Investar Holding Corp

Previous wording

During 2023, we pivoted our near-term strategy from primarily a growth strategy to primarily a focus on consistent, quality earnings through the optimization of our balance sheet. Our long-term strategy includes organic growth through high quality loans and growth through acquisitions, including whole-bank acquisitions, strategic branch acquisitions and asset acquisitions. We have completed seven whole-bank acquisitions since 2011 and regularly review acquisition opportunities. Our most recent whole bank acquisition was completed in April 2021. During our last three fiscal years, we have not opened any de novo branch locations; however, in the third quarter of 2023, we converted an existing loan and deposit production office in Tuscaloosa, Alabama to a cashless branch designed to provide a digital banking experience. During the third and fourth quarters of 2023, we purchased commercial and industrial revolving lines of credit with an unpaid principal balance of $162.7 million in two tranches.

Current wording

During 2023, we pivoted our near-term strategy from primarily a growth strategy to primarily a focus on consistent, quality earnings through the optimization of our balance sheet. Our strategy includes a focus on originating and renewing high quality, primarily variable-rate, loans and allowing higher risk credit relationships to run off. Our long-term strategy includes organic growth through high quality loans and growth through acquisitions, including whole-bank acquisitions, strategic branch acquisitions and asset acquisitions. We have completed seven whole-bank acquisitions since 2011 and regularly review acquisition opportunities. Our most recent whole bank acquisition was completed in April 2021. During our last three fiscal years, we have not opened any de novo branch locations; however, in the third quarter of 2023, we converted an existing loan and deposit production office in Tuscaloosa, Alabama to a cashless branch designed to provide a digital banking experience. During the second half of 2023, we purchased commercial and industrial revolving lines of credit with an unpaid principal balance of $162.7 million.

Previous wording

We have continued to evaluate opportunities to improve our branch network efficiency, leverage our digital initiatives, and further reduce costs. We closed five branches during our last three fiscal years, and one in Alabama during the first quarter of 2024. Three of the branches had been acquired, and the closures involved anticipated synergies that resulted in significant cost savings. In 2022, we sold five former branch locations and three tracts of land that were being held for future branch locations. On January 27, 2023, we completed the sale of certain assets, deposits and other liabilities associated with our Alice, Texas and Victoria, Texas branch locations to First Community Bank in order to focus more on our core markets. Of the Bank’s entire branch network, these two locations were geographically the most distant from our Louisiana headquarters. During the third quarter of 2023, we ceased operation of 14 ATMs.

Current wording

We have continued to evaluate opportunities to improve our branch network efficiency, leverage our digital initiatives, and further reduce costs. We closed five branches during our last three fiscal years, and one in Alabama during the first quarter of 2024. Three of the branches had been acquired, and the closures involved anticipated synergies that resulted in significant cost savings. In 2022, we sold five former branch locations and three tracts of land that were being held for future branch locations. On January 27, 2023, we completed the sale of certain assets, deposits and other liabilities associated with our Alice, Texas and Victoria, Texas branch locations in order to focus more on our core markets. Of the Bank’s entire branch network, these two locations were geographically the most distant from our Louisiana headquarters. During the third quarter of 2023, we ceased operation of 14 ATMs. During 2024, we began to reinvest within our geographic areas, particularly in our Texas markets, including through a lease of a loan production office in the southeast Texas market and strategic hires.

Previous wording

In an effort to focus more on our core business and optimize profitability, in the third quarter of 2023, we made the strategic decision to exit the consumer mortgage origination business. Consumer mortgage loan products are typically long-term and fixed-rate and generally require a higher relative allowance for credit losses than other loan products. Consumer mortgage volumes have decreased to historical lows due to the combination of rising housing prices and interest rates and constriction of housing supply. As a result of this decision, we further optimized our workforce and will continue to dedicate resources to our more profitable business lines. Related severance expense was $0.1 million. Substantially all of the consumer mortgage portfolio is included in the 1-4 family loan category.

Current wording

In an effort to focus more on our core business and optimize profitability, in the third quarter of 2023, we made the strategic decision to exit the consumer mortgage origination business. Consumer mortgage loan products are typically long-term and fixed-rate and generally require a higher relative allowance for credit losses than other loan products. Consumer mortgage volumes have decreased to historical lows due to the combination of higher housing prices and interest rates and constriction of housing supply. As a result of this decision, we further optimized our workforce and will continue to dedicate resources to our more profitable business lines. Substantially all of the consumer mortgage portfolio is included in the 1-4 family loan category.

Previous wording

Changing Inflation andInterest*** Rates***. During the entirety of 2021, the federal funds target rate was 0% to 0.25%, and it remained at that rate until March 2022. Inflation increased rapidly during 2021 through June 2022. Since June 2022, the rate of inflation generally has declined; however, it has remained at high levels compared to recent historical periods. In response, the Federal Reserve raised the federal funds target rate multiple times from March 2022 through July 2023. Through these incremental increases to the target rate, the Federal Reserve has raised, on a cumulative basis, the target rate from 0% to 0.25% by 525 basis points to 5.25% to 5.50%.

Current wording

Changing Inflation andInterest*** Rates***. During the entirety of 2021, the federal funds target rate was 0% to 0.25%, and it remained at that rate until March 2022. Inflation increased rapidly during 2021 through June 2022. Since June 2022, the rate of inflation generally has declined; however, it has remained above the Federal Reserve’s target inflation rate of 2% through August 1, 2024. In response, the Federal Reserve raised the federal funds target rate multiple times from March 2022 through July 2023. Through these incremental increases to the target rate, the Federal Reserve has raised, on a cumulative basis, the target rate from 0% to 0.25% by 525 basis points to 5.25% to 5.50%. During the first six months of 2023, the Federal Reserve raised the federal funds target rate three times, from 4.25% to 4.50%, to 5.00% to 5.25%. During the first six months of 2024, the federal funds target rate was 5.25% to 5.50% with no changes.

Previous wording

In response to the disruptions and related publicity, we formed an internal task force that included members of our ALCO. The task force met frequently to review our liquidity position and liquidity sources, and oversaw the Bank’s process to qualify for the BTFP. In addition, we took steps to inform our customers about our financial position, liquidity and insured deposit products. During the second quarter of 2023, we utilized the BTFP and reduced FHLB advances. The Bank utilized this source of funding due to its lower rate, the ability to prepay the obligations without penalty, and as a means to lock in funding. During the fourth quarter of 2023 and again in the first quarter of 2024, the Bank refinanced its BTFP borrowings with new borrowings under the program due to more favorable rates. In January 2024, the Federal Reserve announced that it will cease making new loans under the BTFP on March 11, 2024. As of March 31, 2024, estimated uninsured deposits represented approximately 31% of our total deposits. For additional information, see “Discussion and Analysis of Financial Condition – Deposits, Borrowings, Liquidity and Capital Resources” and our Annual Report, Part II. Item 1A. Risk Factors.

Current wording

In response to the disruptions and related publicity, we formed an internal task force that included members of our ALCO. The task force met frequently to review our liquidity position and liquidity sources, and oversaw the Bank’s process to qualify for the BTFP. In addition, we took steps to inform our customers about our financial position, liquidity and insured deposit products. During the second quarter of 2023, we utilized the BTFP and reduced FHLB advances. The Bank utilized this source of funding due to its lower rate, the ability to prepay the obligations without penalty, and as a means to lock in funding. During the fourth quarter of 2023 and again in the first quarter of 2024, the Bank refinanced its BTFP borrowings with new borrowings under the program due to more favorable rates. The Federal Reserve ceased making new loans under the BTFP on March 11, 2024. As of June 30, 2024, estimated uninsured deposits represented approximately 33% of our total deposits. For additional information, see “Discussion and Analysis of Financial Condition – Deposits, Borrowings, Liquidity and Capital Resources” and our Annual Report, Part II. Item 1A. Risk Factors.

Previous wording

***Loan Purchase Agreement.***In August 2023, we entered into a loan purchase agreement to acquire commercial and industrial revolving lines of credit, and related accrued interest, with an unpaid principal balance of $162.7 million and total commitments of $237.8 million in two tranches. The first and second tranches consist of unpaid principal balances of $35.8 million and $127.0 million, respectively, and total commitments of $61.1 million and $176.7 million, respectively. The purchase of the first tranche was completed on September 15, 2023, and the purchase of the second tranche was completed on October 3, 2023. The revolving lines of credit are variable-rate and shorter-term in nature with varying renewal terms. The loans are to consumer finance lending companies that possess a history of high credit quality and that we believe provide us with opportunities to deepen the relationships through our services such as treasury management. We also hired two individuals with significant experience in lending in this area.

Current wording

***Loan Purchase Agreement.***In August 2023, we entered into a loan purchase agreement to acquire commercial and industrial revolving lines of credit, and related accrued interest, with an unpaid principal balance of $162.7 million and total commitments of $237.8 million in two tranches. The first and second tranches consisted of unpaid principal balances of $35.8 million and $127.0 million, respectively, and total commitments of $61.1 million and $176.7 million, respectively. The purchase of the first tranche was completed on September 15, 2023, and the purchase of the second tranche was completed on October 3, 2023. The revolving lines of credit are variable-rate and shorter-term in nature with varying renewal terms. The loans are to consumer finance lending companies that possess a history of high credit quality and that we believe provide us with opportunities to deepen the relationships through our services such as treasury management. We also hired two individuals with significant experience in lending in this area.

Previous wording

Exit from Consumer Mortgage Origination Business***.*** In the third quarter of 2023, we made the strategic decision to exit the consumer mortgage origination business. For additional discussion, see “Overview.”

Current wording

Exit from Consumer Mortgage Origination Business***.*** In the third quarter of 2023, we made the strategic decision to exit the consumer mortgage origination business. For additional discussion, see “Company Overview.”

Previous wording

***COVID-19 Pandemic.***The COVID-19 pandemic and related governmental control measures severely disrupted financial markets and overall economic conditions in 2020 and 2021. While the impact of the pandemic and the associated uncertainties remained in 2022 and 2023, there has been significant progress made with COVID-19 vaccination levels, which has resulted in the easing of restrictive measures in the U.S. At the same time, many industries continue to experience supply chain disruptions and labor shortages. Inflation also increased significantly during 2021 and 2022, and in response the Federal Reserve has raised the federal funds target rate multiple times in 2022 and 2023, as discussed above. Oil and gas prices have also been volatile due in part to the pandemic and the wars in Ukraine and Israel and surrounding areas. On April 10, 2023, the COVID-19 national emergency was ended by Congress, and the national public health emergency ended on May 11, 2023.

Current wording

***COVID-19 Pandemic.***The COVID-19 pandemic and related governmental control measures severely disrupted financial markets and overall economic conditions in 2020 and 2021. While the impact of the pandemic and the associated uncertainties remained in 2022 and 2023, there was significant progress made with COVID-19 vaccination levels, which resulted in the easing of restrictive measures in the U.S. At the same time, many industries experienced supply chain disruptions and labor shortages. Inflation increased significantly during 2021 and 2022, and in response the Federal Reserve has raised the federal funds target rate multiple times in 2022 and 2023, as discussed above. On April 10, 2023, the COVID-19 national emergency was ended by Congress, and the national public health emergency ended on May 11, 2023.

Previous wording

Subordinated Debt Repurchase. In March 2024, werepurchased $1.0 million in principal amount of our 5.125% Fixed-to-Floating Rate Subordinated Notes due 2032 (the“2032 Notes”).

Current wording

Subordinated Debt Repurchases. During the first quarter of 2024, werepurchased $1.0 million in principal amount of our 5.125% Fixed-to-Floating Rate Subordinated Notes due 2032 (the“2032 Notes”). During the second quarter of 2024, we repurchased $5.0 million in principal amount of our 5.125% Fixed-to-Floating Rate Subordinated Notes due 2029 (the“2029 Notes”) and $2.0 million in principal amount of our 2032 Notes.

Previous wording

For thethree months ended March 31, 2024, net income was$4.7 million, or$0.48 per basic and diluted common share, compared to net income of$3.8 million, or$0.38, per basic and diluted common share for thethree months ended March 31, 2023. Net income increased primarily due to a $1.4 million negative provision for credit losses in the first quarter of 2024 compared to a $0.4 million provision for credit losses in the first quarter of 2023, a$1.7 million increase in noninterest income, and a $0.9 million decrease in noninterest expense, partially offset by a$3.0 million decrease in net interest income and $0.5 million increase in income tax expense. The negative provision for credit losses in the quarter ended March 31, 2024 was primarily due to a decrease in total loans, aging of existing loans, and, to a lesser extent, the completion of our annual CECL allowance model recalibration. The increase in noninterest income is mainly attributable to a gain on sale or disposition of fixed assets of $0.4 million during the three months ended March 31, 2024, primarily resulting from the closure of one branch in the Alabama market, compared to a loss on sale or disposition of fixed assets of $0.9 million recorded during the three months ended March 31, 2023, primarily resulting from the sale of the Alice and Victoria, Texas branches. Thedecrease in noninterest expense was primarily driven by $0.7 million in expenses as a result of the sale of the Alice and Victoria, Texas branches recorded during the three months ended March 31, 2023. The decrease in net interest income was a result of a$7.7 million increase in interest expense partially offset by a$4.7 million increase in interest income, as the Bank experienced margin compression due to rising market interest rates. The increase in income tax expense was primarily the result of the surrender of BOLI contracts. At March 31, 2024, the Company and Bank each were in compliance with all regulatory capital requirements, and the Bank was considered “well-capitalized” under the FDIC’s prompt corrective action regulations. Other key components of our performance for thethree months ended March 31, 2024 compared to thethree months ended March 31, 2023 are summarized below.

Current wording

For thesix months ended June 30, 2024, net income was$8.8 million, or$0.89 per basic and diluted common share, compared to net income of$10.4 million, or$1.05, per basic and diluted common share for thesix months ended June 30, 2023. Net income decreased primarily due toa$4.1 million decrease in net interest income, partially offset bya$2.4 million increase in noninterest income and a $0.6 million decrease in noninterest expense. In addition, we recorded a negative provision for credit losses of $1.8 million in the first half of 2024 compared to $2.5 million for the comparable prior period. The decrease in net interest income was a result of a$12.3 million increase in interest expense partially offset by an$8.1 million increase in interest income, as the Bank experienced margin compression due to higher market interest rates. The negative provision for credit losses in the six months ended June 30, 2024 was primarily due to a decrease in total loans, aging of existing loans, and, to a lesser extent, the completion of our annual CECL allowance model recalibration. The negative provision for credit losses in the six months ended June 30, 2023 was primarily due to net recoveries in the loan portfolio. The increase in noninterest income is mainly attributable to a gain on sale or disposition of fixed assets of $0.4 million during the six months ended June 30, 2024, primarily resulting from the closure of one branch in the Alabama market, compared to a loss on sale or disposition of fixed assets of $0.9 million recorded during the six months ended June 30, 2023, primarily resulting from the sale of the Alice and Victoria, Texas branches. We also recorded a gain on sale of other real estate owned of $0.7 million during the six months ended June 30, 2024, primarily relatedto one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida, compared to a loss on sale of other real estate owned of $0.1 million recorded during the six months ended June 30, 2023. Noninterest expense for thesix months ended June 30, 2024 included a $0.5 million gain on early extinguishment of subordinated debt and for the comparable prior period included$0.7 million in expenses as a result of the sale of the Alice and Victoria, Texas branches. At June 30, 2024, the Company and Bank each were in compliance with all regulatory capital requirements, and the Bank was considered “well-capitalized” under the FDIC’s prompt corrective action regulations. Other key components of our performance for thesix months ended June 30, 2024 compared to thesix months ended June 30, 2023 are summarized below.

Previous wording

General. Loans constitute our most significant asset, comprising 78% and 79% of our total assets at March 31, 2024 and December 31, 2023, respectively. Total loans decreased $30.0 million, or 1.4%, to$2.18 billion at March 31, 2024, compared to$2.21 billion at December 31, 2023. Thedecrease in loans was primarily the result of lower demand and loan amortization. Given the high interest rate environment, we are emphasizing origination of high margin loans that promote long-term profitability and proactively exiting credit relationships that do not fit this strategy.

Current wording

General. Loans constitute our most significant asset, comprising 78% and 79% of our total assets at June 30, 2024 and December 31, 2023, respectively. Total loans decreased $43.9 million, or 2.0%, to$2.17 billion at June 30, 2024, compared to$2.21 billion at December 31, 2023. Thedecrease in loans was primarily the result of lower demand and loan amortization. Given the high interest rate environment, we are emphasizing origination of high margin loans that promote long-term profitability and proactively exiting credit relationships that do not fit this strategy.

Previous wording

At March 31, 2024, the Company’s business lending portfolio, which consists of loans secured by owner-occupied commercial real estate properties and commercial and industrial loans, was$972.4 million, a decrease of$20.6 million, or 2.1%, compared to$993.0 million at December 31, 2023. Thedecrease in the business lending portfolio is primarily driven by lower demand and loan amortization. We experienced a$7.7 million increase in nonowner-occupied loans primarily due to conversions from construction and development loans upon completion of construction. We experienced a $16.9 million decrease in construction and development loans primarily due to conversions to permanent loans upon completion of construction. Our variable-rate loans as a percentage of total loans increased to 28% at March 31, 2024 compared to 27% at December 31, 2023.

Current wording

At June 30, 2024, the Company’s business lending portfolio, which consists of loans secured by owner-occupied commercial real estate properties and commercial and industrial loans, was$961.3 million, a decrease of$31.8 million, or 3.2%, compared to$993.0 million at December 31, 2023. Thedecrease in the business lending portfolio is primarily driven by loan amortization partially offset by conversions of construction and development loans to owner-occupied loans upon completion of construction. We experienced a$1.9 million increase in nonowner-occupied loans primarily due to conversions of construction and development loans to nonowner-occupied loans upon completion of construction, partially offset by loan amortization. We experienced a $12.5 million decrease in construction and development loans primarily due to conversions to permanent loans upon completion of construction. Our variable-rate loans as a percentage of total loans increased to 30% at June 30, 2024 compared to 27% at December 31, 2023.

Previous wording

As discussed above, during the third quarter of 2023 we exited the consumer mortgage loan origination business. The consumer mortgage portfolio was approximately$259.1 million and $261.6 million at March 31, 2024 and December 31, 2023, respectively, substantially all of which is included in the 1-4 family category. The remaining loans in the 1-4 family category consisted primarily of second mortgages, home equity loans, home equity lines of credit, and business purpose loans secured by 1-4 family residential real estate.

Current wording

As discussed above, during the third quarter of 2023 we exited the consumer mortgage loan origination business. The consumer mortgage portfolio was approximately$252.3 million and $261.6 million at June 30, 2024 and December 31, 2023, respectively, substantially all of which is included in the 1-4 family category. The remaining loans in the 1-4 family category consisted primarily of second mortgages, home equity loans, home equity lines of credit, and business purpose loans secured by 1-4 family residential real estate.

Previous wording

We purchase investment securities primarily to provide a source for meeting liquidity needs, with return on investment a secondary consideration. We also use investment securities as collateral for certain deposits and other types of borrowings. Investment securities represented 13% of our total assets and totaled$371.1 million at March 31, 2024, a decrease of$11.3 million, or 3.0%, from$382.4 million at December 31, 2023. Thedecrease in investment securities at March 31, 2024 compared to December 31, 2023 was driven primarily by a $6.2 million decrease in residential mortgage-backed securities and a $3.5 million decrease in obligations of state and political subdivisions. Due in large part to higher interest rates and market volatility, net unrealized losses in our AFS investment securities portfolio totaled$62.2 million at March 31, 2024 and $57.4 million at December 31, 2023. For additional information, see Note 3. Investment Securities.

Current wording

We purchase investment securities primarily to provide a source for meeting liquidity needs, with return on investment a secondary consideration. We also use investment securities as collateral for certain deposits and other types of borrowings. Investment securities represented 13% of our total assets and totaled$355.1 million at June 30, 2024, a decrease of$27.3 million, or 7.1%, from$382.4 million at December 31, 2023. Thedecrease in investment securities at June 30, 2024 compared to December 31, 2023 was driven primarily by a $13.4 million decrease in residential mortgage-backed securities, a $4.9 million decrease in obligations of state and political subdivisions, and a $4.1 million decrease in obligations of the U.S. Treasury and U.S. government agencies and corporations. Due in large part to higher interest rates and market volatility, net unrealized losses in our AFS investment securities portfolio totaled $62.3 million at June 30, 2024 and $57.4 million at December 31, 2023. For additional information, see Note 3. Investment Securities.

Previous wording

Total deposits were$2.21 billion at March 31, 2024, a decrease of$47.9 million, or 2.1%, compared to$2.26 billion at December 31, 2023. The increase in interest-bearing demand deposits at March 31, 2024 compared to December 31, 2023 is primarily due to organic growth. The decrease in noninterest-bearing demand deposits, money market deposits, and savings deposits at March 31, 2024 compared to December 31, 2023 is primarily the result of customers drawing down on their existing deposit accounts. The decrease in time deposits at March 31, 2024 compared to December 31, 2023 is primarily due to a reduced emphasis on attracting time deposits. Brokered time deposits decreased to $237.9 million at March 31, 2024 from $269.1 million at December 31, 2023 primarily due to scheduled maturities as part of our laddering strategy. The Bank utilizes brokered time deposits, entirely in denominations of less than $250,000, to secure fixed cost funding and reduce short-term borrowings. At March 31, 2024, the balance of brokered time deposits remained below 10% of total assets, and the remaining weighted average duration was approximately 14 months with a weighted average rate of 5.18%.

Current wording

Total deposits were$2.21 billion at June 30, 2024, a decrease of$45.5 million, or 2.0%, compared to$2.26 billion at December 31, 2023. Time deposits increased, and other deposit categories decreased. The decrease in deposits other than time deposits at June 30, 2024 compared to December 31, 2023 is primarily the result of customers drawing down on their existing deposit accounts. The increase in time deposits at June 30, 2024 compared to December 31, 2023 is primarily due organic growth resulting from a deposit campaign. Brokered time deposits decreased to $249.4 million at June 30, 2024 from $269.1 million at December 31, 2023 primarily due to scheduled maturities as part of our laddering strategy. We utilize brokered time deposits, entirely in denominations of less than $250,000, to secure fixed cost funding and reduce short-term borrowings. At June 30, 2024, the balance of brokered time deposits remained below 10% of total assets, and the remaining weighted average duration was approximately 11 months with a weighted average rate of 5.19%.

Previous wording

We had$7.9 million of securities sold under agreements to repurchase at March 31, 2024 and $8.6 million at December 31, 2023. Our advances from the FHLB were$23.5 million at March 31, 2024 and December 31, 2023. Based on original maturities, at March 31, 2024 and December 31, 2023, all of our $23.5 million of FHLB advances were long-term. FHLB advances are used to fund increased loan and investment activity that is not funded by deposits or other borrowings.

Current wording

We had$7.4 million of securities sold under agreements to repurchase at June 30, 2024 and $8.6 million at December 31, 2023. Our advances from the FHLB were$23.5 million at June 30, 2024 and December 31, 2023. Based on original maturities, at June 30, 2024 and December 31, 2023, all of our $23.5 million of FHLB advances were long-term. FHLB advances are used to fund new loan and investment activity that is not funded by deposits or other borrowings.

Previous wording

On March 12, 2023, the Federal Reserve established the BTFP. The BTFP is a one-year program which provides additional liquidity through borrowings for a term of up to one year secured by the pledging of certain qualifying securities and other assets valued at par. Beginning in the second quarter of 2023, we utilized the BTFP to secure fixed rate funding for a one-year term and reduce short-term FHLB advances, which are priced daily. We utilized this source of funding due to its lower rate and the ability to prepay the obligations without penalty. The rates on the borrowings under the BTFP are fixed for one year from the day each borrowing is made. During the fourth quarter of 2023 and again in the first quarter of 2024, we refinanced all of our borrowings under the BTFP with new loans under the BTFP with a one-year term due to more favorable rates. At March 31, 2024, outstanding borrowings under the BTFP were $229.0 million with a weighted average rate of 4.76% compared to $212.5 million at December 31, 2023 with a weighted average rate of 4.83%.

Current wording

On March 12, 2023, the Federal Reserve established the BTFP. The BTFP is a one-year program which provides additional liquidity through borrowings for a term of up to one year secured by the pledging of certain qualifying securities and other assets valued at par. Beginning in the second quarter of 2023, we utilized the BTFP to secure fixed rate funding for a one-year term and reduce short-term FHLB advances, which are priced daily. We utilized this source of funding due to its lower rate and the ability to prepay the obligations without penalty. The rates on the borrowings under the BTFP are fixed for one year from the day each borrowing is made. During the fourth quarter of 2023 and again in the first quarter of 2024, we refinanced all of our borrowings under the BTFP with new loans under the BTFP with a one-year term due to more favorable rates. At June 30, 2024, outstanding borrowings under the BTFP were $229.0 million with a weighted average rate of 4.76% compared to $212.5 million at December 31, 2023 with a weighted average rate of 4.83%. The BTFP ceased making new loans as scheduled on March 11, 2024.

Previous wording

The average balances and cost of short-term borrowings for thethree months ended March 31, 2024 and 2023 are summarized in the table below (dollars in thousands).

Current wording

The average balances and cost of short-term borrowings for thesix months ended June 30, 2024 and 2023 are summarized in the table below (dollars in thousands).

Previous wording

The carrying value of the subordinated debt was$43.4 million and$44.3 million at March 31, 2024 and December 31, 2023, respectively. During the first quarter of 2024, we repurchased $1.0 million in principal amount of the 2032 Notes. The$8.7 million and$8.6 million in junior subordinated debt at March 31, 2024 and December 31, 2023, respectively, represent the junior subordinated debentures that we assumed through acquisitions.

Current wording

The carrying value of the subordinated debt was$36.5 million and$44.3 million at June 30, 2024 and December 31, 2023, respectively. During the first quarter of 2024, we repurchased $1.0 million in principal amount of the 2032 Notes. During the second quarter of 2024, we repurchased $5.0 million in principal amount of the 2029 Notes and $2.0 million in principal amount of the 2032 Notes. The$8.7 million and$8.6 million in junior subordinated debt at June 30, 2024 and December 31, 2023, respectively, represent the junior subordinated debentures that we assumed through acquisitions.

Previous wording

For a description of our 2032 Notes and 5.125% Fixed-to-Floating Rate Subordinated Notes (the “2029 Notes”), which are outstanding at March 31, 2024, see our Annual Report, Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations– Discussion and Analysis of Financial Condition– Borrowings– 2032 Notes and 2029 Notes” and Note 10 tothe financial statements included in such report.

Current wording

For a description of the 2032 Notes and 2029 Notes, see our Annual Report, Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations– Discussion and Analysis of Financial Condition– Borrowings– 2032 Notes and 2029 Notes” and Note 10 tothe financial statements included in such report.

Previous wording

Stockholders’ equity was$227.0 million at March 31, 2024, an increase of$0.2 million compared to December 31, 2023. The increase is primarily attributable to $4.7 million of net income for thethree months ended March 31, 2024, partially offset by a$3.8 million increase in accumulated other comprehensive loss due to a decrease in the fair value of the Bank’s AFS securities portfolio and payments of $1.0 million in dividends and $0.2 million for share repurchases.

Current wording

Stockholders’ equity was$230.2 million at June 30, 2024, an increase of$3.4 million compared to December 31, 2023. The increase is primarily attributable to $8.8 million of net income for thesix months ended June 30, 2024, partially offset by a$3.9 million increase in accumulated other comprehensive loss due to a decrease in the fair value of the Bank’s AFS securities portfolio and payments of $2.0 million in dividends and $0.3 million for share repurchases.

Previous wording

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. The Federal Reserve increased the federal funds target rate a total of seven times during 2022 andfour times during 2023. At March 31, 2024, the federal funds target rate was 5.25% to 5.50% compared to 4.75% to 5.00% at March 31, 2023. For additional discussion, see Certain Events That Affect Period-over-Period Comparability –Changing Inflation and Interest Rates.

Current wording

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. The Federal Reserve increased the federal funds target rate three times during the first six months of 2023, from 4.25% to 4.50%, to 5.00% to 5.25%. During the first six months of 2024, the federal funds target rate was 5.25% to 5.50%, with no changes. For additional discussion, see Certain Events That Affect Period-over-Period Comparability –Changing Inflation and Interest Rates.

Previous wording

Three months ended**March 31, 2024 vs. three months ended March 31, 2023. Net interest income decreased 14.7% to$17.2 million for the three months ended March 31, 2024 compared to$20.2 million for the same period in 2023. Thedecrease is primarily due to an increase in the rates paid on deposits and an increase in average balance of time deposits and brokered time deposits, partially offset primarily by an increase in the yield earned on and the average balance of loans and a lower average balance of short-term borrowings. Average time deposits increased $126.1 million primarily due to organic growth and customer funds migrating from other deposit categories due to higher rates offered, which resulted in a$4.2 million increase in interest expense compared to the same period in 2023. Average brokered time deposits were$255.7 million during the three months ended March 31, 2024 compared to $67.1 million during the three months ended March 31, 2023, which resulted in a $2.5 million increase in interest expense compared to the same period in 2023. Average interest-bearing demand deposits decreased $55.5 million, but increases in rates led to a $1.6 million increase in interest expense compared to the same period in 2023. Average noninterest-bearing deposits decreased $122.4 million. Average loans increased$91.5 million primarily due to organic growthand the purchase of commercial and industrial revolving lines of credit in the second half of 2023 which, in addition to higher loan yields, resulted in a$4.8 million increase in interest income compared to the same period in 2023. Average short-term borrowings decreased $64.2 million, as we reduced our FHLB advances. The lower average balance of short-term borrowings resulted in a $0.8 million decrease in interest expense compared to the same period in 2023. Our yield on interest-earning assets increased as did our rate paid on interest-bearing liabilities primarily as a result of the overall increase in prevailing interest rates.

Current wording

Three months ended**June 30, 2024 vs. three months ended June 30, 2023. Net interest income decreased 6.5% to$17.2 million for the three months ended June 30, 2024 compared to$18.4 million for the same period in 2023. Thedecrease is primarily due to an increase in the rates paid on deposits and an increase in average balance of time deposits and brokered time deposits, partially offset primarily by an increase in the yield earned on and the average balance of loans and a lower average balance of, and a decrease in rates paid on, short-term borrowings. Average time deposits increased $47.6 million primarily due to organic growth and customer funds migrating from other deposit categories due to higher rates offered, which resulted in a$2.7 million increase in interest expense compared to the same period in 2023. Average brokered time deposits were$241.8 million during the three months ended June 30, 2024 compared to $151.4 million during the three months ended June 30, 2023, which resulted in a $1.3 million increase in interest expense compared to the same period in 2023. Average interest-bearing demand deposits decreased $24.4 million, but increases in rates led to a $1.1 million increase in interest expense compared to the same period in 2023. Average noninterest-bearing deposits decreased $64.2 million. Average loans increased$68.0 million primarily due to the purchase of commercial and industrial revolving lines of credit in the second half of 2023, partially offset by loan amortization, which, in addition to higher loan yields, resulted in a$3.6 million increase in interest income compared to the same period in 2023. Average short-term borrowings decreased $33.5 million, as we reduced our FHLB advances. The lower average balance of, and a decrease in rates paid on, short-term borrowings resulted in a $0.7 million decrease in interest expense compared to the same period in 2023. Our yield on interest-earning assets increased as did our rate paid on interest-bearing liabilities primarily as a result of the overall increase in prevailing interest rates.

Previous wording

Interest income was$35.7 million for the three months ended March 31, 2024, compared to$31.0 million for the same period in 2023. Loan interest income made up substantially all of our interest income for the three months ended March 31, 2024 and 2023, although interest on investment securities contributed 8.6% of interest income during thefirst quarter of 2024 compared to 10.3% during thefirst quarter of 2023. Of the $4.7 million increase in interest income, an increase of$3.8 million can be attributed toan increase in the yield earned on interest-earning assets, and an increase in interest income of $0.9 million can be attributed to the change in the volume of interest-earnings assets. The overall yield on interest-earning assets was 5.38% and 4.80% for the three months ended March 31, 2024 and 2023, respectively. The loan portfolio yielded 5.89% and 5.27% for the three months ended March 31, 2024 and March 31, 2023, respectively, while the yield on the investment portfolio was 2.81% for the three months ended March 31, 2024 compared to 2.72% for the three months ended March 31, 2023. Theincrease in the overall yield on interest-earning assets compared to the quarter ended March 31, 2023 was primarily driven by a 62 basis point increase in the yield on the loan portfolio and a nine basis point increase in the yield on the investment securities portfolio.

Current wording

Interest income was$35.8 million for the three months ended June 30, 2024, compared to$32.4 million for the same period in 2023. Loan interest income made up substantially all of our interest income for the three months ended June 30, 2024 and 2023, although interest on investment securities contributed 8.3% of interest income during thesecond quarter of 2024 compared to 10.4% during thesecond quarter of 2023. Of the $3.4 million increase in interest income, an increase of$2.6 million can be attributed toan increase in the yield earned on interest-earning assets, and an increase in interest income of $0.8 million can be attributed to the change in the volume of interest-earnings assets. The overall yield on interest-earning assets was 5.45% and 4.98% for the three months ended June 30, 2024 and 2023, respectively. The loan portfolio yielded 5.96% and 5.44% for the three months ended June 30, 2024 and June 30, 2023, respectively, while the yield on the investment portfolio was 2.81% for the three months ended June 30, 2024 compared to 2.84% for the three months ended June 30, 2023. Theincrease in the overall yield on interest-earning assets compared to the quarter ended June 30, 2023 was primarily driven by a 52 basis point increase in the yield on the loan portfolio, partially offset by a three basis point decrease in the yield on the investment securities portfolio.

Previous wording

Interest expense was$18.5 million for the three months ended March 31, 2024, an increase of$7.7 million compared to interest expense of$10.8 million for the three months ended March 31, 2023. An increase of$5.9 million resulted from theincreasein the cost of interest-bearing liabilities, primarily time deposits and interest-bearing demand deposits. An increase in interest expense of$1.8 million resulted from an increase in volume of interest-bearing liabilities, primarily brokered time deposits. We utilized shorter term brokered time deposits, which were laddered to provide flexibility, to fund a portion of the purchase of commercial and industrial revolving lines of credit in the second half of 2023. Average interest-bearing liabilities increased $157.4 million for the three months ended March 31, 2024 compared to the same period in 2023, as average interest-bearing deposits increased by$247.9 million, as discussed in further detail above. Also as discussed above, average short-term borrowings decreased by$64.2 million. Average long-term borrowings decreased by $26.3 million. As previously discussed, the federal funds target rate was 5.25% to 5.50% as of March 31, 2024 compared to 4.75% to 5.00% at March 31, 2023, which affects the rate we pay for deposits, immediately available overnight funds, borrowings under the BTFP, and long-term borrowings. We increased rates offered on our interest-bearing products in order to remain competitive in our markets. The cost of deposits increased 169 basis points to 3.31% for the three months ended March 31, 2024 compared to 1.62% for the three months ended March 31, 2023 as a result of increases in both the average balance of and rates paid for time deposits and brokered time deposits, and an increase in rates paid for interest-bearing demand deposits. The cost of interest-bearing liabilities increased 128 basis points to 3.51% for the three months ended March 31, 2024 compared to 2.23% for the same period in 2023, primarily due to an increase in the cost and higher average balance of deposits, partially offset by a lower average balance of short-term borrowings.

Current wording

Interest expense was$18.6 million for the three months ended June 30, 2024, an increase of$4.6 million compared to interest expense of$14.0 million for the three months ended June 30, 2023. An increase of$3.6 million resulted from theincreasein the cost of interest-bearing liabilities, primarily time deposits and interest-bearing demand deposits. An increase in interest expense of$0.9 million resulted from an increase in volume of interest-bearing liabilities, primarily brokered time deposits. We utilized shorter term brokered time deposits, which were laddered to provide flexibility, to fund a portion of the purchase of commercial and industrial revolving lines of credit in the second half of 2023. Average interest-bearing liabilities increased $76.8 million for the three months ended June 30, 2024 compared to the same period in 2023, as average interest-bearing deposits increased by$115.5 million. As discussed above, average short-term borrowings decreased by$33.5 million. Average long-term borrowings decreased by $5.2 milliondue to our repurchases of our subordinated debt during the first half of 2024. We offered higher rates on our interest-bearing products during the second quarter of 2024 compared to the second quarter of 2023, due to higher prevailing market interest rates andin order to remain competitive in our markets. The cost of deposits increased 107 basis points to 3.38% for the three months ended June 30, 2024 compared to 2.31% for the three months ended June 30, 2023 as a result of increases in both the average balance of, and rates paid for, time deposits and brokered time deposits, and an increase in rates paid for interest-bearing demand deposits. The cost of interest-bearing liabilities increased 79 basis points to 3.58% for the three months ended June 30, 2024 compared to 2.79% for the same period in 2023, primarily due to an increase in the cost and higher average balance of deposits, partially offset by a lower average balance of, and rates paid on, short-term borrowings.

Previous wording

Net interest margin was 2.59% for the three months ended March 31, 2024, a decrease of 54 basis points from 3.13% for the three months ended March 31, 2023. Thedecrease in net interest margin was primarily driven by a 128 basis point increase in the cost of interest-bearing liabilities partially offset by a 58 basis point increase in the yield on interest-earning assets. We experienced margin pressure beginning late in 2022, which continued in 2023 and 2024. We raised rates offered on deposits compared to the three months ended March 31, 2023. We may experience additional pressure on our net interest margin if our cost of funds increases faster than the yield on our interest-earning assets.

Current wording

Net interest margin was 2.62% for the three months ended June 30, 2024, a decrease of 20 basis points from 2.82% for the three months ended June 30, 2023. Thedecrease in net interest margin was primarily driven by a 79 basis point increase in the cost of interest-bearing liabilities partially offset by a 47 basis point increase in the yield on interest-earning assets.

Previous wording

Noninterest income includes, among other things, service charges on deposit accounts, losses on call or sale of investment securities, gains and losses on sales or dispositions of fixed assets, losses on other real estate owned, gains on sale of loans, servicing fees and fee income on serviced loans, interchange fees, income from BOLI, 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.

Current wording

Noninterest income includes, among other things, service charges on deposit accounts, losses on call or sale of investment securities, gains and losses on sales or dispositions of fixed assets, gains and losses on other real estate owned, gains on sale of loans, interchange fees, income from BOLI, 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.

Previous wording

Three months ended March 31, 2024 vs. three months ended March 31, 2023. Total noninterest income increased $1.7 million, or 155.4%, to$2.7 million for the three months ended March 31, 2024 compared to$1.1 million for the three months ended March 31, 2023. Theincrease in noninterest incomeis primarily attributable to a $1.3 million increase in gain on sale or disposition of fixed assets, a $0.1 decrease in the loss on other real estate owned, $0.1 million increase in the change in fair value of equity securities, and a $0.2 million increase in other operating income. During thethree months ended March 31, 2024, there was a gain on sale or disposition of fixed assets of $0.4 million resulting from the closure of one branch in the Alabama market compared to a loss on sale or disposition of fixed assets of $0.9 million as a result of the sale of the Alice and Victoria, Texas branches duringthe three months ended March 31, 2023. The increase in other operating income is primarily attributable to a $0.1 million increase in the change in the net asset value of other investments.

Current wording

Three months ended June 30, 2024 vs. three months ended June 30, 2023. Total noninterest income increased $0.7 million, or 32.9%, to$2.8 million for the three months ended June 30, 2024 compared to$2.1 million for the three months ended June 30, 2023. Theincrease in noninterest incomeis primarily attributable to a $0.7 million increase in gain on sale of other real estate owned, a $0.1 million increase in income from BOLI, and a $0.1 million increase in other operating income, partially offset by a $0.4 million increase in loss on call or sale of investment securities. The increase in the gain on sale of other real estate owned resulted primarily from the sale of a property during the second quarter of 2024 related to one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida. The increase in other operating income is primarily attributable to a $0.2 million increase in derivative fee income, partially offset by a $0.1 million decrease in the change in the net asset value of other investments.

Previous wording

Three months ended March 31, 2024 vs. three months ended March 31, 2023. Total noninterest expense was$15.3 million for the three months ended March 31, 2024, a decrease of$0.9 million, or 5.4%, compared to the same period in 2023. Thedecrease was primarily driven by $0.7 million in expenses as a result of the sale of the Alice and Victoria, Texas branch locations duringthe three months ended March 31, 2023. As a result of the sale of the Alice and Victoria, Texas branches, we recorded $0.4 million of occupancy expense to terminate the remaining contractually obligated lease payments, $0.1 million of salaries and employee benefits for severance, $0.1 million of professional fees for legal and consulting services, and $0.1 million of depreciation and amortization to accelerate the amortization of the remaining core deposit intangible. The remaining decrease of $0.2 million is primarily due to a $0.2 million gain on early extinguishment of subordinated debt, a $0.1 million decrease in depreciation and amortization, and a $0.1 million decrease in professional fees unrelated to the sale of the Alice and Victoria, Texas branch locations, partially offset by a $0.3 million increase in other operating expenses. The increase in other operating expense resulted from a $0.2 million increase in FDIC assessments and a $0.2 million write-down of other real estate owned primarily related to a former branch location, partially offset by a $0.1 million decrease in collection and repossession expenses and a $0.1 million decrease in bank shares tax.

Current wording

Six months ended**June 30, 2024 vs. six months ended June 30, 2023. Total noninterest expense was $30.8 million for the six months ended June 30, 2024, a decrease of $0.6 million, or 2.0%, compared to the same period in 2023. The decrease was primarily driven by$0.7 million in expenses as a result of the sale of the Alice and Victoria, Texas branches recorded during the six months ended June 30, 2023. As a result of the sale of the Alice and Victoria, Texas branches, we recorded $0.4 million of occupancy expense to terminate the remaining contractually obligated lease payments, $0.1 million of salaries and employee benefits for severance, $0.1 million of professional fees for legal and consulting services, and $0.1 million of depreciation and amortization to accelerate the amortization of the remaining core deposit intangible. The remaining increase of $0.1 million was primarily attributable to a $0.3 million increase in salaries and employee benefits, a $0.1 million increase in data processing and a $0.4 million increase in other operating expenses, partially offset bya $0.5 million gain on early extinguishment of subordinated debt recorded during thesix months ended June 30, 2024 and a $0.3 million decrease in depreciation and amortization. The decrease in depreciation and amortization is primarily due to the sales of the Alice and Victoria, Texas branches in the first quarter of 2023 and the closure of one branch location in the first quarter of 2024. The increase in other operating expense resulted from a $0.2 million increase in write-down of other real estate owned primarily related to a former branch location, a $0.2 million increase in other real estate expenses, and a $0.1 million increase in FDIC assessments, partially offset by a $0.1 million decrease in collection and repossession expenses.

Previous wording

Income tax expense for the three months ended March 31, 2024 and 2023 was$1.4 million and$0.9 million, respectively. The effective tax rate for the three months ended March 31, 2024 and 2023 was 22.7% and 18.7%, respectively. We surrendered approximately $8.4 million of BOLI contracts and reinvested the proceeds in higher yielding policies, which resulted in $0.3 million of income tax expense. The restructuring has an expected earn-back period of just over one year.

Current wording

Income tax expense for the three months ended June 30, 2024 and 2023 was$0.8 million and$1.5 million, respectively. The effective tax rate for the three months ended June 30, 2024 and 2023 was 17.0% and 18.7%, respectively. Income tax expense for thesix months ended June 30, 2024 and 2023 was$2.2 million and$2.4 million, respectively. The effective tax rate for thesix months ended June 30, 2024 and 2023 was 20.1% and 18.7%, respectively. During the first quarter of 2024, we surrendered approximately $8.4 million of BOLI contracts and reinvested the proceeds in higher yielding policies, which resulted in $0.3 million of income tax expense. The restructuring had an expected earn-back period of just over one year.

Previous wording

For the three months ended March 31, 2024, the effective tax rate differed from the statutory tax rate of 21% primarily due to the surrender of BOLI contracts, partially offset by tax-exempt interest income earned on certain loans and investment securities and income from BOLI. For the three months ended March 31, 2023, the effective tax rate differed from the statutory tax rate of 21% primarily duetax-exempt interest income earned on certain loans and investment securities and income from BOLI.

Current wording

For thesix months ended June 30, 2024, the effective tax rate differed from the statutory tax rate of 21% primarily due totax-exempt interest income earned on certain loans and investment securities and income from BOLI, partially offset by the surrender of BOLI contracts. For the three months ended June 30, 2024 and thethree and six months ended June 30, 2023, the effective tax rate differed from the statutory tax rate of 21% primarily due totax-exempt interest income earned on certain loans and investment securities and income from BOLI.

Previous wording

At March 31, 2024 and December 31, 2023, there were no loans classified as loss or doubtful. At March 31, 2024 and December 31, 2023, there were$20.8 million and$12.0 million, respectively, of loans classified as substandard, and$7.5 million and$10.8 million, respectively, of loans classified as special mention. The increase in loans classified as substandard is primarily due to one loan relationship in which $10.1 million of construction and development loans were downgraded and are still accruing.

Current wording

At June 30, 2024 and December 31, 2023, there were no loans classified as loss, while there were $0.1 million and no loans, respectively, classified as doubtful, $23.2 million and$12.0 million, respectively, of loans classified as substandard, and$9.8 million and$10.8 million, respectively, of loans classified as special mention. The increase in loans classified as substandard is primarily due to one loan relationship in which $12.7 million of construction and development and commercial real estate loans were downgraded and are still accruing.

Previous wording

Allowance for Credit Losses. Effective January 1, 2023, we adopted ASU 2016-13, which uses the CECL accounting methodology for the allowance for credit losses. Upon adoption, we recorded a one-time, cumulative effect adjustment to increase the allowance for credit losses by $5.9 million. The allowance for credit losses was$29.1 million and$30.5 million at March 31, 2024 and December 31, 2023, respectively. The CECL methodology requires that lifetime expected credit losses be recorded at the time the financial asset is originated or acquiredand be adjusted each period through a provision for credit losses for changes in the expected lifetime credit losses. Refer to Note 1. Summary of Significant Accounting Policies – Accounting Standards Adopted in 2023 in the Annual Report for information regarding our adoption of ASU 2016-13.

Current wording

Allowance for Credit Losses. Effective January 1, 2023, we adopted ASU 2016-13, which uses the CECL accounting methodology for the allowance for credit losses. Upon adoption, we recorded a one-time, cumulative effect adjustment to increase the allowance for credit losses by $5.9 million. The allowance for credit losses was$28.6 million and$30.5 million at June 30, 2024 and December 31, 2023, respectively. The CECL methodology requires that lifetime expected credit losses be recorded at the time the financial asset is originated or acquiredand be adjusted each period through a provision for credit losses for changes in the expected lifetime credit losses. Refer to Note 1. Summary of Significant Accounting Policies – Accounting Standards Adopted in 2023 in the Annual Report for information regarding our adoption of ASU 2016-13.

Previous wording

We maintain a separate allowance for credit losses on unfunded loan commitments, which is included in “Accrued taxes and other liabilities” in the accompanying consolidated balance sheets. The allowance for credit losses is generally increased by the provision for credit losses and decreased by charge-offs, net of recoveries. For thethree months ended March 31, 2024, the provision for credit losses was negative$1.4 million, compared to a provision for credit losses of$0.4 million for thethree months ended March 31, 2023. The negative provision for credit losses for the three months ended March 31, 2024 wasprimarily due to a decrease in total loans, aging of existing loans, and, to a lesser extent, the completion of our annual CECL allowance model recalibration in the first quarter, which resulted in lower historical loss rates.

Current wording

We maintain a separate allowance for credit losses on unfunded loan commitments, which is included in “Accrued taxes and other liabilities” in the accompanying consolidated balance sheets. The allowance for credit losses is generally increased by the provision for credit losses and decreased by charge-offs, net of recoveries. The negative provision for credit losses for the three months ended June 30, 2024 was primarily due to a decrease in total loans and aging of existing loans. The negative provision for credit losses for the six months ended June 30, 2024 was primarily due to a decrease in total loans, aging of existing loans, and, to a lesser extent, the completion of our annual CECL allowance model recalibration, which resulted in lower historical loss rates. The negative provision for credit losses for thethree and six months ended June 30, 2023 was primarily attributable to recoveries on one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida.

Previous wording

During the first quarter of 2024, the Company completed its annual model recalibration process. Our annual review includes peer group analysis, updates to its probability of default and loss-given default models, including prepayment and curtailment assumptions, and qualitative factor scorecard ranges, as needed. The changes resulting from the model recalibration reduced the allowance for credit loss by approximately $0.5 million.

Current wording

During the first quarter of 2024, we completed our annual model recalibration process. Our annual review includes peer group analysis, updates to our probability of default and loss-given default models, including prepayment and curtailment assumptions, and qualitative factor scorecard ranges, as needed. The changes resulting from the model recalibration reduced the allowance for credit loss by approximately $0.5 million.

Previous wording

(1) For the three months ended March 31, 2024, the $1.4 million negative provision for credit losses on the consolidated statement of income includes a $1.4 million negative provision for loan losses and a $9,000 negative provision for unfunded loan commitments. For the three months ended March 31, 2023, the $0.4 million provision for credit losses on the consolidated statement of income includes a $0.6 million provision for loan losses and a $0.2 million negative provision for unfunded loan commitments.

Current wording

(1) For the three months ended June 30, 2024, the $0.4 million negative provision for credit losses on the consolidated statement of income includes a $0.3 million negative provision for loan losses and a $0.1 million negative provision for unfunded loan commitments. For the six months ended June 30, 2024, the $1.8 million negative provision for credit losses on the consolidated statement of income includes a $1.7 million negative provision for loan losses and a $0.1 million negative provision for unfunded loan commitments. For the three months ended June 30, 2023, the $2.8 million negative provision for credit losses on the consolidated statement of income includes a $2.8 million negative provision for loan losses and a $7,000 negative provision for unfunded loan commitments. For the six months ended June 30, 2023, the $2.5 million negative provision for credit losses on the consolidated statement of income includes a $2.3 million negative provision for loan losses and a $0.2 million negative provision for unfunded loan commitments.

Previous wording

The allowance for credit losses to total loans decreased to 1.34% at March 31, 2024 compared to 1.45% at March 31, 2023, and the allowance for credit losses to nonaccrual loans ratio decreased to 515% at March 31, 2024 compared to 547% at March 31, 2023. The decreases in the allowance for credit losses to total loans and allowance for credit losses to nonaccrual loans compared to March 31, 2023, is primarily due to an improvement in economic forecasts and loan portfolio composition, and, to a lesser extent, the completion of our annual CECL allowance model recalibration, which resulted in lower historical loss rates. Nonaccrual loans were$5.6 million, or 0.26% of total loans, at March 31, 2024 and March 31, 2023.

Current wording

The allowance for credit losses to total loans decreased to 1.32% at June 30, 2024 compared to 1.44% at June 30, 2023, and the allowance for credit losses to nonaccrual loans ratio increased to 582.7% at June 30, 2024 compared to 429.6% at June 30, 2023. The decrease in the allowance for credit losses to total loans compared to June 30, 2023 is primarily due to an improvement in economic forecasts and loan portfolio composition, and, to a lesser extent, the completion of our annual CECL allowance model recalibration, which resulted in lower historical loss rates. The increase in allowance for credit losses to nonaccrual loans compared to June 30, 2023 is primarily due to a decrease in nonaccrual loans. Nonaccrual loans were$4.9 million, or 0.23% of total loans, at June 30, 2024, a decrease of$2.1 million compared to$7.0 million, or 0.34% of total loans, at June 30, 2023. The decrease in nonaccrual loans is primarily due to paydowns.

Previous wording

Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for credit losses on loans. Net charge-offs include recoveries of amounts previously charged off. For thethree months ended March 31, 2024, net charge-offs were$15,000, or less than 0.01%, of the average loan balance for the period. Net charge-offs during three months ended March 31, 2024 were primarily attributable to commercial and industrial and consumer loans. Net charge-offs for thethree months ended March 31, 2023 were$0.3 million, or 0.01%, of the average loan balance for the period.

Current wording

Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for credit losses on loans. Net charge-offs include recoveries of amounts previously charged off. For thethree and six months ended June 30, 2024, net charge-offs were$0.2 million, or 0.01%, of the average loan balance for the periods. Net charge-offs during the three and six months ended June 30, 2024 were primarily attributable to construction and development and 1-4 family loans. Net recoveries for the three and six months ended June 30, 2023 were $2.4 million and$2.1 million, or 0.11% and 0.10%, respectively, of the average loan balance for the periods. Net recoveries during thethree and six months ended June 30, 2023 were primarily attributable to recoveries on one loan relationship that became impaired in the third quarter of 2021 as a result of Hurricane Ida.

Previous wording

Nonperforming Assets. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Loans are ordinarily placed on nonaccrual when a loan is specifically* determined to be impaired or when principal and interest is delinquent for 90 days or more. Additionally, management may elect to continue the accrual when the estimated net available value of collateral is sufficient to cover the principal balance and accrued *interest. It is our policy to discontinue the accrual of interest income on any loan for which we have reasonable doubt as to the payment of interest or principal. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period of repayment performance by the borrower. Nonperforming loans were$5.6 million, or 0.26% of total loans, at March 31, 2024, a decrease of$0.2 million compared to$5.8 million, or 0.26% of total loans, at December 31, 2023. The decrease in nonperforming loans compared to December 31, 2023 is mainly attributable to paydowns.

Current wording

Nonperforming Assets. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Loans are ordinarily placed on nonaccrual when a loan is specifically* determined to be impaired or when principal and interest is delinquent for 90 days or more. Additionally, management may elect to continue the accrual when the estimated net available value of collateral is sufficient to cover the principal balance and accrued *interest. It is our policy to discontinue the accrual of interest income on any loan for which we have reasonable doubt as to the payment of interest or principal. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period of repayment performance by the borrower. Nonperforming loans were$5.0 million, or 0.23% of total loans, at June 30, 2024, a decrease of$0.8 million compared to$5.8 million, or 0.26% of total loans, at December 31, 2023. The decrease in nonperforming loans compared to December 31, 2023 is mainly attributable to paydowns.

Previous wording

Loan Modifications to Borrowers Experiencing Financial Difficulty.Occasionally, we modify loans to borrowers in financial distress by providing certain concessions, such as principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension, excluding covenant waivers and modification of contingent acceleration clauses, or a combination of such concessions. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses. Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off. During the three months ended March 31, 2024 and 2023, we did not provide any modifications under these circumstances to borrowers experiencing financial difficulty.

Current wording

Loan Modifications to Borrowers Experiencing Financial Difficulty.Occasionally, we modify loans to borrowers in financial distress by providing certain concessions, such as principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension, excluding covenant waivers and modification of contingent acceleration clauses, or a combination of such concessions. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses. Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off. During the six months ended June 30, 2024 and 2023, we did not provide any modifications under these circumstances to borrowers experiencing financial difficulty.