Business First Bancshares, Inc. (BFST) FY 2024 MD&A

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion presents management’s analysis of our results of operations and financial condition over each of the last two most recent fiscal years. The discussion should be read in conjunction with our financial statements and the notes related thereto which appear elsewhere in this Report.

The following discussion and analysis is to focus on significant changes in the financial condition of Business First and its subsidiaries from December 31, 2023 to December 31, 2024 and its results of operations for the year ended December 31, 2024. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this Report, particularly the consolidated financial statements and related notes appearing in Item 8. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that Business First believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Forward-Looking Statements,” “Risk Factors” and elsewhere in this statement, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. Business First assumes no obligation to update any of these forward-looking statements. A discussion regarding significant changes in the financial condition of Business First and its subsidiaries from December 31, 2022 to December 31, 2023 and its results of operations for the year ended December 31, 2023 can be found under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 1, 2024, as amended, which is available on the SEC’s website at www.sec.gov and on the Company’s website, www.b1bank.com.

Overview

We are a registered financial holding company headquartered in Baton Rouge, Louisiana. Through our wholly-owned subsidiary, b1BANK, a Louisiana state chartered bank, we provide a broad range of financial services tailored to meet the needs of small-to-midsized businesses and professionals. Since our inception in 2006, our priority has been and continues to be creating shareholder value through the establishment of an attractive commercial banking franchise in Louisiana and across our region. We consider our primary market to include the State of Louisiana, the Dallas/Fort Worth metroplex and Houston. We currently operate out of banking centers and loan production offices in markets across Louisiana and Texas. As of December 31, 2024, we had total assets of $7.9 billion, total loans of $6.0 billion, total deposits of $6.5 billion, and total shareholders’ equity of $799.5 million.

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

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

While we continue to prioritize organic growth, we also seek to capitalize upon other opportunities as they arise. Below is a summary of recent transactions that have contributed to our growth. For additional information about these transactions, See “Note 3 – Mergers and Acquisitions” in our audited consolidated financial statements included in Item 8 of this Report.

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Bank Term Funding Program (“BTFP”)

On March 12, 2023, the Federal Reserve developed the BTFP, which offered loans to banks with a term of up to one year. These loans were secured by pledging participating banks’ U.S. treasuries, agency securities, agency mortgage-backed securities, and other qualifying assets. These pledged securities were valued at par for collateral purposes. The Bank participated in the BTFP and had outstanding debt of $300.0 million at December 31, 2023. These loans bore a fixed rate of 4.38% and matured on March 22, 2024, at which time we repaid them in full.

Federal Reserve Bank’s Discount Window

On April 11, 2023, the Bank opened two new lines of credit for additional contingent liquidity, totaling $907.7 million and $1.0 billion as of December 31, 2024 and 2023, respectively, through the Federal Reserve discount window. The Bank has not yet drawn on either of the lines of credit as of the date of this report.

Sale of Leesville Banking Center

On August 31, 2023, we sold the Leesville banking center, located in Leesville, Louisiana, to Merchants & Farmers Bank & Trust Company headquartered in Leesville, Louisiana, in accordance with the Branch Purchase and Assumption Agreement dated May 11, 2023. We maintained the loan portfolio and transferred those loans to other nearby banking centers. The sale included total deposits of $16.3 million and a pre-tax gain of $945,000.

Acquisition of Waterstone

On January 31, 2024, we consummated the acquisition, through b1BANK, of Waterstone, headquartered in Katy, Texas. Waterstone offers community banks and small businesses a range of SBA lending services including planning, pre-qualification, packaging, closing and disbursements, servicing, and liquidations. Upon consummation of the acquisition, we paid $3.3 million in cash to the former owners of Waterstone.

Acquisition of Oakwood

On October 1, 2024, we consummated the merger of Oakwood, the parent bank holding company for Oakwood Bank, with and into us, with us continuing as the surviving corporation pursuant to the terms of the Reorganization Agreement. Immediately following the consummation of the Oakwood acquisition, Oakwood Bank merged with and into us, with us surviving the merger. Pursuant to the terms of the Reorganization Agreement, upon consummation of the Oakwood acquisition, we issued 3,973,134 shares of our common stock to the former shareholders of Oakwood. As of September 30, 2024, Oakwood had $863.6 million in total assets, $700.2 million in loans and $741.3 million in total deposits.

Financial Highlights

The financial highlights as of and for the year ended December 31, 2024 include:

•Total assets of $7.9 billion, a $1.3 billion, or 19.3%, increase from December 31, 2023.

•Total loans held for investment of $6.0 billion, a $988.6 million, or 19.8%, increase from December 31, 2023.

•Total deposits of $6.5 billion, a $1.3 billion, or 24.1%, increase from December 31, 2023.

•Net income available to common shareholders of $59.7 million, a $5.9 million, or 9.0%, decrease from the year ended December 31, 2023.

•Net interest income of $227.4 million, a $12.3 million, or 5.7%, increase from the year ended December 31, 2023.

•An allowance for credit losses of 0.98% of total loans held for investment, compared to 0.88% as of December 31, 2023, and a ratio of nonperforming loans to total loans held for investment of 0.42%, compared to 0.34% as of December 31, 2023.

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•Earnings per common share for the year ended December 31, 2024 of $2.27 per basic common share and $2.26 per diluted common share, compared to $2.62 per basic common share and $2.59 per diluted common share for the year ended December 31, 2023.

•Return to common shareholders on average assets of 0.86% compared to 1.04% for the year ended December 31, 2023.

•Return to common shareholders on average common equity of 9.54% compared to 12.36% for the year ended December 31, 2023.

•Capital Ratios included Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 9.53%, 9.44%, 10.56% and 12.75%, respectively, compared to Tier 1 Leverage, Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based Capital of 9.52%, 9.15%, 10.46% and 12.85% for the year ended December 31, 2023.

•Book value per common share of $24.62, an increase of 9.0% from $22.58 at December 31, 2023.

Results of Operations for the Years Ended December 31, 2024 and 2023

Performance Summary

For the year ended December 31, 2024, net income available to common shareholders was $59.7 million, or $2.27 per basic common share and $2.26 per diluted common share, compared to net income available to common shareholders of $65.6 million, or $2.62 per basic common share and $2.59 per diluted common share, for the year ended December 31, 2023. Return to common shareholders on average assets decreased to 0.86% for the year ended December 31, 2024 from 1.04% for the year ended December 31, 2023. Return to common shareholders on average common equity decreased to 9.54% for the year ended December 31, 2024, as compared to 12.36% for the year ended December 31, 2023.

Net Interest Income

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

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

For the year ended December 31, 2024, net interest income totaled $227.4 million, and net interest margin and net interest spread were 3.48% and 2.55%, respectively. For the year ended December 31, 2023, net interest income totaled $215.1 million and net interest margin and net interest spread were 3.62% and 2.72%, respectively. The average yield on the loan portfolio was 7.03%, for the year ended December 31, 2024, compared to 6.65% for the year ended December 31, 2023, and the average yield on total interest-earning assets was 6.35% for the year ended December 31, 2024, compared to 5.95% for the year ended December 31, 2023. For the year ended December 31, 2024, overall cost of funds (which includes noninterest-bearing deposits) increased 58 basis points compared to the year ended December 31, 2023.

The following table presents, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned

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on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the years ended December 31, 2024, 2023 and 2022, interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield. The average total loans reflected below is net of deferred loan fees and discounts. Acquired loans were recorded at fair value at acquisition and accrete/amortize discounts and premiums as an adjustment to yield.

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

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

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities, and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates.

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For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

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Provision for Credit Losses

Our provision for credit losses is a charge to income in order to bring our allowance for credit losses to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the allowance for credit losses see “—Financial Condition—Allowance for Credit Losses.” The provision for credit losses was $10.9 million and $4.5 million for the years ended December 31, 2024 and 2023, respectively. The higher provision during the year ended December 31, 2024 compared to 2023 relates primarily to the acquisition of Oakwood, and, to a lesser extent, increases from organic loan growth and non-performing loans.

Noninterest Income (“Other Income”)

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

Noninterest income for the year ended December 31, 2024 increased $7.6 million, or 20.6%, to $44.2 million compared to noninterest income of $36.6 million for the same period in 2023. The components of noninterest income with significant fluctuations compared to the prior year period were as follows:

Service charges on deposit accounts. We earn fees from our customers for deposit-related services, and these fees constitute a significant and predictable component of our noninterest income. Service charges on deposit accounts were $10.6 million for the year ended December 31, 2024, compared to $9.7 million for the 2023, an increase of $873,000, or 9.0%.

Gain on sales of loans. We had gains on sales of loans of $3.0 million in 2024, compared to $2.0 million in 2023, an increase of $1.0 million, or 50.8%, primarily due to increased SBA loan sale activity.

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Gain (loss) on sales of investment securities. We had net gains on the sales of investment securities of $7,000 in 2024, compared to net losses on the sales of $2.6 million in 2023. During the fourth quarter of 2023, we sold $71.5 million in securities at a loss, with a weighted average book yield of 1.98% and reinvested the funds into high yielding investments with an average book yield of 5.17%, locking in higher yields and keeping consistent, the duration and overall portfolio weighted average life.

Gain on sales of other real estate owned. We had net gains on the sales or other real estate owned of $89,000 in 2024, compared to $646,000 in 2023, a decrease of $557,000. The majority of the gains on sale of other real estate in 2023 resulted from the sale of two properties at a total gain of $511,000.

Gain on sale of banking center. We sold a banking center located in Leesville, Louisiana that resulted in a gain of $945,000 during 2023.

Gain on extinguishment of debt. We extinguished $8.9 million in subordinated debt resulting in a gain on the extinguishment of debt of $1.5 million during 2023.

Swap fee income. We had swap fee income from back-to-back interest rate swaps in the amount of $2.7 million in 2024, compared to $964,000 during 2023, an increase of $1.8 million, or 184.1%.

Other. This category includes a variety of other income producing activities, including wire transfer fees, insurance commissions and credit card income. Other income increased $2.5 million, or 53.0%, for the year ended December 31, 2024, compared to the same period in 2023.

Noninterest Expense (“Other Expense”)

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

The following table presents, for the periods indicated, the major categories of noninterest expense:

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Noninterest expense for the year ended December 31, 2024 increased $21.0 million, or 13.4%, to $177.7 million compared to noninterest expense of $156.7 million for the same period in 2023. The components of noninterest expense with significant fluctuations compared to the prior year period were as follows:

Salaries and employee benefits. Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $103.9 million for the year ended December 31, 2024, an increase of $13.3 million, or 14.7%, compared to the same period in 2023. The increase was primarily due to the acquisitions of Waterstone and Oakwood, additional hires for new positions and our merit increase cycle. As of December 31, 2024, we had 859 full-time equivalent employees, compared to 761 full-time equivalents as of December 31, 2023. Salaries and employee benefits included stock-based compensation expense of $2.5 million and $4.4 million for the years ended December 31, 2024 and 2023, respectively.

Occupancy of bank premises. Occupancy of bank premises expenses were $10.9 million and $9.5 million for the years ended December 31, 2024 and 2023, respectively, an increase of $1.4 million, or 15.0%, which is primarily due to the acquisition of Oakwood.

Data processing. Data processing fees were $12.0 million and $9.0 million for the years ended December 31, 2024 and 2023, respectively, an increase of $2.9 million, or 32.4%.

Merger and conversion related expenses. Merger and conversion related expenses for the year ended December 31, 2024 was primarily to the acquisitions of Waterstone and Oakwood in 2024.

Other. This category includes various operating and administrative expenses including business development expenses (i.e. travel and entertainment, donations and club dues), insurance, supplies and printing, equipment rent, and software support and maintenance. Other noninterest expense increased $235,000, or 1.1%, for the year ended December 31, 2024 compared to the same period in 2023.

Income Tax Expense

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

For the year ended December 31, 2024, income tax expense totaled $17.9 million, an decrease of $1.6 million, or 8.2%, compared to $19.5 million for the same period in 2023. For the years ended December 31, 2024 and 2023, our effective tax rates were 21.6% and 21.6%, respectively.

Financial Condition

Our total assets increased $1.3 billion, or 19.3%, from $6.6 billion as of December 31, 2023 to $7.9 billion as of December 31, 2024, due primarily from the acquisition of Oakwood, increases in our loan portfolio, as well as our cash and cash equivalents due to our increase in deposits.

Loan Portfolio

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

As of December 31, 2024, total loans, excluding mortgage loans held for sale, were $6.0 billion, an increase of $988.6 million or 19.8%, compared to $5.0 billion as of December 31, 2023. The increase was primarily due to the acquisition of Oakwood. Additionally, $717,000 and $835,000 in mortgage loans were classified as loans held for sale as of December 31, 2024 and 2023, respectively.

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Total loans held for investment as a percentage of deposits were 91.9% and 95.1% as of December 31, 2024 and 2023, respectively. Total loans held for investment as a percentage of assets were 76.1% and 75.8% as of December 31, 2024 and 2023, respectively.

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

Real Estate: Commercial loans are extensions of credit secured by owner-occupied and non-owner-occupied collateral. Repayment is generally dependent on the successful operations of the property. General economic conditions may impact the performance of these types of loans, including fluctuations in the value of real estate, vacancy rates, and unemployment trends. Real estate commercial loans also include farmland loans that can be, or are, used for agricultural purposes. These loans are usually repaid through refinancing, cash flow from the borrower’s ongoing operations, development of the property, or sale of the property.

Real Estate: Commercial loans increased $265.3 million, or 12.0%, to $2.5 billion as of December 31, 2024, from $2.2 billion as of December 31, 2023.

Real Estate: Construction loans include loans to small-to-midsized businesses to construct owner-occupied properties, loans to developers of commercial real estate investment properties and residential developments and, to a lesser

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extent, loans to individual clients for construction of single-family homes in our market areas. Risks associated with these loans include fluctuations in the value of real estate, project completion risk and changes in market trends. We are also exposed to risk based on the ability of the construction loan borrower to finance the loan or sell the property upon completion of the project, which may be affected by changes in secondary market terms and criteria for permanent financing since the time we funded the loan.

Real Estate: Construction loans increased $704,000, or 0.1%, to $670.5 million as of December 31, 2024, from $669.8 million as of December 31, 2023.

Real Estate: Residential loans include first and second lien 1-4 family mortgage loans, as well as home equity lines of credit, in each case primarily on owner-occupied primary residences. The Company is exposed to risk based on fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness, or other personal hardship. Real estate residential loans also include multi-family residential loans originated to provide permanent financing for multi-family residential income producing properties. Repayment of these loans primarily relies on successful rental and management of the property.

Real Estate: Residential loans increased $202.1 million, or 29.6%, to $884.5 million as of December 31, 2024, from $682.4 million as of December 31, 2023.

Commercial loans include general commercial and industrial, or C&I, loans, including commercial lines of credit, working capital loans, term loans, equipment financing, asset acquisition, expansion, and development loans, borrowing base loans, letters of credit and other loan products, primarily in the Company’s target markets that are underwritten based on the borrower’s ability to service the debt from income. Commercial loan risk is derived from the expectation that such loans generally are serviced principally from the operations of the business, and those operations may not be successful. Any interruption or discontinuance of operating cash flows from the business, which may be influenced by events not under the control of the borrower such as economic events and changes in governmental regulations, could materially affect the ability of the borrower to repay the loan.

Commercial loans increased $509.8 million, or 37.5%, to $1.9 billion as of December 31, 2024, from $1.4 billion as of December 31, 2023.

Consumer and other loans include a variety of loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans. The risk is based on changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness or other personal hardship, and fluctuations in the value of the real estate or personal property securing the consumer loan, if any.

Consumer and other loans increased $10.6 million, or 16.7%, to $74.5 million as of December 31, 2024, from $63.8 million as of December 31, 2023.

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

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Nonperforming Assets

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

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

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We believe our conservative lending approach and focused management of nonperforming assets has resulted in sound asset quality and the timely resolution of problem assets. We had $30.5 million and $18.8 million in nonperforming assets as of December 31, 2024 and 2023, respectively. We had $25.0 million in nonperforming loans as of December 31, 2024 compared to $17.1 million as of December 31, 2023. The increase in nonperforming assets from December 31, 2023 to December 31, 2024 is primarily due to two lending relationships secured by residential real estate, one secured by commercial real estate, and one commercial loan that is unsecured.

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

Potential Problem Loans

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

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

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

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

The following tables summarize our internal ratings of loans held for investment as of the dates indicated. See Note 7 of the consolidated financial statements for the presentation of loans in their credit quality categories that is in compliance with the CECL standard.

Allowance for Credit Losses

We maintain an allowance for credit losses, which includes both our allowance for loan losses and reserves for unfunded commitments, that represents management’s best estimate of the credit losses and risks inherent in the loan portfolio. In determining the allowance for credit losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for credit losses is based on internally assigned risk classifications of loans, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical credit loss rates. For additional discussion of our methodology, please refer to “—Critical Accounting Estimates—Allowance for Credit Losses.”

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

•for Real Estate: Commercial loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral, and the volatility of income, property value and future operating results typical for properties of that type;

•for Real Estate: Construction loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, the experience and ability of the developer, and the loan to value ratio;

•for Real Estate: Residential real estate loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan to value ratio, and the age, condition and marketability of the collateral; and

•for Commercial loans, the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category, and the value, nature and marketability of collateral;

As of December 31, 2024, the allowance for credit losses totaled $58.5 million, or 0.98%, of total loans held for investment. As of December 31, 2023, the allowance for credit losses totaled $43.7 million, or 0.88%, of total loans held for investment. As of December 31, 2022, the allowance for credit losses totaled $38.8 million, or 0.84%, of total loans held for investment.

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The following tables present, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data:

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

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

Securities

We use our securities portfolio to provide a source of liquidity, an appropriate return on funds invested, manage interest rate risk, meet collateral requirements, and meet regulatory capital requirements. As of December 31, 2024, the carrying amount of investment securities totaled $893.5 million, an increase of $14.0 million, or 1.6%, compared to $879.6 million as of December 31, 2023. Securities represented 11.4% and 13.4% of total assets as of December 31, 2024 and 2023, respectively.

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

All of our mortgage-backed securities are agency securities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio as of December 31, 2024.

The allowance for credit losses encompasses potential expected credit losses related to the securities portfolio. In order to develop an estimate of credit losses expected for the current securities portfolio, we perform an assessment that includes reviewing historical loss data for both our portfolio and similar types of investment securities. Additionally, our review of the securities portfolio for expected credit losses includes an evaluation of factors including the security issuer bond ratings, delinquency status, insurance or other available credit support, as well as our expectations of the forecasted economic outlook relevant to these securities. The results of the analysis are evaluated quarterly to confirm that credit loss estimates are appropriate for the securities portfolio. Based on our assessments, expected credit losses on the investment securities portfolio as of December 31, 2024 and 2023, was negligible and therefore, no allowance for credit loss was recorded related to our investment securities.

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

The contractual maturity of mortgage-backed securities, collateralized mortgage obligations and asset-backed securities is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and asset-backed securities are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay. Monthly paydowns on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was 4.63 years with an estimated effective duration of 3.79 years as of December 31, 2024.

As of December 31, 2024 and 2023, we did not own securities of any one issuer for which aggregate adjusted cost exceeded 10% of the consolidated shareholders’ equity as of such respective dates.

As of December 31, 2024 and 2023, the Company held other equity securities of $41.1 million and $33.9 million, respectively, comprised mainly of FHLB stock, SBIC’s and financial technology (“Fintech”) fund investments.

Deposits

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

Total deposits as of December 31, 2024 were $6.5 billion, an increase of $1.3 billion, or 24.1%, compared to $5.2 billion as of December 31, 2023. Total uninsured deposits were $2.8 billion, or 43.4% of deposits as of December 31, 2024 compared to $2.0 billion, or 38.9%, or total deposits as of December 31, 2023. Since it is not reasonably practicable to

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provide a precise measure of uninsured deposits, the amounts are estimated and are based on the same methodologies and assumptions that are used for regulatory reporting requirements for the call report.

Noninterest-bearing deposits as of December 31, 2024 were $1.4 billion compared to $1.3 billion as of December 31, 2023, an increase of $58.0 million, or 4.5%.

Average deposits for the year ended December 31, 2024 were $5.7 billion, an increase of $733.5 million, or 14.7%, compared to the year ended December 31, 2023 of $5.0 billion. The average rate paid on total interest-bearing deposits increased over this period from 3.00% for the year ended December 31, 2023 to 3.73% for the year ended December 31, 2024. The increase in average rates was driven by the federal reserve raising interest rates during the years ended December 31, 2023 and 2022. In addition, the stability and the continued growth of noninterest-bearing demand accounts served to reduce the cost of deposits to 2.89% for the year ended December 31, 2024 and 2.15% for the year ended December 31, 2023.

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

The ratio of average noninterest-bearing deposits to average total deposits for the years ended December 31, 2024 and 2023 was 22.5% and 28.4%, respectively.

The following table sets forth the contractual maturities of certain certificates of deposit at December 31, 2024:

Borrowings

We utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities. In addition, we use short-term borrowings to periodically repurchase outstanding shares of our common stock and for general corporate purposes. Each of these relationships are discussed below.

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FHLB advances. The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of December 31, 2024 and 2023, total borrowing capacity of $2.0 billion and $1.8 billion, respectively, was available under this arrangement and $355.9 million and $211.2 million, respectively, was outstanding with a weighted average stated interest rate of 4.15% as of December 31, 2024 and 3.65% as of December 31, 2023. Our current longest dated FHLB advance matures within ten years. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio.

The following table presents our FHLB borrowings at the dates indicated.

Bank Term Funding Program (“BTFP”). On March 12, 2023, the Federal Reserve launched the BTFP, which offered loans to banks with a term of up to one year. The loans were secured by pledging participating banks’ U.S. treasuries, agency securities, agency mortgage-backed securities, and any other qualifying assets. These pledged securities were valued at par for collateral purposes. The Bank participated in the BTFP and had outstanding debt of $300.0 million at December 31, 2023. These loans bore a fixed interest rate of 4.38% and matured on March 22, 2024, at which time we repaid them in full.

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The following table presents our Bank Term Funding Program borrowings at the date indicated.

Subordinated Note Purchase Agreement (“Subordinated Debt”). In December 2018 we issued subordinated notes in the amount of $25.0 million. The subordinated notes bear a fixed rate of interest at 6.75% until December 31, 2028 and a floating rate thereafter through maturity in 2033. The balance outstanding at both December 31, 2024 and 2023 was $25.0 million. These subordinated notes were issued for the purpose of paying off our long term advance and line of credit with First National Bankers' Bank ("FNBB"), for general corporate purposes and to provide Tier 2 capital. The subordinated notes are redeemable by the Company at its option beginning in 2028.

On March 26, 2021, we issued $52.5 million in subordinated notes. These subordinated notes bear interest at a fixed rate of 4.25% through March 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031. The balance outstanding at both December 31, 2024 and 2023 was $52.5 million. The subordinated notes are redeemable by the Company at its option beginning in 2026.

On April 1, 2021, we consummated the acquisition of SSW. Under the terms of the acquisition, we issued $3.9 million in subordinated debt to the former owners of SSW. This subordinated debt bears interest at a fixed rate of 4.75% through April 1, 2026 and a floating rate, based on a benchmark rate plus 442 basis points, thereafter through maturity in 2031. The balance outstanding at both December 31, 2024 and 2023 was $3.9 million. The subordinated notes are redeemable by the Company at its option beginning in 2026.

On March 1, 2022, we consummated the acquisition of TCBI. As part of the acquisition, we assumed $26.4 million in subordinated debt. Of those notes, $10.0 million bears an adjustable interest rate plus 350 basis points, based on a benchmark rate, adjusting quarterly until maturity on April 11, 2028, and was callable beginning April 11, 2023, $7.5 million bears an adjustable interest rate plus 350 basis points, based on a benchmark rate, adjusting quarterly, until maturity on December 13, 2028, and was callable beginning December 13, 2023, $8.9 million was called on May 1, 2023 and ceased bearing interest as of such date. This $8.9 million note was fully extinguished during the year ended December 31, 2023. As part of valuing these three subordinated notes from TCBI, we incurred a fair value adjustment premium of $3.4 million that will accrete over five-to-seven years, with $833,000 and $1.1 million remaining at December 31, 2024 and December 31, 2023, respectively. We recognized $1.5 million in gains on the extinguishment of this debt during the year ended December 31, 2023.

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The following table presents the Subordinated Debt at the dates indicated.

Trust preferred securities. In the Pedestal acquisition, we assumed their obligations of $5.2 million in junior subordinated debentures, which are associated with $5.0 million in trust preferred securities issued by a trust. Interest on the junior subordinated debentures is accrued at an annual rate equal to the 3-month LIBOR, as determined in the agreement, plus 3.05%. Interest is payable quarterly. The agreement indenture governing the debentures allows us to defer interest payments for up to 20 consecutive quarterly periods. The trust preferred securities do not have a stated maturity date, however, they are subject to mandatory redemption on September 17, 2033, or upon earlier redemption. We have guaranteed, on a subordinated basis, distributions and other payments due on the trust preferred securities subject to the guarantee agreement and the indenture. Principal and interest payments on the junior subordinated debentures are in a superior position to the liquidation rights of holders of common stock.

Federal Funds Purchased Lines of Credit Relationships

We maintain Federal Funds Purchased Lines of Credit Relationships with the following correspondent banks and limits as of December 31, 2024:

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The following table represents combined Federal Funds Purchased Lines of Credit for all relationships at the dates indicated.

Liquidity and Capital Resources

Liquidity

Liquidity involves our ability to utilize funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the years ended December 31, 2024 and 2023, liquidity needs were primarily met by core deposits, security and loan maturities, and amortizing investment and loan portfolios. In addition, we utilize, or have available, brokered deposits, purchased funds from correspondent banks, the Federal Reserve discount window, and overnight advances from the FHLB. As of December 31, 2024 and 2023, we maintained six and five lines of credit, respectively, with correspondent banks which provided for extensions of credit with an availability to borrow up to an aggregate of $160.0 million and $145.0 million as of December 31, 2024 and 2023, respectively. There were no funds under these lines of credit outstanding as of December 31, 2024 and 2023, respectively.

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The following table illustrates, during the periods presented, the mix of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the period indicated. Average assets totaled $7.0 billion and $6.3 billion for the years ended December 31, 2024 and 2023, respectively.

Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average loans increased 9.6% for the year ended December 31, 2024 compared to the same period in 2023. We predominantly invest excess funds in overnight deposits with the Federal Reserve, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth. Our securities portfolio had a weighted average life of 4.63 years and an effective duration of 3.79 years as of December 31, 2024 and a weighted average life of 4.57 years and an effective duration of 3.81 years as of December 31, 2023.

As of December 31, 2024, we had outstanding $1.4 billion in commitments to extend credit and $50.0 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2023, we had outstanding $1.2 billion in commitments to extend credit and $45.2 million in commitments associated with outstanding standby and commercial letters of credit. Because commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. See “-Off Balance Sheet Items” below for additional information.

As of December 31, 2024, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature. We had cash and cash equivalents, federal funds sold and securities purchased under agreements to resell, of $567.6 million and $377.2 million as of December 31, 2024 and 2023, respectively.

Capital Resources

Total shareholders’ equity increased to $799.5 million as of December 31, 2024, compared to $644.3 million as of December 31, 2023, an increase of $155.2 million, or 24.1%. This increase was primarily due to the acquisition of Oakwood, which resulted in stock issuance of $103.8 million, net income available to common shareholders of $59.7 million, other comprehensive income of $3.6 million resulting from the after tax effect of unrealized gains in our investment securities portfolio, and offset by dividends paid on common shares of $14.9 million.

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On January 23, 2025, our board of directors declared a quarterly dividend in the amount of $18.75 per preferred share to the preferred shareholders of record as of February 15, 2025. The dividend was paid on February 28, 2025.

On January 23, 2025, our board of directors declared a quarterly dividend based upon our financial performance for the three months ended December 31, 2024 in the amount of $0.14 per common share to the common shareholders of record as of February 15, 2025. The dividend was paid on February 28, 2025.

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

Capital management consists of providing equity to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the holding company and bank levels. As of December 31, 2024 and December 31, 2023, we and b1BANK were in compliance with all applicable regulatory capital requirements, and b1BANK was classified as “well-capitalized,” for purposes of prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all applicable regulatory capital standards applicable to us.

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

Preferred Stock

On September 1, 2022, we entered into a securities purchase agreement with certain investors pursuant to which we offered and sold shares of our 7.50% fixed-to-floating rate non-cumulative perpetual preferred stock, with no par value, for an aggregate purchase price of $72.0 million. The preferred stock was structured to qualify as additional Tier 1 capital under applicable regulatory capital guidelines. Holders of the preferred stock will be entitled to receive, if, when, and as declared by our board of directors, non-cumulative cash dividends at a rate of 7.50% for the first five years following issuance and thereafter at a variable rate equal to the then current 3-month secured overnight financing rate (“SOFR”), reset quarterly, plus 470 basis points. The preferred stock has a perpetual term and may not be redeemed, except under certain circumstances, under the first five years of issuance.

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Long Term Debt

For information on our subordinated debt, please refer to “Borrowings”.

FHLB Advances

Advances from the FHLB totaled approximately $355.9 million and $211.2 million at December 31, 2024 and 2023, respectively. As of December 31, 2024, and 2023, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 4.15% and 3.65%, respectively, and mature within ten years. At December 31, 2024, $55.0 million in advances were short term with a rate of 4.38% and none at December 31, 2023.

Bank Term Funding Program (“BTFP”)

On March 12, 2023, the Federal Reserve launched the BTFP, which offered loans to banks with a term of up to one year. The loans were secured by pledging participating banks’ U.S. treasuries, agency securities, agency mortgage-backed securities, and any other qualifying assets. These pledged securities were valued at par for collateral purposes. The Bank participated in the BTFP and had outstanding debt of $300.0 million at December 31, 2023. These loans bore a fixed interest rate of 4.38% and mature on March 22, 2024, at which time we repaid them in full.

Contractual Obligations

The following tables summarize contractual obligations and other commitments to make future payments as of December 31, 2024 and 2023 (other than non-maturity deposit obligations), which consist of future cash payments associated with our contractual obligations pursuant to our FHLB advances, subordinated debt, revolving line of credit, and non-cancelable future operating leases. Payments related to leases are based on actual payments specified in underlying contracts. Advances from the FHLB totaled approximately $355.9 million and $211.2 million as of December 31, 2024 and 2023, respectively. As of December 31, 2024 and 2023, the FHLB advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average stated rate of 4.15% and 3.65%, respectively, and maturing within ten years. We participated in the BTFP in March 2023 and as of December 31, 2023, had outstanding debt of $300.0 million, at a fixed rate of 4.38% and set to mature on March 22, 2024. We repaid this debt in full at the time of maturity. The subordinated debt totaled $99.8 million and $100.0 million as of December 31, 2024 and 2023. Of this subordinated debt, $25.0 million bears interest at a fixed rate of 6.75% through December 31, 2028 and a floating rate, based on a benchmark rate plus 369 basis points, thereafter through maturity in 2033, $52.5 million of this subordinated debt bears interest at a fixed rate of 4.25% through March 31, 2026 and a floating rate, based on a benchmark rate plus 354 basis points, thereafter through maturity in 2031, $3.9 million of this subordinated debt bears interest at a fixed rate of 4.75% through April 1, 2026 and a floating rate, based on a benchmark rate plus 442 basis points, thereafter through maturity in 2031. We acquired three separate notes as part of the TCBI acquisition totaling $26.4 million. Of those notes, $10.0 million bears an adjustable interest rate plus 350 basis points, based on a benchmark rate, adjusting quarterly until maturity on April 11, 2028, and callable beginning April 11, 2023, $7.5 million bears an adjustable interest rate plus 350 basis points, based on a benchmark rate, adjusting quarterly, until maturity on December 13, 2028, and callable beginning December 13, 2023, $8.9 million was called on May 1, 2023 and ceased bearing interest as of such date. This $8.9 million note was fully extinguished during the year ended December 31, 2023. As part of valuing these three subordinated notes from TCBI, we incurred a fair value adjustment premium of $3.4 million that will accrete over five-to-seven years, with $833,000 and $1.1 million remaining at December 31, 2024 and December 31, 2023, respectively. We recognized $1.5 million in gains on the extinguishment of this debt during the year ended December 31, 2023.

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