424B4
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-196014

 

2,875,000 shares

 

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Common Stock

 

 

This prospectus relates to the initial public offering and sale of 2,875,000 shares of Investar Holding Corporation common stock.

Prior to this offering, there has been no established public trading market for our common stock. The public offering price per share of our common stock is $14.00. Our common stock has been approved for listing on The Nasdaq Global Market under the symbol “ISTR.”

Investing in our common stock involves risks. See Risk Factors, beginning on page 12 of this prospectus, for a discussion of certain risks that you should consider before making an investment decision to purchase our common stock.

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. See About this Prospectus—Implications of Being an Emerging Growth Company.

 

     Per Share      Total  

Initial public offering price of our common stock

   $ 14.00       $ 40,250,000   

Underwriting discounts(1)

   $ 0.91       $ 2,616,250   

Proceeds to us, before expenses

   $ 13.09       $ 37,633,750   

 

(1) The offering of our common stock will be conducted on a firm commitment basis. See Underwriting for additional information regarding our agreement with the underwriters in connection with this offering.

We have granted the underwriters an option to purchase up to an additional 431,250 shares of our common stock at the initial public offering price less the underwriting discount within 30 days from the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission or other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The shares of our common stock in this offering are not savings accounts, deposits or other obligations of any bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency and are subject to investment risk, including the possible loss of the entire amount you invest.

The underwriters expect to deliver the shares of our common stock against payment on or about July 3, 2014, subject to customary closing conditions.

 

 

 

Sandler O’Neill + Partners, L.P.   Sterne Agee

 

 

The date of this prospectus is June 30, 2014.


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

The Offering

     6   

Selected Financial Information

     8   

Risk Factors

     12   

Special Note Regarding Forward-Looking Statements

     30   

Use of Proceeds

     31   

Dividend Policy

     32   

Capitalization

     34   

Dilution

     36   

Price Range of Our Common Stock

     37   

Business

     37   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     53   

Supervision and Regulation

     86   

Management

     97   

Executive Compensation

     105   

Security Ownership of Certain Beneficial Owners and Management

     109   

Certain Relationships and Related Party Transactions

     111   

Description of Capital Stock

     113   

Shares Eligible for Future Sale

     118   

Underwriting

     119   

Legal Matters

     123   

Experts

     123   

Where You Can Find More Information

     124   

Index to Consolidated Financial Statements

     F-1   

 

Annex A    Historical Financial Information of First Community Bank and Related Pro Forma Financial Information
A-1    Audited Consolidated Financial Statements of First Community Holding Company and Subsidiary (First Community Bank) as of and for the years ended December 31, 2012 and 2011, including the report of Hannis T. Bourgeois, LLP on such audited financial statements
A-2    Selected unaudited financial information of First Community Bank as of and for the three months ended March 31, 2013 and 2012
A-3    Unaudited pro forma condensed consolidated financial information for the year ended December 31, 2013


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About this Prospectus

You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by or on our behalf or to which we have referred you. We have not, and the underwriters have not, authorized anyone to provide you with different or additional information. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any different or additional information that others may give you. If anyone provides you with different or inconsistent information, you should not rely on it.

This prospectus is not an offer to sell, nor is it seeking an offer to buy, shares of our common stock in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of the delivery of this prospectus or any sale of our common stock. Our business, financial condition, results of operations and growth prospects may have changed since that date. Information contained on, or accessible through, our website is not part of this prospectus.

In this prospectus, unless we state otherwise or the context otherwise requires, references to “we,” “our,” “us” and “the Company” refer to Investar Holding Corporation, a Louisiana corporation, and our consolidated subsidiary, Investar Bank, a Louisiana state-chartered bank, and references to “the Bank” refer to Investar Bank.

Market Data

We obtained the statistical and other market data used in this prospectus from independent industry sources and publications as well as from research reports prepared by third parties. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. Although we believe that this information is reliable, we have not independently verified such information. Our internal data, estimates and forecasts are based on information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. All estimates, forecasts and assumptions are necessarily subject to a high degree of risk due to a variety of factors, including those described in the Risk Factors section and elsewhere in this prospectus.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements and is relieved of certain other significant regulatory requirements that are otherwise generally applicable to public companies. As an emerging growth company,

 

   

we may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations, and we may provide less than five years of selected financial data in our initial public offering registration statement;

 

   

we are exempt from the requirement to obtain an attestation report from our auditors on management’s assessment of our internal control over financial reporting under the Sarbanes-Oxley Act of 2002;

 

   

we may choose to not adopt new or revised accounting standards until they would apply to private companies;

 

   

we may elect to not comply with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and our audited financial statements;

 

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we are permitted to provide reduced disclosure about our executive compensation arrangements, which means we do not have to include, among other things, a compensation discussion and analysis; and

 

   

we are not required to give our shareholders non-binding advisory votes on executive compensation or golden parachute arrangements.

We will continue to be an emerging growth company until the earliest to occur of the following: (1) the last day of the fiscal year following the fifth anniversary of this offering; (2) the last day of the fiscal year in which we have more than $1.0 billion in annual revenues; (3) the date on which we have more than $700 million in market value of our common stock held by non-affiliates; or (4) the date on which we have issued more than $1.0 billion in non-convertible debt over a three-year period.

We have elected in this prospectus to present two years of audited balance sheets and related discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations, while we have included three years of audited statements of operations, cash flows and changes in stockholders’ equity and related discussion as well as five years of selected financial information. We have taken advantage of the reduced disclosure relating only to executive compensation arrangements. We do not intend to take advantage of any other scaled disclosure or relief during the time that we qualify as an emerging growth company, although the JOBS Act would permit us to do so.

We have elected not to take advantage of the exemption from the auditor attestation requirement in the assessment of an emerging growth company’s internal control over financial reporting. In addition, we have decided not to opt in to the extended transition period for the adoption of new or revised accounting standards, which means that the consolidated financial statements included in this prospectus, as well as any financial statements that we file in the future, will be subject to all new or revised accounting standards generally applicable to public companies. Our election not to take advantage of the extended transition period is irrevocable.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained in this prospectus and may not contain all of the information that you need to consider in making your investment decision. To understand this offering fully, you should read the entire prospectus carefully, including the section titled “Risk Factors” and our consolidated financial statements. Unless we state otherwise or the context otherwise requires, references in this prospectus to “we,” “our,” “us,” and “the Company” refer to Investar Holding Corporation, a Louisiana corporation, and our consolidated subsidiary, Investar Bank, a Louisiana-chartered bank, and references to “the Bank” refer to Investar Bank.

Overview

We are a bank holding company headquartered in Baton Rouge, Louisiana, offering a wide range of commercial banking products tailored to meet the needs of individuals and small to medium-sized businesses through Investar Bank, our Louisiana-chartered commercial bank subsidiary. We serve our primary markets of Baton Rouge, New Orleans, Lafayette and Hammond, Louisiana, and their surrounding metropolitan areas from our main office located in Baton Rouge and from nine additional full-service branches located throughout our market area. We have experienced significant growth since the Bank was chartered as a de novo commercial bank by John J. D’Angelo, our President and Chief Executive Officer, in 2006 and believe we will have continuing opportunities to grow, both organically and through strategic acquisitions. With an experienced management team that has successfully executed two acquisitions since 2011, excellent credit quality, high levels of capital, and an infrastructure capable of accommodating our growing franchise, we believe that we are positioned to take advantage of market opportunities in the future.

As of March 31, 2014, we had consolidated total assets of approximately $673.9 million, total loans (excluding loans held for sale) of $528.2 million, total deposits of $564.2 million and total stockholders’ equity of $56.5 million. The largest component of our loan portfolio at March 31, 2014 was our commercial real estate loans, which totaled $185.4 million, or 35.1% of our total loans, followed by consumer loans and one-to-four family mortgage loans, which were 25.0% and 21.6% of total loans, respectively, at March 31, 2014. Construction and development loans and commercial and industrial loans, which totaled 11.9% and 6.4%, respectively, of our total loans at March 31, 2014, constituted the remaining significant components of our loan portfolio. We generate a substantial portion of our revenue from our lending activities, in the form of both interest income and loan-related fees. Loan interest income, on a tax-equivalent basis, was $7.0 million for the three months ended March 31, 2014 and $22.7 million for the year ended December 31, 2013, comprising substantially all of our interest income for both periods. Fee income charged in connection with our mortgage loans held for sale, the largest component of our non-interest income, was $0.5 million, or 49.3% of our total non-interest income, for the three months ended March 31, 2014, and $2.8 million, or 53.1% of our total non-interest income, for the year ended December 31, 2013.

Our History and Growth

Led by Mr. D’Angelo and a team of experienced bankers, we first achieved profitability in 2008 and have accomplished significant milestones including:

 

    June, 2006—Chartered with an initial capitalization of $10.1 million from local investors.

 

    October, 2011—Expanded our presence in the Baton Rouge market with the acquisition of South Louisiana Business Bank, which contributed approximately $50.9 million in assets, $38.6 million in deposits, $12.0 million in capital and one branch located in Prairieville, a suburb of Baton Rouge.

 

    December, 2012—Entered the New Orleans market through de novo branching by purchasing two closed branch locations of another bank in suburban New Orleans.

 

 

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    May, 2013—Entered the Hammond market with our acquisition of First Community Bank, which contributed approximately $99.2 million in assets, $86.5 million in deposits, $4.5 million in capital and two branches, one located in Hammond and the other in Mandeville, a suburb of New Orleans.

 

    July, 2013—Entered the Lafayette, Louisiana market by opening a de novo branch.

Over the past five full years, our assets have grown at a compound annual growth rate, which we refer to as CAGR, of 34.8%, while our loans and deposits have grown over the same period at CAGRs of 33.2% and 35.2%, respectively. Over the same five-year period, our net income before taxes has grown at a CAGR of 112.3% to $4.3 million for the year ended December 31, 2013, while our net interest income and our noninterest income have grown at CAGRs of 42.3% and 78.4%, respectively.

Our Current Operations

Our current operations primarily consist of making loans and accepting deposits in our market areas, and our income is derived chiefly from interest and fees charged on loans and from fees for the deposit services that we offer. We generate a small amount of interest income from returns on our investment securities, although at this time we view investment securities chiefly as a source of liquidity to fund our loan growth, with investment return being a secondary consideration. We do not currently offer trust or insurance products or wealth management services.

Our Competitive Strengths

We believe that we are well-positioned to create value for our shareholders, particularly as a result of our attractive markets and the following competitive strengths:

 

    Management and Technology Infrastructure in Place for Growth. Our management team has a long and successful history of managing banks, with an average of 27 years of banking experience across 14 senior executives. Our senior managers have a demonstrated track record of managing growth profitably, establishing profitable de novo branches, successfully executing acquisitions, maintaining a strong credit culture and implementing a relationship-based and community service-focused approach to banking.

To more effectively manage our anticipated growth, our executive functions are organized in a manner typically found in much larger financial institutions. We have centralized our credit review, product development and other policymaking functions and appointed a regional president for each of our markets.

In addition, we have embraced the latest technological developments in the banking industry, which we believe allows us to better leverage our employees by enabling them to focus on developing customer relationships, expands the suite of products that we can offer to customers and allows us to compete more efficiently and effectively as we grow.

 

    Proven Ability in Acquisition Execution and Integration. Since 2011, we have successfully completed the SLBB and FCB mergers, both of which we consider to have been highly strategic and value-enhancing for our franchise. We believe these acquisitions demonstrate our disciplined approach to acquisitions and our successful evaluation of the financial metrics, as well as the cultural, operational and other factors associated with the acquisitions. Moreover, we efficiently integrated the acquired operations of both SLBB and FCB, allowing us to quickly expand our presence in the new markets. We believe this experience makes us an attractive buyer and should position us to take advantage of acquisition opportunities in the future.

 

   

Strong Credit Quality and Capital Base. Through disciplined underwriting procedures and management of our concentrations and credits, we have maintained our asset quality despite the

 

 

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economic downturn beginning in 2008, even as we have grown our franchise significantly. We proactively and decisively deal with problem credits as they are identified. At March 31, 2014, delinquent legacy loans (i.e., those not acquired in an acquisition) were 0.08% of total loans, while our annualized net charge-offs were 0.02% of total average loans for the quarter ended March 31, 2014 and our allowance for loan losses as a percentage of total nonperforming loans was 206%. Net charge-offs as a percentage of average loans averaged 0.06% and 0.31% for the three and five years ended December 31, 2013, respectively.

We have also maintained strong capital levels throughout our operating history. We have supplemented the capital generated by our operations through five exempt offerings subsequent to our initial capitalization, raising a total of $17.3 million from investors predominantly located within our markets. At March 31, 2014, we had a 7.94% tangible common equity ratio, an 8.80% tier 1 leverage capital ratio, a 10.21% tier 1 risk-based capital ratio and a 10.84% total risk-based capital ratio.

Our Growth Strategy

Our goal is to become the bank of choice in each of the markets that we serve, while seeking to provide an attractive return to our shareholders. We have implemented the following operational strategies to achieve this goal:

Focus on relationship banking. We believe that customer satisfaction is a key to generating sustainable growth and profitability. While continually striving to ensure that our products and services meet our customers’ demands, we also encourage our officers and employees to focus on providing personal service and attentiveness to our customers in a proactive manner.

Relationship banking also underpins our referral-based strategy, since we believe that a customer who knows and trusts his or her representative at the Bank is more likely to refer his or her friends, family and business partners to us. Our loan officers have been actively involved in a direct lending capacity in their particular markets for many years, which tends to make such referrals more likely. Our directors and shareholders also have provided a good source of introductions and referrals, and we anticipate such introductions and referrals will continue to occur.

Growth through acquisition and de novo branching. We plan to grow our operations primarily in our existing markets both organically and by acquisition, with a focus on expansion opportunities in our southern Louisiana markets. Although we will consider expansion into other markets if presented with an attractive acquisition opportunity, as a general matter we intend to focus on expansion opportunities in our southern Louisiana markets. We have a relatively small market share (based on deposits) in our markets, which we believe provides an opportunity through a strategic acquisition or a successful de novo branch expansion.

Our strategic plan calls for us to open three new branches over the next two years. We currently expect to open a new branch in Baton Rouge in the third quarter of 2014. In addition to increasing our physical footprint, we intend to continue to recruit experienced and talented management and lending personnel to join our team. For example, we recently recruited two top producers of auto loans from other banks with a large presence in the New Orleans market. We also consider strategic acquisitions to be an important component of our growth strategy (although we have no present agreement or plan concerning any specific acquisition transaction). Our acquisition focus will be primarily on financial institutions with less than $500 million in assets, as we believe acquisitions of financial institutions of this size pose fewer regulatory obstacles and other execution risks than acquisitions of larger institutions.

Expansion of our product line and income streams. Where we perceive market opportunities to increase our income, we will introduce new products and services to complement the products and services we currently

 

 

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offer our customers. For example, we have been approved to sell mortgage loans to Freddie Mac while retaining servicing rights (and expect to apply to Fannie Mae to do the same). We expect to be able to quickly leverage our existing mortgage origination activities to generate additional servicing fee income and be more competitive in our pricing of mortgage loans.

In the consumer lending area, we have undertaken two initiatives to expand our consumer loan portfolio, which will continue to be one of our core products. First, we are in the process of establishing the infrastructure to make indirect auto loans to markets on the Mississippi Gulf Coast. Also, we have recently organized a new division of the Bank that engages in “finance company” type lending, offering auto loans and small consumers loans directly to individual customers. Our finance company activities will focus on making auto loans to consumers with FICO scores slightly below the minimum FICO score that the Bank otherwise requires in its auto lending, although we will not make loans generally considered to be “sub-prime.”

Our Markets

Our primary market areas are in Southern Louisiana and in particular the Baton Rouge metropolitan statistical area, the New Orleans-Metairie MSA, and the MSAs of Lafayette and Hammond. At March 31, 2014, approximately 73.82% of our loans (by dollar value) were made to borrowers in the Baton Rouge and New Orleans MSAs, while approximately 98.41% of our secured loans are secured by collateral located in Louisiana.

Using deposit share (as of June 30, 2013) as a measure, our primary markets are dominated by a few large financial institutions. Four financial institutions collectively maintain a 76.71% and 69.86% market share in the Baton Rouge and New Orleans MSAs, respectively, while in Lafayette two large institutions have an approximately 36.1% market share. One institution has a 39.42% market share in Hammond. We maintain a 1.81% market share in the Baton Rouge MSA, placing us fifth overall, while our market share in the New Orleans MSA was 0.19%, although we had been operating in New Orleans for less than a year when this measurement was taken. We have a 3.19% deposit share in Hammond. We entered the Lafayette market after the date of the deposit share measurements, but our deposits in the Lafayette market totaled $43.6 million at March 31, 2014.

The following information provides a brief overview of each of our markets.

Baton Rouge. Baton Rouge is the capital of Louisiana and its second largest market by deposits. As the farthest inland deep-water port on the Mississippi River, Baton Rouge serves as a major center of commercial and industrial activity, especially for the chemical and gas industries. However, Baton Rouge’s economy has diversified, and it is now a center for research and development, renewable energy sources, transportation, construction and distribution. IBM announced in March, 2013 plans to locate a service center in downtown Baton Rouge providing software development and software maintenance, with 800 new direct jobs (and an estimated 500+ new indirect jobs). In its July/August, 2013 issue, Business Facilities magazine ranked Baton Rouge the No. 1 metro area in the United States for Economic Growth Potential.

New Orleans and Hammond. New Orleans is Louisiana’s largest city, both by population and by deposits. It serves as a major economic hub of the Gulf Coast region. The hospitality and tourism industries, each a significant driver of the New Orleans economy, have returned to pre-Hurricane Katrina levels. In 2012, nine million visitors spent a record $6.0 billion in New Orleans.

New Orleans is also a major port city. The Port of New Orleans is the fifth largest port in the United States by cargo tonnage and is fueled by the economic activity of the Mississippi River and the Gulf Coast region. The Port of New Orleans also is becoming a major port for the cruise industry. Cruise Lines International Association ranks it as the sixth largest U.S. cruise port, up from ninth in 2011. In 2013, a record number of cruise passengers

 

 

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set sail from the Port of New Orleans, with nearly one million embarkations and disembarkations. A study commissioned by the Port of New Orleans found that in 2012 cruise passengers and ship crews spent approximately $78.4 million in New Orleans.

Finally, the New Orleans economy has recently become more diversified, with growing motion picture, medical and technology sectors supported by a burgeoning entrepreneurship climate. In April, 2013, Bloomberg Rankings ranked the New Orleans metropolitan area No. 2 in its list of Top 12 American Boomtowns, and Forbes ranked New Orleans sixth in its October, 2013 listing of cities creating the most middle class jobs.

Hammond, which is roughly an hour’s drive from both New Orleans and Baton Rouge, is the commercial hub of Tangipahoa Parish and the home of Southeastern Louisiana University. Located at the intersection of Interstates 12 and 55, Hammond has evolved from a primarily agricultural area to a major distribution hub. Wal-Mart, Home Depot and Winn Dixie, among others, have distribution centers in Hammond.

Lafayette. Lafayette is Louisiana’s third largest city and deposit market. The area has historically been driven primarily by the oil and gas industry, but healthcare now provides the most private sector jobs. Regional and parish economic growth is in expansion mode. For example, in December, 2013, Bell Helicopter announced its intention to locate a helicopter assembly plant in Lafayette. Construction on the plant will begin in the first half of 2014. The area healthcare industry continues its growth with the recent completion of Our Lady of Lourdes Complex and the renovation of Lafayette General Medical Center. Office and retail space continues to enjoy low vacancies as does the residential rental market.

Although we believe our markets present attractive opportunities to continue our growth, the median household income in each of our markets is below the national average, which could impact the demand for our products and services. In addition, southern Louisiana, including each of our markets, is susceptible to major hurricanes and other adverse weather events, which can result in widespread property damage and a severe impact on local economies. More information about our markets can be found in the Business section under —Our Markets.

Corporate Information

Our principal executive offices are located at 7244 Perkins Road, Baton Rouge, Louisiana 70808, and our telephone number at that address is (225) 227-2222. Our website address is www.investarbank.com. The information contained on our website is not a part of, or incorporated by reference into, this prospectus.

 

 

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THE OFFERING

The following summary of the offering contains basic information about the offering and our common stock and is not intended to be complete. It does not contain all the information that may be important to you, and you are encouraged to carefully review in its entirety the remainder of this prospectus.

 

Common stock offered by us

   2,875,000 shares of common stock
   3,306,250 shares if the underwriters’ option is exercised in full

Common stock outstanding after this offering

   6,820,029 shares of common stock(1)
   7,251,279 shares if the underwriters’ option is exercised in full(1)

Use of proceeds

   The net proceeds to us from this offering, after deducting estimated underwriting discounts and offering expenses payable by us, will be approximately $36.2 million (or approximately $41.8 million if the underwriters exercise their purchase option in full). We intend to use the net proceeds of this offering (substantially all of which we intend to contribute to the capital of the Bank, after repaying amounts outstanding under our line of credit) primarily to support growth in loans and deposits, bolster our capital to permit future strategic acquisitions and for other general working capital and corporate purposes. We have no present agreement or plan concerning any specific acquisition or similar transaction. See Use of Proceeds.

Dividend Policy

   Subsequent to the share exchange in November, 2013 that resulted in Investar Bank becoming a wholly-owned subsidiary of the Company (referred to in this prospectus as the “Share Exchange”), the Company paid a dividend in the amount of $0.0121 per share of common stock to its shareholders. This dividend, which was paid on January 31, 2014, was the first dividend the Company paid to its shareholders. In addition, on June 13, 2014, the Company declared a dividend in the amount of $0.0123 per share, payable on July 31, 2014 to shareholders of record as of June 24, 2014. Prior to the Share Exchange, Investar Bank paid dividends to its shareholders from time to time, with the first dividend being paid in early 2011. Subject to prior approval from our board of directors, we intend to continue the payment of a cash dividend on a quarterly basis to holders of our common stock. Our board of directors will make any determination whether or not to pay dividends based upon our results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to our trust preferred securities, which are senior to our shares of common stock and have a preference on dividends), our business strategy and other factors that the board deems relevant. See Dividend Policy.

Rank

   Our common stock is subordinate to our trust preferred securities with respect to the payment of dividends and the distribution of assets upon liquidation. In addition, our common stock will be subordinate to any preferred stock or debt that we may issue in the future.

 

 

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Listing

   Our common stock has been approved for listing on the Nasdaq Global Market under the trading symbol “ISTR.”

Directed Share Program

   We have reserved 115,000 shares of the common stock being offered by this prospectus for sale at the initial offering price to our directors and senior executive officers and members of their families.

Risk factors

   Investing in our common stock involves a significant degree of risk. See Risk Factors beginning on page 12 of this prospectus for a discussion of certain factors that you should carefully consider before making an investment decision.

 

(1) The number of shares of our common stock to be outstanding after this offering is based on 3,945,029 shares of our common stock issued and outstanding as of May 31, 2014, which amount includes 43,578 shares of restricted stock that remain subject to forfeiture until completion of the applicable service period. Unless otherwise indicated, information contained in this prospectus regarding the number of outstanding shares of our common stock excludes the following:

 

    22,811 shares of common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $13.33 per share, all of which have vested;

 

    Options to acquire 216,000 shares of common stock and 9,564 shares of restricted stock, the grant and award of which (as applicable) are subject to the effectiveness of the registration statement of which this prospectus forms a part. The exercise price of each option is the initial public offering price;

 

    1,428 shares of restricted stock awarded to two employees as employment inducement and retention awards;

 

    306,619 shares of common stock reserved for issuance in connection with stock awards that remain available for issuance under our 2014 Long-Term Incentive Compensation Plan, which is referred to in this prospectus as our Equity Incentive Plan; and

 

    193,498 shares of common stock issuable upon the exercise of certain outstanding warrants at a weighted average exercise price of $13.39 per share.

 

 

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SELECTED FINANCIAL INFORMATION

The following table sets forth selected historical financial information and other data as of and for the three months ended March 31, 2014 and 2013 and the years ended December 31, 2013, 2012, 2011, 2010 and 2009. As noted elsewhere, Investar Bank did not become a subsidiary of the Company until the completion of the Share Exchange in November, 2013. Accordingly, the selected financial information below as of and for the three months ended March 31, 2013 and the years ended December 31, 2012, 2011, 2010 and 2009 relates only to the operations of the Bank, while the selected financial information below as of and for the three months ended March 31, 2014 and the year ended December 31, 2013 reflects the operations of the Company and the Bank on a consolidated basis. The selected financial information for the year ended December 31, 2013 has been derived from the audited consolidated financial statements of the Company as of and for such year, other than the performance ratios, and the selected financial information for the years ended December 31, 2012, 2011, 2010 and 2009 has been derived from the audited financial statements of Investar Bank as of and for such years, other than the performance ratios. The selected financial information below as of and for the three months ended March 31, 2014 and 2013 was not audited, but in the opinion of management reflects all adjustments necessary for a fair presentation. All of these adjustments are normal and recurring. Our historical results for any prior period are not necessarily indicative of the results of operations that may be expected in any future period.

You should read the selected financial information below in conjunction with other information contained in this prospectus, including the information contained under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the consolidated financial statements and related notes of the Company and of the Bank, respectively, beginning on page F-1 of this prospectus. As described elsewhere in this prospectus, we have consummated two acquisitions in recent fiscal periods. The results of operation and other financial data of the acquired companies are not included in the table below for the periods prior to their respective acquisition date and, therefore, the results of operations and other financial data for these prior periods are not comparable in all respects and may not be predictive of future results. For additional information about First Community Holding Company and its subsidiary (First Community Bank), you should read the audited consolidated financial statements and related notes of First Community Holding Company, selected unaudited financial information of First Community Bank, and the unaudited pro forma condensed consolidated information for the year ended December 31, 2013 included as Annex A to this prospectus.

(In thousands, except share data)(1)

 

     As of
March 31,
2014
     As of December 31,  
        2013      2012      2011      2010      2009  

Financial Condition Data:

                 

Total assets

   $ 673,964       $ 634,946       $ 375,446       $ 279,330       $ 209,465       $ 173,915   

Total loans, net of allowance for loan losses

     549,877         505,744         303,019         226,209         163,052         134,411   

Allowance for loan losses

     3,530         3,380         2,722         1,746         1,476         1,471   

Investment securities

     69,773         62,752         44,326         28,930         22,842         27,906   

Goodwill and other intangible assets

     3,247         3,257         2,828         2,839         0         0   

Noninterest-bearing deposits

     64,545         72,795         37,489         18,208         15,337         8,241   

Interest-bearing deposits

     499,649         459,811         262,181         209,960         168,452         136,257   

Total deposits

     564,194         532,606         299,670         228,168         183,789         144,498   

Long-term borrowings

     37,827         34,427         26,794         9,575         3,773         9,715   

Total stockholders’ equity

     56,498         55,483         43,553         35,166         16,814         15,219   

(foootnotes on page 10)

 

 

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    As of and for the
three months ended
March 31,
    As of and for the year ended December 31,  
    2014     2013     2013     2012     2011     2010     2009  

Income Statement Data:

             

Interest income

  $ 6,957      $ 4,083      $ 22,472      $ 14,587      $ 11,302      $ 9,710      $ 8,776   

Interest expense

    1,090        691        3,460        2,542        2,579        3,494        3,852   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    5,867        3,392        19,012        12,045        8,723        6,216        4,924   

Provision for loan losses

    245        89        1,026        685        639        1,019        1,273   

Net interest income after provision

    5,622        3,303        17,986        11,360        8,084        5,197        3,651   

Noninterest income

    1,066        1,170        5,354        3,625        2,032        2,096        901   

Noninterest expense

    5,385        3,574        19,024        11,645        8,615        6,195        4,052   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    1,303        899        4,316        3,340        1,501        1,098        500   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

    424        281        1,148        979        502        383        170   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 879      $ 618      $ 3,168      $ 2,361      $ 999      $ 715      $ 330   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

             

Basic earnings per share

  $ 0.23      $ 0.19      $ 0.86      $ 0.79      $ 0.54      $ 0.51      $ 0.25   

Diluted earnings per share

  $ 0.21      $ 0.18      $ 0.81      $ 0.71      $ 0.47      $ 0.43      $ 0.21   

Dividends per share

  $ 0.01      $ 0.01      $ 0.047      $ 0.046      $ 0.07      $ 0.00      $ 0.00   

Book value per share

  $ 14.32      $ 13.70      $ 14.06      $ 13.56      $ 12.82      $ 11.46      $ 10.88   

Tangible book value per share(2)

  $ 13.50      $ 12.83      $ 13.24      $ 12.68      $ 11.79      $ 11.46      $ 10.88   

Period end shares outstanding

    3,945,029        3,262,855        3,945,114        3,210,816        2,742,205        1,467,778        1,399,245   

Basic weighted average shares outstanding

    3,901,064        3,207,763        3,667,929        2,998,087        1,843,180        1,414,257        1,330,570   

Diluted weighted average shares outstanding

    4,161,421        3,450,279        3,923,375        3,302,661        2,120,471        1,680,140        1,584,410   

Performance Ratios:

             

Return on average assets

    0.55     0.66     0.64     0.74     0.44     0.37     0.21

Return on average equity

    6.32     5.67     6.10     5.90     4.44     4.50     2.33

Net interest margin

    3.93     3.88     4.10     4.04     4.09     3.43     3.28

Net interest income to average assets

    3.65     3.62     3.83     3.77     3.86     3.20     3.10

Noninterest expense to average assets

    3.31     3.76     3.83     3.65     3.82     3.19     2.55

Efficiency ratio(3)

    77.67     78.34     78.07     74.32     80.10     74.53     69.56

Dividend payout ratio

    4.44     5.19     5.44     5.84     12.91     —          —     

Asset Quality Ratios:

             

Nonperforming assets to total assets

    0.79     0.70     0.79     0.62     0.75     1.86     0.60

Nonperforming assets to total loans, net of unearned income, plus real estate owned, net

    0.95     0.86     0.98     0.76     0.92     2.36     0.76

Nonperforming loans to total loans, net of unearned income

    0.31     0.07     0.30     0.02     0.01     2.32     0.54

Allowance for loan losses to total loans, net of unearned income

    0.67     0.86     0.67     0.94     0.79     0.93     1.11

Allowance for loan losses to nonperforming loans

    206     1205     227     5136     6236     40     205

Net charge-offs to average loans

    0.02     0.05     0.09     -0.12     0.20     0.68     0.69

Capital Ratios:

             

Total equity to total assets

    8.38     11.31     8.74     11.60     12.59     8.03     8.75

Tangible equity to tangible assets(4)

    7.94     10.67     8.27     10.93     11.69     8.03     8.75

Tier 1 capital to average assets

    8.80     11.05     9.53     11.55     11.67     8.06     8.87

Tier 1 capital to risk-weighted assets

    10.21     12.53     10.85     13.06     14.36     10.42     11.26

Total capital to risk-weighted assets

    10.84     13.33     11.51     13.95     15.14     11.35     12.36

(foootnotes on page 10)

 

 

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(1) Selected consolidated financial data includes the effect of mergers from the date of each merger. On May 1, 2013, Investar Bank acquired First Community Bank, a Louisiana state bank headquartered in Hammond, Louisiana (“FCB”), by merger of FCB with and into Investar Bank. On October 1, 2011, Investar Bank acquired South Louisiana Business Bank, a Louisiana state bank headquartered in Prairieville, Louisiana (“SLBB”), by merger of SLBB with and into Investar Bank. References in this prospectus to assets purchased and liabilities assumed in the FCB and SLBB mergers reflect the fair value of such assets and liabilities on the date of acquisition, unless the context otherwise requires. For additional information about the FCB and SLBB mergers, please refer to the section entitled Business beginning on page 37 of this prospectus, Note B, Acquisition Activity, to our audited consolidated financial statements as of and for the year ended December 31, 2013 beginning on page F-1 of this prospectus and Annex A to this prospectus.
(2) Tangible book value per share is a non-GAAP financial measure. Tangible book value per share is calculated as total stockholders’ equity less goodwill and other intangible assets, divided by the number of common shares outstanding as of the balance sheet date. We believe that the most directly comparable GAAP financial measure is book value per share. For a reconciliation of the non-GAAP measure to the most directly comparable GAAP financial measure, refer to the information under the heading Selected Financial Information—Non-GAAP Financial Measures below.
(3) Efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income. Efficiency ratio, as calculated, is a non-GAAP financial measure. See Selected Financial Information—Non-GAAP Financial Measures below.
(4) Tangible equity to tangible assets is a non-GAAP financial measure. Tangible equity is calculated as total stockholders’ equity less goodwill and other intangible assets, and tangible assets is calculated as total assets less goodwill and other intangible assets. We believe that the most directly comparable GAAP financial measure is total equity to total assets. For a reconciliation of the non-GAAP measure to the most directly comparable GAAP financial measure, refer to the information under the heading Selected Financial Information—Non-GAAP Financial Measures below.

Non-GAAP Financial Measures

Our accounting and reporting policies conform to accounting principles generally accepted in the United States, or GAAP, and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional metrics. The efficiency ratio, tangible book value per share and the ratio of tangible equity to tangible assets are not financial measures recognized under GAAP and, therefore, are considered non-GAAP financial measures.

Our management, banking regulators, many financial analysts and other 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

 

 

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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.

(Unaudited)

 

     As of and for the three
months ended March 31,
    As of and for the year ended December 31,  
          2014               2013          2013     2012     2011     2010     2009  
     (in thousands, except share data)  

Total stockholders’ equity—GAAP

   $ 56,498      $ 44,697      $ 55,483      $ 43,553      $ 35,166      $ 16,814      $ 15,219   

Adjustments

              

Goodwill

     2,684        2,684        2,684        2,684        2,684        0        0   

Other intangibles

     563        142        573        145        155        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible equity

     53,251        41,871        52,226        40,724        32,327        16,814        15,219   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets—GAAP

   $ 673,964      $ 395,457      $ 634,946      $ 375,446      $ 279,330      $ 209,465      $ 173,915   

Adjustments

              

Goodwill

     2,684        2,684        2,684        2,684        2,684        0        0   

Other intangibles

     563        142        573        145        155        0        0   

Tangible assets

     670,717        392,631        631,689        372,617        276,491        209,465        173,915   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shares outstanding

              

Book value per share

   $ 14.32      $ 13.70      $ 14.06      $ 13.56      $ 12.82      $ 11.46      $ 10.88   

Effect of adjustment

     (0.82     (0.87     (0.82     (0.88     (1.03     0        0   

Tangible book value per share

   $ 13.50      $ 12.83      $ 13.24      $ 12.68      $ 11.79      $ 11.46      $ 10.88   

Total equity to total assets

     8.38     11.31     8.74     11.60     12.59     8.03     8.75

Effect of adjustment

     (0.44     (0.64     (0.47     (0.67     (0.90     0        0   

Tangible equity to tangible assets

     7.94     10.67     8.27     10.93     11.69     8.03     8.75

Efficiency Ratio

              

Noninterest expense

   $ 5,385      $ 3,574      $ 19,024      $ 11,645      $ 8,615      $ 6,195      $ 4,052   

Income before noninterest expense

     6,688        4,473        23,340        14,985        10,116        7,293        4,552   

Provision

     245        89        1,026        685        639        1,019        1,273   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency Ratio

     77.67     78.34     78.07     74.32     80.10     74.53     69.56

 

 

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RISK FACTORS

Investing in our common stock involves a significant degree of risk. Before deciding to invest in our common stock, you should carefully consider the risks described below, together with all other information contained in this prospectus, including our historical financial statements and accompanying notes. Any of the following risks, as well as risks that we do not know of or currently deem immaterial, could materially and adversely affect our business, financial condition, results of operations, cash flows and growth prospects. As a result, the trading price of our common stock could decline, and you could lose all or part of your investment. Further, to the extent that any of the information in this prospectus constitutes forward-looking statements, the risk factors below also are cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. See “Special Note Regarding Forward-Looking Statements” beginning on page 30.

Risks Related to our Business

Our business strategy includes the continuation of growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

We have grown our business largely through the acquisition of other financial institutions and through de novo branching. Since June 14, 2006, we have opened six de novo branches and acquired South Louisiana Business Bank (“SLBB”) and First Community Bank (“FCB”) by merger. We intend to continue pursuing a growth strategy for our business through de novo branching and to evaluate attractive acquisition opportunities that are presented to us. Our growth prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies when expanding their franchise, including the following:

 

    Management of Growth. We may be unable to successfully maintain loan quality in the context of significant loan growth or maintain adequate management personnel and systems to oversee such growth, including internal audit, loan review and compliance personnel. Our growth may require that we implement additional policies, procedures and operating systems, and we may encounter difficulties in doing so at all or in a timely manner.

 

    Operating Results. There is no assurance that existing offices or future offices will maintain or achieve deposit levels, loan balances or other operating results necessary to avoid losses or produce profits. Our growth and de novo branching strategy necessarily entails growth in overhead expenses as we routinely add new offices and staff. Our historical results may not be indicative of future results or results that may be achieved as we continue to increase the number and concentration of our branch offices. Should any new location be unprofitable or marginally profitable, or should any existing location experience a decline in profitability or incur losses, the adverse effect on our results of operations and financial condition could be more significant than would be the case for a larger company.

 

    De Novo Branching. There are considerable costs involved in opening branches, and new branches generally do not generate sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly, our de novo branches can be expected to negatively impact our earnings for some period of time until the branches reach certain economies of scale. Our expenses could be further increased if we encounter delays in opening any of our de novo branches. We may be unable to accomplish future branch expansion plans due to a lack of available satisfactory sites, difficulties in acquiring such sites, increased expenses or loss of potential sites due to complexities associated with zoning and permitting processes, higher than anticipated merger and acquisition costs or other factors. Finally, we have no assurance our de novo branches or branches that we may acquire will be successful even after they have been established or acquired, as the case may be.

 

    Expansion into New Markets. As we grow into new markets in Louisiana and in other states, we are likely to encounter customer demographics and financial services offerings unlike those found in our current markets. In these markets we are likely to face competition from a wide array of financial institutions, including much larger, better-established financial institutions.

 

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Failure to successfully address these issues could have a material adverse effect on our financial condition and results of operations, and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or declines, our operating results could be materially adversely affected.

Our success depends significantly on our management team, and the loss of our senior executive officers or other key employees and our inability to recruit or retain suitable replacements could adversely affect our business, results of operations and growth prospects.

Our success depends significantly on the continued service and skills of our existing executive management team, particularly John J. D’Angelo, our President and Chief Executive Officer, Travis M. Lavergne, our Chief Credit Officer, Ryan P. Finnan, our Chief Operations Officer, Rachel P. Cherco, our Chief Financial Officer, Randolf F. Kassmeier, our General Counsel, and Christopher L. Hufft, our Chief Accounting Officer (whom the Bank hired on February 24, 2014). The implementation of our business and growth strategies also depends significantly on our ability to retain employees with experience and business relationships within their respective market areas, as well as on our ability to attract, motivate and retain highly qualified senior and middle management. We do not have employment agreements with any of our executive officers, and our officers may terminate their employment with us at any time. Competition for employees is intense, and we could have difficulty replacing such officers with personnel with the combination of skills and attributes required to execute our business and growth strategies and who have ties to the communities within our market areas. The loss of any of our key personnel could therefore have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our business is concentrated in southern Louisiana, and a regional or local economic downturn affecting southern Louisiana may magnify the adverse effects and consequences to us.

We conduct our operations almost exclusively in southern Louisiana, and more specifically, in the Baton Rouge, New Orleans, Lafayette and Hammond metropolitan areas. At March 31, 2014, approximately 98.41% of the secured loans in our loan portfolio are secured by properties and other collateral located in Louisiana, while approximately 73.82% of the loans in our loan portfolio (measured by dollar amount) were made to borrowers who live or work in either the Baton Rouge or New Orleans metropolitan area. This geographic concentration imposes a greater risk to us than to our competitors in the area who maintain significant operations outside of southern Louisiana. Accordingly, any regional or local economic downturn, or natural or man-made disaster, that affects southern Louisiana or existing or prospective property or borrowers in such area may affect us and our profitability more significantly and more adversely than our more geographically diversified competitors.

More particularly, much of our business development and marketing strategy is directed toward fulfilling the banking and financial services needs of small to medium-sized businesses. Such businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact our markets or the Louisiana market generally and these businesses are adversely affected, our financial condition and results of operations may be negatively affected.

We have a significant number of loans secured by real estate, and a downturn in the real estate market could result in losses and negatively impact our profitability.

At March 31, 2014, approximately 68.5% of our total loan portfolio had real estate as a primary or secondary component of the collateral securing the loan. The real estate provides an alternate source of repayment in the event of a default by the borrower and may deteriorate in value during the time the credit is extended. Real estate values in southern Louisiana declined in the aftermath of Hurricane Katrina in August, 2005. These values started to improve in 2006 and 2007. However, in connection with the national recession, real estate values nationally declined severely in 2008 and 2009, including in our markets. Recently, real estate values both nationally and in our markets have shown improvement. Future declines in real estate values in our southern

 

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Louisiana markets could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower’s obligations to us. Furthermore, in a declining real estate market, we often will need to further increase our allowance for loan losses to address the deterioration in the value of the real estate securing our loans. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Commercial real estate loans may expose us to greater risks than 1-4 family real estate loans.

Our loan portfolio includes non-owner-occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties, as well as real estate construction and development loans. As of March 31, 2014, our non-owner-occupied commercial real estate loans totaled $97.7 million, or 18.5% of our total loan portfolio. All of our non-owner-occupied commercial real estate loans were performing as of March 31, 2014.

Commercial real estate loans typically depend on cash flows from the property to service the debt. Cash flows, either in the form of rental income or the proceeds from sales of commercial real estate, may be affected significantly by general economic conditions. These loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. If we foreclose on these loans, our holding period for the collateral typically is longer than for a 1-4 family residential property because there are fewer potential purchasers of the collateral. Additionally, non-owner-occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on non-owner-occupied commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. Unexpected deterioration in the credit quality of our commercial real estate loan portfolio would require us to increase our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition, results of operations and growth prospects.

We are exposed to consumer credit risk.

We originate a significant number of consumer installment loans, particularly with respect to automobile finance. We are subject to credit risk resulting from defaults in payment or performance by customers for our loans, as well as loans that we sell to third parties but retain servicing rights. A weak economic environment and high unemployment rates could exert pressure on our auto loan customers resulting in higher delinquencies, repossessions and losses. There can be no assurances that our monitoring of our credit risk as it affects the value of these loans and the underlying collateral will be sufficient to prevent an effect on our profitability and financial condition.

There are also risks with respect our auto lending in particular. First, as an indirect auto lender, all of our auto loans are originated by dealerships with which we have relationships. As a result, we do not have relationships directly with the borrowers and are dependent on the relationships these dealerships have with their customers to make a determination on whether or not there are factors that would cause an otherwise qualified customer to not repay the loan. In addition, federal and state laws may prohibit, limit, or delay our repossession and sale of vehicles on defaulted automobile loan contracts, which will impair our ability to recover losses on these loans. Additional factors that may affect our ability to recoup the full amount due on an indirect auto loan include, among other things, our failure to perfect our security interest in the relevant vehicle, depreciation, obsolescence, damage or loss to the vehicle and the impact of federal and state bankruptcy and insolvency laws. Furthermore, proceeds from the sale of repossessed vehicles can fluctuate significantly based upon market conditions. A deterioration in general economic conditions could result in a greater loss in the sale of repossessed vehicles than we have historically experienced.

 

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Our allowance for loan losses may prove to be insufficient to absorb losses inherent in our loan portfolio, and we may be required to further increase our provision for loan losses.

Although we endeavor to diversify our loan portfolio in order to minimize the effect of economic conditions within a particular industry, management also maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, to absorb probable credit losses inherent in the entire loan portfolio. We maintain our allowance for loan losses at a level considered adequate by management to absorb probable loan losses, including collateral impairment, based on our analysis of our portfolio and market environment, using relevant information available to us. Among other considerations in establishing the allowance for loan losses, management considers economic conditions reflected within industry segments, the unemployment rate in our markets, loan segmentation and historical losses that are inherent in the loan portfolio.

As of March 31, 2014, our allowance for loan losses as a percentage of total loans, net of unearned income, was 0.67% and as a percentage of total nonperforming loans was 206%. The determination of the appropriate level of the allowance is inherently subjective and requires us to make significant estimates of current credit risks and future trends, all of which are subject to material changes. In addition, loans acquired in connection with business combination transactions are measured at fair value, based on management’s estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. Because fair value measurements incorporate assumptions regarding credit risk, no allowance for loan losses related to the acquired loans is recorded on the acquisition date.

Inaccurate management assumptions, including with respect to the fair value of acquired loans, continuing deterioration of economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loan losses. In addition, bank regulatory agencies periodically review the allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Finally, if actual charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital and may have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Lack of seasoning of our loan portfolio could increase the risk of future credit defaults.

As a result of our growth over the past three years, a large portion of loans in our loan portfolio and of our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because a large portion of our portfolio is relatively new, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could materially adversely affect our business, financial condition, results of operations and growth prospects.

We are subject to interest rate risk.

The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates. Our earnings, like that of most financial institutions, are significantly dependent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and investment securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowings. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our

 

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position, this “gap” will negatively impact our earnings. At March 31, 2014, our interest sensitivity profile was somewhat liability sensitive, meaning that our net interest expense would increase more from rising interest rates than from falling interest rates.

Interest rates are highly sensitive to many factors that are beyond our control, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits, the fair value of our financial assets and liabilities and the average duration of our assets. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

In addition, as interest rates increase, the ability of borrowers to repay their current loan obligations could be negatively impacted, which would adversely affect our results of operations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs but also necessitate further increases to the allowance for loan losses. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income, but we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income. On the other hand, in a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their loans at lower rates.

If short-term interest rates remain at their historically low levels for a prolonged period, and assuming longer term interest rates fall further, we could experience net interest margin compression as our interest-earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. Such an occurrence would have a material adverse effect on our net interest income and our results of operations.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting which would harm our business and the trading price of our securities.

As a public company, our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on that system of internal control. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. We are currently in the process of establishing a system of internal control over financial reporting that will enable us to comply with our obligations under the federal securities laws and other applicable legal requirements. As an emerging growth company, we are exempt from the requirement under the Sarbanes-Oxley Act of 2002 to obtain an attestation report from our auditors on management’s assessment of our internal control over financial reporting, and we have not received such a report.

In connection with the preparation of our financial statements for the year ended December 31, 2013, we identified significant deficiencies in our internal control over financial reporting related to complex accounting transactions and financial closing matters. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness yet important enough to merit attention by those responsible for oversight of our financial reporting. At the direction of our senior management, we have taken what we believe are the appropriate actions to remediate these significant deficiencies, including, among other things, hiring additional accounting personnel, using outside accountants and consultants to supplement our internal staff and improving our internal control procedures. We will continue

 

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to periodically test and update our internal control systems, including our financial reporting controls, but we can give no assurances that our actions will be sufficient to result in an effective internal control environment.

If we are unable to implement and maintain our system of internal control over financial reporting free from material weaknesses or are otherwise unable to comply in a timely manner with the requirements under federal law and regulations with respect to our internal control over financial reporting, we may not be able to report our financial results accurately and timely. As a result, investors, counterparties and customers may lose confidence in the accuracy and completeness of our financial reports. In addition, we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources. As a result of these investigations, we could be required to implement expensive and time-consuming remedial measures, including the potential delisting of our securities from the Nasdaq Global Market. Any of these events could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Hurricanes or other adverse weather conditions, as well as man-made disasters, could negatively affect our local markets or disrupt our operations, which may adversely affect our business and results of operations.

Our business is concentrated in southern Louisiana, and in the Baton Rouge, New Orleans, Lafayette and Hammond metropolitan areas in particular. Southern Louisiana is susceptible to major hurricanes, floods, tropical storms and other natural disasters and adverse weather. These natural disasters can disrupt our operations, cause widespread property damage and severely depress the local economies in which we operate. For example, Hurricane Gustav in 2008 severely impacted our headquarters city of Baton Rouge, with power in many areas of the city not being restored for nearly three weeks after the hurricane. The 2010 Deepwater Horizon oil spill in the Gulf of Mexico illustrates that man-made disasters can also adversely affect economic activity in the markets in which we operate. Any economic decline as a result of a natural disaster, adverse weather, oil spill or other man-made disaster can reduce the demand for loans and our other products and services.

Such events could also affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans (resulting in increased delinquencies, foreclosures and loan losses), impair the value of collateral securing such loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. The occurrence of any such event could, therefore, result in decreased revenue and loan losses that have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We are subject to a variety of risks in connection with any sale of loans we may conduct.

As discussed elsewhere in this prospectus, we sell certain mortgage loans that we originate as well as pools of our auto loans. In connection with these sales, we are typically required to make representations and warranties to the purchaser about the loans sold and the procedures under which those loans have been originated. If these representations and warranties are incorrect, we may be required to indemnify the purchaser for its losses or we may be required to repurchase part or all of the affected loans. Borrower fraud may also cause us to have to repurchase loans that we have sold. If we are required to make any indemnity payments or repurchases and do not have a remedy available to us against a solvent counterparty, we may not be able to recover our losses resulting from these indemnity payments and repurchases. Consequently, our results of operations may be adversely affected.

Federal Reserve quantitative easing and other government programs designed to support the economy could result in inflation and other adverse effects on the economy in general and financial institutions in particular.

It is currently a matter of significant debate among economists, governmental banking agencies and others regarding the likelihood of significant inflation across some or all asset classes, both in the United States and in the global economy. Some policymakers have taken the position that an increase in inflation will be beneficial, rather than harmful, to the U.S. economy. If governmental policies or general market factors result in an increase

 

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in inflation, such increase could significantly affect our profitability and operations. We expect the Board of Governors of the Federal Reserve System, or the Federal Reserve, to continue to support the growth of the money supply in the United States by keeping the Federal funds rate low and by continuing to purchase a substantial amount of U.S. Treasuries and other debt securities (referred to as “quantitative easing”), although the level of purchases has begun to be gradually reduced. If the U.S. economy continues to demonstrate weakness or only sluggish growth in upcoming periods, it seems likely that at least some level of monetary easing will continue for a protracted period. If this occurs, an increase in inflation will become more likely, and any such increase will place significant pressure on bank deposit levels, which may have a material adverse effect on all financial institutions, including the Bank.

Factors outside our control could result in impairment of or losses with respect to our investment securities.

There are many factors beyond our control that can significantly influence, and adversely change, the fair value of the securities in our portfolio. Factors include, for example, rating agency downgrades of the securities, defaults by the issuer or continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely affect our business, results of operations, financial condition and growth prospects. The process for determining whether impairment of a security is other-than-temporary usually requires difficult, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.

We may need to raise additional capital in the future to execute our business strategy.

In addition to the liquidity that we require to conduct our day-to-day operations, the Company, on a consolidated basis, and Investar Bank, on a stand-alone basis, must meet certain regulatory capital requirements. With the implementation of certain new regulatory requirements, such as the Basel III accord and the capital requirements enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, financial institutions may be required to establish higher tangible capital requirements. Also, we may need capital to finance acquisitions.

Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our business, financial condition, results of operations and growth prospects could be materially and adversely affected.

Competition in our industry is intense, which could adversely affect our growth and profitability.

We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and have substantially greater resources than we have, including higher total assets and capitalization, a more extensive and established branch network, greater access to capital markets and a broader offering of financial services. Such competitors primarily include national, regional and community banks within the various markets in which we operate. Because of their scale, many of these competitors can be more aggressive than we can on loan and deposit pricing. We also face competition from many other types of financial institutions, including savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. Many of these entities have fewer regulatory constraints and may have lower cost structures than we do.

Our industry could become even more competitive as a result of legislative and regulatory changes as well as continued consolidation. The increased regulatory requirements imposed on financial institutions as well as the economic downturn in the United States have already resulted in the consolidation of a number of financial

 

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institutions, in addition to acquisitions of failed institutions. We expect additional consolidation to occur. Finally, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. If we are unable to successfully compete, our business, financial condition, results of operations and growth prospects will be materially adversely affected.

We may fail to realize the anticipated benefits of our recent acquisitions.

The success of our recent acquisitions of SLBB and FCB will depend on a number of factors, including, as to each acquisition, the following:

 

    our ability to realize anticipated long-term cost savings and the amount of such realized savings;

 

    the extent to which we are able to retain and grow acquired customer relationships;

 

    how profitably (if at all) we deploy the capital acquired in the transaction; and

 

    our ability to successfully manage the combined operations.

If we are not able to successfully achieve these objectives, the anticipated benefits of the acquisitions may not be realized fully or at all or may take longer to realize than expected. For example, we may experience increased credit costs or need to take additional markdowns and make additional provisions to the allowance for loan losses on the loans acquired from SLBB and FCB, which would reduce the benefits of the applicable acquisition. Additionally, we have made fair value estimates of certain assets and liabilities in recording each acquisition. Actual values of these assets and liabilities could differ from our estimates, which could result in our not achieving the anticipated benefits of the particular acquisition.

Any of these factors could adversely affect our financial condition and results of operations in the future.

If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could require charges to earnings, which would have a negative impact on our financial condition and results of operations.

Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase of another financial institution. We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of the asset might be impaired.

We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of March 31, 2014, our goodwill totaled $2.7 million. While we have not recorded any such impairment charges since we initially recorded the goodwill, there can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.

We may face risks with respect to future acquisitions.

When we attempt to expand our business in Louisiana and other states through mergers and acquisitions, we seek targets that are culturally similar to us, have experienced management and possess either significant market presence or have potential for improved profitability through economies of scale or expanded services. In addition to the general risks associated with our growth plans highlighted above, acquiring other banks, businesses or branches involves various risks commonly associated with acquisitions, including, among other things:

 

    the time and costs associated with identifying and evaluating potential acquisition and merger targets;

 

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    inaccuracies in the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution;

 

    the time and costs of evaluating new markets, hiring experienced local management and opening new bank locations, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;

 

    our ability to finance an acquisition and possible dilution to our existing shareholders;

 

    the diversion of our management’s attention to the negotiation of a transaction;

 

    the incurrence of an impairment of goodwill associated with an acquisition and adverse effects on our results of operations;

 

    entry into new markets where we lack experience; and

 

    risks associated with integrating the operations and personnel of the acquired business in a manner that permits growth opportunities and does not materially disrupt existing customer relationships or result in decreased revenues resulting from any loss of customers.

With respect to the risks particularly associated with the integration of an acquired business, we may encounter a number of difficulties, such as:

 

    customer loss and revenue loss;

 

    the loss of key employees;

 

    the disruption of our operations and business;

 

    our inability to maintain and increase competitive presence;

 

    possible inconsistencies in standards, control procedures and policies; and/or

 

    unexpected problems with costs, operations, personnel, technology and credit.

In addition to the risks posed by the integration process itself, the focus of management’s attention and effort on integration may result in a lack of sufficient management attention to other important issues, causing harm to our business. Also, general market and economic conditions or governmental actions affecting the financial industry generally may inhibit our successful integration of an acquired business.

We expect to continue to evaluate merger and acquisition opportunities that are presented to us and conduct due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Historically, acquisitions of non-failed financial institutions involve the payment of a premium over book and market values, and, therefore, some dilution of our book value and net income per share may occur in connection with any future transaction. Failure to realize the expected revenue increases, cost savings, increases in geographic or product presence and/or other projected benefits from an acquisition could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

The obligations associated with being a public company will require significant resources and management attention, which will increase our costs of operations and may divert focus from our business operations.

We have not been required in the past to file periodic reports with the Securities and Exchange Commission, or the SEC, or to have our consolidated financial statements completed, reviewed or audited and filed prior to a specified deadline. As a publicly traded company following completion of this offering, we will be required to file periodic reports containing our consolidated financial statements with the SEC within a specified time following the completion of quarterly and annual periods. There are also significant financial, legal, accounting,

 

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insurance and other expenses associated with being a public company in addition to the costs associated with complying with the SEC’s reporting requirements. Not only will meeting our obligations as a public company result in our incurrence of additional costs, but they will also occupy a material portion of management’s time that would have been used to implement our growth strategy and other strategic initiatives and otherwise manage our day-to-day operations. Although we cannot predict or estimate the amount of additional costs we may incur in order to comply with our obligations as a public company, we anticipate that these costs will materially increase our general and administrative expenses.

As a business operating in the financial services industry, our business and operations may be adversely affected by current economic conditions.

General business and economic conditions in the United States and abroad can materially affect our business and operations. A weak U.S. economy is likely to cause uncertainty about the federal fiscal policymaking process, the medium and long-term fiscal outlook of the federal government and future tax rates. In addition, economic conditions in foreign countries, including uncertainty over the stability of the euro currency, could affect the stability of global financial markets, which could hinder U.S. economic growth.

Weak economic conditions are characterized by deflation, fluctuations in debt and equity capital markets, a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. The current economic environment in the United States is also characterized by interest rates at historically low levels, which impacts our ability to attract deposits and to generate attractive earnings through our investment portfolio. All of these factors are detrimental to our business, and the interplay between these factors can be complex and unpredictable. Our business is also significantly affected by monetary and related policies of the U.S. federal government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

A lack of liquidity could adversely affect our ability to fund operations and meet our obligations as they become due.

Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations as they come due because of an inability to liquidate assets or obtain adequate funding. The primary source of the Bank’s funds are customer deposits and loan repayments, while borrowings are a secondary source of liquidity. Our access to deposits and other funding sources in adequate amounts and on acceptable terms is affected by a number of factors, including rates paid by competitors, returns available to customers on alternative investments and general economic conditions. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to our shareholders, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our business, financial condition, results of operations and growth prospects.

We rely on information technology and telecommunications systems and third party vendors, and our failure to effectively implement new technology or a breach, computer virus or disruption of service could adversely affect our operations and financial condition.

Our industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. We believe that improved technology allows us to serve our customers in a more efficient and less costly manner. Our ability to compete successfully to some extent depends on whether we can implement new technologies to provide products and services to our customers while avoiding significant operational challenges that increase our costs or delay full implementation of technology enhancements or new products, especially relative to our peers (many of which have greater resources to devote to technological improvements).

 

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Although new technologies enable us to enhance the products and services we offer our customers, this technology exposes us to certain risks. First, the successful and uninterrupted functioning of our information technology and telecommunications systems is critical to our business. We outsource many of our major systems, such as data processing, loan servicing and deposit processing. If one of these third-party service providers terminates their relationship with us or fails to provide services to us for any reason or provides such services poorly, our business will be negatively affected. In addition, we may be forced to replace such vendor, which could interrupt our operations and result in a higher cost to us.

Another risk associated with our reliance on technology is our potential vulnerability to security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers as well as to damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event. We have attempted to address these concerns by backing up our systems as well as retaining qualified third party vendors to test and audit our network. However, there can be no guarantees that our efforts will continue to be successful in avoiding problems with our information technology and telecommunications systems. If our efforts are unsuccessful, security breaches, viruses and other technology disruptions could expose us to claims, regulatory scrutiny, litigation and other possible liabilities, in addition to a loss of the confidence of our existing customers in the reliability of our systems.

We are subject to environmental liability risk associated with our lending activities.

A significant portion of our loan portfolio is secured by real property. Also, in the ordinary course of business, we may foreclose on and take title to properties securing certain loans or purchase real estate to expand our facilities. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, financial condition, results of operations and growth prospects. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although management has policies and procedures to perform an environmental review before the loan is recorded and before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards.

Risks Related to Our Industry

We operate in a highly regulated environment, which could restrain our growth and profitability.

We are subject to extensive regulation and supervision that governs almost all aspects of our operations, including, among other things, our lending practices, capital structure, investment practices, dividend policy, operations and growth. These laws and regulations, and the supervisory framework that oversees the administration of these laws and regulations, are primarily intended to protect consumers, depositors, the Deposit Insurance Fund and the banking system as a whole, and not shareholders and counterparties. Furthermore, new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry, impose restrictions on our operations and our ability to conduct business consistent with historical practices, including in the areas of compensation, interest rates, financial product offerings and disclosures, and have an effect on bankruptcy proceedings with respect to consumer residential real estate mortgages, among other things. Finally, after the completion of this offering, we will be subject to additional laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and SEC regulations.

Our efforts to comply with these additional laws, regulations and standards are likely to result in increased expenses and a diversion of management time and attention. The information under the heading Supervision and

 

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Regulation beginning on page 86 of this prospectus provides more information regarding the regulatory environment in which we and Investar Bank operate.

Financial reform legislation enacted by Congress will, among other things, tighten capital standards and result in new laws and regulations that likely will increase our costs of operations.

The Dodd-Frank Act was signed into law on July 21, 2010. This law significantly changed the then-existing bank regulatory structure and affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act changes the regulatory structure to which we are subject in numerous ways, including, but not limited to, the following:

 

    The base for FDIC insurance assessments has been changed to a bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base, while the FDIC’s authority to raise insurance premiums has been expanded.

 

    The current standard deposit insurance limit has been permanently raised to $250,000.

 

    The FDIC must raise the ratio of reserves to deposits from 1.15% to 1.35% for deposit insurance purposes by September 30, 2020 and to “offset the effect” of increased assessments on insured depository institutions with assets of less than $10.0 billion.

 

    The interchange fees payable on debit card transactions have been limited.

 

    There are multiple new provisions affecting corporate governance and executive compensation at all publicly traded companies.

 

    All federal prohibitions on the ability of financial institutions to pay interest on commercial demand deposit accounts have been repealed.

Our management continues to assess the impact on our operations of the Dodd-Frank Act and its regulations, many of which have yet to be proposed or adopted or are to be phased-in over the next several months and years. Because the impact of many of the regulations adopted pursuant to the Dodd-Frank Act may not be known for some time, it is difficult to predict at this time what specific impact the Dodd-Frank Act will have on us. However, it is expected that at a minimum our operating and compliance costs will increase, and our interest expense could increase.

In addition to the foregoing, the Dodd-Frank Act established the Bureau of Consumer Financial Protection (the “CFPB”) as an independent entity within the Federal Reserve. The CFPB has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards, as well as with respect to certain mortgage-related matters, such as steering incentives, determinations as to a borrower’s ability to repay and prepayment penalties. In March, 2013, the CFPB issued a bulletin indicating its intention to review the policies and practices of indirect auto lenders with regard to pricing activities and advising auto lenders to take appropriate steps to ensure compliance with the fair lending provision of the Equal Credit Opportunity Act, or the ECOA. Additionally, the CFPB has begun investigating indirect auto lenders over the sale and financing of extended warranties and other add-on products. Although we believe our auto lending practices comply with existing law and regulation, new rulemaking by the CFPB as well enforcement actions it brings to enforce the ECOA or other laws within its jurisdiction, if applicable to the Bank, could require us to cease or alter our auto lending practices, which in turn could have a material adverse effect on our business, results of operations, financial condition and growth prospects.

Federal and state regulators periodically examine our business, and we may be required to remediate adverse examination findings.

The Federal Reserve, the FDIC and the Louisiana Office of Financial Institutions, or the OFI, periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a

 

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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.

We may be required to pay significantly higher FDIC deposit insurance premiums in the future.

The deposits of Investar Bank are insured by the FDIC up to legal limits and, accordingly, subject it to the payment of FDIC deposit insurance assessments. A bank’s regular assessments are determined by its risk classification, which is based on its regulatory capital levels and the level of supervisory concern that it poses. Recent insured depository institution failures, as well as deterioration in banking and economic conditions generally, have significantly increased the losses of the FDIC, resulting in a decline in the designated reserve ratio of the FDIC to historical lows. To restore this reserve ratio and bolster its funding position, the FDIC imposed a special assessment on depository institutions and also increased deposit insurance assessment rates. Further increases in assessment rates are possible in the future, especially if there are additional bank failures. Any increase in deposit insurance assessment rates, or any future special assessment, could materially and adversely affect our business, results of operations, financial condition and growth prospects.

The short-term and long-term impact of the new regulatory capital rules is uncertain.

In July 2013, each of the U.S. federal banking agencies adopted final rules implementing the recommendations of the International Basel Committee on Bank Supervision to strengthen the regulatory capital requirements of all banking organizations in the United States. The new capital framework, referred to as Basel III, will replace the existing regulatory capital rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies. The final Basel III rules became effective on January 1, 2014, although the Company and Investar Bank will not be required to be in compliance with the final Basel III rules until January 1, 2015, and the rules will not be fully phased-in until January 1, 2019.

Basel III creates a new regulatory capital standard based on tier 1 common equity and increases the minimum leverage and risk-based capital ratios applicable to all banking organizations. Basel III also changes how a number of the regulatory capital components are calculated. We cannot predict whether the proposed rules will be adopted in the form proposed or if they will be modified in any material way during the rulemaking process. Consequently, the ultimate timing and scope of any U.S. implementation of Basel III remains uncertain. However, any significant increase in our capital requirement could reduce our growth and profitability and materially adversely affect our business, financial condition, results of operations and growth prospects.

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 Community Reinvestment Act, or CRA, 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 Community Reinvestment Act or fair lending laws and regulations is found

 

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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 FDIC’s assessment of our compliance with CRA provisions 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.

Risks Related to an Investment in our Common Stock

An active, liquid market for our common stock may not develop or be sustained following the offering, and you may not be able to sell your common stock when or in the amounts you wish to.

Prior to this offering, there has been no established public trading market for our common stock. Our common stock has been approved for listing on the Nasdaq Global Market. Nevertheless, an active trading market for shares of our common stock may not develop or be sustained following the offering. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of our common stock, over which we have no control. If an active market does not develop, shareholders may not be able to sell their shares at the volume, prices and times desired. The initial public offering price for our common stock has been determined by negotiations between us and the representative of the underwriters. The price may not be indicative of prices that will prevail in the open market after this offering. The market price of our common stock may decline below the initial offering price, and you may not be able to sell your common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to expand our business by using our common stock as consideration.

The market price of our common stock may be volatile following this offering, and our stock price may fall below the initial public offering price at the time you desire to sell your shares of our common stock, resulting in a loss on your investment.

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 or anticipated variations in our quarterly and annual operating results, financial condition or asset quality;

 

    changes in general economic or business conditions, both domestically and internationally;

 

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    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;

 

    the number of securities analysts covering us;

 

    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 deem comparable to us;

 

    the average daily trading volume of our common stock;

 

    future issuances of our common stock or other securities;

 

    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 core market 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 many cases, these changes have been unrelated to the operating performance and prospects of particular companies. 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 you to resell your shares at the volume, prices and times desired.

We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act. While we retain this status, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. See Implications of Being an Emerging Growth Company on page i of this prospectus. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions, or if we choose to rely on additional exemptions in the future. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Investors in this offering will experience immediate dilution as a result of this offering.

The initial public offering price is higher than the net tangible book value per share of our common stock immediately following the offering. Therefore, if you purchase common stock in this offering, you will experience immediate dilution in tangible book value per share in relation to the price that you paid for your shares. The dilution as a result of the offering will be $0.88 per share, and our pro forma net tangible book value of $13.12 per share as of March 31, 2014. This represents 6.3% dilution from the initial public offering price. For a further discussion of the dilution you will experience immediately after this offering, see the Dilution section beginning on page 36 of this prospectus.

 

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Shares eligible for future sale could have a dilutive effect.

Shares of our common stock eligible for future sale, including those that may be issued in any other private or public offering of our common stock for cash or as incentives under incentive plans, could have a dilutive effect on the market for our common stock and could adversely affect market prices. All of the shares of common stock sold in this offering (including 431,250 additional shares if the underwriters exercise their purchase option in full) will be freely tradable, except that any shares purchased by “affiliates” (as that term is defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act) may be sold publicly only in compliance with the limitations described under the heading Shares Eligible For Future Sale beginning on page 118 of this prospectus. The remaining 3.9 million outstanding shares of our common stock, or 54.4% of our outstanding shares (assuming the underwriters exercise their purchase option in full), will be deemed to be “restricted securities” as that term is defined in Rule 144, and may be sold in the market over time in private transactions or future public offerings. We also intend to file a registration statement on Form S-8 under the Securities Act to register up to 600,000 shares of common stock issued or reserved for future issuance under our Equity Incentive Plan. We may issue all of these shares without any action or approval by our shareholders, and these shares, once issued (including upon exercise of outstanding options), will be available for sale into the public market, subject to the restrictions described above, if applicable, for affiliate holders.

Our management will have broad discretion in the use of the net proceeds from this offering, and the use of such proceeds may not yield a favorable return on your investment.

We expect to use the net proceeds of this offering for general working capital and other corporate purposes, which may include, among other things, funding loans and purchasing investment securities through the Bank. We may also use the net proceeds to fund acquisition opportunities, although we have no present plans in that regard. You may not agree with how our management ultimately decides to use the proceeds of this offering. In addition, we may not use the proceeds of this offering effectively or in a manner that increases our market value or enhances our profitability. There is no set timetable for when we will deploy the proceeds, and we cannot predict this timetable. Investing the offering proceeds in securities until we are able to deploy the proceeds will provide lower margins than we generally earn on loans, potentially adversely affecting shareholder returns, including earnings per share, return on assets and return on equity. See the Use of Proceeds section on page 31 of this prospectus.

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 of directors may declare out of funds legally available for the payment of dividends. Although prior to the Share Exchange Investar Bank paid dividends to its shareholders over the past two years and after the Share Exchange the Company paid a dividend to its shareholders on January 31, 2014 and has declared a dividend payable on July 31, 2014 to shareholders of record as of June 24, 2014, we have no obligation to continue paying dividends, and we may change our dividend policy at any time without notice to our shareholders. As of the date of this prospectus, our intention is to pay a quarterly cash dividend after the offering.

Since the Company’s primary asset is its stock of Investar Bank, we are dependent upon dividends from the Bank to pay our operating expenses, satisfy our obligations and to pay dividends on the Company’s common stock. Accordingly, any declaration and payment of dividends on common stock will substantially depend upon the Bank’s earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate and other factors deemed relevant by our board of directors. Furthermore, consistent with our strategic plans, growth initiatives, capital availability, projected liquidity needs, and other factors, we have made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends, if any, paid to our shareholders.

In addition, there are numerous laws and banking regulations that limit our and Investar Bank’s ability to pay dividends. For Investar Bank, federal and state statutes and regulations require, among other things, that the

 

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Bank maintain certain levels of capital in order to pay a dividend. Further, state and federal banking authorities have the ability to restrict the payment of dividends by supervisory action. At the holding company level, the Federal Reserve Board has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s overall asset quality, level of current and prospective earnings and level, composition and quality of capital. The guidance requires that a company inform and consult with the Federal Reserve Board prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to its capital structure.

For additional information, refer to the information under the heading Dividend Policy beginning on page 32 of this prospectus.

Our Restated Articles of Incorporation and By-laws, and certain banking laws applicable to us, could have an anti-takeover effect that decreases our chances of being acquired, even if our acquisition is in our shareholders’ best interests.

Certain provisions of our restated articles of incorporation and by-laws, and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of our organization or conduct a proxy contest, even if those events were perceived by many of our shareholders as beneficial to their interests. These provisions, and the corporate and banking laws and regulations applicable to us:

 

    enable our board of directors to issue additional shares of authorized, but unissued capital stock. In particular, our board may issue “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by the board;

 

    enable our board of directors to increase the size of the board and fill the vacancies created by the increase;

 

    enable our board of directors to amend our by-laws without shareholder approval;

 

    require advance notice for director nominations and other shareholder proposals; and

 

    require prior regulatory application and approval of any transaction involving control of our organization.

These provisions may discourage potential acquisition proposals and could delay or prevent a change in control, including circumstances in which our shareholders might otherwise receive a premium over the market price of our shares.

Our issuance of preferred stock could adversely affect holders of our common stock and discourage a takeover.

Our shareholders authorized our board of directors to issue up to 5,000,000 shares of preferred stock without any further action on the part of our shareholders. The board also has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our board of directors to issue shares of preferred stock without any action on the part of our shareholders may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.

 

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Holders of the junior subordinated debentures have rights that are senior to those of our common shareholders.

We assumed junior subordinated debentures in connection with the FCB acquisition. At March 31, 2014, we had trust preferred securities and accompanying junior subordinated debentures with a carrying value of $3.6 million. Payments of the principal and interest on the trust preferred securities of these trusts are conditionally guaranteed by us. Further, the junior subordinated debentures we issued to the trusts are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on our junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our common stock.

An investment in our common stock is not an insured deposit and is subject to risk of loss.

Your investment in our common stock will not be a bank deposit and will not be insured or guaranteed by the FDIC or any other government agency. Your investment will be subject to investment risk, and you must be capable of affording the loss of your entire investment.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include statements relating to our projected growth, anticipated future financial performance, financial condition, credit quality and performance goals, as well as statements relating to the anticipated effects on our business, financial condition and results of operations from expected developments, our growth and potential acquisitions. These statements can typically be identified through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “think,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable of a future or forward-looking nature.

Our forward-looking statements in this prospectus are based on assumptions and estimates that management believes to be reasonable in light of the information available at this time. However, many of these statements are inherently uncertain and beyond our control and could be affected by many factors. Factors that could have a material effect on our business, financial condition, results of operations and future growth prospects can be found in the Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of this prospectus beginning on pages 12 and 53 of this prospectus, respectively, and elsewhere in this prospectus. These factors include, but are not limited to, the following, any one or more of which could materially affect the outcome of future events:

 

    business and economic conditions generally and in the financial services industry in particular, whether nationally, regionally or in the markets in which we operate;

 

    our ability to achieve organic loan and deposit growth, and the composition of that growth;

 

    changes (or the lack of changes) in interest rates, yield curves and interest rate spread relationships that affect our loan and deposit pricing and changes in quantitative easing by the Federal Reserve;

 

    the extent of continuing client demand for the high level of personalized service that is a key element of our banking approach as well as our ability to execute our strategy generally;

 

    our dependence on our management team, and our ability to attract and retain qualified personnel;

 

    changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries or in the repayment ability of individual borrowers;

 

    inaccuracy of the assumptions and estimates we make in establishing reserves for probable loan losses and other estimates;

 

    the concentration of our business within our geographic areas of operation in Louisiana;

 

    concentration of credit exposure;

 

    deteriorating asset quality and higher loan charge-offs, and the time and effort necessary to resolve problem assets;

 

    a lack of liquidity, including as a result of a reduction in the amount of deposits we hold or other sources of liquidity;

 

    our potential growth, including our entrance or expansion into new markets, and the need for sufficient capital to support that growth;

 

    difficulties in identifying attractive acquisition opportunities and strategic partners that will complement our private banking approach;

 

    our ability to efficiently integrate acquisitions into our operations, retain the customers of acquired businesses and grow the acquired operations;

 

    the impact of litigation and other legal proceedings to which we become subject;

 

    data processing system failures and errors;

 

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    the expenses we will incur to operate as a public company;

 

    competitive pressures in the consumer finance, commercial finance, retail banking, mortgage lending and auto lending industries, as well as the financial resources of, and products offered by, competitors;

 

    the impact of changes in laws and regulations applicable to us, including banking, securities and tax laws and regulations and accounting standards, as well as changes in the interpretation of such laws and regulations by our regulators;

 

    changes in the scope and costs of FDIC insurance and other coverages;

 

    governmental monetary and fiscal policies;

 

    hurricanes, other natural disasters and adverse weather; oil spills and other man-made disasters; acts of terrorism, an outbreak of hostilities or other international or domestic calamities, acts of God and other matters beyond our control; and

 

    other circumstances, many of which are beyond our control.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this prospectus. 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.

USE OF PROCEEDS

The net proceeds to us from the sale of our common stock in this offering will be approximately $36.2 million (or approximately $41.8 million if the underwriters exercise in full their option to purchase additional shares of common stock from us), after deducting estimated underwriting discounts and offering expenses.

We intend to use the net proceeds of this offering (substantially all of which we intend to contribute to the capital of the Bank after repaying amounts outstanding under the line of credit discussed below) primarily to support growth in our loan and investment securities portfolios, to bolster our capital in light of the heightened capital standards under the Basel III accord, to permit future strategic acquisitions and for other general working capital and corporate purposes, all while maintaining our capital ratios at acceptable levels. In addition, a larger capital base will increase our legal lending limit, permitting us to make larger loans and to better penetrate our market areas. To support our balance sheet growth while maintaining the Bank’s capital at levels set by management until the completion of this offering, we established a $5.0 million line of credit with another bank. This line of credit, the entire amount of which has been drawn and contributed to the Bank (or will have been so drawn and contributed prior to the completion of this offering), bears interest at a floating rate equal to the prime rate quoted in The Wall Street Journal and is secured by a pledge of all of the stock of the Bank. We intend to repay all amounts outstanding under this line of credit with the proceeds of this offering. Although in the ordinary course of our business we evaluate potential acquisition opportunities from time to time, we do not have any immediate plans, arrangements or understandings relating to any specific acquisition or similar transaction.

Our management will retain broad discretion to allocate the net proceeds of this offering, and the precise amounts and timing of our use of the net proceeds of this offering will depend upon market conditions, as well as other factors. Until we deploy the proceeds of this offering for the uses described above, we expect to hold such proceeds in short-term investments.

 

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DIVIDEND POLICY

The following table shows the amount and timing of dividends paid on shares of Investar Bank’s common stock in 2012 and 2013 prior to the Share Exchange and on shares of the Company’s common stock subsequent to the Share Exchange in 2014:

 

Declaration Date

   Payment Date    Amount Per Share  

December 31, 2011

   January 31, 2012    $ 0.0118   

March 31, 2012

   April 30, 2012      0.0117   

June 30, 2012

   July 31, 2012      0.0112   

September 30, 2012

   October 31, 2012      0.0115   

December 19, 2012

   February 28, 2013      0.0117   

March 20, 2013

   May 31, 2013      0.0118   

July 17, 2013

   August 31, 2013      0.0119   

September 18, 2013

   October 31, 2013      0.0120   

January 15, 2014

   January 31, 2014      0.0121   

June 13, 2014

   July 31, 2014      0.0123   

Subject to prior approval from our board of directors, we intend to continue the payment of a cash dividend on a quarterly basis to holders of our common stock. Our board of directors may change the amount of, or entirely eliminate the payment of, future dividends at its discretion, without notice to our shareholders. We are in no way obligated to pay dividends on our common stock. Any future determination relating to our dividend policy will depend upon a number of factors, including, but not limited to: (1) our historical and projected financial condition, liquidity and results of operations, (2) our capital levels and needs, (3) any acquisitions or potential acquisitions that we are considering, (4) contractual, statutory and regulatory prohibitions and other limitations (as briefly discussed below), (5) general economic conditions and (6) other factors deemed relevant by the board. There can be no assurances that we will be able to pay dividends to holders of our common stock.

Our ability to pay dividends may be limited on account of the junior subordinated debentures that we assumed in the FCB acquisition, which are senior to our shares of common stock. At March 31, 2014, the carrying value of our junior subordinated debentures was $3.6 million. We must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. Interest accrues on the debentures at a floating rate equal to three-month LIBOR + 1.77% and is payable quarterly in arrears on March 16, June 16, September 16 and December 16 of each year. The amount of the quarterly interest payment due on our junior subordinated debentures for the period from December 16, 2013 through March 16, 2014 was approximately $18,000, which we paid in full in a timely manner. We have the right to defer distributions on our junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our common stock.

As a Louisiana corporation, we are subject to certain restrictions on dividends under the Louisiana Business Corporation Law. Generally, a Louisiana corporation may pay dividends to its shareholders out of its surplus (the excess of its assets over its liabilities and stated capital) or out of its net profits for the then current and preceding fiscal year unless the corporation is insolvent or the dividend would render the corporation insolvent. Our status as a bank holding company also affects our ability to pay dividends, in two ways:

 

    Since we are a holding company with no material business activities, our ability to pay dividends is substantially dependent upon the ability of Investar Bank to transfer funds to us in the form of dividends, loans and advances. The Bank’s ability to pay dividends and make other distributions and payments to us is itself subject to various legal, regulatory and other restrictions.

 

    As a holding company of a bank, our payment of dividends must comply with the policies and enforcement powers of the Federal Reserve.

 

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For additional information about the regulatory restrictions and limitations on both us and Investar Bank with respect to the payment of dividends, refer to the information in the Supervision and Regulation section under the headings —Supervision and Regulation of Investar Holding Corporation, Payment of Dividends; Source of Strength on page 89 of this prospectus and —Supervision and Regulation of Investar Bank, Dividends on page 91 of this prospectus.

 

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CAPITALIZATION

The following table sets forth our consolidated capitalization, including regulatory capital ratios on a consolidated basis, as of March 31, 2014, (1) on an actual basis and (2) on an as adjusted basis after giving effect to the net proceeds from our sale of 2,875,000 shares of common stock in this offering (assuming the underwriters do not exercise their purchase option), after (i) deducting estimated underwriting discounts and the estimated offering expenses payable by us and (ii) the repayment of our $5.0 million line of credit described in Use of Proceeds above. You should read the following table in conjunction with the sections titled Selected Financial Information and Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

     As of March 31, 2014  
     Actual     As
Adjusted
 
     (dollars in thousands,
except share amounts
and per share data)
 

Long-term borrowings:

    

FHLB advances

   $ 34,218      $ 34,218   

Note payable

     3,609        3,609   

Total long-term borrowings

   $ 37,827      $ 37,827   

Stockholders’ equity:

    

Common stock, $1.00 par value per share, 40,000,000 shares authorized, 3,945,029 shares issued and outstanding; and 6,820,029 shares issued and outstanding, as adjusted

     3,943        6,819   

Preferred stock, no par value, 5,000,000 shares authorized

     —          —     

Treasury stock

     (1     (1

Surplus

     45,322        81,520   

Retained earnings

     7,440        7,440   

Accumulated other comprehensive (loss) income

     (206     (206
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 56,498      $ 95,572   

Total capitalization(1)

   $ 3,609      $ 3,609   

Capital ratios:

    

Total risk-based capital

     10.84     17.27

Tier 1 risk-based capital

     10.21     16.64

Tier 1 leverage capital

     8.80     13.58

Total stockholders’ equity to assets

     8.38     13.05

Tangible equity to tangible assets(2)

     7.94     12.65

Basel III capital ratios(3):

    

Tier 1 common equity

     10.14     16.62

Tier 1 risk-based capital

     10.14     16.62

Tier 1 leverage capital

     8.75     13.58

Total risk-based capital

     10.77     17.25

Per share data:

    

Book value

   $ 14.32      $ 13.59   

Tangible book value per share(2)

   $ 13.50      $ 13.12   

 

(1) Total capitalization includes the amount of debt that is included as capital for regulatory purposes.
(2)

Tangible equity to tangible assets and tangible book value per share are both non-GAAP financial measures. Tangible equity is calculated as total stockholders’ equity less goodwill and other intangible assets, and tangible assets is calculated as total assets less goodwill and other intangible assets, while tangible book value per share is calculated as tangible equity divided by the number of shares outstanding as of the balance sheet date. We believe the most directly comparable GAAP financial measure to tangible equity to tangible assets is total equity to total assets and the most directly comparable GAAP financial measure to tangible book value per share is book value per share. For a reconciliation of the non-GAAP measure to the

 

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  most directly comparable GAAP financial measure, refer to the information under the heading Selected Financial Information—Non-GAAP Financial Measures beginning on page 10 of this prospectus.
(3) For a description of the revised regulatory capital ratios to be implemented beginning in 2015, please refer to the information in the Supervision and Regulation section under the heading —Supervision and Regulation of Investar Bank, Capital Adequacy Guidelines.

 

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DILUTION

If you invest in our common stock, your ownership interest will be diluted by the amount that the initial public offering price per share of our common stock exceeds the tangible book value per share of our common stock immediately following this offering. As of March 31, 2014, the tangible book value of our common stock was $53.3 million, or $13.50 per share based on 3,945,029 shares of our common stock issued and outstanding.

After giving effect to our sale of 2,875,000 shares of common stock in this offering (assuming the underwriters do not exercise their purchase option) at the initial public offering price of 14.00 per share, and after deducting estimated underwriting discounts and the estimated offering expenses payable by us and the repayment of our line of credit, our as adjusted net tangible book value as of March 31, 2014 would have been approximately $89.5 million, or $13.12 per share. Therefore, this offering will result in an immediate decrease of $0.38 in the tangible book value per share to our existing shareholders and an immediate dilution of $0.88 in the tangible book value per share to investors in this offering, or approximately 6.3% of the public offering price of $14.00 per share. The following table illustrates the immediate per share dilution to investors in this offering as of March 31, 2014:

 

Initial public offering price per share

   $ 14.00   

Net tangible book value per share at March 31, 2014

     13.50   

Decrease in net tangible book value per share attributable to investors purchasing shares in this offering

     (0.38)   

As adjusted tangible book value per share after this offering

     13.12   

Dilution per share to new investors from offering

     (0.88)   

The following table summarizes, on an as adjusted basis, the total number of shares purchased from us, the total consideration paid to us and the average price paid per share by our existing shareholders (after rounding) and by investors in this offering as of March 31, 2014. As to our existing shareholders, the shares purchased and the consideration and average price paid includes shares purchased and amounts paid for shares of Investar Bank common stock, which shares were subsequently exchanged on a one-for-one basis for Company common stock in the Share Exchange. To the extent that any of our officers or directors or any promoters, or any persons affiliated with any of the foregoing, participated in an offering of the Bank’s common stock, these individuals paid the same price as all other participants in the same offering. This information gives effect to our sale of 2,875,000 shares of common stock in this offering (assuming the underwriters do not exercise their purchase option), before deducting estimated underwriting discounts and estimated expenses payable by us.

 

     Shares
Purchased/Issued
    Total Consideration     Average Price
per Share
 
     Number      Percent     Amount      Percent    

Shareholders as of March 31, 2014

     3,945,029         57.8   $ 49,265,000         55.0   $ 12.49   

New investors in this offering

     2,875,000         42.2   $ 40,250,000         45.0   $ 14.00   

Total

     6,820,029         100.0   $ 89,515,000         100.0   $ 13.13   

The table above includes 43,578 shares of restricted stock that remain subject to forfeiture until completion of the applicable service period. The table excludes (1) options to acquire 216,000 shares of common stock and 9,564 shares of restricted stock, the grant and award of which are subject to the effectiveness of the registration statement of which this prospectus forms a part, (2) vested stock options to acquire 22,811 shares of common stock upon exercise, at a weighted average exercise price of $13.33 per share, (3) 1,428 shares of restricted stock awarded to two employees as employment inducement and retention awards, (4) warrants to acquire 193,498 shares of common stock upon exercise, at a weighted average exercise price of $13.39 per share, and (5) 306,019 shares of common stock remaining available for issuance under our Equity Incentive Plan. To the

 

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extent that any of the foregoing options or warrants are exercised, new options or other equity awards are issued under our incentive plan or we otherwise issue additional shares of common stock in the future, investors in this offering will experience further dilution.

PRICE RANGE OF OUR COMMON STOCK

Prior to this offering, our common stock has not been traded on any established public trading market, and quotations for our common stock were not reported on any market. As a result, there has been no regular market for our common stock. Although our shares may have been sporadically traded in private transactions, the prices at which such transactions occurred may not necessarily reflect the price that would be paid for our common stock in an active market. As of May 31, 2014, there were approximately 1,250 holders of record of our common stock.

We anticipate that this offering and the listing of our common stock on the Nasdaq Global Market will result in a more active trading market for our common stock. However, we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. See Underwriting beginning on page 119 of this prospectus for more information regarding our arrangements with the underwriters. The factors considered in setting the initial public offering price are discussed in the Underwriting section under the heading Offering Price Determination on page 121.

BUSINESS

General

Our Company. Investar Holding Corporation is a bank holding company headquartered in Baton Rouge, Louisiana. Through our wholly-owned subsidiary, Investar Bank, a Louisiana-chartered commercial bank, we offer a wide range of commercial banking products tailored to meet the needs of individuals and small to medium-sized businesses. We serve our primary markets of Baton Rouge, New Orleans, Lafayette and Hammond, Louisiana, and their surrounding metropolitan areas from our main office located in Baton Rouge and from nine additional full-service branches located throughout our market area.

We believe that our markets present a significant opportunity for growth and the expansion of our franchise, both organically and through strategic acquisitions. Although the financial services industry is rapidly changing and intensely competitive, and likely to remain so, we believe that Investar Bank competes effectively as a local community bank. We believe that the Bank possesses the consistency of local leadership, the availability of local access and responsive customer service, coupled with competitively-priced products and services, necessary to successfully compete with other financial institutions for individual and small to medium-sized business customers.

Our principal executive offices are located at 7244 Perkins Road, Baton Rouge, Louisiana 70808, and our telephone number at that address is (225) 227-2222.

Our History and Growth. Investar Bank was chartered as a de novo commercial bank and commenced operations on June 14, 2006. Since inception, the Bank has grown considerably, both organically and through strategic acquisitions. From an initial capitalization of $10.1 million in 2006, we have grown to approximately $673.9 million in assets, $528.2 million in loans (excluding loans held for sale), $564.2 million in deposits and $56.5 million in stockholders’ equity as of March 31, 2014. Over the past five full years, our assets have grown at a compound annual growth rate, which we refer to as CAGR, of 34.8%, while our loans and deposits have grown at CAGRs of 33.2% and 35.2%, respectively, over the same period. We have expanded from our initial branch on Perkins Road in Baton Rouge, Louisiana, to eight parishes across southern Louisiana. As a result of our expansion, we have increased the number of full-time equivalent employees from 7 at December 31, 2006 to 167 at March 31, 2014.

 

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As our franchise has expanded, so too has our profitability. Our first profitable year was 2008, and, despite continued significant investment in the Bank’s infrastructure, we have achieved annual increases in net income of 34.2%, 136.3% and 39.7%, respectively, for the years ended December 31, 2011, 2012 and 2013. This equates to a 3-year CAGR of 23.5% in diluted earnings per share.

Below are a few of our notable milestones:

 

    June, 2006—Chartered with an initial capitalization of $10.1 million from local investors.

 

    May, 2009—Opened our second location in Baton Rouge.

 

    Second half of 2011—Expanded our footprint in the Baton Rouge market with the opening of two additional branches, one in the city of Baton Rouge and the other in the city of Denham Springs.

 

    October, 2011—Expanded our presence in the Baton Rouge market with the acquisition of South Louisiana Business Bank, which contributed approximately $50.9 million in assets, $38.6 million in deposits, $12.0 million in capital and one branch located in Prairieville, a suburb of Baton Rouge. Our acquisition of SLBB represented approximately 72.8% of our $69.9 million in asset growth in 2011.

 

    December, 2012—Entered the Greater New Orleans market through de novo branching by purchasing two closed branch locations of another bank in suburban New Orleans. No deposits or loans were purchased as part of this transaction. To staff these branches, we hired two executive managers and their teams from two other local institutions.

 

    May, 2013—Entered the Hammond market with our acquisition of First Community Bank. This acquisition contributed approximately $99.2 million in assets, $86.5 million in deposits, $4.5 million in capital and two branches, one located in Hammond, which is approximately an hour’s drive from both New Orleans and Baton Rouge, and the other in Mandeville, a suburb of New Orleans.

 

    July, 2013—Entered the Lafayette market by opening a de novo branch. In November, 2013, we completed construction of our permanent location in Lafayette, marking the opening of our tenth full-service location.

In November, 2013, we completed a share exchange with the Bank’s shareholders, resulting in the Bank becoming a wholly-owned subsidiary of the Company (throughout this prospectus, we refer to this reorganization as the “Share Exchange”).

 

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Our Markets

Our primary market areas are the Baton Rouge metropolitan statistical area, or MSA, which includes the suburban areas of Denham Springs, Port Allen and Prairieville (which we refer to as our Baton Rouge market or the Baton Rouge MSA), the New Orleans-Metairie MSA, which includes the suburban areas of Metairie and Mandeville (referred to as our New Orleans market or the New Orleans MSA), and the MSAs of Lafayette and Hammond (we refer to these MSAs simply as Lafayette and Hammond, respectively). The following table identifies our branches by market, date opened and deposits at March 31, 2014.

 

    

Date opened (or acquired)

  Deposits at
March 31, 2014
 
         (in thousands)  

Baton Rouge MSA:

    

7244 Perkins Road, Baton Rouge (main office)

   June 14, 2006   $ 214,096   

3761 La Highway 1 South, Port Allen

   May 11, 2009     23,483   

10922 Coursey Boulevard, Baton Rouge

   April 20, 2010     55,654   

482 South Range Avenue, Denham Springs

   November 17, 2010     29,334   

38567 La Highway 42, Prairieville

   October, 2011     62,003   

18101 Highland Road, Baton Rouge

   Anticipated—3rd quarter, 2014     —     

New Orleans MSA:

    

500 Veterans Memorial Boulevard, Metairie

   December 17, 2012

(date permanent location opened)

  $ 40,171   

2929 Highway 190, Mandeville

   December 20, 2012     12,502   

4892 Louisiana Highway 22, Mandeville

   May 1, 2013     28,871   

Hammond:

    

600 Southwest Railroad Avenue, Hammond

   May 1, 2013   $ 54,469   

Lafayette:

    

4004 Ambassador Caffery Parkway, Lafayette

   November 18, 2013

(date permanent location
opened)

  $ 43,611   

Baton Rouge. Baton Rouge is the capital of Louisiana and the second largest city in Louisiana. It is also the State’s second largest market by deposits. As the farthest inland deep-water port on the Mississippi River, Baton Rouge serves as a major center of commercial and industrial activity, especially for the chemical and gas industries. For example, the ExxonMobil oil refinery in East Baton Rouge Parish is one of the largest oil refineries in the world, and both Dow Chemical Company and Albemarle Corporation also have large plants in the area. However, Baton Rouge’s economy has diversified from its historical core, and it is now a center for finance, healthcare, education, manufacturing, research and development, renewable energy sources, transportation, construction and distribution. IBM announced in March, 2013 plans to locate a service center in downtown Baton Rouge providing software development and software maintenance, with 800 new direct jobs (and an estimated 500+ new indirect jobs). In its July/August, 2013 issue, Business Facilities magazine ranked Baton Rouge the No. 1 metro area in the United States for Economic Growth Potential, while Southern Business & Development magazine named Baton Rouge the “Major Market of the Year” for the South in July, 2013.

 

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The unemployment rate in the Baton Rouge MSA for March, 2014, was 4.2%, below both the United States and Louisiana unemployment rates of 6.8% and 4.5%, respectively, for the same period. The State of Louisiana is the largest overall employer in Baton Rouge, while Turner Industries Group, a general industrial contractor, is the area’s largest private employer as of July, 2011 (the most recent date available). Baton Rouge is the home of the main campus of Louisiana State University, with a total student enrollment of approximately 30,000, as well as Southern University, with approximately 7,000 students. In addition, five of the top 10 public school districts in Louisiana are located in or near the center of Baton Rouge.

Based on information from the National Association of Realtors, the median sale price of existing single-family homes in the Baton Rouge MSA for 2013 was approximately $170,000, below the national average for 2013 of approximately $197,400.

New Orleans and Hammond. New Orleans is Louisiana’s largest city, both by population and by deposits. It serves as a major economic hub of the Gulf Coast region, providing major medical, financial, professional, governmental, transportation and retail services to much of the Gulf South region. New Orleans has substantially recovered from the devastation wrought by Hurricane Katrina. The hospitality and tourism industries, each a significant driver of the New Orleans economy, have returned to pre-hurricane levels, and the unemployment rate has declined from 6.0% in March, 2013 to 4.5% in March, 2014. In 2012, nine million visitors spent a record $6.0 billion in New Orleans, a $512 million increase over 2011 spending. New Orleans hosted the Super Bowl and NCAA Women’s Basketball Final Four Tournament in 2013, and the NBA All Star Game was held in New Orleans in February, 2014.

New Orleans is also a major port city. According to the latest information from the federal Bureau of Transportation Statistics, the Port of New Orleans is the fifth largest port in the United States by cargo tonnage. The port is fueled by the economic activity of the Mississippi River and the Gulf Coast region, and the planned expansion of the Panama Canal, scheduled for completion in 2015, is expected to provide an incremental boost to New Orleans and the surrounding region, as it will allow for shipping of more cargo between the eastern United States and Asia that was previously transported by rail from West Coast ports.

The Port of New Orleans also is becoming a major port for the cruise industry. Cruise Lines International Association ranks it as the sixth largest U.S. cruise port, up from ninth in 2011. In 2013, a record number of cruise passengers set sail from the Port of New Orleans, with nearly 1 million embarkations and disembarkations. This represents a 1% increase over 2012, itself a record year that represented a 32% increase in embarkations and disembarkations over 2011. A top cruise trade publication, Porthole Cruise Magazine, named New Orleans the “Friendliest Homeport” in its 2014 Editor-In-Chief Awards. A study commissioned by the Port of New Orleans found that in 2012 cruise passengers and ship crews spent approximately $78.4 million in New Orleans.

Finally, although tourism and the port still play a major role in New Orleans, the economy has recently become more diversified, with growing motion picture, medical and technology sectors supported by a burgeoning entrepreneurship climate. In April, 2013, Bloomberg Rankings ranked the New Orleans metropolitan area No. 2 in its list of Top 12 American Boomtowns, and a study by the Ewing Marion Kauffman Foundation, as reported by Business Insider, ranked the New Orleans MSA as one of the top 20 start-up hubs in the United States. At the end of the three-year period ending in 2012, the rate of business start-ups in the New Orleans metropolitan area was 56% higher than the national average. Forbes ranked New Orleans sixth in its October, 2013 listing of cities creating the most middle class jobs.

Based on information from the National Association of Realtors, the median sale price of existing single-family homes in the New Orleans MSA for 2013 was approximately $164,400.

Hammond is the commercial hub of Tangipahoa Parish and the home of Southeastern Louisiana University. Located at the intersection of Interstates 12 and 55, Hammond has evolved from a primarily agricultural area to a major distribution hub. Wal-Mart, Home Depot and Winn Dixie, among others, have distribution centers in

 

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Hammond. The unemployment rate at March, 2014 in Hammond of 5.3% is higher than the Louisiana average, but this rate is down from 7.1% for March, 2013.

Lafayette. Lafayette, Louisiana’s third largest city and deposit market, is located in the heart of the Acadiana region. The area has historically been driven primarily by the oil and gas industry, but healthcare now provides the most private sector jobs. Regional and parish economic growth is in expansion mode. For example, in December, 2013, Bell Helicopter announced its intention to locate a helicopter assembly plant in Lafayette. Construction on the plant will begin in the first half of 2014. In addition, the Lafayette economy has been relatively immune from the global recession, while the oil and gas industry in particular has recovered from the negative impacts of the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. In Area Development magazine’s 2013 “Leading Locations” study, Lafayette received the top overall ranking. The goal of this study, which is based on an analysis of economic and work force data for 380 metropolitan statistical areas, is to identify the U.S. cities that were emerging from the recent recession as economic front-runners. The area healthcare industry continues its growth with the recent completion of Our Lady of Lourdes Complex and the renovation of Lafayette General Medical Center. Office and retail space continues to enjoy low vacancies as does the residential rental market. The unemployment rate in the Lafayette MSA for March, 2014 was 3.5%.

Although all of our markets have a number of positive aspects, there are a number of negative features of, and challenges facing, our markets. For example, median home prices in our Baton Rouge and New Orleans markets are below the national average and are rising at a slower rate than the national average. If real estate prices increase only moderately, the extent to which we can grow our mortgage lending operations may be limited. Also, as shown in the table below, the median household income in each of our markets is below the national average. A lower-income population may have less demand for the products and services that we offer relative to financial institutions in markets with higher median household incomes. Finally, as described in more detail in the Risk Factors section, southern Louisiana, including each of our markets, is susceptible to major hurricanes, floods, tropical storms and other natural disasters and adverse weather. These natural disasters can disrupt our operations, cause widespread property damage and severely depress the local economies in which we operate.

The following table sets forth certain information about total deposits and our market share as well as the population and median household income in each of our markets and Louisiana and the United States as a whole. The amount of total deposits in our markets is as of June 30, 2013, while the population and household income information is as of June, 2013.

 

Market

(MSA)

   Total
Deposits
     Investar
Market
Share
    Total
Population
     Projected
Population
Change—
2012 to
2017
    Median
Household
Income
(HHI)
     Projected
HHI
Change—
2012 to
2017
 
     (in millions)                                   

Baton Rouge

   $ 18,025         1.81     1,228,181         2.17   $ 46,771         14.44

New Orleans

   $ 32,050         0.19     819,880         7.45   $ 45,360         14.09

Hammond

   $ 1,216         3.19     125,182         5.94   $ 37,916         12.65

Lafayette

   $ 9,998         n/a        476,434         4.02   $ 41,245         17.77

Louisiana

     —           —          —           4.01   $ 41,601         16.99

United States

     —           —          —           3.47   $ 50,157         13.43

Using deposit share (as of June 30, 2013) as a measure, Chase Bank is the dominant entity in the Baton Rouge MSA, with a 38.02% market share. The next three largest entities, Capital One, Whitney Bank and Regions Bank, together have an approximately 38.69% market share. Our total market share in the Baton Rouge MSA was 1.81%, placing us fifth overall. More particularly, our deposit market share in the city of Baton Rouge was 1.69%, while we maintained an 18.96% market share from our branch in the community of Prairieville, a 4.27% market share from our branch in the city of Denham Springs and a 11.71% market share from our branch in the city of Port Allen.

 

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Chase Bank, Capital One, Whitney Bank and Regions Bank are also the top four banks by deposit share in the New Orleans MSA. In New Orleans, Capital One holds 32.42% of all deposits in the market, with 69.86% of all deposits concentrated in these top four banks. Operating in New Orleans for less than a year before these market share measurements, our deposit share in the New Orleans MSA was only 0.19%. First Guaranty Bank holds 39.42% of the deposits in the smaller Hammond MSA, with no other bank having greater than a 12.06% share. We have a 3.19% deposit share in Hammond.

In Lafayette, deposits are not as concentrated as compared to our other markets. IBERIABANK has a 23.97% market share and Chase Bank a 12.06% share, but no other bank holds more than 6.40% of the deposits in the Lafayette MSA. At March 31, 2014, our deposits in the Lafayette market totaled $43.6 million.

Our Competitive Strengths

We believe that we are well-positioned to create value for our shareholders, particularly as a result of our attractive markets and the following competitive strengths:

 

    Management and Infrastructure in Place for Growth. With an average of 27 years of banking experience across 14 senior executives, our management team has a long history of managing the operations of banks. Most of our senior managers have been with the Bank since its inception, and many of them had previously worked together in executive capacities at other local financial institutions. These individuals have a demonstrated track record of managing growth profitably, establishing profitable de novo branches, successfully executing acquisitions, maintaining a strong credit culture and implementing a relationship-based and community service-focused approach to banking.

To be in a position to more effectively manage our anticipated growth, we have structured our executive functions in a manner typically found in much larger financial institutions. We have centralized our credit review, product development and other policymaking functions and appointed a regional president for each of our markets. This framework allows us to structure our loan and deposit rates and other product offerings with a broad focus, taking into account trends in the industry and region as well as input from our regional presidents.

In addition, we have embraced the latest technological developments in the banking industry, both internally and with respect to the banking solutions that we offer our customers. Our core operating systems are designed for banks with assets in excess of $1 billion. Although these investments have increased our operating expenses, we believe these systems allow us to better leverage our employees by allowing them to focus on developing customer relationships while expanding the suite of products that we can offer. We also expect our core operating systems will help us manage our growth more efficiently.

 

    Proven Ability in Acquisition Execution and Integration. We have successfully completed two acquisitions since 2011, both of which we believe were highly strategic and value-enhancing for our franchise. Through the SLBB and FCB mergers, we believe that we have demonstrated a disciplined approach to acquisitions. This approach begins at the identification of potential acquisition targets and the evaluation of whether such targets are likely to enhance our profitability, taking into account not only financial metrics but also cultural, operational and other factors, and continues through the consummation of the acquisition and the integration of the target’s operations into our own. For both the SLBB and the FCB mergers, we efficiently integrated the acquired operations in a manner that allowed us to quickly expand our presence in the new markets. We believe this experience makes us an attractive buyer and should position us to take advantage of acquisition opportunities in the future.

 

   

Strong Credit Quality and Capital Base. Despite the economic downturn beginning in 2008, and even as we have grown our franchise significantly, we have maintained our asset quality through disciplined underwriting procedures and management of our concentrations and credits. We deal with problem credits as they are identified proactively and decisively. At March 31, 2014, delinquency of our legacy

 

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loans (i.e., those not acquired in an acquisition) as a percentage of total loans was 0.08%, our net loan charge-offs to total average loans was 0.02% and our coverage ratio (i.e., our allowance for loan losses as a percentage of total nonperforming loans) was 206%. Net charge-offs as a percentage of average loans have averaged 0.06% and 0.31% for the three and five years ended December 31, 2013, respectively.

We have also maintained strong capital levels throughout our operating history. We have supplemented the capital generated by our operations through several exempt securities offerings subsequent to our initial capitalization in 2006, raising a total of $17.3 million from investors primarily located in our markets through five offerings of Bank common stock or units consisting of Bank common stock and warrants. At March 31, 2014, we had a 7.94% tangible common equity ratio, a 8.80% tier 1 leverage capital ratio, a 10.21% tier 1 risk-based capital ratio and a 10.84% total risk-based capital ratio.

Our Growth Strategy

Our mission is to be a full service bank focused on relationships that create value. Consistent with our mission, our goal is to become the bank of choice in each of the markets that we serve, while seeking to provide an attractive return to our shareholders. To achieve this, we have implemented the following operational strategies:

Focus on relationship banking. We believe that customer satisfaction is a key to sustainable growth and profitability. We strive to ensure that our products and services meet our customers’ demands. However, we believe that how we deliver our products and services is just as important as what we offer. We encourage our officers and employees to focus on providing personal service and attentiveness to our customers in a proactive manner. For example, we have an active calling program, where our personnel visit existing and prospective customers to provide them information about what we offer and how we do business. As we learn more about a customer through this personal interaction, we can respond to the customer’s requests more quickly and in a manner tailored to the customer’s particular circumstances.

Relationship banking also underpins our referral-based strategy. A customer who has come to know and trust his or her representative at the Bank is more likely to refer his friends, family and business partners to us. The Bank’s loan officers have been actively involved in a direct lending capacity in their particular markets for many years and that tends to make such referrals more likely. In addition, because a majority of our directors and shareholders either work or live in our primary markets, these individuals have provided a good source of introductions and referrals. We believe that these sources are a very effective way to generate banking business and complement our public advertising.

Growth through acquisition and de novo branching. We plan to grow our operations in our existing markets both organically and by acquisition. Although we will consider expansion into other markets if presented with an attractive acquisition opportunity, as a general matter we intend to focus our efforts on expansion opportunities in our southern Louisiana markets. Each of these markets is dominated by a few very large financial institutions, all but one of which are headquartered outside Louisiana. At the same time, we have a relatively small market share (based on deposits) in these markets, which we believe can be increased through a strategic acquisition or a successful de novo branch expansion.

Our strategic plan calls for us to open three new branches over the next two years, subject to market conditions and complying with our regulatory obligations. A new branch site is under construction in Baton Rouge. We have received regulatory approval to open this branch, which we expect to occur in the third quarter of 2014. We have also purchased land in Gonzales, Louisiana (which is between Baton Rouge and New Orleans, in Ascension Parish in the Baton Rouge MSA) and in Lafayette for future branch sites, and we acquired another tract of land in Ascension Parish in the FCB acquisition. We are currently evaluating the acquisition of other potential locations in and around our markets. Our experience is that a new branch achieves profitability in about 18 months, although the two branches we opened in the New Orleans market in 2012 both were profitable within

 

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a year after opening. In addition to increasing our physical footprint, we intend to continue to recruit experienced and talented management and lending personnel to join our team. Recent bank mergers in our markets have dislocated employees, and we believe this dislocation presents an opportunity for us to continue to attract high-performing individuals. For example, we were recently able to recruit two top producers of auto loans from other banks with a large presence in the New Orleans market.

In addition to organic growth, we consider strategic acquisitions to be an important component of our growth strategy, although we have no present agreement or plan concerning any specific acquisition or similar transaction. As of March 31, 2014, 63% of financial institutions headquartered in Louisiana had less than $250 million in assets, and 83% of Louisiana-based financial institutions had less than $500 million in assets. Our acquisition focus will be primarily on financial institutions in this demographic, because we believe acquisitions of financial institutions of this size pose fewer regulatory obstacles and other execution risks than acquisitions of larger institutions. We also believe that the larger, out-of-state institutions that dominate our markets are generally not interested in acquiring smaller banks, which reduces the number of possible competitors for those financial institutions. Ultimately, our willingness to move forward on any potential acquisition will be dictated by whether the target presents an attractive opportunity to us, not just from the perspective of the loans and deposits that would be acquired but also with respect to whether the employees and branches that we acquire position us for additional growth and profitability in the future.

Expansion of our product line and income streams. We believe that our current range of services and pricing strategies make us an attractive option to individuals and small to medium-sized businesses in our markets. At the same time, we will introduce new products and services where we perceive market opportunities to increase our income. For example, with respect to our mortgage operations, we have been approved to sell loans to Freddie Mac while retaining servicing rights (and expect to apply to Fannie Mae to do the same). We have the infrastructure in place to perform mortgage servicing and expect to be able to quickly leverage our existing mortgage origination activities to generate additional servicing fee income and be more competitive in our pricing of mortgage loans. Our decision to retain or release servicing rights will be based on the pricing of the loan in the secondary market and other market-related conditions.

In the consumer lending area, in addition to hiring two experienced auto loan buyers, we have undertaken two initiatives to expand the consumer loan portfolio, which will continue to be one of our core products. First, we are in the process of establishing the infrastructure to make indirect auto loans to markets on the Mississippi Gulf Coast. We intend to employ the same conservative lending practices in these new markets as apply in our existing markets. Next, we have established a new division of the Bank that engages in “finance company” type lending, offering small consumer loans directly to individual customers. We expect this finance company to complement our indirect auto loan activities by making auto loans to consumers with FICO scores slightly below the minimum FICO score that the Bank requires in its indirect auto lending, but we will not make auto loans that are generally considered “sub-prime.” We anticipate charging slightly higher rates on these loans to meet our risk-adjusted return metrics. We may hold these loans in our portfolio or sell them in the secondary market, depending on loan yields and pricing. The activities of the finance company are discussed in more detail in the Lending Activities section.

We view wealth management services as another attractive line of business, given our customer base, and intend to pursue sales of annuities and mutual funds. Our plan would be to enter wealth management by means of a strategic acquisition rather than organically, although we do not currently have any agreements to do so. We do, however, expect to commence sales of annuities and mutual funds in the next two years.

Lending Activities

General. We offer a full range of commercial and retail lending products throughout our market areas, including business loans to small to medium-sized businesses and professional concerns as well as loans to individuals. Our business lending products include owner-occupied commercial real estate loans, construction

 

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loans and commercial and industrial loans, such as term loans, equipment financing and lines of credit, while our loans to individuals include first and second mortgage loans, installment loans, auto loans and lines of credit. For business customers, we target businesses with $10 million in annual revenue or less but do not focus on any particular industry. We also target professional organizations such as law firms and accounting firms. Our lending officers actively solicit both established companies as well as new entrants in our market. Fewer than 15.0% of our total loans were made to borrowers located outside our current market areas, and the substantial majority of these loans are auto loans made to borrowers who relocated from our markets subsequent to the loan’s origination. Income generated by our lending activities represents a substantial portion of our total revenue. For the years ended December 31, 2013, 2012 and 2011, income from our lending activities comprised 80.8%, 80.1%, and 84.8%, respectively, of our total revenue.

 

LOGO

Lending to Businesses. Our lending to small to medium-sized businesses falls into three general categories:

 

    Commercial real estate loans. Approximately 35.1% of our total loans at March 31, 2014 were commercial real estate loans, which include multifamily, farmland and non-farm, non-residential real estate loans, with owner-occupied loans comprising approximately 47.3% of the commercial real estate loan portfolio. Commercial real estate loan terms generally are ten years or less, although payments may be structured on a longer amortization basis. Interest rates may be fixed or adjustable, although rates typically will not be fixed for a period exceeding 120 months, and we generally charge an origination fee. We do not offer non-recourse loans. Risks associated with commercial real estate loans include, among other things, fluctuations in the value of real estate, new job creation trends, tenant vacancy rates and the quality of the borrower’s management. We attempt to limit risk by analyzing a borrower’s cash flow and collateral value on an ongoing basis. Also, we typically require personal guarantees from the principal owners of the property, supported by a review of their personal financial statements, as an additional means of mitigating our risk.

 

    Construction and development loans. Construction and development loans, which consist of loans for the construction of commercial projects, single family residential properties and multi-family properties, accounted for approximately 11.9% of our total loans at March 31, 2014. Of these loans, 36.8% were loans for the construction of single family residential properties. Our construction and development loans are made on both a “pre-sold” basis and on a “speculative” basis. At March 31, 2014, pre-sold construction loans represented approximately 61.1% of our total construction loans, with speculative construction loans representing the remainder.

Construction and development loans are generally made with a term of six to 12 months, with interest accruing at either a fixed or floating rate and paid monthly. These loans are secured by the underlying project being built. For construction loans, loan to value ratios range from 75% to 80% of

 

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the developed/completed value, while for development loans our loan to value ratios typically will not exceed 70% to 75% of such value. Speculative loans are based on the borrower’s financial strength and cash flow position, and we disburse funds in installments based on the percentage of completion and only after the project has been inspected by an experienced construction lender or third-party inspector.

Construction lending entails significant additional risks compared to commercial real estate or residential real estate lending. One such risk is that loan funds are advanced upon the security of the property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and to calculate related loan-to-value ratios. We attempt to minimize the risks associated with construction lending by limiting loan-to-value ratios as described above. In addition, as to speculative development loans, we generally make such loans only to borrowers that have a positive pre-existing relationship with us. By developing good relationships with land developers, we believe that we are better able to gauge whether the borrower can successfully execute the development plans that our loan will fund.

At March 31, 2014, the aggregate balance of the construction loans that we acquired in our acquisitions of SLBB and FCB was approximately $16.1 million, or 25.6% of our total construction loans. In conducting our due diligence for those acquisitions, we carefully evaluated the SLBB and FCB construction loan portfolios in order to identify potential problems within the respective portfolios, and we continue to closely monitor these loans. At March 31, 2014, none of the construction loans that we acquired in the SLBB acquisition were classified as nonperforming loans, while 1.5% of the construction loans acquired in the FCB acquisition were nonperforming.

 

    Commercial and industrial loans. Commercial and industrial loans primarily consist of working capital lines of credit and equipment loans. We often make commercial loans to borrowers with whom we have previously made a commercial real estate loan. The terms of these loans vary by purpose and by type of underlying collateral. We make equipment loans for a term of five years or less at fixed or variable rates, with the loan fully amortized over the term and secured by the relevant piece of equipment. Loans to support working capital typically have terms not exceeding one year, and such loans are secured by accounts receivable or inventory. Fixed rate loans are priced based on collateral, term and amortization. The interest rate for floating rate loans is typically tied to the prime rate published in The Wall Street Journal with a floor of 5.75%. Commercial loans accounted for approximately 6.4% of our total loans at March 31, 2014.

Commercial lending generally involves different risks from those associated with commercial real estate lending or construction lending. Although commercial loans may be collateralized by equipment or other business assets (including real estate, if available as collateral), the repayment of these types of loans depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors). Thus, the general business conditions of the local economy and the borrower’s ability to sell its products and services, thereby generating sufficient operating revenue to repay us under the agreed upon terms and conditions, are the chief considerations when assessing the risk of a commercial loan. The liquidation of collateral is considered a secondary source of repayment because equipment and other business assets may, among other things, be obsolete or of limited resale value. We actively monitor certain financial measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors. We use commercial loan credit scoring models for smaller level commercial loans.

Lending to Individuals. We make the following types of loans to our individual customers:

 

   

Consumer loans. Consumer loans represented 25.0% of our total loans at March 31, 2014. We make these loans (which are normally fixed-rate loans) to individuals for a variety of personal, family and household purposes, including auto loans, secured and unsecured installment and term loans, second mortgages, home equity loans and home equity lines of credit. Because many consumer loans are secured by depreciable assets such as cars, boats and trailers, the loans are amortized over the useful

 

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life of the asset. The amortization of second mortgages generally does not exceed 15 years and the rates generally are not fixed for more than 60 months. As a general matter, in underwriting these loans, our loan officers review a borrower’s past credit history, past income level, debt history and, when applicable, cash flow, and determine the impact of all these factors on the ability of the borrower to make future payments as agreed. A comparison of the value of the collateral, if any, to the proposed loan amount, is also a consideration in the underwriting process. Repayment of consumer loans depends upon the borrower’s financial stability and is more likely to be adversely affected by divorce, job loss, illness and personal hardships than repayment of other loans. A shortfall in the value of any collateral also may pose a risk of loss to us for these types of loans.

Auto loans comprised the largest component of our consumer loans and second largest component of our overall loan portfolio, representing 96.8% of our total consumer loans and 24.3% of our total loans as of March 31, 2014. We are an indirect lender for our auto loans, meaning that the loan is originated by an automobile dealership and then assigned to us. These dealerships are selected based on our review of their operating history and the dealership’s reputation in the marketplace, which we believe helps to mitigate the risks of fraud or negligence by the dealership. At all times, however, the decision whether or not to provide financing resides with us. Our loan officers are expected to regularly contact and visit dealers, not only to maximize the volume of loans each dealership assigns to us, but also to update the dealers about our financing capabilities and underwriting criteria for auto loans. At March 31, 2014, we had non-exclusive relationships with 56 automotive dealerships in our Baton Rouge markets, 44 in our New Orleans and Hammond markets and 37 in Lafayette, including some of the largest dealerships by sales volume in all of these markets. We recently hired two experienced auto loan buyers in the New Orleans market (who also have relationships in our other markets), and we expect our penetration of this segment of the New Orleans market to continue to grow.

We focus on making prime auto loans. In underwriting auto loans, the borrower’s FICO is the chief factor that we focus on. Absent other factors positively impacting our analysis of a borrower’s creditworthiness or the credit risk of the proposed loan, we generally do not make auto loans to borrowers with a FICO below 650. We believe that limiting our auto loans to only borrowers with a high FICO limits our lending risk. Our approval process for indirect auto loans is automated: a dealer submits a loan application to us over the internet and, after reviewing the application, we send our approval (or rejection) of the application, together with the amount of funding and any conditions to funding, to the dealer electronically. As of March 31, 2014, the auto loan portfolio had an average FICO of approximately 740. At March 31, 2014, our auto loan portfolio had an average original term of 67 months, and average interest rate of 3.87%. Net charge-offs of our auto loans as a percentage of average auto loans for the three months ended March 31, 2014 and 2013 were 0.04% for both periods, while net charge-offs of our auto loans as a percentage of average auto loans for the years ended December 31, 2013 and 2012 were 0.22% and 0.16%, respectively. All of our indirect auto loans were made through dealerships located in Louisiana, although some of these borrowers resided in, or have since moved to, other states.

We typically sell pools of our auto loans on a quarterly basis in order to minimize our concentration in these types of loans as well as to generate additional liquidity. These loans are sold on a non-recourse basis, and we usually retain the servicing rights. We earned $59,000 and $104,000 in income from auto loan servicing activities for the three months ending March 31, 2014 and the year ending December 31, 2013, respectively. We are also investigating the benefits and risks associated with securitizing a portion of our indirect auto loan portfolio, while holding an equity interest in the securitization.

As discussed earlier, we have formed a new division within the Bank that engages in “finance company” type lending, making small consumer loans to individuals, including indirect auto loans and loans to finance the purchase of leisure products such as boats and RVs (for the remainder of this discussion of our finance company-type lending activities, references below to the “finance company” mean the activities conducted through this new Bank division while references to “the Bank” mean our

 

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traditional consumer lending operations). Our plan is for the finance company, which has its own personnel and operates under its own trade name, to focus on making loans to individuals whose credit scores are somewhat lower than the minimum FICO otherwise necessary to qualify for an auto or other consumer loan from the Bank. Because of the elevated credit risk associated with these loans, we anticipate charging higher interest rates. We are still in the nascent stages of developing our finance company operations. At March 31, 2014, we had approximately $4.8 million of loans originated through the finance company division, none of which were past due or otherwise nonperforming. We expect to leverage the Bank’s existing relationships with automotive dealerships to generate indirect auto loans for the finance company.

We have elected to keep our finance company activities separate from the Bank’s other consumer lending activities for a few reasons. First, we believe the Bank currently has a reputation as a “super prime” lender among the auto dealerships that it has relationships with on account of its high FICO requirements. While we wish to expand the scope of our auto lending activities, at the same time we do not want these activities to negatively impact the Bank’s positive reputation, and so we will use the finance company to make loans to borrowers with higher credit risk than the Bank’s auto loan borrowers (although, in our view, such credit risk still remains low relative to all potential auto loan customers). Second, the Bank sells pools of auto loans, and we believe that the loans’ high credit quality facilitates our ability to sell auto loan pools. By conducting our expanded auto lending activities through a separate division, we believe we will avoid any adverse effects on the Bank’s ability to sell pools of auto loans. Finally, we are keeping the finance company’s operations separate from the Bank’s lending activities so that the Bank’s auto loan originators will remain focused only on originating “super prime” loans. The finance company has its own loan originators.

Because we expect that the finance company’s borrowers will pose more credit risk than the Bank’s individual borrowers, we intend to take a conservative, disciplined approach to loans made through our finance company. It is not our intent to make loans to borrowers with a FICO below 600 or who have not been employed for the past two years absent other factors positively impacting our analysis of a borrower’s creditworthiness or the credit risk of the proposed loan. Also, we intend to cap the amount of any finance company loan at $35,000 and limit the maximum term of any such loan to 72 months. We believe that these restrictions will limit the lending risk associated with loans originated by the finance company. Although as discussed above our finance company activities are separate from the Bank’s other consumer lending activities, we have incorporated the credit approval process for the finance company into the Bank’s approval processes. Credit applications for consumer loans, whether submitted electronically from a dealership for an indirect auto loan or submitted through a lending officer, will be delivered to our credit department. After review, the loan application (assuming it is approved) will be routed to either the finance company division or, if the application meets the Bank’s higher underwriting standards, to the Bank for funding (subject to the satisfaction of any applicable funding conditions).

As with the Bank’s sales of auto loan pools, we anticipate that we will sell periodically pools of auto loans made by the finance company. However, we do not expect to begin selling pools of finance company auto loans until we have greater experience in finance company lending and a more thorough understanding of this industry segment.

 

   

Residential real estate. One-to-four family residential real estate loans, including second mortgage loans, comprised approximately 21.6% of our total loans at March 31, 2014. Second mortgage loans in this category include only loans we make to cover the gap between the purchase price of a residence and the amount of the first mortgage; all other second mortgage loans are considered consumer loans. Long-term fixed rate mortgages are underwritten for resale to the secondary market; however, we generally hold jumbo mortgage loans (i.e., loans in amounts above $417,000) in our portfolio and sell virtually all of our remaining mortgage loans on the secondary market. Historically, we have sold mortgage loans with servicing rights released, but we expect to be able to retain servicing rights for some of the mortgage loans we sell, as we recently received approval from Freddie Mac to sell and service mortgage loans (and we intend to apply to Fannie Mae to do the same). For the three months

 

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ended March 31, 2014, originations of loans to be sold in the secondary market accounted for 46.3% of our total mortgage originations, while for 2013 originations of loans to be sold in the secondary market accounted for 64.7% of our total mortgage originations. Mortgage loans in our portfolio as of March 31, 2014 had an average loan to value ratio of 63.09% and an average term of 137 months. Unless the borrower has private mortgage insurance, loan to value ratios do not typically exceed 80%, although some of the mortgage loans that we retain in our portfolio may have higher loan to value ratios. We use an independent appraiser to establish collateral values. We generate residential real estate mortgage loans through Bank referrals and contacts with real estate agents in our markets. We do not originate subprime residential real estate loans.

As a general practice we do not buy participations in loans originated by other financial institutions.

In all loan categories, we require our borrowers to adequately insure the collateral securing our loan in order to mitigate the risk of property damage caused by adverse weather conditions. For example, as a condition to our making a loan secured by improved real estate, the borrower must provide us with evidence of (1) hazard insurance, with the Bank named as mortgagee, in the amount of the loan balance or the replacement value of the property, whichever is less, and (2) if the real estate is located in a flood zone, flood insurance, with the Bank named as mortgagee, in the same amount (capped at the maximum amount permitted under federal regulations). With respect to our auto lending, at closing the borrower must present evidence of adequate auto insurance (which covers the type of damage that would result from adverse weather), with the Bank named as loss payee. On a weekly basis beginning 60 days prior to the scheduled expiration date of an insurance policy, our core operating system generates expiration notices to borrowers.

Credit Risk Management

The principal economic risk associated with our lending activities is the creditworthiness of the borrower. Borrower creditworthiness is affected by general economic conditions and the strength of the relevant business market segment, including inflation and employment rates, as well as other factors affecting a borrower’s customers, suppliers and employees. Since our target customers are small to medium-sized businesses and individuals who may be less able to withstand competitive, economic and financial pressures than larger borrowers, it is imperative that our loan underwriting and approval processes are as thorough as is necessary to prevent us from taking excessive credit risks, both on a per-loan basis and throughout the entire portfolio. The remainder of this section discusses our loan underwriting and approval processes, while our procedures for addressing loans with deteriorated credit quality are addressed in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading Risk Management—Credit Risk and the Allowance for Loan Losses.

We centralize our loan underwriting and credit approval process. We believe this centralized approach to our lending activities ensures consistency in underwriting and facilitates our analysis of trends within the loan portfolio, and it is designed to be scalable as we grow our operations in the future.

Underwriting. We believe we have conservative underwriting principles, which include the following:

 

    diversifying our loan portfolio by industry, market and loan type,

 

    focusing on originating loans from customers with whom we have a pre-existing deposit or other relationship (although this does not apply with respect to our indirect auto lending, where we require a customer to have a high FICO to mitigate the risk associated with not having a pre-existing relationship with the customer),

 

    thoroughly analyzing the borrower’s and, if applicable, the project’s financial status to verify the adequacy of repayment sources in light of the amount of the contemplated loan,

 

    strictly adhering to our policies relating to loan to value ratios and collateral requirements, and

 

    ensuring that each loan is thoroughly documented and all liens on collateral are fully perfected.

 

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Our board and management set concentration limits as a percentage of total risk-based capital for our loan portfolio on the basis of established limits based on, among other criteria, loan type, industry and status as owner-occupied. We believe that maintaining a diversified portfolio is an essential facet of a sound credit risk management process. Additionally, we closely monitor our exposure to any single borrower or group of affiliated borrowers to ensure an appropriate level of diversification is maintained within loan types. As a result, we do not have any individual concentrations, as defined by regulatory authorities, within our loan portfolio.

Approval. We use a concurrent approval process for all extensions of credit, with the parties involved in the review dictated by the aggregate size of the borrower relationship with the Bank. Once a loan has been underwritten, our credit department submits its recommendation to one of the following approval authorities, depending on the size and type of the proposed loan:

 

    Small Business Loan Authority. All loans secured by real estate in amounts up to $250,000 must be approved by any two of the applicable regional chief lending officer, regional president and our small business and direct consumer credit manager (if any of these individuals is absent, our Chief Credit Officer serves in his or her place).

 

    Senior Loan Authority. For secured loans between $250,000 and $500,000 and for unsecured loans (or working capital lines of credit not secured by real estate) up to $250,000, approval is required from any two of the applicable regional chief lending officer, regional president and regional commercial credit manager (with our Chief Credit Officer serving in place of any one of these individuals if necessary).

 

    Executive Loan Authority. Our Chief Executive Officer, Chief Credit Officer and the applicable regional president and regional chief lending officer must all approve secured loans between $500,000 and $1 million.

 

    Director’s Credit Committee. Secured loans between $1 million and $2 million and unsecured loans between $250,000 and $500,000 must be approved by the Director’s Credit Committee, which is composed of four members of the Bank’s board of directors. We believe that involving our directors in the loan approval process facilitates the board’s oversight of our risk management processes. For these loans, our Chief Executive Officer, Chief Credit Officer and the applicable regional president and regional chief lending officer must review and recommend approval of these loans before they are sent to the Director’s Credit Committee.

 

    Board Credit Committee. For secured loans in excess of $2 million and unsecured loans in excess of $500,000, after review and recommendation by our Chief Executive Officer, Chief Credit Officer and the applicable regional president and regional chief lending officer, the proposed loan must be approved by a majority of the Board Credit Committee, which is composed of eight directors of the Bank.

Our credit department has created a matrix that tracks the number of loans that are submitted for approval to each of the above authorities. We track the flow of loans to the various approval authorities so that we can analyze whether our loan approval procedures are appropriately structured in light of the size and nature of our lending activities at any given time. Accordingly, as our loan volumes increase, both in the number of loans we make and the average size of our loans, we expect to adjust the approval limits for each approval authority so that each level of our loan approval authorities reviews proposed loans that present credit risks commensurate with the relative risk that each approval authority has been designed to oversee.

Our lending activities are also subject to Louisiana statutes and internal guidelines limiting the amount we can lend to any one borrower. Subject to certain exceptions, under Louisiana law the Bank may not lend on an unsecured basis to any single borrower (i.e., any one individual or business entity and his or its affiliates) an amount in excess of 20% of the sum of the Bank’s capital stock and surplus, or on a secured basis an amount in excess of 50% of the sum of the Bank’s capital stock and surplus. At March 31, 2014, our legal lending limit was approximately $24.6 million. After this offering, our legal lending will be approximately $42.7 million. None of our borrowers are currently approaching this limit.

 

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Deposits

We offer a broad base of deposit products and services to our individual and business clients, including savings, checking, money market and NOW accounts, debit cards and mobile banking with smartphone deposit capability as well as a variety of certificates of deposit and individual retirement accounts. For our business clients, we offer a competitive suite of cash management products which include, but are not limited to, remote deposit capture, electronic statements, positive pay, ACH origination and wire transfer, investment sweep accounts and enhanced business Internet banking. Deposits at Investar Bank are insured by the FDIC up to statutory limits. At March 31, 2014, we held $564.2 million in deposits.

Deposits are our principal source of funds for use in lending and for other general banking purposes. At March 31, 2014, our loan-to-deposit ratio was 93.9%. Our deposit pricing is driven by market rates as well as by our liquidity needs. Our primary sources of deposits are individuals and small to medium-sized businesses located in our market areas. Typically, we try to cross-sell our transaction deposit accounts with higher-rate certificates of deposit, which allows us to manage the overall interest rate that we pay. With respect to our individual customers, we tailor our deposits, by price and transaction features, based on the age of the customer and the amount to be deposited. The Bank obtains these deposits through personal solicitation by its officers and directors, direct mail solicitations and advertisements published in the local media.

Investments

Due to the significant growth in our loan portfolio since the commencement of our operations, our investment policy is to provide the Bank with a source of liquidity to fund our loan growth, with investment return being a secondary consideration, all within the context of maintaining our asset quality and an appropriate asset/liability mix. Our investment securities consist of obligations of agencies of the United States, bank-qualified obligations of state and local political subdivisions, and collateralized mortgage obligations (including hybrid adjustable rate mortgages collateralized mortgage obligations). Collateralized mortgage obligations, primarily consisting of securities issued by government-sponsored entities, comprise the largest share of our investment securities, representing 63.2% of total investment securities, and 65.7% of our available-for-sale securities, at March 31, 2014. From time to time, we may also acquire investment-grade corporate debt or other securities.

The yield on our investment securities portfolio is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact earnings because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. As of March 31, 2014, none of the securities in our investment portfolio were other than temporarily impaired.

Investar Bank’s board of directors reviews the investment policy at least annually, and the board also receives monthly information regarding purchases and sales with the resulting gains or losses, average maturity, federal taxable equivalent yields and appreciation or depreciation by investment categories. In addition, our Asset/Liability Committee, made up of directors and executive officers, monitors our investment securities portfolio and directs our overall acquisition and allocation of funds. Consistent with our investment policy, the committee’s charge is to structure our portfolio such that our securities provide us with a stable source of interest income but without exposing the Bank to an excessive degree of market risk. At its monthly meetings, the Asset/Liability Committee reviews data on economic conditions in our market and beyond, the current interest rate outlook, current forecast on loans and deposits, our mix of interest rate sensitive assets and liabilities, our liquidity position and transactions within the investment portfolio. Our accounting department oversees day-to-day activities pertaining to our investment portfolio.

Other Banking Services

Investar Bank’s other banking services include cashiers’ checks, direct deposit of payroll and Social Security checks, night depository, bank-by-mail, automated teller machines with deposit automation and debit

 

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cards. We have also associated with nationwide networks of automated teller machines, enabling the Bank’s customers to use ATMs throughout Louisiana and other regions. Currently, we reimburse our customers up to $12.50 per month for any foreign ATM fees they may incur. We offer credit card and merchant card services through a correspondent bank. The Bank does not offer trust services or insurance products.

Competition

We face competition in all major product and geographic areas in which we conduct our operations. Through Investar Bank, we compete for available loans and deposits with state, regional and national banks, as well as savings and loan associations, credit unions, finance companies, mortgage companies, insurance companies, brokerage firms and investment companies. All of these institutions compete in the delivery of services and products through availability, quality and pricing, both with respect to interest rates on loans and deposits and fees charged for banking services. Many of our competitors are larger and have substantially greater resources than we do, including higher total assets and capitalization, greater access to capital markets and a broader offering of financial services. As larger institutions, many of our competitors can offer more attractive pricing than we can offer and have more extensive branch networks from which they can offer their financial services products.

While we continually strive to offer competitive pricing for our banking products, we believe that our community bank approach to customers, focusing on quality customer service and maintaining strong customer relationships, affords us the best opportunity to successfully compete with other institutions. In addition, as a smaller institution, we think we can be flexible in developing and implementing new products and services, especially in the online banking area. Further, since the beginning of 2011, there have been 12 mergers or other business combinations involving banks with a presence in our markets. In our view, consolidation activity within our markets provides us with growth opportunities. Many acquisitions, especially when local institutions are acquired by institutions based outside our markets, result not only in customer disruption but also in a loss of market knowledge and relationships that we believe provide us the opportunity to acquire customers seeking a personalized approach to banking. Furthermore, acquisition activity typically creates opportunities to hire talented personnel from the combining institutions.

Employees

As of March 31, 2014, we had 167 full-time equivalent employees and 4 part-time employees. None of our employees are represented by any collective bargaining unit or are parties to a collective bargaining agreement. We believe that our relations with our employees are good.

Properties

Our main office is located at 7244 Perkins Road in Baton Rouge, Louisiana, in an approximately 4,900 square foot building built in May, 2008. In addition to our main office, we operate nine branch offices located in Ascension, East Baton Rouge, Jefferson, Lafayette, Livingston, St. Tammany, Tangipahoa and West Baton Rouge Parishes, Louisiana, as well as a mortgage and loan operations center and a separate executive and operations center, each in Baton Rouge. We also have four stand-alone automated teller machines in Baton Rouge.

We own our main office and all of our branch sites. Each branch facility is a stand-alone building, equipped with an automatic teller machine and on-site parking as well as providing for drive-up access. We believe that our facilities are in good condition and are adequate to meet our operating needs for the foreseeable future.

We have begun construction on a new branch site in our Baton Rouge market, which we expect to open in the third quarter of 2014. We also own two tracts of land in Ascension Parish and one tract of land in Lafayette, each of which has been designated as a future branch location, although the timing of the development of these tracts is uncertain.

 

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Legal Proceedings

From time to time we are a party to ordinary routine litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, financial condition, results of operation, cash flows, growth prospects or capital levels.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and other financial information in this prospectus. As discussed elsewhere in this prospectus, the Company did not become the holding company of the Bank until the completion of the Share Exchange in November, 2013. Accordingly, references below to financial condition or results of operations or to events or circumstances relating to dates or time periods prior to the Share Exchange (even if “we,” “our,” or “us” is used) relate to the Bank alone, while references below to financial condition or results of operations or to events or circumstances relating to dates or time periods after the Share Exchange pertain to the Company and the Bank on a consolidated basis, unless the context explicitly dictates otherwise.

Overview

Our principal business is lending to and accepting deposits from individuals and small to medium-sized businesses. We generate our income principally from interest on loans and, to a lesser extent, our securities investments, as well as from fees charged in connection with our various loan and deposit services and gains on the sale of loans and securities. Our principal expenses are interest expense on interest-bearing customer deposits and borrowings, salaries, employee benefits, occupancy costs, data processing and operating expenses. We measure our performance through our net interest margin, return on average assets, return on average equity and efficiency ratio, among other metrics.

Our total assets grew to $673.9 million at March 31, 2014, an increase of 6.1% and 79.5% from $634.9 million at December 31, 2013 and $375.4 million at December 31, 2012, respectively, while our total deposits grew 5.9% and 88.3% from $532.6 million at December 31, 2013 and $299.7 million at December 31, 2012, respectively, to $564.2 million at March 31, 2014. Net income for the three months ended March 31, 2014 was $0.9 million, compared to $0.6 million for the three months ended March 31, 2013, while net income for the years ended December 31, 2013, 2012 and 2011 was $3.2 million, $2.4 million and $1.0 million, respectively. These substantial increases in our total assets, total deposits and net income were driven by a number of factors, including the following:

 

    Consummation of our acquisition of First Community Bank on May 1, 2013, which contributed assets with a fair value on the acquisition date of $99.2 million, deposits with a fair value of $86.5 million, $4.5 million in capital and two branches located in our New Orleans and Hammond markets. We recorded a bargain purchase gain of $0.9 million in connection with the FCB merger.

 

    Expansion of our franchise through the opening of two new branch locations in our New Orleans market during the fourth quarter of 2012 and one new branch in Lafayette in the third quarter of 2013 (our permanent location in Lafayette opened in the fourth quarter of 2013). These three new branches contributed $101.1 million to our total loans and $96.3 million to our total deposits at March 31, 2014, while the new branches in our New Orleans market contributed $36.5 million to our total loans and $4.1 million to our total deposits at December 31, 2012.

 

    Hiring a number of key bankers in the past two years, including experienced commercial lenders and their teams in the New Orleans market and private bankers and their teams in the Lafayette market.

 

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    Integrating fully in 2012 our acquisition by merger of South Louisiana Business Bank. The SLBB acquisition, which was effective on October 1, 2011, contributed assets with a fair value of $50.9 million, deposits with a fair value of $38.6 million, $12.0 million in capital and one branch located in our Baton Rouge market.

 

    Increasing our mortgage originations in 2012 by $44.3 million and generating $3.1 million in income from sales of mortgage loans, which is more than double the amount of such income for 2011.

Critical Accounting Policies

The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles, or 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. Wherever feasible, we utilize third-party information to provide management with these estimates. Although independent third parties are 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 A, Summary of Significant Accounting Policies, in the notes to our consolidated financial statements contained elsewhere in this prospectus. The following discussion presents an overview of some of our accounting policies and estimates that require us to make difficult, subjective or complex judgments about inherently uncertain matters when preparing our financial statements. We believe that the judgments, estimates and assumptions that we use in the preparation of our consolidated financial statements are appropriate.

Allowance for Loan Losses. One of the accounting policies most important to the presentation of our financial statements relates to the allowance for loan losses and the related provision for loan losses. The allowance for loan losses is established as losses are estimated through a provision for loan losses charged to earnings. The allowance for loan losses is based on the amount that management believes will be adequate to absorb probable losses inherent in the loan portfolio based on, among other things, evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect borrowers’ ability to pay. Another component of the allowance is losses on loans assessed as impaired under Financial Accounting Standards Board Accounting Standards Codification Topic (“ASC”) 310, Receivables (“ASC 310”). The balance of the loans determined to be impaired under ASC 310 and the related allowance is included in management’s estimation and analysis of the allowance for loan losses. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.

The determination of the appropriate level of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. We have an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in our portfolio and portfolio segments. We have an internally developed model that requires significant judgment to determine the estimation method that fits the credit risk characteristics of the loans in our portfolio and portfolio segments. Qualitative and environmental factors that may not be directly reflected in quantitative estimates include: asset quality trends, changes in loan concentrations, new products and process changes, changes and pressures from competition, changes in lending policies and underwriting practices, trends in the nature and volume of the loan portfolio, and national and regional economic trends. Changes in these factors are considered in determining changes in the allowance for loan losses. The impact of these factors on our qualitative assessment of the allowance for loan losses can change from period to period based on management’s assessment of the extent to which these factors are already reflected in historic loss rates. The uncertainty inherent in the estimation process is also considered in evaluating the allowance for loan losses.

 

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Acquisition Accounting. We account for our acquisitions under ASC 805, Business Combinations (“ASC 805”), which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value (which is discussed below). If the fair value of assets purchased exceeds the fair value of liabilities assumed, it results in a bargain purchase gain; if the consideration given exceeds the fair value of the acquired assets, goodwill is recognized. In accordance with ASC 805, estimated fair values are subject to adjustment up to one year after the acquisition date to the extent that additional information relative to closing date fair values becomes available. Material adjustments to acquisition date estimated fair values are recorded in the period in which the acquisition occurred, and as a result, previously reported results are subject to change.

Because the fair value measurements incorporate assumptions regarding credit risk, no allowance for loan losses related to the acquired loans is recorded on the acquisition date. The fair value measurements of acquired loans are based on estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. The fair value adjustment is amortized over the life of the loan using the effective interest method.

The Company accounts for acquired impaired loans under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). An acquired loan is considered impaired when there is evidence of credit deterioration since origination and it is probable at the date of acquisition that we will be unable to collect all contractually required payments. ASC 310-30 prohibits the carryover of an allowance for loan losses for acquired impaired loans. Over the life of the acquired loans, we continually estimate the cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. As of the end of each fiscal quarter, we evaluate the present value of the acquired loans using the effective interest rates. For any increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life, while we recognize a provision for loan loss in the consolidated statement of income if the cash flows expected to be collected have decreased.

Fair Value Measurement. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, using assumptions market participants would use when pricing an asset or liability. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows, and the fair value estimates may not be realized in an immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not necessarily represent our underlying value.

The definition of fair value focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

In accordance with fair value guidance, we group our financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

    Level 1—Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 asset and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

   

Level 2—Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted

 

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prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

 

    Level 3—Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Other-Than-Temporary-Impairment on Investment Securities. On a quarterly basis, we evaluate our investment portfolio for other-than-temporary-impairment (“OTTI”) in accordance with ASC 320, Investments—Debt and Equity Securities. An investment security is considered impaired if the fair value of the security is less than its cost or amortized cost basis. When impairment of an equity security is considered to be other-than-temporary, the security is written down to its fair value and an impairment loss is recorded in earnings. When impairment of a debt security is considered to be other-than-temporary, the security is written down to its fair value. The amount of OTTI recorded as a loss in earnings depends on whether we intend to sell the debt security and whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If we intend to sell the debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis, the entire difference between the security’s amortized cost basis and its fair value is recorded as an impairment loss in earnings. If we do not intend to sell the debt security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis, OTTI is separated into the amount representing credit loss and the amount related to all other market factors. The amount related to credit loss is recognized in earnings. The amount related to other market factors is recognized in other comprehensive income, net of applicable taxes.

Intangible Assets. Our intangible assets consist primarily of goodwill, core deposit intangibles, and customer relationship intangibles. Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill and other intangible assets deemed to have an indefinite useful life are not amortized but instead are subject to review for impairment annually, or more frequently if deemed necessary, in accordance with ASC 350, Intangibles—Goodwill and Other. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives and reviewed for impairment in accordance with ASC 360, Property, Plant, and Equipment. If impaired, the asset is written down to its estimated fair value. Core deposit intangibles representing the value of the acquired core deposit base are generally recorded in connection with business combinations involving banks and branch locations. Our policy is to amortize core deposit intangibles over the estimated useful life of the deposit base, either on a straight line basis not exceeding 15 years or an accelerated basis over 10 years. The remaining useful lives of core deposit intangibles are evaluated periodically to determine whether events and circumstances warrant revision of the remaining period of amortization. All of our core deposit intangibles are currently amortized on a straight-line basis over 15 years.

Stock Based Compensation. We recognize compensation expense for all share-based payments to employees in accordance with ASC 718, Compensation—Stock Compensation. Under this accounting guidance, such payments are measured at fair value. Determining the fair value of, and ultimately the expense we recognize related to, our share-based payments requires us to make assumptions regarding dividend yields, expected stock price volatility, estimated forfeitures and, as to stock options, the expected life of the option. Changes in these assumptions and estimates can materially affect the calculated fair value of stock-based compensation and the related expense to be recognized.

 

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Income Taxes. Accrued taxes represent the estimated amount payable to or receivable from taxing jurisdictions, either currently or in the future, and are reported in our consolidated statement of operations after exclusion of non-taxable income such as interest on state and municipal securities. Also, certain items of income and expense are recognized in different time periods for financial statement purposes than for income tax purposes. Thus, provisions for deferred taxes are recorded in recognition of such temporary differences. The calculation of our income tax expense is complex and requires the use of many estimates and judgments in its determination.

Deferred taxes are determined utilizing a liability method whereby we recognize deferred tax assets for deductible temporary differences and deferred tax liabilities for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We adjust deferred tax assets and liabilities for the effects of changes in tax laws and rates on the date of enactment.

The Company has adopted accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. We recognize deferred tax assets if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50%. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance when, if based on the weight of evidence available, it is more likely than not that some portion or all of deferred tax asset will not be realized.

We recognize interest and penalties on income taxes as a component of income tax expense.

Discussion and Analysis of Financial Condition

Total assets were $673.9 million at March 31, 2014, an increase of 6.1% from total assets of $634.9 million at December 31, 2013. Our total assets of $634.9 million at December 31, 2013 represents a 69.1% increase from total assets of $375.4 million at December 31, 2012. With respect to our growth in 2013, $99.2 million is attributable to the FCB acquisition, with the remainder resulting from organic growth in our loan and securities portfolio.

Loans

General. Loans, excluding loans held for sale, constitute our most significant asset, comprising 78.4%, 79.4% and 76.9% of our total assets at March 31, 2014 and December 31, 2013 and 2012, respectively. Loans, excluding loans held for sale, increased $24.2 million, or 4.8%, to $528.2 million at March 31, 2014 from $504.1 million at December 31, 2013. Loans, excluding loans held for sale, increased $215.3 million, or 75%, to $504.1 million at December 31, 2013 from $288.8 million at December 31, 2012. Although we acquired $77.5 million of loans in connection with the acquisition of FCB, the majority of the increase in 2013 is on account of organic loan growth. Loans in our Baton Rouge market were $195.7 million at March 31, 2014, representing an increase of $19.4 million and $62.1 million from December 31, 2013 and 2012, respectively. Loans in our New Orleans market increased to $110.8 million at March 31, 2014, from $101.5 million and $36.5 million at December 31, 2013 and 2012, respectively. Loans in our Hammond market, which we entered in May 2013 through the FCB acquisition, were $56.1 million at March 31, 2014, a decrease of $10.2 million from $66.3 million at December 31, 2013, while loans in our Lafayette market, where we opened a permanent branch location in the fourth quarter of 2013, totaled $15.6 million at March 31, 2014. The decrease in loans in our

 

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Hammond market from December 31, 2013 to March 31, 2014 reflects our decision not to renew certain relationships acquired in the FCB acquisition as loans matured because the customers did not meet our underwriting standards.

The table below sets forth the balance of loans, excluding loans held for sale, outstanding by loan type as of the dates presented, and the percentage of each loan type to total loans.

 

    As of March 31,
2014
    As of December 31,  
(dollars in thousands)     2013     2012     2011     2010     2009  
    Amount     %     Amount     %     Amount     %     Amount     %     Amount     %     Amount     %  

Mortgage loans on real estate:

                       

Construction and land development

  $ 62,719        11.87   $ 63,170        12.53   $ 20,271        7.02   $ 21,171        9.61   $ 17,798        11.22   $ 18,540        14.00

1-4 family

    113,911        21.56        104,685        20.77        54,813        18.98        46,664        21.19        30,957        19.51        24,631        18.60   

Multifamily

    17,666        3.34        14,286        2.83        1,750        0.61        1,454        0.66        1,278        0.80        0        0   

Farmland

    2,314        0.44        830        0.17        64        0.02        8        0        852        0.54        0        0   

Non-farm, non-residential

    165,381        31.31        157,363        31.22        99,927        34.61        56,467        25.64        39,400        24.83        38,926        29.39   

Commercial and industrial

    33,900        6.42        32,665        6.48        15,319        5.30        11,499        5.22        8,338        5.25        14,947        11.29   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer installment loans:

                       

Auto loans

    128,189        24.27        126,704        25.13        93,062        32.23        79,945        36.30        60,065        37.85        35,397        26.72   

Other consumer installment loans

    4,169        0.79        4,392        0.87        3,547        1.23        3,041        1.38        3        0        2        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unearned income

  $ 528,249        100   $ 504,095        100   $ 288,753        100   $ 220,249        100   $ 158,691        100   $ 132,443        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As the table above indicates, we have experienced significant growth in all loan categories since the end of 2009. Our acquisition of FCB, our strong presence in our Baton Rouge market, and our expansion into the New Orleans and Lafayette markets are the primary reasons for our loan growth in 2013 and in the first quarter of 2014. Of the $77.5 million in total loans that we acquired in connection with the FCB acquisition, $23.1 million were construction and land development loans (with 18.0% being “speculative” loans), $21.9 million were 1-4 family mortgage loans, and $22.7 million were non-farm, non-residential mortgage loans. One-to-four family mortgage loans held in our portfolio and auto loans grew primarily due to our expansion into the New Orleans market. Beyond the impact of the FCB acquisition and our expansion into New Orleans, we believe our loan growth from 2012 through the first quarter of 2014 is due to the successful implementation of our relationship-driven banking strategy. In early 2014, we hired two auto loan buyers with extensive contacts in Louisiana, and we expect these hires to continue to grow this segment of our loan portfolio.

 

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The following table sets forth loans, net of unearned income, outstanding at March 31, 2014, which, based on remaining scheduled repayments of principal, are due in the periods indicated. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported below as due in one year or less.

 

(in thousands)    One
Year or
Less
     After One
Year
Through
Five Years
     After
Five
Through
10 Years
     After
10
Through
15 Years
     After
15 Years
     Total  

Mortgage loans on real estate:

                 

Construction and land development

   $ 38,855       $ 19,954       $ 2,303       $ 1,607       $ 0       $ 62,719   

1-4 family

     9,103         24,842         27,406         19,254         33,306         113,911   

Multifamily

     4,726         9,658         2,138         1,144         0         17,666   

Farmland

     55         0         759         1,500         0         2,314   

Non-farm, non-residential

     13,809         61,911         57,087         32,502         72         165,381   

Commercial and industrial

     9,776         13,691         7,790         2,643         0         33,900   

Consumer installment loans:

                 

Auto loans

     883         62,071         64,906         329         0         128,189   

Other consumer installment loans

     272         3,313         584         0         0         4,169   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned income

   $ 77,479       $ 195,440       $ 162,973       $ 58,979       $ 33,378       $ 528,249   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held for sale. Loans held for sale increased $20.2 million, or 404%, to $25.2 million at March 31, 2014 from $5.0 million at December 31, 2013. The increase is primarily due to approximately $19.5 million of consumer loans (consisting of indirect auto loans) being classified as held for sale at March 31, 2014. No consumer loans were classified as held for sale at December 31, 2013 or 2012. In the first three months of 2014, we originated $16.9 million in mortgage loans for sale, as compared to $25.5 million in mortgage loans for sale originated in the first three months of 2013. Loans held for sale decreased $12.0 million, or 70%, to $5.0 million at December 31, 2013 from $17.0 million at December 31, 2012. The decline is due to a decrease in originations of mortgage loans for sale, which declined from $115.0 million in 2012 to $88.2 million in 2013. Our originations of mortgage loans for sale were $70.6 million in 2011.

Mortgage rates in the latter half of 2011 declined to historic lows and remained at these levels through 2012 and into 2013. These low rates spurred not only new homebuyers, but also resulted in a significant increase in refinancings. Both of these factors contributed to the high level of mortgage originations in 2012. During the latter half of 2013 and continuing into the first quarter of 2014, mortgage rates began to increase, resulting in a decline in originations. As these rates are expected to remain elevated in 2014 relative to their historic lows in the past two years, we do not expect significant growth in mortgage originations and anticipate that our originations of mortgage loans held for sale may continue to decline in the future.

One-to-four family mortgage loans not held in our portfolio are typically sold on a “best efforts” basis within 30 days after the loan is funded. This means that residential real estate originations are locked in at a contractual rate with a third party investor or directly with government sponsored agencies, and we are obligated to sell the mortgage only if it is closed and funded. As a result, the risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Although loan fees and some interest income are derived from mortgage loans held for sale, our main source of income is gains from the sale of these loans in the secondary market.

We also sell pools of our auto loans in order to manage our concentration in auto loans as well as to generate liquidity. During the three months ended March 31, 2014, we recognized gains from the sales of pools of our auto loans of $174,000. We did not sell any auto loan pools in the three months ended March 31, 2013. For the year ended December 31, 2013, the gain from sales of pools of our auto loans was $247,000, an increase over

 

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gains of $34,000 from such sales for the year ended December 31, 2012 due primarily to the overall growth in our auto loan originations. In the future, we anticipate that we will sell pools of our auto loans on a quarterly basis, and we expect gains from the sale of pools of our auto loans to continue to fluctuate with the size of our auto loan portfolio.

Finally, as a general matter we hold construction and development loans in our portfolio. When construction is complete and the construction loan is converted into a permanent loan, however, we typically sell the permanent loan on the secondary market.

Loan concentrations. Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At each of March 31, 2014 and December 31, 2013, we had no concentrations of loans exceeding 10% of total loans other than loans in the categories listed in the table above.

Investment Securities

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 borrowing. Investment securities totaled $69.8 million at March 31, 2014, an increase of $7.0 million, or 11.0%, from $62.8 million at December 31, 2013. Investment securities represented 10.4% of our total assets at March 31, 2014. The investment securities balance at December 31, 2013 represents an $18.4 million, or 42%, increase from $44.3 million at December 31, 2012. Our increase in investment securities at March 31, 2014 compared to December 31, 2013 was primarily due to our investment of cash not used in our lending activities into investment securities. The increase in investment securities from 2012 to 2013 was due to the acquisition of $5.3 million in investment securities in connection with the FCB acquisition as well as our purchase of investment securities with cash not used in our lending activities.

The following table shows the carrying value of our investment securities portfolio by investment type and the percentage that such investment type comprises of our entire portfolio at the dates indicated:

 

(dollars in thousands)    March 31, 2014     December 31, 2013     December 31, 2012  
     Balance      % of
Portfolio
    Balance      % of
Portfolio
    Balance      % of
Portfolio
 

Obligations of other U.S. Government agencies and corporations

   $ 6,155         8.82   $ 6,182         9.85   $ 4,853         10.95

Mortgage-backed securities

     44,108         63.22        37,069         59.07        23,812         53.72   

Obligations of states and political subdivisions

     13,971         20.02        14,100         22.47        13,403         30.24   

Other debt securities

     479         0.69        476         0.76        505         1.14   

Corporate bonds

     5,060         7.25        4,925         7.85        1,753         3.95   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 69,773         100   $ 62,752         100   $ 44,326         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

We classify debt securities as held to maturity if management has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Securities not classified as held to maturity or trading are classified as available for sale. Available for sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income within stockholders’ equity.

In the first three months of 2014, we purchased $19.4 million of investment securities, compared to purchases of $9.4 million of investment securities during the corresponding period in 2013. During 2013, we purchased $40.4 million in investment securities, while we purchased $26.8 million in securities in 2012. We increased our purchases of securities in 2013, which continued into the first quarter of 2014, primarily to increase the amount of liquidity on our balance sheet and also to reposition the portfolio to take advantage of an anticipated rising interest rate environment. Mortgage-backed securities represented 91.6%, 68.2% and 80.6% of

 

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the available for sale securities we purchased in the first quarter of 2014, and in 2013 and 2012, respectively. Of the remaining securities purchased in the first quarter of 2014, and in 2013 and 2012, 7.3%, 5.6% and 6.2%, respectively, were corporate bonds, while 1.2%, 26.2% and 13.2%, respectively, were municipal securities. The mortgage-backed securities that we have purchased since the beginning of 2012 have primarily been adjustable rate securities backed by U.S. government agencies. We purchase municipal securities to take advantage of the tax benefits associated with such securities. However, the volatility in the municipal securities market increased over the course of 2013 and into the first quarter of 2014, and we expect that our level of municipal securities purchases will decrease so long as this market remains volatile. We only purchase corporate bonds that are investment grade securities issued by seasoned corporations.

Typically, our investment securities are available for sale. We did not purchase any held to maturity securities in the first quarter of 2014 or in 2012. Our purchases of held to maturity securities in 2013 consisted of U.S. Government agency securities that we acquired in connection with our acquisition of FCB and mortgage-backed securities that were qualified investments for Community Redevelopment Act purposes.

The following table sets forth the stated maturities and weighted average yields of our investment securities based on the amortized cost of our investment portfolio as of March 31, 2014.

 

(dollars in thousands)    One Year or
Less
    After One Year
Through Five
Years
    After Five Years
Through Ten
Years
    After Ten Years  
     Amount      Yield     Amount      Yield     Amount      Yield     Amount      Yield  

Held to Maturity:

                    

Obligations of other U.S. Government agencies and corporations

   $ 0         0   $ 0         0   $ 0         0   $ 3,974         2.21

Mortgage-backed securities

     0         0        0         0        0         0        2,588         2.34

Available for Sale:

                    

Obligations of other U.S. Government agencies and corporations

     0         0        0         0        181         3.17     2,007         1.85

Mortgage-backed securities

     0         0        0         0        2,332         2.12     39,304         2.25

Obligations of states and political subdivisions

     102         1.21     843         2.31     5,891         3.24     7,324         3.50

Corporate bonds

     498         2.14     900         1.19     3,668         1.85     0         0   
  

 

 

      

 

 

      

 

 

      

 

 

    
   $ 600         $ 1,743         $ 12,072         $ 55,196      
  

 

 

      

 

 

      

 

 

      

 

 

    

The maturity of mortgage-backed securities reflects scheduled repayments based upon the contractual maturities of the securities. Weighted average yields on tax-exempt obligations have been computed on a fully tax equivalent basis assuming a federal tax rate of 34%.

Premises and equipment

Bank premises and equipment increased $1.6 million, or 6.5%, to $26.3 million at March 31, 2014 from $24.7 million at December 31, 2013. Our acquisition of a parcel of land in Lafayette, Louisiana, for a potential future branch location and the purchase of furniture and fixtures related to our consolidation of our back office support staff to a central location are the primary reasons for this increase. Bank premises and equipment increased $9.8 million, or 66%, to $24.7 million at December 31, 2013 from $14.9 million at December 31, 2012. In addition to the two branches we acquired in the FCB acquisition and the opening of our de novo branch in Lafayette, Louisiana, in 2013, we also acquired land in Gonzales and Baton Rouge, Louisiana, for potential future branch locations.

Deferred tax asset

At each of March 31, 2014 and December 31, 2013, our deferred tax asset was $1.2 million, compared to $0.3 million at December 31, 2012. The reason for this significant increase is due to the FCB acquisition, as the

 

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tax basis on the real estate owned that we acquired in the FCB acquisition exceeded its carrying value by approximately $1.9 million, and we also acquired a net operating loss carryforward of approximately $1.4 million on an after-tax basis. At March 31, 2014, we held approximately $2.3 million in net operating loss carryforwards, with expiration dates ranging from 2029 to 2033. U.S. tax law imposes annual limitations on the amount of net operating loss carryforwards that may be used to offset federal taxable income. Under these laws, we may apply up to approximately $0.6 million to offset our taxable income each year through 2015, with declining amounts thereafter as the net operating loss carryforwards amortize. In addition to this limitation, our ability to utilize net operating loss carryforwards depends upon our maintaining profitable results. Given the substantial amount of time before our net operating loss carryforwards begin to expire, we currently expect to utilize these net operating loss carryforwards in full before their expiration.

Deposits

The following table sets forth the composition of our deposits at March 31, 2014 and at December 31, 2013 and 2012:

 

(dollars in thousands)    March 31, 2014     December 31, 2013     December 31, 2012  
     Amount      Percent     Amount      Percent     Amount      Percent  

Noninterest-bearing demand deposits

   $ 64,545         11.44   $ 72,795         13.67   $ 37,489         12.51

NOW accounts

     96,810         17.16        77,190         14.49        43,022         14.36   

Money market deposit accounts

     71,039         12.59        67,006         12.58        46,296         15.45   

Savings accounts

     52,509         9.31        52,177         9.80        30,521         10.18   

Certificates of Deposit

     279,291         49.40        263,438         49.46        142,342         47.50   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 564,194         100   $ 532,606         100   $ 299,670         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

Total deposits were $564.2 million at March 31, 2014, an increase of $31.6 million, or 5.9%, from total deposits of $532.6 million at December 31, 2013. The increase in deposits at March 31, 2014 resulted from organic growth in all of our markets, particularly in our Lafayette market, where deposits grew by approximately $15.6 million from December 31, 2013 to March 31, 2014. Deposits in our Hammond and New Orleans markets increased by approximately $7.4 million and $7.8 million, respectively, over the same period. The remaining $0.8 million in deposit growth in the first quarter of 2014 came from the Baton Rouge market.

Total deposits were $532.6 million at December 31, 2013, an increase of $232.9 million, or 77.7%, from total deposits of $299.7 million at December 31, 2012. Our acquisition of FCB contributed $86.5 million in deposits, with the remainder of the increase in deposits resulting from organic growth. Deposits in our Baton Rouge and New Orleans markets increased $78.4 million and $69.6 million, respectively, from December 31, 2012 to December 31, 2013. Deposits in our Hammond market were $76.4 million at December 31, 2013, compared to $86.5 million on May 1, 2013, the date that we completed the FCB acquisition. Deposits from our de novo location in Lafayette totaled $28.0 million at December 31, 2013. Total deposits, and noninterest-bearing deposits in particular, at December 31, 2013 were slightly inflated by a $14.0 million short-term deposit that a commercial customer made in late December, 2013 that was fully withdrawn in January, 2014.

Our management is focused on growing and maintaining a stable source of funding, specifically core deposits, and allowing more costly deposits to mature, within the context of mitigating interest rate risk and maintaining our net interest margin and sufficient levels of liquidity. As we have grown, our deposit mix has evolved from a primary reliance on certificates of deposit, which are less relationship driven and less dependent on the convenience of branch locations than other types of deposit accounts. As our branch network has expanded and the reach of our relationship-driven approach to banking has grown, our mix of deposits has shifted and is relatively balanced between transactional accounts, such as checking, savings, money market and NOW accounts, and certificates of deposits. However, as a result of our acquisition of $47.3 million in certificates of deposit from FCB in 2013, at March 31, 2014 and December 31, 2013, certificates of deposit

 

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represented 49.5% of our total deposits as compared to 47.5% at December 31, 2012. In a low interest rate, relatively flat yield curve environment, we have encouraged our customers to extend their maturities by offering higher interest rates in our certificates of deposits with maturities greater than twelve months. In the event that certain of these certificates of deposits are not renewed and the funds are withdrawn, we intend to replace those deposits with other forms of borrowed money or capital, or liquidate assets to reduce our funding needs.

The following table shows the maturity of certificates of deposit and other time deposits of $100,000 or more at March 31, 2014 and at December 31, 2013 and 2012:

Time Remaining Until Maturity:

 

(in thousands)    March 31, 2014      December 31, 2013      December 31, 2012  
   Certificates
of Deposit
     Other Time
Deposits
     Certificates
of Deposit
     Other Time
Deposits
     Certificates
of Deposit
     Other Time
Deposits
 

Three months or less

   $ 5,686       $ 102       $ 4,296       $ 134       $ 3,149       $ 224   

Over three through six months

     3,805         233         5,123         102         6,053         234   

Over six through twelve months

     10,760         112         6,456         396         2,687         506   

Over one year through three years

     7,605         234         9,435         302         6,457         241   

Over three years

     2,082         121         2,861         141         283         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 29,938       $ 802       $ 28,171       $ 1,075       $ 18,629       $ 1,205   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Borrowings

Total borrowings include securities sold under agreements to repurchase, advances from the FHLB and junior subordinated debentures. Securities sold under agreements to repurchase increased $2.6 million to $12.8 million at March 31, 2014 from $10.2 million at December 31, 2013. Our advances from the FHLB were $34.2 million at March 31, 2014, an increase of $3.4 million, or 11.0%, from FHLB advances of $30.8 million at December 31, 2013, resulting generally from the increase in the size of our operations. Our $3.6 million in notes payable at each of March 31, 2014 and December 31, 2013 represent the junior subordinated debentures that we assumed in connection with our acquisition of FCB.

Securities sold under agreements to repurchase increased $6.2 million to $10.2 million at December 31, 2013 from $4.0 million at December 31, 2012 primarily a result of one new overnight repurchase agreement in our Lafayette market. Our advances from the FHLB were $30.8 million at December 31, 2013, an increase of $4.0 million, or 15.0%, from FHLB advances of $26.8 million at December 31, 2012, resulting generally from the increase in the size of our operations.

The average balances and cost of funds of short-term borrowings at March 31, 2014 and at December 31, 2103, 2012 and 2011 are summarized as follows:

 

(dollars in thousands)   Average Balances     Cost of Funds  
    March 31,
2014
    December 31,
2013
    December 31,
2012
    December 31,
2011
    March 31,
2014
    December 31,
2013
    December 31,
2012
    December 31,
2011
 

Federal funds purchased and other short-term borrowings

  $ 3,809      $ 19      $ 2      $ 5        .11     .76     .76     1.04

Securities sold under agreements to repurchase

    11,289        7,608        5,472        5,045        .12        .15        .20        .28   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total short-term borrowings

  $ 15,098      $ 7,627      $ 5,474      $ 5,050        .12     .15     .20     .28
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Results of Operations

Performance Summary

Three months ended March 31, 2014 vs. three months ended March 31, 2013. For the three months ended March 31, 2014, net income was $0.9 million, or $0.23 per basic share and $0.21 per diluted share, compared to net income of $0.6 million, or $0.19 per basic share and $0.18 per diluted share, for the three months ended March 31, 2013. Our results of operations for the three months ended March 31, 2013 do not include any impact of the FCB acquisition. The increase in our net income was primarily driven by higher levels of net interest income resulting from strong organic loan growth as well as the increase in loans as a result of the FCB acquisition, offset, in part, by a slight decrease in yields on interest-earning assets. Return on average assets declined to 0.55% for the three months ended March 31, 2014 from 0.66% for three months ended March 31, 2013 primarily on account of increases in our operational costs attributable to our de novo branch facilities and an increase in expenses related to real estate owned acquired in the FCB acquisition. Return on average equity was 6.32% for the three months ended March 31, 2014 as compared to 5.67% for the three months ended March 31, 2013.

2013 vs. 2012. Net income was $3.2 million, or $0.86 per basic share and $0.81 per diluted share, for the year ended December 31, 2013 compared to net income of $2.4 million, or $0.79 per basic share and $0.71 per diluted share, for the same period in 2012. The increase in our net income was primarily driven by the bargain purchase gain and higher levels of net interest income resulting from our strong organic loan growth as well as the increase in loans as a result of the FCB acquisition, offset, in part, by declining yields on interest-earning assets. Return on average assets declined to 0.64% for the year ended December 31, 2013 from 0.74% for 2012 primarily as a result of merger-related expenses, an increase in occupancy expenses related to real estate owned acquired in the FCB acquisition and our de novo branch facilities. Return on average equity was 6.10% for the year ended December 31, 2013 as compared to 5.90% for the year ended December 31, 2012.

2012 vs. 2011. Our net income for 2012 was $2.4 million compared to $1.0 million for 2011. This increase in net income was primarily the result of increases in net interest income resulting from organic loan growth, including fee income on mortgage loans held for sale, as well as a full year’s impact of the SLBB acquisition on our operations, offset by increases in noninterest expenses related to our growth. Basic earnings per share for 2012 were $0.79 as compared to $0.54 for 2011, while diluted earnings per share for 2012 were $0.71 as compared to $0.47 for 2011. Return on average assets for 2012 was 0.74%, as compared to 0.44% for 2011. Return on average equity for 2012 was 5.90% as compared to 4.44% for 2011.

Net Interest Income and Net Interest Margin

Net interest income, which is the largest component of our earnings, is the difference between interest earned on assets and the cost of interest-bearing liabilities. The primary factors affecting net interest income are the volume, yield and mix of our rate-sensitive assets and liabilities as well as the amount of our nonperforming loans and the interest rate environment.

The primary factors affecting net interest income and net interest margin are changes in interest rates, competition and the shape of the interest rate yield curve. The decline in interest rates since 2008 has put significant downward pressure on net interest margin over the past few years. Each rate reduction in interest rate indices (and, in particular, the prime rate, rates paid on U.S. Treasury securities and the London Interbank Offering Rate) resulted in a reduction in the yield on our variable rate loans indexed to one of these indices. However, rates on our deposit and other interest-bearing liabilities did not decline proportionally. To offset the effects on our net interest income and net interest margin from the prevailing interest rate environment, we have attempted to focus our interest-earning assets in loans and shift our interest-bearing liabilities from higher-costing deposits, like certificates of deposit, to noninterest-bearing and other lower cost deposits.

Three months ended March 31, 2014 vs. three months ended March 31, 2013. Net interest income, on a tax-equivalent basis, increased 72.0% to $5.9 million for the three months ended March 31, 2014 from $3.4 million

 

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for the same period in 2013. Net interest margin was 3.93% for the three months ended March 31, 2014, up five basis points from 3.88% for the three months ended March 31, 2013. The increase in net interest income resulted from increases in the volume of interest-earning assets and decreases in the cost of interest-bearing liabilities, offset by declines in the rate paid on interest-earnings assets and an increase in the volume of interest-bearing liabilities. These changes were driven both by the impact of the assets acquired and liabilities assumed in connection with the FCB acquisition as well as organic loan and deposit growth. For the three months ended March 31, 2014, average loans increased approximately $223.4 million as compared to the same period in 2013, while average investment securities increased approximately $23.8 million. The acquired FCB assets increased the average balance of interest-earning assets by $63.9 million and increased the average balance of interest-bearing liabilities by $73.6 million for the first quarter of 2014.

Interest income, on a tax-equivalent basis, was $7.0 million for the three months ended March 31, 2014 compared to $4.1 million for the same period in 2013. As the average balances table below illustrates, loan interest income made up substantially all of our interest income for the three months ended March 31, 2014 and 2013. Interest on our non-farm, non-residential commercial real estate loans, our 1-4 family residential real estate loans and our consumer loans constituted the three largest components of our loan interest income for the three months ended March 31, 2014 and 2013 at 77.4% and 85.7%, respectively, for such periods. Interest income generated from the two branches acquired from FCB was approximately $1.0 million for the three months ended March 31, 2014. The prolonged low interest rate environment contributed to a lower yield on earning assets, offset by the above-described increases in interest-earning assets. The overall yield on interest-earning assets decreased one basis points to 4.65% for the three months ended March 31, 2014 as compared to 4.66% for the same period in 2013. The loan portfolio yielded 5.08% for the three months ended March 31, 2014 as compared to 5.15% for the three months ended March 31, 2013, while the tax-equivalent yield on the investment portfolio was 1.64% for the three months ended March 31, 2014 as compared to 1.43% for the three months ended March 31, 2013.

Interest expense was $1.1 million for the three months ended March 31, 2014, an increase of $0.4 million compared to interest expense of $0.7 million for the three months ended March 31, 2013, as a result of an increase in the volume of interest-bearing liabilities, offset by a decrease in cost of such liabilities. Average interest-bearing liabilities increased approximately $233.5 million for the three months ended March 31, 2014 as compared to the same period in 2013 as a result of the FCB acquisition and our organic deposit growth. Interest expense attributable to the two branches acquired from FCB was approximately $0.1 million for the three months ended March 31, 2014. At the same time, the cost of interest-bearing liabilities decreased 11 basis points to 0.83% for the three months ended March 31, 2014 compared to the same period in 2013. In particular, the weighted average rate paid on certificates of deposit decreased 14 basis points during the three months ended March 31, 2014 compared to same period in 2013. The decrease in deposit rates was driven by competitive factors and the general interest rate environment, as well as our strategy to cross-sell using lower cost deposits.

 

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Average Balances and Yields. The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or paid and the average yield or rate paid on each such category for the three months ended March 31, 2014 and 2013. Averages presented below are daily averages.

 

     Three Months Ended March 31,  
     2014     2013  
     Average
Balance
    Interest
Income/
Expense(1)
     Yield/
Rate(1)
    Average
Balance
    Interest
Income/
Expense(1)
     Yield/
Rate(1)
 
     (dollars in thousands)  

Assets

              

Interest-earning assets:

              

Loans

   $ 532,547      $ 6,675         5.08   $ 309,194      $ 3,926         5.15

Securities:

              

Taxable

     53,607        193         1.46     31,390        78         1.01

Tax-exempt

     14,194        81         2.31     12,649        77         2.47

Interest-bearing balances with banks

     5,812        8         0.56     1,744        2         0.47
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     606,160        6,957         4.65     354,977        4,083         4.66

Cash and due from banks

     10,865             4,066        

Intangible assets

     3,251             2,827        

Other assets

     34,397             20,592        

Allowance for loan losses

     (3,396          (2,699     
  

 

 

        

 

 

      

Total assets

   $ 651,277           $ 379,763        
  

 

 

        

 

 

      

Liabilities and stockholders’ equity

              

Interest-bearing liabilities:

              

Deposits:

              

Interest-bearing demand

   $ 158,712        242         0.62   $ 89,383        150         0.68

Savings deposits

     51,927        89         0.70     30,472        55         0.73

Time deposits

     272,835        672         1.00     155,078        437         1.14
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     483,474        1,003         0.84     274,933        642         0.95

Short-term borrowings

     15,098        4         0.11     5,078        3         0.24

Long-term debt

     34,133        83         0.99     19,149        46         0.97
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     532,705        1,090         0.83     299,160        691         0.94

Noninterest-bearing deposits

     59,166             33,722        

Other liabilities

     2,965             2,670        

Stockholders’ equity

     56,441             44,211        
  

 

 

        

 

 

      

Total liability and shareholders’ equity

   $ 651,277           $ 379,763        
  

 

 

        

 

 

      

Net interest income/net interest margin

     $ 5,867         3.93     $ 3,392         3.88
    

 

 

        

 

 

    

 

(1) Interest income and net interest margin are expressed as a percent of average interest-earning assets outstanding for the indicated periods. Interest expense is expressed as a percent of average interest-bearing liabilities for the indicated periods.

The average balances of nonaccruing assets are included in the table above. Interest income and weighted average yields on tax-exempt securities have been computed on a fully tax-equivalent basis assuming a federal tax rate of 34% and a state tax rate of 0%, which is net of federal tax benefit.

 

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Volume/Rate Analysis. The following table sets forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the three months ended March 31, 2014 compared to the same period in 2013.

 

     Three Months Ended
March 31, 2014

vs.
Three Months Ended
March 31, 2013
 
     Volume      Rate     Net(1)  
     (dollars in thousands)  

Interest income:

       

Loans

   $ 2,836       $ (87   $ 2,749   

Securities:

       

Taxable

     55         60        115   

Tax-exempt

     9         (5     4   

Interest-bearing balances with banks

     5         1        6   
  

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     2,905         (31     2,874   

Interest expense:

       

Interest-bearing demand deposits

     116         (24     92   

Savings deposits

     39         (5     34   

Time deposits

     332         (97     235   

Short-term borrowings

     6         (5     1   

Long-term debt

     36         1        37   
  

 

 

    

 

 

   

 

 

 

Total interest-bearing liabilities

     529         (130     399   
  

 

 

    

 

 

   

 

 

 

Change in net interest income

   $ 2,376       $ 99      $ 2,475   
  

 

 

    

 

 

   

 

 

 

 

(1) Changes in interest due to both volume and rate have been allocated on a pro-rata basis using the absolute ratio value of amounts calculated.

2013 vs. 2012. Net interest income, on a tax-equivalent basis, increased 57% to $19.2 million for the year ended December 31, 2013 from $12.2 million for the same period in 2012. Net interest margin was 4.10% for 2013, up six basis points from 4.04% for 2012. The increase in net interest income resulted from increases in the volume of interest-earning assets and decreases in the cost of interest-bearing liabilities, offset by declines in the rate paid on interest-earnings assets and an increase in the volume of interest-bearing liabilities. These changes were driven both by the impact of the assets acquired and liabilities assumed in connection with the FCB acquisition as well as organic loan and deposit growth. For 2013, average loans increased approximately $155 million as compared to 2012, while average investment securities increased approximately $15 million as compared to 2012. The acquisition of FCB increased the average balance of interest-earning assets by $48.3 million, with an average yield of 6.72%, and increased the average balance of interest-bearing liabilities by $48.8 million, with an average cost of 0.61%, for 2013.

Interest income, on a tax-equivalent basis, was $22.7 million for 2013 compared to $14.7 million for 2012. As the average balances table below illustrates, loan interest income made up virtually all of our interest income in 2013 and 2012. Interest on our non-farm, non-residential commercial real estate loans, our 1-4 family residential real estate loans and our consumer loans constituted the three largest components of our loan interest income for 2013 and 2012, at 79% and 85%, respectively, for such years. Interest income generated from the two branches acquired from FCB was approximately $3.2 million for the year ended December 31, 2013. The prolonged low interest rate environment contributed to a lower yield on earning assets, offset by the above-described increases in interest-earning assets. The overall yield on interest-earning assets decreased four basis points to 4.85% for 2013 as compared to 4.89% for 2012. The loan portfolio yielded 5.34% for 2013 as compared to 5.56% for 2012, while the tax-equivalent yield on the investment portfolio was 1.41% for 2013 as compared to 1.48% for 2012.

 

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Interest expense was $3.5 million for 2013, an increase of $0.9 million compared to interest expense of $2.5 million for 2012, as a result in an increase in volume of interest-bearing liabilities, offset by a decrease in cost. Average interest-bearing liabilities increased approximately $144 million in 2013 as compared to 2012 as a result of the FCB acquisition and our organic growth. Interest expense attributable to the two branches acquired from FCB was approximately $0.3 million for the year ended December 31, 2013. At the same time, the cost of interest-bearing liabilities decreased 14 basis points to 0.87% for 2013 compared to 1.01% for 2012, primarily as a result of lower rates overall and with respect to certificate of deposit rates in particular during 2013 as compared to 2012. We were able to reduce the weighted average rate paid on our certificates of deposits from 1.28% in 2012 to 1.05% in 2013. Competitive factors and the general interest rate environment, as well as the impact of our strategy to cross-sell using lower cost deposits, drove the decrease in deposit rates.

2012 vs. 2011. Net interest income, on a tax-equivalent basis, increased 39% to $12.2 million for the year ended December 31, 2012 from $8.8 million for the same period in 2011. Net interest margin was 4.04% for 2012, down five basis points from 4.09% for 2011. The increase in net interest income resulted from increases in the volume of interest-earning assets and decreases in the cost of interest-bearing liabilities, offset by declines in the rate paid on interest-earnings assets and an increase in the volume of interest-bearing liabilities. Average loans increased approximately $63.4 million and average investments increased approximately $20.1 million in 2012 as compared to 2011. The SLBB acquisition increased the average balance of loans by $7.9 million, with an average yield of 6.23%, and increased the average balance of interest-bearing liabilities by $8.7 million, with an average cost of 0.61%, for 2011.

Interest income, on a tax-equivalent basis, was $14.7 million for 2012 as compared to $11.4 million for 2011. Interest on non-farm, non-residential commercial real estate loans, our 1-4 family residential real estate loans and our consumer loans constituted the three largest components of our loan interest income for 2012 and 2011, at 85% and 82%, respectively, for such years. The overall yield on interest-earnings assets decreased 42 basis points to 4.89% for 2012 as compared to 5.31% for 2011. The loan portfolio yielded 5.56% for 2012 as compared to 5.79% for 2011, while the tax-equivalent yield on the investment portfolio was 1.48% for 2012 as compared to 2.00% for 2011. In 2012, management purchased adjustable rate mortgage-backed securities in an effort to mitigate the effects on our interest income if interest rates began to rise. However, since these adjustable rate mortgage-backed securities yielded lower rates than other investment securities, the yield on the investment portfolio declined.

Interest expense was $2.5 million for 2012, approximately the same as interest expense for 2011. The $66 million increase in average interest-bearing liabilities, primarily resulting from deposit growth, in 2012 as compared to 2011 was offset by a decrease in the cost of interest-bearing liabilities over the same period. The cost of interest-bearing liabilities was 1.01% for 2012, a 37 basis point decrease compared to 2011. Also, the weighted average rate paid on our certificates of deposits decreased from 1.98% in 2011 to 1.28% in 2012. Competitive factors in the our markets in 2012 resulted in lower rates on certificates of deposit as compared to 2011, which allowed us to lower the cost of our certificates of deposits by repricing maturing certificates at lower rates.

 

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Average Balances and Yields. The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or paid and the average yield or rate paid on each such category for the years ended December 31, 2013, 2012 and 2011. Averages presented below are daily averages.

 

    2013     2012     2011  
    Average
Balance
    Interest
Income/
Expense(1)
    Yield/
Rate(1)
    Average
Balance
    Interest
Income/
Expense(1)
    Yield/
Rate(1)
    Average
Balance
    Interest
Income/
Expense(1)
    Yield/
Rate(1)
 
    (dollars in thousands)  

Assets

                 

Interest-earning assets:

                 

Loans

  $ 405,997      $ 21,686        5.34   $ 251,269      $ 13,968        5.56   $ 187,829      $ 10,877        5.79

Securities:

                 

Taxable

    39,957        414        1.04     28,067        289        1.03     17,101        305        1.78

Tax-exempt

    14,685        354        2.41     12,107        307        2.54     3,205        102        3.18

Interest-bearing balances with banks

    2,977        18        0.60     6,838        23        0.34     4,900        18        0.37
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    463,616        22,472        4.85     298,281        14,587        4.89     213,035        11,302        5.31

Cash and due from banks

    7,285            3,086            2,259       

Intangible assets

    3,124            2,834            716       

Other assets

    25,397            17,220            9,679       

Allowance for loan losses

    (2,737         (2,083         (1,559    
 

 

 

       

 

 

       

 

 

     

Total assets

  $ 496,685          $ 319,338          $ 225,689       
 

 

 

       

 

 

       

 

 

     

Liabilities and stockholders’ equity

                 

Interest-bearing liabilities:

                 

Deposits:

                 

Interest-bearing demand

  $ 113,097        726        0.64   $ 82,437        558        0.68   $ 67,370        508        0.75

Savings deposits

    42,774        299        0.70     26,654        206        0.77     12,945        93        0.72

Time deposits

    208,036        2,179        1.05     124,630        1,597        1.28     93,255        1,844        1.98
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing deposits

    363,907        3,204        0.88     233,721        2,361        1.01     173,570        2,445        1.41

Short-term borrowings

    7,627        12        0.16     5,474        11        0.20     5,050        14        0.28

Long-term debt

    24,990        244        0.98     13,288        170        1.28     7,933        120        1.51
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    396,524        3,460        0.87     252,483        2,542        1.01     186,553        2,579        1.38

Noninterest-bearing deposits

    47,564            25,736            15,641       

Other liabilities

    1,527            1,108            957       

Stockholders’ equity

    51,070            40,011            22,538       
 

 

 

       

 

 

       

 

 

     

Total liability and shareholders’ equity

  $ 496,685          $ 319,338          $ 225,689       
 

 

 

       

 

 

       

 

 

     

Net interest income/net interest margin

    $ 19,012        4.10     $ 12,045        4.04     $ 8,723        4.09
   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

 

(1) Interest income and net interest margin are expressed as a percent of average interest-earning assets outstanding for the indicated periods. Interest expense is expressed as a percent of average interest-bearing liabilities for the indicated periods.

The average balances of nonaccruing assets are included in the table above. Interest income and weighted average yields on tax-exempt securities have been computed on a fully tax-equivalent basis assuming a federal tax rate of 34% and a state tax rate of 0%, which is net of federal tax benefit.

 

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Volume/Rate Analysis. The following table sets forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the year ended December 31, 2013 compared to the year ended December 31, 2012 and for the year ended December 31, 2012 compared to the year ended December 31, 2011.

 

     2013 vs. 2012     2012 vs. 2011  
     Volume     Rate     Net(1)     Volume      Rate     Net(1)  
     (dollars in thousands)  

Interest income:

             

Loans

   $ 8,601      $ (883   $ 7,718      $ 3,674       $ (583   $ 3,091   

Securities:

             

Taxable

     122        3        125        196         (212     (16

Tax-exempt

     65        (18     47        283         (78     205   

Interest-bearing balances with banks

     (13     8        (5     7         (2     5   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     8,775        (890     7,885        4,160         (875     3,285   

Interest expense:

             

Interest-bearing demand deposits

     208        (40     168        114         (64     50   

Savings deposits

     125        (32     93        98         15        113   

Time deposits

     1,069        (487     582        620         (867     (247

Short-term borrowings

     4        (3     1        1         (4     (3

Long-term debt

     150        (76     74        81         (31     50   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-bearing liabilities

     1,556        (638     918        914         (951     (37
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Change in net interest income

   $ 7,219      $ (252   $ 6,967      $ 3,246       $ 76      $ 3,322   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Changes in interest due to both volume and rate have been allocated on a pro-rata basis using the absolute ratio value of amounts calculated.

Non-interest income

Non-interest income includes, among other things, fees generated from our deposit services and in connection with our mortgage loan activities, non-recurring bargain purchase gain resulting from acquisitions and securities gains. We expect to continue to develop new products that generate non-interest income, and enhance our existing products, in order to diversify our revenue sources.

Three months ended March 31, 2014 vs. three months ended March 31, 2013. Total non-interest income decreased $0.1 million, or 9.0%, to $1.1 million for the three months ended March 31, 2014 compared to $1.2 million for the three months ended March 31, 3013. Non-interest income generated from the two branches acquired from FCB was approximately $51,000 for the three months ended March 31, 2014. The decrease is primarily due to a decrease in fee income on mortgage loans held for sale.

Fee income on mortgage loans held for sale is the largest component of our non-interest income. These fees decreased $0.3 million to $0.5 million for the three months ended March 31, 2014 from $0.8 million for the same period in 2013, as originations of mortgage loans held for sale decreased. The decrease in such fee income, as well as our originations of mortgage loans held for sale, is due to an industry-wide increase in mortgage loan rates in the latter half of 2013 that has continued into the first quarter of 2014. As interest rates remain high relative to prior years, we expect our mortgage loan originations as well as fee income on mortgage loans held for sale to remain flat and possibly even decline during 2014.

Gains on the sale of loans, other than mortgage loans, for the three months ended March 31, 2014 were $0.2 million. These gains were generated by sales of pools of our auto loans. We did not sell any auto loans during the three months ended March 31, 2013. We expect to sell pools of our auto loans on a quarterly basis in the future.

 

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Service charges on deposit accounts include maintenance fees on accounts, account enhancement charges for additional deposit account features, per item charges and overdraft fees. Service charges on deposits increased 125% to $63,000 for the three months ended March 31, 2014 as compared to $28,000 for the same period in 2013. Approximately 50% of this increase is due to increased deposits resulting from the FCB acquisition, with the remainder of the increase attributable to our organic deposit growth.

Gains on the sale of investment securities for the three months ended March 31, 2014 decreased $147,000, or 56%, to $116,000 from $263,000 for the same period in 2013. We sold approximately $10.7 million in securities for the three months ended March 31, 2014, compared to sales of $6.4 million for the three months ended March 31, 2013.

Other operating income was $0.2 million for the three months ended March 31, 2014 compared to $0.1 million for the same period in 2013. Other operating income consists of interchange fees, ATM surcharge income, loan servicing fees and rental income.

2013 vs. 2012. Total non-interest income increased $1.7 million, or 48%, to $5.4 million for the year ended December 31, 2013 as compared to $3.6 million for the year ended December 31, 2012 primarily due to the FCB acquisition as well as gains on the sale of loans, other than mortgage loans, and gains on the sale of securities. We recorded a bargain purchase gain in the amount of $0.9 million as a result of such acquisition. This gain represents the amount that the net estimated fair value of the assets acquired and the liabilities assumed in the FCB acquisition exceeded the consideration we paid to FCB shareholders in the merger.

Fee income on mortgage loans held for sale decreased 9.0%, to $2.8 million in 2013 from $3.1 million in 2012, as originations of mortgage loans held for sale decreased from $115.0 million in 2012 to $88.2 million in 2013. Such fee income as well as our mortgage originations declined for the same reasons described above with respect to the three months ended March 31, 2014 as compared to the corresponding period in 2013.

Gains on the sale of loans, other than mortgage loans, in 2013 increased to $0.2 million as compared to $34,000 in 2012. These gains were generated by sales of pools of our auto loans and increased from the prior year as a result of the growth in our auto loan portfolio.

Service charges on deposit accounts include maintenance fees on accounts, account enhancement charges for additional deposit account features, per item charges and overdraft fees. Service charges on deposits increased 82% to $0.2 million in 2013 as compared to $0.1 million in 2012. Approximately 78% of this increase is due to increased deposits resulting from the FCB acquisition, with the remainder of the increase attributable to our organic deposit growth.

Gains on the sale of investment securities for the year ended December 31, 2013 increased $0.3 million, or 222%, to $0.4 million from $0.1 million for the same period in 2012. We sold approximately $17.2 million in securities in 2013, as compared to sales of $6.7 million in securities in 2012. Gain on sales of real estate owned increased $95,000 to $97,000 for 2013 as compared to 2012. Our real estate owned increased due to the acquisition of FCB, with approximately $1.6 million of the real estate owned acquired in the FCB acquisition remaining in the portfolio at December 31, 2013. Our increase in gains on sale of real estate owned reflects our efforts to aggressively market the real estate owned held in our portfolio.

Other operating income was $0.6 million in 2013 as compared to $0.2 million in 2012. Other operating income consists of interchange fees, ATM surcharge income, loan servicing fees and rental income.

2012 vs. 2011. Total non-interest income for the year ended December 31, 2012 was $3.6 million, an increase of $1.6 million, or 78%, from $2.0 million in 2011. The growth in non-interest income from 2011 to 2012 reflects organic growth within our existing franchise. Fee income on mortgage loans held for sale increased 99% to $3.1 million in 2012 from $1.6 million in 2011 as mortgage loan originations of mortgage loans held for

 

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sale increased from $70.6 million in 2011 to $115.0 million in 2012 as borrowers took advantage of historically low interest rates in 2012 as compared to 2011.

Service charges on deposit accounts increased 15% to $118,000 in 2012 from $102,000 in 2011, reflecting the increase in our deposits, while gains on the sale of investment securities decreased $21,000 to $139,000 in 2012 from $160,000 in 2011, as we sold roughly the same amount of investment securities in 2012 as we sold in 2011.

Non-interest expense

Non-interest expense includes salaries and benefits and other costs associated with the conduct of our operations. We are committed to managing our costs within the framework of our operating strategy. However, since we are focused on growing both organically and through acquisition, we expect our expenses to continue to increase as we add employees and physical locations to accommodate our growing franchise.

Three months ended March 31, 2014 vs. three months ended March 31, 2013. Total non-interest expense was $5.4 million for the three months ended March 31, 2014, an increase of $1.8 million, or 50%, from $3.6 million for the same period in 2013. This increase was a result of increased costs associated with our expanded operations as a result of the FCB acquisition, the opening of our Lafayette branch and our organic growth.

Salaries and employee benefits increased $1.2 million, or 52%, to $3.5 million for the three months ended March 31, 2014, compared to $2.3 million for the same period in 2013. Staff levels increased to 167 full-time equivalent employees at March 31, 2014 compared to 107 full-time equivalent employees at March 31, 2013, accounting for most of the increase in salary and benefits expense. Of this increase, it was partially due to the 24 employees who joined the Bank upon the completion of the FCB acquisition as well as due to new employees hired in connection with the opening of the Lafayette branch in the fourth quarter of 2013.

Net occupancy and equipment expense increased 63% to $0.6 million for the three months ended March 31, 2014 from $0.4 million for the three months ended March 31, 2013. This increase is primarily attributable to the costs associated with the two branches we acquired in the FCB acquisition and the costs associated with our new branch in Lafayette.

Data processing expenses increased to $0.3 million for the three months ended March 31, 2014 from $0.2 million for the three months ended March 31, 2013. This increase is primarily a result of the additional processing expense associated with the increased size of our loan portfolio resulting from the FCB merger as well as our organic growth, particularly with respect to servicing our auto loan portfolio, the amount of which fluctuates. Software amortization and expenses increased to $0.1 million for the three months ended March 31, 2014 from $68,000 for the same period in 2013, which increase is also attributable to the increased servicing volume of indirect auto loans.

Other expenses include an increase in FDIC and OFI assessments of $49,000 to $114,000 for the three months ended March 31, 2014 compared to $65,000 for the three months ended March 31, 2013, due to our increase in average total assets.

Other operating expenses include security, business development, charitable contributions, training, filing fees and duplicating costs. Other operating expenses increased $0.1 million to $0.5 million for the three months ended March 31, 2014 from $0.4 million for the same period in 2013. The increase is primarily the result of the FCB acquisition and the opening of our Lafayette branch as well as our organic growth.

2013 vs. 2012. Total non-interest expense was $19.0 million for the year ended December 31, 2013, an increase of $7.4 million, or 63%, from $11.6 million for the year ended December 31, 2012. This increase was a result of cost increases associated with our expansion as a result of the FCB acquisition and our organic growth,

 

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including the costs associated with opening two new branches as well as our operations center and costs incurred to update our software to accommodate our indirect auto lending. In 2013, we recorded approximately $250,000 in one-time merger-related expenses associated with the FCB acquisition, which is included in other operating expenses.

Salaries and employee benefits increased $4.3 million, or 58%, to $11.8 million in 2013, as compared to $7.5 million in 2012. Staff levels increased to 163 full-time equivalent employees at December 31, 2013 as compared to 100 full-time equivalent employees at December 31, 2012, accounting for most of the increase in salary and benefits expense. In addition to the 24 employees who joined us upon the completion of the FCB acquisition, we also experienced a full-year’s impact of the personnel we added in connection with the opening of our two de novo branches in the New Orleans markets in December, 2012.

Net occupancy and equipment expense increased 68% to $1.9 million in 2013 from $1.1 million for 2012. This increase is primarily attributable to the costs associated with the two branches we acquired in the FCB acquisition and the costs of constructing our permanent branch in Lafayette.

Data processing expenses increased to $0.8 million in 2013 from $0.5 million in 2012. This increase is primarily a result of the conversion and merger of FCB’s core data system following the completion of the merger. Data processing expenses are also related to the number of auto loans that we service, and fluctuations in this portfolio will affect the amount of data processing expense. Software amortization and expenses increased 42% to $0.4 million in 2013 from $0.3 million in 2012 due to a software upgrade to support the expansion of our indirect auto lending, including our ability to service such loans.

Other expenses included FDIC and OFI assessments of $0.3 million in 2013, which increased from $0.2 million in 2012 due to our increase in average total assets. Advertising expenses increased $0.1 million to $0.3 million in 2013 from $0.2 million in 2012 due to an advertising campaign conducted in connection with our expansion into new markets and the FCB acquisition.

In addition to non-recurring merger-related expenses of $250,000 related to the FCB acquisition, other operating expenses include security, business development, charitable contributions, training, filing fees and duplicating costs. Other operating expenses increased $1.0 million to $2.2 million in 2013 from $1.1 million in 2012. Included in other operating expenses is $31,000 in amortization expense related to the amortization of our core deposit intangible associated with the FCB and SLBB acquisitions.

2012 vs. 2011. Total non-interest expense was $11.6 million for the year ended December 31, 2012, an increase of $3.0 million, or 35% from $8.6 million for the year ended December 31, 2011. This increase is a result of the costs associated with our organic growth as well as due to the impact of a full year of the operations we acquired in connection with the SLBB acquisition in 2011. In 2011, we recorded approximately $229,000 in one-time merger-related expenses associated with the SLBB acquisition, which is included in other operating expenses.

Salaries and employee benefits increased to $7.5 million in 2012 from $4.9 million in 2011. Staff levels increased to 100 full-time equivalent employees at December 31, 2012 from 69 at December 31, 2011 to support our growth. This increase includes the full-year impact of the nine employees who joined the Bank in connection the SLBB acquisition.

Net occupancy costs and equipment expense increased 43% to $1.1 million for 2012 from $0.8 million for 2011. This increase is attributable to the costs associated with the opening of two de novo locations in the New Orleans area.

Data processing expenses decreased 9.0% to $530,000 in 2012 from $584,000 in 2011. In 2011, we converted our core data system to a new service provider, and we also incurred data processing expenses in connection with the conversion and merger of SLBB’s core data system with our own.

 

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Other operating expenses increased $0.1 million to $1.1 million in 2012 from $1.0 million in 2011 due primarily to an increase in ATM and debit card expenses and business expenses, among other things, offset by a decrease in collection expenses related to real estate owned.

Income Tax Expense

Income tax expense for the three months ended March 31, 2014 was $0.4 million up from $0.3 million for the three months ended March 31, 2013. The effective tax rate for the three months ending March 31, 2014 and 2013 was 32.5% and 31.3%, respectively.

Income tax expense was $1.1 million for the year ended December 31, 2013, as compared to $1.0 million for 2012 and $0.5 million for 2011. The effective tax rates for 2013, 2012 and 2011 were 26.1%, 29.3% and 33.4%, respectively. The decrease in the effective tax rate from 2012 to 2013 is due to the non-taxable bargain purchase gain resulting from the FCB acquisition as well as an increase in tax-exempt interest income. We were able to fully utilize our available net operating loss carryforwards in 2013. The decrease in our effective tax rate for 2012 as compared to 2011 is due to an increase in our tax-exempt interest income as well as the effects of the difference between the bases of the assets acquired in the SLBB acquisition and their fair value. We expect our effective tax rate to increase in future periods as we exhaust our net operating loss carryforwards.

Risk Management

The primary risks associated with our operations are credit, interest rate and liquidity risk. Credit and interest rate risk are discussed below, while liquidity risk is discussed in this section under the heading Liquidity and Capital Resources below.

Credit Risk and the Allowance for Loan Losses

General. The risk of loss should a borrower default on a loan is inherent in any lending activity. We monitor and manage such credit risk on an ongoing basis by our credit administration department, the board of director’s loan committee and the full board of directors. The information in the Business section under the heading Credit Risk Management describes our procedures for the underwriting and approval of loans.

When we make a loan, the originating loan officer recommends a loan grade, which must then be approved by the credit underwriter. The loan grade categorizes the loan into one of five risk categories, based on information about the ability of borrowers to service the debt. The information includes, among other factors, current financial information about the borrower, historical payment experience, credit documentation, public information and current economic trends. These categories assist management in monitoring our credit quality. The following describes each of the risk categories, which are consistent with the definitions used in guidance promulgated by federal banking regulators:

 

    Pass (Loan grades 1-6)—Loans not meeting the criteria below are considered pass. These loans have high credit characteristics and financial strength. The borrowers at least generate profits and cash flow that are in line with peer and industry standards and have debt service coverage ratios above loan covenants and our policy guidelines. For some of these loans, a guaranty from a financially capable party mitigates characteristics of the borrower that might otherwise result in a lower grade.

 

    Special Mention (grade 7)—Loans classified as special mention possess some credit deficiencies that need to be corrected to avoid a greater risk of default in the future. For example, financial ratios relating to the borrower may have deteriorated. Often, a special mention categorization is temporary while certain factors are analyzed or matters addressed before the loan is re-categorized as either Pass or Substandard.

 

   

Substandard (grade 8)—Substandard-rated loans are inadequately protected by the current net worth and paying capacity of the borrower or the liquidation value of any collateral. If deficiencies are not

 

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addressed, it is likely that this category of loan will result in the Bank incurring a loss. Where a borrower has been unable to adjust to industry or general economic conditions, the borrower’s loan is often categorized as Substandard.

 

    Doubtful (grade 9)—Doubtful loans are Substandard loans with one or more additional negative factors that makes full collection of amounts outstanding, either through repayment or liquidation of collateral, highly questionable and improbable.

 

    Loss (grade 10)—Loans classified as Loss have deteriorated to such a point that it is not practicable to defer writing off the loan. For these loans, all efforts to remediate the loan’s negative characteristics have failed and the value of the collateral, if any, has severely deteriorated relative to the amount outstanding. Although some value may be recovered on such a loan, it is not significant in relation to the amount borrowed.

At March 31, 2014 and December 31, 2013, there were no loans classified as Doubtful or Loss, while there were $4.5 million and $4.2 million, respectively, of loans classified as Substandard and $0.6 million and $1.2 million, respectively, of loans classified as Special Mention as of such dates. Of the $5.1 million in total Substandard and Special Mention loans at March 31, 2014, $4.5 million of such loans were acquired in the FCB acquisition and marked to fair value at the time of their acquisition, while $4.9 million of the $5.4 million of total Substandard and Special Mention loans at December 31, 2013 were acquired in the FCB acquisition and marked to fair value. At December 31, 2012, we had no Doubtful or Loss loans, and we had Substandard and Special Mention loans of $0.9 million and $0.3 million, respectively.

An external loan review consultant is engaged annually by the risk management department to review approximately 40% of commercial loans, utilizing a risk-based approach designed to maximize the effectiveness of the review. In addition, credit analysts periodically review smaller dollar commercial loans to identify negative financial trends related to any one borrower, any related groups of borrowers or an industry. All loans not categorized as Pass are put on an internal watch list, with quarterly reports to the board of directors. In addition, a written status report is maintained by our special assets division for all commercial loans categorized as Substandard or worse. We use this information in connection with our collection efforts.

If our collection efforts are unsuccessful, collateral securing loans may be repossessed and sold or, for loans secured by real estate, foreclosure proceedings initiated. The collateral is sold at public auction for fair market value (based upon recent appraisals), with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. If the loan balance is greater than the sales proceeds, the deficient balance is sent to the board of directors’ loan committee for charge-off approval.

Allowance for Loan Losses. The allowance for loan losses is an amount that management believes will be adequate to absorb probable losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collective impairment as recognized under ASC 450, Contingencies. Collective impairment is calculated based on loans grouped by grade. Another component of the allowance is losses on loans assessed as impaired under ASC 310. The balance of these loans and their related allowance is included in management’s estimation and analysis of the allowance for loan losses. Other considerations in establishing the allowance for loan losses include the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to pay, as well as trends within each of these factors. The allowance for loan losses is established after input from management as well as our risk management/credit analysis department and our special assets committee. We evaluate the adequacy of the allowance for loan losses on a quarterly basis. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses was $3.5 million at March 31, 2014, up from $3.4 million at December 31, 2013 and $2.7 million at December 31, 2012, with such increase primarily due to our organic loan growth.

 

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A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Determination of impairment is treated the same across all classes of loans. Impairment is measured on a loan-by-loan basis for, among others, all loans of $500,000 or greater, nonaccrual loans and a sample of loans between $250,000-$500,000. When we identify a loan as impaired, we measure the extent of the impairment based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole (remaining) source of repayment for the loans is the operation or liquidation of the collateral. In these cases when foreclosure is probable, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. For real estate collateral, the fair value of the collateral is based upon a recent appraisal by a qualified and licensed appraiser. If we determine that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), we recognize impairment through an allowance estimate or a charge-off to the allowance. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual, contractual interest is credited to interest income when received, under the cash basis method.

Impaired loans at March 31, 2014 were $4.5 million, including impaired loans acquired in the FCB acquisition in the amount of $4.1 million, compared to $4.2 million, including impaired loans acquired in the FCB acquisition in the amount of $3.8 million, at December 31, 2013. Impaired loans were $1.0 million at December 31, 2012, none of which were acquired loans. At March 31, 2014 and December 31, 2013, $64,000 and $37,000, respectively, of the allowance for loan losses were specifically allocated to impaired loans, while $120,000 of the allowance was specifically allocated to such loans at December 31, 2012.

The provision for loan losses is a charge to income in an amount that management believes is necessary to maintain an adequate allowance for loan losses. The provision is based on management’s regular evaluation of current economic conditions in our specific markets as well as regionally and nationally, changes in the character and size of the loan portfolio, underlying collateral values securing loans, and other factors which deserve recognition in estimating loan losses. For the three months ended March 31, 2014 and 2013, the provision for loan losses was $245,000 and $89,000, respectively. For the year ended December 31, 2013, the provision for loan losses was $1.0 million, up from $0.7 million in 2012 and $0.6 million in 2011. The increases over all periods are due primarily to the overall growth in our loan portfolio, including our commercial real estate loans.

Acquired SLBB loans had a carrying value of $31.3 million and a fair value of $31.5 million on the acquisition date, while acquired FCB loans had a carrying value of $78.4 million and a fair value of $77.5 million on the acquisition date. Acquired loans that are accounted for under ASC 310-30 were marked to market on the date we acquired the loans to values which, in management’s opinion, reflected the estimated future cash flows, based on the facts and circumstances surrounding each respective loan at the date of acquisition. We continually monitor these loans as part of our normal credit review and monitoring procedures for changes in the estimated future cash flows. Because ASC 310-30 does not permit carry over or recognition of an allowance for loan losses, we may be required to reserve for these loans in the allowance for loan losses through future provision for loan losses if future cash flows deteriorate below initial projections. We did not increase the allowance for loan losses for loans accounted for under ASC 310-30 during 2013 or 2012 or during the first three months of 2014 or 2013. There was no provision for loan losses charged to operating expense attributable to loans accounted for under ASC 310-30 for the three months ended March 31, 2014 and 2013 and the years ended December 31, 2013, 2012 and 2011.

 

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The following table presents the allocation of the allowance for loan losses by loan category at the dates indicated:

 

     At March 31,      At December 31,  
     2014      2013      2012      2011      2010      2009  
     (dollars in thousands)  

Mortgage loans on real estate:

                 

Construction and land development

   $ 435       $ 420       $ 276       $ 385       $ 356       $ 657   

1-4 family

     619         567         415         194         158         164   

Multifamily

     124         101         18         5         6         4   

Farmland

     11         4         0         0         4         0   

Non-farm, non-residential

     1,070         992         977         506         332         292   

Commercial and industrial

     374         397         332         306         307         230   

Consumer installment loans:

                 

Auto loans

     857         831         683         337         254         108   

Other consumer installment loans

     40         68         21         13         59         16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned income

   $ 3,530       $ 3,380       $ 2,722       $ 1,746       $ 1,476       $ 1,471   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the amount of the allowance for loan losses allocated to each loan category as a percentage of total loans at the dates indicated:

 

     March 31,     At December 31,  
     2014     2013     2012     2011     2010     2009  

Mortgage loans on real estate:

            

Construction and land development

     .08     .08     .10     .18     .23     .50

1-4 family

     .12        .11        .14        .09        .10        .13   

Multifamily

     .02        .02        .01        0        0        0   

Farmland

     0        0        0        0        0        0   

Non-farm, non-residential

     .21        .20        .33        .22        .21        .22   

Commercial and industrial

     .07        .08        .12        .14        .19        .17   

Consumer installment loans:

            

Auto loans

     .16        .17        .24        .15        .16        .08   

Other consumer installment loans

     .01        .01        0        .01        .04        .01   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unearned income

     .67     .67     .94     .79     .93     1.11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     Three Months
Ended

March 31,
    Year Ended December 31,  
     2014     2013     2013     2012     2011     2010     2009  
     (in thousands)  

Allowance at beginning of year

   $ 3,380      $ 2,722      $ 2,722      $ 1,746      $ 1,476      $ 1,471      $ 1,093   

Provision for loan losses

     245        89        1,026        685        639        1,019        1,273   

Charge-offs:

              

Mortgage loans on real estate:

              

Construction and land development

     0        0        0        0        0        (334     0   

1-4 family

     (30     0        0        0        (63     (55     (326

Multifamily

     0        0        0        (15     0        0        0   

Farmland

     0        0        0        0        0        0        0   

Non-farm, non-residential

     (3     0        0        0        (20     (448     0   

Commercial and industrial

     0        (118     (118     0        (218     (84     (500

Consumer installment loans:

              

Auto loans

     (70     (41     (255     (160     (71     (100     (70

Other consumer installment loans

     (5     (2     (16     (6     (6     (3     0   

Total charge-offs

     (108     (161     (389     (181     (378     (1,024     (896

Recoveries:

              

Mortgage loans on real estate:

              

Construction and land development

     1        0        0        0        0        8        0   

1-4 family

     0        0        0        0        0        0        0   

Multifamily

     0        0        0        0        0        0        0   

Farmland

     0        0        0        0        0        0        0   

Non-farm, non-residential

     0        0        0        448        0        0        0   

Commercial and industrial

     0        0        0        2        0        0        0   

Consumer installment loans:

              

Auto loans

     10        2        16        20        9        2        1   

Other consumer installment loans

     2        0        5        2        0        0        0   

Total recoveries

     13        2        21        472        9        10        1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (95     (159     (368     291        (369     (1,014     (895
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 3,530      $ 2,652      $ 3,380      $ 2,722      $ 1,746      $ 1,476      $ 1,471   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs to:

              

Loans—average

     0.02     0.05     0.09     -0.12     0.20     0.68     0.69

Allowance for loan losses

     2.69     6.00     10.89     -10.69     21.13     68.70     60.84

Allowance for loan losses to:

              

Total loans

     0.67     0.86     0.67     0.94     0.79     0.93     1.11

Nonperforming loans

     206     1,205     227     5,136     6,236     40     205

The allowance for loan losses to total loans ratio was unchanged at 0.67% at March 31, 2014 compared to December 31, 2013. The allowance for loan losses to nonperforming loans ratio decreased to 206% at March 31, 2014 from 227% at December 31, 2013 as the result of a $0.2 million increase in nonperforming loans. The

 

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decrease in both the ratio of the allowance for loan losses to total loans and the ratio of the allowance for loan losses to nonperforming loans at December 31, 2013 compared to December 31, 2012 was due to the $77.5 million of loans acquired in the FCB acquisition and an overall improvement of credit quality. Loans acquired from FCB caused a seven basis point decline in the ratio of the allowance for loan losses to total loans at March 31, 2014 as compared to December 31, 2013. At March 31, 2014 and December 31, 2013, the allowance for loan losses to total loans, other than those acquired in the SLBB and FCB acquisitions, was 0.75% and 0.77%, respectively.

Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for loan losses. Net charge-offs for the three months ended March 31, 2014 and 2013 were $0.1 million and $0.2 million, respectively, equal to 0.02% and 0.05%, respectively, of our average loan balance as of such dates. Net charge-offs for 2013 were $0.4 million, or 0.09% as a percentage of average loans. For 2012, we had a net recovery of $0.3 million, or -0.12% as a percentage of average loans, due to a single recovery on a non-farm, non-residential commercial real estate loan. For the three months ended March 31, 2014 and 2013 and the years ended December 31, 2013 and 2012, the majority of our charge-offs were auto loans, with the exception of a $0.1 million commercial and industrial loan charged off during the first quarter of 2013. Net charge-offs of our auto loans as a percentage of average auto loans for the three months ended March 31, 2014 and 2013 were 0.04% for both periods, while net charge-offs of our auto loans as a percentage of average auto loans for the years ended December 31, 2013 and 2012 were 0.22% and 0.16%, respectively. Through March 31, 2014, we have charged off an aggregate of $33,194 of loans that we acquired in connection with our FCB acquisition.

Management believes the allowance for loan losses at March 31, 2014 is sufficient to provide adequate protection against losses in our portfolio. Although the allowance for loan losses is considered adequate by management, there can be no assurance that this allowance will prove to be adequate over time to cover ultimate losses in connection with our loans. This allowance may prove to be inadequate due to unanticipated adverse changes in the economy or discrete events adversely affecting specific customers or industries. Our results of operations and financial condition could be materially adversely affected to the extent that the allowance is insufficient to cover such changes or events.

Nonperforming assets and restructured loans. Nonperforming assets consist of nonperforming loans and real estate owned. Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Loans are ordinarily placed on nonaccrual when a loan is specifically determined to be impaired or when principal and interest is delinquent for 90 days or more. However, management may elect to continue the accrual when the estimated net available value of collateral is sufficient to cover the principal balance and accrued interest. It is our policy to discontinue the accrual of interest income on any loan for which we have reasonable doubt as to the payment of interest or principal. Nonaccrual loans are returned to accrual status when the financial position of the borrower indicates there is no longer any reasonable doubt as to the payment of principal or interest.

Another category of assets which contribute to our credit risk is troubled debt restructurings, or restructured loans. A restructured loan is a loan for which a not-insignificant concession has been granted to the borrower due to a deterioration of the borrower’s financial condition and which is performing in accordance with the new terms. Such concessions may include reduction in interest rates, deferral of interest or principal payments, principal forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. We strive to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before such loan reaches nonaccrual status. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. Restructured loans that are not performing in accordance with their restructured terms that are either contractually 90 days past due or placed on nonaccrual status are reported as nonperforming loans.

 

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All of our restructured loans, consisting of four credits, were acquired from FCB. All four contracts were considered restructured loans due to a modification of term through adjustments to maturity. As of March 31, 2014, there have been no subsequent defaults on our restructured loans.

The following table shows the principal amounts of nonperforming and restructured loans as of March 31, 2014 and as of December 31, 2013, 2012, 2011, 2010 and 2009. All loans where information exists about possible credit problems that would cause us to have serious doubts about the borrower’s ability to comply with the current repayment terms of the loan have been reflected in the table below.

 

     At
March 31,

2014
     At December 31,  
        2013      2012      2011      2010      2009  
     (in thousands)  

Nonaccrual loans

   $ 1,712       $ 1,489       $ 53       $ 28       $ 3,686       $ 717   

Accruing loans past due 90 days or more

     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonperforming loans

     1,712         1,489         53         28         3,686         717   

Restructured loans

     818         815         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonperforming and restructured loans

   $ 2,530       $ 2,304       $ 53       $ 28       $ 3,686       $ 717   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized on nonaccruing and restructured loans

     15         100         2         1         117         18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income foregone on nonaccruing and restructured loans

     50         281         4         4         91         30   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Of our total nonaccrual loans at March 31, 2014 and December 31, 2013, $1.3 million and $1.2 million, respectively, were acquired in the acquisition of FCB. We had no nonaccrual loans acquired through acquisition at December 31, 2012. Delinquent loans are comprised of loans 90 days or more past due and nonaccrual loans. Delinquent loans outstanding represented 0.32% of total loans at March 31, 2014, delinquent loans other than those acquired through an acquisition were 0.08%, and delinquent acquired loans were 0.24% at such date. Delinquent loans outstanding, including acquired loans, represented 0.30% and 0.02% of total loans at December 31, 2013 and 2012, respectively. None of the loans acquired from SLBB were delinquent at December 31, 2012.

Real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair market value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for loan losses. Real estate owned with a cost basis of $0.1 million and $0.2 million was sold during the three months ended March 31, 2014 and 2013, respectively, resulting in a net loss of $3,000 for the three months ended March 31, 2014 and neither a gain nor a loss for the three months ended March 31, 2013. For the years ended December 31, 2013 and 2012, real estate owned with a cost basis of $1.6 million and $0.3 million, respectively, was sold, resulting in net gains of $97,000 and $2,000, respectively.

At March 31, 2014, $1.7 million of our real estate owned was related to our acquisition of FCB compared to $1.6 million at December 31, 2013. In connection with our acquisition of FCB, the Bank agreed to share with the former FCB shareholders the proceeds that we receive in connection with the sale of one piece of property, which had a carrying value and a fair market value of $637,000 as of each of March 31, 2014 and December 31, 2013. Under this arrangement, if this property is sold within four years of the closing date of our acquisition of FCB, then we are entitled to retain the first $714,000 of the sale proceeds plus an amount necessary to cover our selling expenses, with the remaining proceeds, if any, to be paid to former FCB shareholders. After the fourth anniversary of the closing date, which is May 1, 2017, we are entitled to retain all sales proceeds arising upon the sale of this property.

 

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The following table provides details of our real estate owned as of the dates indicated:

 

     March 31,
2014
     December 31,  
        2013      2012  
     (in thousands)  

Construction and land development

   $ 2,604       $ 2,353       $ 1,726   

1-4 family

     770         812         0   

Multifamily

     40         350         550   

Nonfarm, non-residential

     180         0         0   

Total real estate owned

   $ 3,594       $ 3,515       $ 2,276   
  

 

 

    

 

 

    

 

 

 

Changes in our real estate owned were as follows (in thousands)

 

     Three
Months
Ended

March 31,
2014
   

Year Ended

December 31,

 
       2013     2012  
     (in thousands)  

Balance as of January 1

   $ 3,515      $ 2,276      $ 2,079   

Transfers from loans

     0        465        550   

Transfers from acquired loans

     180        822        0   

Acquired real estate owned

     0        1,718        0   

Sales of real estate owned

     (91     (1,645     (327

Write-downs

     (10     (121     (26
  

 

 

   

 

 

   

 

 

 

Balance as of Period End

   $ 3,594      $ 3,515      $ 2,276   
  

 

 

   

 

 

   

 

 

 

Interest Rate Risk

Market risk is the risk of loss from adverse changes in market prices and rates. Since the majority of our assets and liabilities are monetary in nature, our market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities. A sudden and substantial change in interest rates may adversely impact our earnings and profitability because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. Accordingly, our ability to proactively structure the volume and mix of our assets and liabilities to address anticipated changes in interest rates, as well as to react quickly to such fluctuations, can significantly impact our financial results. To that end, management actively monitors and manages our interest rate risk exposure.

We have an Asset/Liability Committee (“ALCO”) which has been authorized by the board of directors to implement our asset/liability management policy, which establishes guidelines with respect to our exposure to interest rate fluctuations, liquidity, loan limits as a percentage of funding sources, exposure to correspondent banks and brokers and reliance on non-core deposits. The goal of the policy is to enable us to maximize our interest income and maintain our net interest margin without exposing the Bank to excessive interest rate risk, credit risk and liquidity risk. Within that framework, the ALCO monitors our interest rate sensitivity and makes decisions relating to our asset/liability composition.

We monitor the impact of changes in interest rates on our net interest income using gap analysis. The gap represents the net position of our assets and liabilities subject to repricing in specified time periods. During any given time period, if the amount of rate-sensitive liabilities exceeds the amount of rate-sensitive assets, a financial institution would generally be conside