RED RIVER BANCSHARES INC (RRBI) FY 2024 MD&A

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

The purpose of this discussion and analysis is to focus on significant changes in financial condition and results of operations of Red River Bancshares, Inc. on a consolidated basis during the year ended December 31, 2024 and selected prior periods. This discussion and analysis should be read in conjunction with information presented elsewhere in this Report, including our audited consolidated financial statements and notes thereto included in “Item 8. Financial Statements and Supplementary Data.”

The following discussion contains forward-looking statements that reflect our current views with respect to, among other things, future events and our financial performance. We caution that assumptions, expectations, projections, intentions, or beliefs about future events may, and often do, vary from actual results and the differences can be material. See the risk factors and other cautionary statements described in “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” in this Report. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

CORPORATE SUMMARY

Red River Bancshares, Inc. is the bank holding company for Red River Bank, a Louisiana state-chartered bank established in 1999 that provides a fully integrated suite of banking products and services tailored to the needs of our commercial and retail customers. As of December 31, 2024, Red River Bank operated from a network of 28 banking centers throughout Louisiana and one combined LDPO in New Orleans, Louisiana. Banking centers are located in the following Louisiana markets: Central, which includes the Alexandria MSA; Northwest, which includes the Shreveport-Bossier City MSA; Capital, which includes the Baton Rouge MSA; Southwest, which includes the Lake Charles MSA; the Northshore, which includes Covington; Acadiana, which includes the Lafayette MSA; and New Orleans.

Our priority is to drive shareholder value through the establishment of a market-leading commercial banking franchise based in Louisiana. We provide our services through relationship-oriented bankers who are committed to their customers and the communities where we offer our products and services. Our strategy is to expand market share in existing markets and engage in opportunistic new market de novo expansion, supplemented by strategic acquisitions of financial institutions with customer-oriented, compatible philosophies and in desirable geographic areas.

2024 FINANCIAL AND OPERATIONAL HIGHLIGHTS

In 2024, we had steady improvement in the net interest margin and EPS, along with solid loan activity and growth. We also increased our cash dividend, had significant stock buyback activity, and expanded our banking center network.

•Net income for the year ended December 31, 2024, was $34.2 million, or $4.95 diluted EPS, a decrease of $644,000, or 1.8%, compared to $34.9 million, or $4.86 diluted EPS, for the year ended December 31, 2023. The decrease in net income was mainly due to higher operating expenses, lower noninterest income, and higher provision for credit losses, partially offset by higher net interest income.

•The return on assets was 1.11% for 2024 and 1.15% for 2023.

•The return on equity was 11.02% for 2024 and 12.44% for 2023.

•Assets increased $20.8 million, or 0.7%, to $3.15 billion as of December 31, 2024, compared to $3.13 billion as of December 31, 2023.

•Loans HFI increased $82.2 million, or 4.1%, to $2.08 billion as of December 31, 2024, compared to $1.99 billion as of December 31, 2023. The increase in loans was due to new loan activity in various markets across Louisiana.

•Deposits totaled $2.81 billion as of December 31, 2024, consistent with December 31, 2023. In 2024, customer deposit balances were consistent, with normal activity.

•As of December 31, 2024, total securities were $684.9 million, or 21.7% of assets, compared to $714.3 million, or 22.8% of assets, as of December 31, 2023. Securities decreased $29.4 million mainly due to maturities and principal repayments exceeding purchases.

•For 2024, liquid assets, which are cash and cash equivalents, decreased $36.5 million to $269.0 million, compared to $305.4 million for 2023. The liquid assets to assets ratio was 8.54% as of December 31, 2024 and 9.76% as of December 31, 2023.

•Net interest income increased between 2024 and 2023 with higher interest income being partially offset by higher interest expense. The net interest margin FTE increased 5 bps to 2.96% for 2024 compared to 2.91% for the prior year. The 2024 net interest income and net interest margin FTE were impacted by the changing interest rate environment, combined with repricing activity in loans, securities, and deposits.

•Provision expense was $1.2 million for 2024 compared to $735,000 for 2023.

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•NPAs were $3.3 million, or 0.10% of assets, as of December 31, 2024. As of December 31, 2024, the ACL was $21.7 million, or 1.05% of loans HFI.

•In 2024, we paid a quarterly cash dividend of $0.09 per share, resulting in annual cash dividends of $0.36 per share. In 2023, we paid a quarterly cash dividend of $0.08 per share, resulting in annual cash dividends of $0.32 per share. In the first quarter of 2025, we declared a quarterly cash dividend of $0.12 per share.

•The 2024 stock repurchase program authorized us to purchase up to $5.0 million of our outstanding common stock from January 1, 2024 through December 31, 2024. In 2024, under this plan, on the open market, we repurchased 17,085 shares of our common stock at an aggregate cost of $809,000. We also completed a privately negotiated stock repurchase of 60,000 shares of our common stock for $3.0 million, which reduced the availability under the 2024 stock repurchase program. The 2024 stock repurchase program expired on December 31, 2024, with $1.1 million of remaining availability.

•Also in 2024, we completed two other privately negotiated stock repurchases of an aggregate of 250,000 shares of our common stock for a total purchase price of approximately $12.5 million. These repurchases were supplemental to our 2024 stock repurchase program and did not impact the amount of permitted repurchases under the program.

•In 2024, we repurchased a total of 327,085 shares of our common stock, or 4.6% of the December 31, 2023 outstanding shares. For 2024, these repurchases benefited earnings per share by $0.14.

•On December 19, 2024, our Board of Directors approved the renewal of our stock repurchase program for 2025. The 2025 stock repurchase program authorizes us to purchase up to $5.0 million of our outstanding shares of common stock from January 1, 2025 through December 31, 2025.

•We expanded organically throughout Louisiana with the following events:

◦In the second quarter of 2024, we opened a second Red River Bank full-service banking center in the New Orleans, Louisiana market.

◦In the fourth quarter of 2024, Red River Bank purchased property in Lafayette, Louisiana and plans to build a new banking center at that location, which would be our second banking center in the Acadiana market.

•In 2024, the Company and Red River Bank, were included in various financial industry ranking reports:

◦S&P Global Market Intelligence ranked Red River Bank 15th of the top 50 best-performing community banks in 2023 with assets between $3.0 and $10.0 billion.

◦Bank Director Magazine ranked the Company 9th in the top 30 best-performing publicly traded financial institutions with assets less than $5.0 billion.

◦The American Banker publication included Red River Bank in its “2024 Best Banks to Work For” ranking.

The following tables set forth selected historical consolidated financial information for each of the periods indicated. The historical financial information as of and for the years ended December 31, 2024, 2023, and 2022, except for the selected ratios, is derived from our audited consolidated financial statements. Our historical results may not be indicative of our future performance.

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(1)Non-GAAP financial measure. Calculations of this measure and reconciliations to GAAP are included in “- Non-GAAP Financial Measures” in this Report. This measure has not been audited.

(2)We calculate tangible book value per share as total stockholders’ equity, less intangible assets, divided by the outstanding number of shares of our common stock at the end of the relevant period.

(3)We calculate realized book value per share as total stockholders’ equity, less AOCI, divided by the outstanding number of shares of our common stock at the end of the relevant period.

(4)Net interest margin FTE includes an FTE adjustment using a 21.0% federal income tax rate on tax-exempt securities and tax-exempt loans.

(5)Efficiency ratio represents operating expenses divided by the sum of net interest income and noninterest income.

(6)We calculate tangible common equity as total stockholders’ equity, less intangible assets, net of accumulated amortization, and we calculate tangible assets as total assets, less intangible assets, net of accumulated amortization.

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RESULTS OF OPERATIONS

The following is a discussion of results of operations for the year ended December 31, 2024, compared to the year ended December 31, 2023. A discussion regarding our results of operations for the year ended December 31, 2023, compared to the year ended December 31, 2022, can be found in “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 15, 2024.

General

Net income for the year ended December 31, 2024, was $34.2 million, or $4.95 diluted EPS, a decrease of $644,000, or 1.8%, compared to $34.9 million, or $4.86 diluted EPS, for the year ended December 31, 2023. The decrease in net income was mainly due to a $2.3 million increase in operating expenses, a $673,000 decrease in noninterest income, and a $465,000 increase in the provision for credit losses, partially offset by a $2.9 million increase in net interest income. The return on assets for the year ended December 31, 2024, was 1.11%, compared to 1.15% for the prior year. The return on equity was 11.02% for the year ended December 31, 2024, compared to 12.44% for the prior year. Our efficiency ratio for the year ended December 31, 2024, was 60.29%, compared to 59.39% for the year ended December 31, 2023.

Net Interest Income and Net Interest Margin

Our operating results depend primarily on our net interest income. Fluctuations in market interest rates impact the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Changes in the amount and type of interest-earning assets and interest-bearing liabilities impact our net interest income. To evaluate net interest income, we measure and monitor: (1) yields on loans and other interest-earning assets; (2) the cost of deposits and other funding sources; (3) net interest spread; and (4) net interest margin. Since noninterest-bearing sources of funds, such as noninterest-bearing deposits and stockholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing funding sources.

The Federal Reserve sets the target federal funds rate, which is the cost of immediately available overnight funds, and influences other market rates, such as the prime rate. These market rates impact pricing of certain assets and liabilities used by financial institutions. In 2023, the interest rate environment trended upward. The FOMC increased the federal funds rate by 50 bps in the first quarter of 2023, by 25 bps in the second and third quarters of 2023, then kept the rate consistent through the second quarter of 2024. Late in the third quarter of 2024, the FOMC decreased the federal funds rate by 50 bps, and by an additional 50 bps during the fourth quarter of 2024, reducing the target federal funds range to 4.25%-4.50%. The average effective federal funds rate was 5.14% for 2024 compared to 5.03% for 2023. The net interest income and net interest margin FTE increased for the year ended December 31, 2024, compared to the year ended December 31, 2023.

Net interest income for the year ended December 31, 2024, was $89.3 million, which was $2.9 million, or 3.3%, higher than the year ended December 31, 2023. Net interest income increased due to an $18.7 million increase in interest and dividend income, partially offset by a $15.8 million increase in interest expense.

The increase in interest and dividend income for the year ended December 31, 2024, when compared to the year ended December 31, 2023, was primarily due to higher interest income on loans and securities. Loan income increased $15.5 million primarily due to higher rates on new and renewed loans, combined with higher balances in loans HFI. Securities income increased $2.8 million due to reinvesting lower yielding securities cash flows into higher yielding securities. The increase in interest expense for the year ended December 31, 2024, when compared to the year ended December 31, 2023, was due to high deposit rates through the third quarter of 2024, as we responded to deposit rate pressure, combined with larger balances in higher cost deposit accounts. However, in the fourth quarter of 2024, deposit rates were reduced in conjunction with the federal funds rate decreases by the FOMC.

Net interest margin FTE increased 5 bps to 2.96% for the year ended December 31, 2024, from 2.91% for the year ended December 31, 2023, as a result of interest rate environment fluctuations along with our balance sheet repricing structure. The net interest margin FTE improved each quarter in 2024. This improvement was due to having increased yields on loans and securities throughout the year, combined with the lower cost of deposits in the fourth quarter of 2024. The yield on securities increased 52 bps due to reinvesting lower yielding securities cash flows into higher yielding securities. The yield on loans increased 50 bps due to higher rates on new and renewed loans as a result of the higher interest rate environment through the third quarter of 2024. The average rate on new and renewed loans was 7.62% for the year ended December 31, 2024, compared to 7.19% for the prior year.

The net interest margin FTE for the year ended December 31, 2024, when compared to the year ended December 31, 2023, was impacted by an increase in the cost of deposits. The cost of deposits increased 56 bps to 1.74% for the year ended December 31, 2024, from 1.18% for the year ended December 31, 2023. For the same time periods, the rates on time deposits and interest-bearing transaction deposits increased 111 and 44 bps, respectively. The cost of deposits increased through the third quarter of 2024, due to deposit rate pressure and customers moving deposits from lower yielding categories to higher yielding categories. However, in conjunction with the federal funds rate decreases by the

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FOMC that began late in the third quarter of 2024, we lowered selected deposit rates in the third and fourth quarters, which reduced deposit costs at the end of 2024.

As of December 31, 2024, the target federal funds range was 4.25%-4.50%. The market’s expectation is that the FOMC may lower the target range of the federal funds rate by at least 25 bps in 2025. In 2025, we anticipate receiving approximately $101.0 million in securities cash flows with an average yield of 3.01%, and we project approximately $194.0 million of fixed rate loans will mature with an average yield of 6.04%. We expect to redeploy these balances into higher yielding assets. Additionally, in 2025, we expect $541.9 million of time deposits to mature with an average rate of 4.10%, which we anticipate repricing into lower cost deposits. As of December 31, 2024, floating rate loans were 16.0% of loans HFI, and floating rate transaction deposits were 8.1% of interest-bearing transaction deposits. Depending on balance sheet activity and the movement in interest rates, we expect the net interest income and net interest margin to improve slightly during the first half of 2025.

The following table presents average balance sheet information, interest income, interest expense, and the corresponding average yields earned and rates paid for the years presented:

(1)Includes average outstanding balances of loans HFS of $2.9 million and $2.4 million for the years ended December 31, 2024 and 2023, respectively.

(2)Nonaccrual loans are included as loans carrying a zero yield.

(3)Net interest margin FTE includes an FTE adjustment using a 21.0% federal income tax rate on tax-exempt securities and tax-exempt loans.

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Rate/Volume Analysis

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the years ended December 31, 2024 and 2023.

(1)The change in interest attributable to rate has been determined by applying the change in rate between periods to average balances outstanding in the earlier period. The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods. Changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

Provision for Credit Losses

The provision for credit losses is the amount necessary to maintain the ACL and the reserve for unfunded commitments at a level considered appropriate by management. Factors impacting the provision include loan portfolio growth, changes in the quality and composition of the loan portfolio, the level of nonperforming loans, delinquency and charge-off trends, the level of unfunded commitments, and current economic conditions.

The table below presents, for the periods indicated, the provision for credit losses:

The provision for credit losses for the year ended December 31, 2024, totaled $1.2 million, an increase of $465,000 from $735,000 for the year ended December 31, 2023. The provision for credit losses for 2024 included $1.0 million for loans and $200,000 for unfunded commitments. The primary drivers of the increase were the potential economic challenges resulting from the recent inflationary environment, changing monetary policy, current economic forecasts, and loan growth. In the second half of 2024, we had an increase in unfunded loan commitments, which also contributed to the increase in provision for credit losses. We will continue to evaluate future provision needs in relation to current economic situations, loan growth, trends in asset quality, forecasted information, and other conditions influencing loss expectations.

Noninterest Income

Our primary sources of noninterest income are fees related to the sale of mortgage loans, service charges on deposit accounts, debit card fees, brokerage income from advisory services, and other loan and deposit fees.

Noninterest income decreased $673,000 to $20.4 million for the year ended December 31, 2024, compared to $21.1 million for the prior year. The decrease in noninterest income was due to lower income from SBIC limited partnerships of which the Bank is a member and lower loan and deposit fee income, partially offset by higher mortgage loan income and net debit card income.

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The table below presents, for the periods indicated, the major categories of noninterest income:

SBIC income decreased $1.4 million to $1.5 million for 2024, compared to $2.9 million for 2023. In 2024, we received $114,000 of distribution payments, in addition to normal income. In 2023, we received income from the sale of an investment, in addition to normal income.

Loan and deposit income decreased $106,000 to $2.0 million for 2024, compared to $2.1 million for 2023. The decrease was primarily related to lower deposit fees due to changing customer deposit activity, partially offset by higher nonrecurring loan related fees.

Mortgage loan income increased $525,000 to $2.5 million for 2024, compared to $2.0 million for 2023, mainly due to an increase in the average loan amount, which generated higher mortgage loan fee income.

Debit card income, net, increased $273,000 to $3.8 million for 2024, compared to $3.6 million for 2023. In the first quarter of 2024, we terminated our previous debit card provider contract, which resulted in $145,000 of nonrecurring income. In January 2024, a newly negotiated debit card provider contract became effective, which resulted in an increase in debit card income. These increases were partially offset by higher debit card processing expenses.

Operating Expenses

Operating expenses are composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships, and providing services.

Operating expenses increased $2.3 million to $66.2 million for the year ended December 31, 2024, compared to $63.9 million for the year ended December 31, 2023. The increase in operating expenses was mainly due to higher personnel expenses, technology expenses, legal and professional expenses, and occupancy and equipment expenses, partially offset by lower other taxes and loan and deposit expenses.

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The following table presents, for the periods indicated, the major categories of operating expenses:

Personnel expenses are the largest component of operating expenses and include payroll expenses, incentive compensation, benefit plans, health insurance, and payroll taxes. Personnel expenses increased $1.4 million to $38.6 million for 2024 compared to $37.2 million in 2023. This increase was primarily due to higher compensation expense as a result of net staff changes, partially offset by a decrease in medical insurance expense. As of December 31, 2024 and 2023, we had 369 and 362 total employees, respectively.

Technology expenses increased $423,000 to $3.2 million for 2024 compared to $2.8 million for 2023. This increase was primarily due to implementing new software and $51,000 of nonrecurring expenses related to our new banking center location and new administrative office, both in the New Orleans market.

Legal and professional expenses increased $279,000 to $2.7 million for 2024 compared to $2.4 million for 2023. This increase was due to higher contracted services, higher public company expenses, and higher professional and advisory services mainly related to a newly negotiated debit card provider contract effective January 2024.

Occupancy and equipment expenses increased $110,000 to $6.7 million for 2024 compared to $6.6 million for 2023. This increase was primarily due to $111,000 of nonrecurring expenses related to our new banking center location and new administrative office, both in the New Orleans market, and other 2024 property renovations. The same period prior year had $255,000 of nonrecurring expenses related to opening our new operations center building, the expansion of a banking center in the Southwest market, and renovations of the main office building in Alexandria, Louisiana.

Other taxes decreased $314,000 to $2.4 million for 2024 compared to $2.7 million for 2023. This decrease was primarily due to a decrease in State of Louisiana bank stock tax resulting from lower deposit account balances and lower net income for the applicable tax years.

Loan and deposit expenses decreased $89,000 to $895,000 for 2024 compared to $984,000 for 2023. 2024 benefited from the receipt of a $262,000 negotiated, variable rebate from a vendor. This decrease was partially offset by an increase in collection and loan expenses.

Income Tax Expense

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

Our accrued tax rate is based on an annualized projection and changes considering our most recent financial results and balances. Our effective income tax rates have differed from the U.S. statutory rate due to the effect of tax-exempt income from loans, securities, life insurance policies, income tax effects associated with stock-based compensation, and permanent and temporary tax differences.

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The table below presents, for the periods indicated, income tax expense:

For the years ended December 31, 2024 and 2023, income tax expense remained consistent at $8.1 million. The comparability in income tax expense was primarily due to the decrease in pre-tax income offset by an increase in the effective income tax rate due to permanent book versus tax differences. The effective income tax rate for 2024 was 19.2%, compared to 18.8% for 2023.

FINANCIAL CONDITION

As of December 31, 2024, assets were $3.15 billion, which was $20.8 million, or 0.7%, higher than $3.13 billion as of December 31, 2023. During 2024, loans HFI increased $82.2 million, or 4.1%, to $2.08 billion as of December 31, 2024. The increase in loans was due to improved loan activity in various markets across Louisiana. Cash and cash equivalents decreased $36.5 million, or 11.9%, to $269.0 million and were 8.5% of assets as of December 31, 2024. Cash and cash equivalents decreased due to loan growth exceeding deposit growth. Total securities decreased $29.4 million, or 4.1%, to $684.9 million and were 21.7% of assets as of December 31, 2024. The decrease in securities was due to maturities and principal repayments exceeding purchases. Deposits were fairly consistent at $2.81 billion as of December 31, 2024 and $2.80 billion as of December 31, 2023. We had no outstanding borrowings as of December 31, 2024 and 2023. During 2024, stockholders’ equity increased $15.9 million to $319.7 million as of December 31, 2024. As of December 31, 2024, the loans HFI to deposits ratio was 73.97%, compared to 71.13% as of December 31, 2023, and the noninterest-bearing deposits to total deposits ratio was 30.89%, compared to 32.71% as of December 31, 2023.

Interest-Bearing Deposits in Other Banks

Interest-bearing deposits in other banks were the third-largest component of earning assets as of December 31, 2024. As of December 31, 2024, interest-bearing deposits in other banks were $238.4 million and were 7.6% of assets, a decrease of $13.9 million, or 5.5%, compared to $252.4 million and 8.1% of assets as of December 31, 2023. Excess liquidity that is not being deployed into loans or securities is placed in these accounts.

Securities

Our securities portfolio is the second-largest component of earning assets and provides a significant source of revenue. Securities are classified as AFS, HTM, and equity securities. As of December 31, 2024, our total securities portfolio was 21.7% of assets. It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring unnecessary interest rate and credit risk, and complement our lending activities. We may invest in various types of liquid assets that are permissible under governing regulations and approved by our investment policy, which include U.S. Treasury obligations, U.S. government agency obligations, certificates of deposit of insured domestic banks, mortgage-backed and mortgage-related securities, corporate notes having an investment rating of “A” or better, municipal bonds, and certain equity securities.

Securities AFS and Securities HTM

Securities AFS and securities HTM are debt securities. Total debt securities on the consolidated balance sheets were $681.9 million as of December 31, 2024, a decrease of $29.4 million, or 4.1%, from $711.3 million as of December 31, 2023.

Securities AFS are held for indefinite periods of time and are carried at estimated fair value. As of December 31, 2024, the estimated fair value of securities AFS was $550.1 million. The carrying values of our securities AFS are adjusted for unrealized gain or loss, and any unrealized gain or loss is reported on an after-tax basis as a component of AOCI in stockholders’ equity. The net unrealized loss on securities AFS increased $1.0 million for the year ended December 31, 2024, resulting in a net unrealized loss of $63.2 million as of December 31, 2024, compared to a net unrealized loss of $62.2 million as of December 31, 2023.

Securities HTM, which we have the intent and ability to hold until maturity, are carried at amortized cost. As of December 31, 2024, the amortized cost of securities HTM was $131.8 million. Securities HTM had an unrealized loss of $22.8 million as of December 31, 2024, compared to an unrealized loss of $22.2 million as of December 31, 2023.

Investment activity for the year ended December 31, 2024, included $157.3 million in maturities, principal repayments, and calls, partially offset by $128.9 million of securities purchased. There were no sales of securities AFS, and there were no purchases or sales of securities HTM for the same period.

Securities AFS purchased for the year ended December 31, 2024, consisted of $94.6 million in mortgage-backed securities and $34.2 million in U.S. agency securities. The mortgage-backed securities purchased had a yield of 5.26% and an average life of 3.99 years. The U.S. agency securities purchased had a yield of 5.71% and an average life of 4.08 years.

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The securities portfolio tax-equivalent yield was 2.43% for the year ended December 31, 2024, compared to 1.90% for the year ended December 31, 2023. The increase in yield for the year ended December 31, 2024, was primarily due to reinvesting lower yielding securities cash flows received during 2024 into higher yielding securities.

The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected lives because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay. Monthly pay downs on mortgage-backed securities may cause the average lives of the securities to be much different than the stated contractual maturity. During a period of rising interest rates, fixed rate mortgage-backed securities are not likely to experience heavy prepayments of principal, and consequently, the average lives of these securities are typically lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated average lives of these securities. As of December 31, 2024, the average life of our securities portfolio was 7.0 years with an estimated effective duration of 4.9 years. As of December 31, 2023, the average life of our securities portfolio was 7.1 years with an estimated effective duration of 5.0 years.

The following tables summarize the amortized cost and estimated fair value of our securities by type as of the dates indicated. As of December 31, 2024, other than securities issued by U.S. government agencies or government-sponsored enterprises, our securities portfolio did not contain securities of any one issuer with an aggregate book value in excess of 10.0% of our stockholders’ equity.

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The following table shows the fair value of securities AFS that mature during each of the periods indicated. The contractual maturity of a mortgage-backed security is the date the last underlying mortgage matures. Yields are weighted-average tax equivalent yields that are calculated by dividing projected annual income by the average amortized cost of the applicable securities while using a 21.0% federal income tax rate, when applicable.

(1)Tax equivalent projected book yield as of December 31, 2024.

The following table shows the amortized cost of securities HTM that mature during each of the periods indicated. The contractual maturity of a mortgage-backed security is the date the last underlying mortgage matures. Yields are weighted-average tax equivalent yields that are calculated by dividing projected annual income by the average amortized cost of the applicable securities while using a 21.0% federal income tax rate, when applicable.

Equity Securities

Equity securities are an investment in a CRA mutual fund, consisting primarily of bonds. We invest in the mutual fund as part of our strategy to meet our obligations described within the CRA, which encourages financial institutions to help meet the credit needs of their entire market area, including low and moderate income neighborhoods, consistent with safe and sound banking principles. Through this fund, mortgage-backed securities are purchased according to our allocations, with their underlying collateral located in our market areas, which strengthens our efforts to meet our CRA obligations.

Equity securities are carried at fair value on the consolidated balance sheets with periodic changes in value recorded through the consolidated statements of income. As of December 31, 2024, equity securities had a fair value of $2.9 million with a recognized loss of $28,000 for the year ended December 31, 2024. As of December 31, 2023, equity securities had a fair value of $3.0 million with a recognized loss of $14,000 for the year ended December 31, 2023.

Loan Portfolio

Our loan portfolio is our largest category of earning assets, and interest income earned on our loan portfolio is our primary source of income. We maintain a diversified loan portfolio with a focus on CRE, one-to-four family residential, and commercial and industrial loans. As of December 31, 2024, loans HFI were $2.08 billion, an increase of $82.2 million, or 4.1%, compared to $1.99 billion as of December 31, 2023. Loans HFI increased primarily due to new loan activity in various markets across Louisiana.

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Loans by Category

Loans HFI by category and loans HFS are summarized below as of the dates indicated:

Commercial Real Estate Loans. CRE loans are primarily made for commercial property that is owner occupied as well as commercial property owned by real estate investors. Real estate securing these loans includes many property types, such as retail centers, nursing homes, offices and office buildings, medical facilities, warehouses, churches and related facilities, production facilities, and multifamily properties. CRE loans increased $33.1 million, or 3.9%, to $884.6 million as of December 31, 2024, from $851.6 million as of December 31, 2023. The average CRE loan size was $953,000 as of December 31, 2024 and $938,000 as of December 31, 2023.

Non-owner occupied CRE loans were $458.9 million, or 22.1% of loans HFI, and represented 116.6% of the Bank’s total risk-based capital as of December 31, 2024. Non-owner occupied office loans were $56.4 million, or 2.7% of loans HFI, as of December 31, 2024, and are primarily centered in low-rise suburban areas. The owner occupied and non-owner occupied components of the CRE portfolio are summarized below:

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Industry concentrations, based on NAICS, within the CRE loan portfolio are presented below:

One-to-Four Family Residential Loans. One-to-four family residential loans are predominantly first lien mortgage loans secured by owner occupied one-to-four family residential properties. One-to-four family residential loans increased $15.1 million, or 2.5%, to $614.6 million as of December 31, 2024, compared to $599.5 million as of December 31, 2023.

Construction and Development Loans. The construction and development portfolio includes loans to small and medium-sized businesses to construct owner occupied facilities, loans to developers of CRE investment properties and residential developments, and, to a lesser extent, loans to individual clients for construction of single-family homes. Construction and development loans increased $30.0 million, or 23.9%, to $155.2 million as of December 31, 2024, compared to $125.2 million as of December 31, 2023.

Commercial and Industrial Loans. Commercial and industrial loans are made for a variety of business purposes, including, but not limited to, inventory, equipment, capital expansion, and working capital enhancement. Collateral typically includes a lien on general business assets including, among other things, accounts receivable, inventory, equipment, and available real estate. A personal guaranty is generally obtained from the borrower or principal. Commercial and industrial loans increased $11.8 million, or 3.7%, to $327.1 million as of December 31, 2024, from $315.3 million as of December 31, 2023.

Tax-Exempt Loans. Tax-exempt loans are made to political subdivisions of the State of Louisiana including parishes, municipalities, utility districts, school districts, and development authorities. These loans are typically secured by and paid

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for by ad valorem taxes. Tax-exempt loans decreased $8.0 million, or 10.9%, to $64.9 million as of December 31, 2024, compared to $72.9 million as of December 31, 2023.

Consumer Loans. Consumer loans are made to individuals for personal, family, and household purposes and include secured and unsecured installment and term loans. Consumer loans are offered as an accommodation to existing customers and are not marketed to persons without a pre-existing relationship with us.

Industry Concentrations

Industry concentrations, based on NAICS, stated as a percentage of loans HFI are presented below:

Health care loans are our largest industry concentration and are made up of a diversified portfolio of health care providers. As of December 31, 2024, total health care loans were $167.3 million, or 8.1% of loans HFI, compared to $153.8 million, or 7.7% of loans HFI, as of December 31, 2023. The average health care loan size was $372,000 as of December 31, 2024, and $334,000 as of December 31, 2023. Within the health care sector, loans to nursing and residential care facilities were 4.4% of loans HFI as of December 31, 2024, and 4.0% as of December 31, 2023. Loans to physician and dental practices were 3.4% of loans HFI as of December 31, 2024, and 3.6% as of December 31, 2023.

Geographic Markets

As of December 31, 2024, the Bank operated in seven geographic markets throughout the state of Louisiana. The following table summarizes loans HFI by market of origin:

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Loan Portfolio Maturity Analysis

The maturity distribution for loans HFI are summarized below:

Fixed and Floating Rate Loans

The dollar amount, as of December 31, 2024, of fixed and floating rate loans HFI that mature after December 31, 2025, are presented in the following table:

Nonperforming Assets

NPAs consist of nonperforming loans and property acquired through foreclosures or repossession. Nonperforming loans include loans that are contractually past due 90 days or more and loans that are on nonaccrual status. Loans are considered past due when principal and interest payments have not been received as of the date such payments are due.

Asset quality is managed through disciplined underwriting policies, continual monitoring of loan performance, and focused management of NPAs. There can be no assurance, however, that the loan portfolio will not become subject to losses due to declines in economic conditions, deterioration in the financial condition of our borrowers, or a decline in the value of collateral.

NPAs totaled $3.3 million as of December 31, 2024, an increase of $670,000, or 25.7%, from $2.6 million as of December 31, 2023. The increase was primarily due to an increase in nonaccrual loans, partially offset by a decrease in past due loans. The ratio of NPAs to assets was 0.10% as of December 31, 2024 and 0.08% as of December 31, 2023.

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Nonperforming loan and asset information is summarized below:

Nonaccrual loans are summarized below by category:

Potential Problem Loans

From a credit risk standpoint, we classify loans in one of five categories: pass, special mention, substandard, doubtful, or loss. Loan classifications reflect a judgment about the risk of default and loss associated with the loans. Classifications are reviewed periodically and adjusted to reflect the degree of risk and loss believed to be inherent in each loan. The methodology is structured so that reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Loans classified as pass are of satisfactory quality and do not require a more severe classification.

Loans classified as special mention have potential weaknesses that deserve management’s close attention. If these weaknesses are not corrected, repayment possibilities for the loan may deteriorate. However, the loss potential does not warrant substandard classification.

Loans classified as substandard have well-defined weaknesses that jeopardize normal repayment of principal and interest. Prompt corrective action is required to reduce exposure and to assure adequate remedial actions are taken by the borrower. If these weaknesses do not improve, loss is possible.

Loans classified as doubtful have well-defined weaknesses that make full collection improbable.

Loans classified as loss are considered uncollectible and charged-off to the ACL.

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The following table summarizes loans HFI by risk rating:

There were no loans classified as doubtful or loss as of December 31, 2024 or 2023.

Allowance for Credit Losses

In determining the ACL for loans HFI, we estimate losses on a collective pool basis when similar risk characteristics and risk profiles exist. Loans that do not share similar risk characteristics are evaluated individually and excluded from the collective evaluation. The ACL is determined using the CECL model, which considers relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

As of December 31, 2024, the ACL was $21.7 million, or 1.05%, of loans HFI. As of December 31, 2023, the ACL was $21.3 million, or 1.07%, of loans HFI. The $395,000 increase in the ACL for the year ended December 31, 2024, was due $1.0 million from the provision for credit losses on loans, partially offset by $605,000 of net charge-offs.

The provision for credit losses for the year ended December 31, 2024, was $1.2 million, an increase of $465,000 from $735,000 for the year ended December 31, 2023. The provision for credit losses for 2024 included $1.0 million for loans and $200,000 for unfunded commitments. The primary drivers of the increase were the potential economic challenges resulting from the recent inflationary environment, changing monetary policy, current economic forecasts, and loan growth. In the second half of 2024, we had an increase in unfunded loan commitments, which contributed to the increase in provision for credit losses. We will continue to evaluate future provision needs in relation to current economic situations, loan growth, trends in asset quality, forecasted information, and other conditions influencing loss expectations.

Net charge-offs for the year ended December 31, 2024, were $605,000, an increase of $300,000 from $305,000 for the year ended December 31, 2023. The ratio of net charge-offs to average loans HFI was 0.03% and 0.02% for the years ended December 31, 2024 and 2023, respectively.

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The following table displays activity in the ACL for December 31, 2024 and 2023:

(1)The $1.2 million provision for credit losses on the consolidated statements of income for the year ended December 31, 2024, includes $1.0 million for loans and $200,000 for unfunded loan commitments.

We believe that we have established our ACL in accordance with GAAP and that the ACL was adequate to provide for known and inherent losses in the portfolio at all times shown above. Future provisions for credit losses on loans are subject to ongoing evaluations of the factors and loan portfolio risks, including economic pressures related to inflation, labor market and supply chain constraints, and natural disasters affecting the state of Louisiana. A decline in market area economic conditions, deterioration of asset quality, or growth in portfolio size could cause the allowance to become inadequate, and material additional provisions for credit losses could be required.

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The following table displays the allocation of the ACL among the loan classifications as of the dates indicated. The allocations shown below should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in the future will necessarily occur in these amounts or in the indicated proportions. The total ACL is available to absorb losses from any loan classification.

The following table displays the ratio of net charge-offs to average loans HFI outstanding by category for the periods shown:

Deposits

Deposits are the primary funding source for loans and investments. We offer a variety of deposit products designed to attract and retain consumer, commercial, and public entity customers. These products consist of noninterest and interest-bearing checking accounts, savings accounts, money market accounts, and time deposit accounts. Deposits are gathered from individuals, partnerships, corporations, and public entities located primarily in our market areas. We do not have any internet-sourced or brokered deposits.

Total deposits were $2.81 billion as of December 31, 2024, which remained consistent with $2.80 billion as of December 31, 2023. In 2024, customer deposit balances were consistent with normal activity. Noninterest-bearing deposits decreased $50.0 million, or 5.5%, during 2024 to $866.5 million as of December 31, 2024. Noninterest-bearing deposits as a percentage of total deposits were 30.89% as of December 31, 2024, compared to 32.71% as of December 31, 2023. Interest-bearing deposits increased $53.2 million, or 2.8%, during 2024 to $1.94 billion as of December 31, 2024, with the largest increase in time deposits.

The Bank has a granular, diverse deposit portfolio with customers in a variety of industries throughout Louisiana. The average deposit account size was approximately $28,000 as of December 31, 2024 and December 31, 2023.

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The following table presents our deposits by account type as of the dates indicated:

The following table presents deposits by customer type as of the dates indicated:

We manage our interest expense on deposits through a deposit pricing strategy that is based on competitive pricing, economic conditions, and current or anticipated funding needs. We adjust deposit rates in part based upon our anticipated funding needs and liquidity position. We also consider the potential interest rate risk caused by extended maturities of time deposits when adjusting deposit rates.

Our average deposit balance was $2.75 billion for the year ended December 31, 2024, an increase of $27.0 million, or 1.0%, from $2.72 billion for the year ended December 31, 2023. For 2024, average public entity deposits were 8.1% of average total deposits. The average cost of interest-bearing deposits and total deposits for 2024 was 2.60% and 1.74%, respectively, compared to 1.86% and 1.18% for 2023, respectively. The increase in the average cost of interest-bearing deposits and total deposits in 2024 as compared to 2023 was due to a higher rate environment that began in the second half of 2022 and continued until the FOMC decreased rates in the third and fourth quarters of 2024. Also, as of December 31, 2024, 8.1% of interest-bearing transaction deposits had floating rates, which adjust with market rates.

The following table presents our average deposits by account type and the average rate paid for the periods indicated:

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As of December 31, 2024, our estimated uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000), were approximately $879.8 million, or 31.4% of total deposits, compared to $887.8 million, or 31.7% of total deposits, as of December 31, 2023. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes. Also, as of December 31, 2024, our estimated uninsured deposits, excluding collateralized public entity deposits, were approximately $667.6 million, or 23.8% of total deposits, compared to $643.6 million, or 23.0% of total deposits, as of December 31, 2023. As of December 31, 2024, our cash and cash equivalents of $269.0 million combined with our available borrowing capacity of $1.62 billion equaled 214.6% of our estimated uninsured deposits and 282.8% of our estimated uninsured deposits, excluding collateralized public entity deposits.

The following table presents the amount of time deposits, by account, that are in excess of the FDIC insurance limit (currently $250,000) by time remaining until maturity for the period indicated:

Borrowings

Although deposits are our primary source of funds, we may, from time to time, utilize borrowings as a cost-effective source of funds when such borrowings can then be invested at a positive interest rate spread for additional capacity to fund loan demand or to meet our liquidity needs. We had no outstanding borrowings as of December 31, 2024 or 2023.

Federal Home Loan Bank Advances. We utilize the FHLB of Dallas as needed as a funding source. As of December 31, 2024 and 2023, availability under our FHLB of Dallas line was $1.04 billion and $934.1 million, respectively. This line is secured by a blanket lien on selected Red River Bank loans that meet FHLB of Dallas collateral requirements. At various times, we may obtain letters of credit from the FHLB of Dallas as collateral for our public entity deposits. As of December 31, 2024 and 2023, we held unfunded letters of credit from the FHLB of Dallas in the amount of $104.3 million and $104.8 million, respectively. As of December 31, 2024 and 2023, we had net borrowing capacity of $931.6 million and $829.2 million, respectively, under this arrangement. As of December 31, 2024 and 2023, we had no outstanding borrowings under these agreements.

Federal Reserve Bank’s Discount Window. In 2023, we pledged securities to have borrowing access to the Federal Reserve Bank’s Discount Window facility. In addition, effective March 2024, the Bank was approved for the Discount Window’s Borrower-In-Custody “BIC” program, which provides borrowing capacity through the pledging of eligible Red River Bank loans that are not pledged to the FHLB. As of December 31, 2024, we had a total borrowing capacity of $157.8 million, including $118.7 million through the BIC program, compared to a total borrowing capacity of $45.5 million as of December 31, 2023.

Other Borrowings. We may also utilize federal funds from various correspondent financial institutions as a source of short-term funding. As of December 31, 2024 and 2023, we had $95.0 million in federal funds lines available from these funding sources. We had no outstanding balances on these lines as of December 31, 2024 or 2023.

Hancock Whitney Bank Line of Credit. We maintained a revolving line of credit of $6.0 million at Hancock Whitney Bank collateralized by 100.0% of the stock of the Bank until July 1, 2024. We had no outstanding balances on this line during 2024 or 2023.

Stockholders’ Equity

Total stockholders’ equity as of December 31, 2024, was $319.7 million, compared to $303.9 million as of December 31, 2023, an increase of $15.9 million, or 5.2%. This increase was attributable to $34.2 million of net income for the year ended December 31, 2024, $411,000 of stock compensation, and a $247,000, net of tax, market adjustment to AOCI related to securities, partially offset by the repurchase of 327,085 shares of common stock for $16.5 million and $2.5 million in cash dividends. The $16.5 million of common stock repurchases includes $213,000 of stock repurchase excise tax related to our 2023 and 2024 stock repurchases, which regulations require to be recorded as a reduction to stockholders’ equity.

During the second quarter of 2022, we reclassified $166.3 million, net of $17.9 million of unrealized loss, from securities AFS to securities HTM. The securities were transferred at fair value, which became the cost basis for the securities HTM. At the date of transfer, the net unrealized loss of $17.9 million, of which $14.2 million, net of tax, was included in AOCI and is being amortized over the remaining life of the securities as a yield adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. There were no gains or

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losses recognized as a result of the transfer. As of December 31, 2024, the net unamortized, unrealized loss remaining on the transferred securities included in the consolidated balance sheets totaled $13.0 million, of which $10.3 million, net of tax, was included in AOCI.

On December 14, 2023, our board of directors approved the renewal of the 2023 stock repurchase program that was completed in the fourth quarter of 2023 after reaching its purchase limit. The 2024 stock repurchase program authorized us to purchase up to $5.0 million of our outstanding shares of common stock from January 1, 2024 through December 31, 2024. Repurchases were made from time to time in the open market at prevailing prices and based on market conditions, and in privately negotiated transactions.

On March 13, 2024, we entered into a privately negotiated stock repurchase agreement for the purchase of 200,000 shares of our common stock for a total purchase price of approximately $10.0 million. This repurchase was supplemental to our 2024 stock repurchase program and did not impact the amount of permitted repurchases thereunder.

On August 8, 2024, we entered into a privately negotiated stock repurchase agreement for the purchase of 60,000 shares of our common stock for a total purchase price of approximately $3.0 million. This repurchase was supplemental to our 2024 stock repurchase program. However, in connection with the repurchase, we reduced the availability under our 2024 stock repurchase program by $3.0 million.

On November 5, 2024, we entered into a privately negotiated stock repurchase agreement for the purchase of 50,000 shares of our common stock for a total purchase price of approximately $2.5 million. This repurchase was supplemental to our 2024 stock repurchase program and did not impact the amount of permitted repurchases thereunder.

For the year ended December 31, 2024, we repurchased 17,085 shares of our common stock on the open market at an aggregate cost of $809,000 under the stock repurchase program.

The 2024 stock repurchase program expired on December 31, 2024, with $1.1 million of remaining availability.

Effective January 1, 2023, stock repurchases are subject to a nondeductible excise tax under the Inflation Reduction Act of 2022 equal to 1.0% of the fair market value of the shares repurchased, subject to certain limitations. In the fourth quarter of 2024, $213,000 of stock repurchase excise tax was recorded. This tax relates to our 2023 and 2024 stock repurchases, which regulations require to be recorded as a reduction to stockholders’ equity.

On December 19, 2024, our board of directors approved the renewal of the 2024 stock repurchase program that expired on December 31, 2024. The renewed program authorizes us to purchase up to $5.0 million of our outstanding shares of common stock from January 1, 2025 through December 31, 2025. Repurchases may be made from time to time in the open market at prevailing prices and based on market conditions, or in privately negotiated transactions.

Regulatory Capital Requirements

Capital management consists of maintaining equity and other instruments that qualify as regulatory capital to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, bank holding companies and FDIC-insured depository institutions are required to maintain minimum capital relative to the amount and types of assets they hold.

As we deploy our capital and continue to grow our operations, our capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us.

For additional information on regulatory capital guidelines and limits for the Bank and the Company, see “Item 8. Financial Statements and Supplementary Data - Note 15. Regulatory Capital Requirements.”

LIQUIDITY AND ASSET-LIABILITY MANAGEMENT

Liquidity

As of December 31, 2024, we had sufficient liquid assets available and $1.62 billion accessible from other liquidity sources.

Liquidity involves our ability to raise funds to support asset growth and potential acquisitions, reduce assets to meet deposit withdrawals and other payment obligations, maintain reserve requirements, and otherwise operate on an ongoing basis and manage unexpected events. For the years ended December 31, 2024 and 2023, liquidity needs were primarily met by core deposits, security and loan maturities, and cash flows from amortizing security and loan portfolios. While maturities and scheduled amortization of loans are predictable sources of funds, deposit outflows, mortgage prepayments, and prepayments on amortizing securities are greatly influenced by market interest rates, economic conditions, and the competitive environment in which we operate; therefore, these cash flows are monitored regularly.

Liquidity levels are dependent on our operating, financing, lending, and investing activities during any given period. Access to purchased funds from correspondent banks and overnight advances from the FHLB of Dallas and the Federal

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Reserve Bank of Atlanta are also available. Purchased funds from correspondent banks and overnight advances can be utilized to meet funding obligations.

Our primary source of funds is deposits, and our primary use of funds is the funding of loans. We invest excess deposits in interest-earning deposit accounts at other banks or at the Federal Reserve, federal funds sold, securities, or other short-term liquid investments until the deposits are needed to fund loan growth or other obligations. Our average deposits increased $27.0 million, or 1.0%, for the year ended December 31, 2024, compared to the average deposits for the year ended December 31, 2023. The increase in average total deposits was primarily due to new time deposit activity. Our average total loans increased $103.0 million, or 5.3%, for the year ended December 31, 2024, compared to average total loans for the year ended December 31, 2023. The increase in average total loans was primarily due to the increase in real estate and commercial and industrial activity.

As of December 31, 2024, liquid assets were $269.0 million compared to $305.4 million as of December 31, 2023. The decrease of $36.5 million, or 11.9%, was due to the funding of loans, partially offset by the inflow of deposits and net securities cash flows received during the year. The liquid assets to assets ratio was 8.54% as of December 31, 2024, compared to 9.76% as of December 31, 2023.

Our securities portfolio is an alternative source for meeting liquidity needs and was our second-largest component of assets as of December 31, 2024. The securities portfolio generates cash flow through principal repayments, calls, and maturities, and certain securities can be sold or used as collateral in borrowings that allow for their conversion to cash. Securities AFS can generally be sold, while securities HTM have significant restrictions related to sales. As of December 31, 2024, we project receipt of approximately $101.0 million of principal repayments and maturities through December 31, 2025. As of December 31, 2024, approximately $434.8 million, or 65.7%, of the fair value of the securities portfolio was available to be sold or used as collateral in borrowings as a liquidity source.

We also utilize the FHLB of Dallas as needed as a viable funding source. FHLB of Dallas advances may be used to meet the Bank’s liquidity needs, particularly if the prevailing interest rate on an FHLB of Dallas advance compares favorably to the rates that would be required to attract the necessary deposits. We currently are classified as having “blanket lien collateral status,” which means that advances can be executed at any time without further collateral requirements. As of December 31, 2024 and 2023, our net borrowing capacity from the FHLB of Dallas was $931.6 million and $829.2 million, respectively. There were no outstanding borrowings from the FHLB as of December 31, 2024 and 2023.

Another borrowing source is the Federal Reserve Bank’s Discount Window. Effective the third quarter of 2023, the Bank pledged securities to have borrowing access to the Federal Reserve Bank’s Discount Window. In addition, effective March 2024, the Bank was approved for the Discount Window’s Borrower-In-Custody “BIC” program, which provides borrowing capacity through the pledging of eligible Red River Bank loans that are not pledged to the FHLB. As of December 31, 2024, we had a total borrowing capacity of $157.8 million, including $118.7 million through the BIC program, compared to a total borrowing capacity of $45.5 million as of December 31, 2023. There were no outstanding borrowings from the Federal Reserve Bank’s Discount Window as of December 31, 2024 and 2023.

Other sources available for meeting liquidity needs include federal funds lines, repurchase agreements, and other lines of credit. We maintain four federal funds lines of credit with commercial banks that provided for the availability to borrow up to an aggregate of $95.0 million in federal funds as of December 31, 2024 and 2023. The rates for the federal funds lines are determined by the applicable commercial bank at the time of borrowing. We also maintained an additional $6.0 million revolving line of credit at one of our correspondent banks until July 1, 2024. As of December 31, 2024 and 2023, we had total borrowing capacity of $95.0 million and $101.0 million, respectively, through these combined funding sources. We had no outstanding balances from either of these sources as of December 31, 2024 and 2023.

The Federal Reserve’s Bank Term Funding Program was available from March 12, 2023 through March 11, 2024. The Bank did not utilize this program while it was being offered.

Off-Balance Sheet Items

In the normal course of business, we enter into certain financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of our customers. These commitments involve elements of credit risk, interest rate risk, and liquidity risk. Some instruments may not be reflected in the accompanying consolidated financial statements until they are funded, although they expose us to varying degrees of credit risk and interest rate risk in much the same way as funded loans. We may also enter into contractual obligations.

For more information about our commitments to extend credit and standby letters of credit, see “Item 8. Financial Statements and Supplementary Data - Note 3. Loans and Asset Quality - Commitments to Extend Credit.” For more information about our financial commitments with time deposits, operating lease obligations, and limited partnership investments and construction commitments, see “Item 8. Financial Statements and Supplementary Data - Note 5. Deposits,” “- Note 7. Leases,” and “- Note 12. Off-Balance Sheet Contractual Obligations and Contingencies,” respectively.

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Interest Rate Sensitivity and Market Risk

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

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

We manage exposure to interest rates by structuring the balance sheet appropriately during the ordinary course of business. We have the ability to enter into interest rate swaps to mitigate interest rate risk in limited circumstances, but it is not our policy to enter into such transactions on a regular basis. We do not enter into instruments such as financial options, financial futures contracts, or forward delivery contracts for the purpose of reducing interest rate risk. We are not subject to foreign exchange risk, and our commodity price risk is immaterial, as the percentage of our agricultural loans to loans HFI was only 0.35% as of December 31, 2024.

Our exposure to interest rate risk is managed by the Bank’s Asset-Liability Management Committee. The committee formulates strategies based on appropriate levels of interest rate risk and monitors the results of those strategies. In determining the appropriate level of interest rate risk, the committee considers the impact on both earnings and capital given the current outlook on interest rates, regional economies, liquidity, business strategies, and other related factors.

The committee meets quarterly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and economic values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans, and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits, and consumer and commercial deposit activity. We employ methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, as well as an interest rate simulation model and shock analysis.

In conjunction with our interest rate risk management process, on a quarterly basis, we run various simulations within a static balance sheet. This model tests the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. We use parallel rate shock scenarios that assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. We also deploy a ramped rate scenario over a 12-month and 24-month horizon based upon parallel yield curve shifts. Our nonparallel rate shock model simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Contractual maturities and repricing opportunities of loans are incorporated into the model, as are prepayment assumptions and maturity data and call options within the securities portfolio. The average life of non-maturity deposit accounts are based on assumptions developed from non-maturity deposit decay studies, which calculate average lives using historic closure rates.

Bank policy regarding interest rate risk simulations performed by our risk model currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 10.0% for a 100 bp shift, 15.0% for a 200 bp shift, and 20.0% for a 300 bp shift. In accordance with Bank policy regarding economic value at risk simulations performed by our risk model for instantaneous parallel shifts of the yield curve, estimated fair value of equity for the subsequent one-year period should not decline by more than 10.0% for a 100 bp shift, 20.0% for a 200 bp shift, and 30.0% for a 300 bp shift.

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The following table shows the impact of an instantaneous and parallel change in rates, at the levels indicated, and summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated.

The results above, as of December 31, 2024 and 2023, demonstrate that our balance sheet is asset sensitive, which means our assets have the opportunity to reprice at a faster pace than our liabilities, over the 12-month horizon. Our repricing opportunity is captured in a gap analysis, which is the process by which we measure the repricing gap between interest rate-sensitive assets versus interest rate-sensitive liabilities.

As of December 31, 2024, the reported percentage of changes in net interest income and fair value of equity remained within the policy thresholds. These values are reported at each quarterly Asset-Liability Management Committee meeting. The net interest income at risk and the fair value of equity will continue to be monitored, and appropriate mitigating action will be taken if needed.

The impact of our floating rate loans and floating rate transaction deposits are also reflected in the results shown in the above table. As of December 31, 2024, floating rate loans were 16.0% of loans HFI, and floating rate transaction deposits were 8.1% of interest-bearing transaction deposits.

The assumptions incorporated into the model are inherently uncertain, and as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various management strategies and the slope of the yield curve.

Impact of Inflation

Our consolidated financial statements and related notes included in “Item 8. Financial Statements and Supplementary Data” of this Report have been prepared in accordance with GAAP. GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession. Changes in interest rates affect the financial condition of a financial institution to a much greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or by the same level as the inflation rate. The primary effect of inflation on our operations is our ability to manage the impact of changes in interest rates. In addition, inflation could also increase our operating costs related to our products and services.

NON-GAAP FINANCIAL MEASURES

Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. Certain financial measures used by management to evaluate our operating performance are discussed in this Report as supplemental non-GAAP performance measures. In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the U.S.

Management and the board of directors review tangible book value per share, tangible common equity to tangible assets, and realized book value per share as part of managing operating performance. However, these non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner we calculate the non-GAAP financial measures that are discussed in this Report may differ from that of other companies’ reporting measures with similar names. It is important to understand how such other banking organizations calculate and name their financial measures similar to the non-GAAP financial measures discussed in this Report when comparing such non-GAAP financial measures.

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Tangible Assets, Tangible Equity, Tangible Book Value, and Realized Book Value

Tangible Book Value Per Share. Tangible book value per share is a non-GAAP measure commonly used by investors, financial analysts, and investment bankers to evaluate financial institutions. We believe that this measure is important to many investors in the marketplace who are interested in changes from period to period in book value per share exclusive of changes in intangible assets. We calculate tangible book value per share as total stockholders’ equity, less intangible assets, divided by the outstanding number of shares of our common stock at the end of the relevant period. Intangible assets have the effect of increasing total book value while not increasing tangible book value. The most directly comparable GAAP financial measure for tangible book value per share is book value per share.

As a result of previous acquisitions, we have a small amount of intangible assets. As of December 31, 2024, total intangible assets were $1.5 million, which is less than 1.0% of total assets.

Tangible Common Equity to Tangible Assets. Tangible common equity to tangible assets is a non-GAAP measure generally used by investors, financial analysts, and investment bankers to evaluate financial institutions. We believe that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period of tangible common equity to tangible assets, each exclusive of changes in intangible assets. Intangible assets have the effect of increasing both total stockholders’ equity and assets while not increasing our tangible common equity or tangible assets. We calculate tangible common equity as total stockholders’ equity less intangible assets, and we calculate tangible assets as total assets less intangible assets. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common stockholders’ equity to total assets.

Realized Book Value Per Share. Realized book value per share is a non-GAAP measure that we use to evaluate our operating performance. We believe that this measure is important because it allows us to monitor changes from period to period in book value per share exclusive of changes in AOCI. Our AOCI is impacted primarily by the unrealized gains and losses on securities AFS. These unrealized gains or losses on securities AFS are driven by market factors and may also be temporary and vary greatly from period to period. Due to the possibly temporary and greatly variable nature of these changes, we find it useful to monitor realized book value per share. We calculate realized book value per share as total stockholders’ equity less AOCI, divided by the outstanding number of shares of our common stock at the end of the relevant period. AOCI has the effect of increasing or decreasing total book value while not increasing or decreasing realized book value. The most directly comparable GAAP financial measure for realized book value per share is book value per share.

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The following table reconciles, as of the dates set forth below, stockholders’ equity to tangible common equity, stockholders’ equity to realized common equity, and assets to tangible assets, and presents related resulting ratios:

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.

The following discussion presents an overview of our accounting policies that require difficult, subjective, or complex judgments and assumptions that are inherent in our policies and estimates and the potential sensitivity of the financial statements. Due to the complexity of these judgments and assumptions, an understanding of our financial condition and results of operations is critical. We believe that the judgments, estimates, and assumptions used in the preparation of the consolidated financial statements are appropriate. Refer to “Item 8. Financial Statements and Supplementary Data - Note 1. Significant Accounting Policies” for details on the significant accounting principles and practices we follow.

Allowance for Credit Losses

The ACL is a valuation account that is deducted from the amortized cost basis of loans HFI to present management’s best estimate of the expected credit losses to be recognized over the lifetime of the loans. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. This reasonable and supportable forecast period is currently one year and incorporates the Company’s and its peer’s historical losses. After the forecast period, the Company reverts to an average historical loss rate over a two-year period. The determination of the amount of allowance involves a high degree of judgment and subjectivity.

The ACL is available to absorb losses on loans HFI. The process and methodology employed to establish an ACL consist of two components: (1) a component involving individual loans that do not share similar risk characteristics with other loans and the measurement of expected credit losses for such individual loans and (2) a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.

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Management establishes an allowance for individual loans that do not share similar risk characteristics with other loans based on the amount of expected credit losses calculated on those individual loans and any amounts determined to be uncollectible. Factors considered in measuring the extent of expected credit losses include payment status, collateral value, borrower financial condition, guarantor support, and the probability of collecting scheduled principal and interest payments when due. For loans evaluated on an individual bases that are collateral dependent, the specific allowance is estimated by calculating the difference between the fair value of the underlying collateral less estimated selling costs and the Bank’s exposure. If the loan is not collateral dependent, the discounted cash flow methodology is used.

In estimating an allowance for loans that share similar risk characteristics, loans are segmented into pools based on regulatory call report codes that are considered to share similar risk characteristics or areas of risk concentration. Expected credit losses are estimated using the cohort loss rate and remaining life loss rate methodologies. The cohort loss rate methodology tracks a closed pool of loans over their remaining lives to determine their loss behavior. Once the losses have been tracked, the results are averaged together to determine the average remaining life loss rate to be applied to the current loans in the cohort and are adjusted for reasonable and supportable forecast periods, which is not to exceed a two-year period. Additionally, a lookback period and delay period are established for each pool, which affects the average remaining life loss rate. The lookback period defines how many quarterly cohort periods will be averaged together to form the average remaining life loss rate and varies by pool in order to capture the performance of cohorts under a variety of different conditions, both internal and external. The delay period defines the most recent cohort that will be used in the historical average and varies by pool due to the differing terms and remaining lives that may exist in different pools. The remaining life loss rate methodology takes the calculated loss rate and applies that rate to a pool of loans on a periodic basis based on the remaining life expectation of that pool and is further adjusted for current conditions and reasonable and supportable economic forecast periods.

Additionally, for loans that share similar risk characteristics, the ACL considers qualitative factors for each loan pool to adjust for differences between the historical period and expected conditions over the remaining lives of the loans in the portfolio related to:

•Lending policies and procedures;

•International, national, regional, and local economic business conditions;

•The nature of the loan portfolio, including the volume of the portfolio and terms of the loans;

•The experience, depth, and ability of our lending management;

•The volume and severity of past due loans and other similar conditions;

•The quality of the loan review and process;

•The value of underlying collateral for collateral dependent loans;

•The existence and effect of any concentrations of credit and changes in the level of such concentrations; and

•The effect of other external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the existing portfolio.

These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in the historical loss experience for these expectations.

Management considers the appropriateness of these qualitative assumptions as part of its allowance review and believes the ACL level is appropriate based on information available through the financial statement date.

RECENT ACCOUNTING PRONOUNCEMENTS

See “Item 8. Financial Statements and Supplementary Data - Note 1. Significant Accounting Policies - Accounting Standards Adopted in 2024” and “- Recent Accounting Pronouncements.”