# Third Coast Bancshares, Inc. (TCBX) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Third Coast Bancshares, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1781730/000095017022003984/tcbx-20211231.htm
Accession: 0000950170-22-003984
Filing date: 2022-03-17
Report date: 2021-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

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

Overview

We are a bank holding company headquartered in Humble, Texas and operated through our wholly owned subsidiary, the Bank, and the Bank’s wholly owned subsidiary, TCCC. We focus on providing commercial banking solutions to small- and medium-sized businesses and professionals with operations in our markets. Our market expertise, coupled with a deep understanding of our customers’ needs, allows us to deliver tailored financial products and services. We currently operate twelve branches, with seven branches in the Greater Houston market, two branches in the Dallas-Fort Worth market, two branches in the Austin-San Antonio market, and one branch in Detroit, Texas. As of December 31, 2021, we had, on a consolidated basis, total assets of $2.50 billion, total loans of $2.07 billion, total deposits of $2.14 billion and total shareholders’ equity of $299.0 million.

On January 1, 2020, we acquired 100% of the outstanding stock of Heritage Bancorp, Inc. and its subsidiary, Heritage Bank, with five branches located in Texas, and merged Heritage Bancorp, Inc. with and into the Company and Heritage Bank with and into the Bank. The estimated values of assets acquired and liabilities assumed as of January 1, 2020 were total assets of $315.9 million, total loans of $259.6 million, and total deposits of $260.2 million. Pursuant to the merger, we issued $50.9 million in common stock and $103,627 in cash and recognized total goodwill of $18.0 million.

As a bank holding company that operates through one segment, community banking, we generate most of our revenue from interest on loans, and customer service and loan fees. We incur interest expense on deposits and other borrowed funds, as well as noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest-earning assets and control the interest expenses of our liabilities, measured as net interest income, through our net interest margin and net interest spread. Net interest income is the difference between interest income on interest-earning assets, such as loans and interest-bearing time deposits in other banks, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest spread is the difference between average rates earned on interest-earning assets and average rates paid on interest-bearing liabilities.

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

COVID-19 Update

The Company has been, and may continue to be, impacted by the COVID-19 pandemic. In recent months, vaccination rates have been increasing and restrictive measures have eased in certain areas. However, uncertainty remains about the duration of the pandemic and the timing and strength of the global economy’s recovery. To address the economic impact of the pandemic in the U.S., multiple stimulus packages have been enacted to provide economic relief to individuals and businesses, including the CARES Act, which established the PPP, and the American Rescue Plan Act of 2021, enacted in March 2021.

As the pandemic evolves, we continue to evaluate protocols and processes in place to execute our business continuity plans while promoting the health and safety of our employees and continuing to support our customers and communities.

We have been an active participant in all phases of the PPP, administered by the SBA, and have helped many of our customers obtain loans through the program. PPP loans have a two or five-year term and earn interest at 1.0%. At December 31, 2021,

46

outstanding PPP loans, net of deferred loan fees of $2.1 million, were $81.6 million which are included in commercial and industrial loans. Assuming compliance with PPP origination and documentation requirements, loans funded through the PPP program are fully guaranteed by the U.S. government.

The Company also participated in the Main Street Lending Program (the “MSLP”), created by the Federal Reserve to support lending to small and medium-sized businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. At December 31, 2021, outstanding MSLP loans, excluding the 95% portion sold to the Federal Reserve and net of deferred loan fees of $1.0 million, were $5.4 million which are included in commercial and industrial loans.

Completion of $70.5 Million Private Placement

On August 27, 2021, the Company completed the issuance and sale of 2,937,876 shares of its common stock for aggregate proceeds of approximately $70.5 million, consisting of 227,307 shares issued and sold during the six months ended June 30, 2021 for aggregate proceeds of approximately $5.4 million and 2,710,569 shares issued and sold between July 1, 2021 and August 27, 2021 for aggregate proceeds of approximately $65.1 million, in a private placement in reliance upon the exemption from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. The Company used a portion of the net proceeds from the private placement to repay $32.5 million of outstanding indebtedness, consisting of (i) $19.5 million under the Company's senior debt due September 10, 2022; (ii) $11.0 million under a subordinated debt due July 29, 2022; and (iii) $2.0 million under a subordinated debt due September 27, 2022.

Initial Public Offering

On November 9, 2021, the Company's common stock began trading on the NASDAQ Global Select Market under the symbol “TCBX”. We issued and sold an aggregate of 4,025,000 shares of our common stock, including 525,000 shares of common stock sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, in our initial public offering at a public offering price of $25.00 per share, for aggregate gross proceeds of $100.6 million before deducting underwriting discounts and offering expenses. Aggregate net proceeds from our initial public offering were $92.0 million after deducting underwriting discounts and offering expenses. The initial closing of our initial public offering occurred on November 12, 2021, and the closing for the shares issued pursuant to the underwriters’ option occurred on November 17, 2021. In connection with the closing of our initial public offering, we issued an aggregate of 49,750 shares of restrictive stock to our directors, advisory directors, and executive officers. We intend to use the net proceeds from our initial public offering to support our organic growth and for general corporate purposes, including maintenance of our required regulatory capital and potential future acquisition opportunities.

Results of Operations

Our results of operations depend substantially on net interest income and noninterest income. Other factors contributing to our results of operations include our level of our noninterest expenses, such as salaries and employee benefits, occupancy and equipment and other miscellaneous operating expenses. See the analysis of the material fluctuations in the related discussions that follow.

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,","","","For the Year Ended December 31,"],["(Dollars in thousands)","2021","","","2020","","","Increase (Decrease)","2020","","","2019","","","Increase (Decrease)"],["Interest income","$","100,615","","","$","82,241","","","$","18,374","","","","22.3","%","","$","82,241","","","$","49,925","","","$","32,316","","","","64.7","%"],["Interest expense","","10,062","","","","14,360","","","","(4,298",")","","","(29.9",")%","","","14,360","","","","15,974","","","","(1,614",")","","","(10.1",")%"],["Net interest income","","90,553","","","","67,881","","","","22,672","","","","33.4","%","","","67,881","","","","33,951","","","","33,930","","","","99.9","%"],["Provision for loan losses","","9,923","","","","7,550","","","","2,373","","","","31.4","%","","","7,550","","","","1,625","","","","5,925","","","","364.6","%"],["Noninterest income","","4,878","","","","2,682","","","","2,196","","","","81.9","%","","","2,682","","","","1,217","","","","1,465","","","","120.4","%"],["Noninterest expense","","71,025","","","","47,403","","","","23,622","","","","49.8","%","","","47,403","","","","30,310","","","","17,093","","","","56.4","%"],["Income before income taxes","","14,483","","","","15,610","","","","(1,127",")","","","(7.2",")%","","","15,610","","","","3,233","","","","12,377","","","","382.8","%"],["Income tax expense","","3,059","","","","3,495","","","","(436",")","","","(12.5",")%","","","3,495","","","","852","","","","2,643","","","","310.2","%"],["Net income","$","11,424","","","$","12,115","","","$","(691",")","","","(5.7",")%","","$","12,115","","","$","2,381","","","$","9,734","","","","408.8","%"]]
[[/GREPCENT_TABLE]]

47

Net Interest Income

Our operating results depend primarily on our net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Fluctuations in market interest rates impact the yield and rates paid on interest-earning assets and interest-bearing liabilities, respectively. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact our net interest income. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Year ended December 31, 2021 vs. Year ended December 31, 2020

Net interest income increased $22.7 million, or 33.4%, during the year ended December 31, 2021, compared to the year ended December 31, 2020 primarily due to an increase in average loans and lower average rates paid on interest-bearing deposits as well as increase in income from PPP loans. Average loans was $1.43 billion for the year ended December 31, 2020 compared to $1.65 billion for the year ended December 31, 2021 with the increase primarily due to loan growth in commercial and industrial loans and commercial real estate loans. The average cost of interest-bearing deposits was 0.60% for the year ended December 31, 2021 and 1.07% for the year ended December 31, 2020. The Company recognized $19.2 million in PPP deferred origination fees for the year ended December 31, 2021 through both accretion and forgiveness of the related PPP loans compared to $10.2 million for the year ended December 31, 2020. For the year ended December 31, 2021, net interest margin and net interest spread were 4.65% and 4.50%, respectively, compared to 4.24% and 3.98%, respectively, for the year ended December 31, 2020.

Year ended December 31, 2020 vs. Year ended December 31, 2019

Net interest income increased $33.9 million, or 99.9%, during the year ended December 31, 2020, compared to the year ended December 31, 2019 primarily due to an increase in average loans and lower average rates paid on interest-bearing deposits as well as income from PPP loans. Average loans was $739.5 million for the year ended December 31, 2019 compared to $1.43 billion for the year ended December 31, 2020. The increase in average loans was primarily due to the acquisition of Heritage on January 1, 2020 and loan growth in commercial and industrial loans and commercial real estate loans. The average cost of interest-bearing deposits was 1.07% for the year ended December 31, 2020 and 2.21% for the year ended December 31, 2019. The Company recognized $10.2 million in PPP deferred origination fees for the year ended December 31, 2020 through both accretion and forgiveness of the related PPP loans. For the year ended December 31, 2020, net interest margin and net interest spread were 4.24% and 3.98%, respectively, compared to 4.08% and 3.67%, respectively, for the year ended December 31, 2019.

48

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

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2021","","","2020","","","2019"],["(Dollars in thousands)","","Average Outstanding Balance","","","Interest Earned/ Paid(3)","","","Average Yield/ Rate","","","Average Outstanding Balance","","","Interest Earned/ Paid(3)","","","Average Yield/ Rate","","","Average Outstanding Balance","","","Interest Earned/ Paid(3)","","","Average Yield/ Rate"],["Assets"],["Interest-earnings assets:"],["Investment securities","","$","31,251","","","$","1,043","","","","3.34","%","","$","14,709","","","$","297","","","","2.02","%","","$","2,422","","","$","24","","","","0.99","%"],["Loans, gross","","","1,646,591","","","","98,886","","","","6.01","%","","","1,433,412","","","","80,791","","","","5.64","%","","","739,525","","","","47,570","","","","6.43","%"],["Federal funds sold and other interest- earning assets","","","267,983","","","","686","","","","0.26","%","","","152,066","","","","1,153","","","","0.76","%","","","90,356","","","","2,331","","","","2.58","%"],["Total interest-earning assets","","","1,945,825","","","","100,615","","","","5.17","%","","","1,600,187","","","","82,241","","","","5.14","%","","","832,303","","","","49,925","","","","6.00","%"],["Less allowance for loan losses","","","(14,198",")","","","","","","","","","(10,506",")","","","","","","","","","(7,360",")"],["Total interest-earning assets, net of allowance","","","1,931,627","","","","","","","","","","1,589,681","","","","","","","","","","824,943"],["Noninterest-earning assets","","","132,825","","","","","","","","","","80,686","","","","","","","","","","44,220"],["Total assets","","$","2,064,452","","","","","","","","","$","1,670,367","","","","","","","","","$","869,163"],["Liabilities and Shareholders\u2019 Equity"],["Interest-bearing liabilities:"],["Interest-bearing deposits","","$","1,421,757","","","$","8,526","","","","0.60","%","","$","1,150,723","","","$","12,302","","","","1.07","%","","$","625,040","","","$","13,787","","","","2.21","%"],["Notes payable","","","22,329","","","","1,091","","","","4.89","%","","","39,793","","","","1,615","","","","4.06","%","","","24,335","","","","1,436","","","","5.90","%"],["FHLB advances","","","56,442","","","","445","","","","0.79","%","","","50,000","","","","443","","","","0.89","%","","","36,995","","","","751","","","","2.03","%"],["Total interest-bearing liabilities","","","1,500,528","","","","10,062","","","","0.67","%","","","1,240,516","","","","14,360","","","","1.16","%","","","686,370","","","","15,974","","","","2.33","%"],["Noninterest-bearing deposits","","","383,747","","","","","","","","","","310,357","","","","","","","","","","122,961"],["Other liabilities","","","9,547","","","","","","","","","","6,661","","","","","","","","","","3,442"],["Total liabilities","","","1,893,822","","","","","","","","","","1,557,534","","","","","","","","","","812,773"],["Shareholders\u2019 equity, including ESOP owned shares","","","170,630","","","","","","","","","","112,833","","","","","","","","","","56,390"],["Total liabilities and shareholders\u2019 equity","","$","2,064,452","","","","","","","","","$","1,670,367","","","","","","","","","$","869,163"],["Net interest income","","","","","$","90,553","","","","","","","","","$","67,881","","","","","","","","","$","33,951"],["Net interest spread(1)","","","","","","","","","4.50","%","","","","","","","","","3.98","%","","","","","","","","","3.67","%"],["Net interest margin(2)","","","","","","","","","4.65","%","","","","","","","","","4.24","%","","","","","","","","","4.08","%"]]
[[/GREPCENT_TABLE]]

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

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

(3)
Interest earned/paid includes accretion of deferred loan fees, premiums and discounts. Interest income on loans includes loan fees and discount accretion of $32.8 million, $18.5 million, and $6.4 million for the year ended December 31, 2021, 2020, and 2019, respectively.

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31, 2021 compared to 2020","","","For the Year Ended December 31, 2020 compared to 2019"],["","","Increase (Decrease) Due to Changes In","","","Total Increase","","","Increase (Decrease) Due to Changes In","","","Total Increase"],["(Dollars in thousands)","","Volume","","","Rate","","","(Decrease)","","","Volume","","","Rate","","","(Decrease)"],["Interest-earning assets:"],["Investment securities","","$","334","","","$","412","","","$","746","","","$","122","","","$","151","","","$","273"],["Loans, gross","","","12,015","","","","6,080","","","","18,095","","","","44,598","","","","(11,377",")","","","33,221"],["Federal funds sold and other interest-earning assets","","","879","","","","(1,346",")","","","(467",")","","","1,592","","","","(2,770",")","","","(1,178",")"],["Total increase in interest income","","$","13,228","","","$","5,146","","","$","18,374","","","$","46,312","","","$","(13,996",")","","$","32,316"],["Interest-bearing liabilities:"],["Interest-bearing deposits","","$","2,898","","","$","(6,674",")","","$","(3,776",")","","$","11,644","","","$","(13,129",")","","$","(1,485",")"],["Notes payable","","","(709",")","","","185","","","","(524",")","","","912","","","","(733",")","","","179"],["FHLB advances","","","57","","","","(55",")","","","2","","","","264","","","","(572",")","","","(308",")"],["Total increase (decrease) in interest expense","","$","2,246","","","$","(6,544",")","","$","(4,298",")","","$","12,820","","","$","(14,434",")","","$","(1,614",")"],["Increase in net interest income","","$","10,982","","","$","11,690","","","$","22,672","","","$","33,492","","","$","438","","","$","33,930"]]
[[/GREPCENT_TABLE]]

49

Provision for Loan Losses

The provision for loan losses is an expense we use to maintain an allowance for loan losses at a level which is deemed appropriate by management to absorb inherent losses on existing loans.

The provision for loan losses for the year ended December 31, 2021 was $9.9 million compared to $7.6 million for the year ended December 31, 2020. The majority of the provision for 2021 related to provisions on newly originated non-PPP loans. As of December 31, 2021, the allowance for loan losses totaled $19.3 million, or 0.93% of total loans, compared to $12.0 million, or 0.77% of total loans, as of December 31, 2020.

The provision for loan losses for the year ended December 31, 2020 was $7.6 million compared to $1.6 million for the year ended December 31, 2019. The increase of $6.0 million was primarily due to the increase in net charge-offs for the year ended December 31, 2020 compared to the same period in 2019, loan growth for the year ended December 31, 2020 and an increase in qualitative factors used in our analysis. As of December 31, 2020, the allowance for loan losses totaled $12.0 million, or 0.77% of total loans, compared to $8.1 million, or 1.00% of total loans, as of December 31, 2019.

Noninterest Income

Our primary sources of recurring noninterest income are service charges and fees on deposit accounts, gains from the sale of SBA loans, and earnings from bank-owned life insurance. Noninterest income does not include loan origination fees, which are recognized in interest income.

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

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,","","","For the Year Ended December 31,"],["(Dollars in thousands)","","2021","","","2020","","","Increase (Decrease)","","","2020","","","2019","","","Increase (Decrease)"],["Noninterest Income:"],["Service charges and fees","","$","2,367","","","$","1,709","","","$","658","","","","38.5","%","","$","1,709","","","$","547","","","$","1,162","","","","212.4","%"],["Gain on sale of SBA loans","","","586","","","","266","","","","320","","","","120.3","%","","","266","","","","\u2014","","","","266","","","","100.0","%"],["Earnings on bank-owned life insurance","","","567","","","","354","","","","213","","","","60.2","%","","","354","","","","258","","","","96","","","","37.2","%"],["Other","","","1,358","","","","353","","","","1,005","","","","284.7","%","","","353","","","","412","","","","(59",")","","","(14.3",")%"],["Total noninterest income","","$","4,878","","","$","2,682","","","$","2,196","","","","81.9","%","","$","2,682","","","$","1,217","","","$","1,465","","","","120.4","%"]]
[[/GREPCENT_TABLE]]

Year ended December 31, 2021 vs. Year ended December 31, 2020

The increase in noninterest income of $2.2 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to the increase in service charges and fees, gain on sale of SBA loans, increases in earnings on bank-owned life insurance, and other non-loan related fee income. The increase in service charges and fees was primarily due to a $512,000 increase in ATM income and a $171,000 increase in mortgage secondary market fee income. The Company recognized $586,000 on the sale of the guarantee portion of several (non-PPP) SBA loans in 2021 compared to the sale of one non-PPP SBA loan in 2020 for a gain of $266,000. The Company purchased $10.0 million in additional bank-owned life insurance policies during the fourth quarter of 2020 resulting in the increased earnings on bank-owned life insurance in 2021. Included in other noninterest income in 2021 is $820,000 in fee income related to non-loan related fee income.

Year ended December 31, 2020 vs. Year ended December 31, 2019

The increase in noninterest income of $1.5 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, was primarily due to the $266,000 gain recognized on the sale of the guaranteed portion of one (non-PPP) SBA loan and the increase in service charges and fees. The increase in service charges and fees was primarily due to a $396,000 increase in ATM income, $181,000 increase in non-sufficient funds fees, and $40,000 increase in commercial account analysis fees as a result of our growth in retail services and acquisition of Heritage January 1, 2020. In addition, mortgage secondary market fee income for the year ended December 31, 2020 totaled $438,000.

Noninterest Expense

Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization of our facilities and our furniture, fixtures and office equipment, legal and professional fees, data processing and network expenses, regulatory fees, including FDIC assessments, advertising and marketing expenses, and loan operations and repossessed asset related expenses.

50

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

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,","","","For the Year Ended December 31,"],["(Dollars in thousands)","","2021","","","2020","","","Increase (Decrease)","","","2020","","","2019","","","Increase (Decrease)"],["Noninterest Expense:"],["Salaries and employee benefits","","$","48,642","","","$","29,262","","","$","19,380","","","","66.2","%","","$","29,262","","","$","19,983","","","$","9,279","","","","46.4","%"],["Net occupancy and equipment expenses","","","5,367","","","","4,127","","","","1,240","","","","30.0","%","","","4,127","","","","2,612","","","","1,515","","","","58.0","%"],["Other:"],["Legal and professional fees","","","5,293","","","","3,962","","","","1,331","","","","33.6","%","","","3,962","","","","2,415","","","","1,547","","","","64.1","%"],["Data processing and network expenses","","","3,060","","","","3,184","","","","(124",")","","","(3.9",")%","","","3,184","","","","1,738","","","","1,446","","","","83.2","%"],["Regulatory assessments","","","1,101","","","","1,303","","","","(202",")","","","(15.5",")%","","","1,303","","","","434","","","","869","","","","200.2","%"],["Advertising and marketing expenses","","","1,889","","","","1,326","","","","563","","","","42.5","%","","","1,326","","","","699","","","","627","","","","89.7","%"],["Loan operations and other real estate owned expenses","","","1,963","","","","1,369","","","","594","","","","43.4","%","","","1,369","","","","819","","","","550","","","","67.2","%"],["Loss on sale of other real estate owned","","","344","","","","\u2014","","","","344","","","","100.0","%","","","\u2014","","","","38","","","","(38",")","","","100.0","%"],["Other expenses","","","3,366","","","","2,870","","","","496","","","","17.3","%","","","2,870","","","","1,572","","","","1,298","","","","82.6","%"],["Total noninterest expense","","$","71,025","","","$","47,403","","","$","23,622","","","","49.8","%","","$","47,403","","","$","30,310","","","$","17,093","","","","56.4","%"]]
[[/GREPCENT_TABLE]]

Year ended December 31, 2021 vs. Year ended December 31, 2020

The increase in noninterest expense of $23.6 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to increases in salaries and employee benefits expense, net occupancy and equipment expenses, and legal and professional expenses.

Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $48.6 million for the year ended December 31, 2021, an increase of $19.4 million, or 66.2%, compared to $29.3 million for the same period in 2020. The increase was due to our investment in additional personnel, which we expect will foster future growth and allow us to accommodate that growth, and increased commissions related to our loan and deposit growth. As of December 31, 2021 and 2020, the number of employees was 334 and 213, respectively.

Net occupancy expenses were $5.4 million and $4.1 million for the years ended December 31, 2021 and 2020, respectively. This category includes building, leasehold, furniture, fixtures and equipment depreciation and software amortization totaling $2.5 million and $1.9 million for the years ended December 31, 2021 and 2020, respectively. In addition, during 2021, additional office space was leased to accommodate the increase in employees which resulted in an increase in lease expense from $1.2 million in 2020 to $1.6 million in 2021. Expenses related to building maintenance, landscaping services and janitorial services also increased partly due to the five branches acquired in the Heritage acquisition.

Legal and professional fees were $5.3 million and $4.0 million for the years ended December 31, 2021 and 2020, respectively. The increase was primarily due to the $1.1 million increase in professional fees as a result of costs associated with the PPP loan program and recruitment costs related to hiring additional personnel in 2021. Expenses related to audit, consulting, and legal increased as a result of growth and regulatory requirements.

Year ended December 31, 2020 vs. Year ended December 31, 2019

The increase in noninterest expense of $17.1 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, was primarily due to increases in salaries and employee benefits expense, net occupancy and equipment expense, legal and professional fees, and data processing and network expenses.

Salaries and employee benefits were $29.3 million for the year ended December 31, 2020, an increase of $9.3 million, or 46.4%, compared to $20.0 million for the same period in 2019. The increase was primarily due to the addition of approximately 60 employees from the acquisition of Heritage on January 1, 2020 and increased commissions related to our loan and deposit growth. As of December 31, 2020 and 2019, the number of employees was 213 and 147, respectively.

Net occupancy expenses were $4.1 million and $2.6 million for the years ended December 31, 2020 and 2019, respectively. This category includes building, leasehold, furniture, fixtures and equipment depreciation and software amortization totaling $1.9 million for the year ended December 31, 2020 and $1.1 million for the same period in 2019. The increase of $1.5 million, or 58.0%, in occupancy expenses for the year ended December 31, 2020 compared to 2019 was due primarily to the addition of five branches acquired in the Heritage acquisition.

51

Legal and professional fees were $4.0 million and $2.4 million for the years ended December 31, 2020 and 2019, respectively. The increase was primarily due to higher audit, consulting, legal, and recruitment costs. Higher costs primarily resulted from expenses related to the acquisition of Heritage, the PPP loan program, and additional personnel.

Data processing and network expenses were $3.2 million for the year ended December 31, 2020, an increase of $1.4 million or 83.2%, compared to $1.7 million for the same period in 2019. The increase was primarily due to: (i) higher transaction volumes related to the increased number of loan and deposit accounts, (ii) data conversion costs related to the Heritage acquisition, (iii) data processing costs for Heritage prior to core system conversion on July 1, 2020, (iv) increase in the number of branches from seven to twelve as a result of the Heritage acquisition, and (v) an increase in the number of employees.

Income Tax Expense

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

Income tax expense and effective tax rates for the periods shown below were as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(Dollars in thousands)","","2021","","","2020","","","2019"],["Income tax expense","","$","3,059","","","$","3,495","","","$","852"],["Effective tax rate","","","21.1","%","","","22.4","%","","","26.4","%"]]
[[/GREPCENT_TABLE]]

Year ended December 31, 2021 vs. Year ended December 31, 2020

For the years ended December 31, 2021 and 2020, income tax expense totaled $3.1 million and $3.5 million, respectively, and our effective tax rate was 21.1% and 22.4% for the years ended December 31, 2021 and 2021, respectively. The decrease in the effective tax rate for year ended 2021 as compared to 2020 was due to an increase in non-taxable income related to bank-owned life insurance.

Year ended December 31, 2020 vs. Year ended December 31, 2019

For the years ended December 31, 2020 and 2019, income tax expense totaled $3.5 million and $852,000, respectively. Our effective tax rate for the years ended December 31, 2020 and 2019 were 22.4% and 26.4%, respectively. The decrease in the effective tax rate was due to an increase in non-deductible capital offering expenses and merger costs.

Financial Condition

Total assets were $2.50 billion as of December 31, 2021 compared to $1.87 billion as of December 31, 2020. The increase of $632.1 million, or 33.9% was primarily due to organic loan growth and an increase in cash and cash equivalents from deposit growth and completion of our private placement and initial public offerings.

Loan Portfolio

Our primary source of income is derived through interest earned on loans to small- to medium-sized businesses, commercial companies, professionals and individuals located in our primary market areas. A substantial portion of our loan portfolio consists of commercial and industrial loans and real estate loans secured by commercial real estate properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our earning assets.

As of December 31, 2021, total loans were $2.07 billion, an increase of $512.6 million, or 32.9%, compared to $1.56 billion as of December 31, 2020. The increase in loans was due to growth of non-PPP related loans totaling $821.8 million, primarily commercial and industrial loans and commercial real estate loans, offset by a decrease in PPP loans of $309.2 million due to forgiveness payments received from the SBA. Total loans as a percentage of deposits were 96.6% and 95.2% as of December 31, 2021 and 2020, respectively. Total loans as a percentage of assets were 82.8% and 83.3% as of December 31, 2021 and 2020, respectively.

52

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

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2021","","","2020","","","2019","","","2018","","","2017"],["(Dollars in thousands)","","Amount","","","Percent","","","Amount","","","Percent","","","Amount","","","Percent","","","Amount","","","Percent","","","Amount","","","Percent"],["Real estate:"],["Commercial real estate:"],["Non-farm non-residential owner occupied","","$","383,941","","","","18.6","%","","$","353,273","","","","22.7","%","","$","219,920","","","","27.2","%","","$","190,954","","","","27.7","%","","$","169,947","","","","28.3","%"],["Non-farm non-residential non-owner occupied","","","445,308","","","","21.5","%","","","277,804","","","","17.9","%","","","191,036","","","","23.6","%","","","155,850","","","","22.7","%","","","116,169","","","","19.4","%"],["Residential","","","213,264","","","","10.3","%","","","140,622","","","","9.0","%","","","87,064","","","","10.7","%","","","60,048","","","","8.7","%","","","47,125","","","","7.9","%"],["Construction, development and other","","","320,335","","","","15.5","%","","","98,207","","","","6.3","%","","","60,445","","","","7.5","%","","","57,026","","","","8.3","%","","","57,874","","","","9.6","%"],["Farmland","","","9,934","","","","0.5","%","","","4,653","","","","0.3","%","","","7,359","","","","0.9","%","","","8,955","","","","1.3","%","","","5,952","","","","1.0","%"],["Commercial and industrial","","","611,348","","","","29.5","%","","","645,928","","","","41.5","%","","","214,935","","","","26.6","%","","","191,487","","","","27.8","%","","","178,663","","","","29.8","%"],["Consumer","","","4,001","","","","0.2","%","","","4,157","","","","0.3","%","","","3,781","","","","0.5","%","","","4,184","","","","0.6","%","","","5,473","","","","0.9","%"],["Other","","","80,593","","","","3.9","%","","","31,448","","","","2.0","%","","","24,066","","","","3.0","%","","","19,855","","","","2.9","%","","","18,825","","","","3.1","%"],["Total loans","","$","2,068,724","","","","100.0","%","","$","1,556,092","","","","100.0","%","","$","808,606","","","","100.0","%","","$","688,359","","","","100.0","%","","$","600,028","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Commercial Real Estate Loans. Commercial real estate loans are underwritten primarily based on cash flows of the borrower and, secondarily, the value of the underlying collateral. These loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the portfolio are located primarily throughout our markets and are generally diverse in terms of type. This diversity helps reduce the exposure to adverse economic events that affect any single industry.

Owner-occupied commercial real estate loans are a key component of our lending strategy to owner-operated businesses, representing a large percentage of our total commercial real estate loans. Owner-occupied commercial real estate loans increased $30.7 million, or 8.7%, to $383.9 million as of December 31, 2021 from $353.3 million as of December 31, 2020.

Non-owner-occupied commercial real estate loans are loans for income producing properties and are generally for retail strip centers, office buildings, self-storage facilities, and multi and single tenant office warehouses, all within our markets. Non-owner-occupied commercial real estate loans increased $167.5 million, or 60.3%, to $445.3 million as of December 31, 2021 from $277.8 million as of December 31, 2020.

The increases in commercial real estate loans were due to the addition of several lenders in 2021 and increased productivity of existing lenders in response to market demand.

Residential Real Estate Loans. Residential real estate loans consists of 1-4 family residential loans and multi-family residential loans. Our 1-4 family residential loan portfolio is predominately comprised of loans secured by 1-4 family homes, which are investor owned. While we do have some owner-occupied 1-4 family residential loans, we have not historically pursued this product line; however, we do offer limited mortgage products through our mortgage department. Our multi-family residential loan portfolio is comprised of loans secured by properties deemed multi-family, which includes apartment buildings. Our current multifamily loans are to operators who we believe are seasoned and successful and possess quality alternative repayment sources. Residential real estate loans increased $72.6 million, or 51.7%, to $213.3 million as of December 31, 2021 from $140.6 million as of December 31, 2020 due primarily to continued organic growth.

Construction, Development and Other Loans. Construction and development loans are comprised of loans used to fund construction, land acquisition and land development. Historically, the properties securing the portfolio were primarily in the Greater Houston and Dallas markets and were generally diverse in terms of type. During 2021, we expanded our construction and development portfolio through the formation of our builder finance group, which provides traditional homebuilder lines secured by lots and single-family homes, and land acquisition and development loans. This group also finances bond anticipation notes and lines of credit to large national institutional tier-one funds that invest equity in various real estate assets. Construction, development and other loans increased $222.1 million, or 226.2%, to $320.3 million as of December 31, 2021 from $98.2 million as of December 31, 2020 due primarily to the additional productivity from the formation of the builder finance group.

Commercial and Industrial Loans. Commercial and industrial loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and effectively. These loans are primarily made based on the borrower's ability to service the debt from income. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and generally include personal guarantees. Our commercial and industrial loan portfolio consists of loans principally to retail trade, service, and manufacturing firms located in our market areas.

53

In addition, the commercial and industrial loan category includes factored receivables. TCCC provides working capital solutions for small- to medium-sized businesses throughout the United States. TCCC provides working capital financing through the purchase of accounts receivables. Our factored receivables portfolio consists primarily of customers in the transportation, energy services and service industries. At December 31, 2021 and 2020, outstanding factored receivables were $41.9 million and $23.1 million, respectively.

The commercial and industrial loan category also includes indirect auto loans with local dealerships that are funded through our indirect lending department. The loans are with recourse to the dealership and are structured as commercial lines of credit with the dealerships. The loans are approved with the same underwriting criteria as other commercial credits. Any loans under these lines of credit that are past due in excess of 90 days are required to be paid in full by the dealership. At December 31, 2021 and 2020, outstanding indirect auto loans included in the commercial and industrial category were $7.3 million and $7.0 million, respectively.

In April 2020, we began originating loans to qualified small businesses under the provisions of the CARES Act which are included in commercial and industrial loans. Loans covered by the PPP administered by the SBA may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA. At December 31, 2021 and 2020, outstanding PPP loans, net of deferred loan fees, were $81.6 million and $390.8 million, respectively.

Commercial and industrial loans decreased $34.6 million, or 5.4%, to $611.3 million as of December 31, 2021 from $645.9 million as of December 31, 2020. The decrease was primarily a result of the net decrease in PPP loans of $309.2 due to payoffs and forgiveness by the SBA offset by continued organic growth in non-PPP loans.

Other Loan Categories. Other categories of loans included in our loan portfolio include farmland loans, lease financing, Bond Anticipation Notes (BANs), consumer loans, and agricultural loans made to farmers and ranchers relating to their operations. None of these categories of loans represents a material portion of our total loan portfolio.

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

[[GREPCENT_TABLE]]
[["","","As of December 31, 2021"],["(Dollars in thousands)","","One Year or Less","","","One Through Five Years","","","Five Years Through Fifteen Years","","","After Fifteen Years","","","Total"],["Real estate:"],["Commercial real estate:"],["Non-farm non-residential owner occupied","","$","24,056","","","$","104,877","","","$","164,147","","","$","90,861","","","$","383,941"],["Non-farm non-residential non-owner occupied","","","36,719","","","","234,347","","","","137,368","","","","36,874","","","","445,308"],["Residential","","","26,662","","","","77,088","","","","60,334","","","","49,180","","","","213,264"],["Construction, development and other","","","83,846","","","","207,120","","","","20,526","","","","8,843","","","","320,335"],["Farmland","","","2,483","","","","4,399","","","","1,715","","","","1,337","","","","9,934"],["Commercial and industrial","","","243,510","","","","291,570","","","","70,445","","","","5,823","","","","611,348"],["Consumer","","","1,260","","","","2,126","","","","615","","","","\u2014","","","","4,001"],["Other","","","44,713","","","","35,832","","","","48","","","","\u2014","","","","80,593"],["Total loans","","$","463,249","","","$","957,359","","","$","455,198","","","$","192,918","","","$","2,068,724"],["Amounts with fixed rates","","$","181,575","","","$","492,259","","","$","54,915","","","$","35,698","","","$","764,447"],["Amounts with floating rates","","$","281,674","","","$","465,100","","","$","400,283","","","$","157,220","","","$","1,304,277"]]
[[/GREPCENT_TABLE]]

Nonperforming Assets

Nonperforming assets include nonaccrual loans, loans that are accruing over 90 days past due, restructured loans - accruing, and foreclosed assets. Generally, loans are placed on nonaccrual status when they become more than 90 days past due and/or collection of principal or interest is in doubt.

54

The following table presents information regarding nonperforming assets at the dates indicated:

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["(Dollars in thousands)","","2021","","","2020","","","2019","","","2018","","","2017"],["Nonaccrual loans(1)","","$","10,030","","","$","7,257","","","$","4,078","","","$","5,044","","","$","4,549"],["Loans 90 days and still accruing","","","278","","","","752","","","","194","","","","-","","","","694"],["Restructured loan\u2014accruing","","","5,295","","","","4,395","","","","328","","","","419","","","","460"],["Total nonperforming loans","","$","15,603","","","$","12,404","","","$","4,600","","","$","5,463","","","$","5,703"],["Other real estate owned and repossessed assets","","","1,676","","","","3,367","","","","1,767","","","","2,052","","","","727"],["Total nonperforming assets","","$","17,279","","","$","15,771","","","$","6,367","","","$","7,515","","","$","6,430"],["Ratio of nonaccrual loans to total loans","","","0.48","%","","","0.47","%","","","0.50","%","","","0.73","%","","","0.76","%"],["Ratio of nonperforming loans to total loans","","","0.75","%","","","0.80","%","","","0.57","%","","","0.79","%","","","0.95","%"],["Ratio of nonperforming loans to total assets","","","0.62","%","","","0.66","%","","","0.50","%","","","0.65","%","","","0.85","%"],["Ratio of nonperforming assets to total assets","","","0.69","%","","","0.84","%","","","0.69","%","","","0.89","%","","","0.96","%"],["Ratio of nonperforming loans to total loans plus OREO","","","0.75","%","","","0.80","%","","","0.57","%","","","0.79","%","","","0.95","%"],["Ratio of nonaccrual loans to total loans","","","","","","0.47","%","","","0.50","%","","","0.73","%","","","0.76","%"],["Ratio of allowance for loan losses to nonaccrual loans","","","192.37","%","","","165.07","%","","","199.19","%","","","137.33","%","","","120.03","%"]]
[[/GREPCENT_TABLE]]

(1)
Restructured loans-nonaccrual are included in nonaccrual loans.

We had $17.3 million in nonperforming assets as of December 31, 2021 compared to $15.8 million as of December 31, 2020, and we had $15.6 million in nonperforming loans as of December 31, 2021 compared to $12.4 million as of December 31, 2020. The increase in nonperforming assets was primarily attributable to the placement of several commercial and real estate loans on nonaccrual during 2021 as a result of continued deteriorating financial performance for the identified loans. We believe that the value recorded for each of the properties held in other real estate owned is adequately supported by recent appraisals.

The following table summarizes our nonaccrual loans by category as of the dates indicated:

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["(Dollars in thousands)","","2021","","","2020","","","2019","","","2018","","","2017"],["Nonaccrual loans by category:"],["Real estate:"],["Commercial real estate"],["Non-farm non-residential owner occupied","","$","1,008","","","$","1,944","","","$","57","","","$","\u2014","","","$","\u2014"],["Non-farm non-residential non-owner occupied","","","346","","","","385","","","","\u2014","","","","1,310","","","","\u2014"],["Residential","","","127","","","","85","","","","630","","","","\u2014","","","","1,557"],["Construction, development and other","","","244","","","","264","","","","\u2014","","","","53","","","","\u2014"],["Commercial and industrial","","","8,297","","","","4,155","","","","3,342","","","","3,681","","","","2,992"],["Consumer","","","\u2014","","","","\u2014","","","","15","","","","\u2014","","","","\u2014"],["Other","","","\u2014","","","","\u2014","","","","34","","","","\u2014","","","","\u2014"],["Purchased credit impaired","","","8","","","","424","","","","\u2014","","","","\u2014","","","","\u2014"],["Total nonaccrual loans","","$","10,030","","","$","7,257","","","$","4,078","","","$","5,044","","","$","4,549"]]
[[/GREPCENT_TABLE]]

COVID-19 Loan Deferments

During March of 2020 and to help mitigate the anticipated effects of the COVID-19 pandemic on certain borrowers, we began offering deferral modifications of principal and/or interest payments for varying periods, but typically no more than 90 days. After 90 days, customers were able to apply for an additional deferral, and a small portion of our customers requested such an additional deferral. At December 31, 2021, we had approximately 500 loans totaling $223.7 million that had deferral and modification agreements due to COVID-19 whereby principal and/or interest payments during a specified period were deferred to the end of each of the loan terms. Subsequent to the approved deferral period, customers resumed their regular payments. The CARES Act provides banks an option to elect to not account for certain loan modifications related to COVID-19 as troubled debt restructurings if the borrowers were not more than 30 days past due at December 31, 2019. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status. At December 31, 2021, $4.4 million in accrued interest receivables related to these loans remained outstanding and are due at the end of each loan term.

Risk Gradings

As part of the on-going monitoring of the credit quality of the Company's loan portfolio and methodology for calculating the allowance for loan losses, management assigns and tracks risk gradings as indicated below that are used as credit quality indicators.

55

The following table summarizes the internal ratings of our loans as of the dates indicated:

[[GREPCENT_TABLE]]
[["","","As of December 31, 2021"],["(Dollars in thousands)","","Pass","","","Special Mention","","","Substandard","","","Purchased Credit Impaired","","","Doubtful","","","Total"],["Real estate:"],["Commercial real estate:"],["Non-farm non-residential owner occupied","","$","370,062","","","$","6,953","","","$","6,926","","","$","\u2014","","","$","\u2014","","","$","383,941"],["Non-farm non-residential non-owner occupied","","","428,972","","","","8,338","","","","7,276","","","","722","","","","\u2014","","","","445,308"],["Residential","","","212,109","","","","\u2014","","","","1,069","","","","86","","","","\u2014","","","","213,264"],["Construction, development and other","","","315,979","","","","\u2014","","","","244","","","","4,112","","","","\u2014","","","","320,335"],["Farmland","","","9,934","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","9,934"],["Commercial and industrial","","","605,322","","","","1,146","","","","4,816","","","","64","","","","\u2014","","","","611,348"],["Consumer","","","3,979","","","","22","","","","\u2014","","","","\u2014","","","","\u2014","","","","4,001"],["Other","","","80,593","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","80,593"],["Gross loans","","$","2,026,950","","","$","16,459","","","$","20,331","","","$","4,984","","","$","\u2014","","","$","2,068,724"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","As of December 31, 2020"],["(Dollars in thousands)","","Pass","","","Special Mention","","","Substandard","","","Purchased Credit Impaired","","","Doubtful","","","Total"],["Real estate:"],["Commercial real estate:"],["Non-farm non-residential owner occupied","","$","335,442","","","$","12,189","","","$","5,642","","","$","\u2014","","","$","\u2014","","","$","353,273"],["Non-farm non-residential non-owner occupied","","","255,468","","","","12,706","","","","5,730","","","","3,900","","","","\u2014","","","","277,804"],["Residential","","","139,743","","","","\u2014","","","","861","","","","18","","","","\u2014","","","","140,622"],["Construction, development and other","","","93,817","","","","\u2014","","","","267","","","","4,123","","","","\u2014","","","","98,207"],["Farmland","","","4,653","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","4,653"],["Commercial and industrial","","","629,093","","","","6,144","","","","9,847","","","","270","","","","574","","","","645,928"],["Consumer","","","4,157","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","4,157"],["Other","","","31,448","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","31,448"],["Gross loans","","$","1,493,821","","","$","31,039","","","$","22,347","","","$","8,311","","","$","574","","","$","1,556,092"]]
[[/GREPCENT_TABLE]]

Allowance for Loan Losses

We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in our loan portfolio. The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature and volume of our loan portfolio, overall portfolio quality, industry or borrower concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates, among other factors. Please see “—Critical Accounting Policies—Allowance for Loan Losses” below and “Part II—Item 8. Financial Statements and Supplementary Data—Note 3.”

As of December 31, 2021, the allowance for loan losses totaled $19.3 million, or 0.9% of total loans. As of December 30, 2020, the allowance for loan losses totaled $12.0 million, or 0.8% of total loans. The increase in our allowance for loan losses of $7.3 million, or 61.1%, was primarily due to loan loss provisions related to $821.8 million in non-PPP loan growth.

56

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

[[GREPCENT_TABLE]]
[["","","For Year Ended December 31,"],["(Dollars in thousands)","","2021","","","2020","","","2019","","","2018","","","2017"],["Allowance for loan loss at beginning of period","","$","11,979","","","$","8,123","","","$","6,927","","","$","5,460","","","$","4,597"],["Provision for loan loss","","","9,923","","","","7,550","","","","1,625","","","","1,500","","","","1,613"],["Charge-offs:"],["Commercial real estate:"],["Non-farm non-residential non-owner occupied","","","\u2014","","","","(2,336",")","","","\u2014","","","","\u2014","","","","\u2014"],["Commercial and industrial","","","(2,914",")","","","(1,389",")","","","(506",")","","","(108",")","","","(750",")"],["Consumer","","","\u2014","","","","(7",")","","","(2",")","","","(14",")","","","\u2014"],["Other","","","(20",")","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Total charge-offs","","","(2,934",")","","","(3,732",")","","","(508",")","","","(122",")","","","(750",")"],["Recoveries:"],["Commercial real estate:"],["Non-farm non-residential owner occupied","","","\u2014","","","","\u2014","","","","50","","","","\u2014","","","","\u2014"],["Commercial and industrial","","","323","","","","33","","","","29","","","","89","","","","\u2014"],["Consumer","","","1","","","","5","","","","\u2014","","","","\u2014","","","","\u2014"],["Other","","","3","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Total recoveries","","","327","","","","38","","","","79","","","","89","","","","\u2014"],["Net (charge-offs) recoveries","","","(2,607",")","","","(3,694",")","","","(429",")","","","(33",")","","","(750",")"],["Allowance for loan losses at end of period","","$","19,295","","","$","11,979","","","$","8,123","","","$","6,927","","","$","5,460"],["Ratio of allowance for loan loss to total loans","","","0.93","%","","","0.77","%","","","1.00","%","","","1.01","%","","","0.91","%"],["Ratio of net (charge-offs) recoveries to average loans","","","(0.16",")%","","","(0.26",")%","","","(0.06",")%","","","(0.01",")%","","","(0.14",")%"]]
[[/GREPCENT_TABLE]]

The allowance for loan losses by loan category as of the dates indicated was as follows:

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2021","","","2020","","","2019","","","2018","","","2017"],["(Dollars in thousands)","","Allowance for Loan Loss Amount","","","% Loans in Each Category","","","Allowance for Loan Loss Amount","","","% Loans in Each Category","","","Allowance for Loan Loss Amount","","","% Loans in Each Category","","","Allowance for Loan Loss Amount","","","% Loans in Each Category","","","Allowance for Loan Loss Amount","","","% Loans in Each Category"],["Real estate:"],["Commercial real estate:"],["Non-farm non-residential owner occupied","","$","3,456","","","","18.6","%","","$","2,608","","","","22.7","%","","$","2,158","","","","27.2","%","","$","1,559","","","","27.7","%","","$","1,119","","","","28.3","%"],["Non-farm non-residential non-owner occupied","","","5,935","","","","21.5","%","","","3,107","","","","17.9","%","","","1,627","","","","23.6","%","","","1,669","","","","22.7","%","","","1,094","","","","19.4","%"],["Residential","","","957","","","","10.3","%","","","1,218","","","","9.0","%","","","373","","","","10.7","%","","","219","","","","8.7","%","","","137","","","","7.9","%"],["Construction, development and other","","","2,064","","","","15.5","%","","","932","","","","6.3","%","","","330","","","","7.5","%","","","306","","","","8.3","%","","","260","","","","9.6","%"],["Farmland","","","45","","","","0.5","%","","","32","","","","0.3","%","","","29","","","","0.9","%","","","28","","","","1.3","%","","","14","","","","1.0","%"],["Commercial and industrial","","","6,500","","","","29.5","%","","","3,858","","","","41.5","%","","","3,504","","","","26.6","%","","","3,063","","","","27.8","%","","","2,731","","","","29.8","%"],["Consumer","","","6","","","","0.2","%","","","35","","","","0.3","%","","","16","","","","0.5","%","","","14","","","","0.6","%","","","12","","","","0.9","%"],["Other","","","332","","","","3.9","%","","","189","","","","2.0","%","","","86","","","","3.0","%","","","69","","","","2.9","%","","","93","","","","3.1","%"],["","","$","19,295","","","","100.0","%","","$","11,979","","","","100.0","%","","$","8,123","","","","100.0","%","","$","6,927","","","","100.0","%","","$","5,460","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Securities

Our investment portfolio consists of state and municipal securities, mortgage-backed securities, and corporate bonds classified as available for sale. The carrying value of such securities is adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity.

57

The following table summarizes the amortized cost and estimated fair value of our investment securities as of the dates shown:

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2021","","","2020","","","2019"],["(Dollars in thousands)","","Amortized Cost","","","Estimated Fair Value","","","Amortized Cost","","","Estimated Fair Value","","","Amortized Cost","","","Estimated Fair Value"],["Investment securities available for sale:"],["State and municipal securities","","$","1,087","","","$","1,094","","","$","1,881","","","$","1,894","","","$","\u2014","","","$","\u2014"],["Mortgage-backed securities","","","791","","","","811","","","","1,005","","","","1,028","","","","535","","","","536"],["Corporate bonds","","","23,556","","","","24,527","","","","22,571","","","","22,673","","","","\u2014","","","","\u2014"],["","","$","25,434","","","$","26,432","","","$","25,457","","","$","25,595","","","$","535","","","$","536"]]
[[/GREPCENT_TABLE]]

As of December 31, 2021, the carrying amount of the security portfolio was $26.4 million compared to $25.6 million as of December 31, 2020, an increase of $837,000, or 3.3%. Investment securities represented 1.1% and 1.4% of total assets as of December 31, 2021 and 2020, respectively.

The mortgage-backed securities held include Fannie Mae, Freddie Mac, and Ginnie Mae securities. We do not hold any preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A or second lien elements in our investment portfolio. As of December 31, 2021 and 2020, our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages.

Our management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures. The contractual maturities of the mortgage-backed securities held ranges from 2022 to 2046 and are not a reliable indicator of the expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The terms 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 tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal, and, consequently, the average life of the security is typically lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of the security. Therefore, schedules of maturities for mortgage-backed securities have been excluded from this disclosure.

The amortized cost and estimated fair value of securities available for sale at December 31, 2021, by contractual maturity, are shown below:

[[GREPCENT_TABLE]]
[["","","As of December 31, 2021"],["(Dollars in thousands)","","Amortized Cost","","","Estimated Fair Value"],["Due in one year or less","","$","661","","","$","662"],["Due from one year to five years","","","426","","","","432"],["Due from five years to ten years","","","23,556","","","","24,527"],["","","","24,643","","","","25,621"],["Mortgage-backed securities","","","791","","","","811"],["Total available for sale","","$","25,434","","","$","26,432"]]
[[/GREPCENT_TABLE]]

The weighted average life of our investment portfolio was 5.88 years with an estimated modified duration of 5.02 years as of December 31, 2021. The weighted average life of our investment portfolio was 7.97 years with an estimated modified duration of 6.49 years as of December 31, 2020.

Deposits

Total deposits as of December 31, 2021 were $2.14 billion, an increase of $507.4 million, or 31.1%, compared to $1.63 billion as of December 31, 2020. The increase was primarily due to continued growth in our primary market areas and the increase in commercial lending relationships for which we also seek deposit balances offset by a decrease in time deposits resulting from a reduction in interest rates paid.

Noninterest-bearing deposits as of December 31, 2021 were $531.4 million, an increase of $204.0 million, or 62.3%, compared to $327.4 million as of December 31, 2020. Total interest-bearing account balances as of December 31, 2021 were $1.61 billion, an increase of $303.3 million, or 23.2%, from $1.31 billion as of December 31, 2020.

58

The components of deposits as of the dates shown below were as follows:

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2021","","","2020","","","2019"],["(Dollars in thousands)","","Amount","","","Percent","","","Amount","","","Percent","","","Amount","","","Percent"],["Noninterest-bearing demand deposits","","$","531,401","","","","24.8","%","","$","327,361","","","","20.0","%","","$","128,297","","","","15.9","%"],["Interest-bearing deposits","","","1,298,546","","","","60.6","%","","","909,992","","","","55.7","%","","","388,430","","","","48.1","%"],["Savings","","","33,539","","","","1.6","%","","","22,261","","","","1.4","%","","","5,178","","","","0.6","%"],["Time deposits","","","277,713","","","","13.0","%","","","374,217","","","","22.9","%","","","285,353","","","","35.4","%"],["Total deposits","","$","2,141,199","","","","100.0","%","","$","1,633,831","","","","100.0","%","","$","807,258","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

The following table sets forth the Company’s estimated uninsured time deposits by time remaining until maturity as of the dates indicated:

[[GREPCENT_TABLE]]
[["","As of December 31,"],["(Dollars in thousands)","2021","","","2020","","","2019"],["Three months or less","$","41,920","","","$","49,874","","","$","34,863"],["Over three months through six months","","20,200","","","","24,566","","","","8,518"],["Over six months through twelve months","","44,770","","","","65,431","","","","74,802"],["Over twelve months","","4,576","","","","9,704","","","","21,484"],["Total","$","111,466","","","$","149,575","","","$","139,667"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","2019"],["(Dollars in thousands)","","Average Balance","","","Average Rate","","","Average Balance","","","Average Rate","","","Average Balance","","","Average Rate"],["Noninterest-bearing deposits","","$","383,747","","","","\u2014","","","$","310,357","","","","\u2014","","","$","122,961","","","","\u2014"],["Interest-bearing demand deposits","","$","1,064,737","","","","0.62","%","","$","734,638","","","","0.82","%","","$","353,066","","","","2.07","%"],["Savings","","","27,776","","","","0.29","%","","","19,877","","","","0.21","%","","","4,114","","","","0.53","%"],["Time deposits","","","329,244","","","","0.57","%","","","396,208","","","","1.57","%","","","267,860","","","","2.41","%"],["Total interest-bearing deposits","","$","1,421,757","","","","0.60","%","","$","1,150,723","","","","1.07","%","","$","625,040","","","","2.21","%"],["Total deposits","","$","1,805,504","","","","0.47","%","","$","1,461,080","","","","0.84","%","","$","748,001","","","","1.84","%"]]
[[/GREPCENT_TABLE]]

The ratio of average noninterest-bearing deposits to average total deposits for each of the years ended December 31, 2021 and 2020 was 21.3%.

Borrowings

We have the ability to utilize advances from the FHLB and other borrowings to supplement deposits used to fund our lending and investment activities.

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["(Dollars in thousands)","","2021","","","2020"],["FHLB borrowings","","$","50,000","","","","70,000"],["Line of Credit - Senior Debt","","","1,000","","","","\u2014"],["Note Payable - Senior Debt","","","\u2014","","","","20,875"],["Note Payable - Subordinated Debt","","","\u2014","","","","13,000"],["Total borrowings","","$","51,000","","","$","103,875"]]
[[/GREPCENT_TABLE]]

Federal Home Loan Bank (FHLB) Advances. The FHLB allows us to borrow on a blanket floating lien status collateralized by FHLB stocks, real estate loans and investment securities. As of December 31, 2021 and 2020, total borrowing capacity available under this arrangement was $450.4 million and $474.8 million, respectively.

FHLB advances of $50.0 million were outstanding at December 31, 2021 and $70.0 million outstanding at December 31, 2020. Our cost of FHLB advances was 0.79% for the year ended December 31, 2021 and 0.89% for the year ended December 31, 2020. In addition, letters of credit with the FHLB in the amount of $100.5 million and $109.5 million were outstanding at December 31, 2021 and 2020, respectively. The letters of credit are used to collateralize public fund deposit accounts in excess of FDIC insurance limits.

Line of Credit - Senior Debt. On March 10, 2021, notes totaling $20.9 million outstanding at December 31, 2020 were consolidated into a new revolving line of credit loan with a third party lender with new funds of $10.0 million for a total facility of $30.9 million. The line of credit bears interest at The Wall Street Journal US Prime Rate, as such changes from time to time, with a floor rate of 4.00% per annum. Interest is payable quarterly on the 10th day of March, June, September and December through

59

maturity date of September 10, 2022. All principal and unpaid interest is due at maturity. As of December 31, 2021, the outstanding principal balance was $1.0 million. The line of credit is secured by 100% of the outstanding stock of the Bank.

Note Payable - Subordinated Debt. On July 29, 2019, a note for $3.0 million scheduled to mature on September 27, 2019 was retired and replaced with a new subordinated promissory note to the same note holder in the amount of $4.0 million. The note bore interest at a fixed rate of 5.00% through maturity of July 29, 2020. Upon maturity, the note was renewed and increased to $11.0 million with a fixed rate of 6.00% and maturity date of July 29, 2022. The note was subordinate and junior in rights to the senior indebtedness. In August 2021, the principal and unpaid interest on the note was paid in full.

On September 27, 2020, a note for $2.0 million scheduled to mature on September 27, 2020 was renewed and extended to September 27, 2022 at a fixed rate of 6.00%. The note was subordinate and junior in rights to the senior indebtedness. In August 2021, the principal and unpaid interest on the note was paid in full.

Our cost of notes payable was 4.89% and 4.06% for the years ended December 31, 2021 and 2020, respectively.

For additional information on our advances from the FHLB and other borrowings, see Note 7- FHLB Advances and Other Borrowings in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Liquidity and Capital Resources

Liquidity

Liquidity involves our ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events.

For the years ended December 31, 2021 and 2020, liquidity needs were primarily met by core deposits, loan maturities, amortizing loan portfolios, brokered deposits and borrowings.

As of December 31, 2021, we maintained federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate of $50.5 million in federal funds. As of December 31, 2020, we maintained federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate of $20.5 million in federal funds. The Company had no advances outstanding under these lines of credit at December 31, 2021 and 2020.

The following table illustrates, during the periods presented, the composition of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the periods indicated. Average assets were $2.06 billion for the year ended December 31, 2021 and $1.67 billion for the year ended December 31, 2020.

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["","2021","","","2020","","","2019"],["Sources of Funds:"],["Deposits:"],["Noninterest-bearing","","18.6","%","","","18.6","%","","","14.1","%"],["Interest-bearing","","68.9","%","","","68.9","%","","","71.9","%"],["FHLB advances","","2.7","%","","","3.0","%","","","4.3","%"],["Notes payable","","1.1","%","","","2.4","%","","","2.8","%"],["Other liabilities","","0.4","%","","","0.4","%","","","0.4","%"],["Shareholders\u2019 equity, including ESOP-owned shares","","8.3","%","","","6.7","%","","","6.5","%"],["Total","","100.0","%","","","100.0","%","","","100.0","%"],["Uses of Funds:"],["Loans, net","","79.1","%","","","85.1","%","","","84.2","%"],["Securities (available for sale and held to maturity)","","1.4","%","","","1.0","%","","","0.3","%"],["Federal funds sold and other interest-earning assets","","13.0","%","","","9.1","%","","","10.4","%"],["Other noninterest-earning assets","","6.5","%","","","4.8","%","","","5.1","%"],["Total","","100.0","%","","","100.0","%","","","100.0","%"],["Average noninterest-bearing deposits to average deposits","","21.3","%","","","21.3","%","","","16.4","%"],["Average total loans to average deposits","","91.2","%","","","98.1","%","","","98.9","%"]]
[[/GREPCENT_TABLE]]

Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future.

As of December 31, 2021, we had $606.2 million in outstanding commitments to extend credit and $14.1 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2020, we had $162.4 million in outstanding commitments to extend credit and $1.7 million in commitments associated with outstanding standby and commercial letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.

60

As of December 31, 2021 and 2020, we had no exposure to future cash requirements associated with known uncertainties or capital expenditure of a material nature. As of December 31, 2021, we had cash and cash equivalents of $327.0 million, compared to $203.6 million as of December 31, 2020. The increase was primarily due to an increase in deposits of $507.4 million, proceeds from our private placement and initial public offerings of $70.5 million and $92.0 million, respectively, and net income of $11.4 million, offset by a decrease in borrowings of $52.9 million and loan growth of $512.6 million.

Capital Resources

Total shareholders’ equity (including ESOP-owned shares) increased to $299.0 million as of December 31, 2021, compared to $121.7 million as of December 31, 2020, an increase of $177.3 million, or 145.9%. This increase was primarily the result of $11.4 million in net income for the year ended December 31, 2021, $70.5 million from the issuance of 2,937,876 shares issued in our private placement offering, and $92.0 million from the issuance of 4,025,000 shares issued in our initial public offering.

Capital management consists of providing 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. We are required to comply with certain risk-based capital adequacy guidelines issued by the Federal Reserve and the FDIC.

As of December 31, 2021 and 2020, the Bank was in compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized” for purposes of the FDIC’s prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us.

The following table presents the regulatory capital ratios for the Bank as of the dates indicated.

[[GREPCENT_TABLE]]
[["","","Actual December 31,"],["","","2021","","2020","","2019","","Minimum Capital Requirement","","Minimum Capital Requirement with Capital Buffer","","Minimum To Be Well Capitalized"],["Third Coast Bank, SSB"],["Tier 1 leverage capital (to average assets)","","12.3%","","7.2%","","8.9%","","4.0%","","4.0%","","5.0%"],["Common equity tier 1 capital (to risk weighted assets)","","12.6%","","11.5%","","10.8%","","4.5%","","7.0%","","6.5%"],["Tier 1 capital (to risk weighted assets)","","12.6%","","11.5%","","10.8%","","6.0%","","8.5%","","8.0%"],["Total capital (to risk weighted assets)","","13.5%","","12.5%","","11.9%","","8.0%","","10.5%","","10.0%"]]
[[/GREPCENT_TABLE]]

Interest Rate Sensitivity and Market Risk

As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the 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 sensitivity position within our established 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 which 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 decrease in 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 our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

Our exposure to interest rate risk is managed by the Bank's Asset Liability and Investment Committee, in accordance with policies approved by the Bank’s board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market 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. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities and an interest rate shock simulation model.

We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model, as are prepayment assumptions, maturity data and call options within the

61

investment portfolio. The average life of our non-maturity deposit accounts are updated annually and are incorporated into the model. The assumptions used 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.

On a monthly basis, we run simulation models including a static balance sheet. The models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static model, rates are shocked instantaneously and ramped rate changes over a 12-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. In addition to the monthly reports, we also run various scenarios based on market trends and management analysis needs. These special reports include stress test reports, reports to test the deposit decay rates and growth reports based on budget. Our internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one-year period should not decline by more than 25.0% for a 200 basis point shift and 35.0% for a 300 basis point shift.

The following tables summarize the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated:

[[GREPCENT_TABLE]]
[["","As of December 31,"],["","2021","","","2020","","","2019"],["Change in Interest Rates (Basis Points)","Percent Change in Net Interest Income","","","Percent Change in Fair Value of Equity","","","Percent Change in Net Interest Income","","","Percent Change in Fair Value of Equity","","","Percent Change in Net Interest Income","","","Percent Change in Fair Value of Equity"],["+ 300","8.22%","","","16.74%","","","(1.68)%","","","20.30%","","","4.03%","","","10.06%"],["+ 200","4.80%","","","11.29%","","","(1.91)%","","","13.36%","","","1.66%","","","6.11%"],["+ 100","1.83%","","","5.74%","","","(1.48)%","","","6.82%","","","(0.17)%","","","2.48%"],["Base","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["\u2013100","2.34%","","","(2.36)%","","","5.20%","","","(2.77)%","","","(0.41)%","","","(2.79)%"]]
[[/GREPCENT_TABLE]]

The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. 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 strategies.

Critical Accounting Policies

Our financial reporting and accounting policies conform to GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Our accounting policies are integral to understanding our results of operations. Our accounting policies are described in greater detail in Note 1— Nature of Operations and Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included elsewhere in this Form 10-K. We believe that of our accounting policies, the following may involve a higher degree of judgment and complexity:

Allowance for Loan Losses. The allowance for loan losses represents management’s estimate of probable and reasonably estimable credit losses inherent in the loan portfolio. In determining the allowance, the Company estimates losses on individual impaired loans, or groups of loans which are not impaired, where the probable loss can be identified and reasonably estimated. On a quarterly basis, the Company assesses the risk inherent in the Company’s loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impacts of local, regional and national economic factors on the quality of the loan portfolio. Based on this analysis, the Company records a provision for loan losses to maintain the allowance at appropriate levels.

Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including management’s assessment of overall portfolio quality. The Company maintains the allowance at an amount the Company believes is sufficient to provide for estimated losses inherent in the Company’s loan portfolio at

62

each balance sheet date, and fluctuations in the provision for loan losses may result from management’s assessment of the adequacy of the allowance. Changes in these estimates and assumptions are possible and may have a material impact on the Company’s allowance, and therefore the Company’s financial position, liquidity or results of operations.

Transfers of Financial Assets. Management accounts for the transfers of financial assets as sales when control over the assets has been surrendered. Control is surrendered when the assets have been isolated, a transferee obtains the right to pledge or exchange the transferred assets and there is no agreement to repurchase the assets before their maturity. Management believes the loan participations sold subject to this guidance met the condition to be treated as a sale.

Goodwill and Core Deposit Intangibles. Goodwill represents the excess of cost over fair value of net assets acquired in a business combination. Goodwill is not amortized and is evaluated for impairment at least annually and on an interim basis if an event triggering impairment may have occurred.

Core deposit intangibles are acquired customer relationships arising from bank acquisitions and are amortized on a straight-line basis over their estimated useful life. Core deposit intangibles are tested for impairment whenever events or changes in circumstances indicate the carrying amount of assets may not be recoverable from future undiscounted cash flows.

Recently Issued Accounting Pronouncements

See “Part II—Item 8.—Financial Statements and Supplementary Data—Note 1.”