# Investar Holding Corp (ISTR) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Investar Holding Corp's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1602658/000143774922005693/istr20211231_10k.htm
Accession: 0001437749-22-005693
Filing date: 2022-03-09
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ISTR/
All MD&A years: /company/ISTR/mda/
Next year: /company/ISTR/mda/fy2022/ (FY 2022)

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

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, financial condition, credit quality and performance goals, as well as statements relating to the anticipated effects on our business, financial condition and results of operations from expected developments, our growth, and potential acquisitions. 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:

[[GREPCENT_TABLE]]
[["\u2022","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 in the United States caused by the ongoing COVID-19 pandemic, including but not limited to potential continued higher inflation and supply and labor constraints, which will depend on several factors, including the scope and duration of the pandemic, its continued influence on the economy and financial markets, the impact on market participants on which we rely, and actions taken by governmental authorities and other third parties in response to the pandemic;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","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 evolving risks to economic activity and our customers posed by the COVID-19 pandemic and government actions taken to address the impact of COVID-19 or contain it, the potential impact of the termination of various pandemic-related government support programs, and the potential impact of legislation under consideration in Congress, which could increase government programs, spending and taxes;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","the risk that the SBA will not guarantee the PPP loans we originated if it determines that there is a deficiency in the manner in which any PPP loan was originated, funded, or serviced by us;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","our ability to achieve organic loan and deposit growth, and the composition of that growth;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","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 2022;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","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;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","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;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","our dependence on our management team, and our ability to attract and retain qualified personnel;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries or in the repayment ability of individual borrowers;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","inaccuracy of the assumptions and estimates we make in establishing reserves for probable loan losses and other estimates;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","the concentration of our business within our geographic areas of operation in Louisiana, Texas and Alabama;"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["\u2022","concentration of credit exposure;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","any deterioration in asset quality and higher loan charge-offs, and the time and effort necessary to resolve problem assets;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","a reduction in liquidity, including as a result of a reduction in the amount of deposits we hold or other sources of liquidity;"],["\u2022","ongoing disruptions in the oil and gas industry due to the significant fluctuations in the price of oil and natural gas;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","potential impairment of our goodwill and other intangible assets;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","our potential growth, including our entrance or expansion into new markets, and the need for sufficient capital to support that growth;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","difficulties in identifying attractive acquisition opportunities and strategic partners that will complement our relationship banking approach;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","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;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","the impact of litigation and other legal proceedings to which we become subject;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","data processing system failures and errors;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","cyberattacks and other security breaches;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","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;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","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;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","changes in the scope and costs of FDIC insurance and other coverages;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","governmental monetary and fiscal policies, including the potential for the Federal Reserve Board to raise target interest rates one or more times during 2022;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","hurricanes (including the recent hurricanes, tropical storms and tropical depressions that have affected the Company\u2019s market areas), floods, winter storms, other natural disasters and adverse weather; 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"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","other circumstances, many of which are beyond our control."]]
[[/GREPCENT_TABLE]]

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.

COVID-19

Overview. In March 2020, COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the President of the United States. The global COVID-19 pandemic and the public health response to minimize its impact have had severe disruptive effects on economic, financial market and oil market conditions beginning in the latter part of the first quarter of 2020, and continuing through the fourth quarter of 2021 and beyond. Beginning in the first quarter of 2020, government responses to the pandemic included mandated closures of businesses not deemed essential, restrictions on other businesses, and stay-at-home orders or recommendations, along with crowd restrictions, which caused steep increases in unemployment and decreases in consumer and business spending. Government authorities in our markets began allowing the re-opening of businesses and easing other restrictions in the second quarter of 2020. During 2020 and 2021, the United States experienced multiple periods of declines followed by resurgences of new cases, including due to the emergence of new variants of the COVID-19 virus, leading to cycles of tightening and subsequent lessening of governmental restrictions, such as mask mandates and restrictions on business activity. Economic activity in the U.S., stock prices, and oil prices rose significantly during 2021, as COVID-19 vaccines became widely available and pandemic-related restrictions lessened or were eliminated. At the same time, many industries have been experiencing supply chain disruptions and labor shortages. Inflation has also increased significantly. We cannot predict the extent to which individuals may decide to restrict their activities as a result of evolving pandemic developments, the extent to which governments may reinstitute certain restrictions, nor what future impact evolving pandemic developments may have on the economy or our business. The extent to which our operations and financial performance will be impacted by the pandemic in 2022 will depend in part on future developments, including the long-term efficacy, global availability and acceptance of the vaccines, emergence of new variants of the COVID-19 virus, as well as the effects of existing and potential additional governmental stimulus legislation and other actions taken in response to the pandemic.

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Legislative and Regulatory Developments. In a measure aimed at lessening the economic impact of COVID-19, the Federal Reserve reduced the federal funds rate to 0 to 0.25% on March 16, 2020. This action by the Federal Reserve followed a prior reduction of the targeted federal funds rates to a range of 1.0% to 1.25% on March 3, 2020. On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the largest economic stimulus package in the nation’s history, which included the Small Business Administration’s (“SBA”) and U.S. Department of Treasury’s Paycheck Protection Program (“PPP”), discussed further below, in an effort to lessen the impact of COVID-19 on consumers and businesses. As funds available under the PPP were quickly depleted, on April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was signed into law, which, among other things, increased amounts available under the PPP. On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”) was enacted, which among other things, provided expanded relief under the PPP. On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was enacted providing an additional $900 billion in aid to individuals and businesses, which among other things, provided additional funding for the PPP and allowed businesses meeting certain requirements to obtain a second PPP loan. Congress passed the American Rescue Plan Act of 2021 (“Rescue Act”), an additional $1.9 trillion stimulus package, in March 2021. The Rescue Act provided additional funding for the PPP and extended and modified the Employee Retention Credit (“ERC”) discussed below, among other things.

Paycheck Protection Program. Beginning in the second quarter of 2020, the Bank has participated as a lender in the PPP as established by the CARES Act and as subsequently modified by other legislation. The PPP was established to provide unsecured low interest rate loans to small businesses that have been impacted by the COVID-19 pandemic. The PPP loans are 100% guaranteed by the SBA. The loans have a fixed interest rate of 1% and payments are deferred until the date on which the amount of loan forgiveness is remitted to the lender by the SBA, the forgiveness application is otherwise denied, or if no forgiveness application is filed 10 months after the end of the borrower’s covered period. PPP loans made prior to June 5, 2020 mature two years from origination, or if made on or after June 5, 2020, five years from origination. PPP loans are forgiven by the SBA (which makes forgiveness payments directly to the lender) to the extent the borrower uses the proceeds of the loan for certain purposes (primarily to fund payroll costs) during a certain time period following origination and maintains certain employee and compensation levels. Lenders receive processing fees from the SBA for originating the PPP loans which are based on a percentage of the loan amount. The original PPP program ceased taking applications on August 8, 2020. On December 27, 2020, the CAA was enacted that renewed the PPP and allocated additional funding for both new first time PPP loans under the original PPP and also authorized second draw PPP loans for certain eligible borrowers that had previously received a PPP loan. The application period for the renewed PPP lasted from January 1, 2021 through May 31, 2021. At December 31, 2021 and December 31, 2020, our loan portfolio included PPP loans with balances of $23.3 million and $94.5 million, respectively, all of which are included in commercial and industrial loans.

Guidance on Treatment of Pandemic-related Loan Modifications Pursuant to the CARES Act and Interagency Statement. Section 4013 of the CARES Act provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), we may elect to suspend GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (“TDRs”) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic. The CAA extended the applicable period to the earlier of January 1, 2022 or 60 days after the national emergency termination date.

In addition, our banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the staff of the Financial Accounting Standards Board that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

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Accordingly, during 2020 and 2021, we offered short-term modifications made in response to COVID-19 to borrowers who were current and otherwise not past due. These include 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. See further discussion in the Loans – Loan Deferral Program section of the Discussion and Analysis of Financial Condition below.

Employee Retention Credit. The CARES Act also provided for an ERC, which is a broad based refundable payroll tax credit that incentivized businesses to retain employees on the payroll during the COVID-19 pandemic. The ERC is a credit against certain employment taxes of up to $5,000 per employee for eligible employers based on certain wages paid after March 12, 2020 through December 31, 2020. In 2021, the tax credit increased to up to $7,000 for each quarter, equal to 70% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee per quarter. The ERC terminated effective September 30, 2021. We qualified for the ERC based on the significant adverse financial impacts of the COVID-19 pandemic. In the fourth quarter of 2021, we recorded a $1.9 million reduction to payroll taxes related to the first quarter of 2021, which is included in salaries and employee benefits on the consolidated statements of operations for the year ended December 31, 2021.

Summary of Impact on our Operations and Financial Results. Financial services have been identified as a Critical Infrastructure Sector by the Department of Homeland Security, and therefore, our business has remained open throughout the pandemic. 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. We took actions to protect our customers and employees throughout the pandemic, including increasing our remote banking and working options. Net income for 2020 decreased compared to 2019, largely due to our increased provision for loan losses during 2020 as a result of the impact of the pandemic. Market conditions generally improved during 2021 compared to 2020, as vaccines became available and government restrictions lessened. We continue to service our consumer and business customers from our 33 branch locations and through drive-thrus, ATMs, internet banking, mobile application and telephone.

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 77% of our total deposits as of December 31, 2021), including Baton Rouge, New Orleans, Lafayette, Lake Charles, and their surrounding areas; southeast Texas, including Houston and its surrounding area, Alice and Victoria; and Alabama, including York and its surrounding area and, as of April 1, 2021, Oxford and its surrounding area. 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 23 full service branches in Louisiana, four 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 four de novo branch locations. We closed three branches during our last three fiscal years, as we continued to evaluate opportunities to improve our branch network efficiency and further reduce costs.

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 and gains on the sale of securities. Our principal expenses are interest expense on interest-bearing customer deposits and borrowings, salaries, 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

[[GREPCENT_TABLE]]
[["(In thousands, except share data)","As of and for the year ended December 31,"],["","2021(1)","","2020(1)","","2019(1)","","2018","","2017(1)"],["Financial Information"],["Total assets","$","2,513,203","","$","2,321,181","","$","2,148,916","","$","1,786,469","","$","1,622,734"],["Total stockholders' equity","","242,598","","","243,284","","","241,976","","","182,262","","","172,729"],["Net interest income","","83,814","","","73,534","","","64,818","","","57,370","","","42,517"],["Net income","","8,000","","","13,889","","","16,839","","","13,606","","","8,202"],["Diluted earnings per share","","0.76","","","1.27","","","1.66","","","1.39","","","0.96"],["Performance Ratios"],["Return on average assets","","0.31","%","","0.61","%","","0.85","%","","0.81","%","","0.62","%"],["Return on average equity","","3.22","","","5.77","","","8.21","","","7.68","","","5.65"],["Net interest margin","","3.53","","","3.49","","","3.51","","","3.61","","","3.39"],["Dividend payout ratio","","40.26","","","19.69","","","13.55","","","12.09","","","10.78"],["Capital Ratios"],["Total equity to total assets","","9.65","%","","10.48","%","","11.26","%","","10.20","%","","10.64","%"],["Tangible equity to tangible assets(2)","","8.04","","","9.22","","","9.96","","","9.20","","","9.53"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Certain performance indicators includes the effect of acquisitions from the date of each acquisition. On July 1, 2017, the Company acquired Citizens Bancshares, Inc. and its wholly-owned subsidiary, Citizens Bank, by merger with and into the Company and Bank, respectively. On December 1, 2017, the Company acquired BOJ Bancshares, Inc. and its wholly-owned subsidiary, The Highlands Bank, by merger with and into the Company and Bank, respectively. 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 Company acquired two branches from PlainsCapital Bank by purchase and assumption agreement with and into the 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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(2)","Non-GAAP financial measure. See reconciliation below."]]
[[/GREPCENT_TABLE]]

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).

[[GREPCENT_TABLE]]
[["","","As of and for the year ended December 31,"],["","","2021","","","2020","","","2019","","","2018","","","2017"],["Total stockholders\u2019 equity - GAAP","","$","242,598","","","$","243,284","","","$","241,976","","","$","182,262","","","$","172,729"],["Adjustments:"],["Goodwill","","","40,088","","","","28,144","","","","26,132","","","","17,424","","","","17,086"],["Core deposit intangible","","","3,848","","","","3,988","","","","4,803","","","","2,263","","","","2,740"],["Trademark intangible","","","100","","","","100","","","","100","","","","100","","","","100"],["Tangible equity","","$","198,562","","","$","211,052","","","$","210,941","","","$","162,475","","","$","152,803"],["Total assets - GAAP","","$","2,513,203","","","$","2,321,181","","","$","2,148,916","","","$","1,786,469","","","$","1,622,734"],["Adjustments:"],["Goodwill","","","40,088","","","","28,144","","","","26,132","","","","17,424","","","","17,086"],["Core deposit intangible","","","3,848","","","","3,988","","","","4,803","","","","2,263","","","","2,740"],["Trademark intangible","","","100","","","","100","","","","100","","","","100","","","","100"],["Tangible assets","","$","2,469,167","","","$","2,288,949","","","$","2,117,881","","","$","1,766,682","","","$","1,602,808"],["Total shares outstanding","","","10,343,494","","","","10,608,869","","","","11,228,775","","","","9,484,219","","","","9,514,926"],["Book value per share","","$","23.45","","","$","22.93","","","$","21.55","","","$","19.22","","","$","18.15"],["Effect of adjustments","","","(4.25",")","","","(3.04",")","","","(2.76",")","","","(2.09",")","","","(2.09",")"],["Tangible book value per share","","$","19.20","","","$","19.89","","","$","18.79","","","$","17.13","","","$","16.06"],["Total equity to total assets","","","9.65","%","","","10.48","%","","","11.26","%","","","10.20","%","","","10.64","%"],["Effect of adjustments","","","(1.61",")","","","(1.26",")","","","(1.30",")","","","(1.00",")","","","(1.11",")"],["Tangible equity to tangible assets","","","8.04","%","","","9.22","%","","","9.96","%","","","9.20","%","","","9.53","%"],["Efficiency ratio(1)"],["Noninterest expense","","$","63,062","","","$","57,131","","","$","48,168","","","$","41,882","","","$","32,342"],["Net interest income","","","83,814","","","","73,534","","","","64,818","","","","57,370","","","","42,517"],["Noninterest income","","","12,042","","","","12,096","","","","6,216","","","","4,318","","","","3,815"],["Efficiency ratio","","","65.79","%","","","66.72","%","","","67.81","%","","","67.89","%","","","69.80","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Calculated as noninterest expense divided by the sum of net interest income (before provision for loan losses) and noninterest income."]]
[[/GREPCENT_TABLE]]

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. 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.

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.

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.

Overview of Financial Condition and Results of Operations

Net income for the year ended December 31, 2021 totaled $8.0 million, or $0.76 per diluted share, compared to $13.9 million, or $1.27 per diluted share, for the year ended December 31, 2020. This represents a $5.9 million, or a 42.4%, decrease in net income. The decrease can mainly be attributed to the Company’s increased provision for loan losses during 2021, which includes an impairment charge of $21.6 million recorded in the third quarter as a result of Hurricane Ida, as discussed further below. The Company also experienced an increase in noninterest expense as a result of growth organically and through acquisition. 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.

Key components of the Company’s performance during the year ended December 31, 2021 are summarized below.

[[GREPCENT_TABLE]]
[["","\u2022","Total assets grew to $2.5 billion at December 31, 2021, an increase of 8.3% from $2.3 billion at December 31, 2020."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Total loans, net of allowance for loan losses at December 31, 2021 were $1.9 billion, an increase of $11.2 million, or 0.6% compared to $1.8 billion at December 31, 2020."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Total deposits were $2.1 billion at December 31, 2021, an increase of $232.4 million, or 12.3%, compared to deposits of $1.9 billion at December 31, 2020. Noninterest-bearing deposits increased $137.2 million, or 30.6%, to $585.5 million compared to $448.2 million at December 31, 2020."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Net interest income for the year ended December 31, 2021 was $83.8 million, an increase of $10.3 million, or 14.0%, compared to $73.5 million for the year ended December 31, 2020, driven primarily by an increase in the volume of interest-earning assets and a decrease in the rates paid on interest-bearing liabilities."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","On April 1, 2021, the Company completed its acquisition of Cheaha Financial Group, Inc. (\u201cCheaha\u201d), an Alabama state bank headquartered in Oxford, Alabama, and its wholly-owned subsidiary, Cheaha Bank. See further discussion in Acquisitions below."]]
[[/GREPCENT_TABLE]]

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Certain Events That Affect Year-over-Year Comparability

COVID-19 Pandemic. For an overview of the impacts of the COVID-19 pandemic on our business, please see “COVID-19 – Summary of Impact on our Operations and Financial Results” above and our discussion throughout this report.

Acquisitions. On March 1, 2019, the Company completed the acquisition of Mainland Bank (“Mainland”), a Texas state bank located in Texas City, Texas. The Company acquired 100% of Mainland’s outstanding common shares for approximately $18.6 million in the form of 763,849 shares of the Company’s common stock. The acquisition of Mainland expanded the Company’s branch footprint into Texas and increased the core deposit base to help position the Company to continue to grow. On the date of acquisition, Mainland had total assets with a fair value of approximately $127.6 million, $81.3 million in loans, and $107.6 million in deposits, and served the residents of Harris and Galveston counties through three branch locations. The Company recorded a core deposit intangible and goodwill of $2.4 million and $5.2 million, respectively, related to the acquisition of Mainland. In the fourth quarter of 2021, the Dickinson, Texas branch location was closed and the property was sold in February 2022.

On November 1, 2019, the Company completed the acquisition of Bank of York, an Alabama state bank located in York, Alabama. All of the issued and outstanding shares of Bank of York common stock were converted into aggregate cash merger consideration of $15.0 million. The acquisition of Bank of York expanded the Company’s branch footprint into Alabama. On the date of acquisition, Bank of York had total assets with a fair value of $101.9 million, $46.1 million in loans, and $85.0 million in deposits, and served the residents of Sumter County through two branch locations and one loan production office in Tuscaloosa County. The Company recorded a core deposit intangible and goodwill of $0.9 million and $5.0 million, respectively, related to the acquisition of Bank of York.

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 April 1, 2021, the Company completed its acquisition of Cheaha, an Alabama state bank headquartered in Oxford, Alabama, and its wholly-owned subsidiary, Cheaha Bank. 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.

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. 

Debt and Equity Raise. During the fourth quarter of 2019, we completed both a subordinated debt issuance and a common stock offering. We issued and sold $25.0 million in fixed-to-floating rate subordinated notes due in 2029. The common stock offering generated net proceeds of $28.5 million through the issuance of 1.3 million common shares at a price of $23.25 per share. The proceeds from the subordinated debt issuance and common stock offering were raised for general corporate purposes and potential strategic acquisitions.

Discussion and Analysis of Financial Condition

Total assets were $2.5 billion at December 31, 2021, an increase of 8.3% compared to total assets of $2.3 billion at December 31, 2020. Our total assets of $2.3 billion at December 31, 2020 represents an 8.0% increase compared to total assets of $2.1 billion at December 31, 2019. The growth experienced since December 31, 2019 can mainly be attributed to $180.7 million growth in loans, $23.3 million of which is PPP loans, the acquisition of Cheaha completed in April 2021 which added assets with a fair value of $240.8 million, as well as the acquisition of two branch locations from PlainsCapital Bank in February 2020 which added assets with a fair value of $48.8 million.

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Loans

General. Loans, excluding loans held for sale, constitute our most significant asset, comprising 74%, 80%, and 79% of our total assets at December 31, 2021, 2020 and 2019, respectively. Loans increased $11.7 million, or 0.6%, to $1.9 billion at December 31, 2021 from $1.9 billion at December 31, 2020. Loans increased $168.3 million, or 9.9%, to $1.9 billion at December 31, 2020 from $1.7 billion at December 31, 2019.

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, 2021, the balance, net of repayments, of the Bank’s PPP loans originated was $23.3 million, compared to $94.5 million at December 31, 2020, 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, 2021, approximately 86% of the total balance of PPP loans originated have been forgiven by the SBA or paid off by the customer.

Excluding loans acquired from Cheaha on April 1, 2021 with an aggregate balance of $96.3 million at December 31, 2021 and PPP loans with a total balance of $23.3 million ($0.3 million acquired from Cheaha) and $94.5 million at December 31, 2021 and December 31, 2020, respectively, total loans at December 31, 2021 decreased $13.2 million, or 0.7%, compared to December 31, 2020.

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).

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2021","","","2020","","","2019"],["","","","","","","Percentage of","","","","","","","Percentage of","","","","","","","Percentage of"],["","","Amount","","","Total Loans","","","Amount","","","Total Loans","","","Amount","","","Total Loans"],["Mortgage loans on real estate"],["Construction and development","","$","203,204","","","","10.9","%","","$","206,011","","","","11.1","%","","$","197,797","","","","11.7","%"],["1-4 Family","","","364,307","","","","19.4","","","","339,525","","","","18.2","","","","321,489","","","","19.0"],["Multifamily","","","59,570","","","","3.2","","","","60,724","","","","3.3","","","","60,617","","","","3.6"],["Farmland","","","20,128","","","","1.1","","","","26,547","","","","1.4","","","","27,780","","","","1.6"],["Commercial real estate"],["Owner-occupied","","","460,205","","","","24.6","","","","375,421","","","","20.2","","","","352,324","","","","20.8"],["Nonowner-occupied","","","436,172","","","","23.3","","","","436,974","","","","23.5","","","","378,736","","","","22.4"],["Commercial and industrial","","","310,831","","","","16.6","","","","394,497","","","","21.2","","","","323,786","","","","19.2"],["Consumer","","","17,595","","","","0.9","","","","20,619","","","","1.1","","","","29,446","","","","1.7"],["Total loans","","","1,872,012","","","","100","%","","","1,860,318","","","","100","%","","","1,691,975","","","","100","%"],["Loans held for sale","","","620","","","","","","","","\u2014","","","","","","","","\u2014"],["Total gross loans","","$","1,872,632","","","","","","","$","1,860,318","","","","","","","$","1,691,975"]]
[[/GREPCENT_TABLE]]

At December 31, 2021, 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 $771.0 million, an increase of $1.1 million, or 0.1%, compared to the business lending portfolio of $769.9 million at December 31, 2020. The business lending portfolio at December 31, 2020 increased $93.8 million, or 13.9%, compared to $676.1 million at December 31, 2019. The increase in owner-occupied commercial real estate as of December 31, 2021 was the primary driver of the increase in the business lending portfolio compared to December 31, 2020, and was partially offset by the forgiveness of PPP loans.

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 owner-occupied commercial real estate. We have increased our focus on commercial real estate loans and commercial and industrial loans. In addition, we completed the acquisition of two branch locations from PlainsCapital in February 2020, as well as the acquisition of Cheaha in April 2021, which increased the overall balance of our loans.

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Table of Contents

The following table sets forth loans outstanding at December 31, 2021, 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.

[[GREPCENT_TABLE]]
[["","","","","","","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","","$","149,982","","","$","18,183","","","$","24,262","","","$","9,389","","","$","1,388","","","$","203,204"],["1-4 Family","","","56,916","","","","82,765","","","","51,558","","","","23,141","","","","149,927","","","","364,307"],["Multifamily","","","16,197","","","","39,361","","","","2,492","","","","381","","","","1,139","","","","59,570"],["Farmland","","","7,594","","","","7,288","","","","5,101","","","","145","","","","\u2014","","","","20,128"],["Commercial real estate"],["Owner-occupied","","","46,153","","","","109,038","","","","182,976","","","","99,053","","","","22,985","","","","460,205"],["Nonowner-occupied","","","60,402","","","","196,207","","","","142,759","","","","36,487","","","","317","","","","436,172"],["Commercial and industrial","","","157,621","","","","97,167","","","","35,252","","","","13,159","","","","7,632","","","","310,831"],["Consumer","","","4,793","","","","10,869","","","","1,546","","","","383","","","","4","","","","17,595"],["Total loans","","$","499,658","","","$","560,878","","","$","445,946","","","$","182,138","","","$","183,392","","","$","1,872,012"],["Loans with fixed rates:"],["Mortgage loans on real estate:"],["Construction and development","","$","26,083","","","$","18,168","","","$","24,262","","","$","9,389","","","$","1,388","","","$","79,290"],["1-4 Family","","","27,611","","","","75,103","","","","48,842","","","","23,141","","","","149,927","","","","324,624"],["Multifamily","","","12,571","","","","35,481","","","","2,492","","","","381","","","","1,139","","","","52,064"],["Farmland","","","3,371","","","","5,693","","","","5,101","","","","145","","","","\u2014","","","","14,310"],["Commercial real estate"],["Owner-occupied","","","15,777","","","","92,780","","","","138,321","","","","81,075","","","","16,025","","","","343,978"],["Nonowner-occupied","","","21,573","","","","184,186","","","","100,234","","","","18,042","","","","317","","","","324,352"],["Commercial and industrial","","","32,436","","","","86,302","","","","35,252","","","","13,159","","","","797","","","","167,946"],["Consumer","","","3,485","","","","10,869","","","","1,546","","","","383","","","","4","","","","16,287"],["Total loans with fixed rates","","$","142,907","","","$","508,582","","","$","356,050","","","$","145,715","","","$","169,597","","","$","1,322,851"],["Loans with variable rates:"],["Mortgage loans on real estate:"],["Construction and development","","$","123,899","","","$","15","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","123,914"],["1-4 Family","","","29,305","","","","7,662","","","","2,716","","","","\u2014","","","","\u2014","","","","39,683"],["Multifamily","","","3,626","","","","3,880","","","","\u2014","","","","\u2014","","","","\u2014","","","","7,506"],["Farmland","","","4,223","","","","1,595","","","","\u2014","","","","\u2014","","","","\u2014","","","","5,818"],["Commercial real estate"],["Owner-occupied","","","30,376","","","","16,258","","","","44,655","","","","17,978","","","","6,960","","","","116,227"],["Nonowner-occupied","","","38,829","","","","12,021","","","","42,525","","","","18,445","","","","\u2014","","","","111,820"],["Commercial and industrial","","","125,185","","","","10,865","","","","\u2014","","","","\u2014","","","","6,835","","","","142,885"],["Consumer","","","1,308","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","1,308"],["Total loans with variable rates","","$","356,751","","","$","52,296","","","$","89,896","","","$","36,423","","","$","13,795","","","$","549,161"]]
[[/GREPCENT_TABLE]]

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, 2021 and December 31, 2020, we had no concentrations of loans exceeding 10% of total loans other than loans in the categories listed in the table above.

Our loan portfolio, excluding loans held for sale, includes loans to businesses in certain industries that may be more significantly affected by the pandemic than others. These loans, including loans related to oil and gas, food services, hospitality, and entertainment, represented approximately 5.6% of our total loan portfolio, or 5.4% excluding PPP loans, at December 31, 2021, compared to 6.6% of our total portfolio, or 5.7% excluding PPP loans, at December 31, 2020 as shown below.

[[GREPCENT_TABLE]]
[["Industry","","Percentage of Loan Portfolio December 31, 2021","","","Percentage of Loan Portfolio December 31, 2021 (excluding PPP loans)","","","Percentage of Loan Portfolio December 31, 2020","","","Percentage of Loan Portfolio December 31, 2020 (excluding PPP loans)"],["Oil and gas","","","2.2","%","","","2.1","%","","","3.3","%","","","2.6","%"],["Food services","","","2.3","","","","2.2","","","","2.5","","","","2.3"],["Hospitality","","","0.5","","","","0.5","","","","0.4","","","","0.4"],["Entertainment","","","0.6","","","","0.6","","","","0.4","","","","0.4"],["Total","","","5.6","%","","","5.4","%","","","6.6","%","","","5.7","%"]]
[[/GREPCENT_TABLE]]

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 customers have returned to their regular payment schedules. In accordance with Section 4013 of the CARES Act and the interagency statement, we have not accounted for such loans as 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, 2021, less than $0.2 million remained on deferral, compared to approximately $5.9 million, or 0.3% of the total loan portfolio at December 31, 2020.

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, 2021, Investar had approximately $2.4 million, or 0.1% of the total loan portfolio, remaining on a 90-day deferral plan related to Hurricane Ida.

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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 borrowing. Investment securities represented 15% of our total assets and totaled $365.8 million at December 31, 2021, an increase of $84.9 million, or 30.2%, from $280.8 million at December 31, 2020. The increase in investment securities at December 31, 2021 compared to December 31, 2020 resulted from purchases of multiple investment types in our current portfolio.

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).

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2021","","","2020"],["","","","","","","Percentage of","","","","","","","Percentage of"],["","","Balance","","","Portfolio","","","Balance","","","Portfolio"],["Obligations of U.S. government agencies and corporations","","$","21,268","","","","5.8","%","","$","36,821","","","","13.1","%"],["Obligations of state and political subdivisions","","","39,495","","","","10.8","","","","30,362","","","","10.8"],["Corporate bonds","","","27,667","","","","7.6","","","","27,708","","","","9.8"],["Residential mortgage-backed securities","","","203,249","","","","55.6","","","","126,807","","","","45.2"],["Commercial mortgage-backed securities","","","74,085","","","","20.2","","","","59,146","","","","21.1"],["Total investment securities","","$","365,764","","","","100","%","","$","280,844","","","","100","%"]]
[[/GREPCENT_TABLE]]

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 income. 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 income, net of taxes.

Typically, our investment securities are available for sale. There were no purchases of held to maturity securities during the years ended December 31, 2021 and 2020. In the year ended December 31, 2021, we purchased $255.5 million of investment securities, compared to purchases of $127.1 million during the year ended December 31, 2020. Mortgage-backed securities represented 73% and 58% of the available for sale securities we purchased in 2021 and 2020, respectively. Of the remaining securities purchased in 2021 and 2020, 18%, and 22%, respectively, were U.S. government agency securities, while 5% and 7%, respectively, were municipal securities. We only purchase corporate bonds that are investment grade securities issued by seasoned corporations.

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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, 2021 (dollars in thousands).

[[GREPCENT_TABLE]]
[["","","","","","","","","","","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","","$","870","","","","5.88","%","","$","1,875","","","","5.88","%","","$","4,165","","","","3.59","%","","$","\u2014","","","","\u2014","%"],["Residential mortgage-backed securities","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","3,345","","","","2.93"],["Available for sale:"],["Obligations of U.S. government agencies and corporations","","","1","","","","2.51","","","","3,091","","","","2.63","","","","18,051","","","","2.27","","","","\u2014","","","","\u2014"],["Obligations of states and political subdivisions","","","25","","","","2.66","","","","770","","","","3.05","","","","15,344","","","","2.19","","","","16,191","","","","3.54"],["Corporate bonds","","","700","","","","6.75","","","","8,049","","","","1.73","","","","15,028","","","","3.70","","","","4,000","","","","2.69"],["Residential mortgage-backed securities","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","246","","","","1.99","","","","200,450","","","","1.92"],["Commercial mortgage-backed securities","","","\u2014","","","","\u2014","","","","2,279","","","","2.59","","","","3,319","","","","1.71","","","","69,095","","","","1.82"],["","","$","1,596","","","","","","","$","16,064","","","","","","","$","56,153","","","","","","","$","293,081"]]
[[/GREPCENT_TABLE]]

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 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 which increased bank premises and equipment by $5.4 million, and was partially offset by the closure of two branches in Louisiana which decreased bank premises and equipment by $2.3 million. Bank premises and equipment increased $5.4 million, or 10.6%, to $56.3 million at December 31, 2020 from $50.9 million at December 31, 2019. The increase was mainly attributable to the acquisition of two branch locations in Alice and Victoria, Texas which added $2.8 million in bank premises and equipment, and the addition of two de novo branches.

Deferred Tax Asset/Liability

At December 31, 2021, the net deferred tax asset was $2.2 million, compared to a net deferred tax asset of $1.4 million and a net deferred tax liability of $0.1 million at December 31, 2020 and 2019, respectively. 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 decrease in the deferred tax liability at December 31, 2019 to a net deferred tax asset at December 31, 2020 was primarily driven by the increased provisioning for loan losses during 2020 compared to 2019 as a result of uncertainty surrounding the pandemic. The provision for loan losses is not tax deductible until loans are charged off, causing an increase in the deferred tax asset at December 31, 2020.

The Bank acquired net operating loss carryforwards as a result of acquisitions. At December 31, 2021, we held approximately $0.2 million and $1.3 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 $0.7 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.

42

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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, 2021 and 2020 (dollars in thousands).

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2021","","","2020"],["","","","","","","Percentage of","","","","","","","Percentage of"],["","","","","","","Total","","","","","","","Total"],["","","Amount","","","Deposits","","","Amount","","","Deposits"],["Noninterest-bearing demand deposits","","$","585,465","","","","27.6","%","","$","448,230","","","","23.7","%"],["Interest-bearing demand deposits","","","650,868","","","","30.7","","","","496,745","","","","26.3"],["Brokered deposits","","","\u2014","","","","\u2014","","","","80,017","","","","4.2"],["Money market deposit accounts","","","255,501","","","","12.1","","","","186,307","","","","9.9"],["Savings accounts","","","180,837","","","","8.5","","","","141,134","","","","7.5"],["Time deposits","","","447,595","","","","21.1","","","","535,391","","","","28.4"],["Total deposits","","$","2,120,266","","","","100","%","","$","1,887,824","","","","100","%"]]
[[/GREPCENT_TABLE]]

Total deposits were $2.1 billion at December 31, 2021, an increase of $232.4 million, or 12.3%, from total deposits of $1.9 billion at December 31, 2020. The Company assumed approximately $207.0 million in deposits from Cheaha in April 2021. The Bank utilized brokered deposits to satisfy the borrowings under its interest rate swap agreements due to more favorable pricing. In the third quarter of 2021, the Company terminated multiple swap agreements, the borrowings for which matured in October 2021. Therefore, the Company had no brokered deposits at December 31, 2021. The remaining increase is due to organic growth, partially offset by a decrease in time deposits in alignment with our strategy discussed below. 

The COVID-19 pandemic has created a significant amount of excess liquidity in the market, and, as a result, we experienced increases in both noninterest and interest-bearing demand deposits, and in money market deposit accounts and savings accounts at December 31, 2021 compared to December 31, 2020. These increases were primarily driven by reduced spending by consumer and business customers related to the COVID-19 pandemic, and increases in PPP borrowers’ deposit accounts. We believe these factors may be temporary depending on the future economic effects of the COVID-19 pandemic.

As the state of the economy and financial markets remained uncertain during 2021 in response to the global pandemic, customers desired increased security of funds and transferred holdings into fully-insured checking accounts, or our Assured Checking product, shown in interest-bearing demand deposits in the table above. Our deposit mix improved as management continued its strategy to either reprice or run-off higher yielding time deposits and other interest-bearing deposit products during the year ended December 31, 2021, which contributed to our decreased cost of deposits compared to the same period in 2020, discussed in Results of Operations below.

Estimated uninsured deposits were $719.8 million and $533.6 million at December 31, 2021 and 2020, respectively. The estimates are based on the same methodologies and assumptions used for our regulatory reporting requirements. The insured deposit data for 2021 and 2020 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, 2021 and 2020 (dollars in thousands).

[[GREPCENT_TABLE]]
[["","","December 31,"],["Time remaining until maturity:","","2021","","","2020"],["Three months or less","","$","21,644","","","$","20,861"],["Over three months through six months","","","16,490","","","","11,352"],["Over six months through twelve months","","","25,024","","","","32,036"],["Over twelve months","","","14,211","","","","20,538"],["","","$","77,369","","","$","84,787"]]
[[/GREPCENT_TABLE]]

43

Table of Contents

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 2017 and 2019, and junior subordinated debentures assumed through acquisitions.

Our advances from the FHLB were $78.5 million at December 31, 2021, a decrease of $42.0 million from FHLB advances of $120.5 million at December 31, 2020 as we utilized available cash to pay off a portion of advances. We had no outstanding balances drawn on the unsecured lines of credit at December 31, 2021 or 2020. Securities sold under agreements to repurchase increased $0.1 million to $5.8 million at December 31, 2021 from $5.7 million at December 31, 2020. Junior subordinated debt of $8.4 million and $5.9 million at December 31, 2021 and 2020, 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 funds of short-term borrowings at December 31, 2021, 2020 and 2019 are summarized in the table below (dollars in thousands).

[[GREPCENT_TABLE]]
[["","","Average Balances","","","Cost of Funds"],["","","December 31,","","","December 31,"],["","","2021","","","2020","","","2019","","","2021","","","2020","","","2019"],["Federal funds purchased and other short-term borrowings","","$","3,242","","","$","60,243","","","$","110,603","","","","0.20","%","","","1.15","%","","","2.09","%"],["Securities sold under agreements to repurchase","","","6,081","","","","5,080","","","","2,936","","","","0.21","","","","0.30","","","","1.32"],["Total short-term borrowings","","$","9,323","","","$","65,323","","","$","113,539","","","","0.20","%","","","1.09","%","","","2.07","%"]]
[[/GREPCENT_TABLE]]

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 6.00% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “2027 Notes”), at 100% of the aggregate principal amount of the 2027 Notes in an offering registered under the Securities Act of 1933, as amended.

The 2027 Notes will mature on March 30, 2027. From and including the date of issuance, but excluding March 30, 2022, the 2027 Notes will bear 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 will bear 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.

Principal and interest on the 2027 Notes are not subject to acceleration, except upon certain bankruptcy-related events. The 2027 Notes are unsecured subordinated obligations of the Company. The 2027 Notes are subordinated in right of payment to the payment of the Company’s existing and future senior indebtedness, including all of its general creditors. The 2027 Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of the Company’s subsidiaries. The Company may, 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 are structured to qualify as Tier 2 capital for regulatory capital purposes.

44

Table of Contents

Results of Operations

Performance Summary

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.

2020 vs. 2019. For the year ended December 31, 2020, net income was $13.9 million, or $1.27 per basic and diluted common share, compared to net income of $16.8 million, or $1.68 per basic common share and $1.66 per diluted common share, for the year ended December 31, 2019. The primary drivers of the decrease in net income are related to the state of the economy and financial markets during the year ended December 31, 2020 resulting from the COVID-19 pandemic, along with an increase in noninterest expenses primarily related to our growth. As shown on the consolidated statement of income for the year ended December 31, 2020, a provision for loan losses of $11.2 million was recorded, primarily attributable to the COVID-19 pandemic, compared to a provision for loan losses of $1.9 million for the year ended December 31, 2019. Return on average assets decreased to 0.61% for the year ended December 31, 2020 from 0.85% for the year ended December 31, 2019. Return on average equity was 5.77% for the year ended December 31, 2020 compared to 8.21% for the year ended December 31, 2019. The decrease in both return on average assets and return on average equity is mainly attributable to the $2.9 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. Since December 31, 2015, the federal funds target rate had increased a total of 175 basis points and remained at 2.25% to 2.50%, as of December 19, 2018, until it was lowered to 2.00 to 2.25% on July 31, 2019. The Federal Reserve further reduced the rate by 25 basis points on both September 18, 2019 to 1.75 to 2.00% and October 30, 2019 to 1.50 to 1.75%. 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 as of March 9, 2022.

2021 vs. 2020. Net interest income increased 14.0% to $83.8 million for the year ended December 31, 2021 from $73.5 million for the same period in 2020. Net interest margin was 3.53% for the year ended December 31, 2021, an increase of four basis points from 3.49% for the year ended December 31, 2020. The increase in net interest income resulted primarily from an increase in the volume of interest-earning assets and a decrease in the rates paid on interest-bearing liabilities, partially offset by a decrease in the yield earned on interest-earnings assets. For the year ended December 31, 2021, average loans and average investment securities increased approximately $115.8 million and $15.8 million, respectively, while average interest-bearing deposits increased approximately $211.2 million. The increases in average loans, investment securities and interest-bearing deposits was driven by both organic growth and growth through the acquisition of Cheaha on April 1, 2021. Demand deposit growth also was driven by the pandemic-related factors discussed above. Average total borrowings decreased approximately $54.8 million compared to the same period in 2020 as we used available cash to pay down a portion of advances from the FHLB. Our yield on interest-earning assets declined as did our rate paid on interest-bearing liabilities primarily as a result of the overall decline in prevailing interest rates.

45

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Interest income was $95.5 million for the year ended December 31, 2021 compared to $93.8 million for the same period in 2020. Loan interest income made up substantially all of our interest income for the years ended December 31, 2021 and 2020. 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, 2021 and 2020 at 83% of total interest income on loans for each year. The overall yield on interest-earning assets decreased 43 basis points to 4.02% for the year ended December 31, 2021 compared to 4.45% for the same period in 2020. The loan portfolio yielded 4.74% for the year ended December 31, 2021 compared to 4.89% for the year ended December 31, 2020. The decrease in yield on our loan portfolio was driven primarily by lower yields on commercial real estate loans and 1-4 family residential real estate loans. In addition, the yield on the investment portfolio was 1.52% for the year ended December 31, 2021 compared to 2.00% for the year ended December 31, 2020.

Interest expense was $11.7 million for the year ended December 31, 2021, a decrease of $8.5 million compared to interest expense of $20.3 million for the year ended December 31, 2020. The decrease in interest expense is primarily attributable to the decreases in the rates paid for interest-bearing liabilities for the year ended December 31, 2021 compared to December 31, 2020. As previously mentioned, the federal funds target rate decreased to 0% to 0.25% on March 15, 2020, which affects the rate the Company pays for immediately available overnight funds, long-term borrowings, and deposits. For the year ended December 31, 2021, the cost of interest-bearing deposits decreased 64 basis points to 0.46% and the cost of interest-bearing liabilities decreased 60 basis points to 0.67% compared to the same period in 2020. 

2020 vs. 2019. For a detailed discussion of our net interest income and net interest margin performance for 2020 compared to 2019, see our annual report on Form 10-K for the year ended December 31, 2020, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Net Interest Income and Net Interest Margin –2020 vs. 2019, 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, 2021, 2020 and 2019. Averages presented below are daily averages (dollars in thousands).

[[GREPCENT_TABLE]]
[["","","As of and for the year ended December 31,"],["","","2021","","","2020","","","2019"],["","","","","","","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","","$","1,902,070","","","$","90,230","","","","4.74","%","","$","1,786,302","","","$","87,365","","","","4.89","%","","$","1,539,886","","","$","80,954","","","","5.26","%"],["Securities:"],["Taxable","","","275,963","","","","3,948","","","","1.43","","","","255,405","","","","4,927","","","","1.93","","","","240,751","","","","6,650","","","","2.76"],["Tax-exempt","","","20,259","","","","552","","","","2.73","","","","25,024","","","","686","","","","2.74","","","","31,780","","","","790","","","","2.49"],["Interest-earning balances with banks","","","176,349","","","","812","","","","0.46","","","","42,852","","","","816","","","","1.90","","","","34,905","","","","1,049","","","","3.00"],["Total interest-earning assets","","","2,374,641","","","","95,542","","","","4.02","","","","2,109,583","","","","93,794","","","","4.45","","","","1,847,322","","","","89,443","","","","4.84"],["Cash and due from banks","","","39,262","","","","","","","","","","","","27,768","","","","","","","","","","","","22,969"],["Intangible assets","","","41,299","","","","","","","","","","","","32,190","","","","","","","","","","","","26,107"],["Other assets","","","138,096","","","","","","","","","","","","119,994","","","","","","","","","","","","90,949"],["Allowance for loan losses","","","(20,704",")","","","","","","","","","","","(15,272",")","","","","","","","","","","","(9,969",")"],["Total assets","","$","2,572,594","","","","","","","","","","","$","2,274,263","","","","","","","","","","","$","1,977,378"],["Liabilities and stockholders\u2019 equity"],["Interest-bearing liabilities:"],["Deposits:"],["Interest-bearing demand deposits","","$","858,660","","","$","2,398","","","","0.28","%","","$","612,000","","","$","3,535","","","","0.58","%","","$","510,148","","","$","5,308","","","","1.04","%"],["Brokered deposits","","","77,432","","","","715","","","","0.92","","","","20,308","","","","177","","","","0.87","","","","\u2014","","","","\u2014","","","","\u2014"],["Savings deposits","","","168,194","","","","247","","","","0.15","","","","129,211","","","","401","","","","0.31","","","","110,936","","","","501","","","","0.45"],["Time deposits","","","508,954","","","","4,127","","","","0.81","","","","640,549","","","","11,263","","","","1.76","","","","641,630","","","","13,498","","","","2.10"],["Total interest-bearing deposits","","","1,613,240","","","","7,487","","","","0.46","","","","1,402,068","","","","15,376","","","","1.10","","","","1,262,714","","","","19,307","","","","1.53"],["Short-term borrowings(2)","","","9,323","","","","19","","","","0.20","","","","65,323","","","","710","","","","1.09","","","","113,539","","","","2,348","","","","2.07"],["Long-term debt","","","129,318","","","","4,222","","","","3.26","","","","128,163","","","","4,174","","","","3.26","","","","98,017","","","","2,970","","","","3.03"],["Total interest-bearing liabilities","","","1,751,881","","","","11,728","","","","0.67","","","","1,595,554","","","","20,260","","","","1.27","","","","1,474,270","","","","24,625","","","","1.67"],["Noninterest-bearing demand deposits","","","553,083","","","","","","","","","","","","418,240","","","","","","","","","","","","283,274"],["Other liabilities","","","18,852","","","","","","","","","","","","19,805","","","","","","","","","","","","14,717"],["Stockholders\u2019 equity","","","248,778","","","","","","","","","","","","240,664","","","","","","","","","","","","205,117"],["Total liabilities and stockholders\u2019 equity","","$","2,572,594","","","","","","","","","","","$","2,274,263","","","","","","","","","","","$","1,977,378"],["Net interest income/net interest margin","","","","","","$","83,814","","","","3.53","%","","","","","","$","73,534","","","","3.49","%","","","","","","$","64,818","","","","3.51","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(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 \u2013 Borrowings."]]
[[/GREPCENT_TABLE]]

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 $3.0 million, $2.4 million and $1.9 million for the years ended December 31, 2021, 2020 and 2019, respectively, and discounts and premiums that are amortized or accreted to interest income or expense.

46

Table of Contents

Volume/Rate Analysis. The following table sets 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, 2021 compared to the year ended December 31, 2020 and the year ended December 31, 2020 compared to the year ended December 31, 2019 (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","Year ended December 31, 2021 vs."],["","","Year ended December 31, 2020"],["","","Volume","","","Rate","","","Net(1)"],["Interest income:"],["Loans","","$","5,662","","","$","(2,797",")","","$","2,865"],["Securities:"],["Taxable","","","397","","","","(1,376",")","","","(979",")"],["Tax-exempt","","","(131",")","","","(3",")","","","(134",")"],["Interest-earning balances with banks","","","2,540","","","","(2,544",")","","","(4",")"],["Total interest-earning assets","","","8,468","","","","(6,720",")","","","1,748"],["Interest expense:"],["Interest-bearing demand deposits","","","1,425","","","","(2,562",")","","","(1,137",")"],["Brokered deposits","","","496","","","","42","","","","538"],["Savings deposits","","","121","","","","(275",")","","","(154",")"],["Time deposits","","","(2,314",")","","","(4,822",")","","","(7,136",")"],["Short-term borrowings","","","(609",")","","","(82",")","","","(691",")"],["Long-term debt","","","38","","","","10","","","","48"],["Total interest-bearing liabilities","","","(843",")","","","(7,689",")","","","(8,532",")"],["Change in net interest income","","$","9,311","","","$","969","","","$","10,280"],["","","Year ended December 31, 2020 vs."],["","","Year ended December 31, 2019"],["","","Volume","","","Rate","","","Net(1)"],["Interest income:"],["Loans","","$","12,954","","","$","(6,543",")","","$","6,411"],["Securities:"],["Taxable","","","405","","","","(2,128",")","","","(1,723",")"],["Tax-exempt","","","(168",")","","","64","","","","(104",")"],["Interest-earning balances with banks","","","239","","","","(472",")","","","(233",")"],["Total interest-earning assets","","","13,430","","","","(9,079",")","","","4,351"],["Interest expense:"],["Interest-bearing demand deposits","","","1,060","","","","(2,833",")","","","(1,773",")"],["Brokered deposits","","","\u2014","","","","177","","","","177"],["Savings deposits","","","82","","","","(182",")","","","(100",")"],["Time deposits","","","(23",")","","","(2,212",")","","","(2,235",")"],["Short-term borrowings","","","(997",")","","","(641",")","","","(1,638",")"],["Long-term debt","","","913","","","","291","","","","1,204"],["Total interest-bearing liabilities","","","1,035","","","","(5,400",")","","","(4,365",")"],["Change in net interest income","","$","12,395","","","$","(3,679",")","","$","8,716"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(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."]]
[[/GREPCENT_TABLE]]

Noninterest Income

Noninterest income includes, among other things, fees generated from our deposit services, gain on sale of securities, fixed assets and other real estate owned, servicing fees and fee income on serviced loans, interchange fees, income from bank owned life insurance, and changes in the fair value of equity securities. We expect to continue to develop new products that generate noninterest income, and enhance our existing products, in order to diversify our revenue sources.

2021 vs. 2020. Total noninterest income decreased $0.1 million, or 0.4%, to $12.0 million for the year ended December 31, 2021 compared to $12.1 million for the year ended December 31, 2020. The decrease is primarily due to the $2.8 million decrease in other operating income which was partially offset by the $1.8 million increase in the swap termination fee income, the $0.5 million increase in service charges on deposit accounts, and the $0.5 million increase in interchange fees.

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 26.3% to $2.4 million for the year ended December 31, 2021 compared to $1.9 million for the same period in 2020.

Gain on the sale of investment securities for the year ended December 31, 2021 increased slightly to $2.3 million compared to the same period in 2020. We sold approximately $137.8 million in securities during the year ended December 31, 2021 compared to sales of $56.5 million during the year ended December 31, 2020. 

Loss on sale or disposition of fixed assets for the year ended December 31, 2021 increased to $0.4 million from $38,000 for the year ended December 31, 2020. 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, as other real estate owned.

Swap termination fee income increased to $1.8 million for the year ended December 31, 2021, compared to no fee income for the year ended December 31, 2020. Swap termination fee income was recorded when we voluntarily terminated a number of our interest rate swap agreements at the end of the third quarter of 2021.

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Gain on sale of loans increased to $0.2 million for the year ended December 31, 2021, compared to no gain for the year ended December 31, 2020. 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 $0.2 million, or 46.2%, to $0.2 million, for the year ended December 31, 2021. 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, 2021 and 2020, 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. At December 31, 2021, the weighted average remaining term of the indirect auto loan portfolio was 0.8 years.

Interchange fees, which are fees earned on the usage of the Bank’s credit and debit cards, increased $0.5 million, or 35.8%, to $1.9 million for year ended December 31, 2021 from $1.4 million for the year ended December 31, 2020. 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 $1.1 million for the year ended December 31, 2021 from $0.9 million for the year ended December 31, 2020. This increase reflects increased interest earned on the Company’s bank owned life insurance policies.

Other operating income includes, among other things, credit card, ATM and wire fees, derivative fee income, and rental income. The $2.8 million decrease in other operating income for the year ended December 31, 2021 is primarily attributable to a $2.4 million decrease in derivative fee income compared to the year ended December 31, 2020. We also experienced a decrease in income recorded on an equity method investment of $0.5 million due to the Company’s sale of the asset during the year ended December 31, 2020.

2020 vs. 2019. For a detailed discussion of our noninterest income for 2020 compared to 2019, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Noninterest Income – 2020 vs. 2019 in our annual report on Form 10-K for the year ended December 31, 2020.

Noninterest Expense

Noninterest expense includes salaries and 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 continue to increase as we add employees and physical locations to accommodate our growing franchise. Our goal is to create synergies promptly after completing an acquisition, as this is important to our earnings success.

2021 vs. 2020. Total noninterest expense was $63.1 million for the year ended December 31, 2021, an increase of $5.9 million, or 10.4%, from $57.1 million for the year ended December 31, 2020. This increase was driven by the increases in salaries and employee benefits, acquisition expense, and other operating expenses primarily related to our organic growth and acquisition activity.

Salaries and employee benefits increased $2.1 million, or 6.4%, to $35.5 million for the year ended December 31, 2021, compared to $33.4 million for the year ended December 31, 2020. The increase in salaries and employee benefits is mainly attributable to the increased number of employees as a result of our growth, both organically and through acquisitions. The Company completed the acquisition of Cheaha in April 2021, which added four branch locations and related staff during the year ended December 31, 2021. There were also increases in health insurance claims and deferred compensation costs. In addition, the Bank acquired two branch locations from PlainsCapital Bank in February 2020 and opened two de novo branches in July and November 2020. Included in salaries and employee benefits for the year ended December 31, 2021 is a $1.9 million Employee Retention Credit, previously discussed, which was recognized as a credit to payroll taxes in the fourth quarter of 2021. 

Acquisition expense increased $1.4 million, or 130.5%, to $2.5 million for the year ended December 31, 2021, compared to $1.1 million for the year ended December 31, 2020. The increase in acquisition expense resulted from the acquisition costs related to the acquisition of Cheaha in 2021, which were greater than the costs incurred related to the acquisition of two branches from PlainsCapital Bank in 2020.

Other operating expenses include security, business development, FDIC and OCC assessments, bank shares and property taxes, 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 $1.4 million, or 12.9%, to $12.4 million for the year ended December 31, 2021 from $11.0 million for the year ended December 31, 2020. The increase in other operating expenses was primarily related to increases in FDIC assessment fees, provision for unfunded loan commitments, software expense, and telephone expense.

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Occupancy expense increased $0.6 million, or 27.6% to $2.8 million for the year ended December 31, 2021 from $2.2 million for the year ended December 31, 2020. This increase is attributable to increases in building maintenance, utilities, real property taxes and insurance expense for our branch facilities, including the additional four branch locations acquired as part of the acquisition of Cheaha in April 2021.

2020 vs. 2019. For a detailed discussion of our noninterest expense for 2020 compared to 2019, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Noninterest Expense – 2020 vs. 2019 in our annual report on Form 10-K for the year ended December 31, 2020.

Income Tax Expense

Income tax expense for the years ended December 31, 2021, 2020 and 2019 was $1.9 million, $3.5 million, and $4.1 million, respectively. The effective tax rates for the years ended December 31, 2021, 2020 and 2019 were 19.3%, 19.9%, and 19.7%, respectively. The effective tax rate differs from the statutory rate of 21% primarily due to tax exempt interest income earned on certain 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 10 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:

[[GREPCENT_TABLE]]
[["","\u2022","Pass (Loan grades 1-6)\u2014Loans 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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Special Mention (grade 7)\u2014Loans 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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Substandard (grade 8)\u2014Loans 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\u2019s loan is often categorized as substandard."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Doubtful (grade 9)\u2014Doubtful 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."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u2022","Loss (grade 10)\u2014Loans 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\u2019s 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."]]
[[/GREPCENT_TABLE]]

At December 31, 2021 and December 31, 2020, there were no loans classified as loss, while there were $0.7 million and $0.9 million, respectively, of loans classified as doubtful, $46.8 million and $20.1 million, respectively, of loans classified as substandard, and $7.3 million and $16.9 million, respectively, of loans classified as special mention as of such dates. Of our aggregate $54.8 million and $37.9 million doubtful, substandard and special mention loans at December 31, 2021 and December 31, 2020, respectively, $8.6 million and $8.4 million, respectively, were acquired and marked to fair value at the time of their acquisition. At December 31, 2019, we had no loans classified as loss, and we had doubtful, substandard and special mention loans of $0.1 million, $8.7 million and $4.4 million, respectively.

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. 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 $20.9 million at December 31, 2021, an increase compared to $20.4 million at December 31, 2020 and $10.7 million at December 31, 2019. The primary reason for the increase in the allowance for loan losses at December 31, 2021 and 2020 compared to December 31, 2019 is the change in economic conditions in response to the COVID-19 pandemic.

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 premium or discount), 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, 2021, which include all TDRs and nonaccrual loans individually evaluated for impairment for purposes of determining the allowance for loan losses, were $32.8 million compared to $19.2 million at December 31, 2020, and $2.5 million at December 31, 2019. At December 31, 2021 and December 31, 2020, $0.6 million and $0.2 million, respectively, of the allowance for loan losses were specifically allocated to impaired loans, while $0.1 million of the allowance was specifically allocated to such loans at December 31, 2019. The increase in impaired loans at December 31, 2021 compared to December 31, 2020 was driven by the loan relationship for which we recorded a $21.6 million impairment, 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, 2021, 2020 and 2019, the provision for loan losses was $22.9 million, $11.2 million, and $1.9 million, respectively. 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 have been adversely affected by the COVID-19 pandemic. We continue to assess the impact the pandemic may have on our loan portfolio to determine the need for additional reserves.

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. Because ASC 310-30 does not permit carry over or recognition of an allowance for loan losses, we may be required to reserve for these loans in the allowance for loan losses through future provision for loan losses if future cash flows deteriorate below initial projections. We did not increase the allowance for loan losses for loans accounted for under ASC 310-30 during 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).

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2021","","","2020","","","2019"],["","","Allowance for Loan Losses","","","% of Loans in each Category to Total Loans","","","Allowance for Loan Losses","","","% of Loans in each Category to Total Loans","","","Allowance for Loan Losses","","","% of Loans in each Category to Total Loans"],["Mortgage loans on real estate:"],["Construction and development","","$","2,347","","","","10.9","%","","$","2,375","","","","11.1","%","","$","1,201","","","","11.7","%"],["1-4 Family","","","3,337","","","","19.4","","","","3,370","","","","18.2","","","","1,490","","","","19.0"],["Multifamily","","","673","","","","3.2","","","","589","","","","3.3","","","","387","","","","3.6"],["Farmland","","","383","","","","1.1","","","","435","","","","1.4","","","","101","","","","1.6"],["Commercial real estate","","","9,354","","","","47.9","","","","8,496","","","","43.7","","","","4,424","","","","43.2"],["Commercial and industrial","","","4,411","","","","16.6","","","","4,558","","","","21.2","","","","2,609","","","","19.2"],["Consumer","","","354","","","","0.9","","","","540","","","","1.1","","","","488","","","","1.7"],["Total","","$","20,859","","","","100","%","","$","20,363","","","","100","%","","$","10,700","","","","100","%"]]
[[/GREPCENT_TABLE]]

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).

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2021","","","2020","","","2019"],["Mortgage loans on real estate:"],["Construction and development","","","0.12","%","","","0.13","%","","","0.07","%"],["1-4 Family","","","0.18","","","","0.18","","","","0.09"],["Multifamily","","","0.04","","","","0.03","","","","0.02"],["Farmland","","","0.02","","","","0.02","","","","0.01"],["Commercial real estate","","","0.50","","","","0.46","","","","0.26"],["Commercial and industrial","","","0.23","","","","0.25","","","","0.15"],["Consumer","","","0.02","","","","0.02","","","","0.03"],["Total","","","1.11","%","","","1.09","%","","","0.63","%"]]
[[/GREPCENT_TABLE]]

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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).

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2021","","","2020","","","2019"],["Allowance at beginning of period","","$","20,363","","","$","10,700","","","$","9,454"],["Provision for loan losses","","","22,885","","","","11,160","","","","1,908"],["Net charge-offs","","","(22,389",")","","","(1,497",")","","","(662",")"],["Allowance at end of period","","$","20,859","","","$","20,363","","","$","10,700"],["Total loans - period end","","","1,872,012","","","","1,860,318","","","","1,691,975"],["Nonaccrual loans - period end","","","29,495","","","","13,506","","","","5,490"],["Key Ratios:"],["Allowance for loan losses to total loans - period end","","","1.11","%","","","1.09","%","","","0.63","%"],["Allowance for loan losses to nonaccrual loans - period end","","","71","%","","","151","%","","","195","%"],["Nonaccrual loans to total loans - period end","","","1.58","%","","","0.73","%","","","0.32","%"]]
[[/GREPCENT_TABLE]]

The allowance for loan losses to total loans increased to 1.11% at December 31, 2021 compared to 1.09% at December 31, 2020 while the allowance for loan losses to nonaccrual loans ratio decreased to 71% at December 31, 2021 from 151% at December 31, 2020. The increase in the allowance for loan losses to total loans at December 31, 2021 is primarily due to the increase in the allowance for loan losses compared to December 31, 2020. The decrease in the allowance for loan losses to nonaccrual loans is due to the increase in nonaccrual loans primarily due to one loan relationship impacted by Hurricane Ida. Nonaccrual loans were $29.5 million, or 1.58% of total loans, at December 31, 2021, an increase of $16.0 million compared to $13.5 million, or 0.73% of total loans, at December 31, 2020.

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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2021","","","2020","","","2019"],["","","Net Charge-offs","","","Average balance","","","Ratio of Net Charge-offs to Average Loans","","","Net (Charge-offs) Recoveries","","","Average balance","","","Ratio of Net Charge-offs to Average Loans","","","Net Charge-offs","","","Average balance","","","Ratio of Net Charge-offs to Average Loans"],["Mortgage loans on real estate:"],["Construction and development","","$","(247",")","","$","211,230","","","","0.12","%","","$","47","","","$","193,764","","","","(0.02",")%","","$","(24",")","","$","170,539","","","","0.01","%"],["1-4 Family","","","(156",")","","","354,748","","","","0.04","","","","(99",")","","","327,521","","","","0.03","","","","(35",")","","","303,051","","","","0.01"],["Multifamily","","","\u2014","","","","60,327","","","","\u2014","","","","\u2014","","","","58,664","","","","\u2014","","","","\u2014","","","","55,323","","","","\u2014"],["Farmland","","","(13",")","","","23,128","","","","0.06","","","","\u2014","","","","27,821","","","","\u2014","","","","\u2014","","","","25,089","","","","\u2014"],["Commercial real estate","","","(10,274",")","","","869,098","","","","1.18","","","","(43",")","","","785,431","","","","0.01","","","","(23",")","","","677,424","","","","\u2014"],["Commercial and industrial","","","(11,641",")","","","362,483","","","","3.21","","","","(1,145",")","","","368,239","","","","0.31","","","","(226",")","","","272,605","","","","0.08"],["Consumer","","","(58",")","","","21,056","","","","0.28","","","","(257",")","","","24,862","","","","1.03","","","","(354",")","","","35,855","","","","0.99"],["Total","","$","(22,389",")","","$","1,902,070","","","","1.18","","","$","(1,497",")","","$","1,786,302","","","","0.08","","","$","(662",")","","$","1,539,886","","","","0.04"]]
[[/GREPCENT_TABLE]]

Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for loan losses. Net charge-offs for the year ended December 31, 2021 were $22.4 million, or 1.18% of the average loan balance. Net charge-offs for the years ended December 31, 2020 and 2019 were $1.5 million and $0.7 million respectively, equal to 0.08% and 0.04%, respectively, of the average loan balance for the respective periods. Most of the increase in charge-offs and deterioration in the credit ratios for the year ended December 31, 2021 was 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 years ended December 31, 2020 and 2019, the largest category of charge-offs was commercial and industrial loans and consumer loans, respectively. The increase for the year ended December 31, 2020 was primarily due to the economic impacts of the COVID-19 pandemic.

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Management believes the allowance for loan losses at December 31, 2021 is sufficient to provide adequate protection against losses in our portfolio. Although the allowance for loan losses is considered adequate by management, 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, Hurricane Ida and its potential continuing impact to our market areas, 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.

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 29 credits classified as TDRs at December 31, 2021 that totaled approximately $10.5 million, compared to 34 credits totaling $14.7 million at December 31, 2020. Eleven of the restructured loans were considered TDRs due to modification of terms through adjustments to maturity, eight of the restructured loans were considered TDRs due to a reduction in the interest rate to a rate lower than the current market rate, six restructured loans were considered TDRs due to principal payment forbearance paying interest only for a specified period of time, two of the restructured loans were considered TDRs due to principal and interest payment forbearance, and two restructured loans were considered TDRs due to a reduction in principal payments on a modified payment schedule. At December 31, 2021 and 2020, none of the TDRs were in default of their modified terms and included in nonaccrual loans. At December 31, 2021 and 2020, 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 $0.9 million and $0.1 million was sold during the years ended December 31, 2021 and 2020, respectively, resulting in a net loss of $5,000 and a net gain of $12,000 for the respective periods, compared to a cost basis of $5.1 million and a net gain of $2,000 for the year ended December 31, 2019.

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

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","","December 31, 2020"],["1-4 Family","","$","168","","","$","28"],["Commercial real estate","","","2,485","","","","635"],["Total other real estate owned","","$","2,653","","","$","663"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","Year ended","","","Year ended"],["","","December 31, 2021","","","December 31, 2020"],["Balance, beginning of period","","$","663","","","$","133"],["Additions","","","1,023","","","","41"],["Transfers from bank premises and equipment","","","1,850","","","","665"],["Sales of other real estate owned","","","(883",")","","","(146",")"],["Write-downs","","","\u2014","","","","(30",")"],["Balance, end of period","","$","2,653","","","$","663"]]
[[/GREPCENT_TABLE]]

Impact of Inflation. Inflation reached a near 40-year high in late 2021 primarily due to effects of the ongoing pandemic, and continues to be high in 2022. 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 is expected to increase interest rates one or more times in 2022. 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.

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, 2021, 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.

[[GREPCENT_TABLE]]
[["As of December 31, 2021"],["","","Estimate"],["Changes in Interest Rates","","Increase/Decrease in"],["(in basis points)","","Net Interest Income (1)"],["+300","","3.5","%"],["+200","","2.3","%"],["+100","","1.8","%"],["-100","","(4.5",")%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(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."]]
[[/GREPCENT_TABLE]]

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, 2021 and 2020, 81% and 69% 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, 2021, securities with a carrying value of $118.2 million were pledged to secure deposits or borrowings, compared to $84.6 million in pledged securities at December 31, 2020.

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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, 2021, the balance of our outstanding advances with the FHLB was $78.5 million, a decrease from $120.5 million at December 31, 2020. The total amount of the remaining credit available to us from the FHLB at December 31, 2021 was $845.9 million. At December 31, 2021, our FHLB borrowings were collateralized by approximately $932.4 million of the Company’s loan portfolio and $1.3 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 agency securities. We had $5.8 million of repurchase agreements outstanding at December 31, 2021, compared to $5.7 million at December 31, 2020.

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, 2021 or 2020.

In addition, at December 31, 2021 and 2020 we had $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. As of December 31, 2021, we had no brokered deposits compared to $80.0 million at December 31, 2020. We used brokered deposits to satisfy borrowings under certain interest rate swap agreements that terminated during 2021. 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, 2021, we held $63.8 million of QwickRate® deposits, a decrease compared to $123.1 million at December 31, 2020.

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, 2021 and 2020.

[[GREPCENT_TABLE]]
[["","","Percentage of Total Average Deposits and Borrowed Funds","","","Cost of Funds"],["","","Year ended December 31,","","","Year ended December 31,"],["","","2021","","","2020","","","2021","","","2020"],["Noninterest-bearing demand","","","24","%","","","21","%","","","\u2014","%","","","\u2014","%"],["Interest-bearing demand","","","37","","","","31","","","","0.28","","","","0.58"],["Brokered deposits","","","3","","","","1","","","","0.92","","","","0.87"],["Savings deposits","","","7","","","","6","","","","0.15","","","","0.31"],["Time deposits","","","22","","","","32","","","","0.81","","","","1.76"],["Short-term borrowings","","","1","","","","3","","","","0.20","","","","1.09"],["Borrowed funds","","","6","","","","6","","","","3.26","","","","3.26"],["Total deposits and borrowed funds","","","100","%","","","100","%","","","0.51","%","","","1.00","%"]]
[[/GREPCENT_TABLE]]

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. During 2019, we issued $25.0 million of subordinated notes and during 2017 we issued $18.6 million of subordinated notes, both 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. We also issued 763,849 shares of common stock in connection with our acquisition of Mainland in 2019 and 799,559 shares of common stock in connection with our acquisition of BOJ in 2017. During 2021, we paid $3.1 million in dividends, compared to $2.7 million in 2020 and $2.2 million in 2019. Our board of directors has authorized a share repurchase program and during 2021 we paid $6.9 million to repurchase our shares, compared to $11.1 million in 2020 and $8.3 million in 2019. On March 17, 2021, the board of directors approved an additional 300,000 shares of the Company’s common stock for repurchase. On May 19, 2021, the board of directors approved an additional 200,000 shares of the Company’s common stock for repurchase through July 31, 2021. At December 31, 2021, we had 205,692 shares of our common stock remaining authorized for repurchase under the program.

For additional information, see Notes 2, 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:

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

[[GREPCENT_TABLE]]
[["(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."]]
[[/GREPCENT_TABLE]]

The Company and the Bank each were in compliance with all regulatory capital requirements as of December 31, 2021, 2020 and 2019. The Bank also was considered “well-capitalized” under the OCC’s prompt corrective action regulations as of these dates.

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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).

[[GREPCENT_TABLE]]
[["","","Actual","","","Minimum Capital Requirement to be Well Capitalized"],["","","Amount","","","Ratio","","","Amount","","","Ratio"],["December 31, 2021"],["Investar Holding Corporation:"],["Tier 1 capital to average assets (leverage)","","$","206,899","","","","8.12","%","","$","\u2014","","","","\u2014","%"],["Tier 1 common equity to risk-weighted assets","","","197,399","","","","9.45","","","","\u2014","","","","\u2014"],["Tier 1 capital to risk-weighted assets","","","206,899","","","","9.90","","","","\u2014","","","","\u2014"],["Total capital to risk-weighted assets","","","271,416","","","","12.99","","","","\u2014","","","","\u2014"],["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"],["December 31, 2020"],["Investar Holding Corporation:"],["Tier 1 capital to average assets (leverage)","","$","215,750","","","","9.49","%","","$","\u2014","","","","\u2014","%"],["Tier 1 common equity to risk-weighted assets","","","209,250","","","","11.02","","","","\u2014","","","","\u2014"],["Tier 1 capital to risk-weighted assets","","","215,750","","","","11.36","","","","\u2014","","","","\u2014"],["Total capital to risk-weighted assets","","","279,253","","","","14.71","","","","\u2014","","","","\u2014"],["Investar Bank:"],["Tier 1 capital to average assets (leverage)","","","237,684","","","","10.47","","","","113,546","","","","5.00"],["Tier 1 common equity to risk-weighted assets","","","237,684","","","","12.53","","","","123,268","","","","6.50"],["Tier 1 capital to risk-weighted assets","","","237,684","","","","12.53","","","","151,714","","","","8.00"],["Total capital to risk-weighted assets","","","258,291","","","","13.62","","","","189,642","","","","10.00"]]
[[/GREPCENT_TABLE]]

Swap Contracts. The Bank enters 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. The maximum length of time over which the Bank is currently hedging its exposure to the variability in future cash flows for forecasted transactions is approximately 7.6 years. At December 31, 2021, the Bank had no current interest rate swap agreements compared to current interest rate swap agreements with a total notional amount of $80.0 million at December 31, 2020, and forward starting interest rate swap agreements with a total notional amount $115.0 million compared to $140.0 million at December 31, 2020. 

In September 2021, the Company voluntarily terminated interest rate swaps with a total notional amount of $150.0 million in response to market conditions and as a result of excess liquidity. Unrealized gains of $1.4 million, net of tax expense of $0.4 million, were reclassified from “Accumulated other comprehensive income” and recorded as “Swap termination fee income” in noninterest income in the accompanying consolidated statement of income for the year ended December 31, 2021. The Company used brokered deposits to satisfy the borrowings required by the swap agreements due to more favorable pricing. Accordingly, the Company had no brokered deposits at December 31, 2021.

For the year ended December 31, 2021, a gain of $5.3 million, net of a $1.4 million tax expense, was recognized in “Other comprehensive (loss) income” (“OCI”) in the accompanying consolidated statements of other comprehensive income for the change in fair value of the interest rate swap contracts. For the years ended December 31, 2020 and December 31, 2019, a loss of $2.3 million, net of a $0.6 tax benefit, and a gain of $51,000, net of a $14,000 tax expense, respectively, was recognized in OCI in the accompanying consolidated statements of other comprehensive income for the change in fair value of the interest rate swap contracts.

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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, 2021 and 2020.

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 lending commitments is included in other liabilities in the balance sheet. At December 31, 2021 and 2020, the reserve for unfunded loan commitments was $0.7 million and $0.2 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).

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","","December 31, 2020"],["Commitments to extend credit:"],["Loan commitments","","$","349,701","","","$","266,039"],["Standby letters of credit","","","18,259","","","","14,420"]]
[[/GREPCENT_TABLE]]

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, 2021, 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, 2021 and 2020, 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.

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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, 2021, contractually obligated lease payments due under non-cancelable operating leases by payment date (dollars in thousands).

[[GREPCENT_TABLE]]
[["Less than one year","","$","598"],["One to three years","","","1,110"],["Three to five years","","","815"],["Over five years","","","1,354"],["Total","","$","3,877"]]
[[/GREPCENT_TABLE]]