10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission File Number: 001-36522

 

 

 

 

LOGO

Investar Holding Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Louisiana   27-1560715

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

7244 Perkins Road, Baton Rouge, Louisiana 70808

(Address of principal executive offices, including zip code)

(225) 227-2222

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date, is as follows: Common stock, $1.00 par value, 7,229,924 shares outstanding as of August 8, 2014.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Special Note Regarding Forward-Looking Statements      3   

Part I. Financial Information

  

Item 1.

 

Financial Statements (Unaudited)

     4   
  Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013      4   
 

Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013

     5   
 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013

     6   
 

Consolidated Statements of Changes in Stockholders’ Equity

     7   
 

Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013

     8   
 

Notes to the Consolidated Financial Statements

     9   

Item 2.

 

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

     29   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     51   

Item 4.

 

Controls and Procedures

     51   

Part II. Other Information

  

Item 1A.

 

Risk Factors

     51   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     52   

Item 6.

 

Exhibits

     54   

Signatures

     55   

Exhibit Index

     56   

 

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Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

When included in this Quarterly Report on Form 10-Q, or in other documents that Investar Holding Corporation (the “Company”) files with the Securities and Exchange Commission (“SEC”) or in statements made by or on behalf of the Company, words like “may,” “should,” “could,” “predict,” “potential,” “believe,” “think,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “outlook” and similar expressions or the negative version of those words are intended to identify forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a variety of risks and uncertainties that could cause actual results to differ materially from those described therein. The Company’s forward-looking statements are based on assumptions and estimates that management believes to be reasonable in light of the information available at the time such statements are made. However, many of the matters addressed by these statements are inherently uncertain and could be affected by many factors beyond management’s control. Factors that could have a material effect on the Company’s business, financial condition, results of operations and future growth prospects can be found in the Risk Factors section of the Registration Statement on Form S-1 that the Company originally filed with the SEC on May 16, 2014 (and subsequently amended) and Part II, Item 1A. – Risk Factors, of this Quarterly Report on Form 10-Q. Additional risk factors may also be described in reports that the Company files from time to time with the SEC.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on any forward-looking statement as a prediction of future events. We expressly disclaim any obligation or undertaking to update our forward-looking statements, and we do not intend to release publicly any updates or changes in our expectations concerning the forward-looking statements or any changes in events, conditions or circumstances upon which any forward-looking statement may be based, except as required by law.

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INVESTAR HOLDING CORPORATION

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

     June 30, 2014     December 31, 2013  
     (Unaudited)        

ASSETS

    

Cash and due from banks

   $ 12,872      $ 10,549   

Interest bearing balances due from other banks

     1,777        17,154   

Federal funds sold

     500        500   
  

 

 

   

 

 

 

Cash and cash equivalents

     15,149        28,203   

Available for sale securities at fair value (amortized cost of $65,286 and $56,733, respectively)

     65,528        56,173   

Held to maturity securities at amortized cost (estimated fair value of $13,707 and $5,986, respectively)

     14,015        6,579   

Loans held for sale

     32,131        5,029   

Loans, net of allowance for loan losses of $3,882 and $3,380, respectively

     560,093        500,715   

Other equity securities

     3,409        2,020   

Bank premises and equipment, net

     27,679        24,680   

Real estate owned, net

     3,423        3,515   

Accrued interest receivable

     1,921        1,835   

Prepaid FDIC/OFI assessment

     99        —     

Deferred tax asset

     709        1,205   

Goodwill

     2,684        2,684   

Other assets

     2,230        2,308   
  

 

 

   

 

 

 

Total assets

   $ 729,070      $ 634,946   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Noninterest bearing

   $ 69,804      $ 72,795   

Interest bearing

     508,863        459,811   
  

 

 

   

 

 

 

Total deposits

     578,667        532,606   

Advances from Federal Home Loan Bank

     68,409        30,818   

Repurchase agreements

     11,425        10,203   

Notes payable

     8,609        3,609   

Accrued interest payable

     289        285   

Accrued taxes and other liabilities

     3,731        1,942   
  

 

 

   

 

 

 

Total liabilities

     671,130        579,463   

STOCKHOLDERS’ EQUITY

    

Common stock, $1.00 par value per share; 40,000,000 shares authorized; 3,945,753 and 3,945,114 shares issued and outstanding, respectively

     3,945        3,943   

Treasury Stock

     (4     —     

Surplus

     45,363        45,281   

Retained earnings

     8,458        6,609   

Accumulated other comprehensive income (loss)

     178        (350
  

 

 

   

 

 

 

Total stockholders’ equity

     57,940        55,483   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 729,070      $ 634,946   
  

 

 

   

 

 

 

 

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INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share data)

(Unaudited)

 

     Three months ended
June 30,
     Six months ended
June 30,
 
         2014             2013          2014     2013  

INTEREST INCOME

         

Interest and fees on loans

   $ 7,119      $ 5,391       $ 13,794      $ 9,317   

Interest on investment securities:

         

Taxable interest income

     188        66         379        141   

Exempt from federal income taxes

     90        90         171        167   

Other interest income

     10        6         20        11   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

     7,407        5,553         14,364        9,636   

INTEREST EXPENSE

         

Interest on deposits

     1,050        780         2,053        1,422   

Interest on borrowings

     108        56         194        104   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     1,158        836         2,247        1,526   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     6,249        4,717         12,117        8,110   

Provision for loan losses

     448        143         693        232   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     5,801        4,574         11,424        7,878   

NONINTEREST INCOME

         

Service charges on deposit accounts

     73        58         136        86   

Gain on sale of investment securities, net

     48        47         165        309   

Net (loss) gain on sales of ORE

     (5     91         (7     91   

Gain on sale of loans

     546        52         720        52   

Bargain purchase gain

     —          906         —          906   

Fee income on mortgage loans held for sale, net

     574        921         1,100        1,732   

Other operating income

     273        118         462        186   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     1,509        2,193         2,576        3,362   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before noninterest expense

     7,310        6,767         14,000        11,240   

NONINTEREST EXPENSE

         

Salaries and employee benefits

     3,491        2,860         6,962        5,111   

Net occupancy expense and equipment expense

     577        450         1,162        810   

Bank shares tax

     82        55         160        101   

FDIC and OFI assessments

     119        79         233        144   

Legal fees

     40        77         48        92   

Data processing

     308        215         586        402   

Advertising

     71        71         147        148   

Stationery and supplies

     44        62         92        101   

Software amortization and expense

     122        95         228        162   

Professional fees

     159        100         210        166   

Telephone expense

     46        34         92        59   

Business entertainment

     39        16         65        33   

Other operating expenses

     631        501         1,131        859   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

     5,729        4,615         11,116        8,188   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income tax expense

     1,581        2,152         2,884        3,052   

Income tax expense

     514        455         938        736   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 1,067      $ 1,697       $ 1,946      $ 2,316   
  

 

 

   

 

 

    

 

 

   

 

 

 

EARNINGS PER SHARE

         

Basic earnings per share

   $ 0.27      $ 0.47       $ 0.50      $ 0.68   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted earnings per share

   $ 0.26      $ 0.44       $ 0.47      $ 0.64   
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.01      $ 0.01       $ 0.02      $ 0.02   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
         2014              2013         2014      2013  

Net income

   $ 1,067       $ 1,697      $ 1,946       $ 2,316   

Other comprehensive income (loss):

          

Reclassification of realized gains, net of tax of $16, $16, $56 and $105, respectively

     32         31        108         204   

Unrealized gains (losses), available for sale, net of tax of $114, ($212), $137 and ($344), respectively

     334         (624     402         (1,012

Unrealized gains, transfer from available for sale to held to maturity, net of tax of $6, $8, $6 and $8, respectively

     18         23        18         23   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other comprehensive income (loss)

     384         (570     528         (785
  

 

 

    

 

 

   

 

 

    

 

 

 

Total comprehensive income

   $ 1,451       $ 1,127      $ 2,474       $ 1,531   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share data)

 

     Common
Stock
     Treasury
Stock
    Surplus     Retained
Earnings
    Accumulated Other
Comprehensive
Income (Loss)
    Total
Stockholders’
Equity
 

Balance, December 31, 2012

   $ 3,208       $ —        $ 36,060      $ 3,620      $ 665      $ 43,553   

Proceeds from sale of stock

     382         —          4,957        —          —          5,339   

Common stock issued for acquisition, 320,774 shares

     320         —          4,170        —          —          4,490   

Stock issuance cost

     —           —          (23     —          —          (23

Dividends declared – $0.05 per share

     —           —          —          (179     —          (179

Stock based compensation

     33         —          117        —          —          150   

Net income

     —           —          —          3,168        —          3,168   

Other comprehensive loss, net

     —           —          —          —          (1,015     (1,015
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

   $ 3,943       $ —        $ 45,281      $ 6,609      $ (350   $ 55,483   

Surrendered shares

     —           (4     —          —          —          (4

Dividends declared – $0.01 per share

     —           —          —          (97     —          (97

Stock based compensation

     2         —          82        —          —          84   

Net income

     —           —          —          1,946        —          1,946   

Other comprehensive income, net

     —           —          —          —          528        528   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014 (Unaudited)

   $ 3,945       $ (4   $ 45,363      $ 8,458      $ 178      $ 57,940   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

     For the six months ended
June 30,
 
         2014             2013      

Cash flows from operating activities:

    

Net income

   $ 1,946      $ 2,316   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     693        232   

Amortization of purchase accounting adjustments

     (164     (234

Writedowns of real estate owned

     26        18   

Depreciation and amortization

     610        396   

Net amortization of securities

     509        384   

Bargain purchase gain

     —          (906

Gain on sale of securities

     (165     (309

Loans held for sale:

    

Originations

     (81,448     (59,994

Proceeds from sales

     55,446        65,336   

Fee income on mortgage loans held for sale, net

     (1,100     (1,732

Gain on sale of loans

     (720     (52

Loss (gain) on disposition of real estate owned

     7        (91

Stock dividends

     (3     (2

Stock-based compensation

     84        41   

Net change in:

    

Accrued interest receivable

     (86     (208

Prepaid OFI/FDIC assessment

     (99     211   

Deferred taxes

     90        677   

Other assets

     57        (444

Accrued interest payable

     4        8   

Accrued taxes and other liabilities

     1,917        (431
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (22,396     5,216   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from maturities, calls and sales of investment securities available for sale

     16,497        7,427   

Funds invested in securities available for sale

     (29,559     (20,226

Funds invested in securities held to maturity

     (7,470     —     

Proceeds from principal paydowns and maturities of investment securities available for sale

     4,172        3,406   

Proceeds from principal paydowns and maturities of investment securities held to maturity

     27        —     

Proceeds from sale of loans

     61,745        19,228   

Proceeds from redemption of other equity securities

     348        718   

Purchase of other equity securities

     (1,734     (444

Net increase in loans

     (121,471     (73,085

Proceeds from sales of foreclosed assets

     539        1,293   

Purchases of premises, equipment and software

     (3,609     (4,107

Cash received in acquisition

     —          9,293   
  

 

 

   

 

 

 

Net cash used in investing activities

     (80,515     (56,497
  

 

 

   

 

 

 
Cash flows from financing activities:     

Net increase in customer deposits

     46,141        58,336   

Net increase in repurchase agreements

     1,222        1,571   

Net increase (decrease) in short-term advances

     37,201        (6,114

Proceeds from long-term advances

     6,000        2,700   

Repayment of long-term advances

     (610     (5,942

Cash dividends paid on common stock

     (97     (84

Proceeds from sales of common stock

     —          4,996   

Stock issuance cost

     —          (21
  

 

 

   

 

 

 

Net cash provided by financing activities

     89,857        55,442   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (13,054     4,161   

Cash and cash equivalents, beginning of period

     28,203        4,641   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 15,149      $ 8,802   
  

 

 

   

 

 

 

 

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INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of Investar Holding Corporation (the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three and six month periods ended June 30, 2014 are not necessarily indicative of the results that may be expected for the entire fiscal year. These statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2013, including the notes thereto, which were included as part of the Company’s Registration Statement on Form S-1, originally filed with the Securities and Exchange Commission on May 16, 2014, and subsequently amended.

Nature of Operations

Investar Holding Corporation, headquartered in Baton Rouge, Louisiana, provides full banking services, excluding trust services, through its wholly-owned banking subsidiary, Investar Bank (the “Bank”), a Louisiana-chartered bank. The Company’s primary market is South Louisiana. The Company currently operates 11 full service banking offices located throughout its market and had 165 employees at June 30, 2014.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material. Material estimates that are susceptible to a significant change in the near term are the allowance for loan losses, the fair value of financial instruments and the determination of other-than-temporary impairments of securities.

Concentrations of Credit Risk

The Company’s loan portfolio consists of the various types of loans described in Note 4, Loans. Real estate or other assets secure most loans. The majority of loans has been made to individuals and businesses in the Company’s market of South Louisiana. Customers are dependent on the condition of the local economy for their livelihoods and servicing their loan obligations. The Company does not have any significant concentrations in any one industry or individual customer.

 

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INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Recent Accounting Pronouncements

FASB ASC Subtopic 310-40 “Receivables – Troubled Debt Restructurings by Creditors” Update No. 2014-04. The Financial Accounting Standards Board (the “FASB”) issued Update No. 2014-04 in January 2014. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in the update should be applied prospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position.

FASB ASC Topic 606 “Revenue from Contracts with Customers” Update No. 2014-09. The FASB issued Update No. 2014-09 in May 2014 to address the previous revenue recognition requirements in GAAP that differ from those in International Financial Reporting Standards (“IFRS”). Accordingly, the FASB and the International Accounting Standards Board (“IASB”) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and IFRS. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, the standard is effective for annual and interim periods beginning after December 15, 2016, and calendar year-end public entities will apply it in the quarter that ends March 31, 2017. Early adoption is not permitted. We are currently assessing the potential impact of this amendment on our consolidated financial statements.

FASB ASC Topic 718 “Compensation – Stock Compensation” Update No. 2014 -12. The FASB issued Update No. 2014-12 in June 2014 to resolve the diverse accounting treatment of share-based payment awards that require, as a condition to vesting, achievement of a specific performance target after the requisite service period. Many reporting entities account for these performance targets as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance target in the estimate of the grant-date fair value of the award, while other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award. This amendment requires that these performance targets that affect vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 “Compensation - Stock Compensation” as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position.

FASB ASC Topic 860 “Transfers and Servicing” Update No. 2014-11. The FASB issued Update No. 2014-11 in June 2014 to respond to stakeholders’ concerns about current accounting and disclosures for repurchase agreements and similar transactions. The amendments in this Update require two accounting changes. Firstly, the amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Secondly, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments

 

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Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

in this Update require disclosures for certain transactions comprising (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. For those transactions outstanding at the reporting date, the transferor is required to disclose certain information by type of transaction. The amendments in this Update also require certain disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. The accounting changes in this Update are effective for public business entities for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application for a public business entity is prohibited. For public business entities, the disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position.

NOTE 2. EARNINGS PER SHARE

The following is a summary of the information used in the computation of basic and diluted earnings per common share for the three and six months ended June 30, 2014 and 2013 (dollars in thousands, except share data):

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2014      2013      2014      2013  

Net income available to common shareholders

   $ 1,067       $ 1,697       $ 1,946       $ 2,316   

Weighted average number of common shares outstanding used in computation of basic earnings per common share

     3,901,542         3,598,703         3,901,304         3,404,313   

Effect of dilutive securities:

           

Restricted stock

     44,493         19,223         44,272         18,894   

Stock options

     22,810         30,310         22,810         30,310   

Stock warrants

     193,498         193,498         193,498         193,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding plus effect of dilutive securities used in computation of diluted earnings per common share

     4,162,343         3,841,734         4,161,884         3,647,088   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.27       $ 0.47       $ 0.50       $ 0.68   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.26       $ 0.44       $ 0.47       $ 0.64   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3. INVESTMENT SECURITIES

The amortized cost and approximate fair value of investment securities classified as available for sale are summarized as follows as of the dates presented (dollars in thousands):

 

June 30, 2014

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Obligations of other U.S. government agencies and corporations

   $ 2,482       $ 30       $ (25   $ 2,487   

Mortgage-backed securities

     45,045         310         (76     45,279   

Obligations of state and political subdivisions

     12,686         149         (123     12,712   

Corporate bonds

     4,567         13         (15     4,565   

Equity mutual funds

     506         —           (21     485   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 65,286       $ 502       $ (260   $ 65,528   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

December 31, 2013

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Obligations of other U.S. government agencies and corporations

   $ 2,227       $ 26       $ (43   $ 2,210   

Mortgage-backed securities

     34,478         204         (220     34,462   

Obligations of state and political subdivisions

     14,581         14         (495     14,100   

Corporate bonds

     4,941         13         (29     4,925   

Equity mutual funds

     506         —           (30     476   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 56,733       $ 257       $ (817   $ 56,173   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and approximate fair value of investment securities classified as held to maturity are summarized as follows as of the dates presented (dollars in thousands):

 

June 30, 2014

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Obligations of other U.S. government agencies and corporations

   $ 3,975       $ —         $ (194   $ 3,781   

Mortgage-backed securities

     2,570         —           (114     2,456   

Obligations of state and political subdivisions

     7,470         —           —          7,470   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 14,015       $ —         $ (308   $ 13,707   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Obligations of other U.S. government agencies and corporations

   $ 3,972       $ —         $ (380   $ 3,592   

Mortgage-backed securities

     2,607         —           (213     2,394   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 6,579       $ —         $ (593   $ 5,986   
  

 

 

    

 

 

    

 

 

   

 

 

 

The Company had no securities classified as trading as of June 30, 2014 or December 31, 2013.

The aggregate fair values and aggregate unrealized losses on securities whose fair values are below book values are summarized in the tables below. Due to the nature of the investment and current market prices, these unrealized losses are considered a temporary impairment of the securities.

 

12


Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents, by type and number of securities, the age of gross unrealized losses and fair value by investment category for securities available for sale as of the dates presented (dollars in thousands):

 

June 30, 2014

          Less than 12 Months     12 Months or More     Total  
     Count      Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Obligations of other U.S. government agencies and corporations

     3       $ 506       $ (4   $ 446       $ (21   $ 952       $ (25

Mortgage-backed securities

     33         10,210         (42     2,577         (34     12,787         (76

Obligations of state and political subdivisions

     19         604         (2     5,080         (121     5,684         (123

Corporate bonds

     5         1,038         (12     547         (3     1,585         (15

Equity mutual funds

     1         485         (21     —           —          485         (21
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     61       $ 12,843       $ (81   $ 8,650       $ (179   $ 21,493       $ (260
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2013

          Less than 12 Months     12 Months or More     Total  
     Count      Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Obligations of other U.S. government agencies and corporations

     4       $ 1,337       $ (43   $ —         $ —        $ 1,337       $ (43

Mortgage-backed securities

     47         18,764         (220     —           —          18,764         (220

Obligations of state and political subdivisions

     49         11,818         (495     —           —          11,818         (495

Corporate bonds

     7         2,820         (28     298         (1     3,118         (29

Equity mutual funds

     1         476         (30     —           —          476         (30
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     108       $ 35,215       $ (816   $ 298       $ (1   $ 35,513       $ (817
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table presents, by type and number of securities, the age of gross unrealized losses and fair value by investment category for securities held to maturity as of the dates presented (dollars in thousands):

 

June 30, 2014

          Less than 12 Months     12 Months or More     Total  
     Count      Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Obligations of other U.S. Government agencies and corporations

     2       $ —         $ —        $ 3,781       $ (194   $ 3,781       $ (194

Mortgage-backed securities

     3         —           —          2,456         (114     2,456         (114

Obligations of state and political subdivisions

     1         —           —          7,470         —          7,470         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     6       $ —         $ —        $ 13,707       $ (308   $ 13,707       $ (308
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2013

          Less than 12 Months     12 Months or More     Total  
     Count      Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Obligations of other U.S. Government agencies and corporations

     2       $ 3,592       $ (380   $ —         $ —        $ 3,592       $ (380

Mortgage-backed securities

     3         2,394         (213     —           —          2,394         (213
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     5       $ 5,986       $ (593   $ —         $ —        $ 5,986       $ (593
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

13


Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The unrealized losses in the Bank’s investment portfolio, caused by interest rate increases, are not credit issues, and the Bank does not intend to sell the securities and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases. The Bank does not consider these securities to be other-than-temporarily impaired at June 30, 2014 or December 31, 2013.

Equity securities at June 30, 2014 and December 31, 2013 include Federal Home Loan Bank and First National Bankers Bankshares, Inc. stock. This stock is considered restricted stock as only banks that are members of the organization may acquire or redeem shares of such stock. The stock is redeemable at its face value; therefore, there are no gross unrealized gains or losses associated with this investment.

The Company invested $500,000 in an equity mutual fund known as the Community Reinvestment Act Qualified Investment Fund (ticker CRAIX) on May 11, 2012. The mutual fund is composed of taxable municipal bonds, money market funds, small business administration pools, corporate bonds, single family agency mortgage-backed securities, and multifamily agency mortgage-backed securities. This investment was made in accordance with the Company’s Community Reinvestment Act (“CRA”) action plan in order to receive CRA credit. At June 30, 2014, the approximate fair value of the investment in the fund was $485,000 with a loss of approximately $21,000, and at December 31, 2013, the investment’s approximate fair value was $476,000 with a loss of approximately $30,000.

The amortized cost and approximate fair value of investment debt securities, by contractual maturity (including mortgage-backed securities), are shown below as of the dates presented. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands).

 

June 30, 2014

   Securities Available For Sale      Securities Held To Maturity  
     Weighted
Average T.E.
Yield
    Amortized
Cost
     Fair
Value
     Weighted
Average T.E.
Yield
    Amortized
Cost
     Fair
Value
 

Due within one year

     1.21   $ 102       $ 102         0.00   $ —         $ —     

Due after one year through five years

     1.73     1,739         1,748         0.00     —           —     

Due after five years through ten years

     2.51     12,723         12,825         0.00     —           —     

Due after ten years

     2.38     50,216         50,368         3.36     14,015         13,707   
    

 

 

    

 

 

      

 

 

    

 

 

 

Total debt securities

       64,780         65,043           14,015         13,707   

Total equity securities

       506         485           —           —     
    

 

 

    

 

 

      

 

 

    

 

 

 
     $ 65,286       $ 65,528         $ 14,015       $ 13,707   
    

 

 

    

 

 

      

 

 

    

 

 

 

 

December 31, 2013

   Securities Available For Sale      Securities Held To Maturity  
     Weighted
Average T.E.
Yield
    Amortized
Cost
     Fair
Value
     Weighted
Average T.E.
Yield
    Amortized
Cost
     Fair
Value
 

Due within one year

     2.05   $ 697       $ 702         0.00   $ —         $ —     

Due after one year through five years

     1.38     2,543         2,550         0.00     —           —     

Due after five years through ten years

     2.69     10,809         10,707         0.00     —           —     

Due after ten years

     2.39     42,178         41,738         2.26     6,579         5,986   
    

 

 

    

 

 

      

 

 

    

 

 

 

Total debt securities

       56,227         55,697           6,579         5,986   

Total equity securities

       506         476           —           —     
    

 

 

    

 

 

      

 

 

    

 

 

 
     $ 56,733       $ 56,173         $ 6,579       $ 5,986   
    

 

 

    

 

 

      

 

 

    

 

 

 

 

14


Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4. LOANS

The Company’s loan portfolio consists of the following categories of loans as of the dates presented (dollars in thousands):

 

     June 30, 2014      December 31, 2013  

Mortgage loans on real estate:

     

Construction and development

   $ 60,333       $ 63,170   

1-4 Family

     125,246         104,685   

Multifamily

     17,706         14,286   

Farmland

     2,282         830   

Nonfarm, nonresidential

     191,820         157,363   

Commercial and industrial

     34,778         32,665   

Consumer

     131,810         131,096   
  

 

 

    

 

 

 

Total loans

   $ 563,975       $ 504,095   
  

 

 

    

 

 

 

The following table provides an analysis of the aging of loans as of the dates presented (dollars in thousands):

 

     June 30, 2014  
     Past Due and Accruing      Non-
accrual
     Total Past
Due & Non-
accrual
     Current      Total
Loans
 
     30-59
days
     60-89
days
     90 or more
days
             

Construction and development

   $ 167       $ —         $ —         $ 455       $ 622       $ 59,711       $ 60,333   

1-4 Family

     377         —           —           392         769         124,477         125,246   

Multifamily

     —           —           —           —           —           17,706         17,706   

Farmland

     —           —           —           —           —           2,282         2,282   

Nonfarm, nonresidential

     —           —           —           119         119         191,701         191,820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     544         —           —           966         1,510         395,877         397,387   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and industrial

     —           —           —           185         185         34,593         34,778   

Consumer

     70         126         —           159         355         131,455         131,810   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 614       $ 126       $ —         $ 1,310       $ 2,050       $ 561,925       $ 563,975   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013  
     Past Due and Accruing      Non-
accrual
     Total Past
Due & Non-
accrual
     Current      Total
Loans
 
     30-59
days
     60-89
days
     90 or more
days
             

Construction and development

   $ 62       $ 34       $ —         $ 891       $ 987       $ 62,183       $ 63,170   

1-4 Family

     81         —           —           141         222         104,463         104,685   

Multifamily

     —           —           —           —           —           14,286         14,286   

Farmland

     —           —           —           —           —           830         830   

Nonfarm, nonresidential

     122         —           —           187         309         157,054         157,363   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     265         34         —           1,219         1,518         338,816         340,334   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and industrial

     —           —           —           119         119         32,546         32,665   

Consumer

     120         27         —           151         298         130,798         131,096   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 385       $ 61       $ —         $ 1,489       $ 1,935       $ 502,160       $ 504,095   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On October 1, 2011, the Bank acquired South Louisiana Business Bank (“SLBB”), a full service commercial bank headquartered in Prairieville, Louisiana. On May 1, 2013, the Bank acquired First Community Bank (“FCB”), a full service commercial bank headquartered in Hammond, Louisiana.

Total loans at June 30, 2014 include approximately $53.9 million of loans acquired in the FCB and SLBB acquisitions that were recorded at fair value as of the acquisition dates. Included in the acquired loan balances at June 30, 2014 were approximately $0.5 million in loans 30-59 days outstanding and $0.9 million in nonaccrual loans. There were no acquired loans 60-89 or 90 or more days outstanding at June 30, 2014.

Total loans at December 31, 2013 include approximately $64.8 million of loans acquired in the FCB and SLBB acquisitions that were recorded at fair value as of the acquisition dates. Included in the acquired loan balances as December 31, 2013 were approximately $0.2 million in loans 30-59 days outstanding, $34,000 in loans 60-89 days outstanding, and $1.2 million in nonaccrual loans. There were no acquired loans 90 or more days outstanding at December 31, 2013.

Credit Quality Indicators

Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The following definitions are utilized for risk ratings, which are consistent with the definitions used in supervisory guidance:

Pass – Loans not meeting the criteria below are considered pass. These loans have the highest credit characteristics and financial strength. Borrowers possess characteristics that are highly profitable, with low to negligible leverage and demonstrate significant net worth and liquidity.

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss – Loans classified as loss are considered uncollectible and of such little value that their continuance as recorded assets is not warranted. This classification does not mean that the assets have absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these assets.

 

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Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents a breakdown of the Company’s loan portfolio by credit quality indicators as of the dates presented (dollars in thousands):

 

     June 30, 2014  
     Pass      Special
Mention
     Substandard      Total  

Construction and development

   $ 58,906       $ 348       $ 1,079       $ 60,333   

1-4 Family

     123,765         —           1,481         125,246   

Multifamily

     16,672         —           1,034         17,706   

Farmland

     2,282         —           —           2,282   

Nonfarm, nonresidential

     191,576         —           244         191,820   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     393,201         348         3,838         397,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and industrial

     34,585         —           193         34,778   

Consumer

     131,243         360         207         131,810   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 559,029       $ 708       $ 4,238       $ 563,975   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013  
     Pass      Special
Mention
     Substandard      Total  

Construction and development

   $ 61,399       $ 362       $ 1,409       $ 63,170   

1-4 Family

     103,408         259         1,018         104,685   

Multifamily

     13,319         —           967         14,286   

Farmland

     830         —           —           830   

Nonfarm, nonresidential

     156,448         370         545         157,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     335,404         991         3,939         340,334   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and industrial

     32,538         5         122         32,665   

Consumer

     130,717         228         151         131,096   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 498,659       $ 1,224       $ 4,212       $ 504,095   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company had no loans that were classified as doubtful or loss as of June 30, 2014 or December 31, 2013.

Loan participations and whole loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were approximately $126.2 million and $59.8 million as of June 30, 2014 and December 31, 2013, respectively.

In the ordinary course of business, the Company makes loans to its executive officers, principal stockholders, directors and to companies in which these borrowers are principal owners. Loans outstanding to such borrowers (including companies in which they are principal owners) amounted to approximately $13.4 million and $11.8 million as of June 30, 2014 and December 31, 2013, respectively. These loans are all current and performing according to the original terms. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Company or the Bank and did not involve more than normal risk of collectability or present other unfavorable features.

 

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Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The aggregate amount of loans to such related parties is as follows as of the dates presented (dollars in thousands):

 

     June 30, 2014     December 31, 2013  

Balance, beginning of period

   $ 11,781      $ 10,969   

Acquired loans

     —          159   

New loans

     2,191        3,179   

Repayments

     (543     (2,526
  

 

 

   

 

 

 

Balance, end of period

   $ 13,429      $ 11,781   
  

 

 

   

 

 

 

The Company elected to account for certain loans acquired in the FCB acquisition as acquired impaired loans under FASB Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”), due to evidence of credit deterioration at acquisition and the probability that the Company will be unable to collect all contractually required payments.

The following table presents the fair value of loans acquired with deteriorated credit quality as of the date of the FCB acquisition (dollars in thousands):

 

     May 1, 2013  

Contractually required principal and interest

   $ 7,470   

Nonaccretable difference

     (2,102
  

 

 

 

Cash flows expected to be collected

     5,368   

Accretable yield

     (468
  

 

 

 

Fair value of loans at acquisition

   $ 4,900   
  

 

 

 

Total loans acquired in the FCB acquisition included $72.6 million of performing loans not accounted for under ASC 310-30.

The following table presents changes in the carrying value, net of allowance for loan losses, of the acquired impaired loans for the periods presented (dollars in thousands):

 

     Acquired
Impaired
 

Carrying value, net at December 31, 2012

   $ —     

Loans acquired

     4,900   

Accretion to interest income

     150   

Net transfers from (to) nonaccretable difference to (from) accretable yield

     420   

Payments received, net

     (619

Transfers to real estate owned

     (819
  

 

 

 

Carrying value, net at December 31, 2013

   $ 4,032   

Loans acquired

     —     

Accretion to interest income

     84   

Net transfers from (to) nonaccretable difference to (from) accretable yield

     182   

Payments received, net

     (516

Charge-offs

     (30

Transfers to real estate owned

     (487
  

 

 

 

Carrying value, net at June 30, 2014

   $ 3,265   

 

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Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Accretable yield on acquired impaired loans at June 30, 2014 and December 31, 2013 is as follows (dollars in thousands):

 

     Acquired
Impaired
 

Balance, period ended December 31, 2012

   $ —     

Net transfers from (to) nonaccretable difference to (from) accretable yield

     420   

Accretion

     (150
  

 

 

 

Balance, period ended December 31, 2013

   $ 270   

Net transfers from (to) nonaccretable difference to (from) accretable yield

     182   

Accretion

     (84
  

 

 

 

Balance, period ended June 30, 2014

   $ 368   

NOTE 5. ALLOWANCE FOR LOAN LOSSES

An analysis of the allowance for loan losses is as follows as of the dates presented (dollars in thousands):

 

       June 30, 2014         December 31, 2013    

Balance, beginning of period

   $ 3,380      $ 2,722   

Provision for loan losses

     693        1,026   

Loans charged-off

     (218     (389

Recoveries

     27        21   
  

 

 

   

 

 

 

Balance, end of period

   $ 3,882      $ 3,380   
  

 

 

   

 

 

 

The following tables outline the changes in the allowance for loan losses by collateral type, the allowances for loans individually and collectively evaluated for impairment, and the amount of loans individually and collectively evaluated for impairment as of and for the six months ended June 30, 2014 and the year ended December 31, 2013 (dollars in thousands):

 

    June 30, 2014  
    Construction &
Development
    Farmland     1-4 Family     Multifamily     Nonfarm,
Nonresidential
    Commercial &
Industrial
    Consumer     Total  

Allowance for loan losses:

               

Beginning balance

  $ 420      $ 4      $ 567      $ 101      $ 992      $ 397      $ 899        3,380   

Charge-offs

    —          —          (30     —          (3     (16     (169     (218

Recoveries

    1        —          1        —          —          —          25        27   

Provision

    46        7        141        19        429        (88     139        693   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 467      $ 11      $ 679      $ 120      $ 1,418      $ 293      $ 894      $ 3,882   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance balance for loans individually evaluated for impairment

    —          —          —          —          —          —          64        64   

Ending allowance balance for loans collectively evaluated for impairment

  $ 467      $ 11      $ 679      $ 120      $ 1,418      $ 293      $ 830      $ 3,818   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance balance for loans acquired with deteriorated credit quality

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     

Loans receivable:

               

Balance of loans individually evaluated for impairment

  $ 1,079      $ —        $ 1,481      $ 1,034      $ 244      $ 193      $ 207      $ 4,238   

Balance of loans collectively evaluated for impairment

    59,254        2,282        123,765        16,672        191,576        34,585        131,603        559,737   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total period-end balance

  $ 60,333      $ 2,282      $ 125,246      $ 17,706      $ 191,820      $ 34,778      $ 131,810      $ 563,975   

Balance of loans acquired with deteriorated credit quality

  $ 1,162      $ —        $ 1,021      $ 1,034      $ —        $ —        $ 48      $ 3,265   

 

19


Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

    December 31, 2013  
    Construction &
Development
    Farmland     1-4 Family     Multifamily     Nonfarm,
Nonresidential
    Commercial &
Industrial
    Consumer     Total  

Allowance for loan losses:

               

Beginning balance

  $ 276      $ —        $ 415      $ 17      $ 977      $ 333      $ 704        2,722   

Charge-offs

    —          —          —          —          —          (118     (271     (389

Recoveries

    —          —          —          —          —          —          21        21   

Provision

    144        4        152        84        15        182        445        1,026   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 420      $ 4      $ 567      $ 101      $ 992      $ 397      $ 899      $ 3,380   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance balance for loans individually evaluated for impairment

  $ —        $ —        $ —        $ —        $ —        $ —        $ 37      $ 37   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance balance for loans collectively evaluated for impairment

  $ 420      $ 4      $ 567      $ 101      $ 992      $ 397      $ 862      $ 3,343   

Ending allowance balance for loans acquired with deteriorated credit quality

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     

Loans receivable:

               

Balance of loans individually evaluated for impairment

  $ 1,409      $ —        $ 1,018      $ 967      $ 545      $ 122      $ 151      $ 4,212   

Balance of loans collectively evaluated for impairment

  $ 61,761      $ 830      $ 103,667      $ 13,319      $ 156,818      $ 32,543      $ 130,945      $ 499,883   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total period-end balance

  $ 63,170      $ 830      $ 104,685      $ 14,286      $ 157,363      $ 32,665      $ 131,096      $ 504,095   

Balance of loans acquired with deteriorated credit quality

  $ 1,477      $ —        $ 996      $ 967      $ 545      $ —        $ 47      $ 4,032   

Impaired Loans

The Company considers a loan to be impaired when, based on current information and events, the Company determines that it will not be able to collect all amounts due according to the loan agreement, including scheduled interest payments. Determination of impairment is treated the same across all classes of loans. When the Company identifies a loan as impaired, it measures 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, the Company uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If the Company determines 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), the Company recognizes 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.

The following tables include the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. The Company determined the specific allowance based on the present values of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling cost, was used to determine the specific allowance recorded.

 

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Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Also presented in the tables below is the average recorded investment of the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. The average balances are calculated based on the month-end balances of the loans during the period reported (dollars in thousands).

 

     As of and for the six months ended June 30, 2014  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest Income
Recognized
 

With no related allowance recorded:

              

Construction and development

   $ 1,080       $ 1,079       $ —         $ 1,091       $ 21   

1-4 Family residential

     1,488         1,481         —           1,470         30   

Multifamily

     1,041         1,034         —           1,012         31   

Nonfarm, nonresidential

     246         244         —           249         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,855         3,838         —           3,822         88   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and industrial

     193         193         —           448         —     

Consumer

     78         77         —           81         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4,126         4,108         —           4,351         92   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With related allowance recorded:

              

Consumer

     130         130         64         137         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     130         130         64         137         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans:

              

Construction and development

     1,080         1,079         —           1,091         21   

1-4 Family residential

     1,488         1,481         —           1,470         30   

Multifamily

     1,041         1,034         —           1,012         31   

Nonfarm, nonresidential

     246         244         —           249         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,855         3,838         —           3,822         88   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and industrial

     193         193         —           448         —     

Consumer

     208         207         64         218         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,256       $ 4,238       $ 64       $ 4,488       $ 92   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     As of and for the year ended December 31, 2013  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest Income
Recognized
 

With no related allowance recorded:

              

Construction and development

   $ 1,649       $ 1,409       $ —         $ 1,425       $ 25   

1-4 Family residential

     1,040         1,018         —           1,025         45   

Multifamily

     969         967         —           910         671   

Nonfarm, nonresidential

     555         545         —           563         19   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4,213         3,939         —           3,923         760   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial & industrial

     140         122         —           133         —     

Consumer

     21         18         —           76         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4,374         4,079         —           4,132         762   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With related allowance recorded:

              

Consumer

     136         133         37         138         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     136         133         37         138         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans:

              

Construction and development

     1,649         1,409         —           1,425         25   

1-4 Family residential

     1,040         1,018         —           1,025         45   

Multifamily

     969         967         —           910         671   

Nonfarm, nonresidential

     555         545         —           563         19   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4,213         3,939         —           3,923         760   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and industrial

     140         122         —           133         —     

Consumer

     157         151         37         214         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,510       $ 4,212       $ 37       $ 4,270       $ 767   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring (“TDR”). The Company strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before such loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where the Company grants the borrower new terms that provide for a reduction of either interest or principal, the Company measures any impairment on the restructuring as previously noted for impaired loans.

Loans classified as TDRs, consisting of six credits, totaled approximately $881,000 at June 30, 2014 compared to four credits totaling approximately $815,000 at December 31, 2013. All of the Company’s TDRs were acquired from FCB. All six credits were considered TDRs due to modification of terms through adjustments to maturity, and all are currently performing in accordance with their modified terms.

 

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Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the TDR pre- and post-modification outstanding recorded investments by loan categories as of the dates presented (dollars in thousands):

 

     June 30, 2014      December 31, 2013  

Troubled debt restructurings

   Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Other Construction Loans

     3       $ 473       $ 473         2       $ 454       $ 454   

Commercial Real Estate: Non-owner occupied

     1         358         358         1         358         358   

Commercial & Industrial

     1         2         2         1         3         3   

Consumer

     1         48         48         0         —           —     
     

 

 

    

 

 

       

 

 

    

 

 

 
      $ 881       $ 881          $ 815       $ 815   
     

 

 

    

 

 

       

 

 

    

 

 

 

NOTE 6. INCOME TAXES

The expense for income taxes and the effective tax rate included in the statement of operations is as follows for the periods presented (dollars in thousands):

 

     Three months ended
June 30,
    Six months ended
June 30,
 
         2014             2013             2014             2013      

Income tax expense

   $ 514      $ 455      $ 938      $ 736   

Effective tax rate

     32.5     21.1     32.5     24.1

The effective tax rates differ from the statutory tax rate of 35% largely due to tax exempt interest income earned on certain investment securities and the bargain purchase gain recognized upon the acquisition of FCB in May 2013.

NOTE 7. FAIR VALUES OF FINANCIAL INSTRUMENTS

In accordance with FASB ASC Topic 820, Fair Value Measurement and Disclosure (“ASC 820”), disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, is required. The fair value of a financial instrument is 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 under current market conditions. 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 represent the underlying value of the Company.

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.

 

23


Table of Contents

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value Hierarchy

In accordance with ASC 820, the Company groups its 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 assets 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 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.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Investments and Mortgage-Backed Securities – Where quoted prices are available in an active market, the Company classifies the securities within level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include highly liquid government bonds and exchange-traded equities.

If quoted market prices are not available, the Company estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within level 2 of the valuation hierarchy, include Government Sponsored Enterprise obligations, corporate bonds, and other securities. Mortgage-backed securities are included in level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies those securities in level 3. Equity mutual funds are valued based on market quoted prices and are classified in level 1 as they are actively traded.

Cash and Due from Banks – For those short-term instruments, fair value is the carrying value.

Federal Funds Sold/Purchased and Securities Sold Under Repurchase Agreements – The fair value is the carrying value.

Loans – For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar instruments sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other

 

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INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

loans (for example, commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Loans held for sale are measured using quoted market prices when available. If quoted market prices are not available, comparable market values or discounted cash flow analyses may be utilized. The Company classifies these assets in level 2.

Real Estate Owned – The fair values are estimated based on recent appraisal values of the property less costs to sell the property, as real estate owned is valued at the lower of cost or fair value of the property, less estimated costs to sell. Certain inputs used in appraisals are not always observable, and therefore real estate owned may be classified in level 3 within the fair value hierarchy. When inputs are observable, these assets are classified in level 2.

Accrued Interest – The carrying amounts of accrued interest approximate fair value.

Deposit Liabilities – The fair values disclosed for demand deposits (for example, interest and noninterest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings – The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on current market rates for similar types of borrowing arrangements.

Long-Term Borrowings – The fair values of long-term borrowings are estimated using discounted cash flows analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt would therefore be classified in level 3 within the fair value hierarchy.

Commitments – The fair value of commitments to extend credit was not significant.

 

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INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value of Assets Measured on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below; there were no liabilities measured on a recurring basis at June 30, 2014 or December 31, 2013 (dollars in thousands):

 

     Fair Value      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

June 30, 2014

           

Mortgage-backed securities

   $ 45,279       $ —         $ 45,279       $ —     

Obligations of other U.S. government agencies

     2,487         —           2,487         —     

Obligations of state and political subdivisions

     12,712         —           12,712         —     

Corporate bonds

     4,565         —           4,565         —     

Equity mutual funds

     485         485         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 65,528       $ 485       $ 65,043       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

Mortgage-backed securities

   $ 34,462       $ —         $ 34,462       $ —     

Obligations of other U.S. government agencies

     2,210         —           2,210         —     

Obligations of state and political subdivisions

     14,100         —           14,100         —     

Corporate bonds

     4,925         —           4,925         —     

Equity mutual funds

     476         476         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 56,173       $ 476       $ 55,697       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value Assets Measured on a Nonrecurring Basis

Assets measured at fair value on a non-recurring basis are summarized below; there were no liabilities measured on a non-recurring basis at June 30, 2014 or December 31, 2013 (dollars in thousands):

 

     Fair Value      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level3)
 

June 30, 2014

           

Loans held for sale

   $ 32,131       $ —         $ 32,131       $ —     

Impaired loans

     4,174         —           4,174         —     

Real estate owned

     3,423         —           3,423         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 39,728       $ —         $ 39,728       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

Loans held for sale

   $ 5,029       $ —         $ 5,029       $ —     

Impaired loans

     4,175         —           4,175         —     

Real estate owned

     3,515         —           3,515         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,719       $ —         $ 12,719       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The estimated fair values of the Company’s financial instruments at June 30, 2014 and December 31, 2013 were as follows (dollars in thousands):

 

     June 30, 2014  
     Carrying
Amount
     Total      Level 1      Level 2      Level 3  

Financial assets:

              

Cash and due from banks

   $ 14,649       $ 14,649       $ 14,649       $ —         $ —     

Federal funds sold

     500         500         500         —           —     

Investment securities

     79,543         79,235         485         78,750         —     

Other equity securities

     3,409         3,409         —           3,409         —     

Loans, net of allowance

     592,224         596,919         —           —           596,919   

Accrued interest receivable

     1,921         1,921         1,921         —           —     

Financial liabilities:

              

Deposits, noninterest-bearing

   $ 69,804       $ 69,804       $ —         $ 69,804       $ —     

Deposits, interest-bearing

     508,863         507,095         —           —           507,095   

FHLB short-term advances and repurchase agreements

     11,425         11,425         —           11,425         —     

FHLB long-term advances

     68,409         68,499         —           —           68,499   

Other borrowed funds-long term

     8,609         8,609         —           —           8,609   

Accrued interest payable

     289         289         289         —           —     

 

     December 31, 2013  
     Carrying
Amount
     Total      Level 1      Level 2      Level 3  

Financial assets:

              

Cash and due from banks

   $ 27,703       $ 27,703       $ 27,703       $ —         $ —     

Federal funds sold

     500         500         500         —           —     

Investment securities

     62,752         62,159         476         61,683         —     

Other equity securities

     2,020         2,020         —           2,020         —     

Loans, net of allowance

     505,744         510,998         —           —           510,998   

Accrued interest receivable

     1,835         1,835         1,835         —           —     

Financial liabilities:

              

Deposits, noninterest-bearing

   $ 72,795       $ 72,795       $ —         $ 72,795       $ —     

Deposits, interest-bearing

     459,811         456,046         —           —           456,046   

FHLB short-term advances and repurchase agreements

     10,203         10,203         —           10,203         —     

FHLB long-term advances

     30,818         30,896         —           —           30,896   

Other borrowed funds-long term

     3,609         3,605         —           —           3,605   

Accrued interest payable

     285         285         285         —           —     

NOTE 8. COMMITMENTS AND CONTINGENCIES

The Company is a party to financial instruments with off-balance-sheet risk entered into in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, which are not included in the accompanying financial statements.

Commitments to extend credit are agreements to lend money with fixed expiration dates or termination clauses. The Company applies the same credit standards used in the lending process when extending these commitments,

 

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INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

and periodically reassesses the customer’s creditworthiness through ongoing credit reviews. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral is obtained based on the Company’s assessment of the transaction. Essentially all letters of credit issued have expiration dates within one year. At June 30, 2014 and December 31, 2013, the Company’s commitments to extend credit totaled approximately $50.9 million and $67.1 million, respectively.

The Company is required to maintain average reserves at the Federal Reserve Bank. There were approximately $6.8 million and $4.6 million in required reserves at June 30, 2014 and December 31, 2013, respectively.

NOTE 9. SUBSEQUENT EVENTS

On July 3, 2014, the Company completed an initial public offering (the “Offering”) of 2,875,000 shares of common stock at an initial offering price of $14.00 per share, which generated net proceeds of approximately $37.6 million after deducting underwriting discounts and commissions payable by the Company in connection with the Offering. On July 17, 2014, the underwriters exercised their option to purchase an additional 410,300 shares of Company common stock at the Offering price, less underwriting discounts and commissions.

 

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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section presents management’s perspective on the financial condition and results of operations of Investar Holding Corporation (the “Company,” “we,” “our,” or “us”) and its wholly-owned subsidiary, Investar Bank (the “Bank”). The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes thereto included herein, and the audited consolidated financial statements and notes and the related Management’s Discussion and Analysis of Financial Conditions and Results of Operations in the Registration Statement on Form S-1 that the Company originally filed with the Securities and Exchange Commission (“SEC”) on May 16, 2014, and subsequently amended. As discussed in the Form S-1, in November 2013, the Company completed a share exchange with the Bank’s shareholders, resulting in the Bank becoming a wholly-owned subsidiary of the Company. 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, and return on average equity, among other metrics, while maintaining appropriate regulatory leverage and risk-based capital ratios.

Discussion and Analysis of Financial Condition

Total assets were $729.1 million at June 30, 2014, an increase of 14.8% from total assets of $634.9 million at December 31, 2013.

Loans

General. Loans, excluding loans held for sale, constitute our most significant asset, comprising 77.3% and 79.4% of our total assets at June 30, 2014 and December 31, 2013, respectively. Loans, excluding loans held for sale, increased $59.9 million, or 11.9%, to $564.0 million at June 30, 2014 from $504.1 million at December 31, 2013 as a result of organic loan growth in our markets. 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 (dollars in thousands):

 

     June 30, 2014     December 31, 2013  
     Amount      Percent of Total
Loans
    Amount      Percent of Total
Loans
 

Mortgage loans on real estate:

          

Construction and development

   $ 60,333         10.70   $ 63,170         12.53

1-4 Family

     125,246         22.21        104,685         20.77   

Multifamily

     17,706         3.14        14,286         2.83   

Farmland

     2,282         0.40        830         0.17   

Nonfarm, nonresidential

     191,820         34.01        157,363         31.22   

Commercial and industrial

     34,778         6.17       32,665         6.48  
  

 

 

    

 

 

   

 

 

    

 

 

 

Consumer installment loans:

          

Auto loans

     127,384         22.59        126,704         25.13   

Other consumer installment loans

     4,426         0.78        4,392         0.87   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 563,975         100   $ 504,095         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

The following table sets forth loans outstanding at June 30, 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.

 

(dollars in thousands)    One
Year or
Less
     After One
Year
Through
Five Years
     After Five
Years
Through
Ten Years
     After Ten
Years
Through
Fifteen Years
     After
Fifteen
Years
     Total  

Mortgage loans on real estate:

                 

Construction and development

   $ 37,895       $ 17,816       $ 3,382       $ 1,240       $ —         $ 60,333   

1-4 Family

     8,510         26,025         32,308         22,718         35,685         125,246   

Multifamily

     4,914         9,545         2,120         1,127         —           17,706   

Farmland

     54         —           744         1,484         —           2,282   

Nonfarm, nonresidential

     16,923         63,548         74,797         36,480         72         191,820   

Commercial and industrial

     10,920         13,662         7,531         2,665         —           34,778   

Consumer installment loans:

                 

Auto loans

     1,036         47,771         78,252         325         —           127,384   

Other consumer installment loans

     352         3,164         885         25         —           4,426   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 80,604       $ 181,531       $ 200,019       $ 66,064       $ 35,757       $ 563,975   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held for sale. Loans held for sale increased $27.1 million, or 538.9%, to $32.1 million at June 30, 2014 from $5.0 million at December 31, 2013. The increase is primarily due to approximately $26.3 million of consumer loans (consisting of indirect auto loans) being classified as held for sale at June 30, 2014. No consumer loans were classified as held for sale at December 31, 2013. In the first six months of 2014, we originated $35.7 million in mortgage loans for sale, as compared to $52.1 million in mortgage loans for sale originated in the first six months of 2013.

During the latter half of 2013 and continuing into the second 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 largest 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 and six months ended June 30, 2014, we recognized gains from the sales of auto loan pools of $0.5 million and $0.7 million, respectively. We did not begin selling auto loan pools until the second quarter of 2013 where we recognized a gain of $52,000.

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 June 30, 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.

 

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Table of Contents

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 $79.5 million at June 30, 2014, an increase of $16.8 million, or 26.8%, from $62.8 million at December 31, 2013. Our increase in investment securities at June 30, 2014 compared to December 31, 2013 was primarily due to our investment of cash not used in our lending activities into investment securities.

The securities portfolio consists primarily of U.S. government agency obligations, mortgage-backed securities and municipal securities, although the Company also holds corporate bonds and equity mutual funds. The Asset Liability Committee (“ALCO”) reviews the investment portfolio on an ongoing basis to ensure that the investments conform to the Company’s investment policy.

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):

 

     June 30, 2014     December 31, 2013  
     Balance      Percent of
Portfolio
    Balance      Percent of
Portfolio
 

Obligations of other U.S. government agencies and corporations

   $ 6,462         8.12   $ 6,182         9.85

Mortgage-backed securities

     47,849         60.16        37,069         59.07   

Obligations of state and political subdivisions

     20,182         25.37        14,100         22.47   

Equity mutual funds

     485         0.61        476         0.76   

Corporate bonds

     4,565         5.74        4,925         7.85   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 79,543         100.00   $ 62,752         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

The investment portfolio consists of available for sale and held to maturity securities. Held to maturity securities are stated at amortized cost. The carrying values of the Company’s available for sale securities are adjusted for unrealized gains or losses as valuation allowances, and any gains or losses are reported on an after-tax basis as a component of other comprehensive income. Any expected credit loss due to the inability to collect all amounts due according to the security’s contractual terms is recognized as a charge against earnings. Any remaining unrealized loss related to other factors would be recognized in other comprehensive income, net of taxes.

The following table sets forth the stated maturities and weighted average yields of our investment debt securities based on the amortized cost of our investment portfolio as of June 30, 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

  $ —          —        $ —          —        $ —          —        $ 3,975        2.21

Mortgage-backed securities

    —          —          —          —          —          —          2,570        2.35

Obligations of states and political subdivisions

    —          —          —          —          —          —          7,470        4.33

Available for sale:

               

Obligations of other U.S. government agencies and corporations

    —          —          —          —          181        3.17     2,301        1.88

Mortgage-backed securities

    —          —          —          —          3,110        1.96     41,935        2.24

Obligations of states and political subdivisions

    102        1.21     840        2.31     5,765        3.23     5,980        3.45

Corporate bonds

    —          —          899        1.18     3,667        1.83     —          —     
 

 

 

     

 

 

     

 

 

     

 

 

   
  $ 102        $ 1,739        $ 12,723        $ 64,231     
 

 

 

     

 

 

     

 

 

     

 

 

   

 

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The maturity of mortgage-backed securities reflects scheduled repayments based upon the contractual maturities of the securities.

Premises and Equipment

Bank premises and equipment increased $3.0 million, or 12.1%, to $27.7 million at June 30, 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 construction of a new branch in Baton Rouge, Louisiana opened during the third quarter of 2014 are the primary reasons for this increase.

Deferred tax asset

At June 30, 2014, our deferred tax asset was $0.7 million compared to $1.2 million at December 31, 2013. The deferred tax asset is due to a net operating loss acquired in the FCB acquisition and the non-deductibility of the loan loss provision for tax purposes. The Company assesses the recoverability of its deferred tax asset quarterly, and the current and projected level of taxable income provides for the ultimate realization of the carrying value of its deferred tax asset.

Deposits

The following table sets forth the composition of our deposits and the percentage of each deposit type to total deposits at June 30, 2014 and December 31, 2013 (dollars in thousands):

 

     June 30, 2014     December 31, 2013  
     Amount      Percent of
Total
Deposits
    Amount      Percent of
Total
Deposits
 

Noninterest-bearing demand deposits

   $ 69,804         12.06   $ 72,795         13.67

NOW accounts

     98,889         17.09        77,190         14.49   

Money market deposit accounts

     70,164         12.13        67,006         12.58   

Savings accounts

     52,431         9.06        52,177         9.80   

Time deposits

     287,379         49.66        263,438         49.46   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 578,667         100.00   $ 532,606         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits at June 30, 2014 were $578.7 million, an increase of $46.1 million, or 8.7%, from December 31, 2013. Total noninterest-bearing demand deposits at December 31, 2013 were slightly inflated by a $14.0 million short term deposit made by a commercial customer in late December 2013 that was fully withdrawn in January 2014. With respect to the remainder of our deposit growth, the increase in total deposits was driven primarily by an increase in NOW accounts of $21.7 million, or 28.1%, an increase of $11.0 million, or 18.7%, in noninterest-bearing demand deposits after adjusting for the $14.0 million short term deposit, and an increase in time deposits of $23.9 million, or 9.1%, from December 31, 2013. We believe our deposit cross sell strategy has resulted in both noninterest-bearing demand deposit and NOW account growth.

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.

 

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The following table shows the maturity of certificates of deposit and other time deposits of $100,000 or more at June 30, 2014 and December 31, 2013 (dollars in thousands):

 

     June 30, 2014      December 31, 2013  
     Certificates of
Deposit
     Other Time
Deposits
     Certificates of
Deposit
     Other Time
Deposits
 

Time remaining until maturity:

           

Three months or less

   $ 4,363       $ 233       $ 4,296       $ 134   

Over three months through six months

     7,427         112         5,123         102   

Over six months through twelve months

     6,687         —           6,456         396   

Over one year through three years

     6,948         235         9,435         302   

Over three years

     1,982         122         2,861         141   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 27,407       $ 702       $ 28,171       $ 1,075   
  

 

 

    

 

 

    

 

 

    

 

 

 

Borrowings

Total borrowings include securities sold under agreements to repurchase, advances from the Federal Home Loan Bank (“FHLB”), a line of credit with First National Bankers Bankshares, Inc. FNBB (“FNBB”), and junior subordinated debentures. Securities sold under agreements to repurchase increased $1.2 million to $11.4 million at June 30, 2014 from $10.2 million at December 31, 2013. Our advances from the FHLB were $68.4 million at June 30, 2014, an increase of $37.6 million, or 121.9%, from FHLB advances of $30.8 million at December 31, 2013. The increase in borrowings was used primarily to fund loan growth. The notes payable balance of $8.6 million at June 30, 2014 includes a $5.0 million draw on our line of credit with FNBB, which was repaid with the proceeds of our initial public offering, and the junior subordinated debentures that we assumed in connection with our acquisition of FCB. The notes payable balance at December 31, 2013 included only the junior subordinated debentures.

The average balances and cost of funds of short-term borrowings at June 30, 2014 and at December 31, 2013 are summarized as follows (dollars in thousands):

 

    Average Balances     Cost of Funds  
    June 30, 2014     December 31, 2013     June 30, 2014     December 31, 2013  

Federal funds purchased and other short-term borrowings

  $ 12,936      $ 19        0.31     0.76

Securities sold under agreements to repurchase

    11,217        7,608        0.54        0.15   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total short-term borrowings

  $ 24,153      $ 7,627        0.42     0.15
 

 

 

   

 

 

   

 

 

   

 

 

 

Results of Operations

Performance Summary

Three months ended June 30, 2014 vs. three months ended June 30, 2013. For the three months ended June 30, 2014, net income was $1.1 million, or $0.27 per basic share and $0.26 per diluted share, compared to net income of $1.7 million, or $0.47 per basic share and $0.44 per diluted share, for the three months ended June 30, 2013. The decrease in our net income was due to a $0.9 million bargain purchase gain recorded in the second quarter of 2013 as part of the FCB acquisition. Return on average assets declined to 0.61% for the three months ended June 30, 2014 from 1.43% for three months ended June 30, 2013 primarily due to the $0.9 million bargain purchase gain recorded during the second quarter of 2013 as part of the FCB acquisition. Increases in our operational costs attributable to our de novo branch facilities also contributed to this decline. Return on average equity was 7.45% for the three months ended June 30, 2014 as compared to 13.41% for the three months ended June 30, 2013.

 

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Six months ended June 30, 2014 vs. six months ended June 30, 2013. For the six months ended June 30, 2014, net income was $1.9 million, or $0.50 per basic share and $0.47 per diluted share, compared to net income of $2.3 million, or $0.68 per basic share and $0.64 per diluted share, for the six months ended June 30, 2013. The decrease in our net income was due to a $0.9 million bargain purchase gain recorded in the second quarter of 2013 as part of the FCB acquisition. Return on average assets declined to 0.58% for the six months ended June 30, 2014 from 1.09% for six months ended June 30, 2013 due to the same factors noted above with respect to the quarter over quarter comparison. Return on average equity was 6.89% for the six months ended June 30, 2014 as compared to 9.83% for the six months ended June 30, 2013.

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 deposits 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 continued 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 June 30, 2014 vs. three months ended June 30, 2013. Net interest income increased 32.5% to $6.3 million for the three months ended June 30, 2014 from $4.7 million for the same period in 2013. Net interest margin was 3.85% for the three months ended June 30, 2014, down 43 basis points from 4.28% for the three months ended June 30, 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-earning assets and an increase in the volume of interest-bearing liabilities. For the three months ended June 30, 2014, average loans increased approximately $188.2 million as compared to the same period in 2013, while average investment securities increased approximately $19.0 million. Over the same comparative period, average interest-bearing liabilities increased approximately $197.5 million. All of 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.

Interest income was $7.4 million for the three months ended June 30, 2014 compared to $5.5 million for the same period in 2013 as a result of an increase in the volume of interest-earning assets, offset by a decrease in the rate paid on such assets. As the average balances table below illustrates, loan interest income made up substantially all of our interest income for the three months ended June 30, 2014 and 2013. Competitive factors and the prolonged low interest rate environment have contributed to a lower yield on earning assets. The overall yield on interest-earning assets decreased 48 basis points to 4.56% for the three months ended June 30, 2014 as compared to 5.04% for the same period in 2013. The loan portfolio yielded 4.96% for the three months ended June 30, 2014 as compared to 5.58% for the three months ended June 30, 2013.

Interest expense was $1.2 million for the three months ended June 30, 2014, an increase of $0.4 million compared to interest expense of $0.8 million for the three months ended June 30, 2013, as a result of an increase in the volume of interest-bearing liabilities, offset by a decrease in cost of such liabilities. The cost of interest-bearing liabilities decreased 9 basis points to 0.81% for the three months ended June 30, 2014 compared to the same period in 2013. In particular, the weighted average rate paid on certificates of deposit decreased 8 basis

 

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points during the three months ended June 30, 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.

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 June 30, 2014 and 2013. Averages presented below are daily averages (dollars in thousands):

 

     Three months ended June 30,  
     2014     2013  
     Average
Balance
    Interest
Income/
Expense(1)
     Yield/ Rate(1)     Average
Balance
    Interest
Income/
Expense(1)
     Yield/ Rate(1)  

Assets

              

Interest-earning assets:

              

Loans

   $ 575,978      $ 7,119         4.96   $ 387,738      $ 5,391         5.58

Securities:

              

Taxable

     58,088        188         1.30        37,002        66         0.72   

Tax-exempt

     12,995        90         2.78        15,038        90         2.40   

Interest-bearing balances with banks

     3,750        10         1.07        2,462        6         0.98   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     650,811        7,407         4.56        442,240        5,553         5.04   

Cash and due from banks

     11,734             6,034        

Intangible assets

     3,240             3,131        

Other assets

     35,534             25,878        

Allowance for loan losses

     (3,611          (2,721     
  

 

 

        

 

 

      

Total assets

   $ 697,708           $ 474,562        
  

 

 

        

 

 

      

Liabilities and shareholders’ equity

              

Interest-bearing liabilities:

              

Deposits:

              

Interest-bearing demand

   $ 166,763        262         0.63      $ 104,942        167         0.64   

Savings deposits

     52,407        89         0.68        41,158        68         0.66   

Time deposits

     281,555        699         1.00        202,043        545         1.08   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     500,725        1,050         0.84        348,143        780         0.90   

Short-term borrowings

     33,108        20         0.24        5,576        4         0.29   

Long-term debt

     38,251        88         0.92        20,909        52         1.00   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     572,084        1,158         0.81        374,628        836         0.90   

Noninterest-bearing deposits

     64,494             46,234        

Other liabilities

     3,672             2,925        

Stockholders’ equity

     57,458             50,775        
  

 

 

        

 

 

      

Total liability and stockholders’ equity

   $ 697,708           $ 474,562        
  

 

 

   

 

 

      

 

 

   

 

 

    

Net interest income/net interest margin

     $ 6,249         3.85     $ 4,717         4.28
    

 

 

    

 

 

     

 

 

    

 

 

 

 

(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 percentage of average interest-bearing liabilities for the indicated periods.

The average balances of nonaccruing assets are included in the table above.

 

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Volume/Rate Analysis. The following table sets forth a summary of the changes in interest earned and interest paid resulting from changes in volume and rates for the three months ended June 30, 2014 compared to the same period in 2013 (dollars in thousands):

 

     Three months ended June 30, 2014 vs.
three months ended June 30, 2013
 
         Volume             Rate             Net(1)      

Interest income:

      

Loans

   $ 2,617      $ (889   $ 1,728   

Securities:

      

Taxable

     38        84        122   

Tax-exempt

     (12     12        —     

Interest-bearing balances with banks

     3        1        4   
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     2,646        (792     1,854   

Interest expense:

      

Interest-bearing demand deposits

     98        (3     95   

Savings deposits

     19        2        21   

Time deposits

     214        (60     154   

Short-term borrowings

     20        (4     16   

Long-term debt

     43        (7     36   
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     394        (72     322   
  

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 2,252      $ (720   $ 1,532   
  

 

 

   

 

 

   

 

 

 

 

(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.

Six months ended June 30, 2014 vs. six months ended June 30, 2013. Net interest income increased 49.4% to $12.1 million for the six months ended June 30, 2014 from $8.1 million for the same period in 2013. Net interest margin was 3.89% for the six months ended June 30, 2014, down 21 basis points from 4.10% for the six months ended June 30, 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-earning assets and an increase in the volume of interest-bearing liabilities. For the six months ended June 30, 2014, average loans increased approximately $205.7 million as compared to the same period in 2013, while average investment securities increased approximately $21.4 million. Over the same comparative period, average interest-bearing liabilities increased approximately $215.4 million. All of 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.

Interest income was $14.4 million for the six months ended June 30, 2014 compared to $9.6 million for the same period in 2013 as a result of an increase in the volume of interest-earning assets, offset by a decrease in the rate paid on such assets. As the average balances table below illustrates, loan interest income made up substantially all of our interest income for the six months ended June 30, 2014 and 2013. Competitive factors and the prolonged low interest rate environment contributed to a lower yield on earning assets. The overall yield on interest-earning assets decreased 26 basis points to 4.61% for the six months ended June 30, 2014 as compared to 4.87% for the same period in 2013. The loan portfolio yielded 5.02% for the six months ended June 30, 2014 as compared to 5.39% for the six months ended June 30, 2013.

Interest expense was $2.2 million for the six months ended June 30, 2014, an increase of $0.7 million compared to interest expense of $1.5 million for the six months ended June 30, 2013, as a result of an increase in the volume of interest-bearing liabilities, offset by a decrease in the cost of such liabilities. The cost of interest-bearing liabilities decreased 9 basis points to 0.82% for the six months ended June 30, 2014 compared to the

 

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same period in 2013. In particular, the weighted average rate paid on certificates of deposit decreased 11 basis points during the six months ended June 30, 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.

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 six months ended June 30, 2014 and 2013. Averages presented below are daily averages (dollars in thousands):

 

     Six months ended June 30,  
     2014     2013  
     Average
Balance
    Interest
Income/
Expense(1)
     Yield/ Rate(1)     Average
Balance
    Interest
Income/
Expense(1)
     Yield/ Rate(1)  

Assets

              

Interest-earning assets:

              

Loans

   $ 554,384      $ 13,794         5.02   $ 348,683      $ 9,317         5.39

Securities:

              

Taxable

     55,859        379         1.37        34,211        141         0.83   

Tax-exempt

     13,591        171         2.54        13,850        167         2.43   

Interest-bearing balances with banks

     4,776        20         0.84        2,105        11         1.05   
  

 

 

   

 

 

      

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     628,610        14,364         4.61        398,849        9,636         4.87   

Cash and due from banks

     11,306             5,056        

Intangible assets

     3,245             2,980        

Other assets

     34,967             23,250        

Allowance for loan losses

     (3,504          (2,711     
  

 

 

        

 

 

      

Total assets

   $ 674,624           $ 427,424        
  

 

 

        

 

 

      

Liabilities and shareholders’ equity

              

Interest-bearing liabilities:

              

Deposits:

              

Interest-bearing demand

   $ 162,760        505         0.63      $ 97,205        317         0.66   

Savings deposits

     52,168        178         0.69        35,845        124         0.70   

Time deposits

     277,219        1,370         1.00        178,690        981         1.11   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     492,147        2,053         0.84        311,740        1,422         0.92   

Short-term borrowings

     24,153        25         0.21        5,328        6         0.23   

Long-term debt

     36,203        169         0.95        20,034        98         0.99   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     552,503        2,247         0.82        337,102        1,526         0.91   

Noninterest-bearing deposits

     61,845             40,013        

Other liabilities

     3,324             2,799        

Stockholders’ equity

     56,952             47,510        
  

 

 

        

 

 

      

Total liability and stockholders’ equity

   $ 674,624           $ 427,424        
  

 

 

   

 

 

      

 

 

   

 

 

    

Net interest income/net interest margin

     $ 12,117         3.89     $ 8,110         4.10
    

 

 

    

 

 

     

 

 

    

 

 

 

 

(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 percentage of average interest-bearing liabilities for the indicated periods.

The average balances of nonaccruing assets are included in the table above.

 

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Volume/Rate Analysis. The following table sets forth a summary of the changes in interest earned and interest paid resulting from changes in volume and rates for the six months ended June 30, 2014 compared to the same period in 2013 (dollars in thousands):

 

     Six months ended June 30, 2014 vs.
six months ended June 30, 2013
 
         Volume             Rate             Net(1)      

Interest income:

      

Loans

   $ 5,496      $ (1,019   $ 4,477   

Securities:

      

Taxable

     89        149        238   

Tax-exempt

     (2     7        5   

Interest-bearing balances with banks

     14        (5     9   
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     5,597        (868     4,729   

Interest expense:

      

Interest-bearing demand deposits

     214        (26     188   

Savings deposits

     57        (2     55   

Time deposits

     541        (152     389   

Short-term borrowings

     21        (3     18   

Long-term debt

     79        (7     72   
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     912        (190     722   
  

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 4,685      $ (678   $ 4,007   
  

 

 

   

 

 

   

 

 

 

 

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

Noninterest Income

Non-interest income includes, among other things, fees generated from our deposit services and in connection with our mortgage loan activities, securities gains, gains on sale of consumer loans and a non-recurring bargain purchase gain resulting from an acquisition. 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 June 30, 2014 vs. three months ended June 30, 2013. Total non-interest income decreased $0.7 million, or 31.2%, to $1.5 million for the three months ended June 30, 2014 compared to $2.2 million for the three months ended June 30, 2013. Noninterest income for the three months ended June 30, 2013 included the $0.9 million bargain purchase gain recorded in connection with the FCB acquisition in May 2013. Excluding the bargain purchase gain, the $0.2 million increase in noninterest income for the second quarter of 2014 compared to the second quarter of 2013 resulted primarily from an increase of $0.5 million in gain on sale of consumer loans offset by a decrease of approximately $0.3 million in fee income on mortgage loans held for sale.

Fee income on mortgage loans held for sale is the largest component of our noninterest income. These fees decreased $0.3 million to $0.6 million for the three months ended June 30, 2014 from $0.9 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 second 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 the remainder of 2014.

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

 

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25.9% to $73,000 for the three months ended June 30, 2014 as compared to $58,000 for the same period in 2013. The increase can be attributed to increased deposits resulting from the FCB acquisition as well as organic deposit growth.

Other operating income was $0.3 million for the three months ended June 30, 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.

Six months ended June 30, 2014 vs. six months ended June 30, 2013. Total noninterest income decreased $0.8 million, or 23.4%, to $2.6 million for the six months ended June 30, 2014 compared to $3.4 million for the six months ended June 30, 2013. Noninterest income for the six months ended June 30, 2013 included the aforementioned $0.9 million bargain purchase gain. Excluding the bargain purchase gain, the $0.1 million increase in noninterest income was mainly attributable to an increase in other operating income.

Fee income on mortgage loans held for sale decreased $0.6 million to $1.1 million for the six months ended June 30, 2014 from $1.7 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 second quarter of 2014.

Gains on the sale of loans, other than mortgage loans, for the six months ended June 30, 2014 were $0.7 million as compared to $52,000 for the six months ended June 30, 2013. These gains were generated by sales of pools of our auto loans. We expect to continue to sell pools of our auto loans quarterly as part of our ongoing loan portfolio management.

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 58.1% to $136,000 for the six months ended June 30, 2014 as compared to $86,000 for the same period in 2013. The increase can be attributed to increased deposits resulting from the FCB acquisition as well as organic deposit growth.

Gains on the sale of investment securities for the six months ended June 30, 2014 decreased $144,000, or 46.6%, to $165,000 from $309,000 for the same period in 2013. The Company sells investment securities held as available for sale to fund loan demand, manage its asset/liability sensitivity or for other business purposes.

Other operating income was $0.5 million for the six months ended June 30, 2014 compared to $0.2 million for the same period in 2013. Other operating income consists of interchange fees, ATM surcharge income, loan servicing fees and rental income.

Noninterest Expense

Noninterest expense includes salaries and benefits and other costs associated with the conduct of our operations. We are committed to managing our costs within the framework of our operating strategy. However, since we are focused on 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 June 30, 2014 vs. three months ended June 30, 2013. Total noninterest expense was $5.7 million for the three months ended June 30, 2014, an increase of $1.1 million, or 24.1%, from $4.6 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 $0.6 million, or 22.1%, to $3.5 million for the three months ended June 30, 2014, compared to $2.9 million for the same period in 2013. This increase was due to the 24 employees

 

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who joined the Bank upon the completion of the FCB acquisition as well as employees hired in connection with the opening of the Lafayette branch in the fourth quarter of 2013.

Net occupancy and equipment expense increased to $0.6 million for the three months ended June 30, 2014 from $0.5 million for the three months ended June 30, 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 June 30, 2014 from $0.2 million for the three months ended June 30, 2013. This increase is primarily a result of the additional processing expenses associated with the increased size of our loan portfolio resulting from the FCB acquisition as well as our organic growth, particularly with respect to servicing our consumer loan portfolio, the amount of which fluctuates.

Other operating expenses include security, business development, charitable contributions, training, filing fees and duplicating costs. Other operating expenses increased $0.1 million to $0.6 million for the three months ended June 30, 2014 from $0.5 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.

Six months ended June 30, 2014 vs. six months ended June 30, 2013. Total noninterest expense was $11.1 million for the six months ended June 30, 2014, an increase of $2.9 million, or 35.8%, from $8.2 million for the same period in 2013. This increase in total noninterest expense, as well as the increases of the components therein, discussed below, were results of the same factors discussed above with respect to the quarter over quarter discussion.

Salaries and employee benefits increased $1.9 million, or 36.2%, to $7.0 million for the six months ended June 30, 2014, compared to $5.1 million for the same period in 2013.

Net occupancy and equipment expense increased to $1.2 million for the six months ended June 30, 2014 from $0.8 million for the six months ended June 30, 2013.

Data processing expenses increased to $0.6 million for the six months ended June 30, 2014 from $0.4 million for the six months ended June 30, 2013.

Software amortization and expenses increased $66,000 to $0.2 million for the six months ended June 30, 2014 from $162,000 for the same period in 2013, which is also attributable to the increased servicing volume of consumer loans.

Other expenses include an increase in FDIC and OFI assessments of $89,000 to $0.2 million for the six months ended June 30, 2014 compared to $0.1 million for the six months ended June 30, 2013, due to the increase in average total assets.

Other operating expenses include security, business development, charitable contributions, training, filing fees and duplicating costs. Other operating expenses increased $0.2 million to $1.1 million for the six months ended June 30, 2014 from $0.9 million for the same period in 2013.

Income Tax Expense

Income tax expense for the three months ended June 30, 2014 was $0.5 million, an increase of $0.1 million from $0.4 million for the three months ended June 30, 2013. The effective tax rate for the three months ending June 30, 2014 and 2013 was 32.5% and 21.1%, respectively.

 

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Income tax expense for the six months ended June 30, 2014 was $0.9 million, an increase of $0.2 million from $0.7 million for the six months ended June 30, 2013. The effective tax rate for the six months ending June 30, 2014 and 2013 was 32.5% and 24.1%, respectively.

Risk Management

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

Credit Risk and the Allowance for Loan Losses

General. The risk of loss should a borrower default on a loan is inherent in any lending activity. Our portfolio and related credit risk are monitored and managed on an ongoing basis by our risk management department, the board of directors’ loan committee and the full board of directors. We utilize a ten point risk-rating system, which assigns a risk grade to each borrower based on a number of quantitative and qualitative factors associated with a loan transaction. The risk grade categorizes the loan into one of five risk categories, based on information about the ability of borrowers to service the debt. The information includes, among other factors, current financial information about the borrower, historical payment experience, credit documentation, public information and current economic trends. These categories assist management in monitoring our credit quality. The following describes each of the risk categories, which are consistent with the definitions used in guidance promulgated by federal banking regulators:

 

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

 

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

 

    Substandard (grade 8) – Loans rated as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or the liquidation value of any collateral. If deficiencies are not addressed, it is likely that this category of loan will result in the Bank incurring a loss. Where a borrower has been unable to adjust to industry or general economic conditions, the borrower’s loan is often categorized as Substandard.

 

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

 

    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 June 30, 2014 and December 31, 2013, there were no loans classified as Doubtful or Loss, while there were $4.2 million of loans classified as Substandard at June 30, 2014 and December 31, 2013 and $0.7 million and $1.2 million, respectively, of loans classified as Special Mention as of such dates. Of the $4.9 million in total

 

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Substandard and Special Mention loans at June 30, 2014, $4.2 million was 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 was acquired in the FCB acquisition and marked to fair value.

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. For collateral dependent loans, new appraisals are obtained on an annual basis. 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, Receivables. The balance of these loans and their related allowance is included in management’s estimation and analysis of the allowance for loan losses. Other considerations in establishing the allowance for loan losses include the nature and volume of the loan portfolio, overall portfolio quality, historical loan loss, review of specific problem loans and current economic conditions that may affect the borrower’s ability to pay, as well as trends within each of these factors. The allowance for loan losses is established after input from management as well as our risk management department and our special assets committee. We evaluate the adequacy of the allowance for loan losses on a quarterly basis. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses was $3.9 million at June 30, 2014, an increase from $3.4 million at December 31, 2013, as we increased our loan loss provisioning to reflect our organic loan growth.

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.

 

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Impaired loans at June 30, 2014 were $4.2 million, including impaired loans acquired in the FCB acquisition in the amount of $3.9 million, and $4.2 million, including impaired loans acquired in the FCB acquisition in the amount of $3.8 million, at December 31, 2013. At June 30, 2014 and December 31, 2013, $64,000 and $37,000, respectively, of the allowance for loan losses was specifically allocated to impaired loans.

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 June 30, 2014 and 2013, the provision for loan losses was $0.4 million and $0.1 million, respectively. For the six months ended June 30, 2014, the provision for loan losses was $0.7 million, an increase of $0.5 million from $0.2 million during the same period in 2013. The increases over both periods are due primarily to the overall growth in our loan portfolio, including our commercial real estate loans.

Acquired loans that are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, 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. Acquired FCB loans had a carrying value of $78.4 million and a fair value of $77.5 million on the acquisition date. 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. There was no provision for loan losses charged to operating expense attributable to loans accounted for under ASC 310-30 for the three and six months ended June 30, 2014 and 2013.

The following table presents the allocation of the allowance for loan losses by loan category at the dates indicated (dollars in thousands):

 

     June 30, 2014      December 31, 2013  

Mortgage loans on real estate:

     

Construction and development

   $ 467       $ 420   

1-4 family

     679         567   

Multifamily

     120         101   

Farmland

     11         4   

Nonfarm, nonresidential

     1,418         992   

Commercial and industrial

     293         397   

Consumer installment loans:

     

Auto loans

     858         831   

Other consumer installment loans

     36         68   
  

 

 

    

 

 

 

Total loans

   $ 3,882       $ 3,380   
  

 

 

    

 

 

 

 

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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:

 

     June 30, 2014     December 31, 2013  

Mortgage loans on real estate:

    

Construction and development

     0.09     0.08

1-4 Family

     0.12        0.11   

Multifamily

     0.02        0.02   

Farmland

     —          —     

Nonfarm, nonresidential

     0.25        0.20   

Commercial and industrial

     0.05        0.08   

Consumer installment loans:

    

Auto loans

     0.15        0.17   

Other consumer installment loans

     0.01        0.01   
  

 

 

   

 

 

 

Total loans

     0.69     0.67
  

 

 

   

 

 

 

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

 

     Three months ended     Six months ended  
     June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013  

Allowance at beginning of period

   $ 3,530      $ 2,652      $ 3,380      $ 2,722   

Provision for loan losses

     448        143        693        232   

Charge-offs:

        

Mortgage loans on real estate:

        

Construction and development

     —          —          —          —     

1-4 Family

     —          (9     (30     (9

Multifamily

     —          —          —          —     

Farmland

     —          —          —          —     

Nonfarm, nonresidential

     —          —          (3     —     

Commercial and industrial

     (16     (1     (16     (119

Consumer installment loans:

        

Auto loans

     (77     (26     (147     (67

Other consumer installment loans

     (17     (3     (22     (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (110     (39     (218     (200
  

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

        

Mortgage loans on real estate:

        

Construction and development

     —          —          1        —     

1-4 Family

     1        1        1        1   

Multifamily

     —          —          —          —     

Farmland

     —          —          —          —     

Nonfarm, nonresidential

     —          —          —          —     

Commercial and industrial

     —          —          —          —     

Consumer installment loans:

        

Auto loans

     13        2        23        4   

Other consumer installment loans

     —          1        2        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     14        4        27        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (96     (35     (191     (194
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 3,882      $ 2,760      $ 3,882      $ 2,760   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs to:

        

Loans-average

     0.02     0.01     0.03     0.05

Allowance for loan losses

     2.47     1.27     4.92     7.03

Allowance for loan losses to:

        

Total loans

     0.69     0.66     0.69     0.66

Nonperforming loans

     296.24     141.01     296.24     141.01

 

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The allowance for loan losses to total loans ratio increased to 0.69% at June 30, 2014 compared to 0.66% at June 30, 2013. T