Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
(Mark One)
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| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018
or
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| |
☐ | 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
Investar Holding Corporation
(Exact name of registrant as specified in its charter)
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| |
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 ☐
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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| | | |
Large accelerated filer | ☐ | Accelerated filer | þ |
Non-accelerated filer | ☐ | Smaller reporting company | þ |
| | Emerging growth company | þ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
The number of shares outstanding of the issuer’s class of common stock, as of the latest practicable date, is as follows: Common stock, $1.00 par value, 9,546,003 shares outstanding as of November 7, 2018.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INVESTAR HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
|
| | | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
| | (Unaudited) | | |
ASSETS | | | | |
Cash and due from banks | | $ | 21,151 |
| | $ | 19,619 |
|
Interest-bearing balances due from other banks | | 3,352 |
| | 10,802 |
|
Federal funds sold | | 285 |
| | — |
|
Cash and cash equivalents | | 24,788 |
| | 30,421 |
|
| | | | |
Available for sale securities at fair value (amortized cost of $238,443 and $220,077, respectively) | | 230,747 |
| | 217,564 |
|
Held to maturity securities at amortized cost (estimated fair value of $16,691 and $17,947, respectively) | | 17,030 |
| | 17,997 |
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Loans, net of allowance for loan losses of $9,021 and $7,891, respectively | | 1,349,391 |
| | 1,250,888 |
|
Equity securities | | 12,671 |
| | 9,798 |
|
Bank premises and equipment, net of accumulated depreciation of $9,332 and $7,825, respectively | | 39,831 |
| | 37,540 |
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Other real estate owned, net | | 4,227 |
| | 3,837 |
|
Accrued interest receivable | | 5,073 |
| | 4,688 |
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Deferred tax asset | | 1,768 |
| | 1,294 |
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Goodwill and other intangible assets, net | | 19,902 |
| | 19,926 |
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Bank owned life insurance | | 23,702 |
| | 23,231 |
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Other assets | | 6,185 |
| | 5,550 |
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Total assets | | $ | 1,735,315 |
| | $ | 1,622,734 |
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| | | | |
LIABILITIES | | |
| | |
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Deposits: | | |
| | |
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Noninterest-bearing | | $ | 214,190 |
| | $ | 216,599 |
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Interest-bearing | | 1,081,431 |
| | 1,008,638 |
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Total deposits | | 1,295,621 |
| | 1,225,237 |
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Advances from Federal Home Loan Bank | | 208,083 |
| | 166,658 |
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Repurchase agreements | | 17,931 |
| | 21,935 |
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Subordinated debt, net of unamortized issuance costs | | 18,203 |
| | 18,168 |
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Junior subordinated debt | | 5,832 |
| | 5,792 |
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Accrued taxes and other liabilities | | 11,238 |
| | 12,215 |
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Total liabilities | | 1,556,908 |
| | 1,450,005 |
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| | | | |
STOCKHOLDERS’ EQUITY | | |
| | |
|
Preferred stock, no par value per share; 5,000,000 shares authorized | | — |
| | — |
|
Common stock, $1.00 par value per share; 40,000,000 shares authorized; 9,545,701 and 9,514,926 shares issued and outstanding, respectively | | 9,546 |
| | 9,515 |
|
Surplus | | 131,333 |
| | 131,582 |
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Retained earnings | | 42,868 |
| | 33,203 |
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Accumulated other comprehensive loss | | (5,340 | ) | | (1,571 | ) |
Total stockholders’ equity | | 178,407 |
| | 172,729 |
|
Total liabilities and stockholders’ equity | | $ | 1,735,315 |
| | $ | 1,622,734 |
|
See accompanying notes to the consolidated financial statements.
INVESTAR HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share data)
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
INTEREST INCOME | | | | | | | | |
Interest and fees on loans | | $ | 16,905 |
| | $ | 12,893 |
| | $ | 48,754 |
| | $ | 33,456 |
|
Interest on investment securities | | 1,710 |
| | 1,399 |
| | 4,813 |
| | 3,627 |
|
Other interest income | | 162 |
| | 150 |
| | 397 |
| | 296 |
|
Total interest income | | 18,777 |
| | 14,442 |
| | 53,964 |
| | 37,379 |
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| | | | | | | | |
INTEREST EXPENSE | | |
| | |
| | |
| | |
|
Interest on deposits | | 2,994 |
| | 2,137 |
| | 7,673 |
| | 5,817 |
|
Interest on borrowings | | 1,398 |
| | 767 |
| | 3,728 |
| | 1,862 |
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Total interest expense | | 4,392 |
| | 2,904 |
| | 11,401 |
| | 7,679 |
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Net interest income | | 14,385 |
| | 11,538 |
| | 42,563 |
| | 29,700 |
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| | | | | | | | |
Provision for loan losses | | 785 |
| | 420 |
| | 1,977 |
| | 1,145 |
|
Net interest income after provision for loan losses | | 13,600 |
| | 11,118 |
| | 40,586 |
| | 28,555 |
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| | | | | | | | |
NONINTEREST INCOME | | |
| | |
| | |
| | |
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Service charges on deposit accounts | | 368 |
| | 281 |
| | 1,054 |
| | 474 |
|
Gain on sale of investment securities, net | | 15 |
| | 27 |
| | 37 |
| | 242 |
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Gain on sale of fixed assets, net | | 9 |
| | 160 |
| | 98 |
| | 184 |
|
(Loss) gain on sale of other real estate owned, net | | — |
| | 37 |
| | (4 | ) | | 32 |
|
Servicing fees and fee income on serviced loans | | 232 |
| | 352 |
| | 773 |
| | 1,153 |
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Other operating income | | 593 |
| | 310 |
| | 1,524 |
| | 768 |
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Total noninterest income | | 1,217 |
| | 1,167 |
| | 3,482 |
| | 2,853 |
|
Income before noninterest expense | | 14,817 |
| | 12,285 |
| | 44,068 |
| | 31,408 |
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| | | | | | | | |
NONINTEREST EXPENSE | | |
| | |
| | |
| | |
|
Depreciation and amortization | | 644 |
| | 542 |
| | 1,871 |
| | 1,309 |
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Salaries and employee benefits | | 6,646 |
| | 5,136 |
| | 19,189 |
| | 13,195 |
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Occupancy | | 337 |
| | 317 |
| | 1,052 |
| | 826 |
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Data processing | | 493 |
| | 446 |
| | 1,600 |
| | 1,169 |
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Marketing | | 71 |
| | 124 |
| | 153 |
| | 271 |
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Professional fees | | 281 |
| | 263 |
| | 764 |
| | 726 |
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Acquisition expense | | — |
| | 824 |
| | 1,104 |
| | 1,049 |
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Other operating expenses | | 1,782 |
| | 1,470 |
| | 5,243 |
| | 4,189 |
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Total noninterest expense | | 10,254 |
| | 9,122 |
| | 30,976 |
| | 22,734 |
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Income before income tax expense | | 4,563 |
| | 3,163 |
| | 13,092 |
| | 8,674 |
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Income tax expense | | 516 |
| | 1,032 |
| | 2,823 |
| | 2,756 |
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Net income | | $ | 4,047 |
| | $ | 2,131 |
| | $ | 10,269 |
| | $ | 5,918 |
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| | | | | | | | |
EARNINGS PER SHARE | | |
| | |
| | |
| | |
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Basic earnings per share | | $ | 0.42 |
| | $ | 0.24 |
| | $ | 1.06 |
| | $ | 0.72 |
|
Diluted earnings per share | | 0.41 |
| | 0.24 |
| | 1.05 |
| | 0.71 |
|
Cash dividends declared per common share | | 0.05 |
| | 0.03 |
| | 0.12 |
| | 0.07 |
|
See accompanying notes to the consolidated financial statements.
INVESTAR HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
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| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Net income | | $ | 4,047 |
| | $ | 2,131 |
| | $ | 10,269 |
| | $ | 5,918 |
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Other comprehensive income (loss): | | |
| | |
| | |
| | |
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Unrealized gain (loss) on investment securities: | | |
| | |
| | |
| | |
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Unrealized (loss) gain, available for sale, net of tax (benefit) expense of ($410), $51, ($1,081) and $711, respectively | | (1,542 | ) | | 95 |
| | (4,065 | ) | | 1,320 |
|
Reclassification of realized gain, net of tax expense of $3, $10, $7 and $85, respectively | | (12 | ) | | (18 | ) | | (29 | ) | | (157 | ) |
Unrealized loss, transfer from available for sale to held to maturity, net of tax benefit of $0 for all respective periods | | — |
| | — |
| | (1 | ) | | (1 | ) |
| | | | | | | | |
Fair value of derivative financial instruments: | | |
| | |
| | |
| | |
|
Change in fair value of interest rate swap designated as a cash flow hedge, net of tax (benefit) expense of ($3), $20, $87 and $62, respectively | | (11 | ) | | 37 |
| | 326 |
| | 114 |
|
Total other comprehensive (loss) income | | (1,565 | ) | | 114 |
| | (3,769 | ) | | 1,276 |
|
Total comprehensive income | | $ | 2,482 |
| | $ | 2,245 |
| | $ | 6,500 |
| | $ | 7,194 |
|
See accompanying notes to the consolidated financial statements.
INVESTAR HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in thousands, except share data)
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Surplus | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
Balance, December 31, 2016 | | $ | 7,102 |
| | $ | 81,499 |
| | $ | 26,227 |
| | $ | (2,071 | ) | | $ | 112,757 |
|
Common stock issued in offering, net of direct costs of $1,991 | | 1,624 |
| | 30,885 |
| | — |
| | — |
| | 32,509 |
|
Surrendered shares | | (8 | ) | | (158 | ) | | — |
| | — |
| | (166 | ) |
Shares repurchased | | (12 | ) | | (252 | ) | | | | | | (264 | ) |
Options and warrants exercised | | 67 |
| | 822 |
| | — |
| | — |
| | 889 |
|
Dividends declared, $0.07 per share | | — |
| | — |
| | (637 | ) | | — |
| | (637 | ) |
Stock-based compensation and other activity | | (68 | ) | | 655 |
| | — |
| | — |
| | 587 |
|
Net tax effect of stock-based compensation | | — |
| | 7 |
| | — |
| | — |
| | 7 |
|
Net income | | — |
| | — |
| | 5,918 |
| | — |
| | 5,918 |
|
Other comprehensive income, net | | — |
| | — |
| | — |
| | 1,276 |
| | 1,276 |
|
Balance, September 30, 2017 | | $ | 8,705 |
| | $ | 113,458 |
| | $ | 31,508 |
| | $ | (795 | ) | | $ | 152,876 |
|
| | | | | | | | | | |
Balance, December 31, 2017 | | $ | 9,515 |
| | $ | 131,582 |
| | $ | 33,203 |
| | $ | (1,571 | ) | | $ | 172,729 |
|
Surrendered shares | | (9 | ) | | (212 | ) | | — |
| | — |
| | (221 | ) |
Options and warrants exercised | | 77 |
| | 960 |
| | — |
| | — |
| | 1,037 |
|
Dividends declared, $0.12 per share | | — |
| | — |
| | (1,156 | ) | | — |
| | (1,156 | ) |
Stock-based compensation | | 34 |
| | 765 |
| | — |
| | — |
| | 799 |
|
Reclassification of tax effects of the Tax Cuts and Jobs Act(1) | | — |
| | — |
| | 557 |
| | — |
| | 557 |
|
Shares repurchased | | (71 | ) | | (1,762 | ) | | — |
| | — |
| | (1,833 | ) |
Net income | | — |
| | — |
| | 10,269 |
| | — |
| | 10,269 |
|
Other comprehensive loss, net | | — |
| | — |
| | — |
| | (3,769 | ) | | (3,769 | ) |
Impact of adoption of new accounting standards(2) | | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Balance, September 30, 2018 | | $ | 9,546 |
| | $ | 131,333 |
| | $ | 42,868 |
| | $ | (5,340 | ) | | $ | 178,407 |
|
| |
(1) | The Tax Cuts and Jobs Act, enacted on December 22, 2017, required the revaluation of the Company’s deferred tax assets and liabilities as of December 31, 2017 as a result of the lower corporate tax rates to be realized beginning January 1, 2018. The $0.6 million adjustment to retained earnings for the period ended September 30, 2018 represents a reclassification of the tax effects of the Tax Cuts and Jobs Act. |
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(2) | Represents the impact of adopting Accounting Standards Update (“ASU”) No. 2016-01. See Note 1 to the consolidated financial statements for more information. |
See accompanying notes to the consolidated financial statements.
INVESTAR HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
|
| | | | | | | | |
| | Nine months ended September 30, |
| | 2018 | | 2017 |
Net income | | $ | 10,269 |
| | $ | 5,918 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 1,871 |
| | 1,309 |
|
Provision for loan losses | | 1,977 |
| | 1,145 |
|
Amortization of purchase accounting adjustments | | (1,854 | ) | | (234 | ) |
Provision for other real estate owned | | — |
| | 183 |
|
Net amortization of securities | | 449 |
| | 834 |
|
Gain on sale of investment securities, net | | (37 | ) | | (242 | ) |
Gain on sale of fixed assets, net | | (98 | ) | | (184 | ) |
Loss (gain) on sale of other real estate owned, net | | 4 |
| | (32 | ) |
FHLB stock dividend | | (162 | ) | | (65 | ) |
Stock-based compensation | | 799 |
| | 587 |
|
Deferred taxes | | 820 |
| | (210 | ) |
Net change in value of bank owned life insurance | | (471 | ) | | (154 | ) |
Amortization of subordinated debt issuance costs | | 35 |
| | 23 |
|
Unrealized gain on equity securities | | (22 | ) | | — |
|
Net change in: | | | | |
Accrued interest receivable | | (385 | ) | | (276 | ) |
Other assets | | 290 |
| | (195 | ) |
Accrued taxes and other liabilities | | (1,335 | ) | | (1,045 | ) |
Net cash provided by operating activities | | 12,150 |
| | 7,362 |
|
| | | | |
Cash flows from investing activities: | | |
| | |
|
Proceeds from sales of investment securities available for sale | | 7,021 |
| | 82,537 |
|
Purchases of securities available for sale | | (48,886 | ) | | (95,614 | ) |
Proceeds from maturities, prepayments and calls of investment securities available for sale | | 22,254 |
| | 19,702 |
|
Proceeds from maturities, prepayments and calls of investment securities held to maturity | | 930 |
| | 741 |
|
Proceeds from redemption or sale of equity securities | | 1,047 |
| | 1,307 |
|
Purchase of equity securities | | (2,870 | ) | | (3,624 | ) |
Net increase in loans | | (99,225 | ) | | (88,313 | ) |
Proceeds from sales of other real estate owned | | 37 |
| | 513 |
|
Proceeds from the sales of fixed assets | | 19 |
| | 601 |
|
Purchases of other real estate owned | | (227 | ) | | — |
|
Purchases of fixed assets | | (3,878 | ) | | (1,214 | ) |
Purchase of other investments | | (119 | ) | | (624 | ) |
Distributions from investments | | 31 |
| | 12 |
|
Cash paid for Citizens, net of cash acquired | | — |
| | (1,235 | ) |
Net cash used in investing activities | | (123,866 | ) | | (85,211 | ) |
| | | | |
|
| | | | | | | | |
INVESTAR HOLDING CORPORATION |
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED |
(Amounts in thousands) |
(Unaudited) |
| | | | |
Cash flows from financing activities: | | |
| | |
|
Net increase (decrease) in customer deposits | | 70,515 |
| | (18,603 | ) |
Net decrease in repurchase agreements | | (4,004 | ) | | (14,195 | ) |
Net increase in short-term FHLB advances | | 22,500 |
| | 38,500 |
|
Proceeds from long-term FHLB advances | | 75,000 |
| | 45,000 |
|
Repayment of long-term FHLB advances | | (56,100 | ) | | (3,603 | ) |
Cash dividends paid on common stock | | (1,032 | ) | | (457 | ) |
Proceeds from public offering of common stock, net of issuance costs | | — |
| | 32,509 |
|
Proceeds from stock options and warrants exercised | | 1,037 |
| | 889 |
|
Payments to repurchase common stock | | (1,833 | ) | | (264 | ) |
Proceeds from other borrowings | | — |
| | 78 |
|
Repayment of other borrowings | | — |
| | (1,078 | ) |
Proceeds from subordinated debt, net of issuance costs | | — |
| | 18,133 |
|
Net cash provided by financing activities | | 106,083 |
| | 96,909 |
|
| | | | |
Net change in cash and cash equivalents | | (5,633 | ) | | 19,060 |
|
Cash and cash equivalents, beginning of period | | 30,421 |
| | 29,448 |
|
Cash and cash equivalents, end of period | | $ | 24,788 |
| | $ | 48,508 |
|
See accompanying notes to the consolidated financial statements.
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 GAAP. 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 nine month periods ended September 30, 2018 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 consolidated financial statements for the year ended December 31, 2017, including the notes thereto, which were included as part of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 16, 2018.
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. At September 30, 2018, the Company operated 20 full service banking offices located throughout its market and had 253 employees.
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 financial 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 particularly susceptible to significant change relate to the determination of the allowance for loan losses. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for loan losses may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
Other estimates that are susceptible to significant change in the near term relate to the determination of other-than-temporary impairments of securities and the fair value of financial instruments.
Investment Securities
The Company’s investments in securities are accounted for in accordance with applicable guidance contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), which requires the classification of securities into one of the following categories:
| |
• | Securities to be held to maturity (“HTM”): bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. |
| |
• | Securities available for sale (“AFS”): available for sale securities consist of bonds, notes, and debentures that are available to meet the Company’s operating needs. These securities are reported at fair value. |
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unrealized holding gains and losses, net of tax, on AFS debt securities are reported as a net amount in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses on the sale of debt securities are determined using the specific-identification method.
The Company follows FASB guidance related to the recognition and presentation of other-than-temporary impairment. The guidance specifies that if an entity does not have the intent to sell a debt security and it is not more likely than not that the Company will be required to sell the security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.
Loans
The Company’s loan portfolio categories include real estate, commercial and consumer loans. Real estate loans are further categorized into construction and development, 1-4 family residential, multifamily, farmland and commercial real estate loans. The consumer loan category includes loans originated through indirect lending. Indirect lending, which is lending initiated through third-party business partners, is largely comprised of loans made through automotive dealerships.
Loans for which management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at unpaid principal balances, adjusted by an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loans are ordinarily placed on nonaccrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more; however, management may elect to continue the accrual when the estimated net realizable value of collateral is sufficient to cover the principal balance and the accrued interest. Any unpaid interest previously accrued on nonaccrual loans is reversed from income. Interest income, generally, is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period of repayment performance by the borrower.
The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The Company’s impaired loans include troubled debt restructurings and performing and non-performing loans for which full payment of principal or interest is not expected. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of its collateral. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is required as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.
The Company follows the FASB accounting guidance on sales of financial assets, which includes participating interests in loans. For loan participations that are structured in accordance with this guidance, the sold portions are recorded as a reduction of the loan portfolio. Loan participations that do not meet the criteria are accounted for as secured borrowings.
Allowance for Loan Losses
The adequacy of the allowance for loan losses is determined in accordance with GAAP. The allowance for loan losses is estimated through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the loan balance is uncollectable. Subsequent recoveries, if any, are credited to the allowance.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The allowance is an amount that management believes will be adequate to absorb probable losses inherent in the loan portfolio as of the balance sheet date based on evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Credits deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance. Past due status is determined based on contractual terms.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. Based on management’s review and observations made through qualitative review, management may apply qualitative adjustments to determine loss estimates at a group and/or portfolio segment level as deemed appropriate. Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in its portfolio and portfolio segments. The Company utilizes an internally developed model that requires judgment to determine the estimation method that fits the credit risk characteristics of the loans in its portfolio and portfolio segments. Qualitative and environmental factors that may not be directly reflected in quantitative estimates include: asset quality trends, changes in loan concentrations, new products and process changes, changes and pressures from competition, changes in lending policies and underwriting practices, trends in the nature and volume of the loan portfolio, changes in experience and depth of lending staff and management and national and regional economic trends. Changes in these factors are considered in determining changes in the allowance for loan losses. The impact of these factors on the Company’s qualitative assessment of the allowance for loan losses can change from period to period based on management’s assessment of the extent to which these factors are already reflected in historic loss rates. The uncertainty inherent in the estimation process is also considered in evaluating the allowance for loan losses.
In the ordinary course of business, the Bank enters into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses. The reserve for unfunded lending commitments is included in other liabilities in the balance sheet. At September 30, 2018 and December 31, 2017 the reserve for unfunded loan commitments was $101,000 and $32,000, respectively.
Acquisition Accounting
Acquisitions are accounted for under the purchase method of accounting. Purchased assets and assumed liabilities are recorded at their respective acquisition date fair values, and identifiable intangible assets are recorded at fair value. If the consideration given exceeds the fair value of the net assets received, goodwill is recognized. If the fair value of the net assets received exceeds the consideration given, a bargain purchase gain is recognized. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available.
Purchased loans acquired in a business combination are recorded at their estimated fair value as of the acquisition date. The fair value of loans acquired is determined using a discounted cash flow model based on assumptions regarding the amount and timing of principal and interest prepayments, estimated payments, estimated default rates, estimated loss severity in the event of defaults, and current market rates. Estimated credit losses are included in the determination of fair value; therefore, an allowance for loan losses is not recorded on the acquisition date. The fair value adjustment is amortized over the life of the loan using the effective interest method, except for those loans accounted for under ASC Topic 310-30, discussed below.
The Company accounts for acquired impaired loans under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). An acquired loan is considered impaired when there is evidence of credit deterioration since origination and it is probable, at the date of acquisition, that we will be unable to collect all contractually required payments. ASC 310-30 prohibits the carryover of an allowance for loan losses for acquired impaired loans. Over the life of the acquired loans, we continually estimate the cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. As of the end of each fiscal quarter, we evaluate the present value of the acquired loans using the effective interest rates. For any increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life, while we recognize a provision for loan loss in the consolidated statement of operations if the cash flows expected to be collected have decreased.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Servicing Rights
Primary servicing rights represent the Company’s right to service consumer automobile loans for third-party whole-loan sales and loans sold as participations. Primary servicing involves the collection of payments from individual borrowers and the distribution of these payments to the investors.
The Company capitalizes the value expected to be realized from performing specified automobile servicing activities for others as automobile servicing rights (“ASRs”) when the expected future cash flows from servicing are projected to be more than adequate compensation for such activities. These capitalized servicing rights are purchased or retained upon sale of consumer automobile loans.
The Company measures all consumer automobile servicing assets and liabilities at fair value. The Company defines servicing rights based on both the availability of market inputs and the manner in which the Company manages the risks of servicing assets and liabilities. The Company leverages all available relevant market data to determine the fair value of recognized servicing assets and liabilities.
The Company calculates the fair value of ASRs using various assumptions including future cash flows, market discount rates, expected prepayments, servicing costs and other factors. A significant change in prepayments of loans in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of ASRs.
For the nine months ended September 30, 2018 and 2017, expected future cash flows from ASRs approximated adequate compensation for such activities. Accordingly, the Company has not recorded an asset or liability. There were no loan sales during the nine months ended September 30, 2018 or 2017.
Reclassifications
Certain reclassifications have been made to the 2017 financial statements to be consistent with the 2018 presentation, if applicable.
Concentrations of Credit Risk
The Company’s loan portfolio consists of the various types of loans described in Note 5. Loans and Allowance for Loan Losses. Real estate or other assets secure most loans. The majority of loans have 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.
Tax Cuts and Jobs Act
Public law No. 115-97, known as the Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. Also on December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. Any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. Based on the information available and current interpretation of the rules, the Company recorded the impact of the reduction in the corporate tax rate and remeasurement of certain deferred tax assets and liabilities. The amount recorded in the fourth quarter of 2017 related to the remeasurement of the Company’s deferred tax balance and resulted in additional income tax expense of $0.3 million. An additional $0.6 million was expensed in the first quarter of 2018 due to the remeasurement of the Company’s deferred tax balance.
Accounting Standards Adopted in 2018
FASB ASC Topic 230 “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments” Update No. 2016-15 (“ASU 2016-15”). The FASB issued ASU 2016-15 in August 2016. The amendments in the ASU address eight specific cash flow issues with the objective of reducing the existing diversity in practice, as the issues are either unclear or do not have specific guidance under current GAAP. ASU 2016-15 became effective for the Company on January 1, 2018 and did not have a material impact on the Company’s consolidated financial statements.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FASB ASC Topic 825 “Financial Instruments – Overall” Update No. 2016-01 (“ASU 2016-01”). ASU 2016-01 makes targeted amendments to the guidance for recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 requires equity investments, other than equity method investments, to be measured at fair value with changes in fair value recognized in net income. The ASU requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption to reclassify the cumulative change in fair value of equity securities previously recognized in accumulated other comprehensive income (AOCI). ASU 2016-01 became effective for the Company on January 1, 2018. The adoption of the guidance resulted in an insignificant cumulative-effect adjustment that decreased retained earnings, with offsetting related adjustments to deferred taxes and AOCI. The adoption of this ASU also resulted in equity securities previously classified as AFS securities to be classified as equity securities at fair value in the Company’s September 30, 2018 Consolidated Balance Sheet. ASU 2016-01 also emphasizes the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities should not make use of a practicability exception in determining the fair value of loans. Accordingly, we refined the calculation used to determine the disclosed fair value of our loans held for investment portfolio as part of adopting this standard. The refined calculation did not have a significant impact on our fair value disclosures. See Note 9. Fair Values of Financial Instruments.
As a result of the adoption of ASU 2016-01, $1.4 million of equity securities was reclassified from AFS securities to equity securities in the first quarter of 2018. At September 30, 2018, equity securities include $0.6 million of exchange-traded equity securities that are measured at fair value with changes in fair value recognized in net income. The remaining balance of equity securities at September 30, 2018 consists of stock in correspondent banks and is measured at cost, adjusted for any observable market transactions less any impairment. ASU 2016-01 also requires that other investments previously accounted for using the cost method be measured at fair value with changes in fair value recognized in net income. These investments, which had a $1.4 million balance at September 30, 2018, are included in other assets in the consolidated balance sheet and represent investments in small business investment companies without readily determinable fair values. These investments are measured at fair value using the net asset value of the investment and any changes in fair value are recognized in net income.
FASB ASC Topic 606 “Revenue from Contracts with Customers” Update No. 2014-09 (“ASU 2014-09”). ASU 2014-09 was effective for the Company on January 1, 2018. ASU 2014-09 amends existing guidance related to revenue from contracts with customers by (i) creating a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revising when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as other real estate owned (“OREO”). The Company adopted ASU 2014-09 using the modified retrospective method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new guidance while prior period amounts continue to be reported in accordance with legacy GAAP. The adoption of ASU 2014-09 did not result in a significant change to the accounting for any in-scope revenue streams. As such, no cumulative effect adjustment was recorded. The majority of the Company’s revenues comes from interest income from loans and securities, which falls outside the scope of ASU 2014-09. The Company’s services that fall within the scope of ASU 2014-09 are primarily included within noninterest income in the consolidated income statements and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of the new guidance include service charges on deposit accounts, interchange fees and other fees, and the sale of OREO. The adoption of this ASU was not significant to the Company and had no material effect on how the Company recognizes revenue nor did it result in any presentation changes to the consolidated financial statements.
Recent Accounting Pronouncements
FASB ASC Topic 250 “Intangibles - Goodwill and Other - Internal Use Software (Subtopic 250-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” Update No. 2018-15. In August 2018, the FASB issued ASU 2018-15. This ASU requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an “other asset”). The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service. ASU 2018-15 is effective for the Company on January 1, 2020. Early adoption is permitted, including adoption in any interim period. The adoption of ASU 2018-15 is not expected to have a material impact on the Company’s consolidated financial statements.
FASB ASC Topic 820 “Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” Update No. 2018-13. In August 2018, the FASB issued ASU 2018-13, which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. ASU 2018-13 removes the disclosure requirement detailing the amount of and reasons for transfers between Level 1 and Level 2 and the valuation processes for Level 3 fair value measurements will be removed. In addition, this ASU modifies the disclosure requirement for investments in certain entities that calculate net asset value. Lastly, ASU 2018-13 adds a disclosure requirement for changes in unrealized gains and
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. ASU 2018-13 is effective for the Company on January 1, 2020. Early adoption is permitted upon the issuance of ASU 2018-13. The removed and modified disclosures will be adopted on a retrospective basis, and the new disclosures will be adopted on a prospective basis. The adoption of ASU 2018-13 is not expected to have a material impact on the Company’s consolidated financial statements.
FASB ASC Topic 718 “Compensation - Stock Compensation: Improvements to Nonemployees Share-Based Payment Accounting” Update No. 2018-07. In June 2018, the FASB issued ASU 2018-07, which expands the scope of Topic 718 (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. As this ASU becomes effective, the accounting for share-based payments for nonemployees and employees will be substantially the same. The ASU supersedes Subtopic 505-50, “Equity – Equity-Based Payments to Non-Employees”. ASU 2018-07 is effective for the Company on January 1, 2019. The adoption of ASU 2018-07 is not expected to have a material impact on the Company’s consolidated financial statements.
FASB ASC Topic 815 “Derivatives and Hedging” Update No. 2017-12. The FASB issued ASU No. 2017-12 in August 2017. The ASU amends the hedge accounting model in Topic 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. This amended guidance is effective for the Company on January 1, 2019, and, given the current level of derivatives designated as hedges, is not expected to have a material impact on our consolidated operating results or financial condition.
FASB ASC Subtopic 310-20 “Receivables – Nonrefundable Fees and Other Costs, Premium Amortization on Purchased Callable Debt Securities” Update No. 2017-08. The FASB issued ASU No. 2017-08 in March 2017. The amendments in the ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. Update 2017-08 will be effective for the Company beginning January 1, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is assessing the impact of ASU 2017-08 on its accounting and disclosures.
FASB ASC Topic 350 “Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment” Update No. 2017-04. The FASB issued ASU No. 2017-04 in January 2017. The ASU simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Therefore, any carrying amount which exceeds the reporting unit’s fair value, up to the amount of goodwill recorded, will be recognized as an impairment loss. ASU 2017-04 will be effective for the Company on January 1, 2020. The amendments will be applied prospectively on or after the effective date. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Based on recent goodwill impairments tests, which did not require the application of Step 2, the Company does not expect the adoption of this ASU to have an immediate impact.
FASB ASC Topic 326 “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments” Update No. 2016-13. The FASB issued ASU No. 2016-13 in June 2016. The amendments introduce an impairment model that is based on expected credit losses, rather than incurred losses, to estimate credit losses on certain types of financial instruments (e.g., loans and held-to-maturity securities), including certain off-balance sheet financial instruments (e.g., loan commitments). The expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. Financial instruments with similar risk characteristics may be grouped together when estimating expected credit losses. The ASU also amends the current AFS security impairment model for debt securities. The new model will require an estimate of expected credit losses when the fair value is below the amortized cost of the asset through the use of an allowance to record estimated credit losses (and subsequent recoveries). Non-credit related losses will continue to be recognized through other comprehensive income. In addition, the amendments provide for a simplified accounting model for purchased financial assets with a more-than-insignificant amount of credit deterioration since their origination. The initial estimate of expected credit losses would be recognized through an allowance for loan losses with an offset (i.e., increase) to the cost basis of the related financial asset at acquisition.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ASU 2016-13 will be effective for the Company beginning January 1, 2020. The amendments will be applied through a modified-retrospective approach, resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which other-than-temporary impairment had been recognized before the effective date. Amounts previously recognized in accumulated other comprehensive income as of the date of adoption that relate to improvements in cash flows expected to be collected should continue to be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption should be recorded in earnings when received. Management is currently evaluating the potential impact of ASU 2016-13 on the Company’s consolidated financial statements.
FASB ASC Topic 842 “Leases” Update No. 2016-02. In February 2016, the FASB issued ASU 2016-02. This ASU will require all organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additional qualitative and quantitative disclosures will be required so that users can understand more about the nature of an entity’s leasing activities. The new guidance is effective for the Company beginning January 1, 2019. Early adoption is permitted. Management is currently analyzing data on leased assets. The adoption of this guidance is expected to increase both assets and liabilities, but is not expected to have a material impact on the consolidated statements of income.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. BUSINESS COMBINATIONS
Citizens Bancshares, Inc.
On July 1, 2017, the Company completed the acquisition of Citizens Bancshares, Inc. (“Citizens”) and its wholly-owned subsidiary, Citizens Bank, located in Evangeline Parish, Louisiana. The Company acquired 100% of Citizens’ outstanding common shares for an aggregate amount of cash consideration equal to $45.8 million, or approximately $419.20 per share. The acquisition of Citizens expanded the Company’s branch footprint in Louisiana and increased the core deposit base to help position the Company to continue to grow. There were certain adjustments to the initial calculation of goodwill during the open measurement period in 2018 which were not material. As consideration paid was in excess of the net fair value of acquired assets, the Company recorded $9.1 million of goodwill.
The table below shows the allocation of the consideration paid for Citizens’ common equity to the acquired identifiable assets and liabilities assumed and the goodwill generated from the transaction (dollars in thousands).
|
| | | | |
Purchase price: | | |
Cash paid | | $ | 45,800 |
|
| | |
Fair value of assets acquired: | | |
Cash and cash equivalents | | 44,565 |
|
Investment securities | | 69,912 |
|
Loans | | 129,181 |
|
Bank premises and equipment | | 3,307 |
|
Core deposit intangible asset | | 1,462 |
|
Other assets | | 2,223 |
|
Total assets acquired | | 250,650 |
|
| | |
Fair value of liabilities acquired: | | |
Deposits | | 212,228 |
|
Other liabilities | | 1,675 |
|
Total liabilities assumed | | 213,903 |
|
| | |
Fair value of net assets acquired | | 36,747 |
|
Goodwill | | $ | 9,053 |
|
Fair value adjustments to assets acquired and liabilities assumed are generally amortized using the effective yield method over periods consistent with the average life, useful life and/or contractual term of the related assets and liabilities.
The fair value of net assets acquired includes a fair value adjustment to loans as of the acquisition date. The adjustment for the acquired loan portfolio is based on current market interest rates and the Company’s initial evaluation of credit losses identified.
The tables below present information about the loans acquired with deteriorated credit quality from Citizens as of the date of acquisition (dollars in thousands).
|
| | | | |
| | Purchase Credit Impaired |
Contractually required principal | | $ | 5,123 |
|
Non-accretable difference | | (700 | ) |
Cash flows expected to be collected | | 4,423 |
|
Accretable yield | | — |
|
Fair value of acquired loans | | $ | 4,423 |
|
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BOJ Bancshares, Inc.
On December 1, 2017, the Company completed the acquisition of BOJ Bancshares, Inc. (“BOJ”) and its wholly-owned subsidiary, The Highlands Bank, located in East Feliciana Parish, Louisiana. The Company acquired 100% of BOJ’s outstanding common shares for an aggregate merger consideration consisting of $3.95 million in cash, and an aggregate of 799,559 shares of the Company’s common stock, for a total of approximately $22.7 million. As with the Citizens acquisition, the acquisition of BOJ expanded the Company’s branch footprint in Louisiana, allowing us to serve more customers in our surrounding market areas. After fair value adjustments, including total adjustments of $(0.3) million to loans, bank premises and equipment, other assets, and deposits recorded during the open measurement period in 2018, the acquisition added $152.1 million in total assets, $102.4 million in loans, and $125.8 million in deposits. As consideration paid was in excess of the net fair value of acquired assets, the Company recorded $5.7 million of goodwill.
The table below shows the allocation of the consideration paid for BOJ’s common equity to the acquired identifiable assets and liabilities assumed and the goodwill generated from the transaction (dollars in thousands). The fair values listed below, primarily related to loans and deferred tax assets and liabilities, are subject to refinement for up to one year after the closing date of the acquisition as additional information becomes available.
|
| | | | |
Purchase price: | | |
Cash paid | | $ | 3,950 |
|
Stock Issued | | 18,749 |
|
| | |
Fair value of assets acquired: | | |
Cash and cash equivalents | | 26,438 |
|
Investment securities | | 16,194 |
|
Loans | | 102,393 |
|
Bank premises and equipment | | 3,725 |
|
Core deposit intangible asset | | 1,018 |
|
Other assets | | 2,375 |
|
Total assets acquired | | 152,143 |
|
| | |
Fair value of liabilities acquired: | | |
Deposits | | 125,788 |
|
FHLB advances | | 5,956 |
|
Trust preferred | | 2,178 |
|
Other liabilities | | 1,209 |
|
Total liabilities assumed | | 135,131 |
|
| | |
Fair value of net assets acquired | | 17,012 |
|
Goodwill | | $ | 5,687 |
|
Fair value adjustments to assets acquired and liabilities assumed are generally amortized using the effective yield method over periods consistent with the average life, useful life and/or contractual term of the related assets and liabilities.
The fair value of net assets acquired includes a fair value adjustment to loans as of the acquisition date. The adjustment for the acquired loan portfolio is based on current market interest rates, and the Company’s initial evaluation of credit losses identified.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below presents information about the loans acquired with deteriorated credit quality from BOJ as of the date of acquisition (dollars in thousands).
|
| | | | |
| | Purchase Credit Impaired |
Contractually required principal | | $ | 4,557 |
|
Non-accretable difference | | (671 | ) |
Cash flows expected to be collected | | 3,886 |
|
Accretable yield | | — |
|
Fair value of acquired loans | | $ | 3,886 |
|
Supplemental Unaudited Pro Forma Information
The following unaudited supplemental pro forma information is presented to show estimated results assuming Citizens and BOJ were acquired as of January 1, 2017. These unaudited pro forma results are not necessarily indicative of the operating results that the Company would have achieved had it completed the acquisitions as of January 1, 2017 and should not be considered representative of future operating results. The pro forma net income for the three months ended September 30, 2017 excludes the tax-affected amount of $0.7 million of acquisition expenses recorded in noninterest expense by the Company and BOJ. The pro forma net income for the nine months ended September 30, 2017 excludes the tax-affected amount of $1.5 million of acquisition expenses recorded in noninterest expense by the Company, Citizens, and BOJ.
|
| | | | | | | |
| Unaudited Pro Forma for the |
| Three months ended September 30, | | Nine months ended September 30, |
(dollars in thousands) | 2017 | | 2017 |
Interest income | $ | 15,966 |
| | $ | 46,065 |
|
Noninterest income | 1,436 |
| | 4,106 |
|
Net income | 3,001 |
| | 8,206 |
|
For the three months ended September 30, 2018, the acquired companies added approximately $3.3 million, $0.4 million, and $1.1 million to interest income, noninterest income, and net income, respectively. For the nine months ended September 30, 2018, the acquired companies added approximately $10.5 million, $1.2 million, and $2.5 million to interest income, noninterest income, and net income, respectively.
Acquisition Expense
There were no acquisition expenses recorded in the three months ended September 30, 2018. Acquisition related costs of $1.1 million are included in acquisition expenses in the accompanying consolidated statements of income for the nine months ended September 30, 2018. These costs include system conversion and integrating operations charges as well as legal and consulting expenses.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. EARNINGS PER SHARE
The following is a summary of the information used in the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2018 and 2017 (in thousands, except share data).
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Earnings per common share - basic | |
|
| |
|
| |
|
| |
|
|
Net income allocated to common shareholders | | $ | 3,990 |
| | $ | 2,131 |
| | $ | 10,125 |
| | $ | 5,918 |
|
Weighted-average basic shares outstanding | | 9,563,550 |
| | 8,702,559 |
| | 9,545,436 |
| | 8,203,645 |
|
Basic earnings per common share | | $ | 0.42 |
| | $ | 0.24 |
| | $ | 1.06 |
| | $ | 0.72 |
|
| |
|
| |
|
| |
|
| |
|
|
Earnings per common share - diluted | |
|
| |
|
| |
|
| |
|
|
Net income allocated to common shareholders | | $ | 3,990 |
| | $ | 2,131 |
| | $ | 10,126 |
| | $ | 5,918 |
|
Weighted-average basic shares outstanding | | 9,563,550 |
| | 8,702,559 |
| | 9,545,436 |
| | 8,203,645 |
|
Dilutive effect of securities | | 119,330 |
| | 94,958 |
| | 133,503 |
| | 76,350 |
|
Total weighted average diluted shares outstanding | | 9,682,880 |
| | 8,797,517 |
| | 9,678,939 |
| | 8,279,995 |
|
Diluted earnings per common share | | $ | 0.41 |
| | $ | 0.24 |
| | $ | 1.05 |
| | $ | 0.71 |
|
The weighted average shares that have an antidilutive effect in the calculation of diluted earnings per common share and have been excluded from the computations above are shown below.
|
| | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Stock Options | | 31,788 |
| | 36,177 |
| | 24,918 |
| | 28,138 |
|
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities classified as AFS are summarized below as of the dates presented (dollars in thousands).
|
| | | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
September 30, 2018 | | | | |
Obligations of U.S. government agencies and corporations | | $ | 8,098 |
| | $ | 2 |
| | $ | (232 | ) | | $ | 7,868 |
|
Obligations of state and political subdivisions | | 35,060 |
| | 3 |
| | (1,102 | ) | | 33,961 |
|
Corporate bonds | | 16,022 |
| | 22 |
| | (500 | ) | | 15,544 |
|
Residential mortgage-backed securities | | 120,778 |
| | 11 |
| | (3,813 | ) | | 116,976 |
|
Commercial mortgage-backed securities | | 58,485 |
| | 4 |
| | (2,091 | ) | | 56,398 |
|
Total | | $ | 238,443 |
| | $ | 42 |
| | $ | (7,738 | ) | | $ | 230,747 |
|
|
| | | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
December 31, 2017 | | | | |
Obligations of U.S. government agencies and corporations | | $ | 8,241 |
| | $ | 8 |
| | $ | (81 | ) | | $ | 8,168 |
|
Obligations of state and political subdivisions | | 35,572 |
| | 87 |
| | (422 | ) | | 35,237 |
|
Corporate bonds | | 16,428 |
| | 112 |
| | (330 | ) | | 16,210 |
|
Residential mortgage-backed securities | | 110,690 |
| | 58 |
| | (1,270 | ) | | 109,478 |
|
Commercial mortgage-backed securities | | 48,299 |
| | 16 |
| | (686 | ) | | 47,629 |
|
Equity securities | | 847 |
| | 24 |
| | (29 | ) | | 842 |
|
Total | | $ | 220,077 |
| | $ | 305 |
| | $ | (2,818 | ) | | $ | 217,564 |
|
The amortized cost and approximate fair value balances of obligations of U.S. government agencies and corporations at December 31, 2017 reflect reclasses of small business association securities that are collateralized by commercial mortgages and backed by the U.S. government. These securities were included in the commercial mortgage-backed securities category of our investment portfolio at December 31, 2017 to conform with the presentation of balances at September 30, 2018.
Proceeds from sales of investment securities AFS and gross gains and losses are summarized below for the periods presented (dollars in thousands).
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Proceeds from sale | | $ | 7,021 |
| | $ | 63,488 |
| | $ | 7,021 |
| | $ | 82,537 |
|
Gross gains | | $ | 35 |
| | $ | 27 |
| | $ | 35 |
| | $ | 275 |
|
Gross losses | | $ | (20 | ) | | $ | — |
| | $ | (20 | ) | | $ | (33 | ) |
The amortized cost and approximate fair value of investment securities classified as HTM are summarized below as of the dates presented (dollars in thousands).
|
| | | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
September 30, 2018 | | | | |
Obligations of state and political subdivisions | | $ | 11,531 |
| | $ | — |
| | $ | (109 | ) | | $ | 11,422 |
|
Residential mortgage-backed securities | | 5,499 |
| | — |
| | (230 | ) | | 5,269 |
|
Total | | $ | 17,030 |
| | $ | — |
| | $ | (339 | ) | | $ | 16,691 |
|
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
December 31, 2017 | | | | |
Obligations of state and political subdivisions | | $ | 11,861 |
| | $ | 9 |
| | $ | (15 | ) | | $ | 11,855 |
|
Residential mortgage-backed securities | | 6,136 |
| | 4 |
| | (48 | ) | | 6,092 |
|
Total | | $ | 17,997 |
| | $ | 13 |
| | $ | (63 | ) | | $ | 17,947 |
|
Securities are classified in the consolidated balance sheets according to management’s intent. The Company had no securities classified as trading as of September 30, 2018 or December 31, 2017.
The aggregate fair values and aggregate unrealized losses on securities whose fair values are below book values are summarized in the tables below. Unrealized losses are generally due to changes in interest rates. The Company has the intent to hold these securities either until maturity or a forecasted recovery, and it is more likely than not that the Company will not have to sell the securities before the recovery of their cost basis. Due to the nature of the investment, current market prices, and a rising interest rate environment, these unrealized losses are considered a temporary impairment of the securities.
The number of AFS securities, fair value, and unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized below as of the dates presented (dollars in thousands).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Less than 12 Months | | 12 Months or More | | Total |
| | Count | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
September 30, 2018 | | | | | | | |
Obligations of U.S. government agencies and corporations | | 18 |
| | $ | 3,857 |
| | $ | (80 | ) | | $ | 3,873 |
| | $ | (152 | ) | | $ | 7,730 |
| | $ | (232 | ) |
Obligations of state and political subdivisions | | 66 |
| | 20,855 |
| | (529 | ) | | 12,986 |
| | (573 | ) | | 33,841 |
| | (1,102 | ) |
Corporate bonds | | 29 |
| | 7,561 |
| | (63 | ) | | 5,811 |
| | (437 | ) | | 13,372 |
| | (500 | ) |
Residential mortgage-backed securities | | 209 |
| | 49,705 |
| | (1,102 | ) | | 65,629 |
| | (2,711 | ) | | 115,334 |
| | (3,813 | ) |
Commercial mortgage-backed securities | | 112 |
| | 23,255 |
| | (540 | ) | | 32,317 |
| | (1,551 | ) | | 55,572 |
| | (2,091 | ) |
Total | | 434 |
| | $ | 105,233 |
| | $ | (2,314 | ) | | $ | 120,616 |
| | $ | (5,424 | ) | | $ | 225,849 |
| | $ | (7,738 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Less than 12 Months | | 12 Months or More | | Total |
| | Count | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
December 31, 2017 | | | | | | | |
Obligations of U.S. government agencies and corporations | | 14 |
| | $ | 5,815 |
| | $ | (50 | ) | | $ | 1,505 |
| | $ | (31 | ) | | $ | 7,320 |
| | $ | (81 | ) |
Obligations of state and political subdivisions | | 57 |
| | 12,315 |
| | (77 | ) | | 9,930 |
| | (345 | ) | | 22,245 |
| | (422 | ) |
Corporate bonds | | 20 |
| | 1,116 |
| | (6 | ) | | 6,273 |
| | (324 | ) | | 7,389 |
| | (330 | ) |
Residential mortgage-backed securities | | 159 |
| | 71,893 |
| | (729 | ) | | 28,410 |
| | (541 | ) | | 100,303 |
| | (1,270 | ) |
Commercial mortgage-backed securities | | 80 |
| | 30,445 |
| | (406 | ) | | 11,216 |
| | (280 | ) | | 41,661 |
| | (686 | ) |
Equity securities | | 1 |
| | — |
| | — |
| | 478 |
| | (29 | ) | | 478 |
| | (29 | ) |
Total | | 331 |
| | $ | 121,584 |
| | $ | (1,268 | ) | | $ | 57,812 |
| | $ | (1,550 | ) | | $ | 179,396 |
| | $ | (2,818 | ) |
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The number of HTM securities, fair value, and unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized below as of the dates presented (dollars in thousands).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Less than 12 Months | | 12 Months or More | | Total |
| | Count | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
September 30, 2018 | | | | | | | |
Obligations of state and political subdivisions | | 8 |
| | $ | 11,422 |
| | $ | (109 | ) | | $ | — |
| | $ | — |
| | $ | 11,422 |
| | $ | (109 | ) |
Residential mortgage-backed securities | | 9 |
| | 3,018 |
| | (106 | ) | | 2,251 |
| | (124 | ) | | 5,269 |
| | (230 | ) |
Total | | 17 |
| | $ | 14,440 |
| | $ | (215 | ) | | $ | 2,251 |
| | $ | (124 | ) | | $ | 16,691 |
| | $ | (339 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Less than 12 Months | | 12 Months or More | | Total |
| | Count | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
December 31, 2017 | | | | | | | |
Obligations of state and political subdivisions | | 1 |
| | $ | 6,007 |
| | $ | (15 | ) | | $ | — |
| | $ | — |
| | $ | 6,007 |
| | $ | (15 | ) |
Residential mortgage-backed securities | | 6 |
| | 1,601 |
| | (3 | ) | | 2,522 |
| | (45 | ) | | 4,123 |
| | (48 | ) |
Total | | 7 |
| | $ | 7,608 |
| | $ | (18 | ) | | $ | 2,522 |
| | $ | (45 | ) | | $ | 10,130 |
| | $ | (63 | ) |
The unrealized losses in the Company’s investment portfolio, caused by interest rate increases, are not credit issues and the Company does not intend to sell the securities. Furthermore, it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2018 or December 31, 2017.
The amortized cost and approximate fair value of debt securities, by contractual maturity (including mortgage-backed securities), are shown below as of the dates presented (dollars in thousands). Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
| | | | | | | | | | | | | | | | |
| | Securities Available For Sale | | Securities Held To Maturity |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
September 30, 2018 | | | | |
Due within one year | | $ | 4,105 |
| | $ | 4,095 |
| | $ | 720 |
| | $ | 720 |
|
Due after one year through five years | | 10,492 |
| | 10,326 |
| | 3,245 |
| | 3,244 |
|
Due after five years through ten years | | 33,767 |
| | 32,690 |
| | 1,875 |
| | 1,874 |
|
Due after ten years | | 190,079 |
| | 183,636 |
| | 11,190 |
| | 10,853 |
|
Total debt securities | | $ | 238,443 |
| | $ | 230,747 |
| | $ | 17,030 |
| | $ | 16,691 |
|
|
| | | | | | | | | | | | | | | | |
| | Securities Available For Sale | | Securities Held To Maturity |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
December 31, 2017 | | | | |
Due within one year | | $ | 1,319 |
| | $ | 1,319 |
| | $ | 720 |
| | $ | 721 |
|
Due after one year through five years | | 15,379 |
| | 15,331 |
| | 3,245 |
| | 3,249 |
|
Due after five years through ten years | | 28,242 |
| | 27,833 |
| | 1,875 |
| | 1,878 |
|
Due after ten years | | 174,290 |
| | 172,239 |
| | 12,157 |
| | 12,099 |
|
Total debt securities | | $ | 219,230 |
| | $ | 216,722 |
| | $ | 17,997 |
| | $ | 17,947 |
|
At September 30, 2018, securities with a carrying value of $90.4 million were pledged to secure certain deposits, borrowings, and other liabilities, compared to $90.8 million in pledged securities at December 31, 2017.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company’s loan portfolio consists of the following categories of loans as of the dates presented (dollars in thousands).
|
| | | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
Construction and development | | $ | 160,921 |
| | $ | 157,667 |
|
1-4 Family | | 286,976 |
| | 276,922 |
|
Multifamily | | 50,770 |
| | 51,283 |
|
Farmland | | 20,902 |
| | 23,838 |
|
Commercial real estate | | 592,996 |
| | 537,364 |
|
Total mortgage loans on real estate | | 1,112,565 |
| | 1,047,074 |
|
Commercial and industrial | | 193,563 |
| | 135,392 |
|
Consumer | | 52,284 |
| | 76,313 |
|
Total loans | | $ | 1,358,412 |
| | $ | 1,258,779 |
|
Unamortized premiums and discounts on loans, included in the total loans balances above, were $1.6 million and $2.6 million at September 30, 2018 and December 31, 2017, respectively.
Nonaccrual and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regard to our collateral position. Regulatory provisions would typically require the placement of a loan on nonaccrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on nonaccrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.
The table below provides an analysis of the aging of loans as of the dates presented (dollars in thousands).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2018 |
| | Accruing | | | | | | | | |
| | Current | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Nonaccrual | | Total Past Due & Nonaccrual | | Acquired Impaired Loans | | Total Loans |
Construction and development | | $ | 160,161 |
| | $ | 39 |
| | $ | — |
| | $ | — |
| | $ | 705 |
| | $ | 744 |
| | $ | 16 |
| | $ | 160,921 |
|
1-4 Family | | 283,910 |
| | 839 |
| | 264 |
| | — |
| | 1,438 |
| | 2,541 |
| | 525 |
| | 286,976 |
|
Multifamily | | 50,770 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 50,770 |
|
Farmland | | 18,638 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,264 |
| | 20,902 |
|
Commercial real estate | | 589,990 |
| | 131 |
| | — |
| | 67 |
| | 766 |
| | 964 |
| | 2,042 |
| | 592,996 |
|
Total mortgage loans on real estate | | 1,103,469 |
| | 1,009 |
| | 264 |
| | 67 |
| | 2,909 |
| | 4,249 |
| | 4,847 |
| | 1,112,565 |
|
Commercial and industrial | | 192,093 |
| | 194 |
| | 6 |
| | — |
| | 66 |
| | 266 |
| | 1,204 |
| | 193,563 |
|
Consumer | | 50,815 |
| | 379 |
| | 63 |
| | — |
| | 982 |
| | 1,424 |
| | 45 |
| | 52,284 |
|
Total loans | | $ | 1,346,377 |
| | $ | 1,582 |
| | $ | 333 |
| | $ | 67 |
| | $ | 3,957 |
| | $ | 5,939 |
| | $ | 6,096 |
| | $ | 1,358,412 |
|
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Accruing | | | | | | | | |
| | Current | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Nonaccrual | | Total Past Due & Nonaccrual | | Acquired Impaired Loans | | Total Loans |
Construction and development | | $ | 157,123 |
| |