfy each of the required ratios in the table. In order to be undercapitalized or significantly undercapitalized, a bank would need to fall below just one of the relevant ratio thresholds in the table. In order to be well capitalized, the Bank cannot be subject to any written agreement or order requiring it to maintain a specific level of capital for any capital measure. Pursuant to regulatory capital rules, the Company has made an election not to include unrealized gains and losses in the investment securities portfolio for purposes of calculating “Tier 1” capital and “Tier 2” capital.

The Company and the Bank each were in compliance with all regulatory capital requirements at March 31, 2025 and December 31, 2024. The Bank also was considered “well-capitalized” under the OCC’s prompt corrective action regulations as of these dates.

The following table presents the actual capital amounts and regulatory capital ratios for the Company and the Bank as of the dates presented (dollars in thousands).

Off-Balance Sheet Transactions and Lease Obligations

Swap Contracts. The Bank historically has entered into interest rate swap contracts, some of which are forward starting, to manage exposure against the variability in the expected future cash flows (future interest payments) attributable to changes in the one-month SOFR associated with the forecasted issuances of one-month fixed rate debt arising from a rollover strategy. An interest rate swap is an agreement whereby one party agrees to pay a fixed rate of interest on a notional principal amount in exchange for receiving a floating rate of interest on the same notional amount for a predetermined period of time, from a second party. At March 31, 2025 and December 31, 2024, we had no current or forward starting interest rate swap agreements, other than interest rate swaps related to customer loans, described below. For additional information, see Note 6. Derivative Financial Instruments.

The Company also enters into interest rate swap contracts that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under ASC 815, and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by ASC 820. The Company did not recognize any gains or losses in other income resulting from fair value adjustments during the three months ended March 31, 2025 and 2024 . At March 31, 2025 and December 31, 2024 , we had notional amounts of $183.3 million and $186.9 million, respectively, in interest rate swap contracts with customers and $183.3 million and $186.9 million, respectively, in offsetting interest rate swap contracts with other financial institutions. At March 31, 2025 and December 31, 2024 , the fair value of the swap contracts consisted of gross assets of $15.1 million and $17.2 million, respectively, and gross liabilities of $15.1 million and $17.2 million, respectively, recorded in “Other assets” and “Accrued taxes and other liabilities”, respectively, in the accompanying consolidated balance sheets.

Unfunded Commitments. The Bank enters into loan commitments and standby letters of credit in the normal course of its business. Loan commitments are made to meet the financing needs of our customers, while standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. The credit risks associated with loan commitments and standby letters of credit are essentially the same as those involved in making loans to our customers. Accordingly, our normal credit policies apply to these arrangements. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the customer. Loan commitments are also evaluated in a manner similar to the ACL on loans. The reserve for unfunded loan commitments is included in “Accrued taxes and other liabilities” in the accompanying consolidated balance sheets and was $0.1 million and $42,000 at March 31, 2025 and December 31, 2024, respectively.

Loan commitments and standby letters of credit do not necessarily represent future cash requirements, in that while the customer typically has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon in full or at all. Substantially all of our standby letters of credit expire within one year. Our unfunded loan commitments and standby letters of credit outstanding are summarized below as of the dates indicated (dollars in thousands):

The Company closely monitors the amount of remaining future commitments to borrowers in light of prevailing economic conditions and adjusts these commitments as necessary. The Company intends to continue this process as new commitments are entered into or existing commitments are renewed.

Additionally, at March 31, 2025, the Company had unfunded commitments of $0.9 million for its investment in SBIC qualified funds and other investment funds.

For the three months ended March 31, 2025 and for the year ended December 31, 2024, except as disclosed herein and in the Company’s Annual Report, we engaged in no off-balance sheet transactions that we believe are reasonably likely to have a material effect on our financial condition, results of operations, or cash flows.

Lease Obligations. The Company’s primary leasing activities relate to certain real estate leases entered into in support of the Company’s branch operations. The Company’s branch locations operated under lease agreements have all been designated as operating leases. The Company does not lease equipment under operating leases, nor does it have leases designated as finance leases.

The following table presents, as of March 31, 2025, contractually obligated lease payments due under non-cancelable operating leases by payment date (dollars in thousands).

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Quantitative and qualitative disclosures about market risk as of December 31, 2024 are set forth in the Company’s Annual Report in the section captioned “MD&A – Risk Management.” Please refer to the information in Item 2. “MD&A,” under the heading “Risk Management” in this report for additional information about the Company’s market risk for the three months ended March 31, 2025; except as discussed therein, there have been no material changes in the Company’s market risk since December 31, 2024.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Principal Executive Officer and Principal Financial Officer have concluded that 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) are effective for ensuring that information the Company is required to disclose in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

For information regarding material risk factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors disclosed in Part I. Item 1A. “Risk Factors” in the Annual Report. There have been no material changes in our risk factors as described in such Annual Report, except for certain heightened risks relating to changing U.S. trade and tariff policies particularly since the end of first quarter 2025, as discussed in “MD&A – Risk Management – Credit Risk and the Allowance for Credit Losses,” which discussion is incorporated by reference herein.