This section presents management's perspective on the financial condition and
results of operations of Investar Holding Corporation (the "Company," "we,"
"our," or "us") and its wholly-owned subsidiary, Investar Bank, National
Association (the "Bank"). The following discussion and analysis should be read
in conjunction with the Company's consolidated financial statements and related
notes and other supplemental information included herein. Certain risks,
uncertainties and other factors, including those set forth under Item 1A. Risk
Factors in Part I, and elsewhere in this Annual Report on Form 10-K, may cause
actual results to differ materially from those projected results discussed in
the forward-looking statement appearing in this discussion and analysis.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, both in Management's Discussion and Analysis of
Financial Condition and Results of Operations, and elsewhere, contains
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements include statements relating to
our projected growth, anticipated future financial performance, financial
condition, credit quality and performance goals, as well as statements relating
to the anticipated effects on our business, financial condition and results of
operations from expected developments, our growth, and potential acquisitions.
These statements can typically be identified through the use of words or phrases
such as "may," "should," "could," "predict," "potential," "believe," "think,"
"will likely result," "expect," "continue," "will," "anticipate," "seek,"
"estimate," "intend," "plan," "projection," "would" and "outlook," or the
negative version of those words or other comparable words or phrases of a future
or forward-looking nature.
Our forward-looking statements contained herein are based on assumptions and
estimates that management believes to be reasonable in light of the information
available at this time. However, many of these statements are inherently
uncertain and beyond our control and could be affected by many factors. Factors
that could have a material effect on our business, financial condition, results
of operations, cash flows and future growth prospects can be found in Item 1A.
Risk Factors. These factors include, but are not limited to, the following, any
one or more of which could materially affect the outcome of future events:
•the significant risks and uncertainties for our business, results of operations
and financial condition, as well as our regulatory capital and liquidity ratios
and other regulatory requirements in the United States caused by the ongoing
COVID-19 pandemic, which will depend on several factors, including the scope and
duration of the pandemic, its continued influence on the economy and financial
markets, the impact on market participants on which we rely, and actions taken
by governmental authorities and other third parties in response to the pandemic;
•business and economic conditions generally and in the financial services
industry in particular, whether nationally, regionally or in the markets in
which we operate; including evolving risks to economic activity and our
customers posed by the COVID-19 pandemic and government actions taken to address
the impact of COVID-19 or contain it;
•ongoing disruptions in the oil and gas industry due to the significant decrease
in the price of oil;
•the risk of holding PPP loans at unfavorable rates and on terms that are less
favorable than other types of loans, and the Company's ability to pursue
available remedies in the event of a loan default of PPP loans under the
Paycheck Protection Program;
•our ability to achieve organic loan and deposit growth, and the composition of
that growth;
•changes (or the lack of changes) in interest rates, yield curves and interest
rate spread relationships that affect our loan and deposit pricing;
•possible cessation or market replacement of LIBOR and the related effect on our
LIBOR-based financial products and contracts, including, but not limited to,
hedging products, debt obligations, investments, and loans;
•the extent of continuing client demand for the high level of personalized
service that is a key element of our banking approach as well as our ability to
execute our strategy generally;
•our dependence on our management team, and our ability to attract and retain
qualified personnel;
•changes in the quality or composition of our loan or investment portfolios,
including adverse developments in borrower industries or in the repayment
ability of individual borrowers;
•inaccuracy of the assumptions and estimates we make in establishing reserves
for probable loan losses and other estimates;
•the concentration of our business within our geographic areas of operation in
Louisiana, Texas and Alabama;
                                       34
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•concentration of credit exposure;
•any deterioration in asset quality and higher loan charge-offs, and the time
and effort necessary to resolve problem assets;
•a reduction in liquidity, including as a result of a reduction in the amount of
deposits we hold or other sources of liquidity;
•impairment of our goodwill and other intangible assets;
•our potential growth, including our entrance or expansion into new markets, and
the need for sufficient capital to support that growth;
•difficulties in identifying attractive acquisition opportunities and strategic
partners that will complement our relationship banking approach;
•our ability to complete any pending or future acquisitions and efficiently
integrate completed acquisitions into our operations, meet the regulatory
requirements related to such acquisitions, retain the customers of acquired
businesses and grow the acquired operations;
•the impact of litigation and other legal proceedings to which we become
subject;
•data processing system failures and errors;
•cyber attacks and other security breaches;
•competitive pressures in the commercial finance, retail banking, mortgage
lending and consumer finance industries, as well as the financial resources of,
and products offered by, competitors;
•the impact of changes in laws and regulations applicable to us, including
banking, securities and tax laws and regulations and accounting standards, as
well as changes in the interpretation of such laws and regulations by our
regulators;
•changes in the scope and costs of FDIC insurance and other coverages;
•governmental monetary and fiscal policies;
•hurricanes (including the recent hurricanes, tropical storms and tropical
depressions that have affected the Company's market areas), floods, winter
storms, other natural disasters and adverse weather; oil spills and other
man-made disasters; acts of terrorism, an outbreak of hostilities or other
international or domestic calamities, acts of God and other matters beyond our
control; and
•other circumstances, many of which are beyond our control.
The foregoing factors should not be construed as exhaustive and should be read
together with the other cautionary statements included herein. If one or more
events related to these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, actual results may differ
materially from what we anticipate. Accordingly, you should not place undue
reliance on any such forward-looking statements.
Any forward-looking statement speaks only as of the date on which it is made,
and we do not undertake any obligation to publicly update or review any
forward-looking statement, whether as a result of new information, future
developments or otherwise. New factors emerge from time to time, and it is not
possible for us to predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. We qualify all of our
forward-looking statements by these cautionary statements.
Recent Developments Related to COVID-19
Overview. In March 2020, COVID-19 was declared a pandemic by the World Health
Organization and a national emergency by the President of the United States. The
global COVID-19 pandemic and the public health response to minimize its impact
have had severe adverse and disruptive effects on economic, financial market and
oil market conditions beginning in the latter part of the first quarter of 2020,
and continuing through the fourth quarter of 2020 and beyond. Beginning in the
first quarter of 2020, government responses to the pandemic included mandated
closures of businesses not deemed essential, restrictions on other businesses,
and stay-at-home orders or recommendations, along with crowd restrictions, which
caused steep increases in unemployment and decreases in consumer and business
spending. Government authorities in our markets began allowing the re-opening of
businesses and easing other restrictions in the second quarter of 2020; however,
the country, including areas in which we do business, experienced multiple
periods of resurgences of new cases in both the third and fourth quarters of
2020. Authorities reacted to these resurgences by extending or re-imposing some
restrictions.
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Legislative and Regulatory Developments. In a measure aimed at lessening the
economic impact of COVID-19, the Federal Reserve reduced the federal funds rate
to 0% to 0.25% on March 16, 2020. This action by the Federal Reserve followed a
prior reduction of the targeted federal funds rates to a range of 1.0% to 1.25%
on March 3, 2020. On March 27, 2020, the U.S. government enacted the Coronavirus
Aid, Relief, and Economic Security Act ("CARES Act"), the largest economic
stimulus package in the nation's history, which included the Small Business
Administration's ("SBA") and U.S. Department of Treasury's Paycheck Protection
Program ("PPP"), discussed further below, in an effort to lessen the impact of
COVID-19 on consumers and businesses. As funds available under the PPP were
quickly depleted, on April 24, 2020, the Paycheck Protection Program and Health
Care Enhancement Act was signed into law, which, among other things, increased
amounts available under the Program. On June 5, 2020, the Paycheck Protection
Program Flexibility Act of 2020 ("Flexibility Act") was enacted, which among
other things, provided expanded relief under the PPP. On December 27, 2020,
legislation was enacted providing additional aid to individuals and businesses,
which among other things, provided additional funding for the PPP and allowed
businesses meeting certain requirements to obtain a second PPP loan.
Paycheck Protection Program. Beginning in the second quarter of 2020, the Bank
has participated as a lender in the PPP as established by the CARES Act and
enhanced by the Paycheck Protection Program and Health Care Enhancement Act and
the Flexibility Act. The PPP was established to provide unsecured low interest
rate loans to small businesses that have been impacted by the COVID-19 pandemic.
The PPP loans are 100% guaranteed by the SBA. The loans have a fixed interest
rate of 1%, and payments are deferred until the date on which the amount of loan
forgiveness is remitted to the lender by the SBA, the forgiveness application is
otherwise denied, or if no forgiveness application is filed 10 months after the
end of the borrower's covered period. PPP loans made prior to June 5, 2020
mature two years from origination, or if made on or after June 5, 2020, five
years from origination. PPP loans are forgiven by the SBA (which makes
forgiveness payments directly to the lender) to the extent the borrower uses the
proceeds of the loan for certain purposes (primarily to fund payroll costs)
during a certain time period following origination and maintains certain
employee and compensation levels. Lenders receive processing fees from the SBA
for originating the PPP loans which are based on a percentage of the loan
amount. The original PPP program ceased taking applications on August 8, 2020.
On December 27, 2020, legislation was enacted that renewed the PPP and allocated
additional funding for both new first time PPP loans under the original PPP and
also authorized second draw PPP loans for certain eligible borrowers that had
previously received a PPP loan. The SBA began accepting applications on the next
round of the PPP in January 2021, and the application period will last until
March 31, 2021, subject to the availability of funds. In April 2020, we began
originating loans to qualified small businesses under the PPP. At December 31,
2020, our loan portfolio included PPP loans with a balance of $94.5 million, all
of which are included in commercial and industrial loans.
Guidance on Treatment of Pandemic-related Loan Modifications Pursuant to the
CARES Act and Interagency Statement. Section 4013 of the CARES Act provides
that, from the period beginning March 1, 2020 until the earlier of December 31,
2020 or the date that is 60 days after the date on which the national emergency
concerning the COVID-19 pandemic declared by the President of the United States
under the National Emergencies Act terminates (the "applicable period"), we may
elect to suspend GAAP for loan modifications related to the pandemic that would
otherwise be categorized as troubled debt restructurings ("TDRs") and suspend
any determination of a loan modified as a result of the effects of the pandemic
as being a TDR, including impairment for accounting purposes. The suspension is
applicable for the term of the loan modification that occurs during the
applicable period for a loan that was not more than 30 days past due as of
December 31, 2019. The suspension is not applicable to any adverse impact on the
credit of a borrower that is not related to the pandemic. Legislation enacted on
December 27, 2020, extended this relief to the earlier of January 1, 2022 or 60
days after the national emergency termination date.
In addition, our banking regulators and other financial regulators, on March 22,
2020 and revised April 7, 2020, issued a joint interagency statement titled the
"Interagency Statement on Loan Modifications and Reporting for Financial
Institutions Working with Customers Affected by the Coronavirus" that encourages
financial institutions to work prudently with borrowers who are or may be unable
to meet their contractual payment obligations due to the effects of the COVID-19
pandemic. Pursuant to the interagency statement, loan modifications that do not
meet the conditions of Section 4013 of the CARES Act may still qualify as a
modification that does not need to be accounted for as a TDR. Specifically, the
agencies confirmed with the staff of the Financial Accounting Standards Board
that short-term modifications made in good faith in response to the pandemic to
borrowers who were current prior to any relief are not TDRs under GAAP. This
includes short-term (e.g. six months) modifications such as payment deferrals,
fee waivers, extensions of repayment terms, or delays in payment that are
insignificant. Borrowers considered current are those that are less than 30 days
past due on their contractual payments at the time a modification program is
implemented. Appropriate allowances for loan and lease losses are expected to be
maintained. With regard to loans not otherwise reportable as past due, financial
institutions are not expected to designate loans with deferrals granted due to
the pandemic as past due because of the deferral. The interagency statement also
states that during short-term pandemic-related loan modifications, these loans
generally should not be reported as nonaccrual.
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Accordingly, during 2020, we offered short-term modifications made in response
to COVID-19 to borrowers who were current and otherwise not past due. These
include short-term modifications of 90 days or less, in the form of deferrals of
payment of principal and interest, principal only, or interest only, and fee
waivers. As of December 31, 2020, the balance of loans participating in the
90-day deferral program was approximately $5.9 million, or 0.3% of the total
loan portfolio. See further discussion in the Loans section of the Discussion
and Analysis of Financial Condition below.
Impact on our Operations. As discussed above, within the states in which we
operate, beginning in the first quarter of 2020, many jurisdictions declared
health emergencies and executed stay-at-home orders and closed non-essential
businesses which impacted our operations as well as the operations of our
customers. Though authorities began phasing out certain restrictions in the
summer of 2020, resurgences in the number of COVID-19 cases in the second and
third quarters of 2020 resulted in the extension and, in some instances, the
re-imposition of certain restrictions. For example, in Louisiana, where most of
our operations are currently located, a stay-at-home order was issued on March
22, 2020, and the state moved into Phase 1 of recovery on May 15, 2020, Phase 2
on June 4, 2020, and Phase 3 on September 11, 2020. However, the state
experienced several resurgences in the number of cases in the fall and winter of
2020, which prompted the issuance of an order reverting back to a modified Phase
2 as of November 25, 2020, which was extended through March 2, 2021, when
Louisiana re-entered Phase 3. Under Phase 3, generally speaking, places of
public amusement are closed, only bars in qualifying parishes may open with
stringent restrictions (except for takeout), most other nonessential businesses
are restricted to 75% capacity, crowd sizes are limited to 250 people or 50%
capacity for indoor gatherings, face coverings are mandatory and all individuals
with a higher risk of severe illness from COVID-19 are urged to stay at home.
Additionally, effective March 10, 2021, the Texas governor issued an order
lifting the state's mask mandate and rescinding most of its restrictions related
to COVID-19.
Financial services have been identified as a Critical Infrastructure Sector by
the Department of Homeland Security, and therefore, our business remains open.
We continue to service our consumer and business customers from our 31 branch
locations and through drive-thrus, ATMs, internet banking, mobile application
and telephone.
Impact on our financial results for 2020. As discussed in further detail below,
during 2020, we experienced decreased earnings compared to 2019, primarily
related to the deterioration in the economy caused by the pandemic. While our
net interest income increased, due primarily to an increase in the volume of our
interest-earning assets, and lower interest rates on deposits resulting from
lower prevailing interest rates, we substantially increased our provision for
loan losses.
Overview
Through our wholly-owned subsidiary Investar Bank, National Association, we
provide full banking services, excluding trust services, tailored primarily to
meet the needs of individuals and small to medium-sized businesses. Our primary
areas of operation are south Louisiana (approximately 86% of our total deposits
as of December 31, 2020), including Baton Rouge, New Orleans, Lafayette, Lake
Charles, and their surrounding areas; southeast Texas, including Houston and its
surrounding area, Alice, and Victoria; and west Alabama, including York and its
surrounding area. Our Bank commenced operations in 2006 and we completed our
initial public offering in July 2014. On July 1, 2019, the Bank changed from a
Louisiana state bank charter to a national bank charter and its name changed to
Investar Bank, National Association. Our strategy includes organic growth
through high quality loans and growth through acquisitions, including whole-bank
acquisitions and strategic branch acquisitions. We currently operate 24 full
service branches in Louisiana, five full service branches in Texas, and two full
service branches in Alabama. We have completed six whole-bank acquisitions since
2011 and regularly review acquisition opportunities. In addition to our branches
acquired through acquisitions, during our last three fiscal years, we opened
five de novo branch locations.
Our principal business is lending to and accepting deposits from individuals and
small to medium-sized businesses in our areas of operation. We generate our
income principally from interest on loans and, to a lesser extent, our
securities investments, as well as from fees charged in connection with our
various loan and deposit services and gains on the sale of securities. Our
principal expenses are interest expense on interest-bearing customer deposits
and borrowings, salaries, employee benefits, occupancy costs, data processing
and other operating expenses. We measure our performance through our net
interest margin, return on average assets, and return on average equity, among
other metrics, while seeking to maintain appropriate regulatory leverage and
risk-based capital ratios.
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For certain GAAP performance measures, see "Certain Performance Indicators"
below. We also monitor changes in our tangible equity, tangible assets, tangible
book value per share, and our efficiency ratio, shown in the section "Certain
Performance Indicators: Non-GAAP Financial Measures" below.
Certain Performance Indicators
(In thousands, except share
data)                                                              As of 

and for the year ended December 31,


                                          2020(1)              2019(1)                2018               2017(1)                2016
Financial Information
Total assets                           $ 2,321,181          $ 2,148,916          $ 1,786,469          $ 1,622,734          $ 1,158,960
Total stockholders' equity                 243,284              241,976              182,262              172,729              112,757
Net interest income                         73,534               64,818               57,370               42,517               34,739
Net income                                  13,889               16,839               13,606                8,202                7,880
Diluted earnings per share                    1.27                 1.66                 1.39                 0.96                 1.10

Performance Ratios
Return on average assets                      0.61  %              0.85  %              0.81  %              0.62  %              0.71  %
Return on average equity                      5.77                 8.21                 7.68                 5.65                 6.99
Net interest margin                           3.49                 3.51                 3.61                 3.39                 3.32
Dividend payout ratio                        19.69                13.55                12.09                10.78                 3.80

Capital Ratios
Total equity to total assets                 10.48  %             11.26  %             10.20  %             10.64  %              9.73  %
Tangible equity to tangible                   9.22                 9.96                 9.20                 9.53                 9.48
assets


(1)Selected consolidated financial data includes the effect of mergers from the
date of each merger. On July 1, 2017, the Company acquired Citizens Bancshares,
Inc. and its wholly-owned subsidiary, Citizens Bank, by merger with and into the
Company and Bank, respectively. On December 1, 2017, the Company acquired BOJ
Bancshares, Inc. and its wholly-owned subsidiary, The Highlands Bank, by merger
with and into the Company and Bank, respectively. On March 1, 2019, the Company
acquired Mainland Bank, by merger with and into the Bank. On November 1, 2019,
the Company acquired Bank of York, by merger with and into the Bank. On February
21, 2020, the Company acquired two branches from PlainsCapital Bank by purchase
and assumption agreement with and into the Bank. References in this document to
assets purchased and liabilities assumed in acquisition transactions reflect the
fair value of such assets and liabilities on the date of acquisition, unless the
context indicates otherwise.
Certain Performance Indicators: Non-GAAP Financial Measures
Our accounting and reporting policies conform to accounting principles generally
accepted in the United States, or GAAP, and the prevailing practices in the
banking industry. However, we also evaluate our performance based on certain
additional metrics. The efficiency ratio, tangible book value per share, and the
ratio of tangible equity to tangible assets are not financial measures
recognized under GAAP and, therefore, are considered non-GAAP financial
measures.
Our management, banking regulators, financial analysts and investors use these
non-GAAP financial measures to compare the capital adequacy of banking
organizations with significant amounts of preferred equity and/or goodwill or
other intangible assets, which typically stem from the use of the purchase
accounting method of accounting for mergers and acquisitions. Tangible equity,
tangible assets, tangible book value per share or related measures should not be
considered in isolation or as a substitute for total stockholders' equity, total
assets, book value per share or any other measure calculated in accordance with
GAAP. Moreover, the manner in which we calculate tangible equity, tangible
assets, tangible book value per share and any other related measures may differ
from that of other companies reporting measures with similar names. The
following table reconciles, as of the dates set forth below, stockholders'
equity (on a GAAP basis) to tangible equity and total assets (on a GAAP basis)
to tangible assets and calculates both our tangible book value per share and
efficiency ratio (dollars in thousands).
                                       38
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                                                               As of and 

for the year ended December 31,


                                        2020                 2019                 2018                 2017                 2016

Total stockholders' equity - $ 243,284 $ 241,976

 $   182,262          $   172,729          $   112,757
GAAP
Adjustments:
Goodwill                                28,144               26,132               17,424               17,086                2,684
Core deposit intangible                  3,988                4,803                2,263                2,740                  450
Trademark intangible                       100                  100                  100                  100                  100
Tangible equity                    $   211,052          $   210,941          $   162,475          $   152,803          $   109,523

Total assets - GAAP                $ 2,321,181          $ 2,148,916          $ 1,786,469          $ 1,622,734          $ 1,158,960
Adjustments:
Goodwill                                28,144               26,132               17,424               17,086                2,684
Core deposit intangible                  3,988                4,803                2,263                2,740                  450
Trademark intangible                       100                  100                  100                  100                  100
Tangible assets                    $ 2,288,949          $ 2,117,881          $ 1,766,682          $ 1,602,808          $ 1,155,726

Total shares outstanding            10,608,869           11,228,775            9,484,219            9,514,926            7,101,851
Book value per share               $     22.93          $     21.55          $     19.22          $     18.15          $     15.88
Effect of adjustment                     (3.04)               (2.76)               (2.09)               (2.09)               (0.46)
Tangible book value per            $     19.89          $     18.79

$ 17.13 $ 16.06 $ 15.42 share Total equity to total assets

             10.48  %             11.26  %             10.20  %             10.64  %              9.73  %
Effect of adjustment                     (1.26)               (1.30)               (1.00)               (1.11)               (0.25)
Tangible equity to tangible               9.22  %              9.96  %              9.20  %              9.53  %              9.48  %
assets

Efficiency ratio(1)
Noninterest expense                $    57,131          $    48,168          $    41,882          $    32,342          $    26,639
Net interest income                     73,534               64,818               57,370               42,517               34,739
Noninterest income                      12,096                6,216                4,318                3,815                5,468
Efficiency ratio                         66.72  %             67.81  %             67.89  %             69.80  %             66.25  %


(1)Calculated as noninterest expense divided by the sum of net interest income
(before provision for loan losses) and noninterest income.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with GAAP
requires us to make estimates and judgments that affect our reported amounts of
assets, liabilities, income and expenses and related disclosure of contingent
assets and liabilities. Although independent third parties are often engaged to
assist us in the estimation process, management evaluates the results,
challenges assumptions used and considers other factors which could impact these
estimates. Actual results may differ from these estimates under different
assumptions or conditions.
For more detailed information about our accounting policies, please refer to
Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated
Financial Statements contained in Item 8. Financial Statements and Supplementary
Data. The following discussion presents our critical accounting estimates, which
are those estimates made in accordance with GAAP that involve a significant
level of estimation uncertainty and have had or are reasonably likely to have a
material impact on our financial condition or results of operations. We believe
that the judgments, estimates and assumptions that we use in the preparation of
our consolidated financial statements are appropriate.
                                       39
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Allowance for Loan Losses. One of the accounting policies most important to the
presentation of our financial statements relates to the allowance for loan
losses and the related provision for loan losses. The allowance for loan losses
is established as losses are estimated through a provision for loan losses
charged to earnings. The allowance for loan losses is based on the amount that
management believes will be adequate to absorb probable losses inherent in the
loan portfolio based on, among other things, evaluations of the collectability
of loans and prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect borrowers' ability to pay. Another component of the
allowance is losses on loans assessed as impaired under Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 310,
Receivables ("ASC 310"). The balance of the loans determined to be impaired
under ASC 310 and the related allowance is included in management's estimation
and analysis of the allowance for loan losses. Allowances for impaired loans are
generally determined based on collateral values or the present value of
estimated cash flows.
The determination of the appropriate level of the allowance is inherently
subjective as it requires estimates that are susceptible to significant revision
as more information becomes available. We have an established methodology to
determine the adequacy of the allowance for loan losses that assesses the risks
and losses inherent in our portfolio and portfolio segments. We have an
internally developed model that requires significant judgment to determine the
estimation method that fits the credit risk characteristics of the loans in our
portfolio and portfolio segments. Qualitative and environmental factors that may
not be directly reflected in quantitative estimates include: asset quality
trends, changes in loan concentrations, new products and process changes,
changes and pressures from competition, changes in lending policies and
underwriting practices, trends in the nature and volume of the loan portfolio,
and national and regional economic trends. Changes in these factors are
considered in determining changes in the allowance for loan losses. The impact
of these factors on our qualitative assessment of the allowance for loan losses
can change from period to period based on management's assessment of the extent
to which these factors are already reflected in historic loss rates. The
uncertainty inherent in the estimation process is also considered in evaluating
the allowance for loan losses.
Acquisition Accounting. We account for our acquisitions under ASC Topic 805,
Business Combinations ("ASC 805"), which requires the use of the purchase method
of accounting. All identifiable assets acquired, including loans, are recorded
at fair value (which is discussed below). The excess purchase price over the
fair value of net assets acquired is recorded as goodwill. If the fair value of
the net assets acquired exceeds the purchase price, a bargain purchase gain is
recognized.
Because the fair value measurements incorporate assumptions regarding credit
risk, no allowance for loan losses related to the acquired loans is recorded on
the acquisition date. The fair value measurements of acquired loans are based on
estimates related to expected prepayments and the amount and timing of
undiscounted expected principal, interest and other cash flows. The fair value
adjustment is amortized over the life of the loan using the effective interest
method.
The Company accounts for acquired impaired loans under ASC Topic 310-30, Loans
and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). An
acquired loan is considered impaired when there is evidence of credit
deterioration since origination and it is probable at the date of acquisition
that we will be unable to collect all contractually required payments. ASC
310-30 prohibits the carryover of an allowance for loan losses for acquired
impaired loans. Over the life of the acquired loans, we continually estimate the
cash flows expected to be collected on individual loans or on pools of loans
sharing common risk characteristics. As of the end of each fiscal quarter, we
evaluate the present value of the acquired loans using the effective interest
rates. For any increases in cash flows expected to be collected, we adjust the
amount of accretable yield recognized on a prospective basis over the loan's or
pool's remaining life, while we recognize a provision for loan loss in the
consolidated statement of operations if the cash flows expected to be collected
have decreased.
Overview of Financial Condition and Results of Operations
Net income for the year ended December 31, 2020 totaled $13.9 million, or $1.27
per diluted share, compared to $16.8 million, or $1.66 per diluted share, for
the year ended December 31, 2019. This represents a $3.0 million, or a 17.5%,
decrease in net income. The decrease can mainly be attributed to the Company's
increased provisions for loan losses during 2020, as a result of the impacts of
the pandemic. The Company also experienced an increase in noninterest expense.
Key components of the Company's performance during the year ended December 31,
2020 are summarized below.
•Total assets grew to $2.3 billion at December 31, 2020, an increase of 8.0%
from $2.1 billion at December 31, 2019.
•Total loans, net of allowance for loan losses at December 31, 2020 were $1.8
billion, an increase of $158.7 million, or 9.4% compared to $1.7 billion at
December 31, 2019.
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•Total deposits were $1.9 billion at December 31, 2020, an increase of $180.1
million, or 10.5%, compared to deposits of $1.7 billion at December 31, 2019.
Noninterest-bearing deposits increased $96.3 million, or 27.4%, to $448.2
million compared to $351.9 million at December 31, 2019.
•Net interest income for the year ended December 31, 2020 was $73.5 million, an
increase of $8.7 million, or 13.4%, compared to $64.8 million for the year ended
December 31, 2019.
•On February 21, 2020, the Bank completed its acquisition and assumption of
certain assets, deposits and other liabilities associated with the Alice and
Victoria, Texas locations of PlainsCapital Bank, a wholly-owned subsidiary of
Hilltop Holdings, Inc. See further discussion in Acquisitions below.
Certain Events That Affect Year-over-Year Comparability
COVID-19 Pandemic. As discussed throughout this report, the COVID-19 pandemic
impacted our Company during 2020.
Acquisitions. On March 1, 2019, the Company completed the acquisition of
Mainland Bank ("Mainland"), a Texas state bank located in Texas City, Texas. The
Company acquired 100% of Mainland's outstanding common shares for approximately
$18.6 million in the form of 763,849 shares of the Company's common stock. The
acquisition of Mainland expanded the Company's branch footprint into Texas and
increased the core deposit base to help position the Company to continue to
grow. On the date of acquisition, Mainland had total assets with a fair value of
approximately $127.6 million, $81.3 million in loans, and $107.6 million in
deposits, and served the residents of Harris and Galveston counties through
three branch locations. The Company recorded a core deposit intangible and
goodwill of $2.4 million and $5.2 million, respectively, related to the
acquisition of Mainland.
On November 1, 2019, the Company completed the acquisition of Bank of York, an
Alabama state bank located in York, Alabama. All of the issued and outstanding
shares of Bank of York common stock were converted into aggregate cash merger
consideration of $15.0 million. The acquisition of Bank of York expanded the
Company's branch footprint into Alabama. On the date of acquisition, Bank of
York had total assets with a fair value of $101.9 million, $46.1 million in
loans, and $85.0 million in deposits, and served the residents of Sumter County
through two branch locations and one loan production office in Tuscaloosa
County. The Company recorded a core deposit intangible and goodwill of $0.9
million and $5.0 million, respectively, related to the acquisition of Bank of
York.
On February 21, 2020, the Bank completed the acquisition and assumption of
certain assets, deposits and other liabilities associated with the Alice and
Victoria, Texas locations of PlainsCapital Bank, a wholly-owned subsidiary of
Hilltop Holdings Inc., for an aggregate consideration of approximately $11.2
million. The Bank acquired approximately $45.3 million in loans and $37.0
million in deposits. In addition, the Bank acquired substantially all the fixed
assets at the branch locations, and assumed the leases for the branch
facilities. The Company recorded a core deposit intangible and goodwill of $0.2
million and $0.5 million, respectively, related to the acquisition.
Debt and Equity Raise. During the fourth quarter of 2019, we completed both a
subordinated debt issuance and a common stock offering. We issued and sold $25.0
million in fixed-to-floating rate subordinated notes due in 2029. The common
stock offering generated net proceeds of $28.5 million through the issuance of
1.3 million common shares at a price of $23.25 per share. The proceeds from the
subordinated debt issuance and common stock offering were raised for general
corporate purposes and potential strategic acquisitions.
Discussion and Analysis of Financial Condition
Total assets were $2.3 billion at December 31, 2020, an increase of 8.0% from
total assets of $2.1 billion at December 31, 2019. Our total assets of $2.1
billion at December 31, 2019 represents a 20.3% increase from total assets of
$1.8 billion at December 31, 2018. The growth experienced since December 31,
2018 can mainly be attributed to growth in loans, $94.5 million of which is PPP
loans originated during 2020, four de novo branch openings, two acquisitions
completed in 2019 which added assets with a fair value of $229.5 million, as
well as the acquisition of two branch locations in February 2020 which added
assets with a fair value of $48.8 million.
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Loans


General. Loans constitute our most significant asset, comprising 80%, 79%, and
78% of our total assets at December 31, 2020, 2019 and 2018, respectively. Loans
increased $168.3 million, or 9.9%, to $1.9 billion at December 31, 2020 from
$1.7 billion at December 31, 2019. Loans increased $291.2 million, or 20.8%, to
$1.7 billion at December 31, 2019 from $1.4 billion at December 31, 2018.
In the second quarter of 2020, the Bank began participating as a lender in the
PPP as established by the CARES Act. At December 31, 2020, the balance, net of
repayments, of the Bank's PPP loans originated was $94.5 million, which is
included in the commercial and industrial loan portfolio. Eighty-seven percent
of the total number of PPP loans we have originated have principal balances of
$150,000 or less. Excluding PPP loans, total loans increased $73.8 million, or
4.4%, at December 31, 2020 compared to December 31, 2019.
The table below sets forth the balance of loans outstanding by loan type as of
the dates presented, and the percentage of each loan type to total loans
(dollars in thousands).
                                                                                                                                                         December 31,
                                                          2020                                              2019                                              2018                                              2017                                             2016
                                                                Percentage of                                     Percentage of                                     Percentage of                                     Percentage of                                   Percentage of
                                           Amount                Total Loans                 Amount                Total Loans                 Amount                Total Loans                 Amount                Total Loans                Amount               Total Loans
Mortgage loans on real estate:
Construction and land
development                            $   206,011                         11.1  %       $   197,797                         11.7  %       $   157,946                         11.3  %       $   157,667                         12.5  %       $  90,737                         10.2  %
1-4 Family                                 339,525                         18.2              321,489                         19.0              287,137                         20.5              276,922                         22.0            177,205                         19.8
Multifamily                                 60,724                          3.3               60,617                          3.6               50,501                          3.6               51,283                          4.1             42,759                          4.8
Farmland                                    26,547                          1.4               27,780                          1.6               21,356                          1.5               23,838                          1.9              8,207                          0.9
Commercial real estate
Owner-occupied                             375,421                         20.2              352,324                         20.8              298,222                         21.3              272,433                         21.6            180,458                         20.2
Nonowner-occupied                          436,974                         23.5              378,736                         22.4              328,782                         23.5              264,931                         21.0            200,258                         22.4
Commercial and industrial                  394,497                         21.2              323,786                         19.2              210,924                         15.0              135,392                         10.8             85,377                          9.6
Consumer                                    20,619                          1.1               29,446                          1.7               45,957                          3.3               76,313                          6.1            108,425                         12.1
Total loans                            $ 1,860,318                          100  %       $ 1,691,975                          100  %       $ 1,400,825                          100  %       $ 1,258,779                          100  %       $ 893,426                          100  %


Our focus on a relationship-driven banking strategy and the hiring of
experienced commercial lenders are the primary reasons for our organic loan
growth. Over the last three fiscal years, we have increased our focus on
commercial real estate loans and commercial and industrial loans, including
adding and expanding a new Commercial and Industrial division in early 2018.
Excluding $94.5 million of PPP loans outstanding as of December 31, 2020, which
are included in our commercial and industrial loan portfolio, we experienced the
greatest loan growth in our commercial real estate portfolio from December 31,
2019 to December 31, 2020. In addition, we completed two acquisitions in 2019,
as well as the acquisition of two branch locations in February 2020.
The decrease in the consumer loan portfolio during this period is primarily a
result of pay-downs of portfolio loans. At December 31, 2020, indirect auto
loans made up 22.2% of the consumer loan portfolio. The Company discontinued
accepting indirect auto loan applications on December 31, 2015 and expects its
consumer loan portfolio as a percentage of the total loan portfolio to continue
to decrease over time. At December 31, 2020, the weighted average remaining term
of the indirect auto loan portfolio was 1.3 years.
At December 31, 2020, the Company's total business lending portfolio, which
consists of loans secured by owner-occupied commercial real estate properties
and commercial and industrial loans, was $769.9 million, an increase of $93.8
million, or 13.9%, compared to the business lending portfolio of $676.1 million
at December 31, 2019. The business lending portfolio at December 31, 2019
increased $167.0 million, or 32.8%, compared to $509.1 million at December 31,
2018. The origination of PPP loans, which are included in the commercial and
industrial loan portfolio, was the primary driver of the increase in the
business lending portfolio compared to December 31, 2019.
                                       42
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The following table sets forth loans outstanding at December 31, 2020, which,
based on remaining scheduled repayments of principal, are due in the periods
indicated, as well as the amount of loans with fixed and variable rates in each
maturity range. Loans with balloon payments and longer amortizations are often
repriced and extended beyond the initial maturity when credit conditions remain
satisfactory. Demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported below as due in one year or less.
                                                                        After One              After Five               After Ten
                                                 One Year or           Year Through           Years Through           Years Through           After Fifteen
(dollars in thousands)                              Less                Five Years              Ten Years             Fifteen Years               Years                 Total
Mortgage loans on real estate:
Construction and land development              $    143,943          $      20,498          $       32,544          $        8,786          $          240          $   206,011
1-4 Family                                           61,081                 86,910                  43,605                  17,681                 130,248              339,525
Multifamily                                           9,101                 49,048                   2,199                     242                     134               60,724
Farmland                                              8,080                  9,218                   9,152                      97                       -               26,547
Commercial real estate
Owner-occupied                                       44,547                128,834                 131,889                  53,099                  17,052              375,421
Nonowner-occupied                                   107,020                156,931                 152,885                  20,138                       -              436,974
Commercial and industrial                           166,842                187,223                  25,630                   6,864                   7,938              394,497
Consumer                                              5,351                 14,069                     838                     358                       3               20,619
Total loans                                    $    545,965          $    

652,731 $ 398,742 $ 107,265 $ 155,615 $ 1,860,318 Amounts with fixed rates

$    122,784          $     

599,740 $ 329,203 $ 89,603 $ 148,501 $ 1,289,831 Amounts with variable rates

                         423,181                 52,991                  69,539                  17,662                   7,114              570,487
Total loans                                    $    545,965          $     652,731          $      398,742          $      107,265          $      155,615          $ 1,860,318


Loan Concentrations. Loan concentrations are considered to exist when there are
amounts loaned to multiple borrowers engaged in similar activities that would
cause them to be similarly impacted by economic or other conditions. At
December 31, 2020 and December 31, 2019, we had no concentrations of loans
exceeding 10% of total loans other than loans in the categories listed in the
table above.
Our loan portfolio includes loans to businesses in certain industries that may
be more significantly affected by the pandemic than others. These loans,
including loans related to oil and gas, food services, hospitality, and
entertainment, represented approximately 6.6% of our total loan portfolio, or
5.7% excluding PPP loans, at December 31, 2020, as shown below.
                                                      Percentage of Loan Portfolio
   Industry         Percentage of Loan Portfolio         (excluding PPP loans)
Oil and gas                                3.3  %                            2.6  %
Food services                              2.5                               2.3
Hospitality                                0.4                               0.4
Entertainment                              0.4                               0.4
Total                                      6.6  %                            5.7  %


Loan Deferral Program. In response to the COVID-19 pandemic, beginning in the
first quarter of 2020, the Bank has offered short-term modifications to
borrowers impacted by the pandemic who are current and otherwise not past due.
These currently include short-term modifications of 90 days or less, in the form
of deferrals of payment of principal and interest, principal only, or interest
only, and fee waivers. As of December 31, 2020, the balance of loans
participating in the 90-day deferral program was approximately $5.9 million, or
0.3% of the total loan portfolio. Of these loans, 57% have deferrals of
principal and interest, 40% have deferrals of principal only, and 3% have
deferrals of interest only. As 90-day loan deferrals have expired, most
customers have returned to their regular payment schedules. The Bank continues
to support borrowers experiencing financial hardships related to the pandemic
and expects to process additional deferrals requested by qualified borrowers.
Therefore, we may experience fluctuations in the balance of loans participating
in the deferral program. In accordance with Section 4013 of the CARES Act and
the interagency statement, we have not accounted for such loans as TDRs, nor
have we designated them as past due or nonaccrual.
                                       43
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Investment Securities
We purchase investment securities primarily to provide a source for meeting
liquidity needs, with return on investment as a secondary consideration. We also
use investment securities as collateral for certain deposits and other types of
borrowing. Investment securities represented 12% of our total assets and totaled
$280.8 million at December 31, 2020, an increase of $6.6 million, or 2.4%, from
$274.2 million at December 31, 2019. The investment securities balance at
December 31, 2019 represented a $9.2 million, or 3.5%, increase from $265.0
million at December 31, 2018. The increase in investment securities at
December 31, 2020 compared to December 31, 2019 and 2018 resulted from purchases
of multiple investment types in our current portfolio.
The table below shows the carrying value of our investment securities portfolio
by investment type and the percentage that such investment type comprises of our
entire portfolio as of the dates indicated (dollars in thousands).
                                                                                                     December 31,
                                                           2020                                          2019                                          2018
                                                                Percentage of                                 Percentage of                                 Percentage of
                                            Balance               Portfolio               Balance               Portfolio               Balance               Portfolio
Obligations of U.S. government
agencies and corporations                 $  36,821                       13.1  %       $  33,651                       12.3  %       $   7,870                        3.0  %
Obligations of state and political
subdivisions                                 30,362                       10.8             42,936                       15.7             44,685                       16.9
Corporate bonds                              27,708                        9.8             19,163                        6.9             15,509                        5.8
Residential mortgage-backed
securities                                  126,807                       45.2            106,868                       39.0            140,294                       52.9
Commercial mortgage-backed
securities                                   59,146                       21.1             71,596                       26.1             56,689                       21.4
Total investment securities               $ 280,844                        100  %       $ 274,214                        100  %       $ 265,047                        100  %


The investment portfolio consists of available for sale and held to maturity
securities. We do not hold any investments classified as trading. We classify
debt securities as held to maturity if management has the positive intent and
ability to hold the securities to maturity. Held to maturity securities are
stated at amortized cost. Securities not classified as held to maturity are
classified as available for sale. The carrying values of the Company's available
for sale securities are adjusted for unrealized gains or losses as valuation
allowances, and any gains or losses are reported on an after-tax basis as a
component of other comprehensive income. Any expected credit loss due to the
inability to collect all amounts due according to the security's contractual
terms is recognized as a charge against earnings. Any remaining unrealized loss
related to other factors would be recognized in other comprehensive income, net
of taxes.
Typically, our investment securities are available for sale. There were no
purchases of held to maturity securities during the years ended December 31,
2020, 2019 and 2018. In the year ended December 31, 2020, we purchased $127.1
million of investment securities, compared to purchases of $110.4 million and
$72.3 million of investment securities during the years ended December 31, 2019
and 2018, respectively. Mortgage-backed securities represented 58%, 65%, and 68%
of the available for sale securities we purchased in 2020, 2019 and 2018,
respectively. Of the remaining securities purchased in 2020, 2019 and 2018, 22%,
29%, and 25%, respectively, were U.S. government agency securities, while 7%,
4%, and 1%, respectively, were municipal securities. We only purchase corporate
bonds that are investment grade securities issued by seasoned corporations.
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The table below sets forth the stated maturities and weighted average yields of
our investment debt securities based on the amortized cost of our investment
portfolio as of December 31, 2020 (dollars in thousands).
                                                                                                                    After One Year                                   After Five Years
                                                               One Year or Less                                   Through Five Years                                 Through Ten Years                             After Ten Years
                                                          Amount                    Yield                     Amount                      Yield                 Amount                  Yield                Amount                 Yield
Held to maturity:
Obligations of states and political
subdivisions                                     $          830                       5.88  %       $          2,745                        5.88  %       $          4,650                3.59  %       $            -                   -  %
Residential mortgage-backed securities                        -                          -                         -                           -                         -                   -                   4,209              

2.83


Available for sale:
Obligations of U.S. government agencies
and corporations                                             73                       3.13                     2,373                        2.34                    31,579                2.12                   2,623              

1.64


Obligations of states and political
subdivisions                                                 88                       2.96                       893                        3.06                     8,824                2.65                  11,845                4.05
Corporate bonds                                           1,503                       3.51                     8,393                        1.55                    16,687                4.52                   1,000                1.95
Residential mortgage-backed securities                        5                       3.00                         -                           -                       335                1.99                 119,594              

1.36


Commercial mortgage-backed securities                         -                          -                     1,278                        2.93                     6,734                1.30                  50,086                2.11
                                                 $        2,499                                     $         15,682                                      $         68,809                              $      189,357


The maturity of mortgage-backed securities reflects scheduled repayments based
upon the contractual maturities of the securities. Weighted average yields on
tax-exempt obligations have been computed on a fully tax equivalent basis
assuming a federal tax rate of 21%.
Premises and Equipment
Bank premises and equipment increased $5.4 million, or 10.6%, to $56.3 million
at December 31, 2020 from $50.9 million at December 31, 2019. The increase was
mainly attributable to the acquisition of two branch locations in Alice and
Victoria, Texas which added $2.8 million in bank premises and equipment, and the
addition of two de novo branches. Bank premises and equipment increased $10.7
million, or 26.6%, to $50.9 million at December 31, 2019 from $40.2 million at
December 31, 2018. The increase was mainly attributable to the completion of two
acquisitions which added $3.5 million in bank premises and equipment, the
addition of right-of-use assets related to leases of $3.3 million, and the
addition of two de novo branches.
Deferred Tax Asset/Liability
At December 31, 2020, the net deferred tax asset was $1.4 million, compared to a
net deferred tax liability of $0.1 million and a net deferred tax asset of $1.1
million at December 31, 2019 and 2018, respectively. The decrease in the
deferred tax liability at December 31, 2019 to a net deferred tax asset at
December 31, 2020 was primarily driven by the increased provisioning for loan
losses during 2020 compared to 2019. The provision for loan losses is not tax
deductible until loans are charged off, causing an increase in the deferred tax
asset at December 31, 2020. The decrease in the deferred tax asset to a net
deferred tax liability at December 31, 2019 compared to December 31, 2018 is
mainly attributable to the increase in the unrealized gain on available for sale
("AFS") securities during the period.
The Bank acquired net operating loss carryforwards as a result of acquisitions.
At December 31, 2020, we held approximately $0.4 million and $1.7 million in net
operating loss carryforwards that expire in 2033 and 2039, respectively. U.S.
tax law imposes annual limitations under Internal Revenue Code Section 382 on
the amount of net operating loss carryforwards that may be used to offset
federal taxable income. Under these laws, we may apply up to approximately $0.6
million to offset our taxable income each year. In addition to this limitation,
our ability to utilize net operating loss carryforwards depends upon the Company
generating taxable income. Given the substantial amount of time before our net
operating loss carryforwards begin to expire, we currently expect to utilize
these net operating loss carryforwards in full before their expiration.
                                       45
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Deposits


The following table sets forth the composition of our deposits and the
percentage of each deposit type to total deposits at December 31, 2020, 2019 and
2018 (dollars in thousands).
                                                                                                                   December 31,
                                                                       2020                                             2019                                             2018
                                                                             Percentage of                                    Percentage of                                    Percentage of
                                                                                 Total                                            Total                                            Total
                                                        Amount                 Deposits                  Amount                 Deposits                  Amount                 Deposits
Noninterest-bearing demand deposits                 $   448,230                        23.7  %       $   351,905                        20.6  %       $   217,457                        16.0  %
Interest-bearing demand deposits                        496,745                        26.3              335,478                        19.6              295,212                        21.7
Brokered deposits                                        80,017                         4.2                    -                           -                    -                           -
Money market deposit accounts                           186,307            

            9.9              198,999                        11.7              179,340                        13.2
Savings accounts                                        141,134                         7.5              115,324                         6.8              104,146                         7.6
Time deposits                                           535,391                        28.4              706,000                        41.3              565,576                        41.5
Total deposits                                      $ 1,887,824                       100.0  %       $ 1,707,706                       100.0  %       $ 1,361,731                       100.0  %


Total deposits were $1.9 billion at December 31, 2020, an increase of $180.1
million, or 10.5%, from total deposits of $1.7 billion at December 31, 2019. The
Company acquired approximately $37.0 million in deposits from two branch
locations acquired from PlainsCapital Bank in February 2020 and utilized $80.0
million in brokered deposits in the fourth quarter of 2020. The remaining
increase of approximately $63.1 million is due to organic growth. Total deposits
at December 31, 2019 increased $346.0 million, or 25.4%, from total deposits of
$1.4 billion at December 31, 2018. The Company acquired approximately $85.0
million and $107.6 million in deposits from Bank of York and Mainland Bank,
respectively, in 2019. The remaining increase is due to organic growth.
Noninterest-bearing and interest-bearing demand deposits experienced the largest
increases compared to December 31, 2019. These increases were primarily driven
by government stimulus payments, reduced spending by consumer and business
customers related to the COVID-19 pandemic, and increases in PPP borrowers'
deposit accounts. We believe these factors may be temporary depending on the
future economic effects of the COVID-19 pandemic.
As the state of the economy and financial markets deteriorated during 2020 in
response to the global pandemic, customers desired increased security of funds
and transferred holdings into fully-insured checking accounts, or our Assured
Checking product, shown in interest-bearing demand deposits in the table above.
Management also made the strategic decision to either reprice or run-off higher
yielding time deposits and other interest-bearing deposit products during the
year ended December 31, 2020, which contributed to our decreased cost of
deposits compared to the same period in 2019, discussed in Results of Operations
below.
The following table shows the contractual maturities of certificates of deposit
and other time deposits greater than $100,000 at December 31, 2020 and 2019
(dollars in thousands).
                                                                                 December 31,
                                                               2020                                         2019
                                               Certificates of         

Other Time Certificates of Other Time Time remaining until maturity:

                     Deposit               Deposits               Deposit               Deposits
Three months or less                          $       78,482          $     

1,733 $ 89,995 $ 2,162 Over three months through six months

                  73,456                2,619                  74,759                1,421
Over six months through twelve months                108,901                3,128                 198,801                1,852
Over one year through three years                     90,101                4,202                  90,541                4,954
Over three years                                      10,529                  283                  13,935                1,629
                                              $      361,469          $    11,965          $      468,031          $    12,018


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Borrowings


Total borrowings include securities sold under agreements to repurchase,
advances from the Federal Home Loan Bank ("FHLB"), unsecured lines of credit
with First National Bankers Bank and The Independent Bankers Bank totaling $60.0
million, subordinated debt issued in 2017 and 2019, and junior subordinated
debentures assumed through acquisitions.
Securities sold under agreements to repurchase increased $2.7 million to $5.7
million at December 31, 2020 from $3.0 million at December 31, 2019. Our
advances from the FHLB were $120.5 million at December 31, 2020, a decrease of
$11.1 million from FHLB advances of $131.6 million at December 31, 2019 as we
utilized available cash to pay off a portion of advances. We had no outstanding
balances drawn on the unsecured lines of credit at December 31, 2020 or 2019.
Junior subordinated debt of $5.9 million at December 31, 2020 and 2019
represents the junior subordinated debentures that we assumed in connection with
our acquisitions of BOJ Bancshares, Inc. in 2017 and First Community Bank in
2013.
The average balances and cost of funds of short-term borrowings at December 31,
2020, 2019 and 2018 are summarized in the table below (dollars in thousands).
                                                    Average Balances                                             Cost of Funds
                                                      December 31,                                               December 31,
                                       2020               2019               2018               2020                 2019                 2018

Federal funds purchased and other short-term borrowings $ 60,243 $ 110,603 $ 126,670

                1.15  %              2.09  %              1.84  %
Securities sold under
agreements to repurchase               5,080              2,936             18,420                0.30                 1.32                 0.99

Total short-term borrowings $ 65,323 $ 113,539 $ 145,090

                1.09  %              2.07  %              1.73  %



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

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

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

2027 Notes. On March 24, 2017, the Company issued $18.6 million in aggregate
principal amount of its 6.00% Fixed-to-Floating Rate Subordinated Notes due 2027
(the "2027 Notes"), at 100% of the aggregate principal amount of the 2027 Notes
in an offering registered under the Securities Act of 1933, as amended.

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

Principal and interest on the 2027 Notes are not subject to acceleration, except upon certain bankruptcy-related events. The 2027 Notes are unsecured subordinated obligations of the Company. The 2027 Notes are subordinated in right of payment to the payment of the Company's existing and future senior indebtedness, including all of its general creditors. The 2027 Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of the Company's subsidiaries. The


                                       47
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Company may, beginning with the interest payment date of March 30, 2022, and on
any interest payment date thereafter, redeem the 2027 Notes, in whole or in
part, at a redemption price equal to 100% of the principal amount of the 2027
Notes to be redeemed plus accrued and unpaid interest to but excluding the date
of redemption. The 2027 Notes are structured to qualify as Tier 2 capital for
regulatory capital purposes.
Results of Operations
Performance Summary
2020 vs. 2019. For the year ended December 31, 2020, net income was $13.9
million, or $1.27 per basic and diluted common share, compared to net income of
$16.8 million, or $1.68 per basic common share and $1.66 per diluted common
share, for the year ended December 31, 2019. The primary drivers of the decrease
in net income are related to the state of the economy and financial markets
during the year ended December 31, 2020 resulting from the pandemic, along with
an increase in noninterest expenses primarily related to our growth. As shown on
the consolidated statement of income for the year ended December 31, 2020, a
provision for loan losses of $11.2 million was recorded, primarily attributable
to the COVID-19 pandemic, compared to a provision for loan losses of $1.9
million for the year ended December 31, 2019. Return on average assets decreased
to 0.61% for the year ended December 31, 2020 from 0.85% for the year ended
December 31, 2019. Return on average equity was 5.77% for the year ended
December 31, 2020 compared to 8.21% for the year ended December 31, 2019. The
decrease in both return on average assets and return on average equity is mainly
attributable to the $2.9 million decrease in net income.
2019 vs. 2018. For the year ended December 31, 2019, net income was $16.8
million, or $1.68 per basic common share and $1.66 per diluted common share,
compared to net income of $13.6 million, or $1.41 per basic common share and
$1.39 per diluted common share, for the year ended December 31, 2018. The
increases in basic and diluted earnings per common share and net income were
primarily driven by an increase in net interest income resulting from both
organic loan growth and loans acquired during 2019, as well as an increase in
the yields on interest-earning assets, offset, in part, by an increase in the
cost of funds. The increase in net interest income was partially offset by an
increase in noninterest expense. Return on average assets increased to 0.85% for
the year ended December 31, 2019 from 0.81% for the year ended December 31,
2018. Return on average equity was 8.21% for the year ended December 31, 2019
compared to 7.68% for the year ended December 31, 2018. The increase in both
return on average assets and return on average equity is mainly attributable to
the $3.2 million increase in net income.
Net Interest Income and Net Interest Margin
Net interest income, our principal source of earnings, is the difference between
the interest income generated by earning assets and the total interest cost of
the deposits and borrowings obtained to fund those assets. Factors affecting the
level of net interest income include the volume of earning assets and
interest-bearing liabilities, yields earned on loans and investments and rates
paid on deposits and other borrowings, the level of nonperforming loans, the
amount of noninterest-bearing liabilities supporting earning assets, and the
interest rate environment.
The primary factors affecting net interest margin are changes in interest rates,
competition, and the shape of the interest rate yield curve. The Federal Reserve
Board sets various benchmark rates, including the Federal Funds rate, and
thereby influences the general market rates of interest, including the deposit
and loan rates offered by financial institutions. Since December 31, 2015, the
Federal Funds target rate had increased a total of 175 basis points and remained
at 2.25% to 2.50%, as of December 19, 2018, until it was lowered to 2.00 to
2.25% on July 31, 2019. The Federal Reserve further reduced the rate by 25 basis
points on both September 18, 2019 to 1.75 to 2.00% and October 30, 2019 to 1.50
to 1.75%. On March 3, 2020, the Federal Reserve lowered the Federal Funds target
rate to 1.00 to 1.25%, which the Federal Reserve stated was in response to the
evolving risks to economic activity posed by the coronavirus. In a measure aimed
at lessening the economic impact of COVID-19, the Federal Reserve reduced the
federal funds target rate to 0% to 0.25% on March 16, 2020, where it remained as
of March 10, 2021.
2020 vs. 2019. Net interest income increased 13.4% to $73.5 million for the year
ended December 31, 2020 from $64.8 million for the same period in 2019. Net
interest margin was 3.49% for the year ended December 31, 2020, a decrease of
two basis points from 3.51% for the year ended December 31, 2019. The increase
in net interest income resulted from an increase in the volume of
interest-earning assets, and a decrease in the rates paid on interest-bearing
liabilities, partially offset by a decrease in the yield earned on
interest-earnings assets and increase in the volume of interest-bearing
liabilities. For the year ended December 31, 2020, average loans and average
investment securities increased approximately $246.4 million and $7.9 million,
respectively, while average interest-bearing deposits increased approximately
$139.4 million. The increases in average loans, investment securities and
interest-bearing deposits was driven by both organic growth and growth through
the acquisitions of Bank of York on November 1, 2019 and two branch locations of
PlainsCapital Bank on February 21, 2020. Demand deposit
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growth also was driven by the pandemic-related factors discussed above. Average
total borrowings decreased approximately $18.1 million compared to the same
period in 2019 as we used available cash to pay down a portion of advances from
the FHLB. Our yield on interest-earning assets declined as did our rate paid on
interest-bearing liabilities primarily as a result of the overall decline in
prevailing interest rates.
Interest income was $93.8 million for the year ended December 31, 2020 compared
to $89.4 million for the same period in 2019. Loan interest income made up
substantially all of our interest income for the years ended December 31, 2020
and 2019. Interest on our commercial real estate loans, commercial and
industrial loans, and one-to-four family residential real estate loans
constituted the three largest components of our loan interest income for the
years ended December 31, 2020 and 2019 at 83% and 81% of total interest income
on loans, respectively. The overall yield on interest-earning assets decreased
39 basis points to 4.45% for the year ended December 31, 2020 compared to 4.84%
for the same period in 2019. The loan portfolio yielded 4.89% for the year ended
December 31, 2020 compared to 5.26% for the year ended December 31, 2019. The
PPP loans originated in 2020 have a contractual interest rate of 1% and
origination fees based on the loan amount, which contributed to the decline in
the yield on our portfolio. In addition, the yield on the investment portfolio
was 2.00% for the year ended December 31, 2020 compared to 2.73% for the year
ended December 31, 2019.
Interest expense was $20.3 million for the year ended December 31, 2020, a
decrease of $4.4 million compared to interest expense of $24.6 million for the
year ended December 31, 2019. While there was an increase in the volume of
interest-bearing liabilities, the decrease in interest expense is mainly
attributable to the decrease in the rate paid for these liabilities for the year
ended December 31, 2020 compared to December 31, 2019. As previously mentioned,
the federal funds target rate decreased to 0% to 0.25% on March 15, 2020, which
affects the rate the Company pays for immediately available overnight funds,
long-term borrowings, and deposits. For the year ended December 31, 2020, the
cost of interest-bearing deposits decreased 43 basis points to 1.10% and the
cost of interest-bearing liabilities decreased 40 basis points to 1.27% compared
to the same period in 2019.
2019 vs. 2018. For a detailed discussion of our net interest income and net
interest margin performance for 2019 compared to 2018, see our annual report on
Form 10-K for the year ended December 31, 2019, Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results of
Operations - Net Interest Income and Net Interest Margin - 2019 vs. 2018, and -
Volume/Rate Analysis.
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Average Balances and Yields. The following table sets forth average balance
sheet data, including all major categories of interest-earning assets and
interest-bearing liabilities, together with the interest earned or paid and the
average yield or rate paid on each such category as of and for the years ended
December 31, 2020, 2019 and 2018. Averages presented below are daily averages
(dollars in thousands).
                                                                                                                              As of and for the year ended December 31,
                                                                            2020                                                                 2019                                                                 2018
                                                                       Interest                                                             Interest                                                             Interest
                                                  Average              Income/                                         Average              Income/                                         Average              Income/
                                                  Balance             Expense(1)            Yield/ Rate(1)             Balance             Expense(1)            Yield/ Rate(1)             Balance             Expense(1)            Yield/ Rate(1)
Assets
Interest-earning assets:
Loans                                          $ 1,786,302          $    87,365                       4.89  %       $ 1,539,886          $    80,954                       5.26  %       $ 1,306,264          $    66,750                       5.11  %
Securities:
Taxable                                            255,405                4,927                       1.93              240,751                6,650                       2.76              222,948                5,793                       2.60
Tax-exempt                                          25,024                  686                       2.74               31,780                  790                       2.49               34,159                  815                       2.39
Interest-earning balances with banks                42,852                  816                       1.90               34,905                1,049                       3.00               24,126                  533                       2.21
Total interest-earning assets                    2,109,583               93,794                       4.45            1,847,322               89,443                       4.84            1,587,497               73,891                       4.65
Cash and due from banks                             27,768                                                               22,969                                                               17,219
Intangible assets                                   32,190                                                               26,107                                                               19,927
Other assets                                       119,994                                                               90,949                                                               73,472
Allowance for loan losses                          (15,272)                                                              (9,969)                                                              (8,491)
Total assets                                   $ 2,274,263                                                          $ 1,977,378                                                          $ 1,689,624
Liabilities and stockholders' equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand                        $   612,000          $     3,535                       0.58  %       $   510,148          $     5,308                       1.04  %       $   394,336          $     3,206                       0.81  %
Brokered Deposits                                   20,308                  177                       0.87                    -                    -                          -                    -                    -                          -
Savings deposits                                   129,211                  401                       0.31              110,936                  501                       0.45              116,544                  567                       0.49
Time deposits                                      640,549               11,263                       1.76              641,630               13,498                       2.10              530,881                7,621                       1.44
Total interest-bearing deposits                  1,402,068               15,376                       1.10            1,262,714               19,307                       1.53            1,041,761               11,394                       1.09
Short-term borrowings                               65,323                  710                       1.09              113,539                2,348                       2.07              145,090                2,511                       1.73
Long-term debt                                     128,163                4,174                       3.26               98,017                2,970                       3.03               95,692                2,616                       2.73
Total interest-bearing liabilities               1,595,554               20,260                       1.27            1,474,270               24,625                       1.67            1,282,543               16,521                       1.29
Noninterest-bearing deposits                       418,240                                                              283,274                                                              220,068
Other liabilities                                   19,805                                                               14,717                                                                9,817
Stockholders' equity                               240,664                                                              205,117                                                              177,196
Total liabilities and stockholders'
equity                                         $ 2,274,263                                                          $ 1,977,378                                                          $ 1,689,624
Net interest income/net interest margin                             $    73,534                       3.49  %                            $    64,818                       3.51  %                            $    57,370                       3.61  %


(1)Interest income and net interest margin are expressed as a percentage of
average interest-earning assets outstanding for the indicated periods. Interest
expense is expressed as a percentage of average interest-bearing liabilities for
the indicated periods.
Nonaccrual loans were included in the computation of average loan balances but
carry a zero yield. The yields include the effect of loan fees of $2.4 million,
$1.9 million and $2.1 million for the years ended December 31, 2020, 2019 and
2018, respectively, and discounts and premiums that are amortized or accreted to
interest income or expense.
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Volume/Rate Analysis. The following table sets forth a summary of the changes in
interest earned and interest paid resulting from changes in volume and rates for
the year ended December 31, 2020 compared to the year ended December 31, 2019
(dollars in thousands):
                                                   Year ended December 31, 2020 vs.
                                                     Year ended December 31, 2019
                                                  Volume                Rate        Net(1)
Interest income:
Loans                                     $     12,954               $ (6,543)     $ 6,411
Securities:
Taxable                                            405                 (2,128)      (1,723)
Tax-exempt                                        (168)                    64         (104)
Interest-earning balances with banks               239                   (472)        (233)
Total interest-earning assets                   13,430                 (9,079)       4,351
Interest expense:
Interest-bearing demand deposits                 1,060                 (2,833)      (1,773)
Brokered deposits                                    -                    177          177
Savings deposits                                    82                   (182)        (100)
Time deposits                                      (23)                (2,212)      (2,235)
Short-term borrowings                             (997)                  (641)      (1,638)
Long-term debt                                     913                    291        1,204
Total interest-bearing liabilities               1,035                 (5,400)      (4,365)
Change in net interest income             $     12,395               $ 

(3,679) $ 8,716




(1)Changes in interest due to both volume and rate have been allocated on a
pro-rata basis using the absolute ratio value of amounts calculated.
Noninterest Income
Noninterest income includes, among other things, fees generated from our deposit
services, gain on sale of securities, fixed assets and other real estate owned,
servicing fees and fee income on serviced loans, interchange fees, income from
bank owned life insurance, and changes in the fair value of equity securities.
We expect to continue to develop new products that generate noninterest income,
and enhance our existing products, in order to diversify our revenue sources.
2020 vs. 2019. Total noninterest income increased $5.9 million, or 94.6%, to
$12.1 million for the year ended December 31, 2020 compared to $6.2 million for
the year ended December 31, 2019. The increase is primarily due to the $3.6
million increase in other operating income and the $2.0 million increase in the
gain on sale of investment securities.
Other operating income is the largest component of our noninterest income for
the year ended December 31, 2020. Other operating income includes, among other
things, credit card, ATM and wire fees, derivative fee income, and rental
income. The $3.6 million increase in other operating income for the year ended
December 31, 2020 is primarily attributable to a $2.8 million increase in
derivative fee income compared to the year ended December 31, 2019. We also
experienced an increase in rental income of $0.2 million due to the Company's
purchase in May 2020 of the first floor of its corporate headquarters, which has
multiple tenants.
Service charges on deposit accounts include maintenance fees on accounts,
account enhancement charges for additional deposit account features, per item
charges, overdraft fees, and treasury management charges. Service charges on
deposit accounts increased 4.2% to $1.9 million for the year ended December 31,
2020 compared to $1.8 million for the same period in 2019.
Gain on the sale of investment securities for the year ended December 31, 2020
increased to $2.3 million from $0.3 million for the same period in 2019. We sold
approximately $56.5 million in securities during the year ended December 31,
2020 compared to sales of $65.6 million during the year ended December 31, 2019.
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Servicing fees and fee income on serviced loans decreased $0.2 million, or
36.1%, to $0.4 million, for the year ended December 31, 2020. This decrease is a
result of the Bank exiting the indirect auto loan origination business at the
end of 2015. Since the Bank did not originate auto loans for sale during the
years ended December 31, 2020 and 2019, the servicing portfolio, which
experienced regularly scheduled paydowns, was not replaced with new loans. We
expect servicing fees and fee income on serviced loans to decrease over time
until all serviced loans are paid off. At December 31, 2020, the weighted
average remaining term of the indirect auto loan portfolio was 1.3 years.
Interchange fees, which are fees earned on the usage of the Bank's credit and
debit cards, increased $0.3 million, or 26.9%, to $1.4 million for year ended
December 31, 2020 from $1.1 million for same period in 2019. The increase in
interchange fees can primarily be attributed to the increase in the volume of
debit and credit card transactions.
Income from bank owned life insurance increased $0.2 million to $0.9 million for
the year ended December 31, 2020 from $0.7 million for the same period in 2019.
This increase reflects increased interest earned on the Company's bank owned
life insurance policies.
Change in the fair value of equity securities for the year ended December 31,
2020 was a decrease of $0.1 million and represents the change in the fair value
of marketable equity securities that, prior to January 1, 2018, were included as
AFS investment securities in the Company's consolidated balance sheet. With the
adoption of ASU 2016-01 on January 1, 2018, equity securities can no longer be
classified as AFS, and, therefore, marketable equity securities are disclosed as
equity securities on the balance sheet with changes in the fair value reflected
in noninterest income.
2019 vs. 2018. For a detailed discussion of our noninterest income for 2019
compared to 2018, see our annual report on Form 10-K for the year ended December
31, 2019, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations - Noninterest Income - 2019
vs. 2018.
Noninterest Expense
Noninterest expense includes salaries and benefits and other costs associated
with the conduct of our operations. We are committed to managing our costs
within the framework of our operating strategy. However, since we are focused on
growth both organically and through acquisition, we expect our expenses to
continue to increase as we add employees and physical locations to accommodate
our growing franchise. Our goal is to create synergies promptly after completing
an acquisition, as this is important to our earnings success.
2020 vs. 2019. Total noninterest expense was $57.1 million for the year ended
December 31, 2020, an increase of $9.0 million, or 18.6%, from $48.2 million for
the year ended December 31, 2019. This increase was driven by the increases in
salaries and employee benefits, depreciation and amortization, and other
operating expenses.
Salaries and employee benefits increased $4.7 million, or 16.5%, to $33.4
million for the year ended December 31, 2020, compared to $28.6 million for the
year ended December 31, 2019. The increase in salaries and employee benefits is
mainly attributable to the increased number of employees as a result of our
growth, both organically and through acquisitions. The Company completed the
acquisitions of Mainland Bank in March 2019 and Bank of York in November 2019,
which added five branch locations and related staff during the year ended
December 31, 2019. The Bank also added staff when it opened two de novo branches
in October and December 2019. In addition, the Bank acquired two branch
locations from PlainsCapital Bank in February 2020 and opened two de novo
branches in July and November 2020. Further, as a result of the success of the
PPP loan program, the Bank paid a $0.2 million incentive in the fourth quarter
of 2020 to recognize the efforts of Bank employees.
Depreciation and amortization increased $1.1 million, or 32.0%, to $4.6 million
for the year ended December 31, 2020, compared to $3.5 million for the year
ended December 31, 2019. The increase in depreciation and amortization was
driven by the addition of approximately $2.8 million in fixed assets acquired
from PlainsCapital, as well as various projects throughout the year, including
equipment upgrades at acquired branches, opening of a free-standing interactive
teller machine in Morgan City, Louisiana in August 2020, and the addition of two
de novo branches in July and November 2020.
Other operating expenses include security, business development, FDIC and OCC
assessments, bank shares and property taxes, charitable contributions, repair
and maintenance costs, personnel training and development, filing fees, and
other costs related to the operation of our business. Other operating expenses
increased $2.6 million, or 31.7%, to $11.0 million for the year ended
December 31, 2020 from $8.3 million for the same period in 2019. The increase in
other operating expenses was primarily related to increases in software and
telephone expenses, and FDIC and OCC assessment fees.
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Data processing increased $0.7 million, or 30.0%, to $3.1 million for the year
ended December 31, 2020 from $2.4 million for the same period in 2019. The
increase is mainly attributable to the Bank's investments in multiple technology
enhancements for our customers such as teller capture, Zelle®, and Business
Electronic Banking for our more complex business customers' banking needs. We
also experienced an increase in customers due to organic growth, including new
PPP customers, and growth from acquisitions.
Occupancy expense increased $0.4 million, or 21.7% to $2.2 million for the year
ended December 31, 2020 from $1.8 million for the year ended December 31, 2019.
This increase is primarily attributable to building rent, as the Bank acquired
leases for the two branch locations acquired from PlainsCapital in February
2020.
2019 vs. 2018. For a detailed discussion of our noninterest expense for 2019
compared to 2018, see our annual report on Form 10-K for the year ended December
31, 2019, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations - Noninterest Expense - 2019
vs. 2018.
Income Tax Expense
Income tax expense for the years ended December 31, 2020, 2019 and 2018 was $3.5
million, $4.1 million, and $3.6 million, respectively. The effective tax rates
for the years ended December 31, 2020, 2019 and 2018 were 19.9%, 19.7%, and
21.1%, respectively. The effective tax rate differs from the statutory rate of
21% primarily due to tax exempt interest income earned on certain investment
securities and bank owned life insurance, and in 2018, a $0.3 million charge
related to the Tax Cuts and Jobs Act.
Risk Management
The primary risks associated with our operations are credit, interest rate and
liquidity risk. Credit and interest rate risk are discussed below, while
liquidity risk is discussed in this section under the heading Liquidity and
Capital Resources below.
Credit Risk and the Allowance for Loan Losses
General. The risk of loss should a borrower default on a loan is inherent in any
lending activity. Our portfolio and related credit risk are monitored and
managed on an ongoing basis by our risk management department, the board of
directors' loan committee and the full board of directors. We utilize a 10 point
risk-rating system, which assigns a risk grade to each borrower based on a
number of quantitative and qualitative factors associated with a loan
transaction. The risk grade categorizes the loan into one of five risk
categories, based on information about the ability of borrowers to service the
debt. The information includes, among other factors, current financial
information about the borrower, historical payment experience, credit
documentation, public information and current economic trends. These categories
assist management in monitoring our credit quality. The following describes each
of the risk categories, which are consistent with the definitions used in
guidance promulgated by federal banking regulators:
•Pass (Loan grades 1-6)-Loans not meeting the criteria below are considered
pass. These loans have high credit characteristics and financial strength. The
borrowers at least generate profits and cash flow that are in line with peer and
industry standards and have debt service coverage ratios above loan covenants
and our policy guidelines. For some of these loans, a guaranty from a
financially capable party mitigates characteristics of the borrower that might
otherwise result in a lower grade.
•Special Mention (grade 7)-Loans classified as special mention possess some
credit deficiencies that need to be corrected to avoid a greater risk of default
in the future. For example, financial ratios relating to the borrower may have
deteriorated. Often, a special mention categorization is temporary while certain
factors are analyzed or matters addressed before the loan is re-categorized as
either pass or substandard.
•Substandard (grade 8)-Loans classified as substandard are inadequately
protected by the current net worth and paying capacity of the borrower or the
liquidation value of any collateral. If deficiencies are not addressed, it is
likely that this category of loan will result in the Bank incurring a loss.
Where a borrower has been unable to adjust to industry or general economic
conditions, the borrower's loan is often categorized as substandard.
•Doubtful (grade 9)-Doubtful loans are substandard loans with one or more
additional negative factors that makes full collection of amounts outstanding,
either through repayment or liquidation of collateral, highly questionable and
improbable.
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•Loss (grade 10)-Loans classified as loss have deteriorated to such a point that
it is not practicable to defer writing off the loan. For these loans, all
efforts to remediate the loan's negative characteristics have failed and the
value of the collateral, if any, has severely deteriorated relative to the
amount outstanding. Although some value may be recovered on such a loan, it is
not significant in relation to the amount borrowed.
At December 31, 2020 and December 31, 2019, there were no loans classified as
loss, while there were $0.9 million and $0.1 million, respectively, of loans
classified as doubtful, $20.1 million and $8.7 million, respectively, of loans
classified as substandard, and $16.9 million and $4.4 million, respectively, of
loans classified as special mention as of such dates. Of our aggregate $37.9
million and $13.2 million doubtful, substandard and special mention loans at
December 31, 2020 and December 31, 2019, respectively, $8.4 million and $7.1
million, respectively, were acquired and marked to fair value at the time of
their acquisition. At December 31, 2018, we had no loans classified as loss, and
we had doubtful, substandard and special mention loans of $0.1 million, $9.5
million and $0.2 million, respectively.
An independent loan review is conducted annually, whether internally or
externally, on at least 40% of commercial loans utilizing a risk-based approach
designed to maximize the effectiveness of the review. Internal loan review is
independent of the loan underwriting and approval process. In addition, credit
analysts periodically review certain commercial loans to identify negative
financial trends related to any one borrower, any related groups of borrowers or
an industry. All loans not categorized as pass are put on an internal watch
list, with quarterly reports to the board of directors. In addition, a written
status report is maintained by our special assets division for all commercial
loans categorized as substandard or worse. We use this information in connection
with our collection efforts.
If our collection efforts are unsuccessful, collateral securing loans may be
repossessed and sold or, for loans secured by real estate, foreclosure
proceedings initiated. The collateral is sold at public auction for fair market
value (based upon recent appraisals), with fees associated with the foreclosure
being deducted from the sales price. The purchase price is applied to the
outstanding loan balance. If the loan balance is greater than the sales
proceeds, the deficient balance is charged-off.
Allowance for Loan Losses. The allowance for loan losses is an amount that
management believes will be adequate to absorb probable losses inherent in the
entire loan portfolio. The appropriate level of the allowance is based on an
ongoing analysis of the loan portfolio and represents an amount that management
deems adequate to provide for inherent losses, including collective impairment
as recognized under ASC Topic 450, Contingencies. Collective impairment is
calculated based on loans grouped by grade. Another component of the allowance
is losses on loans assessed as impaired under ASC 310. The balance of these
loans and their related allowance is included in management's estimation and
analysis of the allowance for loan losses. Other considerations in establishing
the allowance for loan losses include the nature and volume of the loan
portfolio, overall portfolio quality, historical loan loss, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay, as well as trends within each of these factors. The allowance
for loan losses is established after input from management as well as our risk
management department and our special assets committee. We evaluate the adequacy
of the allowance for loan losses on a quarterly basis. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. The allowance for
loan losses was $20.4 million at December 31, 2020, an increase compared to
$10.7 million at December 31, 2019 and $9.5 million at December 31, 2018. The
primary reason for the increase in the allowance for loan losses at December 31,
2020 compared to prior years is the change in economic conditions in response to
the COVID-19 pandemic.
A loan is considered impaired when, based on current information and events, it
is probable that we will be unable to collect the scheduled payments of
principal and interest when due according to the contractual terms of the loan
agreement. Determination of impairment is treated the same across all classes of
loans. Impairment is measured on a loan-by-loan basis for, among others, all
loans of $500,000 or greater, nonaccrual loans and a sample of loans between
$250,000 and $500,000. When we identify a loan as impaired, we measure the
extent of the impairment based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, except when the sole
(remaining) source of repayment for the loans is the operation or liquidation of
the collateral. In these cases when foreclosure is probable, we use the current
fair value of the collateral, less selling costs, instead of discounted cash
flows. For real estate collateral, the fair value of the collateral is based
upon a recent appraisal by a qualified and licensed appraiser. If we determine
that the value of the impaired loan is less than the recorded investment in the
loan (net of previous charge-offs, deferred loan fees or costs and unamortized
premium or discount), we recognize impairment through an allowance estimate or a
charge-off recorded against the allowance. When the ultimate collectability of
the total principal of an impaired loan is in doubt and the loan is on
nonaccrual, all payments are applied to principal, under the cost recovery
method. When the ultimate collectability of the total principal of an impaired
loan is not in doubt and the loan is on nonaccrual, contractual interest is
credited to interest income when received, under the cash basis method.
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Impaired loans at December 31, 2020, which include all TDRs and nonaccrual loans
individually evaluated for impairment for purposes of determining the allowance
for loan losses, were $19.2 million compared to $2.5 million at December 31,
2019, and $3.3 million at December 31, 2018. At December 31, 2020 and
December 31, 2019, $0.2 million and $0.1 million, respectively, of the allowance
for loan losses were specifically allocated to impaired loans, while $0.2
million of the allowance was specifically allocated to such loans at December
31, 2018.
The provision for loan losses is a charge to income in an amount that management
believes is necessary to maintain an adequate allowance for loan losses. The
provision is based on management's regular evaluation of current economic
conditions in our specific markets as well as regionally and nationally, changes
in the character and size of the loan portfolio, underlying collateral values
securing loans, and other factors which deserve recognition in estimating loan
losses. For the years ended December 31, 2020, 2019 and 2018, the provision for
loan losses was $11.2 million, $1.9 million, and $2.6 million, respectively.
Additional provision for loan losses was recorded in the year ended December 31,
2020 primarily as a result of the deterioration of market conditions which have
been adversely affected by the COVID-19 pandemic. Although we have not yet
experienced charge-offs directly related to the pandemic, the Company continues
to assess the impact the pandemic may have on its loan portfolio to determine
the need for additional reserves.
Acquired loans that are accounted for under ASC 310-30 were marked to market on
the date we acquired the loans to values which, in management's opinion,
reflected the estimated future cash flows, based on the facts and circumstances
surrounding each respective loan at the date of acquisition. If future cash
flows are not reasonably estimable, the Company accounts for the acquired loans
using the cash basis method. We continually monitor these loans as part of our
normal credit review and monitoring procedures for changes in the estimated
future cash flows. Because ASC 310-30 does not permit carry over or recognition
of an allowance for loan losses, we may be required to reserve for these loans
in the allowance for loan losses through future provision for loan losses if
future cash flows deteriorate below initial projections. We did not increase the
allowance for loan losses for loans accounted for under ASC 310-30 during 2019
or 2018. In 2020, one acquired loan accounted for under ASC 310-30 required a
specific reserve of $0.2 million, which was charged to provision for loan
losses.
The following table presents the allocation of the allowance for loan losses by
loan category as of the dates indicated (dollars in thousands).
                                                             December 31,
                                       2020          2019         2018         2017         2016
Mortgage loans on real estate:
Construction and development        $  2,375      $  1,201      $ 1,038      $   945      $   579
1-4 Family                             3,370         1,490        1,465        1,287        1,377
Multifamily                              589           387          331          332          355
Farmland                                 435           101           81           60           60
Commercial real estate                 8,496         4,424        4,182        3,599        2,499
Commercial and industrial              4,558         2,609        1,641          693          759
Consumer                                 540           488          716          975        1,422
Total                               $ 20,363      $ 10,700      $ 9,454      $ 7,891      $ 7,051

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


                                                           December 31,
                                       2020         2019        2018        2017        2016
Mortgage loans on real estate:
Construction and development           0.13  %     0.07  %     0.07  %     0.07  %     0.06  %
1-4 Family                             0.18        0.09        0.10        0.10        0.15
Multifamily                            0.03        0.02        0.02        0.03        0.04
Farmland                               0.02        0.01        0.01           -        0.01
Commercial real estate                 0.46        0.26        0.30        0.29        0.28
Commercial and industrial              0.25        0.15        0.12        0.06        0.09
Consumer                               0.02        0.03        0.05        0.08        0.16
Total                                  1.09  %     0.63  %     0.67  %     0.63  %     0.79  %


                                       55

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As discussed above, the balance in the allowance for loan losses is principally
influenced by the provision for loan losses and by net loan loss experience.
Additions to the allowance are charged to the provision for loan losses. Losses
are charged to the allowance as incurred and recoveries on losses previously
charged to the allowance are credited to the allowance at the time recovery is
collected.
The table below reflects the activity in the allowance for loan losses for the
periods indicated (dollars in thousands).
                                                             Year ended 

December 31,


                                          2020           2019           2018          2017          2016
Allowance at beginning of period       $ 10,700       $  9,454       $ 7,891       $ 7,051       $ 6,128
Provision for loan losses                11,160          1,908         2,570         1,540         2,079
Charge-offs:
Mortgage loans on real estate:
Construction and development                  -            (51)          (24)            -           (27)
1-4 Family                                 (173)           (62)         (167)            -           (57)
Commercial real estate                      (51)           (24)            -             -          (526)

Commercial and industrial                (1,195)          (252)         (481)         (270)            -
Consumer                                   (335)          (411)         (513)         (495)         (618)
Total charge-offs                        (1,754)          (800)       (1,185)         (765)       (1,228)
Recoveries
Mortgage loans on real estate:
Construction and development                 47             27            12            34            14
1-4 Family                                   74             27            29             7            13
Commercial real estate                        8              1             -             -             1
Commercial and industrial                    50             26            55             -            20
Consumer                                     78             57            82            24            24
Total recoveries                            257            138           178            65            72
Net charge-offs                          (1,497)          (662)       (1,007)         (700)       (1,156)
Balance at end of period               $ 20,363       $ 10,700       $ 9,454       $ 7,891       $ 7,051
Net charge-offs to:
Loans - average                            0.08  %        0.04  %       0.08  %       0.07  %       0.14  %
Allowance for loan losses                  7.35  %        6.19  %      10.65  %       8.87  %      16.39  %
Allowance for loan losses to:
Total loans                                1.09  %        0.63  %       0.67  %       0.63  %       0.79  %

Nonperforming loans                         147  %         171  %        159  %        214  %        356  %


The allowance for loan losses to total loans increased to 1.09% at December 31,
2020 compared to 0.63% at December 31, 2019 while the allowance for loan losses
to nonperforming loans ratio decreased to 147% at December 31, 2020 from 171% at
December 31, 2019. The increase in the allowance for loan losses to total loans
at December 31, 2020 is primarily due to the large increase in the allowance for
loan losses in response to the deterioration of economic conditions related to
the COVID-19 pandemic compared to December 31, 2019. The decrease in the
allowance for loan losses to nonperforming loans is due to the increase in
nonperforming loans. Nonperforming loans were $13.8 million, or 0.74% of total
loans, at December 31, 2020, an increase of $7.5 million compared to $6.3
million, or 0.37% of total loans, at December 31, 2019.
Charge-offs reflect the realization of losses in the portfolio that were
recognized previously through the provision for loan losses. Net charge-offs for
the year ended December 31, 2020 were $1.5 million, or 0.08% of the average loan
balance. Net charge-offs for the years ended December 31, 2019 and 2018 were
$0.7 million and $1.0 million respectively, equal to 0.04% and 0.08%,
respectively, of the average loan balance for the respective periods. For the
year ended December 31, 2020, the largest category of charge-offs was commercial
and industrial loans. For the years ended December 31, 2019 and 2018, the
largest category of charge-offs was consumer loans. Net charge-offs of
commercial and industrial loans as a percentage of the average commercial and
industrial loan portfolio for the year ended December 31, 2020 was 0.3%. Net
charge-offs of consumer loans as a percentage of average consumer loans for the
years ended December 31, 2019 and 2018 were 1.1% and 0.7%, respectively.
                                       56
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Management believes the allowance for loan losses at December 31, 2020 is
sufficient to provide adequate protection against losses in our portfolio.
Although the allowance for loan losses is considered adequate by management,
there can be no assurance that this allowance will prove to be adequate over
time to cover ultimate losses in connection with our loans. This allowance may
prove to be inadequate due to unanticipated adverse changes in the economy or
discrete events, such as the COVID-19 pandemic, adversely affecting specific
customers or industries. Our results of operations and financial condition could
be materially adversely affected to the extent that the allowance is
insufficient to cover such changes or events.
Nonperforming assets and restructured loans. Nonperforming assets consist of
nonperforming loans and other real estate owned. Nonperforming loans are those
on which the accrual of interest has stopped or loans which are contractually 90
days past due on which interest continues to accrue. Loans are ordinarily placed
on nonaccrual when a loan is specifically determined to be impaired or when
principal and interest is delinquent for 90 days or more. However, management
may elect to continue the accrual when the estimated net available value of
collateral is sufficient to cover the principal balance and accrued interest. It
is our policy to discontinue the accrual of interest income on any loan for
which we have reasonable doubt as to the payment of interest or principal.
Nonaccrual loans are returned to an accrual status when the financial position
of the borrower indicates there is no longer any reasonable doubt as to the
payment of principal or interest.
Another category of assets which contributes to our credit risk is troubled debt
restructurings, or restructured loans ("TDR"). A TDR is a loan for which a
concession that is not insignificant has been granted to the borrower due to a
deterioration of the borrower's financial condition and subsequently performs in
accordance with the new terms. Such concessions may include reduction in
interest rates, deferral of interest or principal payments, principal
forgiveness and other actions intended to minimize the economic loss and to
avoid foreclosure or repossession of the collateral. We strive to identify
borrowers in financial difficulty early and work with them to modify their loans
to more affordable terms before such loans reach nonaccrual status. In
evaluating whether to restructure a loan, management analyzes the long-term
financial condition of the borrower, including guarantor and collateral support,
to determine whether the proposed concessions will increase the likelihood of
repayment of principal and interest. TDRs that are not performing in accordance
with their restructured terms that are either contractually 90 days past due or
placed on nonaccrual status are reported as nonperforming loans.
There were 34 loans classified as TDRs at December 31, 2020 that totaled
approximately $14.7 million, compared to 18 credits totaling $1.5 million at
December 31, 2019. Twelve of the restructured loans were considered TDRs due to
modification of terms through adjustments to maturity, eleven restructured loans
were considered TDRs due to principal payment forbearance paying interest only
for a specified period of time, seven of the restructured loans were considered
TDRs due to a reduction in the interest rate to a rate lower than the current
market rate, three of the restructured loans were considered TDRs due to
principal and interest payment forbearance, and one restructured loan was
considered a TDR due to a reduction in principal payments on a modified payment
schedule. At December 31, 2020, none of the TDRs were in default of their
modified terms and included in nonaccrual loans. At December 31, 2019, two of
the TDRs were in default of their modified terms and were included in nonaccrual
loans. At December 31, 2020 and 2019, there were no available balances on loans
classified as TDRs that the Company was committed to lend. The Company
individually evaluates each TDR for allowance purposes, primarily based on
collateral value, and excludes these loans from the loan population that is
collectively evaluated for impairment.
The following table shows the principal amounts of nonperforming and
restructured loans as of the dates indicated. All loans for which information
exists about possible credit problems that would cause us to have serious doubts
about the borrower's ability to comply with the current repayment terms of the
loan have been reflected in the table below (dollars in thousands).
                                                                              December 31,
                                              2020              2019              2018              2017              2016
Nonaccrual loans                           $ 13,506          $  5,490          $  5,891          $  3,547          $  1,978
Accruing loans past due 90 days or
more                                            321               795                58               134                 1
Total nonperforming loans                    13,827             6,285             5,949             3,681             1,979
TDRs                                          8,017             1,020             1,248             1,621             2,399
Total nonperforming and restructured
loans                                      $ 21,844          $  7,305          $  7,197          $  5,302          $  4,378
Interest income recognized on
nonperforming and restructured loans       $    757          $    144          $    315          $    185          $    169
Interest income foregone on
nonperforming and restructured loans       $    455          $    300

$ 164 $ 104 $ 159




Nonperforming loans are comprised of accruing loans past due 90 days or more and
nonaccrual loans. Nonperforming loans outstanding represented 0.74%, 0.37%, and
0.42% of total loans at December 31, 2020, 2019 and 2018, respectively.
                                       57
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Other Real Estate Owned. Other real estate owned consists of properties acquired
through foreclosure or acceptance of a deed in lieu of foreclosure, as well as
any properties owned by the Company that are not intended to be used to carry
out its operations. These properties are carried at the lower of cost or fair
market value based on appraised value less estimated selling costs. Losses
arising at the time of foreclosure of properties are charged against the
allowance for loan losses. Other real estate owned with a cost basis of $0.1
million and $5.1 million was sold during the years ended December 31, 2020 and
2019, respectively, resulting in a net gain of $12,000 and $2,000 for the
respective periods, compared to a cost basis of $0.1 million and a net loss of
$24,000 for the year ended December 31, 2018.
The following table provides details of our other real estate owned as of the
dates indicated (dollars in thousands).
                                     December 31, 2020       December 31, 2019

1-4 Family                                          28                     133

Commercial real estate                             635                       -
Total other real estate owned       $              663      $              133

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


                                                     Year ended             

Year ended


                                                 December 31, 2020       December 31, 2019
Balance, beginning of period                    $              133      $   

3,611


Additions                                                       41                     181
Transfers from bank premises and equipment                     665                       -
Acquired other real estate owned                                 -          

1,507


Sales of other real estate owned                              (146)                 (5,148)
Write-downs                                                    (30)                    (18)
Balance, end of period                          $              663      $              133


Interest Rate Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
Since the majority of our assets and liabilities are monetary in nature, our
market risk arises primarily from interest rate risk inherent in our lending and
deposit activities. A sudden and substantial change in interest rates may
adversely impact our earnings and profitability because the interest rates borne
by assets and liabilities do not change at the same speed, to the same extent,
or on the same basis. Accordingly, our ability to proactively structure the
volume and mix of our assets and liabilities to address anticipated changes in
interest rates, as well as to react quickly to such fluctuations, can
significantly impact our financial results. To that end, management actively
monitors and manages our interest rate risk exposure.
The Asset/Liability Committee ("ALCO") has been authorized by the board of
directors to implement our asset/liability management policy, which establishes
guidelines with respect to our exposure to interest rate fluctuations,
liquidity, loan limits as a percentage of funding sources, exposure to
correspondent banks and brokers and reliance on non-core deposits. The goal of
the policy is to enable us to maximize our interest income and maintain our net
interest margin without exposing the Bank to excessive interest rate risk,
credit risk and liquidity risk. Within that framework, the ALCO monitors our
interest rate sensitivity and makes decisions relating to our asset/liability
composition.
Net interest income simulation is the Bank's primary tool for benchmarking near
term earnings exposure. Given the ALCO's objective to understand the potential
risk/volatility embedded within the current mix of assets and liabilities,
standard rate scenario simulations assume total assets remain static (i.e. no
growth).
The Bank may also use a standard gap report in its interest rate risk management
process. The primary use for the gap report is to provide supporting detailed
information to the ALCO's discussion. The Bank has particular concerns with the
utility of the gap report as a risk management tool because of difficulties in
relating gap directly to changes in net interest income. Hence, the income
simulation is the key indicator for earnings-at-risk since it expressly measures
what the gap report attempts to estimate.
Short term interest rate risk management tactics are decided by the ALCO where
risk exposures exist out into the 1 to 2-year horizon. Tactics are formulated
and presented to the ALCO for discussion, modification, and/or approval. Such
tactics may include asset and liability acquisitions of appropriate maturities
in the cash market, loan and deposit product/pricing strategy modification, and
derivatives hedging activities to the extent such activity is authorized by the
board of directors.
                                       58
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Since the impact of rate changes due to mismatched balance sheet positions in
the short-term can quickly and materially affect the current year's income
statement, they require constant monitoring and management.
Within the gap position that management directs, we attempt to structure our
assets and liabilities to minimize the risk of either a rising or falling
interest rate environment. We manage our gap position for time horizons of one
month, two months, three months, four to six months, seven to twelve months,
13-24 months, 25-36 months, 37-60 months and more than 60 months. The goal of
our asset/liability management is for the Bank to maintain a net interest income
at risk in an up or down 100 basis point environment at less than (5)%. At
December 31, 2020, the Bank was within the policy guidelines for asset/liability
management.
The following table depicts the estimated impact on net interest income of
immediate changes in interest rates at the specified levels for the periods
presented.
                      As of December 31, 2020
                                                  Estimated
  Changes in Interest Rates                  Increase/Decrease in
      (in basis points)                    Net Interest Income (1)
            +300                                     5.8%
            +200                                     4.3%
            +100                                     2.8%
            -100                                    (1.5)%


(1)The percentage change in this column represents the projected net interest
income for 12 months on a flat balance sheet in a stable interest rate
environment versus the projected net interest income in the various rate
scenarios.
The computation of the prospective effects of hypothetical interest rate changes
requires numerous assumptions regarding characteristics of new business and the
behavior of existing positions. These business assumptions are based upon our
experience, business plans and published industry experience. Key assumptions
include asset prepayment speeds, competitive factors, the relative price
sensitivity of certain assets and liabilities, and the expected life of
non-maturity deposits. However, there are a number of factors that influence the
effect of interest rate fluctuations on us which are difficult to measure and
predict. For example, a rapid drop in interest rates might cause our loans to
repay at a more rapid pace and certain mortgage-related investments to prepay
more quickly than projected. This could mitigate some of the benefits of falling
rates as are expected when we are in a negatively-gapped position. Conversely, a
rapid rise in rates could give us an opportunity to increase our margins and
stifle the rate of repayment on our mortgage-related loans which would increase
our returns. As a result, because these assumptions are inherently uncertain,
actual results will differ from simulated results.
Liquidity and Capital Resources
Liquidity. Liquidity is a measure of the ability to fund loan commitments and
meet deposit maturities and withdrawals in a timely and cost-effective way. Cash
flow requirements can be met by generating net income, attracting new deposits,
converting assets to cash or borrowing funds. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
outflows, loan prepayments, and borrowings are greatly influenced by general
interest rates, economic conditions, and the competitive environment in which we
operate. To minimize funding risks, we closely monitor our liquidity position
through periodic reviews of maturity profiles, yield and rate behaviors, and
loan and deposit forecasts. Excess short-term liquidity is usually invested in
overnight federal funds sold.
Our core deposits, which are deposits excluding time deposits greater than
$250,000 and deposits of municipalities and other political entities, are our
most stable source of liquidity to meet our cash flow needs due to the nature of
the long-term relationships generally established with our customers.
Maintaining the ability to acquire these funds as needed in a variety of
markets, and within ALCO compliance targets, is essential to ensuring our
liquidity. At December 31, 2020 and 2019, 69% and 68% of our total assets,
respectively, were funded by core deposits.
Our investment portfolio is another alternative for meeting our cash flow
requirements. Investment securities generate cash flow through principal
payments and maturities, and they generally have readily available markets that
allow for their conversion to cash. Some securities are pledged to secure
certain deposit types or short-term borrowings (such as FHLB advances), which
impacts their liquidity. At December 31, 2020, securities with a carrying value
of $84.6 million were pledged to secure deposits or borrowings, compared to
$89.5 million in pledged securities at December 31, 2019.
                                       59
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Other sources available for meeting liquidity needs include advances from the
FHLB, repurchase agreements and other borrowings. FHLB advances are primarily
used to match-fund fixed rate loans in order to minimize interest rate risk and
also may be used to meet day to day liquidity needs, particularly if the
prevailing interest rate on an FHLB advance compares favorably to the rates that
we would be required to pay to attract deposits. At December 31, 2020, the
balance of our outstanding advances with the FHLB was $120.5 million, a decrease
from $131.6 million at December 31, 2019. The total amount of the remaining
credit available to us from the FHLB at December 31, 2020 was $654.9 million. At
December 31, 2020, our FHLB borrowings were collateralized by approximately
$775.7 million of the Company's loan portfolio and $9.0 million of the Company's
investment securities.
Repurchase agreements are contracts for the sale of securities which we own with
a corresponding agreement to repurchase those securities at an agreed upon price
and date. Our policies limit the use of repurchase agreements to those
collateralized by U.S. Treasury and agency securities. We had $5.7 million of
repurchase agreements outstanding at December 31, 2020, compared to $3.0 million
at December 31, 2019.
We maintain unsecured lines of credit with FNBB and TIB totaling $60.0 million.
These lines of credit are Fed Funds lines of credit and are used for overnight
borrowing only. There were no outstanding balances on our unsecured lines of
credit at December 31, 2020 or 2019.
In addition, at December 31, 2020 and 2019 we had $43.6 million in aggregate
principal amount of subordinated debt outstanding, respectively. For additional
information, see Note 11 in the Notes to Consolidated Financial Statements
contained in Item 8. Financial Statements and Supplementary Data, and see Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations - Discussion and Analysis of Financial Condition - Borrowings.
Our liquidity strategy is focused on using the least costly funds available to
us in the context of our balance sheet composition and interest rate risk
position. Accordingly, we target growth of noninterest-bearing deposits.
Although we cannot directly control the types of deposit instruments our
customers choose, we can influence those choices with the interest rates and
deposit specials we offer. As of December 31, 2020, we held $80.0 million in
brokered deposits, as defined for federal regulatory purposes, which the Bank
uses periodically to satisfy the required borrowings under its interest rate
swap agreements, due to more favorable pricing. We also hold QwickRate®
deposits, included in our time deposit balances, to address liquidity needs when
rates on such deposits compare favorably with deposit rates in our markets. At
December 31, 2020, we held $123.1 million of QwickRate® deposits, an increase
compared to $101.8 million at December 31, 2019.
The following table presents, by type, our funding sources, which consist of
total average deposits and borrowed funds, as a percentage of total funds and
the total cost of each funding source for the years ended December 31, 2020 and
2019.
                                                              Percentage of 

Total Average Deposits and Borrowed


                                                                                    Funds                                            Cost of Funds
                                                                           Year ended December 31,                              Year ended December 31,
                                                                          2020                        2019                    2020                     2019
Noninterest-bearing demand                                                           21  %                 16  %                      -  %                   -  %
Interest-bearing demand                                                              31                    29                      0.58                   1.04
Brokered deposits                                                                     1                     -                      0.87                      -
Savings deposits                                                                      6                     6                      0.31                   0.45
Time deposits                                                                        32                    37                      1.76                   2.10
Short-term borrowings                                                                 3                     6                      1.09                   2.07
Borrowed funds                                                                        6                     6                      3.26                   3.03
Total deposits and borrowed funds                                                   100  %                100  %                   1.00  %              

1.40 %




Capital Management. Our primary sources of capital include retained earnings,
capital obtained through acquisitions and proceeds from the sale of our capital
stock and subordinated debt. We may issue capital stock and debt securities from
time to time to fund acquisitions and support our organic growth. During 2019,
we issued $25.0 million of subordinated notes and during 2017 we issued $18.6
million of subordinated notes, both structured to qualify as Tier 2 capital for
regulatory capital purposes. For additional information see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Discussion and Analysis of Financial Condition - Borrowings.
                                       60
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In 2019, we issued 1,290,323 shares of common stock for net proceeds of $28.5
million. We also issued 763,849 shares of common stock in connection with our
acquisition of Mainland in 2019 and 799,559 shares of common stock in connection
with our acquisition of BOJ in 2017. During 2020, we paid $2.7 million in
dividends, compared to $2.2 million in 2019 and $1.5 million in 2018. Our board
of directors has authorized a share repurchase program and during 2020 we paid
$11.1 million to repurchase our shares, compared to $8.3 million in 2019 and
$3.4 million in 2018. On both March 10, 2020 and August 27, 2020, the board of
directors approved an additional 300,000 shares of the Company's common stock
for repurchase. At December 31, 2020, we had 264,830 shares of our common stock
remaining authorized for repurchase under the program.
For additional information, see Notes 2, 11 and 14 to our consolidated financial
statements. We are subject to restrictions on dividends under applicable banking
laws and regulations. Please refer to the discussion under the heading
"Supervision and Regulation - Dividends" in Item 1. Business, for more
information. We are also subject to additional legal and contractual
restrictions on dividends. Please refer to the discussion under the heading
"Dividend Policy" in Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities and under the
heading "Common Stock - Dividend Restrictions" in Note 14 in the Notes to
Consolidated Financial Statements contained in Item 8. Financial Statements and
Supplementary Data.
We are subject to various regulatory capital requirements administered by the
Federal Reserve and the OCC. These requirements are described in greater detail
under the heading "Supervision and Regulation - Regulatory Capital Requirements"
of Item 1. Business. Those guidelines specify capital tiers, which include the
following classifications:
                                                                                Common Equity Tier 1                                                                    Ratio of Tangible
Capital Tiers(1)                                   Tier 1 Leverage Ratio           Capital Ratio            Tier 1 Capital Ratio           Total Capital Ratio           to Total Asset
Well capitalized                                        5% or above                6.5% or above                 8% or above                  10% or above
Adequately capitalized                                  4% or above                4.5% or above                 6% or above                   8% or above
Undercapitalized                                       Less than 4%                Less than 4.5%               Less than 6%                  Less than 8%
Significantly undercapitalized                         Less than 3%                 Less than 3%                Less than 4%                  Less than 

6%


Critically undercapitalized                                                                                                                                                2% or less


(1) In order to be well capitalized or adequately capitalized, a bank must
satisfy each of the required ratios in the table. In order to be
undercapitalized or significantly undercapitalized, a bank would need to fall
below just one of the relevant ratio thresholds in the table. In order to be
well capitalized, the Bank cannot be subject to any written agreement or order
requiring it to maintain a specific level of capital for any capital measure.
The Company and the Bank each were in compliance with all regulatory capital
requirements as of December 31, 2020, 2019 and 2018. The Bank also was
considered "well-capitalized" under the OCC's prompt corrective action
regulations as of these dates.
                                       61
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The following table presents the actual capital amounts and regulatory capital
ratios for the Company and the Bank as of the dates presented (dollars in
thousands).
                                                                Actual                       Minimum Capital Requirement to be Well Capitalized
                                                    Amount                Ratio                        Amount                         Ratio
December 31, 2020
Investar Holding Corporation:
Tier 1 capital to average assets
(leverage)                                       $ 215,750                    9.49  %       $            -                                   -  %
Tier 1 common equity to risk-weighted
assets                                             209,250                   11.02                       -                                   -
Tier 1 capital to risk-weighted assets             215,750                   11.36                       -                                   -
Total capital to risk-weighted assets              279,253                   14.71                       -                                   -
Investar Bank:
Tier 1 capital to average assets
(leverage)                                         237,684                   10.47                 113,546                                5.00
Tier 1 common equity to risk-weighted
assets                                             237,684                   12.53                 123,268                                6.50
Tier 1 capital to risk-weighted assets             237,684                   12.53                 151,714                                8.00
Total capital to risk-weighted assets              258,291                   13.62                 189,642                               10.00

December 31, 2019
Investar Holding Corporation:
Tier 1 capital to average assets
(leverage)                                       $ 215,550                   10.45  %       $            -                                   -  %
Tier 1 common equity to risk-weighted
assets                                             209,050                   11.67                       -                                   -
Tier 1 capital to risk-weighted assets             215,550                   12.03                       -                                   -
Total capital to risk-weighted assets              269,171                   15.02                       -                                   -
Investar Bank:
Tier 1 capital to average assets
(leverage)                                         222,316                   10.77                 103,223                                5.00
Tier 1 common equity to risk-weighted
assets                                             222,316                   12.43                 116,293                                6.50
Tier 1 capital to risk-weighted assets             222,316                   12.43                 143,130                                8.00
Total capital to risk-weighted assets              233,111                   13.03                 178,912                               10.00


Off-Balance Sheet Transactions
Swap Contracts. The Bank enters into interest rate swap contracts, some of which
are forward starting, to manage exposure against the variability in the expected
future cash flows (future interest payments) attributable to changes in the
1-month LIBOR associated with the forecasted issuances of 1-month fixed rate
debt arising from a rollover strategy. An interest rate swap is an agreement
whereby one party agrees to pay a fixed rate of interest on a notional principal
amount in exchange for receiving a floating rate of interest on the same
notional amount for a predetermined period of time, from a second party. The
maximum length of time over which the Bank is currently hedging its exposure to
the variability in future cash flows for forecasted transactions is
approximately 9.6 years. At December 31, 2020, the Bank had interest rate swap
contracts with a notional amount of $80.0 million and forward starting interest
rate swap agreements with a total notional amount of $140.0 million, compared to
one interest rate swap contract with a total notional amount of $50.0 million at
December 31, 2019.
For the year ended December 31, 2020, a loss of $2.3 million, net of a $0.6
million tax benefit, was recognized in "Other comprehensive (loss) income"
("OCI") in the accompanying consolidated statements of other comprehensive
income for the change in fair value of the interest rate swap contracts. For the
years ended December 31, 2019 and December 31, 2018, a gain of $51,000, net of a
$14,000 tax expense, and a gain of $84,000, net of a $22,000 tax expense,
respectively, was recognized in OCI in the accompanying consolidated statements
of other comprehensive income for the change in fair value of the interest rate
swap contracts.
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The Company also enters into interest rate swap contracts that allow commercial
loan customers to effectively convert a variable-rate commercial loan agreement
to a fixed-rate commercial loan agreement. Under these agreements, the Company
enters into a variable-rate loan agreement with a customer in addition to an
interest rate swap agreement, which serves to effectively swap the customer's
variable-rate loan into a fixed-rate loan. The Company then enters into a
corresponding swap agreement with a third party in order to economically hedge
its exposure through the customer agreement. The interest rate swaps with both
the customers and third parties are not designated as hedges under FASB ASC
Topic 815, Derivatives and Hedging, and are marked to market through earnings.
As the interest rate swaps are structured to offset each other, changes to the
underlying benchmark interest rates considered in the valuation of these
instruments do not result in an impact to earnings; however, there may be fair
value adjustments related to credit quality variations between counterparties,
which may impact earnings as required by FASB ASC Topic 820, Fair Value
Measurements. The Company did not recognize any gains or losses in other income
resulting from fair value adjustments during the years ended December 31, 2020
and 2019.
Unfunded Commitments. The Bank enters into loan commitments and standby letters
of credit in the normal course of its business. Loan commitments are made to
meet the financing needs of our customers, while standby letters of credit
commit the Bank to make payments on behalf of customers when certain specified
future events occur. The credit risks associated with loan commitments and
standby letters of credit are essentially the same as those involved in making
loans to our customers. Accordingly, our normal credit policies apply to these
arrangements. Collateral (e.g., securities, receivables, inventory, equipment,
etc.) is obtained based on management's credit assessment of the customer. The
credit risk associated with these commitments is evaluated in a manner similar
to the allowance for loan losses. The reserve for unfunded lending commitments
is included in other liabilities in the balance sheet. At December 31, 2020 and
2019, the reserve for unfunded loan commitments was $0.2 million and
$0.1 million, respectively.
Loan commitments and standby letters of credit do not necessarily represent
future cash requirements, in that while the customer typically has the ability
to draw upon these commitments at any time, these commitments often expire
without being drawn upon in full or at all. Virtually all of our standby letters
of credit expire within one year. Our unfunded loan commitments and standby
letters of credit outstanding are summarized below as of the dates indicated
(dollars in thousands).
                                     December 31, 2020       December 31, 

2019


Commitments to extend credit:
Loan commitments                    $          266,039      $          242,180
Standby letters of credit                       14,420                  11,475


The Company closely monitors the amount of remaining future commitments to
borrowers in light of prevailing economic conditions and adjusts these
commitments as necessary. The Company will continue this process as new
commitments are entered into or existing commitments are renewed.
Additionally, at December 31, 2020, the Company had unfunded commitments of $1.0
million for its investment in Small Business Investment Company qualified funds.
For each of the years ended December 31, 2020 and 2019, we engaged in no
off-balance sheet transactions reasonably likely to have a material effect on
our financial condition, results of operations, or cash flows currently or in
the future.
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Contractual Obligations
The following table presents, as of December 31, 2020, significant fixed and
determinable contractual obligations to third parties by payment date (dollars
in thousands).
                                                                                   Payments Due In:
                                             Less Than              One to               Three to           Over Five
                                              One Year            Three Years           Five Years            Years               Total
Deposits without a stated
maturity(1)                                $ 1,352,433          $          -          $         -          $       -          $ 1,352,433
Time deposits(1)                               382,573               136,860               15,958                  -              535,391
Securities sold under agreements to
repurchase(1)                                    5,653                     -                    -                  -                5,653
Federal Home Loan Bank advances(2)              42,000                     -               23,500             55,000              120,500
Subordinated debt(2)                                 -                     -                    -             43,600               43,600
Junior subordinated debentures(2)                    -                     -                    -              6,702                6,702
Operating lease commitment                         593                 1,193                  991              1,691                4,468
Total contractual obligations              $ 1,783,252          $    138,053          $    40,449          $ 106,993          $ 2,068,747


(1)Excludes interest.
(2)Excludes unamortized premiums and discounts.

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