Investar Holding Corporation

ISTR

US46134L1052

Banks

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Apr. 22	Earnings Flash (ISTR) INVESTAR HOLDING CORPORATION Posts Q1 EPS $0.43	MT
Apr. 22	Tranche Update on Investar Holding Corporation's Equity Buyback Plan announced on February 19, 2015.	CI

INVESTAR HOLDING CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

March 08, 2023 at 05:11 pm EST

This section presents management's perspective on the financial condition and
results of operations of Investar Holding Corporation (the "Company," "we,"
"our," or "us") and its wholly-owned subsidiary, Investar Bank, National
Association (the "Bank"). The following discussion and analysis should be read
in conjunction with the Company's consolidated financial statements and related
notes and other supplemental information included herein. Certain risks,
uncertainties and other factors, including those set forth under Item 1A. Risk
Factors in Part I, and elsewhere in this Annual Report on Form 10-K, may cause
actual results to differ materially from those projected results discussed in
the forward-looking statement appearing in this discussion and analysis.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS





This annual report on Form 10-K, both in Management's Discussion and Analysis of
Financial Condition and Results of Operations, and elsewhere, contains
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements include statements relating to
our projected growth, anticipated future financial performance, changes in our
allowance for loan or credit losses including due to the adoption of ASU
2016-13, anticipated future credit quality and our potential ability to achieve
performance and strategic goals, as well as statements relating to the
anticipated effects of these factors on our business, financial condition and
results of operations. These statements can typically be identified through the
use of words or phrases such as "may," "should," "could," "predict,"
"potential," "believe," "think," "will likely result," "expect," "continue,"
"will," "anticipate," "seek," "estimate," "intend," "plan," "projection,"
"would" and "outlook," or the negative version of those words or other
comparable words or phrases of a future or forward-looking nature.



Our forward-looking statements contained herein are based on assumptions and
estimates that management believes to be reasonable in light of the information
available at this time. However, many of these statements are inherently
uncertain and beyond our control and could be affected by many factors. Factors
that could have a material effect on our business, financial condition, results
of operations, cash flows and future growth prospects can be found in Item 1A.
Risk Factors. 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 risks

and uncertainties caused by the ongoing COVID-19 pandemic, potential continued

higher inflation and interest rates, supply and labor constraints, the war in

Ukraine and uncertainty regarding whether the United States Congress will raise

the statutory debt limit;

• our ability to achieve organic loan and deposit growth, and the composition of

that growth;

• changes (or the lack of changes) in interest rates, yield curves and interest

rate spread relationships that affect our loan and deposit pricing, including

potential continued increases in interest rates in 2023;

our ability to identify and enter into agreements to combine with attractive • acquisition partners, finance acquisitions, complete acquisitions after

definitive agreements are entered into, and successfully integrate and grow

acquired operations;

the estimated 20% to 30% increase in our allowance for loan losses in the first

quarter of 2023 and corresponding decrease in retained earnings of the • after-tax amount, resulting from our adoption on January 1, 2023 of ASU

2016-13, and 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;

cessation of the one-week and two-month U.S. dollar settings of LIBOR as of

December 31, 2021 and announced cessation of the remaining U.S. dollar LIBOR • settings after June 30, 2023, and the related effect on our LIBOR-based

financial products and contracts, including, but not limited to, hedging

products, debt obligations, investments and loans;

• the concentration of our business within our geographic areas of operation in

Louisiana, Texas and Alabama;




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• concentration of credit exposure;

• any deterioration in asset quality and higher loan charge-offs, and the time

and effort necessary to resolve problem assets;

• a reduction in liquidity, including as a result of a reduction in the amount of


  deposits we hold or other sources of liquidity;
• ongoing disruptions in the oil and gas industry due to the significant

fluctuations in the price of oil and natural gas; • data processing system failures and errors; • cyberattacks and other security breaches;

• 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, including the potential for the

Federal Reserve Board to raise target interest rates one or more times during

2023;

• hurricanes, tropical storms, tropical depressions, floods, winter storms,

tornadoes, and other adverse weather events, all of which have affected our

market areas from time to time; other natural disasters; oil spills and other

man-made disasters; acts of terrorism, an outbreak or intensifying of

hostilities including the war in Ukraine or other international or domestic

calamities, acts of God and other matters beyond our control; and

• other circumstances, many of which are beyond our control.






The foregoing factors should not be construed as exhaustive and should be read
together with the other cautionary statements included herein. If 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 publicly update or review any
forward-looking statement, whether as a result of new information, future
developments or otherwise. 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. We qualify all of our
forward-looking statements by these cautionary statements.



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Overview



Through our wholly-owned subsidiary Investar Bank, National Association, 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 (approximately
76% of our total deposits as of December 31, 2022), 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. Our 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. Our strategy includes
organic growth through high quality loans and growth through acquisitions,
including whole-bank acquisitions and strategic branch acquisitions. We
currently operate 29 full service branches comprised of 21 full service branches
in Louisiana, two full service branches in Texas, and six full service branches
in Alabama. We have completed seven whole-bank acquisitions since 2011 and
regularly review acquisition opportunities. In addition to our branches acquired
through acquisitions, during our last three fiscal years, we opened two de novo
branch locations.



We closed five branches during our last three fiscal years as we continued to
evaluate opportunities to improve our branch network efficiency, leverage our
digital initiatives and further reduce costs. Four of the branches had been
acquired, and the closures involved anticipated synergies that resulted in
significant cost savings. In 2022, we sold these five former branch locations
and three tracts of land that were being held for future branch locations. On
January 27, 2023, we completed our previously announced sale of certain assets,
deposits and other liabilities associated with our Alice, Texas and Victoria,
Texas branch locations to First Community Bank in order to focus more on our
core markets. Of the Bank's entire branch network, these two locations were
geographically the most distant from our Louisiana headquarters.



Our principal business is lending to and accepting deposits from individuals and
small to medium-sized businesses in our areas of operation. 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.



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For certain GAAP performance measures, see "Certain Performance Indicators"
below. We also monitor changes in our tangible equity, tangible assets, tangible
book value per share, and our efficiency ratio, shown in the section "Certain
Performance Indicators: Non-GAAP Financial Measures" below.

Certain Performance Indicators





                                                  As of and for the years ended December 31,
(In thousands, except share data)         2022         2021(1)       2020(1)       2019(1)        2018
Financial Information
Total assets                          $ 2,753,807   $ 2,513,203   $ 2,321,181   $ 2,148,916   $ 1,786,469
Total stockholders' equity                215,782       242,598       243,284       241,976       182,262
Net interest income                        89,785        83,814        73,534        64,818        57,370
Net income                                 35,709         8,000        13,889        16,839        13,606
Diluted earnings per share                   3.50          0.76          1.27          1.66          1.39

Performance Ratios
Return on average assets                     1.37 %        0.31 %        0.61 %        0.85 %        0.81 %
Return on average equity                    15.63          3.22          5.77          8.21          7.68
Net interest margin                          3.67          3.53          3.49          3.51          3.61
Dividend payout ratio                       10.31         40.26         19.69         13.55         12.09

Capital Ratios
Total equity to total assets                 7.84 %        9.65 %

10.48 % 11.26 % 10.20 % Tangible equity to tangible assets(2) 6.37 8.04 9.22 9.96 9.20

(1) Certain performance indicators includes the effect of acquisitions from the

date of each acquisition. On March 1, 2019, the Company acquired Mainland

Bank, by merger with and into the Bank. On November 1, 2019, the Company

acquired Bank of York, by merger with and into the Bank. On February 21,

2020, the Bank acquired two branches from PlainsCapital Bank. On April 1,

2021, the Company acquired Cheaha Financial Group, Inc. and its wholly-owned


      subsidiary Cheaha Bank, by merger with and into the Company and Bank,
      respectively.


  (2) Non-GAAP financial measure. See reconciliation below.

Certain Performance Indicators: Non-GAAP Financial Measures





Our accounting and reporting policies conform to accounting principles generally
accepted in the United States, or GAAP, and the prevailing practices in the
banking industry. However, we also evaluate our performance based on certain
additional metrics. The efficiency ratio, tangible book value per share, and the
ratio of tangible equity to tangible assets are not financial measures
recognized under GAAP and, therefore, are considered non-GAAP financial
measures.



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Our management, banking regulators, financial analysts and investors use these
non-GAAP financial measures to compare the capital adequacy of banking
organizations with significant amounts of preferred equity and/or goodwill or
other intangible assets, which typically stem from the use of the purchase
accounting method of accounting for mergers and acquisitions. Tangible equity,
tangible assets, tangible book value per share or related measures should not be
considered in isolation or as a substitute for total stockholders' equity, total
assets, book value per share or any other measure calculated in accordance with
GAAP. Moreover, the manner in which we calculate tangible equity, tangible
assets, tangible book value per share and any other related measures may differ
from that of other companies reporting measures with similar names. The
following table reconciles, as of the dates set forth below, stockholders'
equity (on a GAAP basis) to tangible equity and total assets (on a GAAP basis)
to tangible assets and calculates both our tangible book value per share and
efficiency ratio (dollars in thousands).



                                                       As of and for the years ended December 31,
                                        2022             2021             2020             2019            2018
Total stockholders' equity - GAAP    $   215,782     $    242,598     $    243,284     $    241,976     $   182,262
Adjustments:
Goodwill                                  40,088           40,088           28,144           26,132          17,424
Core deposit intangible                    2,959            3,848            3,988            4,803           2,263
Trademark intangible                         100              100              100              100             100
Tangible equity                      $   172,635     $    198,562     $    211,052     $    210,941     $   162,475

Total assets - GAAP                  $ 2,753,807     $  2,513,203     $  2,321,181     $  2,148,916     $ 1,786,469
Adjustments:
Goodwill                                  40,088           40,088           28,144           26,132          17,424
Core deposit intangible                    2,959            3,848            3,988            4,803           2,263
Trademark intangible                         100              100              100              100             100
Tangible assets                      $ 2,710,660     $  2,469,167     $

2,288,949 $ 2,117,881 $ 1,766,682



Total shares outstanding               9,901,847       10,343,494       10,608,869       11,228,775       9,484,219
Book value per share                 $     21.79     $      23.45     $      22.93     $      21.55     $     19.22
Effect of adjustments                      (4.36 )          (4.25 )          (3.04 )          (2.76 )         (2.09 )
Tangible book value per share        $     17.43     $      19.20     $      19.89     $      18.79     $     17.13
Total equity to total assets                7.84 %           9.65 %          10.48 %          11.26 %         10.20 %
Effect of adjustments                      (1.47 )          (1.61 )          (1.26 )          (1.30 )         (1.00 )
Tangible equity to tangible assets          6.37 %           8.04 %           9.22 %           9.96 %          9.20 %

Efficiency ratio(1)
Noninterest expense                  $    60,865     $     63,062     $     57,131     $     48,168     $    41,882
Net interest income                       89,785           83,814           73,534           64,818          57,370
Noninterest income                        18,350           12,042           12,096            6,216           4,318
Efficiency ratio                           56.29 %          65.79 %          66.72 %          67.81 %         67.89 %

(1) Calculated as noninterest expense divided by the sum of net interest income


      (before provision for loan losses) and noninterest income.




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.



For more detailed information about our accounting policies, please refer to
Note 1. Summary of Significant Accounting Policies, in the Notes to Consolidated
Financial Statements contained in Item 8. Financial Statements and Supplementary
Data. The following discussion presents our 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.



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Allowance for Loan Losses. One of the accounting policies most important to the
presentation of our financial statements relates to the allowance for loan
losses and the related provision for loan losses. The allowance for loan losses
is established as losses are estimated through a provision for loan losses
charged to earnings. Through December 31, 2022, the allowance for loan losses is
based on the amount that management believes will be adequate to absorb probable
losses inherent in the loan portfolio based on, among other things, evaluations
of the collectability of loans and prior loan loss experience. The evaluations
take into consideration such factors as changes in the nature and volume of the
loan portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect borrowers' ability to pay. Another
component of the allowance is losses on loans assessed as impaired under
Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") Topic 310, Receivables ("ASC 310"). The balance of the loans determined
to be impaired under ASC 310 and the related allowance is included in
management's estimation and analysis of the allowance for loan losses.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows.



The determination of the appropriate level of the allowance is inherently
subjective as it requires estimates that are susceptible to significant revision
as more information becomes available. We have an established methodology to
determine the adequacy of the allowance for loan losses that assesses the risks
and losses inherent in our portfolio and portfolio segments. We have an
internally developed model that requires significant judgment to determine the
estimation method that fits the credit risk characteristics of the loans in our
portfolio and portfolio segments. Qualitative and environmental factors that may
not be directly reflected in quantitative estimates include: asset quality
trends, changes in loan concentrations, new products and process changes,
changes and pressures from competition, changes in lending policies and
underwriting practices, trends in the nature and volume of the loan portfolio,
and national and regional economic trends. Changes in these factors are
considered in determining changes in the allowance for loan losses. The impact
of these factors on our qualitative assessment of the allowance for loan losses
can change from period to period based on management's assessment of the extent
to which these factors are already reflected in historic loss rates. The
uncertainty inherent in the estimation process is also considered in evaluating
the allowance for loan losses.


In June 2016, the Financial Accounting Standards Board ("FASB") issued a new
accounting standard (Accounting Standards Update "ASU" 2016-13), referred to as
the Current Expected Credit Loss ("CECL") standard, which became effective for
us, as a smaller reporting company, on January 1, 2023. The CECL standard
changes the manner in which we account for our allowance for loan losses. Please
refer to Note 1. Summary of Significant Accounting Policies - Recent Accounting
Pronouncements, in the Notes to Consolidated Financial Statements contained in
Item 8. Financial Statements and Supplementary Data for additional discussion.


Acquisition Accounting. We account for our acquisitions under ASC Topic
805,Business Combinations("ASC 805"), which requires the use of the purchase
method of accounting. All identifiable assets acquired, including loans, are
recorded at fair value (which is discussed below). The excess purchase price
over the fair value of net assets acquired is recorded as goodwill. If the fair
value of the net assets acquired exceeds the purchase price, a bargain purchase
gain is recognized.



Because the fair value measurements incorporate assumptions regarding credit
risk, no allowance for loan losses related to the acquired loans is recorded on
the acquisition date. The fair value measurements of acquired loans are based on
estimates related to expected prepayments and the amount and timing of
undiscounted expected principal, interest and other cash flows. The fair value
adjustment is amortized over the life of the loan using the effective interest
method.



Through December 31, 2022, the Company accounts for acquired impaired loans
under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated
Credit Quality ("ASC 310-30"). An acquired loan is considered impaired when
there is evidence of credit deterioration since origination and it is probable
at the date of acquisition that we will be unable to collect all contractually
required payments. ASC 310-30 prohibits the carryover of an allowance for loan
losses for acquired impaired loans. Over the life of the acquired loans, we
continually estimate the cash flows expected to be collected on individual loans
or on pools of loans sharing common risk characteristics. As of the end of each
fiscal quarter, we evaluate the present value of the acquired loans using the
effective interest rates. For any increases in cash flows expected to be
collected, we adjust the amount of accretable yield recognized on a prospective
basis over the loan's or pool's remaining life, while we recognize a provision
for loan loss in the consolidated statement of operations if the cash flows
expected to be collected have decreased.



In June 2016, FASB issued a new accounting standard (ASU 2016-13), referred to
as the Current Expected Credit Loss ("CECL") standard, which became effective
for us, as a smaller reporting company, on January 1, 2023. The CECL standard
changes the manner in which we account for credit losses on purchased financial
assets with credit deterioration. Please refer to Note 1. Summary of Significant
Accounting Policies - Recent Accounting Pronouncements, in the Notes to
Consolidated Financial Statements contained in Item 8. Financial Statements and
Supplementary Data for additional discussion.

Overview of Financial Condition and Results of Operations





We recognized record annual net income in 2022. Net income for the year ended
December 31, 2022 totaled $35.7 million, or $3.50 per diluted share, compared to
$8.0 million, or $0.76 per diluted share, for the year ended December 31, 2021.
This represents a $27.7 million, or a 346.4%, increase in net income. Net
income increased primarily due to the decrease in provision for loan losses as a
result of the $21.6 million impairment charge recorded on one of the Company's
loan relationships connected with Hurricane Ida in the third quarter of 2021.
Noninterest income increased $6.3 million, which was driven by a $6.2 million
increase in swap termination fee income and $1.4 million in income from
insurance proceeds, partially offset by a $2.3 million decrease in gain on call
or sale of investment securities. There was a $6.0 million increase in net
interest income driven by a $5.8 million increase in interest on investment
securities and a $3.1 million increase in interest and fees on loans partially
offset by a $3.0 million increase in interest expense driven by a 17 basis point
increase in our cost of funds. At December 31, 2022, the Company and the Bank
each were in compliance with all regulatory capital requirements, and the Bank
was considered "well-capitalized" under prompt corrective action regulations.

Additional key components of the Company's performance during the year ended December 31, 2022 are summarized below.

• Total assets grew to $2.8 billion at December 31, 2022, an increase of


    9.6% from $2.5 billion at December 31, 2021.

• Total loans, net of allowance for loan losses at December 31, 2022 were

$2.1 billion, an increase of $229.3 million, or 12.4% compared to $1.9 billion


    at December 31, 2021.




  • Total deposits were $2.1 billion at December 31, 2022, a decrease of

$37.9 million, or 1.8%, compared to deposits of $2.1 billion at December 31,


    2021. Noninterest-bearing deposits decreased $4.7 million, or 0.8%, to
    $580.7 million compared to $585.5 million at December 31, 2021.

• Net interest income for the year ended December 31, 2022 was $89.8 million, an

increase of $6.0 million, or 7.1%, compared to $83.8 million for the year

ended December 31, 2021, driven primarily by increases in the volume and yield

earned on interest-earning assets partially offset by an increase in the rates

paid on interest-bearing liabilities. We experienced pressure on our net

interest margin later in 2022 as interest rates rose during the year and we

raised rates offered on deposits and incurred higher costs on our borrowings.

• Our total stockholders' equity decreased to $215.8 million at December 31,

2022 compared to $242.6 million at December 31, 2021 primarily due to an

increase in accumulated other comprehensive loss due to a decrease in the fair

value of the Bank's available for sale securities portfolio, partially offset


    by net income for fiscal year 2022.

• Credit quality metrics improved as nonperforming loans were 0.54% of total


    loans at December 31, 2022 compared to 1.58% at December 31, 2021.




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Certain Events That Affect Year-over-Year Comparability





Rising Inflation and Interest Rates. Inflation reached a near 40-year high in
late 2021, driven in large part by economic recovery from the ongoing COVID-19
pandemic, and continued to be high during 2022 and into 2023. In response, the
Federal Reserve raised interest rates seven times during 2022. During the
entirety of 2021, the federal funds target rate was 0% to 0.25%, and it remained
at that rate until March 2022. The Federal Reserve made the following changes to
the federal funds target rate in 2022:

- On March 16, 2022, the federal funds target rate increased by 25 basis points to 0.25% to 0.50%

- On May 4, 2022, the federal funds target rate increased 50 basis points to 0.75% to 1.00%

- On June 15, 2022, the federal funds target rate increased by 75 basis points to 1.50% to 1.75%

- On July 27, 2022, the federal funds target rate increased by 75 basis points to 2.25% to 2.50%

- On September 21, 2022, the federal funds target rate increased by 75 basis points to 3.00% to 3.25%

- On November 2, 2022, the federal funds target rate increased by 75 basis points to 3.75% to 4.00%

- On December 14, 2022, the federal funds target rate increased by 50 basis points to 4.25% to 4.50%





The Federal Reserve increased the target rate again on February 1, 2023 to 4.50%
to 4.75% and one or more further increases are expected during the remainder of
2023.



Hurricane Ida. On August 29, 2021, Hurricane Ida hit the Louisiana coast as a
category 4 hurricane. Though Hurricane Ida did not cause significant physical
damage to our branch locations, the storm devastated some of our market areas.
The Company set up programs to help employees and customers experiencing
financial difficulty as a result of the hurricane, including a deferral program
discussed further in Discussion and Analysis of Financial Condition - Loans -
Loan Deferral Program below. Additionally, the Company recorded an impairment
charge of $21.6 million in the third quarter of 2021 related to a lending
relationship with related borrowers (collectively, the "Borrower") consisting of
multiple loans that are secured by various types of collateral, including real
estate, inventory, and equipment. As a result of Hurricane Ida's impact on the
Borrower's business operations, some of the collateral securing the loan
relationship, including real estate, inventory, and equipment, experienced a
significant reduction in value.



COVID-19 Pandemic. In March 2020, COVID-19 was declared a pandemic by the World
Health Organization. Our business has remained open through the pandemic,
although it was significantly disrupted in the early stages of the pandemic as
we adjusted to various and changing government and voluntary restrictions on
activities. The pandemic generally slowed business lending activity from the
level we would otherwise have expected, particularly in 2020, except for our
participation in the PPP, and created excess liquidity in the market,
contributing to increases in our noninterest and interest-bearing demand
deposits, and in money market deposit accounts and savings accounts in 2021. We
took actions to protect our customers and employees throughout the pandemic,
including increasing our remote banking and working options. We recorded an
increased provision for loan losses during 2020 as a result of the impact of the
pandemic. Market conditions generally improved during 2021 and 2022 compared to
2020, as vaccines became available and government restrictions lessened. For
additional information, see Item 1A. Risk Factors, Risks Related to our
Business, "The ongoing COVID-19 pandemic, or a similar health crisis, may
adversely affect our business, employees, borrowers, depositors, counterparties
and third-party service providers."



Acquisitions. On February 21, 2020, the Bank completed the acquisition and
assumption of certain assets, deposits and other liabilities associated with the
Alice and Victoria, Texas branch locations of PlainsCapital Bank, a wholly-owned
subsidiary of Hilltop Holdings Inc., for an aggregate cash consideration of
approximately $11.2 million. The Bank acquired approximately $45.3 million in
loans and $37.0 million in deposits. In addition, the Bank acquired
substantially all the fixed assets at the branch locations and assumed the
leases for the branch facilities. The Company recorded a core deposit intangible
and goodwill of $0.2 million and $0.5 million, respectively, related to the
acquisition. On January 27, 2023, we completed our previously announced sale of
certain assets, deposits and other liabilities associated with these branch
locations in order to focus more on our core markets.



On April 1, 2021, the Company completed its acquisition of Cheaha Financial
Group, Inc. ("Cheaha") and its wholly-owned subsidiary, Cheaha Bank, an Alabama
state bank headquartered in Oxford, Alabama. All of the issued and outstanding
shares of Cheaha were converted into aggregate cash merger consideration of
$41.1 million. On the date of the acquisition, Cheaha had total assets with a
fair value of $240.8 million, including $120.4 million in loans,
assumed $207.0 million in deposits, and served the residents of Calhoun County,
Alabama through four branch locations. The Company recorded a core deposit
intangible and goodwill of $0.8 million and $11.9 million, respectively, related
to the acquisition of Cheaha.



Branches. We closed one branch location in Zachary, Louisiana in 2020. We closed
one branch location in Prairieville, Louisiana in April 2021 and one branch
location in Dickinson, Texas in October 2021. We closed one branch location in
Baton Rouge, Louisiana and one branch location in Westlake, Louisiana in May
2022. We do not expect to open de novo branches during the remainder of 2023. We
sold the land and buildings relating to these five locations during 2022. During
2022, we also sold three tracts of land that were held for future branch
locations. We plan to consolidate an additional branch located in our Louisiana
market in 2023. We continue to evaluate opportunities to reduce our physical
branch footprint and further improve efficiency through digital initiatives.
During the last three fiscal years, we have opened two de novo branch locations,
both in Louisiana, in addition to the branches we acquired through our
acquisition activity.



Subordinated Debt Issuance and Redemption. In April 2022, we completed a private
placement of $20.0 million in aggregate principal amount of our 5.125%
Fixed-to-Floating Subordinated Notes due 2032 (the "2032 Notes"). In June 2022,
we used the majority of the proceeds to redeem $18.6 million of our 2017
issuance of 6.00% Fixed-to-Floating Rate Subordinated Notes due 2027 (the "2027
Notes"). We utilized the remaining proceeds for share repurchases and for
general corporate purposes.

Discussion and Analysis of Financial Condition

Total assets were $2.8 billion at December 31, 2022, an increase of 9.6% compared to total assets of $2.5 billion at December 31, 2021. The growth experienced since December 31, 2021 can mainly be attributed to organic growth in loans of $232.8 million.

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Loans



General. Loans, excluding loans held for sale, constitute our most significant
asset, comprising 76% and 74%, of our total assets at December 31, 2022 and
2021, respectively. Loans increased $232.8 million, or 12.4%, to $2.1 billion at
December 31, 2022 from $1.9 billion at December 31, 2021.



Beginning in the second quarter of 2020, the Bank has participated as a lender
in the PPP as established by the CARES Act. At December 31, 2022, the balance,
net of repayments, of the Bank's PPP loans originated was $1.7 million, compared
to $23.3 million at December 31, 2021, and is included in the commercial and
industrial loan portfolio. Eighty-seven percent of the total number of PPP loans
we have originated have principal balances of $150,000 or less. At December 31,
2022, approximately99% of the total balance of PPP loans originated have been
forgiven by the SBA or paid off by the customer.



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).



                                                           December 31,
                                             2022                                2021
                                                 Percentage of                       Percentage of
                                  Amount          Total Loans         Amount          Total Loans
Mortgage loans on real estate
Construction and development    $   201,633                 9.6 %   $   203,204                10.9 %
1-4 Family                          401,377                19.1         364,307                19.4
Multifamily                          81,812                 3.9          59,570                 3.2
Farmland                             12,877                 0.6          20,128                 1.1
Commercial real estate
Owner-occupied                      445,148                21.1         460,205                24.6
Nonowner-occupied                   513,095                24.4         436,172                23.3
Commercial and industrial           435,093                20.7         310,831                16.6
Consumer                             13,732                 0.6          17,595                 0.9
Total loans                       2,104,767                 100 %     1,872,012                 100 %
Loans held for sale                       -                                 620
Total gross loans               $ 2,104,767                         $ 1,872,632




At December 31, 2022, the Company's total business lending portfolio, which
consists of loans secured by owner-occupied commercial real estate properties
and commercial and industrial loans, was $880.2 million, an
increase of $109.2 million, or 14.2%, compared to the business lending portfolio
of $771.0 million at December 31, 2021. The increase in the business lending
portfolio as of December 31, 2022 is primarily driven by increased loan
production, particularly in public finance loans, by our Commercial and
Industrial Division, partially offset by the forgiveness of PPP loans and a
decrease in owner-occupied commercial real estate loans.

Nonowner-occupied loans totaled $513.1 million at December 31, 2022, an increase of $76.9 million, or 17.6% compared to $436.2 million at December 31, 2021, primarily due to organic growth.





Our focus on a relationship-driven banking strategy and hiring of experienced
commercial lenders are the primary reasons we experienced our largest organic
loan growth in the commercial and industrial loan portfolio. We have increased
our emphasis on originating commercial and industrial and commercial real estate
loans.



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 December
31, 2022 and December 31, 2021, we had no concentrations of loans exceeding 10%
of total loans other than loans in the categories listed in the table above.



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The following table sets forth loans outstanding at December 31, 2022, excluding
loans held for sale, which, based on remaining scheduled repayments of
principal, are due in the periods indicated, as well as the amount of loans with
fixed and variable rates in each maturity range. 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.



                                            After One          After Five           After Ten
                         One Year or       Year Through       Years Through       Years Through       After Fifteen
(dollars in
thousands)                  Less            Five Years          Ten Years         Fifteen Years           Years             Total
Mortgage loans on
real estate:
Construction and
development             $      97,765     $       50,271     $        29,689     $        10,229     $        13,679     $   201,633
1-4 Family                     50,523             73,898              58,875              26,143             191,938         401,377
Multifamily                     6,603             61,411              12,237                 443               1,118          81,812
Farmland                        5,826              4,839               2,212                   -                   -          12,877
Commercial real
estate
Owner-occupied                 27,834             90,097             204,710             113,557               8,950         445,148
Nonowner-occupied              31,938            269,193             174,003              37,743                 218         513,095
Commercial and
industrial                    169,481             91,399             103,855              62,287               8,071         435,093
Consumer                        3,058              8,864               1,294                 348                 168          13,732
Total loans             $     393,028     $      649,972     $       586,875     $       250,750     $       224,142     $ 2,104,767

Loans with fixed
rates:
Mortgage loans on
real estate:
Construction and
development             $      12,195     $       49,723     $        29,689     $        10,229     $        13,679     $   115,515
1-4 Family                     14,451             66,799              58,875              26,143             191,938         358,206
Multifamily                     6,303             58,263               5,552                 443               1,118          71,679
Farmland                        2,860              3,638               2,212                   -                   -           8,710
Commercial real
estate
Owner-occupied                 19,772             75,244             162,832              92,636               2,237         352,721
Nonowner-occupied              24,373            249,642             141,039              18,813                 218         434,085
Commercial and
industrial                     40,315             62,914             103,855              62,287               8,071         277,442
Consumer                        2,323              8,864               1,294                 348                 168          12,997
Total loans with
fixed rates             $     122,592     $      575,087     $       505,348     $       210,899     $       217,429     $ 1,631,355

Loans with variable
rates:
Mortgage loans on
real estate:
Construction and
development             $      85,570     $          548     $             -     $             -     $             -     $    86,118
1-4 Family                     36,072              7,099                   -                   -                   -          43,171
Multifamily                       300              3,148               6,685                   -                   -          10,133
Farmland                        2,966              1,201                   -                   -                   -           4,167
Commercial real
estate
Owner-occupied                  8,062             14,853              41,878              20,921               6,713          92,427
Nonowner-occupied               7,565             19,551              32,964              18,930                   -          79,010
Commercial and
industrial                    129,166             28,485                   -                   -                   -         157,651
Consumer                          735                  -                   -                   -                   -             735
Total loans with
variable rates          $     270,436     $       74,885     $        81,527     $        39,851     $         6,713     $   473,412




Loan Deferral Program. In response to the COVID-19 pandemic, beginning in the
first quarter of 2020, the Bank offered short-term modifications to borrowers
impacted by the pandemic who were current and otherwise not past due. These
included short-term modifications of 90 days or less, in the form of deferrals
of payment of principal and interest, principal only, or interest only, and fee
waivers. As 90-day loan deferrals have expired, most affected customers have
returned to their regular payment schedules. In accordance with applicable law
and regulatory guidance adopted in response to the pandemic, we have not
accounted for such loans as troubled debt restructurings ("TDRs"), nor have we
designated them as past due or nonaccrual. The Bank ceased offering loan
deferrals related to COVID-19 during the fourth quarter of 2021. At December 31,
2022, no loans remained on deferral, compared to less than $0.2 million
at December 31, 2021.



The Bank also instituted a 90-day deferral program for eligible customers who
were impacted by Hurricane Ida beginning in the third quarter of 2021. The Bank
has provided payment deferrals on approximately $50.0 million of loans.
At December 31, 2022, no loans remained on deferral, compared to approximately
$2.4 million, or 0.1% of the total loan portfolio, remaining on a 90-day
deferral plan related to Hurricane Ida at December 31, 2021.



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Investment Securities

We purchase investment securities primarily to provide a source for meeting
liquidity needs, with return on investment as a secondary consideration. We also
use investment securities as collateral for certain deposits and other types of
borrowings. Investment securities represented 15% of our total assets and
totaled $413.5 million at December 31, 2022, an increase of $47.7 million,
or 13.0%, from $365.8 million at December 31, 2021. The increase in investment
securities at December 31, 2022 compared to December 31, 2021 resulted from
purchases of multiple investment types in our current portfolio, primarily
mortgage-backed 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).

December 31,
2022 2021
Percentage of Percentage of
Balance Portfolio Balance Portfolio
Obligations of the U.S Treasury and U.S.
government agencies and corporations $ 29,805 7.2 % $ 21,268 5.8 %
Obligations of state and political
subdivisions 23,916 5.8 39,495 10.8
Corporate bonds 29,942 7.2 27,667 7.6
Residential mortgage-backed securities 254,618 61.6 203,249 55.6
Commercial mortgage-backed securities 75,191 18.2 74,085 20.2
Total investment securities $ 413,472 100 % $ 365,764 100 %

The investment portfolio consists of available for sale and held to maturity
securities. We do not hold any investments classified as trading. We classify
debt securities as held to maturity if management has the positive intent and
ability to hold the securities to maturity. Held to maturity securities are
stated at amortized cost. Securities not classified as held to maturity are
classified as available for sale and are stated at fair value. The carrying
values of the Company's available for sale securities are adjusted for
unrealized gains or losses as valuation allowances, and any gains or losses are
reported on an after-tax basis as a component of other comprehensive loss. Any
expected credit loss due to the inability to collect all amounts due according
to the security's contractual terms is recognized as a charge against earnings.
Any remaining unrealized loss related to other factors would be recognized in
other comprehensive loss, net of taxes. Please refer to Note 1. Summary of
Significant Accounting Policies - Recent Accounting Pronouncements, in the Notes
to Consolidated Financial Statements contained in Item 8. Financial Statements
and Supplementary Data for information regarding our adoption, effective January
1, 2023, of ASU 2016-13, which will impact how we account for our securities
portfolio.

Typically, our investment securities are available for sale. There were no
purchases of held to maturity securities during the years ended December 31,
2022 and 2021. In the year ended December 31, 2022, we purchased $181.6 million
of investment securities, compared to purchases of $255.5 million during the
year ended December 31, 2021. Mortgage-backed securities represented 84% and 73%
of the available for sale securities we purchased in 2022 and 2021,
respectively. Of the remaining securities purchased in 2022 and 2021, 9%, and
18%, respectively, were U.S. Treasury and U.S. government agencies and
corporations securities, 5% and 4%, respectively were corporate bonds, and 2%
and 5%, respectively, were municipal securities. We only purchase corporate
bonds that are investment grade securities issued by seasoned corporations. Due
in large part to higher interest rates and market volatility during 2022, at
December 31, 2022, unrealized losses in our investment portfolio totaled $62.5
million.

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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 as of December 31, 2022 (dollars in thousands).



                                                            After One Year             After Five Years
                                One Year or Less          Through Five Years          Through Ten Years          After Ten Years
                                Amount       Yield        Amount         Yield        Amount        Yield       Amount       Yield
Held to maturity:
Obligations of states and
political subdivisions        $      915       5.88 %   $       960        5.88 %   $     3,663       3.59 %   $       -          - %
Residential mortgage-backed
securities                             -          -               -           -               -          -         2,767       3.06
Available for sale:
Obligations of the U.S
Treasury and U.S.
government agencies and
corporations                         490       2.92          14,999        3.53          14,881       4.84             -          -
Obligations of states and
political subdivisions               342       3.14           1,573        2.56          10,257       2.41         8,926       2.77
Corporate bonds                      250       5.37          12,176

3.65 17,051 4.25 4,000 2.69 Residential mortgage-backed securities

                             -          -               -           -           6,349       2.78       292,518       2.26
Commercial mortgage-backed
securities                             -          -           3,704        2.72           3,555       2.82        76,245       3.07
                              $    1,997                $    33,412                 $    55,756                $ 384,456




The maturity of mortgage-backed securities reflects scheduled repayments based
upon the contractual maturities of the securities. Weighted average yields on
tax-exempt obligations have been computed on a fully tax equivalent basis
assuming a federal tax rate of 21%.



Premises and Equipment



Bank premises and equipment decreased $8.5 million, or 14.6%, to $49.6 million
at December 31, 2022 from $58.1 million at December 31, 2021. The decrease was
attributable to the closure of two branches in Louisiana and the sale of
three tracts of land that were being held as future branch locations, which
decreased bank premises and equipment by $3.2 million and $3.5 million,
respectively. Bank premises and equipment increased $1.8 million, or 3.2%, to
$58.1 million at December 31, 2021 from $56.3 million at December 31, 2020. The
increase was attributable to the acquisition of four branch locations in Calhoun
County, Alabama as a result of our acquisition of Cheaha which increased bank
premises and equipment by $5.4 million, and was partially offset by the closure
of two branches, one in Louisiana and one in Texas, which decreased bank
premises and equipment by $2.3 million.

Deferred Tax Asset/Liability





At December 31, 2022, the net deferred tax asset was $16.4 million, compared
to net deferred tax assets of $2.2 million and $1.4 million at December 31, 2021
and 2020, respectively. The increase in the deferred tax asset at December 31,
2022 compared to December 31, 2021 was primarily driven by a decrease in
the fair value of the Bank's available for sale securities portfolio. The
increase in the deferred tax asset at December 31, 2021 compared to December 31,
2020 was primarily driven by the deferred compensation agreements acquired from
Cheaha in April 2021 and a timing difference in recognizing payroll tax
expenses.



The Bank acquired net operating loss carryforwards as a result of acquisitions.
At December 31, 2022, we held approximately $0.1 million and $0.8 million in net
operating loss carryforwards that expire in 2033 and 2039, respectively. U.S.
tax law imposes annual limitations under Internal Revenue Code Section 382 on
the amount of net operating loss carryforwards that may be used to offset
federal taxable income. Under these laws, we may apply up to approximately $0.6
million to offset our taxable income each year. In addition to this limitation,
our ability to utilize net operating loss carryforwards depends upon the Company
generating taxable income. Given the substantial amount of time before our net
operating loss carryforwards begin to expire, we currently expect to utilize
these net operating loss carryforwards in full before their expiration.



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Deposits



The following table sets forth the composition of our deposits and the
percentage of each deposit type to total deposits at December 31, 2022 and
2021 (dollars in thousands).



                                                                      December 31,
                                                        2022                                2021
                                                            Percentage of                       Percentage of
                                                                Total                               Total
                                             Amount           Deposits           Amount           Deposits
Noninterest-bearing demand deposits        $   580,741                27.9 %   $   585,465                27.6 %
Interest-bearing demand deposits               565,598                27.1         650,868                30.7
Money market deposit accounts                  208,596                10.0         255,501                12.1
Savings accounts                               155,176                 7.5         180,837                 8.5
Time deposits                                  572,254                27.5         447,595                21.1
Total deposits                             $ 2,082,365                 100 %   $ 2,120,266                 100 %




Total deposits were $2.08 billion at December 31, 2022, a
decrease of $37.9 million, or 1.8%, from total deposits of $2.12 billion at
December 31, 2021. The increase in time deposits compared to December 31,
2021 is due to increased rates offered to remain competitive in our markets, as
we adjusted our strategy in response to the rising interest rate environment
after running off higher yielding time deposits through the end of the second
quarter of 2022. The decreases in the remaining categories compared to December
31, 2021 are primarily driven by customers drawing down on their existing
deposit accounts. During 2021, we experienced large increases in both
noninterest and interest-bearing demand deposits, and in money market deposit
accounts and savings accounts, primarily driven by reduced spending by consumer
and business customers related to the COVID-19 pandemic, and increases in PPP
borrowers' deposit accounts.



The Company had no brokered demand deposits at December 31, 2022 and 2021. Prior
to December 31, 2021, the Bank utilized brokered demand deposits to satisfy the
borrowings under its interest rate swap agreements due to more favorable
pricing. In the third quarter of 2021, we voluntarily terminated multiple swap
agreements, the borrowings for which matured in October 2021. During 2022, we
voluntarily terminated our remaining interest rate swap agreements.



Estimated uninsured deposits were $701.1 million and $719.8 million at December
31, 2022 and 2021, respectively. The estimates are based on the same
methodologies and assumptions used for our regulatory reporting
requirements. The insured deposit data for 2022 and 2021 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.

The following table shows scheduled maturities of time deposits in excess of the FDIC insurance limit of $250,000 at December 31, 2022 and 2021 (dollars in thousands).





                                             December 31,
Time remaining until maturity:            2022          2021
Three months or less                    $  63,006     $ 21,644
Over three months through six months       13,610       16,490
Over six months through twelve months      58,672       25,024
Over twelve months                         14,228       14,211
Total                                   $ 149,516     $ 77,369




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Borrowings



Total borrowings include securities sold under agreements to repurchase, federal
funds purchased, advances from the Federal Home Loan Bank ("FHLB"), unsecured
lines of credit with First National Bankers Bank ("FNBB") and The Independent
Bankers Bank ("TIB") totaling $60.0 million, subordinated debt issued in
2019 and 2022, and junior subordinated debentures assumed through acquisitions.



Our advances from the FHLB were $387.0 million at December 31, 2022, an increase
of $308.5 million from FHLB advances of $78.5 million at December 31, 2021. FHLB
advances are used to fund increased loan and investment activity that is not
funded by deposits or other borrowings. We had no outstanding balances drawn on
the unsecured lines of credit at December 31, 2022 or 2021. We had no securities
sold under agreements to repurchase at December 31, 2022 compared
to $5.8 million at December 31, 2021. Junior subordinated debt of $8.5 million
and $8.4 million at December 31, 2022 and 2021, respectively, represents the
junior subordinated debentures that we assumed in connection with our
acquisitions of Cheaha in 2021, BOJ Bancshares, Inc. in 2017 ("BOJ"), and First
Community Bank in 2013.

The average balances and cost of short-term borrowings for the years ended December 31, 2022, 2021 and 2020 are summarized in the table below (dollars in thousands).





                                            Average Balances                   Cost of Short-term Borrowings
                                              December 31,                             December 31,
                                     2022         2021         2020          2022             2021         2020
Federal funds purchased and
other short-term borrowings        $ 132,703     $ 3,242     $ 60,243           3.08 %           0.20 %      1.15 %
Securities sold under agreements
to repurchase                          1,489       6,081        5,080           0.15             0.21        0.30
Total short-term borrowings        $ 134,192     $ 9,323     $ 65,323           3.05 %           0.20 %      1.09 %




2032 Notes. On April 6, 2022, we entered into a Subordinated Note Purchase
Agreement with certain institutional accredited investors and qualified
institutional buyers (the "Purchasers") under which we issued $20.0 million in
aggregate principal amount of our 2032 Notes to the Purchasers at a price equal
to 100% of the aggregate principal amount of the 2032 Notes. The 2032 Notes were
issued under an indenture, dated April 6, 2022 (the "Indenture"), by and among
the Company and UMB Bank, National Association, as trustee.



The 2032 Notes have a stated maturity date of April 15, 2032 and will bear
interest at a fixed rate of 5.125% per year from and including April 6, 2022 to
but excluding April 15, 2027 or earlier redemption date. From April 15, 2027 to
but excluding the stated maturity date or earlier redemption date, the 2032
Notes will bear interest a floating rate equal to the then current three-month
term secured overnight financing rate ("SOFR"), plus 277 basis points. As
provided in the 2032 Notes, the interest rate on the 2032 Notes during the
applicable floating rate period may be determined based on a rate other
than three-month term SOFR. The 2032 Notes may be redeemed, in whole or in part,
on or after April 15, 2027 or, in whole but not in part, under certain other
limited circumstances set forth in the Indenture. Any redemption we made would
be at a redemption price equal to 100% of the principal balance being redeemed,
together with any accrued and unpaid interest to the date of redemption.



Principal and interest on the 2032 Notes are subject to acceleration only in
limited circumstances in the case of certain bankruptcy and insolvency-related
events. The 2032 Notes are the unsecured, subordinated obligations of the
Company and rank junior in right of payment to our current and future senior
indebtedness and to our obligations to our general creditors. The 2032 Notes are
intended to qualify as Tier 2 capital for regulatory purposes.

We used the majority of the net proceeds to redeem our 2027 Notes in June 2022, and utilized the remaining proceeds for share repurchases and for general corporate purposes.





2029 Notes. On November 12, 2019, the Company issued $25.0 million in aggregate
principal amount of its 5.125% Fixed-to-Floating Rate Subordinated 2029 Notes
due 2029 ("2029 Notes") at 100% of their face amount in a private placement to
certain institutional and other accredited investors. The 2029 Notes have a
maturity date of December 30, 2029. From and including the date of issuance to,
but excluding December 30, 2024, the 2029 Notes will bear interest at an initial
fixed rate of 5.125% per annum, payable semi-annually in arrears. From and
including December 30, 2024 and thereafter, the 2029 Notes will bear interest at
a floating rate equal to the then-current three-month LIBOR as calculated on
each applicable date of determination, or an alternative rate determined in
accordance with the terms of the 2029 Notes if the three-month LIBOR cannot be
determined, plus 3.490%, payable quarterly in arrears.



The Company may redeem the 2029 Notes, in whole or in part, on or after December
30, 2024 or, in whole but not in part, under certain limited circumstances set
forth in the 2029 Notes. Any redemption by the Company would be at a redemption
price equal to 100% of the principal balance being redeemed, together with any
accrued and unpaid interest to the date of redemption.



Principal and interest on the 2029 Notes are not subject to acceleration, except
upon certain bankruptcy-related events. The 2029 Notes are unsecured,
subordinated obligations of the Company and rank junior in right of payment to
the Company's current and future senior indebtedness and to the Company's
obligations to its general creditors. The 2029 Notes are obligations of the
Company only and are not obligations of, and are not guaranteed by, any of the
Company's subsidiaries. The 2029 Notes are structured to qualify as Tier 2
capital for regulatory capital purposes.



2027 Notes. On March 24, 2017, the Company issued $18.6 million in aggregate
principal amount of its 2027 Notes due March 20, 2027 at 100% of the aggregate
principal amount of the 2027 Notes.



From and including the date of issuance, but excluding March 30, 2022, the 2027
Notes bore interest at an initial fixed rate of 6.00% per annum, payable
semi-annually. From and including March 30, 2022 and thereafter, the 2027 Notes
bore interest at a floating rate equal to the then-current three-month LIBOR
(but not less than zero) as calculated on each applicable date of determination,
plus 3.945%, payable quarterly.



The Company could, beginning with the interest payment date of March 30, 2022,
and on any interest payment date thereafter, redeem the 2027 Notes, in whole or
in part, at a redemption price equal to 100% of the principal amount of the 2027
Notes to be redeemed plus accrued and unpaid interest to but excluding the date
of redemption. The 2027 Notes were structured to qualify as Tier 2 capital for
regulatory capital purposes.



In June 2022, we redeemed the 2027 Notes in full in accordance with their terms
at a redemption price equal to 100% of the outstanding principal balance plus
accrued and unpaid interest up to but excluding the June 30, 2022 redemption
date ("Redemption Date") . The aggregate redemption price, excluding accrued
interest, totaled $18.6 million. Interest on the 2027 Notes no longer accrued on
or after the Redemption Date.



Stockholders' Equity



Stockholders' equity was $215.8 million at December 31, 2022, a
decrease of $26.8 million, or 11.1%, compared to December 31, 2021. The decrease
in stockholders' equity is primarily attributable to an increase in accumulated
other comprehensive loss due to a decrease in the fair value of the Bank's AFS
securities portfolio, partially offset by net income for fiscal year 2022.



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Results of Operations



Performance Summary



2022 vs. 2021. For the year ended December 31, 2022, net income was $35.7
million, or $3.54 per basic common share and $3.50 per diluted common share,
compared to net income of $8.0 million, or $0.77 per basic common share
and $0.76 per diluted common share, for the year ended December 31, 2021. The
primary driver of the increase in net income is related to a decrease in
provision for loan losses due to the $21.6 million impairment charge recorded
during the third quarter of 2021 as a result of Hurricane Ida. As shown on the
consolidated statement of income for the year ended December 31, 2022, a
provision for loan losses of $2.9 million was recorded, compared to a provision
for loan losses of $22.9 million for the year ended December 31, 2021. We had
record annual net income in 2022 primarily as a result of increases in interest
income and noninterest income as well as a decrease in noninterest
expense compared to 2021. Return on average assets increased to 1.37% for the
year ended December 31, 2022 from 0.31% for the year ended December 31, 2021.
Return on average equity was 15.63% for the year ended December 31, 2022
compared to 3.22% for the year ended December 31, 2021. The increase in both
return on average assets and return on average equity is mainly attributable to
the $27.7 million increase in net income.



2021 vs. 2020. For the year ended December 31, 2021, net income was $8.0
million, or $0.77 per basic common share and $0.76 per diluted common share,
compared to net income of $13.9 million, or $1.27 per basic and diluted common
share, for the year ended December 31, 2020. The primary drivers of
the decrease in net income are related to an increase in provision for loan
losses due to the $21.6 million impairment charge recorded during the third
quarter of 2021 as a result of Hurricane Ida, along with increases in salaries
and benefits expense, other operating expenses, and acquisition
expenses primarily related to our organic growth and acquisition activity. As
shown on the consolidated statement of income for the year ended December 31,
2021, a provision for loan losses of $22.9 million was recorded, compared to a
provision for loan losses of $11.2 million for the year ended December 31, 2020.
We had record quarterly net income in each quarter of 2021 other than the third
quarter, as market conditions improved and our cost of funds decreased compared
to 2020. Return on average assets decreased to 0.31% for the year ended December
31, 2021 from 0.61% for the year ended December 31, 2020. Return on average
equity was 3.22% for the year ended December 31, 2021 compared to 5.77% for the
year ended December 31, 2020. The decrease in both return on average assets and
return on average equity is mainly attributable to the $5.9 million decrease in
net income.

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.



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. On March 3, 2020, the Federal
Reserve lowered the federal funds target rate to 1.00% to 1.25%, which the
Federal Reserve stated was in response to the evolving risks to economic
activity posed by the coronavirus. In a measure aimed at lessening the economic
impact of COVID-19, the Federal Reserve reduced the federal funds target rate to
0% to 0.25% on March 16, 2020, where it remained until March 2022 when the
Federal Reserve began increasing the federal funds target rate a total of seven
times during 2022 to 4.25% to 4.50% as discussed in Certain Events That Affect
Year-over-Year Comparability - Rising Inflation and Interest Rates.



2022 vs. 2021. Net interest income increased 7.1% to $89.8 million for the year
ended December 31, 2022 from $83.8 million for the same period in 2021. Net
interest margin was 3.67% for the year ended December 31, 2022, an
increase of 14 basis points from 3.53% for the year ended December 31, 2021.
The increase in net interest income resulted primarily from increases in both
the volume of interest-earning assets and the yield earned on those assets,
primarily in our investment securities portfolio and to a lesser extent our loan
portfolio, and a decrease in the volume of interest-bearing liabilities,
partially offset by an increase in the rates paid on interest-bearing
liabilities. For the year ended December 31, 2022, average loans and average
investment securities increased approximately $35.2 million and $165.3 million,
respectively, while average interest-bearing
deposits decreased approximately $110.1 million. The increase in average loans
is primarily driven by organic growth, and the increase in average investment
securities is driven by purchases of investment securities. The decrease in the
average balance of interest-bearing deposits was driven by a decrease in the
average balance of brokered demand deposits due to the timing of terminations of
our interest rate swap agreements and a decrease in the average balance of time
deposits due to management's strategy to run off higher yielding time deposits
through the end of the second quarter of 2022. Average short-term
borrowings increased approximately $124.9 million compared to the same period in
2021 as we utilized advances from the FHLB to fund loan growth and investment
activity. Our yield on interest-earning assets increased as did our rate paid on
interest-bearing liabilities primarily as a result of the overall increase in
prevailing interest rates.



Although our net interest margin increased from 2021 to 2022, we experienced
margin pressure later in 2022. During 2022, as we raised rates offered on
deposits and incurred higher costs on our borrowings, comparing the three months
ended December 30, 2021 and the three months ended December 31, 2022,
respectively, our yield on interest-earning assets increased from 3.95% to 4.57%
while the cost of our total interest-bearing liabilities increased from 0.52% to
1.45%, producing a seven basis point decrease in our net interest margin from
3.57% to 3.50%. We may experience additional pressure on our net interest margin
during 2023 if our cost of funds increases faster than the yield on our
interest-earning assets.



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Interest income was $104.6 million for the year ended December 31, 2022 compared
to $95.5 million for the same period in 2021. Loan interest income made up
substantially all of our interest income for the years ended December 31, 2022
and 2021, although interest on investment securities contributed 9.8% of
interest income for the year ended December 31, 2022 compared to 4.7% for the
same period in 2021. Interest on our commercial real estate loans, commercial
and industrial loans, and 1-4 family residential real estate loans constituted
the three largest components of our loan interest income for the years ended
December 31, 2022 and 2021 at 84% and 83% of total interest income on loans,
respectively. The overall yield on interest-earning assets increased 26 basis
points to 4.28% for the year ended December 31, 2022 compared to 4.02% for the
same period in 2021. The loan portfolio yielded 4.82% for the year ended
December 31, 2022 compared to 4.74% for the year ended December 31, 2021. The
increase in yield on our loan portfolio was driven primarily by higher yields on
commercial real estate loans and 1-4 family residential real estate loans. In
addition, the yield on the investment portfolio was 2.23% for the year ended
December 31, 2022 compared to 1.52% for the year ended December 31, 2021.



Interest expense was $14.8 million for the year ended December 31, 2022, an
increase of $3.1 million compared to interest expense of $11.7 million for the
year ended December 31, 2021. The increase in interest expense is primarily
attributable to the increase in the rates paid for interest-bearing liabilities,
primarily short-term borrowings, partially offset by the decrease in the volume
of interest-bearing liabilities for the year ended December 31, 2022 compared to
December 31, 2021. For the year ended December 31, 2022, the cost of short-term
borrowings increased 285 basis points to 3.05% due to an increase in the federal
funds target rate. As previously discussed, the federal funds target rate
increased from 0% to 0.25% to 4.25% to 4.50% during 2022, which affects the rate
the Company pays for immediately available overnight funds, long-term
borrowings, and deposits. For the year ended December 31, 2022, the cost of
interest-bearing deposits decreased four basis points to 0.42% and the cost of
interest-bearing liabilities increased 17 basis points to 0.84% compared to the
same period in 2021.



2021 vs. 2020. For a detailed discussion of our net interest income and net
interest margin performance for 2021 compared to 2020, see our annual report on
Form 10-K for the year ended December 31, 2021, Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results of
Operations - Net Interest Income and Net Interest Margin -2021 vs. 2020, and -
Volume/Rate Analysis.



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 as of and for the years ended
December 31, 2022, 2021 and 2020. Averages presented below are daily averages
(dollars in thousands).

As of and for the years ended December 31,


                                                2022                                            2021                                            2020
                                               Interest                                        Interest                                        Interest
                               Average         Income/          Yield/         Average         Income/          Yield/         Average         Income/          Yield/
                               Balance        Expense(1)       Rate(1)         Balance        Expense(1)       Rate(1)         Balance        Expense(1)       Rate(1)
Assets
Interest-earning assets:
Loans                        $ 1,937,255     $     93,373           4.82 %   $ 1,902,070     $     90,230           4.74 %   $ 1,786,302     $     87,365           4.89 %
Securities:
Taxable                          442,767            9,796           2.21         275,963            3,948           1.43         255,405            4,927           1.93
Tax-exempt                        18,746              482           2.57          20,259              552           2.73          25,024              686           2.74
Interest-earning balances
with banks                        45,542              918           2.02         176,349              812           0.46          42,852              816           1.90
Total interest-earning
assets                         2,444,310          104,569           4.28       2,374,641           95,542           4.02       2,109,583           93,794           4.45
Cash and due from banks           34,327                                          39,262                                          27,768
Intangible assets                 43,588                                          41,299                                          32,190
Other assets                     103,711                                         138,096                                         119,994
Allowance for loan losses        (22,093 )                                       (20,704 )                                       (15,272 )
Total assets                 $ 2,603,843                                     $ 2,572,594                                     $ 2,274,263
Liabilities and
stockholders' equity
Interest-bearing
liabilities:
Deposits:
Interest-bearing demand
deposits                     $   900,405     $      2,411           0.27 %   $   858,660     $      2,398           0.28 %   $   612,000     $      3,535           0.58 %
Brokered demand deposits           1,773                7           0.42          77,432              715           0.92          20,308              177           0.87
Savings deposits                 173,460               79           0.05         168,194              247           0.15         129,211              401           0.31
Time deposits                    427,498            3,753           0.88         508,954            4,127           0.81         640,549           11,263           1.76
Total interest-bearing
deposits                       1,503,136            6,250           0.42       1,613,240            7,487           0.46       1,402,068           15,376           1.10
Short-term borrowings(2)         134,192            4,093           3.05           9,323               19           0.20          65,323              710           1.09
Long-term debt                   127,288            4,441           3.49         129,318            4,222           3.26         128,163            4,174           3.26
Total interest-bearing
liabilities                    1,764,616           14,784           0.84       1,751,881           11,728           0.67       1,595,554           20,260           1.27
Noninterest-bearing demand
deposits                         600,286                                         553,083                                         418,240
Other liabilities                 10,425                                          18,852                                          19,805
Stockholders' equity             228,516                                         248,778                                         240,664
Total liabilities and
stockholders' equity         $ 2,603,843                                     $ 2,572,594                                     $ 2,274,263
Net interest income/net
interest margin                              $     89,785           3.67 %

$     83,814           3.53 %                   $     73,534           3.49 %

(1) Interest income and net interest margin are expressed as a percentage of

average interest-earning assets outstanding for the indicated periods.

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.




Nonaccrual loans were included in the computation of average loan balances but
carry a zero yield. The yields include the effect of loan fees of $3.6 million,
$3.0 million and $2.4 million for the years ended December 31, 2022, 2021 and
2020, respectively, and discounts and premiums that are amortized or accreted to
interest income or expense.



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Volume/Rate Analysis. The following tables set forth a summary of the changes in
interest earned and interest paid resulting from changes in volume and rates for
the year ended December 31, 2022 compared to the year ended December 31,
2021 and the year ended December 31, 2021 compared to the year ended December
31, 2020 (dollars in thousands).



                                           Year ended December 31, 2022 vs.
                                             Year ended December 31, 2021
                                          Volume             Rate        Net(1)
Interest income:
Loans                                  $      1,669       $    1,474     $ 3,143
Securities:
Taxable                                       2,386            3,462       5,848
Tax-exempt                                      (41 )            (29 )       (70 )
Interest-earning balances with banks           (602 )            708

106


Total interest-earning assets                 3,412            5,615

9,027


Interest expense:
Interest-bearing demand deposits                117             (104 )        13
Brokered demand deposits                       (699 )             (9 )      (708 )
Savings deposits                                  8             (176 )      (168 )
Time deposits                                  (661 )            287        (374 )
Short-term borrowings                           255            3,819       4,074
Long-term debt                                  (66 )            285         219
Total interest-bearing liabilities           (1,046 )          4,102

3,056


Change in net interest income          $      4,458       $    1,513     $ 5,971




                                            Year ended December 31, 2021 vs.
                                              Year ended December 31, 2020
                                         Volume             Rate          Net(1)
Interest income:
Loans                                  $     5,662       $    (2,797 )   $  2,865
Securities:
Taxable                                        397            (1,376 )       (979 )
Tax-exempt                                    (131 )              (3 )       (134 )
Interest-earning balances with banks         2,540            (2,544 )         (4 )
Total interest-earning assets                8,468            (6,720 )

1,748


Interest expense:
Interest-bearing demand deposits             1,425            (2,562 )     (1,137 )
Brokered demand deposits                       496                42          538
Savings deposits                               121              (275 )       (154 )
Time deposits                               (2,314 )          (4,822 )     (7,136 )
Short-term borrowings                         (609 )             (82 )       (691 )
Long-term debt                                  38                10           48
Total interest-bearing liabilities            (843 )          (7,689 )

(8,532 ) Change in net interest income $ 9,311 $ 969 $ 10,280

(1) Changes in interest due to both volume and rate have been allocated on a


      pro-rata basis using the absolute ratio value of amounts calculated.




Noninterest Income



Noninterest income includes, among other things, service charges on deposit
accounts, gain on call or sale of investment securities, gains and losses on
sales or dispositions of fixed assets and other real estate owned, swap
termination fee income, servicing fees and fee income on serviced loans,
interchange fees, income from bank owned life insurance, changes in the fair
value of equity securities, and income from insurance proceeds. We expect to
continue to develop new products that generate noninterest income, and enhance
our existing products, in order to diversify our revenue sources.



2022 vs. 2021. Total noninterest income increased $6.3 million, or 52.4%,
to $18.4 million for the year ended December 31, 2022 compared to $12.0 million
for the year ended December 31, 2021. The increase is primarily due to a $6.2
million increase in swap termination fee income, a $1.4 million increase in
income from insurance proceeds, and a $0.7 million increase in service charges
on deposit accounts, which were partially offset by $2.3 million decrease in
gain on call or sale of investment securities.



Service charges on deposit accounts include maintenance fees on accounts,
account enhancement charges for additional deposit account features, per item
charges, overdraft fees, and treasury management charges. Service charges on
deposit accounts increased 27.6% to $3.1 million for the year ended December 31,
2022 compared to $2.4 million for the same period in 2021.



There was de minimis gain on call or sale of investment securities for the year
ended December 31, 2022 compared to $2.3 million for the same period in 2021. We
did not sell securities during the year ended December 31, 2022 compared to
sales of $137.8 million during the year ended December 31, 2021.



Loss on sale or disposition of fixed assets for the year ended December 31,
2022 decreased to $0.3 million from $0.4 million for the year ended December 31,
2021. During 2022, a loss on sale or disposition of fixed assets of
$0.5 million was recorded as a result of the Bank closing two branches in
Louisiana, which was partially offset by a gain on sale or disposition of fixed
assets as a result of the sale of three tracts of land that were being held for
future branch locations. During 2021, the loss on sale or disposition of fixed
assets was recorded when the Bank reclassified two branch locations that were
closed in 2021, totaling $1.9 million, to other real estate owned.



Swap termination fee income increased to $8.1 million for the year
ended December 31, 2022, compared to $1.8 million for the year ended December
31, 2021. Swap termination fee income was recorded when we voluntarily
terminated a number of our interest rate swap agreements during the first and
second quarters of 2022 and at the end of the third quarter of 2021.



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There was de minimis gain on sale of loans for the year ended December 31, 2022,
compared to $0.2 million for the year ended December 31, 2021. When the Bank
acquired Cheaha on April 1, 2021, it acquired a secondary mortgage loan group
that originates mortgage loans for sale.



Servicing fees and fee income on serviced loans decreased $0.1 million,
or 63.7%, to $0.1 million, for the year ended December 31, 2022.
This decrease is a result of the Bank exiting the indirect auto loan origination
business at the end of 2015. Since the Bank did not originate auto loans for
sale during the years ended December 31, 2022 and 2021, the servicing portfolio,
which experienced regularly scheduled paydowns, was not replaced with new loans.
We expect servicing fees and fee income on serviced loans to decrease over time
until all serviced loans are paid off.



Interchange fees, which are fees earned on the usage of the Bank's credit and
debit cards, increased $0.1 million, or 6.0%, to $2.0 million for year ended
December 31, 2022 from $1.9 million for the year ended December 31, 2021.
The increase in interchange fees can primarily be attributed to the increase in
the volume of debit and credit card transactions.



Income from bank owned life insurance increased $0.2 million to $1.3 million for
the year ended December 31, 2022 from $1.1 million for the year ended December
31, 2021. This increase reflects increased interest earned on the Company's bank
owned life insurance policies.



Income from insurance proceeds totaled $1.4 million for the year ended December
31, 2022. Nontaxable income related to an insurance policy for the former chief
financial officer of the Company and the Bank of $1.4 million was recorded
during the fourth quarter of 2022.



Other operating income includes, among other things, credit card, ATM and wire
fees, derivative fee income, changes in the net asset value of other investments
and rental income. The $0.5 million increase in other operating income for the
year ended December 31, 2022 is primarily attributable to a $0.3 million
increase in the net asset value of other investments, which represents
unrealized net gains on investments in Small Business Investment Company
qualified funds and other investment funds, a $0.1 million increase in
derivative fee income, and a $0.1 million increase in credit card fees compared
to the year ended December 31, 2021.



2021 vs. 2020. For a detailed discussion of our noninterest income for 2021
compared to 2020, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations - Noninterest Income
- 2021 vs. 2020 in our annual report on Form 10-K for the year ended December
31, 2021.



Noninterest Expense



Noninterest expense includes salaries and employee benefits and other costs
associated with the conduct of our operations. We are committed to managing our
costs within the framework of our operating strategy. However, since we are
focused on growth both organically and through acquisition, we expect our
expenses to increase as we grow. Our goal is to create synergies promptly after
completing an acquisition, as this is important to our earnings success.



2022 vs. 2021. Total noninterest expense was $60.9 million for the year ended
December 31, 2022, a decrease of $2.2 million, or 3.5%, from $63.1 million for
the year ended December 31, 2021. This decrease was primarily driven by the
decreases in salaries and employee benefits, acquisition expense, and
depreciation and amortization.



Salaries and employee benefits decreased $0.6 million, or 1.6%, to $35.0 million
for the year ended December 31, 2022, compared to $35.5 million for the year
ended December 31, 2021. The decrease in salaries and employee benefits is
mainly attributable to a decrease in health insurance claims and an increase in
the employee retention credit ("ERC"), partially offset by an increase in
severance due to the separation agreement with the former chief financial
officer of the Company and the Bank. Included in salaries and employee benefits
for the years ended December 31, 2022 and 2021 are $2.3 million and $1.9
million, respectively, of ERCs which were recognized as credits to payroll
taxes. Please refer to Note 1. Summary of Significant Accounting Policies -
Employee Retention Credit, in the Notes to Consolidated Financial Statements
contained in Item 8. Financial Statements and Supplementary Data for additional
discussion regarding the ERCs. As of December 31, 2022, we had 331 full-time and
seven part-time employees, compared to 339 full-time and four part-time
employees as of December 31, 2021.

Depreciation and amortization decreased $0.6 million, or 11.1%, to $4.4 million for the year ended December 31, 2022, compared to $5.0 million for the year ended December 31, 2021. The decrease in depreciation and amortization is primarily driven by the closure of two branch locations during 2022 and two branch locations during 2021.





Data processing increased $0.5 million, or 15.7%, to $3.6 million for the year
ended December 31, 2022 from $3.1 million for the same period in 2021. The
increase is mainly attributable to the Bank's investments in multiple technology
enhancements for our customers as well as an increase in customers due to
organic growth and growth from the acquisition of Cheaha in April 2021.



We did not incur any acquisition expense for the year ended December 31, 2022,
compared to $2.4 million for the year ended December 31, 2021. We did not
complete any acquisitions in 2022. For the year ended December 31, 2021,
acquisition expense resulted from costs related to the acquisition of Cheaha in
April 2021.



Occupancy expense increased $0.2 million, or 5.9% to $2.9 million for the year
ended December 31, 2022 from $2.8 million for the year ended December 31, 2021.
This increase is primarily attributable to increases in utilities and real
property taxes for our branch facilities, including the additional four branch
locations acquired as part of the acquisition of Cheaha in April 2021.



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Other operating expenses include security, business development, FDIC and OCC
assessments, bank shares and property taxes, collection and
repossession, charitable contributions, repair and maintenance costs, personnel
training and development, filing fees, and other costs related to the operation
of our business. Other operating expenses increased $0.3 million, or 2.5%,
to $12.7 million for the year ended December 31, 2022 from $12.4 million for the
year ended December 31, 2021. The increase in other operating expenses was
primarily due to an increase in collection and repossession expenses, the
majority of which is related to one impaired loan relationship impacted by
Hurricane Ida, partially offset by decreases in provision for unfunded loan
commitments and telephone expense.



2021 vs. 2020. For a detailed discussion of our noninterest expense for 2021
compared to 2020, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations - Noninterest
Expense - 2021 vs. 2020 in our annual report on Form 10-K for the year ended
December 31, 2021.



Income Tax Expense



Income tax expense for the years ended December 31, 2022, 2021 and 2020
was $8.6 million, $1.9 million, and $3.5 million, respectively. The effective
tax rates for the years ended December 31, 2022, 2021 and 2020
were 19.5%, 19.3%, and 19.9%, respectively. The effective tax rate differs from
the statutory rate of 21% primarily due to nontaxable income from insurance
proceeds and tax-exempt interest income earned on certain loans, investment
securities and bank owned life insurance.



Risk Management



The primary risks associated with our operations are credit, interest rate and
liquidity risk. Higher inflation also presents risks. 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 Loan 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 of
directors' loan committee and the full board of directors. 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 following describes each
of the risk categories, which are consistent with the definitions used in
guidance promulgated by federal banking regulators:

• Pass (Loan grades 1-6)-Loans not meeting the criteria 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 classified 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.




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• 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 December 31, 2022 and December 31, 2021, there were no loans classified as
loss, while there were $0.2 million and $0.7 million, respectively, of loans
classified as doubtful, $15.0 million and $46.8 million, respectively, of loans
classified as substandard, and $12.8 million and $7.3 million, respectively, of
loans classified as special mention as of such dates. Of our
aggregate $28.0 million and $54.8 million doubtful, substandard and special
mention loans at December 31, 2022 and December 31, 2021, respectively, $4.7
million and $8.6 million, respectively, were acquired and marked to fair value
at the time of their acquisition.



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 of directors. 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 Loan Losses. Through December 31, 2022, the allowance for loan
losses is an amount that management believes will be adequate to absorb probable
losses inherent in the entire loan portfolio. The appropriate level of the
allowance is based on an ongoing analysis of the loan portfolio and represents
an amount that management deems adequate to provide for inherent losses,
including collective impairment as recognized under ASC Topic 450,
Contingencies. Collective impairment is calculated based on loans grouped by
grade. Another component of the allowance is losses on loans assessed as
impaired under ASC 310. The balance of these loans and their related allowance
is included in management's estimation and analysis of the allowance for loan
losses. Other considerations in establishing the allowance for loan losses
include the nature and volume of the loan portfolio, overall portfolio quality,
historical loan loss, review of specific problem loans, and current economic
conditions that may affect the borrower's ability to pay, as well as trends
within each of these factors. The allowance for loan losses is established after
input from management as well as our risk management department and our special
assets committee. We evaluate the adequacy of the allowance for loan losses on a
quarterly basis. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available. The allowance for loan losses was $24.4 million at December
31, 2022, an increase compared to $20.9 million at December 31, 2021
and $20.4 million at December 31, 2020. The primary reason for the increase in
the allowance for loan losses at December 31, 2022 and 2021 compared to December
31, 2020 is increased loan loss provisioning to reflect our organic loan
growth. Please refer to Note 1. Summary of Significant Accounting Policies -
Recent Accounting Pronouncements, in the Notes to Consolidated Financial
Statements contained in Item 8. Financial Statements and Supplementary Data for
information regarding our adoption, effective January 1, 2023, of ASU 2016-13,
which will impact how we account for our loan allowance and for loans acquired
with more than insignificant impairment.



A loan is considered impaired when, based on current information and events, it
is probable that we will be unable to collect the scheduled payments of
principal and interest when due according to the contractual terms of the loan
agreement. Determination of impairment is treated the same across all classes of
loans. Impairment is measured on a loan-by-loan basis for, among others, all
loans of $500,000 or greater, nonaccrual loans and a sample of loans between
$250,000 and $500,000. When we identify a loan as impaired, we measure the
extent of the impairment based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, except when the sole
(remaining) source of repayment for the loans is the operation or liquidation of
the collateral. In these cases when foreclosure is probable, we use the current
fair value of the collateral, less selling costs, instead of discounted cash
flows. For real estate collateral, the fair value of the collateral is based
upon a recent appraisal by a qualified and licensed appraiser. If we determine
that the value of the impaired loan is less than the recorded investment in the
loan (net of previous charge-offs, deferred loan fees or costs and unamortized
premiums or discounts), we recognize impairment through an allowance estimate or
a charge-off recorded against the allowance. When the ultimate collectability of
the total principal of an impaired loan is in doubt and the loan is on
nonaccrual, all payments are applied to principal, under the cost recovery
method. When the ultimate collectability of the total principal of an impaired
loan is not in doubt and the loan is on nonaccrual, contractual interest is
credited to interest income when received, under the cash basis method.



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Impaired loans at December 31, 2022, which include all TDRs and nonaccrual loans
individually evaluated for impairment for purposes of determining the allowance
for loan losses, were $10.4 million compared to $32.8 million at December 31,
2021, and $19.2 million at December 31, 2020. At December 31, 2022 and December
31, 2021, $0.3 million and $0.6 million, respectively, of the allowance for loan
losses were specifically allocated to impaired loans, while $0.2 million of the
allowance was specifically allocated to such loans at December 31, 2020. The
decrease in impaired loans at December 31, 2022 compared to December 31, 2021
was driven by a large paydown on the loan relationship for which we recorded a
$21.6 million impairment in 2021, as discussed in Certain Events That Affect
Year-over-Year Comparability - Hurricane Ida. Many of the loans comprising the
total relationship were placed on nonaccrual following the impairment.



The provision for loan losses is a charge to income in an amount that management
believes is necessary to maintain an adequate allowance for loan losses. The
provision is based on management's regular evaluation of current economic
conditions in our specific markets as well as regionally and nationally, changes
in the character and size of the loan portfolio, underlying collateral values
securing loans, and other factors which deserve recognition in estimating loan
losses. For the years ended December 31, 2022, 2021 and 2020, the provision for
loan losses was $2.9 million, $22.9 million, and $11.2 million,
respectively. The provision for loan losses for the year ended December 31,
2022 reflects provisioning related to our organic loan growth. The provision for
loan losses for the year ended December 31, 2021 includes a $21.6 million
impairment charge related to one loan relationship impacted by Hurricane Ida, as
discussed in Certain Events That Affect Year-over-Year Comparability - Hurricane
Ida. Additional provision for loan losses was recorded in the year
ended December 31, 2020 primarily as a result of the deterioration of market
conditions which were adversely affected by the COVID-19 pandemic.



Acquired loans that are accounted for under ASC 310-30 were marked to market on
the date we acquired the loans to values which, in management's opinion,
reflected the estimated future cash flows, based on the facts and circumstances
surrounding each respective loan at the date of acquisition. If future cash
flows are not reasonably estimable, the Company accounts for the acquired loans
using the cash basis method. We continually monitor these loans as part of our
normal credit review and monitoring procedures for changes in the estimated
future cash flows. ASC 310-30 does not permit carry over or recognition of an
allowance for loan losses. We did not increase the allowance for loan losses for
loans accounted for under ASC 310-30 during 2022 or 2021. In 2020, one acquired
loan accounted for under ASC 310-30 required a specific reserve of $0.2 million,
which was charged to provision for loan losses.

The following table presents the allocation of the allowance for loan losses by loan category as of the dates indicated (dollars in thousands).





                                                                  December 31,
                                     2022                             2021                             2020
                                           % of Loans                       % of Loans                       % of Loans
                                            in each                          in each                          in each
                                            Category                         Category                         Category
                         Allowance for      to Total      Allowance for      to Total      Allowance for      to Total
                          Loan Losses        Loans         Loan Losses        Loans         Loan Losses        Loans
Mortgage loans on real
estate:
Construction and
development              $       2,555            9.6 %   $       2,347           10.9 %   $       2,375           11.1 %
1-4 Family                       3,917           19.1             3,337           19.4             3,370           18.2
Multifamily                        999            3.9               673            3.2               589            3.3
Farmland                           113            0.6               383            1.1               435            1.4
Commercial real estate          10,718           45.5             9,354           47.9             8,496           43.7
Commercial and
industrial                       5,743           20.7             4,411           16.6             4,558           21.2
Consumer                           319            0.6               354            0.9               540            1.1
Total                    $      24,364            100 %   $      20,859            100 %   $      20,363            100 %

The following table presents the amount of the allowance for loan losses allocated to each loan category as a percentage of total loans as of the dates indicated (dollars in thousands).





                                         December 31,
                                  2022       2021       2020
Mortgage loans on real estate:
Construction and development       0.12 %     0.12 %     0.13 %
1-4 Family                         0.18       0.18       0.18
Multifamily                        0.05       0.04       0.03
Farmland                           0.01       0.02       0.02
Commercial real estate             0.51       0.50       0.46
Commercial and industrial          0.27       0.23       0.25
Consumer                           0.02       0.02       0.02
Total                              1.16 %     1.11 %     1.09 %




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

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





                                                        Years ended December 31,
                                                  2022            2021            2020
Allowance at beginning of period               $    20,859     $    20,363     $    10,700
Provision for loan losses                            2,922          22,885          11,160
Net recoveries (charge-offs)                           583         (22,389 )        (1,497 )
Allowance at end of period                     $    24,364     $    20,859     $    20,363
Total loans - period end                         2,104,767       1,872,012       1,860,318
Nonaccrual loans - period end                        9,986          29,495          13,506

Key Ratios:
Allowance for loan losses to total loans -
period end                                            1.16 %          1.11 %          1.09 %
Allowance for loan losses to nonaccrual
loans - period end                                     244 %            71 %           151 %

Nonaccrual loans to total loans - period end 0.47 % 1.58 % 0.73 %






The allowance for loan losses to total loans increased to 1.16% at December 31,
2022 compared to 1.11% at December 31, 2021 while the allowance for loan losses
to nonaccrual loans ratio increased to 244% at December 31, 2022 from 71% at
December 31, 2021. The increase in the allowance for loan losses to total loans
at December 31, 2022 is primarily due to the increase in the allowance for loan
losses compared to December 31, 2021. The increase in the allowance for loan
losses to nonaccrual loans is due to the decrease in nonaccrual loans primarily
due to large paydowns on one loan relationship impacted by Hurricane Ida.
Nonaccrual loans were $10.0 million, or 0.47% of total loans, at December 31,
2022, a decrease of $19.5 million compared to $29.5 million, or 1.58% of total
loans, at December 31, 2021.

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





                                                                                                               Years ended December 31,
                                                      2022                                                              2021                                                             2020
                                                                                                                                          Ratio of Net
                                                                         Ratio of Net                                                      Charge-offs                                                     Ratio of Net
                         Net (Charge-offs)                              Charge-offs to        Net (Charge-offs)                            to Average       Net (Charge-offs)                             Charge-offs to
                             Recoveries          Average Balance        Average Loans            Recoveries          Average Balance          Loans            Recoveries          Average Balance        Average Loans
Mortgage loans on real
estate:
Construction and
development              $               48     $         210,160                  (0.02 )%   $            (247 )   $         211,230              0.12 %   $              47     $         193,764                  (0.02 )%
1-4 Family                              103               380,481                  (0.03 )                 (156 )             354,748              0.04                   (99 )             327,521                   0.03
Multifamily                               -                56,665                      -                      -                60,327                 -                     -                58,664                      -
Farmland                                 13                15,837                  (0.08 )                  (13 )              23,128              0.06                     -                27,821                      -
Commercial real estate                   33               901,422


       (0.00 )              (10,274 )             869,098              1.18                   (43 )             785,431                   0.01
Commercial and
industrial                              535               357,837                  (0.15 )              (11,641 )             362,483              3.21                (1,145 )             368,239                   0.31
Consumer                               (149 )              14,853                   1.00                    (58 )              21,056              0.28                  (257 )              24,862                   1.03
Total                    $              583     $       1,937,255                  (0.03 )%   $         (22,389 )   $       1,902,070              1.18


%   $          (1,497 )   $       1,786,302                   0.08 %




Charge-offs reflect the realization of losses in the portfolio that were
recognized previously through the provision for loan losses. Net recoveries for
the year ended December 31, 2022 were $0.6 million, or 0.03% of the average loan
balance. Net charge-offs for the years ended December 31, 2021 and 2020
were $22.4 million and $1.5 million respectively, equal to 1.18% and 0.08%, of
the average loan balance for the respective periods. Net recoveries for the year
ended December 31, 2022, were primarily driven by one $0.9 million recovery on a
commercial and industrial loan relationship. The net recoveries in 2022 compared
to the net charge-offs in 2021 was primarily due to charge-offs of $21.6 million
in the third quarter of 2021 due to the impairment charge related to one loan
relationship impacted by Hurricane Ida. Commercial and industrial loans and
commercial real estate loans were the categories affected. For the
year ended December 31, 2020, the largest category of charge-offs was commercial
and industrial loans.



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Management believes the allowance for loan losses at December 31, 2022 was
sufficient to provide adequate protection against losses in our portfolio based
on the accounting standards in effect at the time. 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 the scope and duration of the COVID-19 pandemic and its
continued influence on the economy, higher inflation and interest rates than
anticipated, other unanticipated adverse changes in the economy, or discrete
events adversely affecting specific customers or industries. 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. Effective January 1, 2023, we adopted ASU 2016-13, which uses a Current
Expected Credit Loss ("CECL") accounting standard for the loan allowance. 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 for changes in expected lifetime credit losses. The CECL methodology
replaces multiple prior impairment models under U.S. GAAP that generally
required that a loss be "incurred" before it was recognized, and represents a
significant change from prior U.S. GAAP. Please refer to Note 1. Summary of
Significant Accounting Policies - Recent Accounting Pronouncements, in the Notes
to Consolidated Financial Statements contained in Item 8. Financial Statements
and Supplementary Data for information regarding our adoption, effective January
1, 2023, of ASU 2016-13, which will impact how we account for our loan allowance
and for loans acquired with more than insignificant impairment.



Nonperforming assets and restructured loans. 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.



Another category of assets which contributes to our credit risk is TDRs, or
restructured loans. A restructured loan is a loan for which a concession that is
not insignificant has been granted to the borrower due to a deterioration of the
borrower's financial condition and which is performing in accordance with the
new terms. Such concessions may include reduction in interest rates, deferral of
interest or principal payments, principal forgiveness and other actions intended
to minimize the economic loss and to avoid foreclosure or repossession of the
collateral. We strive to identify borrowers in financial difficulty early and
work with them to modify their loans to more affordable terms before such loan
reaches nonaccrual status. In evaluating whether to restructure a loan,
management analyzes the long-term financial condition of the borrower, including
guarantor and collateral support, to determine whether the proposed concessions
will increase the likelihood of repayment of principal and interest.
Restructured loans that are not performing in accordance with their restructured
terms that are either contractually 90 days past due or placed on nonaccrual
status are reported as nonperforming loans.



There were 20 credits classified as TDRs at December 31, 2022 that totaled
approximately $3.0 million, compared to 29 credits totaling $10.5 million
at December 31, 2021. Twelve of the restructured loans were considered TDRs due
to modification of terms through adjustments to maturity, four of the
restructured loans were considered TDRs due to a reduction in the interest rate
to a rate lower than the current market rate, three restructured loans were
considered TDRs due to principal payment forbearance paying interest only for a
specified period of time, and one restructured loan was considered a TDR due to
principal and interest payment forbearance.


At  December 31, 2022 and 2021, none of the TDRs were in default of their
modified terms and included in nonaccrual loans. At  December 31, 2022 and 2021,
there were no available balances on loans classified as TDRs that the Company
was committed to lend. The Company individually evaluates each TDR for allowance
purposes, primarily based on collateral value, and excludes these loans from the
loan population that is collectively evaluated for impairment.



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Other Real Estate Owned. Other real estate owned consists of properties acquired
through foreclosure or acceptance of a deed in lieu of foreclosure, as well as
any properties owned by the Company that are not intended to be used to carry
out its operations. These properties are carried at the lower of cost or fair
market value based on appraised value less estimated selling costs. Losses
arising at the time of foreclosure of properties are charged against the
allowance for loan losses. Other real estate owned with a cost basis
of $5.8 million and $0.9 million was sold during the years ended December 31,
2022 and 2021, respectively, resulting in a net gain of $9,000 and a
net loss of $5,000 for the respective periods, compared to a cost basis of
$0.1 million and a net gain of $12,000 for the year ended December 31, 2020.

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





                                 December 31, 2022       December 31, 2021
1-4 Family                      $               682     $               168
Commercial real estate                            -                   2,485
Total other real estate owned   $               682     $             2,653

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

Year ended Year ended
December 31, 2022 December 31, 2021
Balance, beginning of period $ 2,653 $ 663
Additions 3,327 1,023
Transfers from bank premises and equipment 525 1,850
Sales of other real estate owned (5,823 ) (883 )
Balance, end of period $ 682 $ 2,653

Please refer to Note 5. Other Real Estate Owned, in the Notes to Consolidated
Financial Statements contained in Item 8. Financial Statements and Supplementary
Data for additional information.

Impact of Inflation. Inflation reached a near 40-year high in late 2021
primarily due to effects of the ongoing pandemic and continued rising through
June 2022. Since June 2022, the rate of inflation has decelerated; however, it
has remained at historically high levels through March 2023. When the rate of
inflation accelerates, there is an erosion of consumer and customer purchasing
power. Accordingly, 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 loan losses resulting from a possible increased
default rate. Inflation may lead to lower loan re-financings. Inflation may also
increase the costs of goods and services we purchase, including the costs of
salaries and benefits. In response to higher inflation, the Federal Reserve
increased the federal funds target rate during 2022 as discussed in Certain
Events That Affect Year-over-Year Comparability - Rising Inflation and Interest
Rates. In February 2023, the Federal Reserve increased the federal funds target
rate by 25 basis points to 4.50% to 4.75%, and one or more further increases are
expected during the remainder of 2023. 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.

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 Asset/Liability Committee ("ALCO") has been authorized by the board of
directors 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/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 1 to 2-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 of directors.

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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
December 31, 2022, the Bank was within the policy guidelines for asset/liability
management.

The following table depicts the estimated impact on net interest income of immediate changes in interest rates at the specified levels for the periods presented.





              As of December 31, 2022
                                   Estimated
Changes in Interest Rates    Increase/Decrease in
    (in basis points)       Net Interest Income(1)
          +300                          (11.7 )%
          +200                           (7.9 )%
          +100                           (3.7 )%
          -100                            2.1 %

(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. 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, 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 December 31, 2022 and 2021, 70% and 81% of our total assets,
respectively, were funded by core deposits.



Our investment portfolio is another alternative for meeting our cash flow
requirements. Investment securities generate cash flow through principal
payments and maturities, and they generally have readily available markets that
allow for their conversion to cash. Some securities are pledged to secure
certain deposit types or short-term borrowings (such as FHLB advances), which
impacts their liquidity. At December 31, 2022, securities with a carrying value
of $165.7 million were pledged to secure deposits or borrowings, compared to
$118.2 million in pledged securities at December 31, 2021.



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Other sources available for meeting liquidity needs include advances from the
FHLB, repurchase agreements and other borrowings. FHLB advances are primarily
used to match-fund fixed rate loans in order to minimize interest rate risk and
also 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 December 31, 2022, the
balance of our outstanding advances with the FHLB was $387.0 million, an
increase from $78.5 million at December 31, 2021. The total amount of the
remaining credit available to us from the FHLB at December 31, 2022 was
$533.1 million. At December 31, 2022, our FHLB borrowings were collateralized by
approximately $930.1 million of the Company's loan portfolio and $0.6 million of
the Company's investment securities.

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 U.S. Treasury and U.S. agency securities. We had no repurchase
agreements outstanding at December 31, 2022, compared to $5.8 million at
December 31, 2021.

We maintain unsecured lines of credit with FNBB and TIB totaling $60.0 million.
These lines of credit are federal funds lines of credit and are used for
overnight borrowing only. There were no outstanding balances on our unsecured
lines of credit at December 31, 2022 or 2021.

In addition, at December 31, 2022 and 2021 we had $45.0 million and $43.6
million in aggregate principal amount of subordinated debt outstanding,
respectively. For additional information, see Note 11. Subordinated Debt
Securities in the Notes to Consolidated Financial Statements contained in Item
8. Financial Statements and Supplementary Data and see Discussion and Analysis
of Financial Condition - Borrowings above.

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. During the years ended December 31, 2022 and 2021,
due to more favorable pricing, we used brokered demand deposits to satisfy
borrowings under certain interest rate swap agreements that we voluntary
terminated. At December 31, 2022 and 2021, we held no brokered demand
deposits. We also hold QwickRate® deposits, included in our time deposit
balances, to address liquidity needs when rates on such deposits compare
favorably with deposit rates in our markets. At December 31, 2022, we held $26.5
million of QwickRate® deposits, a decrease compared to $63.8 million at December
31, 2021.

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 years ended December 31, 2022 and
2021.

Percentage of Total Average Deposits and
Borrowed Funds Cost of Funds
Years ended December 31, Years ended December 31,
2022 2021 2022 2021
Noninterest-bearing demand 26 % 24 % - % - %
Interest-bearing demand 38 37 0.27 0.28
Brokered demand deposits - 3 0.42 0.92
Savings deposits 7 7 0.05 0.15
Time deposits 18 22 0.88 0.81
Short-term borrowings 6 1 3.05 0.20
Borrowed funds 5 6 3.49 3.26
Total deposits and borrowed funds 100 % 100 % 0.63 % 0.51 %

Capital Management. 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 capital stock and debt securities from
time to time to fund acquisitions and support our organic growth. In April 2022,
we completed a private placement of $20.0 million in aggregate principal amount
of our 2032 Notes, which are structured to quality as Tier 2 capital for
regulatory purposes, and used the majority of the proceeds to redeem $18.6
million of our 2027 Notes in June 2022. During 2019, we issued $25.0 million of
our 2029 Notes, which are structured to qualify as Tier 2 capital for regulatory
capital purposes. For additional information see Discussion and Analysis of
Financial Condition - Borrowings.

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In 2019, we issued 1,290,323 shares of common stock for net proceeds of $28.5
million and 763,849 shares of common stock in connection with our acquisition of
Mainland Bank. We issued 799,559 shares of common stock in connection with our
acquisition of BOJ in 2017. During 2022, we paid $3.6 million in dividends,
compared to $3.1 million in 2021 and $2.7 million in 2020. Our board of
directors has authorized a share repurchase program and during 2022 we
paid $10.5 million to repurchase our shares, compared to $6.9 million in 2021
and $11.1 million in 2020. On April 21, 2022 and September 21, 2022, the board
of directors approved an additional 400,000 shares and 300,000 shares,
respectively, of the Company's common stock for repurchase. At December 31,
2022, we had 386,714 shares of our common stock remaining authorized for
repurchase under the program.



For additional information, see Notes 11 and 14 to our consolidated financial
statements. We are subject to restrictions on dividends under applicable banking
laws and regulations. Please refer to the discussion under the heading
"Supervision and Regulation - Dividends" in Item 1. Business, for more
information. We are also subject to additional legal and contractual
restrictions on dividends. Please refer to the discussion under the heading
"Dividend Policy" in Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities and under the
heading "Common Stock - Dividend Restrictions" in Note 14. Stockholders' Equity
in the Notes to Consolidated Financial Statements contained in Item 8. Financial
Statements and Supplementary Data.



We are subject to various regulatory capital requirements administered by the
Federal Reserve and the OCC. These requirements are described in greater detail
under the heading "Supervision and Regulation - Regulatory Capital Requirements"
of Item 1. Business. Those guidelines specify capital tiers, which include the
following classifications:



                     Tier 1       Common Equity      Tier 1       Total        Ratio of
                    Leverage     Tier 1 Capital      Capital     Capital     Tangible to
Capital Tiers(1)     Ratio            Ratio           Ratio       Ratio      Total Asset
Well capitalized     5% or        6.5% or above       8% or      10% or
                     above                            above       above
Adequately           4% or        4.5% or above       6% or       8% or
capitalized          above                            above       above
Undercapitalized   Less than     Less than 4.5%     Less than   Less than
                       4%                              6%          8%
Significantly      Less than      Less than 3%      Less than   Less than
undercapitalized       3%                              4%          6%
Critically                                                                    2% or less
undercapitalized

(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.

The Company and the Bank each were in compliance with all regulatory capital requirements as of December 31, 2022, 2021 and 2020. The Bank also was considered "well-capitalized" under the OCC's prompt corrective action regulations as of these dates.

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Table of Contents

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).

Minimum Capital Requirement to be


                                                       Actual

Well Capitalized


                                                Amount         Ratio          Amount                 Ratio
December 31, 2022
Investar Holding Corporation:
Tier 1 capital to average assets (leverage)    $ 231,048          8.53 %   $          -                      - %

Tier 1 common equity to risk-weighted assets 221,548 9.79

           -                      -
Tier 1 capital to risk-weighted assets           231,048         10.21                -                      -
Total capital to risk-weighted assets            300,009         13.25                -                      -
Investar Bank:
Tier 1 capital to average assets (leverage)      267,603          9.89          135,344                   5.00

Tier 1 common equity to risk-weighted assets 267,603 11.83

     147,044                   6.50
Tier 1 capital to risk-weighted assets           267,603         11.83          180,977                   8.00
Total capital to risk-weighted assets            292,339         12.92          226,221                  10.00

December 31, 2021
Investar Holding Corporation:
Tier 1 capital to average assets (leverage)    $ 206,899          8.12 %   $          -                      - %

Tier 1 common equity to risk-weighted assets 197,399 9.45

           -                      -
Tier 1 capital to risk-weighted assets           206,899          9.90                -                      -
Total capital to risk-weighted assets            271,416         12.99                -                      -
Investar Bank:
Tier 1 capital to average assets (leverage)      244,541          9.60          127,313                   5.00

Tier 1 common equity to risk-weighted assets 244,541 11.72

     135,651                   6.50
Tier 1 capital to risk-weighted assets           244,541         11.72          166,956                   8.00
Total capital to risk-weighted assets            266,069         12.75          208,694                  10.00




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 1-month LIBOR associated with the forecasted
issuances of 1-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 December 31, 2022 the Company had no current or forward
starting interest rate swap agreements. At December 31, 2021 the Company had no
current interest rate swap agreements, and forward starting interest rate swap
agreements with a total notional amount of $115.0 million, all of which were
designated as cash flow hedges.



During the year ended December 31, 2022, the Company voluntarily terminated
its remaining interest rate swap agreements with a total notional
amount of $115.0 million in response to market conditions. During year
ended December 31, 2021, the Company voluntarily terminated interest rate swap
agreements with a total notional amount of $150.0 million in response to market
conditions and as a result of excess liquidity. For years ended December 31,
2022, and December 31, 2021, unrealized gains of $6.4 million and $1.4 million,
respectively, net of tax expenses of $1.7 million and $0.4 million,
respectively, were reclassified from "Accumulated other comprehensive (loss)
income" and recorded as "Swap termination fee income" in noninterest income in
the accompanying consolidated statements of income.



For the year ended December 31, 2022, a gain of $4.3 million, net of
a $1.2 million tax expense, was recognized in "Other comprehensive loss" in the
accompanying consolidated statements of comprehensive (loss) income for the
change in fair value of the interest rate swap contracts. For the years ended
December 31, 2021 and December 31, 2020, a gain of $5.3 million, net of
a $1.4 million tax expense, and a loss of $2.3 million net of a $0.6 million
tax benefit, respectively, was recognized in "Other comprehensive loss" in the
accompanying consolidated statements of comprehensive (loss) income for the
change in fair value of the interest rate swap contracts.



                                       55

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Table of Contents





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 FASB ASC
Topic 815, Derivatives and Hedging, 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 FASB ASC Topic 820, Fair Value
Measurements. The Company did not recognize any gains or losses in other income
resulting from fair value adjustments during the years ended December 31, 2022
and 2021.



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. The
credit risk associated with these commitments is evaluated in a manner similar
to the allowance for loan losses. The reserve for unfunded loan commitments is
included in "Accrued taxes and other liabilities" in the accompanying
consolidated balance sheets. At December 31, 2022 and 2021, the reserve for
unfunded loan commitments was $0.4 million and $0.7 million, 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. Virtually 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).



                                 December 31, 2022       December 31, 2021
Commitments to extend credit:
Loan commitments                $           333,040     $           349,701
Standby letters of credit                    11,379                  18,259

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 will continue this process as new commitments are entered into or existing commitments are renewed.

Additionally, at December 31, 2022, the Company had unfunded commitments of $1.9 million for its investment in Small Business Investment Company qualified funds.





For each of the years ended December 31, 2022 and 2021, we engaged in no
off-balance sheet transactions reasonably likely to have a material effect on
our financial condition, results of operations, or cash flows currently or in
the future.



                                       56

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  Table of Contents



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 December 31, 2022, contractually obligated
lease payments due under non-cancelable operating leases by payment date
(dollars in thousands).



Less than one year          $   595
One year to three years         991
Three years to five years       680
Over five years               1,012
Total                       $ 3,278




On January 27, 2023, we completed the previously announced sale
of certain assets, deposits and other liabilities associated with the Alice and
Victoria, Texas branch locations to First Community Bank. Upon the completion of
the sale, we recorded $0.3 million of occupancy expense to terminate the
remaining $0.5 million of contractually obligated lease payments due under
non-cancelable operating leases.

Latest news about Investar Holding Corporation

Earnings Flash (ISTR) INVESTAR HOLDING CORPORATION Posts Q1 EPS $0.43	Apr. 22	MT
Tranche Update on Investar Holding Corporation's Equity Buyback Plan announced on February 19, 2015.	Apr. 22	CI
Investar Holding Corporation Reports Earnings Results for the First Quarter Ended March 31, 2024	Apr. 22	CI
An undisclosed buyer acquired One branch location in Alabama of Investar Holding Corporation.	Apr. 21	CI
Investar Holding Corporation Declares Quarterly Cash Dividend, Payable on April 30, 2024	Mar. 20	CI
Investar Holding Corporation Announces Board Changes	Feb. 23	CI
Tranche Update on Investar Holding Corporation's Equity Buyback Plan announced on February 19, 2015.	Jan. 25	CI
Investar Holding Corporation Reports Earnings Results for the Fourth Quarter and Full Year Ended December 31, 2023	Jan. 25	CI
Earnings Flash (ISTR) INVESTAR HOLDING CORPORATION Posts Q4 EPS $0.39	Jan. 25	MT
Investar Holding Maintains Quarterly Dividend at $0.10 per Share, Payable Jan. 31 to Shareholders of Record as of Jan. 2	Dec. 21	MT
Investar Holding Corporation Declares Quarterly Cash Dividend, Payable on January 31, 2024	Dec. 20	CI
North American Morning Briefing : Amazon, Intel -2-	23-10-27	DJ
North American Morning Briefing : Bond Yields, -2-	23-10-20	DJ
Earnings Flash (ISTR) INVESTAR HOLDING CORPORATION Reports Q3 EPS $0.33	23-10-19	MT
Investar Holding Corporation Reports Earnings Results for the Third Quarter Ended September 30, 2023	23-10-19	CI
Tranche Update on Investar Holding Corporation's Equity Buyback Plan announced on February 19, 2015.	23-10-19	CI
North American Morning Briefing : Investors Await -2-	23-10-06	DJ
Piper Sandler Upgrades Investar Holding to Overweight From Neutral, Price Target is $13.50	23-10-05	MT
Investar Holding Maintains Quarterly Dividend at $0.10 Per Share, Payable Oct. 31 to Shareholders of Record as of Oct. 2.	23-09-21	MT
Investar Holding Corporation Declares Quarterly Cash Dividend, Payable on October 31, 2023	23-09-20	CI
Hovde Group Raises Investar Holding's Price Target to $16 From $15.50, Maintains Outperform Rating	23-07-24	MT
Investar Holding Corporation Reports Earnings Results for the Second Quarter Ended June 30, 2023	23-07-21	CI
Tranche Update on Investar Holding Corporation's Equity Buyback Plan announced on February 19, 2015.	23-07-21	CI
Earnings Flash (ISTR) INVESTAR HOLDING CORPORATION Reports Q2 EPS $0.67	23-07-20	MT
Investar Holding Approves Additional 350,000 Shares as Part of Repurchase Program	23-07-20	MT

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Company Profile

Investar Holding Corporation is a financial holding company that conducts its operations primarily through its subsidiary, Investar Bank, National Association (the Bank). The Company offers a range of commercial and retail lending products throughout its market areas, including business loans to small to medium-sized businesses as well as loans to individuals. Its business lending products include owner-occupied commercial real estate loans, construction loans and commercial and industrial loans, such as term loans, equipment financing and lines of credit, while its loans to individuals include first and second mortgage loans, installment loans, and lines of credit. It offers a base of deposit products and services to individual and business clients, including savings, checking, and money market accounts, as well as a variety of certificates of deposit and individual retirement accounts. It also offers debit cards, Internet banking, direct deposit of payroll and social security checks.

Sector

Banks

Calendar

2024-05-14 - Annual General Meeting

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Income Statement Evolution

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Ratings for Investar Holding Corporation

Trading Rating

Investor Rating

ESG Refinitiv

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Analysts' Consensus

Sell

Buy

Mean consensus

BUY

Number of Analysts

Last Close Price

16.28 USD

Average target price

20 USD

Spread / Average Target

+22.85%

Consensus

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Commercial Banks

Investar Holding Corporation

Equities

ISTR

US46134L1052

Banks

INVESTAR HOLDING CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

EPS Revisions