Investar Holding CorpISTR财报

Item 1. Business , provides more information regarding the regulatory environment in which we and the Bank operate. Federal regulators periodically examine our business, and we may be required to remediate adverse examination findings.

The financial services industry is subject to intense scrutiny from bank supervisors in the examination process and aggressive enforcement of regulations on both the federal and state levels. The Federal Reserve and the OCC periodically examine our business, including our compliance with laws and regulations.

If, as a result of an examination, a federal banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate.

These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship.

If we become subject to any regulatory actions, it could have a material adverse effect on our business, results of operations, financial condition and growth prospects. Failure to comply with any applicable regulations and supervisory expectations related thereto could result in fines, penalties, lawsuits, regulatory sanctions, damage to our reputation or restrictions on business.

We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions. The ECOA, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions.

The Department of Justice and other federal agencies enforce these laws and regulations, but private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.

If an institution’s performance under the fair lending laws and regulations is found to be deficient, the institution could be subject to damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines, among other sanctions.

In addition, the OCC’s assessment of our compliance with the CRA is taken into account when evaluating any application we submit for, among other things, approval of the acquisition or establishment of a branch or other deposit facility, an office relocation, a merger or the acquisition of another financial institution.

Our failure to satisfy our CRA obligations could, at a minimum, result in the denial of such applications and limit our growth. We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The Bank Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate.

The federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service.

We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control.

If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans.

Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.

Any of these results could materially and adversely affect our business, financial condition, results of operations and growth prospects. 26 Table of Contents In addition, bank regulatory agencies consider the effectiveness of a financial institution’s anti-money laundering activities and other regulatory compliance matters when reviewing bank mergers and bank holding company acquisitions.

Accordingly, non-compliance with the applicable regulations could materially impair the Company’s ability to enter into or complete mergers and acquisitions. Our success depends on our ability to respond to the threats and opportunities of fintech innovation.

Fintech developments, such as bitcoin or other types of cryptocurrency and the development of alternative payment systems such as Venmo and PayPal, have the potential to disrupt the financial industry and change the way banks do business.

Our success depends on our ability to adapt to the pace of the rapidly changing technological environment, which is crucial to retention and acquisition of customers. On July 31, 2018, the OCC announced it would grant limited-purpose national bank charters to fintech companies that offer bank products and services.

The federal charter would allow fintech companies to operate nationwide under a single set of national standards, without needing to seek state-by-state licenses or joining with brick-and-mortar banks, which could have the effect of allowing fintech companies to more easily compete with us for financial products and services in the communities we serve.

At present, the future of the OCC limited-purpose fintech charter is unclear. To date, the OCC has not approved any such charters and each application for a charter has been met with a lawsuit challenging the OCC’s authority to issue such charters. We may be required to pay significantly higher FDIC deposit insurance premiums in the future.

The deposits of the Bank are insured by the FDIC up to legal limits and, accordingly, subject it to the payment of FDIC deposit insurance assessments. We are generally unable to control the amount of premiums that we are required to pay for FDIC deposit insurance.

A bank’s regular assessments are determined by its risk classification, which is based on certain financial information and the level of supervisory concern that it poses.

In order to maintain a strong funding position and restore the reserve ratios of the Deposit Insurance Fund, the FDIC has, in the past, increased deposit insurance assessment rates and charged a special assessment to all FDIC-insured financial institutions.

In 2023, the FDIC completed a special assessment that generally only applied to banks with over $5 billion in total assets, but further increases in assessment rates or special assessments that apply to all banks may occur in the future, especially if there are significant financial institution failures.

Any future special assessments, increases in assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could have an adverse effect on our business, financial condition and results of operations.

Our use of third-party vendors and our other ongoing third-party business relationships are subject to increasing regulatory requirements and attention. We regularly use third-party vendors as part of our business. We also have substantial ongoing business relationships with other third parties. These types of third-party relationships are subject to increasingly demanding regulatory requirements and attention by our federal bank regulators.

Regulation requires us to perform due diligence and ongoing monitoring and control over our third-party vendors and other ongoing third-party business relationships. In certain cases, we may be required to renegotiate our agreements with these vendors to meet these requirements, which could increase our costs.

We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third-party relationships and in the performance of the parties with which we have these relationships.

As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third-party vendors or other ongoing third-party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could have a material adverse effect our business, financial condition or results of operations. 27 Table of Contents Risks Related to an Investment in our Common Stock The market price of our common stock may be volatile, which may make it difficult for investors to sell their shares at the volume, prices and times desired.

The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including, without limitation: • actual, anticipated, or unanticipated variations in our quarterly and annual operating results, financial condition or asset quality; • changes in general economic or business conditions, both domestically and internationally; • the effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve, or in laws and regulations affecting us; • changes in the credit, mortgage and real estate markets; • the number of securities analysts covering us; • our creditworthiness; • publication of research reports about us, our competitors, or the financial services industry generally, or changes in, or failure to meet, securities analysts’ estimates of our financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage; • changes in market valuations or earnings of companies that investors deemed comparable to us; • the average daily trading volume of our common stock; • future issuances of our common stock or other securities; • changes in dividends on our common stock; • additions or departures of key personnel; • perceptions in the marketplace regarding our competitors and/or us; • significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us; and • other news, announcements or disclosures (whether by us or others) related to us, our competitors, our markets or the financial services industry.

The stock market and, in particular, the market for financial institution stocks have experienced significant fluctuations in recent years. In addition, significant fluctuations in the trading volume in our common stock may cause significant price variations to occur.

Increased market volatility may materially and adversely affect the market price of our common stock, which may make it difficult for investors to sell their shares at the volume, prices and times desired. Shares eligible for future sale and shares we may issue in the future could adversely affect market prices of our common stock.

Shares of our common stock eligible for future sale, including those that may be issued in any private or public offering of our common stock, as consideration in acquisition transactions, or as incentives under incentive plans, could adversely affect market prices for our common stock.

As of December 31, 2024, we had 9,828,413 shares outstanding and 260,602 shares subject to options granted under our incentive plan.

Because our outstanding shares of common stock either were issued in an offering registered under the Securities Act or have been held for more than one year, such shares are freely tradable, except for shares held by our affiliates (approximately 6% of shares outstanding as of December 31, 2024) and 323,820 shares that represent unvested restricted shares under our incentive plan.

Shares issued under our incentive plan will be available for sale into the public market, except for shares held by our affiliates. Shares held by our affiliates may be resold subject to the restrictions in Rule 144 of the Securities Act.

In the future, we may issue additional shares of common stock to raise capital for growth or as consideration in acquisition transactions or for other purposes, and such shares may be registered under the Securities Act and freely tradable or may be issued in a private placement and registered for resale under the Securities Act. 28 Table of Contents Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions.

Holders of our common stock are entitled to receive only such cash dividends as our Board may declare out of funds legally available for the payment of dividends. We have no obligation to continue paying dividends, and we may change our dividend policy at any time without notice to our shareholders.

In addition, our existing and future debt agreements limit, or may limit, our ability to pay dividends. Under the terms of our 2032 Notes, we are prohibited from paying dividends upon and during the continuance of any Event of Default under such notes.

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 caused by business and economic conditions generally and in the financial services industry in particular, whether nationally, regionally or in the markets in which we operate; • changes in inflation, interest rates, yield curves and interest rate spread relationships that affect our loan and deposit pricing; • our ability to successfully execute our near-term strategy to pivot from primarily a growth strategy to a strategy primarily focused on consistent, quality earnings through the optimization of our balance sheet, and our ability to successfully execute a long-term growth strategy; • our ability to achieve organic loan and deposit growth, and the composition of that growth; • a reduction in liquidity, including as a result of a reduction in the amount of deposits we hold or other sources of liquidity, which may be caused by, among other things, disruptions in the banking industry similar to those that occurred in early 2023 that caused bank depositors to move uninsured deposits to other banks or alternative investments outside the banking industry; • our ability to identify and enter into agreements to combine with attractive acquisition candidates, finance acquisitions, complete acquisitions after definitive agreements are entered into, and successfully integrate and grow acquired operations; • our adoption on January 1, 2023 of ASU 2016-13, and inaccuracy of the assumptions and estimates we make in establishing reserves for credit losses and other estimates; • changes in the quality or composition of our loan portfolio, including adverse developments in borrower industries or in the repayment ability of individual borrowers; • changes in the quality and composition of, and changes in unrealized losses in, our investment portfolio, including whether we may have to sell securities before their recovery of amortized cost basis and realize losses; • 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; • the concentration of our business within our geographic areas of operation in Louisiana, Texas and Alabama; 34 Table of Contents • increasing costs of complying with new and potential future regulations; • new or increasing geopolitical tensions, including resulting from wars in Ukraine and Israel and surrounding areas; • the emergence or worsening of widespread public health challenges or pandemics including COVID-19; • concentration of credit exposure; • any deterioration in asset quality and higher loan charge-offs, and the time and effort necessary to resolve problem assets; • fluctuations in the price of oil and natural gas; • data processing system failures and errors; • risks associated with our digital transformation process, including increased risks of cyberattacks and other security breaches and challenges associated with addressing the increased prevalence of artificial intelligence; • risks of losses resulting from increased fraud attacks against us and others in the financial services industry; • potential 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; • the impact of litigation and other legal proceedings to which we become subject; • 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; and • hurricanes, tropical storms, tropical depressions, floods, winter storms, droughts and other adverse weather events, all of which have affected our market areas from time to time; other natural disasters; oil spills and other man-made disasters; acts of terrorism; other international or domestic calamities; acts of God; and other matters 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. 35 Table of Contents Overview Through the Bank, we provide full banking services, excluding trust services, tailored primarily to meet the needs of individuals, professionals, and small to medium-sized businesses.

Our primary areas of operation are south Louisiana (approximat ely 78% of our tota l deposits as of December 31, 2024), including Baton Rouge, New Orleans, Lafayette, Lake Charles, and their surrounding areas; southeast Texas, primarily Houston and its surrounding area; and Alabama, including York and Oxford and their surrounding areas.

As of March 12, 2025 , we operated 29 fu ll service bran ches comprised of 20 full service branches in Louisiana, three full service branches in Texas, and six full service branches in Alabama. The 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. 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 near-term strategy includes continuing to consider acquisitions on an opportunistic basis. 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. We opened a loan a nd deposit production office in our Texas market in the first quarter of 2024 and converted it to a full-service branch location in the fourth quarter of 2024.

Additionally, 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.

We have continued to evaluate opportunities to improve our branch network efficiency, leverage our digital initiatives, and further reduce costs. We closed four branches during our last three fiscal years. Two 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. 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 ACL 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 products and services. Substantially all of the consumer mortgage portfolio is included in the 1-4 family loan category. Our principal business is lending to and accepting deposits from individuals and small to medium-sized businesses in our areas of operation.

As a financial holding company operating through one reportable segment, we g enerate 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.

Our principal expenses are interest expense on interest-bearing customer deposits and borrowings, salaries and 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. 36 Table of Contents For certain GAAP performance measures, see “ Certain Performance Indicators: GAAP Financial Measures ” below.

We also monitor changes in our tangible equity, tangible assets, and tangible book value per share, shown in the section “ Certain Performance Indicators: Non-GAAP Financial Measures ” below.

Certain Performance Indicators: GAAP Financial Measures As of and for the years ended December 31, (In thousands, except share data) 2024 2023 (1) 2022 2021 (2) 2020 (3) Financial Information Total assets $ 2,722,812 $ 2,815,155 $ 2,753,807 $ 2,513,203 $ 2,321,181 Total stockholders' equity 241,296 226,768 215,782 242,598 243,284 Net interest income 69,753 74,520 89,785 83,814 73,534 Net income 20,252 16,678 35,709 8,000 13,889 Diluted earnings per share 2.04 1.69 3.50 0.76 1.27 Performance Ratios Return on average assets 0.73 % 0.60 % 1.37 % 0.31 % 0.61 % Return on average equity 8.60 7.63 15.63 3.22 5.77 Net interest margin 2.63 2.83 3.67 3.53 3.49 Dividend payout ratio 19.90 23.37 10.31 40.26 19.69 Efficiency Ratio Noninterest expense $ 63,032 $ 62,630 $ 60,865 $ 63,062 $ 57,131 Net interest income 69,753 74,520 89,785 83,814 73,534 Noninterest income 14,205 6,538 18,350 12,042 12,096 Efficiency ratio (4) 75.08 % 77.26 % 56.29 % 65.79 % 66.72 % Capital Ratios Total equity to total assets 8.86 % 8.06 % 7.84 % 9.65 % 10.48 % (1) During 2023 we purchased commercial and industrial lines of credit with an unpaid principal balance of $162.7 million.

We also sold certain assets, deposits, and other liabilities associated with two branches in Texas previously acquired from PlainsCapital Bank. (2) On April 1, 2021, the Company acquired Cheaha Financial Group, Inc. and its wholly-owned subsidiary Cheaha Bank, by merger with and into the Company and Bank, respectively.

(3) On February 21, 2020, the Bank acquired two branches from PlainsCapital Bank. (4) Calculated as noninterest expense divided by the sum of net interest income (before provision for credit losses) and noninterest income.

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.

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. 37 Table of Contents 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 our tangible book value per share (dollars in thousands).

As of and for the years ended December 31, 2024 2023 2022 2021 2020 Total stockholders’ equity - GAAP $ 241,296 $ 226,768 $ 215,782 $ 242,598 $ 243,284 Adjustments: Goodwill 40,088 40,088 40,088 40,088 28,144 Core deposit intangible 1,508 2,132 2,959 3,848 3,988 Trademark intangible 100 100 100 100 100 Tangible equity $ 199,600 $ 184,448 $ 172,635 $ 198,562 $ 211,052 Total assets - GAAP $ 2,722,812 $ 2,815,155 $ 2,753,807 $ 2,513,203 $ 2,321,181 Adjustments: Goodwill 40,088 40,088 40,088 40,088 28,144 Core deposit intangible 1,508 2,132 2,959 3,848 3,988 Trademark intangible 100 100 100 100 100 Tangible assets $ 2,681,116 $ 2,772,835 $ 2,710,660 $ 2,469,167 $ 2,288,949 Total shares outstanding 9,828,413 9,748,067 9,901,847 10,343,494 10,608,869 Book value per share $ 24.55 $ 23.26 $ 21.79 $ 23.45 $ 22.93 Effect of adjustments (4.24 ) (4.34 ) (4.36 ) (4.25 ) (3.04 ) Tangible book value per share $ 20.31 $ 18.92 $ 17.43 $ 19.20 $ 19.89 Total equity to total assets 8.86 % 8.06 % 7.84 % 9.65 % 10.48 % Effect of adjustments (1.42 ) (1.41 ) (1.47 ) (1.61 ) (1.26 ) Tangible equity to tangible assets 7.44 % 6.65 % 6.37 % 8.04 % 9.22 % 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.

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. Allowance for Credit Losses . In June 2016, the FASB issued a new accounting standard (ASU 2016-13), referred to as the CECL standard, which became effective for us, as a smaller reporting company, on January 1, 2023.

The CECL methodology requires that lifetime expected credit losses be recorded at the time the financial asset is originated or acquired, and be adjusted each period for changes in expected lifetime credit losses.

The CECL methodology replaces multiple prior impairment models under GAAP that generally required that a loss be “incurred” before it was recognized, and represents a significant change from prior GAAP.

Results for reporting periods beginning on and after January 1, 2023 are presented in accordance with ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. 38 Table of Contents For reporting periods beginning on and after January 1, 2023, reflecting the adoption of ASU 2016-13: On January 1, 2023, we adopted ASC Topic 326, “ Financial Instruments—Credit Losses ,” commonly referred to as the CECL standard, on a modified retrospective basis.

The provisions of this guidance required a material change to the manner in which the Company estimates and reports losses on financial instruments, including loans and unfunded lending commitments, select investment securities, and other assets carried at amortized cost.

The allowance is sensitive to external factors including the general health of the economy, as evidenced by changes in interest rates, gross domestic product, unemployment rates, and changes in real estate demand and values. Management considers these variables and all other available information when establishing the final level of the allowance.

These variables and others have the ability to result in actual loan losses that differ from the originally estimated amounts. Changes in the factors used by management to determine the appropriateness of the allowance or the availability of new information could cause the allowance to be increased or decreased in future periods.

The Company’s management considers available forecasts, current events not captured and our specific portfolio characteristics and applies weights to the scenario output based on a best estimate of likely outcomes. Changing economic conditions have introduced enhanced estimation uncertainty in the forecasts used to estimate expected credit loss.

Our credit loss models were built using historical data that may not correlate to existing economic conditions. Such forecasted information is inherently uncertain, therefore, actual results may differ significantly from management’s estimates.

The quantitative loss rate analysis is supplemented by a review of qualitative factors that considers whether conditions differ from those existing during the historical periods used in the development of the credit loss models.

Such factors include, but are not limited to, changes in current and expected future economic conditions, changes in the nature and volume of the portfolio, changes in levels of concentrations, changes in the volume and severity of past due loans, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry.

While quantitative data for these factors is used where available, there is significant judgment applied in these processes. For credits that are individually evaluated, a specific allowance is calculated as the shortfall between the credit’s value and the Bank’s exposure.

The loan’s value is measured by either the fair value of the collateral of the loan based on third-party appraisals if it is collateral dependent, or based on a discounted cash flow methodology. Collatera l on impaired loans may include, but is not limited to, commercial and residential real estate and accounts receivable.

Values for impaired credits are highly subjective and based on information available at the time of valuation and the current resolution strategy. These values are difficult to assess and have heightened uncertainty resulting from current market conditions. Actual results could differ from these estimates.

Management considers the appropriateness of these critical assumptions as part of its allowance review and believes the ACL level is appropriate based on information available through the financial statement date. Please refer to Note 3. Loans and Allowance for Credit Losses, and Note 1. Summary of Significant Accounting Policies – Allowance for Credit Losses for additional discussion.