Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_____________________________________
 
FORM 10-Q
_____________________________________
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12894082&doc=12 
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.)
10500 Coursey Boulevard, 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 every Interactive Data File required to be submitted 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 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.
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





Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $1.00 par value per share
ISTR
The Nasdaq Global Market
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, 10,031,690 shares outstanding as of May 7, 2019.




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INVESTAR HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
 
 
March 31, 2019
 
December 31, 2018
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Cash and due from banks
 
$
22,535

 
$
15,922

Interest-bearing balances due from other banks
 
47,506

 
1,212

Federal funds sold
 
2,362

 
6

Cash and cash equivalents
 
72,403

 
17,140

 
 
 
 
 
Available for sale securities at fair value (amortized cost of $265,981 and $253,504, respectively)
 
264,257

 
248,981

Held to maturity securities at amortized cost (estimated fair value of $15,727 and $15,805, respectively)
 
15,816

 
16,066

Loans, net of allowance for loan losses of $9,642 and $9,454, respectively
 
1,485,277

 
1,391,371

Equity securities
 
14,392

 
13,562

Bank premises and equipment, net of accumulated depreciation of $10,513 and $9,898, respectively
 
45,717

 
40,229

Other real estate owned, net
 
1,748

 
3,611

Accrued interest receivable
 
6,377

 
5,553

Deferred tax asset
 
38

 
1,145

Goodwill and other intangible assets, net
 
27,143

 
19,787

Bank owned life insurance
 
24,011

 
23,859

Other assets
 
4,715

 
5,165

Total assets
 
$
1,961,894

 
$
1,786,469

 
 
 
 
 
LIABILITIES
 
 

 
 

Deposits:
 
 

 
 

Noninterest-bearing
 
$
285,811

 
$
217,457

Interest-bearing
 
1,246,982

 
1,144,274

Total deposits
 
1,532,793

 
1,361,731

Advances from Federal Home Loan Bank
 
185,093

 
206,490

Repurchase agreements
 
2,218

 
1,999

Subordinated debt, net of unamortized issuance costs
 
18,227

 
18,215

Junior subordinated debt
 
5,858

 
5,845

Accrued taxes and other liabilities
 
14,691

 
9,927

Total liabilities
 
1,758,880

 
1,604,207

 
 
 
 
 
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; 10,129,993 and 9,484,219 shares issued and outstanding, respectively
 
10,130

 
9,484

Surplus
 
144,813

 
130,133

Retained earnings
 
49,104

 
45,721

Accumulated other comprehensive loss
 
(1,033
)
 
(3,076
)
Total stockholders’ equity
 
203,014

 
182,262

Total liabilities and stockholders’ equity
 
$
1,961,894

 
$
1,786,469

See accompanying notes to the consolidated financial statements.

4



INVESTAR HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share data)
(Unaudited)
 
 
Three months ended March 31,
 
 
2019
 
2018
INTEREST INCOME
 
 
 
 
Interest and fees on loans
 
$
18,544

 
$
15,626

Interest on investment securities
 
1,926

 
1,459

Other interest income
 
216

 
93

Total interest income
 
20,686

 
17,178

 
 
 
 
 
INTEREST EXPENSE
 
 

 
 

Interest on deposits
 
4,106

 
2,253

Interest on borrowings
 
1,424

 
1,067

Total interest expense
 
5,530

 
3,320

Net interest income
 
15,156

 
13,858

 
 
 
 
 
Provision for loan losses
 
265

 
625

Net interest income after provision for loan losses
 
14,891

 
13,233

 
 
 
 
 
NONINTEREST INCOME
 
 

 
 

Service charges on deposit accounts
 
400

 
359

Gain on sale of investment securities, net
 
2

 

Gain on sale of fixed assets, net
 

 
90

Gain on sale of other real estate owned, net
 
5

 

Servicing fees and fee income on serviced loans
 
180

 
288

Interchange fees
 
240

 
191

Income from bank owned life insurance
 
152

 
151

Change in the fair value of equity securities
 
172

 

Other operating income (loss)
 
130

 
(7
)
Total noninterest income
 
1,281

 
1,072

Income before noninterest expense
 
16,172

 
14,305

 
 
 
 
 
NONINTEREST EXPENSE
 
 

 
 

Depreciation and amortization
 
764

 
598

Salaries and employee benefits
 
6,415

 
6,048

Occupancy
 
414

 
380

Data processing
 
536

 
542

Marketing
 
51

 
38

Professional fees
 
305

 
255

Acquisition expense
 
905

 
1,104

Other operating expenses
 
1,913

 
1,597

Total noninterest expense
 
11,303

 
10,562

Income before income tax expense
 
4,869

 
3,743

Income tax expense
 
952

 
1,341

Net income
 
$
3,917

 
$
2,402

 
 
 
 
 
EARNINGS PER SHARE
 
 

 
 

Basic earnings per share
 
$
0.40

 
$
0.25

Diluted earnings per share
 
0.40

 
0.25

Cash dividends declared per common share
 
0.05

 
0.04

See accompanying notes to the consolidated financial statements.

5



INVESTAR HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
 
 
Three months ended March 31,
 
 
2019
 
2018
Net income
 
$
3,917

 
$
2,402

Other comprehensive income (loss):
 
 

 
 

Unrealized gain (loss) on investment securities:
 
 

 
 

Unrealized gain (loss), available for sale, net of tax expense (benefit) of $588 and ($475), respectively
 
2,212

 
(1,789
)
Reclassification of realized gain, net of tax expense of $0 for all respective periods
 
(2
)
 

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 ($44) and $70, respectively
 
(167
)
 
265

Total other comprehensive income (loss)
 
2,043

 
(1,524
)
Total comprehensive income
 
$
5,960

 
$
878

See accompanying notes to the consolidated financial statements.


6



INVESTAR HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in thousands, except share data)
(Unaudited)
 
 
 
Common
Stock
 
Surplus
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
Balance, December 31, 2017
 
$
9,515

 
$
131,582

 
$
33,203

 
$
(1,571
)
 
$
172,729

Surrendered shares
 
(7
)
 
(132
)
 

 

 
(139
)
Shares repurchased
 
(28
)
 
(646
)
 
 
 
 
 
(674
)
Options and warrants exercised
 
13

 
159

 

 

 
172

Dividends declared, $0.04 per share
 

 

 
(328
)
 

 
(328
)
Stock-based compensation and other activity
 
24

 
216

 

 

 
240

Reclassification of tax effects of the Tax Cuts and Jobs Act(1)
 

 

 
557

 

 
557

Net income
 

 

 
2,402

 

 
2,402

Other comprehensive loss, net
 

 

 

 
(1,524
)
 
(1,524
)
Impact of adoption of new accounting standards(2)
 

 

 
(5
)
 

 
(5
)
Balance, March 31, 2018
 
$
9,517

 
$
131,179

 
$
35,829

 
$
(3,095
)
 
$
173,430

 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
$
9,484

 
$
130,133

 
$
45,721

 
$
(3,076
)
 
$
182,262

Common stock issued in acquisition
 
764

 
17,873

 
 
 
 
 
18,637

Surrendered shares
 
(9
)
 
(223
)
 

 

 
(232
)
Dividends declared, $0.05 per share
 

 

 
(534
)
 

 
(534
)
Stock-based compensation
 
35

 
254

 

 

 
289

Shares repurchased
 
(144
)
 
(3,224
)
 

 

 
(3,368
)
Net income
 

 

 
3,917

 

 
3,917

Other comprehensive income, net
 

 

 

 
2,043

 
2,043

Balance, March 31, 2019
 
$
10,130

 
$
144,813

 
$
49,104

 
$
(1,033
)
 
$
203,014


(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 March 31, 2018 represents a reclassification of the tax effects of the Tax Cuts and Jobs Act.
(2) 
Represents the impact of adopting Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments - Overall (Topic 825), which requires equity investments, other than equity method investments, to be measured at fair value with changes in fair value recognized in net income. Upon adoption on January 1, 2018, the ASU required a cumulative-effect adjustment to retained earnings to reclassify the cumulative change in the fair value of equity securities previously recognized in accumulated other comprehensive income.
See accompanying notes to the consolidated financial statements.


7



INVESTAR HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited) 
 
 
Three months ended March 31,
 
 
2019
 
2018
Net income
 
$
3,917

 
$
2,402

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
764

 
598

Provision for loan losses
 
265

 
625

Amortization of purchase accounting adjustments
 
(393
)
 
(714
)
Net amortization of securities
 
(28
)
 
196

Gain on sale of investment securities, net
 
(2
)
 

Gain on sale of fixed assets, net
 

 
(90
)
Gain on sale of other real estate owned, net
 
(5
)
 

FHLB stock dividend
 
(85
)
 
(45
)
Stock-based compensation
 
289

 
240

Deferred taxes
 
289

 
922

Net change in value of bank owned life insurance
 
(152
)
 
(151
)
Amortization of subordinated debt issuance costs
 
12

 
12

Change in the fair value of equity securities
 
(172
)
 
17

Net change in:
 
 
 
 
Accrued interest receivable
 
(578
)
 
(20
)
Other assets
 
281

 
441

Accrued taxes and other liabilities
 
1,464

 
(414
)
Net cash provided by operating activities
 
5,866

 
4,019

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from sales of investment securities available for sale
 
393

 

Purchases of securities available for sale
 
(22,331
)
 
(22,739
)
Proceeds from maturities, prepayments and calls of investment securities available for sale
 
9,499

 
5,560

Proceeds from maturities, prepayments and calls of investment securities held to maturity
 
240

 
259

Purchase of equity securities
 

 
(905
)
Net increase in loans
 
(11,345
)
 
(14,413
)
Proceeds from sales of other real estate owned
 
3,275

 

Purchases of other real estate owned
 

 
(225
)
Purchases of fixed assets
 
(2,425
)
 
(1,089
)
Distributions from investments
 
8

 
6

Cash acquired from acquisition of Mainland Bank
 
38,365

 

Net cash provided by (used in) investing activities
 
15,679

 
(33,546
)

8



INVESTAR HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Amounts in thousands)
(Unaudited)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Net increase in customer deposits
 
63,432

 
1,495

Net decrease in repurchase agreements
 
(4,465
)
 
(882
)
Net decrease in short-term FHLB advances
 
(21,400
)
 
(8,500
)
Proceeds from long-term FHLB advances
 

 
45,000

Repayment of long-term FHLB advances
 

 
(16,100
)
Cash dividends paid on common stock
 
(481
)
 
(303
)
Proceeds from stock options and warrants exercised
 

 
172

Payments to repurchase common stock
 
(3,368
)
 
(674
)
Net cash provided by financing activities
 
33,718

 
20,208

 
 
 
 
 
Net change in cash and cash equivalents
 
55,263

 
(9,319
)
Cash and cash equivalents, beginning of period
 
17,140

 
30,421

Cash and cash equivalents, end of period
 
$
72,403

 
$
21,102

See accompanying notes to the consolidated financial statements.

9

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 month period ended March 31, 2019 is 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, 2018, 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 15, 2019.
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 markets are southeast Louisiana and southeast Texas. At March 31, 2019, the Company operated 21 full service branches located in Louisiana and 3 full service branches located in Texas, and had 280 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.

10

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.

11

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 accrued taxes and other liabilities in the consolidated balance sheet. At March 31, 2019 and December 31, 2018 the reserve for unfunded loan commitments was $85,000 and $66,000, 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.

12

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 three months ended March 31, 2019 and 2018, 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 three months ended March 31, 2019 or 2018.
Reclassifications
Certain reclassifications have been made to the 2018 financial statements to be consistent with the 2019 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 southeast 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 provided a measurement period of up to one year from the enactment date to complete the accounting. Any adjustments during the measurement period were included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments were determined. Based on the information available and 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 in the fourth quarter of 2017. An additional $0.6 million was expensed in the first quarter of 2018 due to the remeasurement of the Company’s deferred tax balance, resulting in an effective tax rate of 35.8% for the quarter ended March 31, 2018. No additional adjustments were recorded during the measurement period, which ended December 31, 2018.
Accounting Standards Adopted in 2019
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), which expands the scope of Topic 718 to include share-based payments issued to nonemployees for goods or services and supersedes Subtopic 505-50, “Equity – Equity-Based Payments to Non-Employees.” The Company adopted ASU 2018-07 on January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.

13

INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which 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 was adopted on January 1, 2019, and, given the current level of derivatives designated as hedges, did not have a material impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. 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. The Company adopted ASU 2017-08 on January 1, 2019. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU intends to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities and disclosing key information about leasing arrangements. The ASU requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessees’ obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) may apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may also elect to apply the amendments in the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company adopted the ASU on January 1, 2019, using the modified retrospective approach, and recognized a right-of-use asset and related lease liability of $1.2 million. The Company historically has owned all property and equipment and had entered an operating lease for a future branch location on December 31, 2018. Therefore, the adoption of this ASU did not have a significant impact on the Company’s 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.

14

INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 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 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 ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for the Company on January 1, 2020. We are currently evaluating the potential impact of ASU 2016-13 on our financial statements. In that regard, we have formed a cross-functional working group, under the direction of our Chief Financial Officer and our Chief Risk Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology. We have developed an implementation plan to include assessment of processes, portfolio segmentation, model development, system requirements and the identification of data and resource needs, among other things. We have also selected a third-party vendor solution to assist us in the application of ASU 2016-13. The adoption of ASU 2016-13 is likely to result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses on debt securities. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as the prevailing economic conditions and forecasts, as of the adoption date.


15

INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2. BUSINESS COMBINATIONS
Mainland Bank
On March 1, 2019, the Company completed the acquisition of Mainland Bank (“Mainland”) located in Texas City, Texas. The Company acquired 100% of Mainland’s outstanding common shares for an aggregate merger consideration of 763,849 shares of the Company’s common stock, for a total of approximately $18.6 million. The acquisition of Mainland expanded the Company’s branch footprint into the greater Houston, Texas market. After fair value adjustments, the acquisition added $128.4 million in total assets, $82.4 million in loans, and $107.6 million in deposits. As consideration paid was in excess of the net fair value of acquired assets, the Company recorded $5.1 million of goodwill. Goodwill resulted from a combination of synergies and cost savings, expansion into Texas with the addition of three branch locations, enhanced products and services, and a lower cost of funds. The change in goodwill and other intangibles at March 31, 2019 compared to December 31, 2018 is primarily attributable to the goodwill and core deposit intangible recorded as a result of the Mainland acquisition.
The table below shows the allocation of the consideration paid for Mainland’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:
 
 
Stock issued
 
$
18,637

 
 
 
Fair value of assets acquired:
 
 
Cash and cash equivalents
 
38,365

Loans
 
82,431

Other real estate owned
 
1,408

Bank premises and equipment
 
2,550

Core deposit intangible asset
 
2,439

Other assets
 
1,210

Total assets acquired
 
128,403

 
 
 
Fair value of liabilities acquired:
 
 
Deposits
 
107,646

Repurchase agreements
 
4,684

Other liabilities
 
2,501

Total liabilities assumed
 
114,831

 
 
 
Fair value of net assets acquired
 
13,572

Goodwill
 
$
5,065

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. No loans acquired from Mainland were considered to be purchased credit impaired loans. The contractually required principal and interest payments of the loans acquired from Mainland is $91.9 million, of which $1.3 million is not expected to be collected.

16

INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Supplemental Unaudited Pro Forma Information
The following unaudited supplemental pro forma information is presented to show estimated results assuming Mainland was acquired as of January 1, 2018. These unaudited pro forma results are not necessarily indicative of the operating results that the Company would have achieved had it completed the acquisition as of January 1, 2018 and should not be considered representative of future operating results. The pro forma net income for the three months ended March 31, 2019 excludes the tax-affected amount of $1.6 million of acquisition expenses recorded in noninterest expense by the Company and Mainland.
 
Unaudited pro forma for the
 
three months ended March 31,
(dollars in thousands)
2019
 
2018
Interest income
$
21,628

 
$
18,604

Noninterest income
1,428

 
1,150

Net income
3,875

 
2,710

For the three months ended March 31, 2019, Mainland added approximately $0.6 million, $20,000, and $0.3 million to interest income, noninterest income, and net income, respectively.
Acquisition Expense
Acquisition related costs of $0.9 million are included in acquisition expenses in the accompanying consolidated statements of income for the three months ended March 31, 2019. These costs include system conversion and integrating operations charges as well as legal and consulting expenses.
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 months ended March 31, 2019 and 2018 (in thousands, except share data).
 
 
 
Three months ended March 31,
 
 
2019
 
2018
Earnings per common share - basic
 


 


Net income allocated to common shareholders
 
$
3,871

 
$
2,370

Weighted-average basic shares outstanding
 
9,675,381

 
9,513,332

Basic earnings per common share
 
$
0.40

 
$
0.25


 


 


Earnings per common share - diluted
 


 


Net income allocated to common shareholders
 
$
3,871

 
$
2,370

Weighted-average basic shares outstanding
 
9,675,381

 
9,513,332

Dilutive effect of securities
 
95,371

 
96,271

Total weighted average diluted shares outstanding
 
9,770,752

 
9,609,603

Diluted earnings per common share
 
$
0.40

 
$
0.25

 
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 March 31,
 
 
2019
 
2018
Stock options
 

 
8,891

Restricted stock awards
 
55

 
32,223

Restricted stock units
 
44,467

 


17

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
March 31, 2019
 
 
 
 
Obligations of U.S. government agencies and corporations
 
$
7,305

 
$
27

 
$
(72
)
 
$
7,260

Obligations of state and political subdivisions
 
31,756

 
123

 
(369
)
 
31,510

Corporate bonds
 
18,755

 
80

 
(483
)
 
18,352

Residential mortgage-backed securities
 
147,104

 
757

 
(1,106
)
 
146,755

Commercial mortgage-backed securities
 
61,061

 
206

 
(887
)
 
60,380

Total
 
$
265,981

 
$
1,193

 
$
(2,917
)
 
$
264,257

 
 
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
December 31, 2018
 
 
 
 
Obligations of U.S. government agencies and corporations
 
$
7,946

 
$
14

 
$
(90
)
 
$
7,870

Obligations of state and political subdivisions
 
34,875

 
6

 
(895
)
 
33,986

Corporate bonds
 
16,166

 
53

 
(710
)
 
15,509

Residential mortgage-backed securities
 
136,768

 
336

 
(2,177
)
 
134,927

Commercial mortgage-backed securities
 
57,749

 
108

 
(1,168
)
 
56,689

Total
 
$
253,504

 
$
517

 
$
(5,040
)
 
$
248,981


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 March 31,
 
 
2019
 
2018
Proceeds from sale
 
$
393

 
$

Gross gains
 
$
2

 
$

Gross losses
 
$

 
$


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
March 31, 2019
 
 
 
 
Obligations of state and political subdivisions
 
$
10,586

 
$
5

 
$
(33
)
 
$
10,558

Residential mortgage-backed securities
 
5,230

 

 
(61
)
 
5,169

Total
 
$
15,816

 
$
5

 
$
(94
)
 
$
15,727

 
 
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
December 31, 2018
 
 
 
 
Obligations of state and political subdivisions
 
$
10,699

 
$
2

 
$
(111
)
 
$
10,590

Residential mortgage-backed securities
 
5,367

 

 
(152
)
 
5,215

Total
 
$
16,066

 
$
2

 
$
(263
)
 
$
15,805

 
Securities are classified in the consolidated balance sheets according to management’s intent. The Company had no securities classified as trading as of March 31, 2019 or December 31, 2018.

18

INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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
March 31, 2019
 
 
 
 
 
 
 
Obligations of U.S. government agencies and corporations
 
11

 
$

 
$

 
$
4,497

 
$
(72
)
 
$
4,497

 
$
(72
)
Obligations of state and political subdivisions
 
39

 
5,379

 
(33
)
 
15,497

 
(336
)
 
20,876

 
(369
)
Corporate bonds
 
26

 
5,209

 
(118
)
 
7,220

 
(365
)
 
12,429

 
(483
)
Residential mortgage-backed securities
 
165

 
4,020

 
(5
)
 
82,591

 
(1,101
)
 
86,611

 
(1,106
)
Commercial mortgage-backed securities
 
91

 
3,188

 
(20
)
 
39,084

 
(867
)
 
42,272

 
(887
)
Total
 
332

 
$
17,796

 
$
(176
)
 
$
148,889

 
$
(2,741
)
 
$
166,685

 
$
(2,917
)
 
 
 
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Count
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
December 31, 2018
 
 
 
 
 
 
 
Obligations of U.S. government agencies and corporations
 
15

 
$
469

 
$

 
$
5,304

 
$
(90
)
 
$
5,773

 
$
(90
)
Obligations of state and political subdivisions
 
63

 
13,716

 
(330
)
 
19,270

 
(565
)
 
32,986

 
(895
)
Corporate bonds
 
27

 
6,793

 
(225
)
 
5,763

 
(485
)
 
12,556

 
(710
)
Residential mortgage-backed securities
 
193

 
24,868

 
(245
)
 
79,517

 
(1,932
)
 
104,385

 
(2,177
)
Commercial mortgage-backed securities
 
94

 
5,156

 
(42
)
 
39,560

 
(1,126
)
 
44,716

 
(1,168
)
Total
 
392

 
$
51,002

 
$
(842
)
 
$
149,414

 
$
(4,198
)
 
$
200,416

 
$
(5,040
)
 
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
March 31, 2019
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
1

 
$

 
$

 
$
5,433

 
$
(33
)
 
$
5,433

 
$
(33
)
Residential mortgage-backed securities
 
9

 

 

 
5,169

 
(61
)
 
5,169

 
(61
)
Total
 
10

 
$

 
$

 
$
10,602

 
$
(94
)
 
$
10,602

 
$
(94
)

 
 
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Count
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
December 31, 2018
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
1

 
$

 
$

 
$
5,468

 
$
(111
)
 
$
5,468

 
$
(111
)
Residential mortgage-backed securities
 
9

 
1,761

 
(35
)
 
3,454

 
(117
)
 
5,215

 
(152
)
Total
 
10

 
$
1,761

 
$
(35
)
 
$
8,922

 
$
(228
)
 
$
10,683

 
$
(263
)

19

INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
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 March 31, 2019 or December 31, 2018.
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
March 31, 2019
 
 
 
 
Due within one year
 
$
3,314

 
$
3,312

 
$
755

 
$
756

Due after one year through five years
 
11,910

 
11,895

 
3,405

 
3,408

Due after five years through ten years
 
52,277

 
51,713

 
960

 
961

Due after ten years
 
198,480

 
197,337

 
10,696

 
10,602

Total debt securities
 
$
265,981

 
$
264,257

 
$
15,816

 
$
15,727


 
 
Securities Available For Sale
 
Securities Held To Maturity
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
December 31, 2018
 
 
 
 
Due within one year
 
$
3,734

 
$
3,730

 
$
755

 
$
755

Due after one year through five years
 
10,681

 
10,600

 
3,405

 
3,406

Due after five years through ten years
 
44,255

 
43,460

 
960

 
961

Due after ten years
 
194,834

 
191,191

 
10,946

 
10,683

Total debt securities
 
$
253,504

 
$
248,981

 
$
16,066

 
$
15,805

At March 31, 2019, securities with a carrying value of $95.3 million were pledged to secure certain deposits, borrowings, and other liabilities, compared to $77.6 million in pledged securities at December 31, 2018.
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).
 
 
March 31, 2019
 
December 31, 2018
Construction and development
 
$
171,483

 
$
157,946

1-4 Family
 
299,061

 
287,137

Multifamily
 
57,487

 
50,501

Farmland
 
24,457

 
21,356

Commercial real estate
 
646,745

 
627,004

Total mortgage loans on real estate
 
1,199,233

 
1,143,944

Commercial and industrial
 
255,476

 
210,924

Consumer
 
40,210

 
45,957

Total loans
 
$
1,494,919

 
$
1,400,825

Unamortized premiums and discounts on loans, included in the total loans balances above, were $2.5 million and $1.4 million at March 31, 2019 and December 31, 2018, respectively.

20

INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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).
 
 
March 31, 2019
 
 
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
 
$
170,870

 
$
154

 
$

 
$

 
$
448

 
$
602

 
$
11

 
$
171,483

1-4 Family
 
296,218

 
1,263

 
10

 

 
1,095

 
2,368

 
475

 
299,061

Multifamily
 
57,378

 

 

 

 
109

 
109

 

 
57,487

Farmland
 
22,193

 

 

 

 

 

 
2,264

 
24,457

Commercial real estate
 
643,889

 

 

 

 
1,291

 
1,291

 
1,565

 
646,745

Total mortgage loans on real estate
 
1,190,548

 
1,417

 
10

 

 
2,943

 
4,370

 
4,315

 
1,199,233

Commercial and industrial
 
253,316

 
871

 
17

 

 
9

 
897

 
1,263

 
255,476

Consumer
 
39,143

 
209

 
31

 

 
784

 
1,024

 
43

 
40,210

Total loans
 
$
1,483,007

 
$
2,497

 
$
58

 
$

 
$
3,736

 
$
6,291

 
$
5,621

 
$
1,494,919

 
 
 
December 31, 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
 
$
157,202

 
$
175

 
$

 
$

 
$
556

 
$
731

 
$
13

 
$
157,946

1-4 Family
 
284,205

 
1,101

 
41

 

 
1,300

 
2,442

 
490

 
287,137

Multifamily
 
50,392

 
109

 

 

 

 
109

 

 
50,501

Farmland
 
19,092

 

 

 

 

 

 
2,264

 
21,356

Commercial real estate
 
624,244

 
66

 

 

 
683

 
749

 
2,011

 
627,004

Total mortgage loans on real estate
 
1,135,135

 
1,451

 
41

 

 
2,539

 
4,031

 
4,778

 
1,143,944

Commercial and industrial
 
209,399

 
221

 
45

 

 
64

 
330

 
1,195

 
210,924

Consumer
 
44,493

 
375

 
51

 

 
994

 
1,420

 
44

 
45,957

Total loans
 
$
1,389,027

 
$
2,047

 
$
137

 
$

 
$
3,597

 
$
5,781

 
$
6,017

 
$
1,400,825


21

INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Portfolio Segment Risk Factors
The following describes the risk characteristics relevant to each of the Company’s loan portfolio segments.
Construction and Development - Construction and development loans are generally made for the purpose of acquisition and development of land to be improved through the construction of commercial and residential buildings. The successful repayment of these types of loans is generally dependent upon a commitment for permanent financing from the Company, or from the sale of the constructed property. These loans carry more risk than commercial or residential real estate loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market, and state and local government regulations. One such risk is that loan funds are advanced upon the security of the property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and to calculate related loan-to-value ratios. The Company attempts to minimize the risks associated with construction lending by limiting loan-to-value ratios as described above. In addition, as to speculative development loans, the Company generally makes such loans only to borrowers that have a positive pre-existing relationship with us. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding excessive concentrations in any one business or industry.
1-4 Family - The 1-4 family portfolio mainly consists of residential mortgage loans to consumers to finance a primary residence. The majority of these loans are secured by properties located in the Company’s market areas and carry risks associated with the creditworthiness of the borrower and changes in the value of the collateral and loan-to-value-ratios. The Company manages these risks through policies and procedures such as limiting loan-to-value ratios at origination, employing experienced underwriting personnel, requiring standards for appraisers, and not making subprime loans.
Multifamily - Multifamily loans are normally made to real estate investors to support permanent financing for multifamily residential income producing properties that rely on the successful operation of the property for repayment. This management mainly involves property maintenance and collection of rents due from tenants. This type of lending carries a lower level of risk, as compared to other commercial lending. In addition, underwriting requirements for multifamily properties are stricter than for other non-owner-occupied property types. The Company manages this risk by avoiding concentrations with any particular customer.
Farmland - Farmland loans are often for land improvements related to agricultural endeavors and may include construction of new specialized facilities. These loans are usually repaid through the conversion to permanent financing, or if scheduled loan amortization begins, for the long-term benefit of the borrower’s ongoing operations. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies.
Commercial Real Estate - Commercial real estate loans are extensions of credit secured by owner occupied and non-owner occupied collateral. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Repayment is commonly derived from the successful ongoing operations of the property. General market conditions and economic activity may impact the performance of these types of loans, including fluctuations in the value of real estate, new job creation trends, and tenant vacancy rates. The Company attempts to limit risk by analyzing a borrower’s cash flow and collateral value on an ongoing basis. The Company also typically requires personal guarantees from the principal owners of the property, supported by a review of their personal financial statements, as an additional means of mitigating our risk. The Company manages risk by avoiding concentrations in any one business or industry.
Commercial and Industrial - Commercial and industrial loans receive similar underwriting treatment as commercial real estate loans in that the repayment source is analyzed to determine its ability to meet cash flow coverage requirements as set forth by Bank policies. Repayment of these loans generally comes from the generation of cash flow as the result of the borrower’s business operations. Commercial lending generally involves different risks from those associated with commercial real estate lending or construction lending. Although commercial loans may be collateralized by equipment or other business assets (including real estate, if available as collateral), the repayment of these types of loans depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors). Thus, the general business conditions of the local economy and the borrower’s ability to sell its products and services, thereby generating sufficient operating revenue to repay us under the agreed upon terms and conditions, are the chief considerations when assessing the risk of a commercial loan. The liquidation of collateral, if any, is considered a secondary source of repayment because equipment and other business assets may, among other things, be obsolete or of limited resale value. The Company actively monitors certain financial measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors.

22

INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Consumer - Consumer loans are offered by the Company in order to provide a full range of retail financial services to its customers and include auto loans, credit cards, and other consumer installment loans. Typically, the Company evaluates the borrower’s repayment ability through a review of credit scores and an evaluation of debt to income ratios. Repayment of consumer loans depends upon key consumer economic measures and upon the borrower’s financial stability, and is more likely to be adversely affected by divorce, job loss, illness and personal hardships than repayment of other loans. A shortfall in the value of any collateral also may pose a risk of loss to the Company for these types of loans. Indirect auto loans comprised the largest component of our consumer loans, representing 64% of our total consumer loans at March 31, 2019. At March 31, 2019, the weighted average remaining term of the indirect auto loan portfolio was 2.6 years. We exited the indirect auto lending business at the end of 2015.
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 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 - 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 - Loans classified 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 - 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.
The table below presents the Company’s loan portfolio by category and credit quality indicator as of the dates presented (dollars in thousands).
 
 
March 31, 2019
 
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Construction and development
 
$
170,907

 
$

 
$
443

 
$
133

 
$
171,483

1-4 Family
 
297,532

 

 
1,457

 
72

 
299,061

Multifamily
 
57,378

 

 
109

 

 
57,487

Farmland
 
22,193

 

 
2,264

 

 
24,457

Commercial real estate
 
645,454

 

 
1,291

 

 
646,745

Total mortgage loans on real estate
 
1,193,464

 

 
5,564

 
205

 
1,199,233

Commercial and industrial
 
252,462

 

 
3,014

 

 
255,476

Consumer
 
39,208

 
218

 
784

 

 
40,210

Total loans
 
$
1,485,134

 
$
218

 
$
9,362

 
$
205

 
$
1,494,919

 

23

INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
 
December 31, 2018
 
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Construction and development
 
$
157,360

 
$

 
$
586

 
$

 
$
157,946

1-4 Family
 
285,692

 
69

 
1,303

 
73

 
287,137

Multifamily
 
50,501

 

 

 

 
50,501

Farmland
 
19,092

 

 
2,264

 

 
21,356

Commercial real estate
 
625,670

 

 
1,334

 

 
627,004

Total mortgage loans on real estate
 
1,138,315

 
69

 
5,487

 
73

 
1,143,944

Commercial and industrial
 
207,941

 

 
2,983

 

 
210,924

Consumer
 
44,798

 
167

 
992

 

 
45,957

Total loans
 
$
1,391,054

 
$
236

 
$
9,462

 
$
73

 
$
1,400,825

 
 
The Company had no loans that were classified as loss at March 31, 2019 or December 31, 2018.
Loan participations and whole loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The balance of loans serviced for others was $128.9 million and $135.4 million as of March 31, 2019 and December 31, 2018, respectively. The unpaid principal balance of these loans was approximately $217.8 million and $187.6 million as of March 31, 2019 and December 31, 2018, respectively.
In the ordinary course of business, the Company makes loans to related parties including its executive officers, principal stockholders, directors and their immediate family members, as well as companies in which these individuals are principal owners. Loans outstanding to such related party borrowers amounted to approximately $92.3 million and $93.0 million as of March 31, 2019 and December 31, 2018, respectively.
The table below shows the aggregate principal balance of loans to such related parties as of the dates presented (dollars in thousands).
 
 
March 31, 2019
 
December 31, 2018
Balance, beginning of period
 
$
93,021

 
$
31,153

New loans
 
1,611

 
79,639

Repayments and changes in relationship
 
(2,349
)
 
(17,771
)
Balance, end of period
 
$
92,283

 
$
93,021

 
Loans Acquired with Deteriorated Credit Quality
The Company accounts for certain loans acquired as acquired impaired loans under 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 acquired impaired loans had no accretable yield recorded for the three months ended March 31, 2019 and 2018.

24

INVESTAR HOLDING CORPORATION