Form 8-K/A Completion of Cheaha Acquisition true 0001602658 0001602658 2021-04-01 2021-04-01
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
 
FORM 8-K/A
___________________
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Date of report (Date of earliest event reported):April 1, 2021
 

 
Investar Holding Corporation
(Exact name of registrant as specified in its charter)
 

 
Louisiana
001-36522
27-1560715
(State or other jurisdiction
of incorporation)
(Commission
File Number)
(I.R.S. Employer
Identification No.)
 
 
 
10500 Coursey Blvd.
Baton Rouge, Louisiana 70816
 
 
(Address of principal executive offices) (Zip Code)
 
 
Registrants telephone number, including area code: (225) 227-2222
 

 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
☐         Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
☐         Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
☐         Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
☐         Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
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
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
 
Emerging growth company ☐
 
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. ☐
 

 
 

 
EXPLANATORY NOTE 
 
This current report on Form 8-K/A is filed as an amendment to the current report on Form 8-K of Investar Holding Corporation (“Investar”) filed with the Securities and Exchange Commission (the “SEC”) on April 1, 2021 (the “Initial Report”) relating to Investar’s acquisition (“Acquisition”) of Cheaha Financial Group, Inc. (“Cheaha”). This current report is filed to provide, and amends the Initial Report to include, financial statements and pro forma financial information for the Acquisition that are described in parts (a) and (b) of Item 9.01 below. Except as otherwise provided in the Form 8-K/A, the Initial Report remains unchanged.
 
Item  9.01. Financial Statements and Exhibits.
 
(a)    Financial statements of businesses acquired.
 
(1)      The audited consolidated financial statements of Cheaha as of December 31, 2020 and for the fiscal year ended December 31, 2020 are filed herewith as Exhibit 99.2 hereto.
 
(2)      The unaudited consolidated financial statements of Cheaha as of and for the three month period ended March 31, 2021 are filed herewith as Exhibit 99.3 hereto.
 
(b)    Pro forma financial information.
 
The unaudited pro forma condensed financial information for Investar as of and for the three month period ended March 31, 2021 and for the year ended December 31, 2020, giving effect to the acquisition of Cheaha, is attached hereto as Exhibit 99.4 and incorporated herein by reference. The unaudited pro forma condensed financial information is presented for informational purposes only and does not purport to represent what Investar’s results of operations for financial position would have been had the transactions reflected occurred on the dates indicated or to project Investar’s financial position as of any future date or Investar’s results of operations for any future period.
 
 
(d) Exhibits
 
     
Exhibit
Number
 
Description of Exhibit
2.1   Agreement and Plan of Reorganization, dated January 21, 2021, by and among Investar Holding Corporation, Cheaha Financial Group, Inc. and High Point Acquisition, Inc. (incorporated by reference to Exhibit 2.1 to Investar Holding Corporation's Current Report on Form 8-K filed on January 25, 2021)*
23.1
  Consent of Warren Averett, LLC.
99.1   Press release dated April 1, 2021 (incorporated by reference to Exhibit 99.1 to Investar Holding Corporation's Current Report on Form 8-K files on April 1, 2021).
99.2   Audited financial statements for Cheaha Financial Group, Inc. as of and for the fiscal year ended December 31, 2020 and the accompanying notes thereto.
99.3   Unaudited consolidated financial statements of Cheaha Financial Group, Inc. as of and for the three months ended March 31, 2021.
99.4   Unaudited pro forma condensed financial information as of and for the three months ended March 31, 2021 and for the year ended December 31, 2020, and the accompanying notes thereto.
104   The cover page of Investar Holding Corporation’s Form 8-K is formatted in Inline XBRL.
 
 
*The registrant has omitted schedules and similar attachments to the subject agreement pursuant to Item 601(a)(5) of Regulation S-K. The registrant will furnish a copy of any omitted schedule or similar attachment to the Commission upon request.
 
 

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
       
   
INVESTAR HOLDING CORPORATION
       
June 10, 2021
 
By:
/s/ John J. D’Angelo
     
John J. D’Angelo
     
President and Chief Executive Officer
 
 
 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We hereby consent to the incorporation by reference in this Form 8-K/A of our report dated April 14, 2021 for Cheaha Financial Group, Inc. as of and for the years ended December 31, 2020 and 2019 relating to the consolidated financial statements.

 

/s/ Warren Averett, LLC

 

Birmingham, Alabama

June 10, 2021

 

 

Exhibit 99.2

 

 

 

 

 

 

 

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

 

CONSOLIDATED FINANCIAL STATEMENTS 

 

DECEMBER 31, 2020 AND 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

TABLE OF CONTENTS

DECEMBER 31, 2020 AND 2019

 


 

INDEPENDENT AUDITORS REPORT

1

   

CONSOLIDATED FINANCIAL STATEMENTS

 
   

Consolidated Statements of Financial Condition

2

   

Consolidated Statements of Income

4

   

Consolidated Statements of Comprehensive Income

6

   

Consolidated Statements of Changes in Stockholders' Equity

7

   

Consolidated Statements of Cash Flows

9

   

Notes to the Consolidated Financial Statements

11

 

 

 

 

B01.JPG

2500 Acton Road

Birmingham, AL 35243

205.979.4100

warrenaverett.com

 

 

 

INDEPENDENT AUDITORS' REPORT

 

 

To the Board of Directors and Stockholders Cheaha Financial Group, Inc.

 

We have audited the accompanying consolidated statements of financial condition of Cheaha Financial Group, Inc. and Subsidiary as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

 

Managements Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cheaha Financial Group, Inc. and Subsidiary as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

 

B02.JPG

 

Birmingham, Alabama

April 14, 2021

 

1

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

DECEMBER 31, 2020 AND 2019

 


 

ASSETS

 

    2020     2019  
                 
CASH AND CASH EQUIVALENTS                
Cash and due from banks   $ 3,711,592     $ 2,628,819  
Interest-bearing deposits with other banks     11,629,227       8,626,288  
                 
Total cash and cash equivalents     15,340,819       11,255,107  
                 
SECURITIES                
Securities available-for-sale     84,786,069       69,266,665  
Securities held-to-maturity, fair values of $15,047 and $696,533 for 2020 and 2019, respectively     15,000       693,920  
Restrictive equity investments     281,500       274,900  
                 
Total securities     85,082,569       70,235,485  
                 

LOANS, NET OF ALLOWANCE FOR LOAN LOSSES

    126,495,471       119,606,290  

MORTGAGE LOANS HELD-FOR-SALE

    184,549        

PREMISES AND EQUIPMENT, NET

    3,914,738       4,046,285  

FORECLOSED REAL ESTATE

     —        

ACCRUED INTEREST RECEIVABLE

    988,043       882,002  

PREPAID EXPENSES

    61,403       34,794  

DEFERRED INCOME TAX ASSET

          370,282  

BANK-OWNED LIFE INSURANCE

    3,002,548       2,920,062  

OTHER ASSETS

    97,735       5,938  
                 

TOTAL ASSETS

  $ 235,167,875     $ 209,356,245  

 

See notes to the consolidated financial statements

 

2

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

DECEMBER 31, 2020 AND 2019

 


 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

   

2020

   

2019

 
DEPOSITS                

Checking

  $ 93,513,890     $ 76,992,193  

Savings

    13,766,563       10,323,927  

Time deposits

    94,409,866       91,486,977  
                 

Total deposits

    201,690,319       178,803,097  
                 

BORROWINGS

    3,093,000       3,093,000  

DEFERRED COMPENSATION AGREEMENTS

    1,025,912       1,055,405  

ACCRUED CHANGE IN CONTROL COMPENSATION

    400,000        

ACCRUED INTEREST PAYABLE

    385,437       550,517  

ADVANCE PAYMENTS FROM BORROWERS FOR TAXES AND INSURANCE

    75,904       77,208  

DEFERRED INCOME TAX LIABILITY

    4,650        

OTHER LIABILITIES

    213,612       191,893  
                 

Total liabilities

    206,888,834       183,771,120  
                 
STOCKHOLDERS' EQUITY                

Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued

           

Common stock, $0.01 par value; 5,000,000 shares authorized; 542,500 shares issued and 513,332 and 513,964 shares outstanding as of December 31, 2020 and 2019, respectively

    5,425       5,425  

Additional paid-in capital

    5,358,478       5,358,478  

Accumulated other comprehensive income

    1,972,758       685,978  

Retained earnings

    21,757,011       20,319,539  

Treasury stock – 29,168 shares and 28,536 shares, at cost, as of December 31, 2020 and 2019, respectively

    (814,631 )     (784,295 )
                 
Total stockholders' equity     28,279,041       25,585,125  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 235,167,875     $ 209,356,245  

 

See notes to the consolidated financial statements

 

3

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

DECEMBER 31, 2020 AND 2019

 


 

   

2020

   

2019

 
INTEREST INCOME                

Interest and fees on loans

  $ 8,390,803     $ 8,028,894  
Interest on investment securities:                

U.S. Government and agency securities

    361,023       557,052  

Obligations of states and political subdivisions

    1,324,426       1,285,978  

Other securities

    11,533       15,490  

Interest on interest bearing deposits

    41,449       92,867  
                 

Total interest income

    10,129,234       9,980,281  
                 
INTEREST EXPENSE                

Interest on deposits

    1,685,034       1,857,361  

Interest on borrowings

    95,894       131,306  
                 

Total interest expense

    1,780,928       1,988,667  
                 

NET INTEREST INCOME

    8,348,306       7,991,614  
                 

PROVISION FOR LOAN LOSSES

           
                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    8,348,306       7,991,614  

 

See notes to the consolidated financial statements

 

4

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

DECEMBER 31, 2020 AND 2019

 


 

   

2020

   

2019

 
NONINTEREST INCOME                

Service charges, fees, and commissions

  $ 627,434     $ 687,764  

Mortgage origination fees

    221,543       175,980  

Net investment security gains

    201,444       108,389  

Miscellaneous income

    111,182       133,211  
                 

Total noninterest income

    1,161,603       1,105,344  
                 
NONINTEREST EXPENSES                

Salaries and employee benefits

    3,400,790       3,096,668  

Occupancy and equipment expense

    916,887       901,495  

Professional fees

    525,956       381,479  

Data processing expense

    394,797       314,976  

Telephone

    202,468       190,328  

Director and committee fees

    93,600       103,200  

FDIC and state assessments

    76,818       35,344  

Advertising and public relations

    66,424       80,144  

Loss on other real estate

    200       25,984  

Other expenses

    510,255       619,917  
                 

Total noninterest expenses

    6,188,195       5,749,535  
                 

INCOME BEFORE INCOME TAXES

    3,321,714       3,347,423  
                 

INCOME TAX PROVISION

    599,332       629,269  
                 

NET INCOME

  $ 2,722,382     $ 2,718,154  
                 
EARNINGS PER COMMON SHARE                

Basic

  $ 5.30     $ 5.29  
                 
WEIGHTED AVERAGE SHARES OUTSTANDING                
Basic     513,756       513,964  

 

See notes to the consolidated financial statements

 

5

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 


 

   

2020

   

2019

 

NET INCOME

  $ 2,722,382     $ 2,718,154  
                 

OTHER COMPREHENSIVE INCOME

               

Unrealized gains (losses) on available-for-sale securities:

 

Unrealized holding gains arising during the period

    1,964,156       3,373,672  

Reclassification adjustments for gains included in net income

    (201,444 )     (108,388 )
                 

Net unrealized gains

    1,762,712       3,265,284  

Income tax related to items of other comprehensive income

    (475,932 )     (881,627 )
                 
Other comprehensive income     1,286,780       2,383,657  
                 
COMPREHENSIVE INCOME   $ 4,009,162     $ 5,101,811  

 

See notes to the consolidated financial statements

 

6

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 


 

                            Accumulated                          
                    Additional     Other                          
    Common Stock     Paid-in     Comprehensive     Retained     Treasury          
    Shares     Par Value     Capital     Income (Loss)     Earnings     Stock     Total  
                                                         
BALANCE AT DECEMBER 31, 2018     542,500     $ 5,425     $ 5,358,478     $ (1,697,679 )   $ 21,456,115     $ (784,295 )   $ 24,338,044  
                                                         
Net income                             2,718,154             2,718,154  
                                                         
Dividends declared and paid                             (3,854,730 )           (3,854,730 )
                                                         
Other comprehensive income                       2,383,657                   2,383,657  
                                                         
BALANCE AT DECEMBER 31, 2019     542,500     $ 5,425     $ 5,358,478     $ 685,978     $ 20,319,539     $ (784,295 )   $ 25,585,125  

 

See notes to the consolidated financial statements

 

7

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 


 

                            Accumulated                          
                    Additional     Other                          
    Common Stock       Paid-in     Comprehensive     Retained     Treasury          
    Shares     Par Value     Capital     Income (Loss)     Earnings     Stock     Total  
                                                         
BALANCE AT DECEMBER 31, 2019     542,500     $ 5,425     $ 5,358,478     $ 685,978     $ 20,319,539     $ (784,295 )   $ 25,585,125  
                                                         
Treasury stock                                   (30,336 )     (30,336 )
                                                         
Net income                             2,722,382             2,722,382  
                                                         
Dividends declared and paid                             (1,284,910 )           (1,284,910 )
                                                         
Other comprehensive income                       1,286,780        —             1,286,780  
                                                         
BALANCE AT DECEMBER 31, 2020     542,500     $ 5,425     $ 5,358,478     $ 1,972,758     $ 21,757,011     $ (814,631 )   $ 28,279,041  

 

See notes to the consolidated financial statements

 

8

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 


 

   

2020

   

2019

 
CASH FLOWS FROM OPERATING ACTIVITIES                

Net income

  $ 2,722,382     $ 2,718,154  
                 

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

               

Provision for depreciation

    165,097       167,351  

Gains on disposition of foreclosed real estate

          19,514  

Writedowns of foreclosed real estate

    34,905        

Amortization and accretion of securities, net

    500,249       519,975  

Realized gain on sale of securities available-for-sale

    (201,444 )     (108,388 )

Deferred income tax benefit

    (101,000 )     25,000  

Change in mortgage loans held-for-sale

    (184,549 )     115,029  

Change in accrued interest receivable

    (106,041 )     54,032  

Change in prepaid expenses

    (26,609 )     24,722  

Change in supplemental executive retirement plan

    (29,493 )     51,006  

Change in accrued change in control compensation

    400,000        

Change in accrued interest payable

    (165,080 )     210,701  

Change in other

    (70,078 )     295,351  
                 

Net cash provided by operating activities

    2,938,339       4,092,447  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Proceeds from calls or maturities of held-to-maturity securities

    680,000       370,000  
Activity in available-for-sale securities:                

Purchases

    (35,371,583 )     (18,633,212 )

Sales

    14,323,187       18,207,024  

Maturities, paydowns, and calls

    6,991,819       6,558,380  

Purchases of restrictive equity investments

    (6,600 )     (800 )

Net change in loans receivable

    (6,936,509 )     (8,120,429 )

Proceeds from disposition of foreclosed real estate

    12,423       71,579  

Purchases of premises and equipment

    (33,550 )     (213,609 )

Change in bank-owned life insurance

    (82,486 )     (83,266 )
                 
Net cash used in investing activities     (20,423,299 )     (1,844,333 )

 

See notes to the consolidated financial statements

 

9

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 


 

   

2020

   

2019

 
CASH FLOWS FROM FINANCING ACTIVITIES                

Net increase in deposit accounts

  $ 22,887,222     $ 5,478,888  

Net change in advance payments from borrowers for taxes and insurance

    (1,304 )     27,409  

Cash dividends paid

    (1,284,910 )     (3,854,730 )

Purchase of treasury stock

    (30,336 )      
                 

Net cash provided by financing activities

    21,570,672       1,651,567  
                 

INCREASE IN CASH AND CASH EQUIVALENTS

    4,085,712       3,899,681  
                 

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

    11,255,107       7,355,426  
                 

CASH AND CASH EQUIVALENTS AT END OF YEAR

  $ 15,340,819     $ 11,255,107  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

               
Cash paid during the year for interest   $ 1,777,966     $ 1,250,750  
                 
Cash paid during the year for income taxes, net   $ 810,957     $ 321,064  
                 
NONCASH ACTIVITIES                
Loans transferred to other real estate owned   $ 47,328     $ 67,500  
                 
Proceeds from sales of foreclosed real estate financed through loans   $     $ 113,599  
                 
Total increase in unrealized gains on securities available-for-sale   $ 1,762,712     $ 3,265,283  

 

See notes to the consolidated financial statements

 

10

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

1.

ORGANIZATION

 

Cheaha Financial Group, Inc. (the Company) and its wholly-owned subsidiary, Cheaha Bank (the Bank), operate predominantly in the domestic commercial banking industry in east Alabama. The Company's main office is in Oxford, Alabama in Calhoun County with additional branches in Alexandria, Anniston, and Jacksonville, Alabama.

 

The accounting and reporting policies of the Company and its subsidiary conform to accounting principles generally accepted in the United States of America (U.S. GAAP) and to general practice within the banking industry. The following summarizes the most significant of these policies.

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany balances and transactions have been eliminated. Variable interest entities (VIEs) are consolidated if the Company is exposed to the majority of the VIEs’ expected losses and/or residual returns (i.e., the Company is considered to be the primary beneficiary). No VIEs were consolidated at December 31, 2020 and 2019. Unconsolidated investments in VIEs in which the Company has significant influence over operating and financing decisions (usually defined as a voting or economic interest of 20% to 50%) are accounted for using the equity method. Unconsolidated investments in VIEs in which the Company has a voting or economic interest of less than 20% are generally carried at cost. Investment in subsidiary is carried at the parent company's equity in the underlying net assets. Unless otherwise indicated herein, the financial results of the Company refer to the Company and the Bank on a consolidated basis.

 

Use of Estimates

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

 

The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral.

 

11

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans 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 estimated losses on loans. Such agencies may require the Bank to recognize additional losses 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 estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

 

Significant Group Concentrations of Credit Risk

The majority of the Company's activities are with customers in east Alabama. Note 4 discusses the types of securities in which the Company invests. Note 5 discusses the types of lending done by  the Company. The Company does not have any concentrations in any one industry or customer. See Note 13 for a discussion of geographic concentration and the risk therein.

 

Securities

Securities are classified as either held-to-maturity, available-for-sale, or trading.

 

Securities held-to-maturity represent securities for which management has the ability and intent to hold on a long-term basis or until maturity. These securities are carried at amortized cost and adjusted for amortization of premiums and accretion of discount, to the earlier of the maturity or call date.

 

Securities available-for-sale represent those securities intended to be held for an indefinite period of time, including securities that management intends to use as part of its asset/liability strategy or that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital, or other similar factors. Securities available-for-sale are recorded at market value with unrealized gains and losses net of any tax effect and are reported as other comprehensive income (loss) in a separate component of stockholders’ equity until realized. Gains or losses on disposition are based on the net proceeds and the adjusted carrying amount on the securities sold, using the specific identification method. The estimated values are provided by security dealers who have obtained quoted prices.

 

Securities carried in trading accounts are carried at market value with unrealized gains and losses reflected in income. The Company had no trading securities at December 31, 2020 and 2019.

 

Realized and unrealized gains and losses are based on the specific identification method.  Purchase premiums and discounts are recognized in interest income using a method which approximates the interest method over the terms of the securities. Declines in fair values of individual held-to-maturity and available-for-sale securities below their costs that are other-than- temporary result in writedowns of the individual securities to their fair values. The related writedowns are included in earnings as realized losses.

 

12

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

Restrictive Investment Securities

The Company has invested in selected equity instruments issued in the form of restricted stocks and common stock of a special purpose trust formed to issue trust preferred securities. The restricted stocks and trust stock are categorized as other investment securities and are accounted for under the cost method. These investments represent less than a 20% economic interest and have no readily ascertainable market value.

 

Loans

Loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances net of any unearned income, charge-offs, and unamortized fees and costs. Loan origination and commitment fees, as well as certain origination costs, when material, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method or the straight-line method.

 

Troubled Debt Restructurings (TDRs)

Modifications to a borrower’s debt agreement are considered troubled debt restructurings (TDRs) if a concession is granted for economic or legal reasons related to a borrower’s financial difficulties that otherwise would not be considered. TDRs are undertaken in order to improve the likelihood of recovery on the loan and may take the form of modifications made with the stated interest rate lower than the current market rate for new debt with similar risk, other modifications to the structure of the loan that fall outside of normal underwriting policies and procedures, or, in certain limited circumstances, forgiveness of principal or interest. TDRs can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accruing status, depending on the individual facts and circumstances of the borrower.

 

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable and reasonably estimable credit losses inherent in loans as of December 31, 2020 and 2019. The estimate of the allowance is based on a variety of factors, including an evaluation of the loan portfolio, past loss experience, adverse situations that have occurred, but are not yet known, that may affect the borrower’s ability to repay, the estimated value of underlying collateral, and current economic conditions.

 

For purposes of determining the allowance for loan losses, the Company has segmented loans into the following segments: commercial, financial, and agricultural; real estate – construction, land development, and other land; real estate – mortgage; and consumer. Significant judgment is used to determine the estimation method that fits the credit risk characteristics of each portfolio segment. The Company uses internally developed models in this process. Management must use judgment in establishing input metrics for the modeling processes. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as information becomes available and as economic conditions change.

 

13

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

Loans considered to be uncollectible are charged-off against the allowance. The amount and  timing of charge-offs on loans includes consideration of the loan type, length of delinquency, insufficiency of collateral value, lien priority, and the overall financial condition of the borrower. Recoveries on loans previously charged-off are credited back to the allowance. Loans that have been charged-off against the allowance are periodically monitored to evaluate whether further adjustments to the allowance are necessary.

 

The allowance for loan losses consists of three components: general, specific, and unallocated.

 

 

The general component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors, which includes trend assessments in delinquent and nonaccrual loans, unanticipated charge-offs, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures, and other influencing factors.

 

The specific component is determined for impaired loans, including TDRs, individually based on management’s evaluation of the borrower’s overall financial condition, resources, and payment record; the prospects for support from any financially responsible guarantors; and the realizable value of any collateral. Reserves are established for these loans based upon an estimate of probable losses for the individual loans deemed to be impaired. This estimate considers all available evidence using one of the methods provided by applicable authoritative guidance. Loans determined to be collateral-dependent are measured at the fair value of collateral less disposal costs. Loans for which impaired reserves are provided are excluded from the general component reserve calculations described above to prevent duplicate reserves.

 

The unallocated component is not allocated to any specific category of loans. This unallocated portion of the allowance reflects management’s best estimate of the elements of imprecision and estimation of risk inherent in the calculation of the overall allowance. Due  to the subjectivity involved in determining the overall allowance, including the unallocated portion, the portion considered unallocated may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current economic conditions, industry or borrower concentrations, and the status of merged institutions.

 

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when 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. If management determines that the value of  the impaired loan is less than the recorded investment in the loan, impairment is recognized through a charge-off to the allowance. Interest income is recognized as earned unless the loan is placed on nonaccrual status.

 

14

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. Generally, impaired loans include loans on nonaccrual status, loans that  have been assigned a specific allowance for credit losses, loans that have been partially charged off, and loans designated as troubled debt restructurings.

 

Based on facts and circumstances available, management believes that the allowance for loan losses is adequate to cover any probable losses in the Company’s loan portfolio. However, future adjustments to the allowance may be necessary, and the Company’s results of operations could be adversely affected if circumstances differ substantially from the assumptions used by management in determining the allowance for loan and lease losses. Management believes that it has established the allowance in accordance with GAAP and has taken into account the views of its regulators and the current economic environment; there can be no assurance that in the future the Bank's regulators or its economic environment will not require further increases in the allowance.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures unless such loans are the subject of a restructuring agreement.

 

Asset Quality

Written underwriting standards established by management govern the lending activities of the Company. An established loan policy requires appropriate documentation, including borrower financial data and credit reports. For loans secured by real property, the Company generally requires property appraisals, title insurance or a title opinion, hazard insurance, and flood insurance, where appropriate. Loan payment performance is monitored, and late charges are assessed on past-due accounts. Legal proceedings are instituted, as necessary, to minimize loss. Commercial and residential loans of the Company are periodically reviewed through a loan review process. All other loans are also subject to loan review through a periodic sampling process.

 

The Company uses an asset risk classification system consistent with guidelines established by the Uniform Financial Institution Ratings System (UFIRS) as part of its efforts to monitor asset quality. In connection with examinations of insured institutions, both federal and state examiners also have the authority to identify problem assets and, if appropriate, classify them.

 

15

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

The Company has nine credit quality indicators for loans:

 

Grade 1: Prime – Prime grade loans are the best credits.  They consist of loans with very little  credit risk by borrowers with an excellent credit reputation and a major borrower who compares favorably in the upper quadrant of ratios presented. They are loans with an individual borrower with a substantial net worth and sufficient income and/or alternative fund sources to retire the debt as agreed.

 

Grade 2: Desirable – Desirable grade loans are loans with little credit risk and an acceptable credit reputation. They consist of loans to a borrower who compares favorably in the middle quadrant of ratio presentations. They are loans with an individual borrower with an acceptable net worth and sufficient income and/or alternative fund sources to retire the debt as agreed. The collateral is acceptable, having reasonable marketability.

 

Grade 3: Acceptable – Acceptable grade loans are loans that meet at least five out of the ten following general characteristics: debt is unsecured, and debt/income ratio exceeds  40% but is  less than 55%; the borrower does not have a loan listing with the bank; the source of repayment is clear, but the income stream is low compared to debt load; length of employment is less than one year with present employer; the borrower invests an insignificant down payment toward the purchase item, usually less than 15%; loan is secured by collateral that has a low possibility of resale; the borrower has a debt to net worth ratio between 1.50/2.25 to 1; the borrower’s credit report shows delinquencies, collections, judgments, or no established credit record; the borrower lives outside of the bank’s assessment area or state; the borrower is refinancing an existing debt for the first time and is not reducing principal, but is paying all accumulated interest and late charges.

 

Grade 4: Specific Identification/Special Mention – Specific identification/special mention grade  loans are loans that have been identified by management as having a strong potential for at least a partial loss. There may be marketable collateral, but of insufficient value to retire the entire debt. Management has recognized the potential for loss and has made the decision to increase loan loss reserve by a percentage of the balance of these loans. The amount will be assigned depending upon circumstances defined by the lending officer.

 

Grade 5: Marginal/Substandard – Marginal/substandard grade loans are loans with credit risk. There is inadequate supporting financial and credit information and/or the borrower has a marginal credit reputation. The borrower compares in the lower quadrant of ratio presentations. This is an individual borrower who has a minimal net worth and income and/or minimal alternative fund sources to repay the debt as agreed. The collateral is acceptable with a reasonable market, but  with minimum margin.

 

Grade 6: Doubtful – Doubtful grade loans are loans where the elements of probable loss exist. The borrower is in poor financial condition, and repayment could only be affected by partial or full sale of vital assets. There is insufficient collateral due to value or marketability.

 

16

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

Grade 7: Loss – Loss grade loans are loans that exhibit the following general characteristics, typically during the life of the loan: the credit substantially exceeds the collateral value; there is no source of repayment; repayment is dependent upon some other person who was not a co-maker on the loan; repayment is based upon a speculative profit or source such as liquidation of assets or high risk ventures; if the bank determines the collateral is illegal, restricted, or no longer in existence; the purpose of the loan was illegal and the borrower has been charged by law enforcement agencies; the debt to net worth ratio has risen significantly and will continue to be significantly more than 3 to 1 in the next three to five years; the bank has foreclosed or repossessed the collateral, and there appears to be little or no value to the collateral; or the borrower has filed bankruptcy and there appears to be little or no assets that could be sold to reduce the debt.

 

Grades 1 through 3 are combined in the notes to the financial statements and classified as pass.

 

Income Recognition on Impaired and Nonaccrual Loans

Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-collateralized and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual.

 

Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time and there is a sustained period of repayment performance by the borrower in accordance with the contractual terms of principal and interest.

 

While a loan is classified as nonaccrual, and the future collectability of the recorded loan balance is doubtful, collections of principal and interest are generally applied as reductions to principal outstanding, except in the cases of loans with scheduled amortizations, where the payment is generally applied to the oldest payment due. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. Interest income recognized on a cash basis was immaterial for the years ended December 31, 2020 and 2019.

 

Mortgage Loans Held-for-Sale

Mortgage loans held-for-sale are carried at the lower of aggregate cost or market. The cost of mortgage loans held-for-sale is the mortgage amount plus certain net origination costs less discounts collected. Gains and losses resulting from changes in the market value of the inventory are netted. Any net gain that results is deferred and recognized when the loan is sold; any net loss that results is recognized when incurred. The aggregate cost of mortgage loans held-for-sale at December 31, 2020 and 2019, approximates their aggregate net realizable value. Gains or losses on the sale of mortgage loans held-for-sale are included in other noninterest income in the consolidated statements of income.

 

17

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

Premises and Equipment

Land is carried at cost. Other premises and equipment are stated at cost less accumulated depreciation. Expenditures for additions and major improvements that significantly extend the  useful lives of the assets are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. The carrying values of assets traded in are used to adjust the carrying values of the new assets acquired by trade. Assets which are disposed of are removed from the accounts, and the resulting gains or losses are recorded in operations.

 

Depreciation is provided generally by the straight-line method based on the estimated useful lives of the respective assets, which generally range from three to forty years.

 

Foreclosed Real Estate

Foreclosed real estate includes both formally foreclosed property and in-substance foreclosed property. In-substance foreclosed properties are those properties for which the Bank has taken physical possession, regardless of whether formal foreclosure proceedings have taken place.

 

At the time of foreclosure, foreclosed real estate is recorded at fair value less cost to sell, which becomes the property's new basis. Any writedowns based on the asset's fair value at date of acquisition are charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management, and an asset is carried at the lower of its new cost basis or fair value less cost to sell. Costs incurred in maintaining foreclosed real estate and subsequent adjustments to the carrying amount of the property are included in income (loss) on foreclosed real estate. Costs incurred to complete, repair, renovate, or make the property whole are capitalized.

 

Bank-Owned Life Insurance

The Company has purchased life insurance policies on certain key employees. These policies are recorded at their cash surrender value or the amount that can be realized. Income from these policies and changes in the cash surrender value are recorded in other noninterest income in the consolidated statements of income.

 

Deposits

Customer deposits include public funds held on deposit under the Security for Alabama Funds Enhancement (SAFE) Program. The SAFE Program was established by the Alabama legislature to provide protection for public funds enrolled in the SAFE Program. Under this program, financial institutions are required to collateralize public fund deposits (Note 4).

 

Borrowings

The Company records Federal Home Loan Bank advances and federal funds purchased at their principal amounts. Interest expense is recognized based on the coupon rate of the obligations.

 

Preferred Stock

Preferred stock represents shares which do not participate in the profits of the Company, are redeemable at par, and whose stockholders have no voting rights.

 

18

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

Common Stock

Common stock represents shares which participate in the profits of the Company and whose stockholders have voting rights that are equal to one vote per share.

 

Treasury Stock

Common stock shares repurchased are recorded as treasury stock at cost.

 

Stock-Based Compensation

The Company recognizes compensation cost relating to share-based payment transactions (stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share plans) in the consolidated financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued.

 

The Company calculates and recognizes compensation cost for all stock awards over the employees’ service period, generally defined as the vesting period. For awards with graded- vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company uses a Black-Scholes model to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.

 

Stock compensation accounting guidance (Accounting Standards Codification (ASC) Topic 718, Compensation-Stock Compensation) requires that the compensation cost related to share-based payment transactions be recognized in financial statements. All stock-based compensation plans result in equity classification.

 

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated based on the grant date fair value and recognized over an employee’s service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black- Scholes model is used to estimate the fair value of stock options, while a market price of the Company’s common stock at the date of grant is used for restricted stock awards.

 

Earnings per Common Share

Basic earnings per common share are computed by dividing earnings available to stockholders by the weighted average number of common shares outstanding during the period.

 

Comprehensive Income (Loss)

Comprehensive income (loss) is generally defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Other comprehensive income (loss) is composed of those items not recorded as components of net income. The accumulated balance of other comprehensive income (loss), if applicable, is to be reported separately from retained earnings in the equity section of the consolidated statements of financial condition.

 

19

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

In the calculation of comprehensive income (loss), certain reclassification adjustments are made to avoid double counting items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income (loss) in that period or earlier periods.

 

Employee Benefit Plans

The Company has a qualified 401(k) profit-sharing plan covering substantially all of its employees. Eligible participating employees may elect to contribute tax-deferred contributions. Company contributions include matching and discretionary annual amounts as determined by the Board of Directors.

 

The Bank has also provided salary continuation plans for certain key employees and directors. These plans are generally funded through life insurance contracts owned by the Bank.

 

Company contributions to these benefit plans are included in salaries and benefits (Note 11).

 

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over assets has been surrendered. Control over transferred assets is deemed surrendered when (1) the assets have been isolated from the Company and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain the transferee from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturities or the ability to unilaterally cause the holder to return specific assets.

 

Advertising Costs

The Company's policy is to expense advertising costs as incurred.

 

Income Taxes

Income taxes are provided for the tax effects of the transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of available-for-sale securities, allowance for loan losses, estimated losses on foreclosed real estate, deferred compensation, and accumulated depreciation for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

 

The Company and its subsidiary file a consolidated federal income tax return. The subsidiary provides for income taxes on a separate return basis and remits to the Company amounts determined to be currently payable.

 

20

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when funded. See Note 12 for a further discussion of these financial instruments.

 

The Bank has available as a source of short-term financing the purchase of federal funds from other commercial banks from available lines totaling $9,500,000, all of which was available and unused at December 31, 2020.

 

The Bank has available as a source of financing a line of credit of approximately $58,747,000 with the Federal Home Loan Bank (FHLB), of which all was available and unused at December 31, 2020. The ability to utilize the remaining line is dependent on the amount of eligible collateral that is free to pledge to the FHLB. In addition, as part of the borrowing agreement, the Bank is required to purchase FHLB stock (Note 4).

 

Fair Value Measurements

The Bank adopted authoritative guidance issued by the Financial Accounting Standards Board (FASB) on fair value measurements. This standard defines fair value for financial reporting purposes as the price that would be received to sell an asset or paid to transfer a liability in an orderly market transaction between market participants at the measurement date (reporting date). Fair value is based on an exit price in the principal market or most advantageous market in which the reporting entity could execute a transaction. New fair value measurements are not required, but fair value disclosures are required for financial assets or liabilities where other accounting pronouncements require or permit fair value reporting.

 

For each asset and liability required to be reported at fair value, management has identified the unit of account and valuation premise to be applied for purposes of measuring fair value. The unit of account is the level at which an asset or liability is aggregated or disaggregated. The valuation premise is a concept that determines whether an asset is measured on a stand-alone basis or in combination with other assets. The Bank measures its assets and liabilities on a stand-alone basis, then aggregates assets and liabilities with similar characteristics for disclosure purposes.

 

The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Bank. Unobservable inputs are inputs that reflect the Bank’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

 

21

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

The hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Bank has the ability to access. Since valuations are based on quoted prices that are readily  and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 

Level 2 – Valuations based on observable inputs, including quoted prices (other than Level 1) in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, such as interest rates, yield curves, volatilities, and default rates, and inputs that are derived principally from or corroborated by observable market data.

 

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

The adoption of this authoritative guidance had no impact on the consolidated financial statements of the Company other than the additional disclosures included in Note 17.

 

Segment Information

All of the Company's offices offer similar products and services, are located in the same geographic region, and serve the same customer segments of the market. As a result, management considers all units as one operating segment and, therefore, feels that the basic consolidated financial statements and related notes provide details related to segment reporting.

 

Subsequent Events

Management has evaluated subsequent events and their potential effects on these consolidated financial statements through the date of the independent auditors’ report, which is the date the consolidated financial statements were available to be issued.

 

Reclassifications

Certain reclassifications have been made to the 2019 financial statements included herein to conform to the 2020 presentation. These reclassifications had no effect on the financial position, results of operations, or cash flows of the Company as previously reported.

 

22

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, in November 2018 issued ASU 2018-19, in April 2019 issued ASU 2019-04, in May 2019 issued ASU 2019-05, and in November 2019 issued ASU 2019-10 and 2019-11, Financial InstrumentsCredit Losses (Topic 326). The amendments in  these ASUs cover two areas: assets measured at amortized cost and available-for-sale debt securities. For assets measured at amortized cost, the amendments in these ASUs require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. For available-for-sale debt securities, credit  losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. Available-for-sale accounting recognizes that value may be realized either through  collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available-for-sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022. All entities may adopt the amendments in this ASU as early as the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is reviewing the impact that the adoption of this ASU may have on its financial statements.

 

 

3.

RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

 

The Bank is required by regulatory authorities to maintain average reserve balances either in vault cash or on deposit with the Federal Reserve Bank. The reserve requirement was $0 and $1,174,000, at December 31, 2020 and 2019, respectively.

 

The Company maintains cash and cash equivalents in various correspondent or other bank accounts. The amounts by which cash and cash equivalents exceeded Federal Deposit Insurance Corporation (FDIC) insurance coverage at December 31, 2020 and 2019, were $11,629,227 and $8,626,288, respectively. Management monitors these bank accounts and does not expect to incur any losses from such accounts. In addition, federal funds sold are not insured or guaranteed by other parties.

 

23

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

4.

SECURITIES

 

The amortized cost and fair value of securities available-for-sale, with gross unrealized gains and losses, as of December 31, 2020 and 2019, were as follows:

 

    Securities Available-for-Sale  
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
                                 
As of December 31, 2020                                
Debt securities:                                
State and municipal   $ 62,623,883     $ 2,290,886     $ 33,429     $ 64,881,340  
Mortgage-backed securities:                                

U.S. Government-sponsored enterprises (GSE)* residential

    19,459,414       456,518       11,567       19,904,365  
                                 

Total debt securities

    82,083,297       2,747,404       44,996       84,785,705  
                                 

Marketable equity securities

    364                   364  
                                 

Total securities available-for-sale

  $ 82,083,661     $ 2,747,404     $ 44,996     $ 84,786,069  
                                 
As of December 31, 2019                                
Debt securities:                                

State and municipal

  $ 42,731,423     $ 1,104,556     $ 29,661     $ 43,806,318  
Mortgage-backed securities:                                

U.S. Government-sponsored enterprises (GSE)* residential

    25,595,182       98,653       233,852       25,459,983  
                                 

Total debt securities

    68,326,605       1,203,209       263,513       69,266,301  
                                 

Marketable equity securities

    364                   364  
                                 

Total securities available-for-sale

  $ 68,326,969     $ 1,203,209     $ 263,513     $ 69,266,665  

 

* GSE – Government-sponsored enterprise, such as Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Government National Mortgage Association (GNMA).

 

24

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

4.

SECURITIES CONTINUED

 

    Securities Held-to-Maturity  
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
                                 
As of December 31, 2020                                
Debt securities:                                
State and municipal   $ 15,000     $ 47     $     $ 15,047  
                                 
As of December 31, 2019                                
Debt securities:                                
State and municipal   $ 693,920     $ 2,613     $     $ 696,533  

 

Investment securities with a carrying amount of $26,048,610 and $25,353,604 were pledged to secure various public funds under the SAFE Program and Federal Home Loan Advances at December 31, 2020 and 2019, respectively.

 

The contractual maturities of securities held-to-maturity and securities available-for-sale at December 31, 2020, are shown below. 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.

 

    Available-for-Sale     Held-to-Maturity  
   

Amortized

Cost

    Fair Value    

Amortized

Cost

    Fair Value  
                                 

Within one year

  $     $     $     $  
Over one year through five years                 15,000       15,047  

Over five years through 10 years

    6,501,348       6,753,569              

Over 10 years

    75,581,949       78,032,136              
                                 
    $ 82,083,297     $ 84,785,705     $ 15,000     $ 15,047  

 

Mortgage-backed securities have been included in the maturity tables based upon the guaranteed pay-off date of each security.

 

25

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

4.

SECURITIES CONTINUED

 

For the years ended December 31, 2020 and 2019, proceeds from sales, calls, and maturities of securities available-for-sale amounted to $15,593,187 and $20,402,025, respectively; gross realized gains were $232,177 and $113,345, respectively; and gross realized losses were $31,491 and $4,956, respectively.

 

For the years ended December 31, 2020 and 2019, proceeds from calls and maturities of securities held-to-maturity amounted to $680,000 and $370,000, respectively, with gross realized gains of $758 and $0, respectively, and no gross realized losses.

 

The following table shows the Company's investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2020 and 2019.

 

    Available-for-Sale  
    Less Than 12 Months     12 Months or More     Total  
   

Fair

Value

   

Gross

Unrealized

Losses

   

Fair

Value

   

Gross

Unrealized

Losses

   

Fair

Value

   

Gross

Unrealized

Losses

 

As of December 31, 2020

                                         

Debt securities:

                                               

State and municipal

  $ 4,728,116     $ 33,429     $     $     $ 4,728,116     $ 33,429  

Mortgage-backed securities:

                                               
GSE residential     9,154,748       11,567                   9,154,748       11,567  
                                                 
    $ 13,882,864     $ 44,996     $     $     $ 13,882,864     $ 44,996  
                                                 
As of December 31, 2019                                                
Debt securities:                                                

State and municipal

  $ 3,211,961     $ 20,889     $ 992,288     $ 8,772     $ 4,204,249     $ 29,661  

Mortgage-backed securities:

                                               

GSE residential

    10,669,700       208,621       4,713,780       25,231       15,383,480       233,852  
                                                 
    $ 13,881,661     $ 229,510     $ 5,706,068     $ 34,003     $ 19,587,729     $ 263,513  

 

As of December 31, 2020 and 2019, there were no held-to-maturity securities in an unrealized loss position.

 

26

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

4.

SECURITIES CONTINUED

 

State and Municipal Securities

At December 31, 2020, the Company had 10 state and municipal securities with unrealized losses. The unrealized losses on these securities were caused by increases in interest rates and reflected aggregate depreciation from amortized cost of 0.70%. The contractual cash flows of these investments are guaranteed by various state and local government agencies. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment.

 

The Company does not consider these investments to be other-than-temporarily impaired at December 31, 2020, because the decline in market value is attributable to increases in interest rates and not credit quality, the Company does not intend to sell the investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

 

Mortgage-Backed Securities: GSE Residential

The Company had five mortgage-backed securities with unrealized losses at December 31, 2020. The unrealized losses on these investments were caused by increases in interest rates and reflected aggregate depreciation from amortized cost of 0.13%. The expected present value of future cash flows is expected to approximate the contractual cash flows. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment.

 

The Company does not consider these investments to be other-than-temporarily impaired at December 31, 2020, because the decline in market value is attributable to increases in interest rates and not credit quality, the Company does not intend to sell the investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

 

Other-than-Temporary Impairment

The Bank recognizes other-than-temporary impairment (OTTI) in accordance with ASC Topic 320, Investments Debt and Equity Securities, which requires that the Bank assess whether it intends to sell or it is more likely than not that the Bank will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired, and that the Bank does not intend to sell and will not be required to sell prior to anticipated recovery of the amortized cost basis, the amount of the impairment is separated into the amount that is credit-related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and, therefore, is not required to be recognized as a loss in the consolidated statements of income, but is recognized in other comprehensive income (loss).

 

27

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

4.

SECURITIES – CONTINUED

 

The Bank believes that it will fully collect the carrying value of securities on which it has recorded a noncredit-related impairment in other comprehensive income (loss). The Bank held no investments with an other-than-temporary impairment at December 31, 2020 and 2019.

 

Restrictive Equity Securities Investment

The aggregate carrying value of the Company's cost-method investments totaled $281,500 and $274,900 at December 31, 2020 and 2019, respectively. These investments were not evaluated for impairment because (1) the Company did not estimate the fair value of these investments in accordance with ASC Topic 825 and (2) the Company did not identify any events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments. The Company estimated that the fair value exceeded the cost of investments (that is, the investments were not impaired).

 

The investment in Cheaha Statutory Trust I represents the Company's capitalization of a subsidiary trust created to issue preferred securities. This investment represents 100% of the common stock issued by the trust; however, in accordance with the provisions of ASC Topic 810, this subsidiary has not been consolidated into these consolidated financial statements (Note 8).

 

The carrying amounts of other investment securities as shown in the consolidated statements of financial condition at December 31, 2020 and 2019, were as follows:

 

    2020     2019  
                 
Federal Home Loan Bank   $ 188,500       181,900  
Cheaha Statutory Trust I     93,000       93,000  
                 
    $ 281,500     $ 274,900  

 

28

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS

 

The Bank grants loans to customers primarily in the east Alabama counties of Calhoun, Cleburne, Etowah, and Talladega. The composition of loans by primary loan classification and by performing and impaired loan status at December 31, 2020 and 2019, are as follows:

 

   

December 31, 2020

 
   

Performing

   

Impaired

         
   

Loans

   

Loans

   

Total

 

Commercial, financial, and agricultural

  $ 23,567,064     $ 153,107     $ 23,720,171  

Real estate – construction, land development, and other land

    16,433,028       151,492       16,584,520  

Real estate – mortgage

    76,022,648       2,924,778       78,947,426  

Consumer

    8,480,776       114,469       8,595,245  
                         

Subtotal

    124,503,516       3,343,846       127,847,362  

Allowance for loan losses

    (926,241 )     (425,650 )     (1,351,891 )
                         

Net loans

  $ 123,577,275     $ 2,918,196     $ 126,495,471  

 

 

   

December 31, 2019

 
   

Performing

   

Impaired

         
   

Loans

   

Loans

   

Total

 

Commercial, financial, and agricultural

  $ 14,994,847     $ 177,418     $ 15,172,265  

Real estate – construction, land development, and other land

    17,150,728       92,919       17,243,647  

Real estate – mortgage

    76,568,245       3,261,700       79,829,945  

Consumer

    8,708,700       90,166       8,798,866  
                         

Subtotal

    117,422,520       3,622,203       121,044,723  

Allowance for loan losses

    (964,968 )     (473,465 )     (1,438,433 )
                         

Net loans

  $ 116,457,552     $ 3,148,738     $ 119,606,290  

 

29

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS CONTINUED

 

Allowance for Loan Losses

 

The changes in the allowance for loan losses for the years ended December 31, 2020 and 2019, are as follows:

 

   

2020

   

2019

 

Balance at beginning of year

  $ 1,438,433     $ 1,645,227  
                 

Loans charged off

    (89,467 )     (236,292 )

Recoveries on loans previously charged off

    2,925       29,498  
                 

Net charge-offs

    (86,542 )     (206,794 )

Provision charged to operating expenses

           
                 

Balance at end of year

  $ 1,351,891     $ 1,438,433  

 

The allocation and changes in the allowance for loan losses, by loan classification, as of and for the years ended December 31, 2020 and 2019, are as follows:

 

    December 31, 2020  
   

Commercial,

Financial, and

Agricultural

   

Real Estate

Construction,

Land

Development,

and Other

Land

   

Real Estate

Mortgage

    Consumer     Unallocated     Total  
                                                 

Balance at beginning of year

  $ 95,947     $ 1,696     $ 444,791     $ 112,834     $ 783,165     $ 1,438,433  
                                                 
Charge-offs                 (34,904 )     (54,563 )           (89,467 )
Recoveries     445       79             2,401             2,925  
                                                 
Net charge-offs     445       79       (34,904 )     (52,162 )           (86,542 )
Provision     153,168       50,222       78,723       116,406       (398,519 )      
                                                 
Ending balance   $ 249,560     $ 51,997     $ 488,610     $ 177,078     $ 384,646     $ 1,351,891  

 

30

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS CONTINUED

 

    December 31, 2019  
           

Real Estate

                                 
           

Construction,

                                 
   

Commercial,

   

Land

Development,

                                 
   

Financial, and

   

and Other

   

Real Estate

                         
   

Agricultural

   

Land

   

Mortgage

   

Consumer

   

Unallocated

   

Total

 

Balance at beginning of year

  $ 91,678     $ 14,723     $ 500,786     $ 123,640     $ 914,400     $ 1,645,227  
                                                 

Charge-offs

    (17,664 )           (191,881 )     (26,747 )           (236,292 )

Recoveries

    170             4,500       24,828             29,498  
                                                 

Net charge-offs

    (17,494 )           (187,381 )     (1,919 )           (206,794 )

Provision

    21,763       (13,027 )     131,386       (8,887 )     (131,235 )      
                                                 

Ending balance

  $ 95,947     $ 1,696     $ 444,791     $ 112,834     $ 783,165     $ 1,438,433  

 

Loan Risk Rating

The following table outlines the amount of each loan classification based on internally assigned risk ratings as of December 31, 2020 and 2019:

 

    December 31, 2020  
   

Commercial,

Financial, and

Agricultural

   

Real Estate

Construction,

Land

Development,

and Other

Land

   

Real Estate

Mortgage

    Consumer     Total  
                                         

Pass*

  $ 23,567,064     $ 16,433,028     $ 76,022,648     $ 8,480,776     $ 124,503,516  

Special mention – impaired

    12,911             214,481             227,392  

Substandard – impaired

    140,196       151,492       2,710,297       114,469       3,116,454  
                                         
    $ 23,720,171     $ 16,584,520     $ 78,947,426     $ 8,595,245     $ 127,847,362  

 

* Loans graded as minimal risk, modest risk, and some risk, but sound loans are classified as “Pass” grade for disclosure purposes.

 

31

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS CONTINUED

 

    December 31, 2019  
   

Commercial,

Financial, and Agricultural

   

Real Estate

Construction,

Land

Development,

and Other Land

   

Real Estate

Mortgage

    Consumer     Total  
                                         

Pass*

  $ 14,994,847     $ 17,150,728     $ 76,568,245     $ 8,708,700     $ 117,422,520  

Special mention – impaired

    15,018             158,770             173,788  

Substandard – impaired

    162,400       92,919       3,102,930       90,166       3,448,415  
                                         
    $ 15,172,265     $ 17,243,647     $ 79,829,945     $ 8,798,866     $ 121,044,723  

 

* Loans graded as minimal risk, modest risk, and some risk, but sound loans are classified as “Pass” grade for disclosure purposes.

 

32

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS CONTINUED

 

Impaired Loans

The following table details the recorded investments, unpaid principal balance, and the related allowance of impaired loans as of December 31, 2020 and 2019, and the average recorded investment of impaired loans for the years ended December 31, 2020 and 2019:

 

    December 31, 2020    

For the Year Ended

December 31, 2020

 
   

Recorded

Investment

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Recorded

Investment

 
Impaired loans with no recorded allowance:                                

Commercial, financial, and agricultural

  $ 649     $ 649     $     $ 4,171  

Real estate – construction, land development, and other land

    94,880       94,654             94,276  

Real estate – mortgage

    1,141,411       1,140,926             1,142,494  
                                 

Total

    1,236,940       1,236,229             1,240,941  
                                 
Impaired loans with a recorded allowance:                                

Commercial, financial, andagricultural

    153,203       152,458       14,013       147,229  

Real estate – construction, land development and other land

    58,273       56,838       8,526       54,990  

Real estate – mortgage

    1,811,854       1,783,852       336,563       1,813,258  

Consumer

    115,196       114,469       66,548       100,594  
                                 

Total

    2,138,526       2,107,617       425,650       2,116,071  
                                 

Total impaired loans

  $ 3,375,466     $ 3,343,846     $ 425,650     $ 3,357,012  

 

33

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS CONTINUED

 

    December 31, 2019    

For the Year Ended

December 31, 2019

 
   

Recorded

Investment

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Recorded

Investment

 
Impaired loans with no recorded allowance:                                

Real estate – construction, land development, and other land

  $ 93,671     $ 92,919     $     $ 46,836  

Real estate – mortgage

    1,143,577       1,140,361             1,150,569  
                                 

Total

    1,237,248       1,233,280             1,197,405  
                                 
Impaired loans with a recorded allowance:                                

Commercial, financial, and agricultural

    178,712       177,418       25,478       188,262  

Real estate – mortgage

    2,146,799       2,121,339       379,544       2,232,624  

Consumer

    90,351       90,166       68,443       83,962  
                                 

Total

    2,415,862       2,388,923       473,465       2,504,848  
                                 

Total impaired loans

  $ 3,653,110     $ 3,622,203     $ 473,465     $ 3,702,253  

 

Past Due Loan

Past due balances and loans on nonaccrual status at December 31, 2020 and 2019, by loan classification, are as follows:

 

    December 31, 2020  
   

Past Due

30-89 Days

and Still

Accruing

   

Past Due 90

Days or More

and Still

Accruing

   

 

Total Past Due

and

Performing

   

 

Loans on

Nonaccrual

Status

    Current     Total Loans  
                                                 
Commercial, financial, and agricultural   $ 73,947     $     $ 73,947     $     $ 23,646,224     $ 23,720,171  

Real estate – construction, land development, and other land

          56,838       56,838             16,527,682       16,584,520  

Real estate – mortgage

    700,343       60,436       760,779             78,186,647       78,947,426  

Consumer

    38,488             38,488             8,556,757       8,595,245  
                                                 

Total

  $ 812,778     $ 117,274     $ 930,052     $     $ 126,917,310     $ 127,847,362  

 

 

34

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS – CONTINUED

 

    December 31, 2019   
   

Past Due

30-89 Days

and Still

Accruing

   

Past Due 90

Days or More

and Still

Accruing

   

Total Past Due

and

Performing

   

Loans on

Nonaccrual

Status

   

Current

   

Total Loans

 

Commercial, financial, and agricultural

  $ 34,692     $ 3,490     $ 38,182     $     $ 15,134,083     $ 15,172,265  

Real estate – construction, land development, and other land

                            17,243,647       17,243,647  

Real estate – mortgage

    203,380       75,035       278,415             79,551,530       79,829,945  

Consumer

    103,566             103,566             8,695,300       8,798,866  
                                                 

Total

  $ 341,638     $ 78,525     $ 420,163     $     $ 120,624,560     $ 121,044,723  

 

At December 31, 2020 and 2019, there were no loans classified as nonaccrual. At the date, such loans were placed on nonaccrual status, the Bank reversed all previously accrued interest income against current year earnings. Had such nonaccrual loans been on accrual status, the increase in interest income would have been immaterial for the years ended December 31, 2020 and 2019. Interest income is subsequently recognized to the extent cash payments are received while the loan is classified as nonaccrual, but is reviewed on a loan-by-loan basis.

 

The Bank has no commitments to loan additional funds to the borrowers of impaired loans.

 

The Bank reviewed all loans that met the following criteria at December 31, 2020 and 2019, for impairment: all loans greater than $500,000 and all loan relationships rated special mention or worse. At December 31, 2020 and 2019, approximately $26 million and $21 million in loans, respectively, was evaluated for impairment.

 

TDRs are modified loans in which a concession is provided to a borrower experiencing financial difficulty. As provided in the CARES Act passed into law on March 27, 2020, certain loan modifications related to the COVID-19 pandemic beginning March 1, 2020, are eligible for relief from TDR classification. The Company elected this provision of the CARES Act; therefore, modified loans that met the required guidelines for relief are not considered. As of December 31, 2020 and 2019, the Bank had no loans classified as TDRs. There were no TDRs that subsequently defaulted during the years ended December 31, 2020 and 2019.

 

35

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

6.

PREMISES AND EQUIPMENT

 

Premises and equipment at December 31, 2020 and 2019, is as follows:

 

    2020    

2019

 

Land improvements

  $ 172,405     $ 172,405  

Building

    3,529,730       3,529,730  

Computer hardware and software

    674,038       674,038  

Furniture and equipment

    1,141,208       1,141,208  

Automobile

    33,550        
      5,550,931       5,517,381  

Accumulated depreciation

    (3,104,606 )     (2,939,509 )

Land

    1,468,413       1,468,413  
                 
Premises and equipment, net   $ 3,914,738     $ 4,046,285  

 

The provision for depreciation charged to occupancy and equipment expense for the years ended December 31, 2020 and 2019, was $165,097 and $167,351, respectively.

 

 

7.

DEPOSITS

 

The aggregate amount of time deposits of $250,000 or more at December 31, 2020 and 2019, was $37,235,329 and $34,408,968, respectively.

 

Demand deposits reclassified as loan balances (overdrafts) as of December 31, 2020 and 2019, amounted to $18,171 and $35,508, respectively.

 

The maturities of time certificates of deposit and other time deposits issued by the Bank at December 31, 2020, are as follows:

 

Years Ending December 31, 2021        
2021   $ 68,373,525  
2022     12,841,325  
2023     5,076,341  
2024     6,474,977  
2025     1,643,698  
         
    $ 94,409,866  

 

Deposits also include the deposits of a local government entity with account balances totaling $26,532,543 and $26,135,168 at December 31, 2020 and 2019, respectively.

 

36

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

8.

BORROWINGS

 

Long-term debt consists of the following at December 31, 2020 and 2019:

 

    2020     2019  

Long-term capital note from Cheaha Statutory Trust I, from a pooled trust preferred private placement for subordinated debentures, dated August 4, 2005, bearing interest at a fixed rate of 6.235% for five years, then floating at LIBOR plus 1.70% (1.937% and 3.608% at December 31, 2020 and 2019, respectively). The subordinated debenture has a 30-year life with a call option of five years, subject to regulatory approval, or earlier, dependent upon certain changes in tax or investment company laws or regulatory capital requirements.

  $ 3,093,000     $ 3,093,000  
                 
    $ 3,093,000     $ 3,093,000  

 

In August 2005, Cheaha Statutory Trust I (the Trust), a Delaware statutory trust established by the Company, received $3,000,000 principal amount of the Trust's floating rate cumulative trust preferred securities (the Trust Preferred Securities) in a trust preferred private placement. The proceeds of that transaction were then used by the Trust to purchase an equal amount of floating rate subordinated debentures (the Subordinated Debentures) of the Company. The Company has fully and unconditionally guaranteed all obligations of the Trust on a subordinated basis with respect to the Trust Preferred Securities. In accordance with the provisions of ASC Topic 810,  the Company accounts for the Trust Preferred Securities as a long-term debt liability to the Trust. Subject to certain limitations, the Trust Preferred Securities qualify as Tier 1 capital.

 

The sole asset of the Trust is the Subordinated Debenture issued by the Company. Both the Trust Preferred Securities and the Subordinated Debentures have approximately 30-year lives. However, both the Company and the Trust have options to call their respective securities after five years, subject to regulatory capital requirements.

 

37

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

8.

BORROWINGS – CONTINUED

 

Maturities of long-term debt following December 31, 2020, are as follows:

 

Years Ending December 31,

       

2021

  $  

2022

     

2023

     

2024

     

2025

     
Thereafter     3,093,000  
         
    $ 3,093,000  

                                               

 

9.

INCOME TAXES

 

Federal and state income taxes receivable (payable) as of December 31, 2020 and 2019, included in other assets and other liabilities, were as follows:

      

    2020     2019  
Current:                

Federal

  $ (85,219 )   $ 5,788  

State

    (8,553 )     (187,725 )

 

38

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

9.

INCOME TAXES CONTINUED

 

The components of the net deferred income tax asset as of December 31, 2020 and 2019, are as follows:

 

 

 

2020

   

2019

 
Deferred income tax asset:                

Federal

  $ 615,305     $ 543,921  

State

    175,674       155,759  
                 

Total deferred income tax asset

    790,979       699,680  
                 
Deferred income tax liability:                

Federal

    (618,811 )     (256,257 )

State

    (176,818 )     (73,141 )
                 

Total deferred income tax liability

    (795,629 )     (329,398 )
                 

Net deferred tax asset

  $ (4,650 )   $ 370,282  

 

The tax effects of each type of income and expense item that gave rise to deferred taxes are:

 

   

2020

   

2019

 

Net unrealized (gains)/losses on securities available-for-sale

  $ (729,650 )   $ (253,718 )

Allowance for loan losses

    335,681       347,561  

Nonqualified deferred compensation

    276,997       284,959  

Deferred change in control compensation

    108,000        

Deferred origination fees

    69,854       66,807  

Depreciation

    (65,963 )     (75,414 )

Other

    431       87  
                 

Net deferred tax asset

  $ (4,650 )   $ 370,282  

 

Additionally, deferred tax assets are subject to a “more likely than not” test. If the “more likely than not” test is not met, a valuation allowance must be established against the deferred tax asset. The Company believes that it is “more likely than not” that the deferred tax asset, net of the valuation allowance, will be realized.

 

39

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

9.

INCOME TAXES CONTINUED

 

The components of income tax expense for the years ended December 31, 2020 and 2019, were as follows:

 

 

 

2020

   

2019

 
Current:                

Federal

  $ 501,779     $ 416,544  

State

    198,553       187,725  
                 
Deferred:                

Federal

    (79,000 )     20,000  

State

    (22,000 )     5,000  
                 
    $ 599,332     $ 629,269  

 

Tax effects of securities transactions resulted in an increase in income taxes for 2020 and 2019 of approximately $53,000 and $23,000, respectively.

 

40

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

9.

INCOME TAXES – CONTINUED

 

Income taxes for financial reporting purposes differ from the amount computed by applying the statutory federal income tax rate of 21% for the years ended December 31, 2020 and 2019, for the reasons below:

 

   

2020

   

2019

 
                 

Income tax expense on income computed at statutory federal income tax rate (21%)

  $ 697,560     $ 702,958  
                 
Increase (decrease) in taxes resulting from:                

State income tax, net of federal tax benefit

    156,857       148,303  

(Accretion) amortization of securities, net

    46,630       47,296  

Nondeductible reorganization costs

    31,661       35,106  

Interest expense disallowance

    13,795       17,020  

Insurance cash surrender value increase, net

    (17,322 )     (17,486 )

Tax-exempt loans and securities

    (310,217 )     (314,700 )

Other

    (19,632 )     10,772  
                 

Income tax expense

  $ 599,332     $ 629,269  

 

As of December 31, 2020, the Company has no uncertain tax positions that qualify for either recognition or disclosure in the consolidated financial statements under the current guidance. The Company has filed tax returns through 2020.

 

 

10.

REGULATORY CAPITAL MATTERS

 

Through December 31, 2019, the Company and Bank were subject to various regulatory capital requirements administered by the state and federal banking agencies. Failure to meet the minimum regulatory capital requirements could initiate certain mandatory and possible additional discretionary actions by regulators which, if undertaken, could have a direct material effect on the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary bank must meet specific capital guidelines involving quantitative measures of the Company and its subsidiary bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

 

The Bank's capital amounts and classification under the prompt corrective guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total risk-based capital and Tier 1 capital to risk-weighted assets (as defined in the regulations) and Tier 1 capital to adjusted total assets (as defined).

 

41

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

10.

REGULATORY CAPITAL MATTERS CONTINUED

 

In July 2013, the banking regulators (or FDIC) published final rules establishing a new comprehensive capital framework for U.S. banking organizations (the final rules). The final rules implement the Basel Committee of Banking Supervision’s December 2010 framework known as Basel III, as well as certain provisions of the Dodd-Frank Act. The final rules, which define the components of capital and also address risk weights, became effective on January 1, 2015. The final rules include a new capital ratio designated as common equity Tier 1 ratio, which is a tighter definition of Tier 1 capital (banks must hold 4.5% by January 2015 and then a further 2.5% capital conservation buffer, totaling 7% that is implemented annually through January 2019); an increase in Tier 1 capital ratio from 4% to 6%; a framework for countercyclical buffers; adjustments to prompt corrective action thresholds; and short- and medium-term quantitative liquidity ratios, and they establish criteria that instruments must meet in order to be considered regulatory capital.

 

Per section 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act, which became law on May 24, 2018, allows qualifying community banking organizations to opt into the Community Banking Leverage Ratio framework (CBLR). The CBLR is an optional framework that is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the CBLR. To be a qualifying community banking organization the Company must meet the following criteria: have a leverage ratio greater than nine percent, less than $10 billion in average total consolidated assets, Off-balance sheet exposures of 25 percent or less to total consolidated assets, total trading assets plus trading liabilities of five percent or less of total consolidated assets, and they are not an advanced approaches banking organization. Qualifying community banking organizations that elect to use the CBLR and that maintain a leverage ratio of greater than nine percent are considered to have satisfied the risk-based and leverage capital requirements in the agencies’ generally applicable capital rule. Additionally, such insured depository institutions are considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. The Company opted into the CBLR as of January 1, 2020.

 

If the Company fails to satisfy one or more of the qualifying criteria but maintains a leverage ratio of greater than eight percent, that banking organization would have a “grace period” of up to two quarters during which it could continue to use the CBLR framework and be deemed to meet the “well capitalized” capital ratio requirements. As long as the banking organization is able to return to compliance with all the qualifying criteria within two quarters, it continues to be deemed to meet the “well capitalized” ratio requirements and be in compliance with the generally applicable capital rule. A banking organization is required to comply with and report under the generally applicable capital rule and file the relevant regulatory reports if the banking organization (i) is unable to restore compliance with all qualifying criteria during the two-quarter grace period (including reporting a leverage ratio greater than nine percent), (ii) has a leverage ratio of eight percent or less, or (iii) ceases to satisfy the qualifying criteria due to consummation of a merger transaction.

 

Management believes, as of December 31, 2020, that the Company meets all the capital adequacy requirements to which it is subject.

 

42

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

10.

REGULATORY CAPITAL MATTERS – CONTINUED

 

The consolidated Company’s and Bank's capital amounts and ratios are as follows (dollars in thousands):

 

    December 31, 2020  
    Amount     Ratio  
Tier 1 leverage:                
Consolidated     26,305       10.960 %
Bank     29,284       12.220 %

 

                    

    Actual    

For Capital Adequacy

Purposes

   

To Be Well-Capitalized

Under the Prompt

Corrective Action

Provisions

 
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
As of December 31, 2019                                                
Total risk-based capital:                                                

Consolidated

  $ 26,337       20.185 %   $ 13,700       10.500 %     N/A       N/A  

Bank

    28,842       22.198 %     13,643       10.500 %   $ 12,993       10.000 %

Common equity Tier 1:

                                               

Consolidated

    24,899       19.083 %     9,133       7.000 %     N/A       N/A  

Bank

    27,404       21.091 %     9,095       7.000 %     8,446       6.500 %

Tier 1 risk-based capital:

                                               

Consolidated

    24,899       19.083 %     11,090       8.500 %     N/A       N/A  

Bank

    27,404       21.091 %     11,090       8.500 %     10,394       8.000 %

Tier 1 leverage:

                                               

Consolidated

    24,899       11.807 %     8,435       4.000 %     N/A       N/A  

Bank

    27,404       13.027 %     8,414       4.000 %     10,518       5.000 %

 

 

11.

BENEFIT PLANS

 

The Company has a profit-sharing plan (the Plan) established under Section 401(k) of the Internal Revenue Code for all eligible employees. The Plan allows employees to defer up to 15% of their earnings on a pretax basis through contributions to the Plan. In accordance with the provisions of the Plan, the Company will contribute a dollar-for-dollar match of the first 5% of an employee's salary followed by 50 cents for each dollar of the next 5% of an employee's salary. For the years ended December 31, 2020 and 2019, the Company recorded expenses for matching contributions of $102,501 and $96,019, respectively.

 

43

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

11.

BENEFIT PLANS CONTINUED

 

The Company has also entered into nonqualified deferred compensation agreements (the Agreements) covering certain executive officers. The Agreements provide for payments of scheduled benefits to the participants or their beneficiaries for a period of 15 years following specified retirement dates (Full Benefit Dates). The Full Benefit Dates range from year 2018 through 2032 and reflect the participant having reached age 65. The Agreements provide for defined retirement benefits (Full Retirement Benefits) upon the fulfillment of certain conditions related primarily to continued length of service. Reduced retirement benefits (Limited Retirement Benefits) are also scheduled in the Agreements, should separation of service occur prior to the Full Benefit Date under certain conditions. The scheduled Limited Retirement Benefits reflect annual increases until reaching the Full Retirement Benefits on the Full Benefit Date. The Agreements provide that each annual increase is subject to annual approval by, and at the discretion of, the Company's Board of Directors, thereby potentially reducing the scheduled Full Retirement Benefits and the Limited Retirement Benefits. The Agreements also provide for acceleration of the length of service requirement to receive the Full Retirement Benefits upon change of control (as defined in the Agreements) and acceleration of both the Full Retirement Benefits and the Full Benefit Date as a result of death or disability (as defined). The present value of the estimated liability under the Agreements is being accrued over the expected remaining years of service.

 

The aggregate benefit cost expected to be accrued for the year ending December 31, 2021, is $19,278.

 

The measurement date for the Agreements is December 31 of each year. A weighted average assumed discount rate of 7% was used in calculating the accumulated benefit obligation. There are no plan assets on which to compute long-term rates of return. Since there are no plan assets, the Plan is underfunded by the total amount of the benefit obligation liability. Furthermore, the  Company plans on funding the required payments through the continuing operations of the Bank.

 

The present value of the Agreements' accumulated benefit obligation included in other liabilities amounted to $1,025,912 and $1,055,405 at December 31, 2020 and 2019, respectively. The expense of the Agreements was ($29,493) and $53,971 at December 31, 2020 and 2019, respectively.

 

44

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

11.

BENEFIT PLANS – CONTINUED

 

Expected benefit payments for the Salary Continuation and Executive Management Retirement Plans for the 10-year period following December 31, 2020, are as follows:

 

Years Ending December 31,          
2021     $  
2022        
2023       95,400  
2024       95,400  
2025       95,400  
  2026 - 2030       477,000  
           
      $ 763,200  

 

The Company has purchased single premium life insurance policies on behalf of the executive officers. The Company is the owner of the policies and the related cash surrender values thereon. The cash value of the policies is generally intended to fund, in part, the nonqualified deferred compensation agreements; however, there exists no formal collateralization or securitization of the Agreements by the Company. The difference in the face value and the cash surrender value of the policies is payable to the officers' designated beneficiaries and is subject to limitations. The cash surrender values at December 31, 2020 and 2019, amounted to $3,002,548 and $2,920,062, respectively.

 

 

12.

COMMITMENTS AND CONTINGENCIES

 

In the normal course of business, the Company offers a variety of financial products to its customers to aid them in meeting their requirements for liquidity, credit enhancement, and interest rate protection. U.S. GAAP recognizes these transactions as contingent liabilities and, accordingly, they are not reflected in the consolidated financial statements.

 

Loan commitments are made to accommodate the financial needs of the Company's customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Historically, most loan commitments and standby letters of credit expire unused. The Company's exposure to credit loss in the event of nonperformance  by the counterparty to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same underwriting standards in making commitments and conditional obligations as it does for on- balance sheet instruments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties. The standby letters of credit at December 31, 2020, were unsecured.

 

45

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

12.

COMMITMENTS AND CONTINGENCIES – CONTINUED

 

The Bank records a liability, when material, for the estimated fair value of standby letters of credit based on the fees charged for these arrangements. At December 31, 2020 and 2019, this liability was not material to these consolidated financial statements.

 

The approximate total amounts of loan commitments and commercial letters of credit are summarized as follows at December 31:

 

    2020    

2019

 

Commitments to extend credit

  $ 16,975,268     $ 15,066,456  

Commercial letters of credit

    68,100       89,100  

Credit card commitments

    52,598       48,950  
                 
    $ 17,095,966     $ 15,204,506  

 

Credit card commitments are unsecured. Management conducts regular reviews of these instruments on an individual customer basis. Management does not anticipate any material losses as a result of these commitments.

 

The Bank, as part of its retail mortgage loan production activities, routinely enters into short-term commitments to originate fixed-rate loans. Most of the loans will be sold to third-party correspondent banks upon closing. For those loans, the Bank enters into individual forward sales commitments at the same time the commitment to originate is finalized. While the forward sales commitments function as an economic hedge and effectively eliminate the Bank's financial risk of rate changes during the interest rate lock period, both the commitment to originate mortgage loans that will be sold and the commitment to sell the mortgage loans are derivatives, the fair values of which are essentially equal and offsetting. The fair values are calculated based on changes in market interest rates after the commitment date. The notional amounts of these mortgage loan origination commitments and the related forward sales commitments were  immaterial  at  December 31, 2020. The unrealized gains/losses of the origination and sales commitments were not material at December 31, 2020.

 

The Company has employment agreements with certain members of executive management and some of them contain provisions for a change in control. As of December 31, 2020, the Company has accrued $400,000 for the payment of the change of control provisions of the employment agreements. See Note 18.

 

46

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

13.

CONCENTRATIONS OF CREDIT

 

Most of the Bank's loans, loan commitments, and commercial standby letters of credit have been granted to customers in the Bank's market area. Many such customers are depositors of the Bank. A substantial portion of the Bank's customers’ ability to honor their contracts is dependent on the business economies in those areas. Of the Bank's loan portfolio, 75% is concentrated in real estate (Note 5). A substantial portion of these loans is secured by real estate in the Bank's primary market area. In addition, a substantial portion of the foreclosed real estate is located in these same markets. Accordingly, the ultimate collectability of the loan portfolio and the recovery of the carrying amount of foreclosed real estate are susceptible to changes in market conditions in the Bank's primary market area.

 

The other significant concentrations of credit by type of loan are set forth in Note 5. The distribution of commitments to extend credit related primarily to unused real estate draw lines and unfunded commercial loans. Commercial and standby letters of credit were granted primarily to commercial borrowers.

 

 

14.

RESTRICTIONS ON SUBSIDIARY DIVIDENDS

 

The Bank is subject to the dividend restrictions set forth by the State Banking Department. Under such restrictions, the Bank may not, without the prior approval of the State Banking Department, declare dividends in excess of the sum of the current year's earnings plus the retained net earnings from the preceding two years. For the year ending December 31, 2021, the Bank can declare dividends, without prior regulatory approval, of approximately $414,000, plus an additional amount equal to its net profits for 2021. However, restrictions exist related to the maintenance of adequate capital and, as such, may further restrict the amounts of allowable dividends which can be paid.

 

 

15.

RELATED PARTY TRANSACTIONS

 

Loans

Certain directors, executive officers, and principal stockholders, including their immediate families and associates, were loan customers of the Bank during 2020 and 2019. A summary of activity and amounts outstanding as of December 31 are as follows:

 

   

2020

   

2019

 

Balance at beginning of year

  $ 2,438,563     $ 2,853,615  

New loans or advances

    571,848       786,838  

Principal repayments

    (889,979 )     (1,201,890 )
                 

Balance at end of year

  $ 2,120,432     $ 2,438,563  

 

47

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

15.

RELATED PARTY TRANSACTIONS – CONTINUED

 

Deposits

Total deposits of related parties at December 31, 2020 and 2019, amounted to $7,105,019 and $7,021,407, respectively.

 

 

16.

LITIGATION

 

While the Company and the Bank are parties to various legal proceedings arising from the ordinary course of business, management believes, after consultation with legal counsel, that there are no proceedings threatened or pending against the Company or the Bank that will, individually or in the aggregate, have a material adverse effect on the business or financial condition of the Company.

 

 

17.

FAIR VALUES OF FINANCIAL INSTRUMENTS

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

 

Cash and cash equivalents – For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Securities – For securities available-for-sale and securities held-to-maturity, fair values are based on quoted market prices or dealer quotes. For other investments, fair value is estimated to be approximately the carrying amount.

 

Mortgage loans held-for-sale – For mortgage loans held-for-sale, the carrying amount is a reasonable estimate of fair value.

 

Loans – For certain homogeneous categories of loans, such as some residential mortgages, credit card receivables, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

 

Accrued interest receivable and payable – The carrying amount of accrued interest receivable and payable approximates fair value.

 

Deposits – The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

 

Borrowings – Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

 

48

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

17.

FAIR VALUES OF FINANCIAL INSTRUMENTS CONTINUED

 

Commitments to extend credit, letters of credit, insurance contracts underwritten, and financial guarantees written – The fair value of commitments, letters of credit, insurance contracts underwritten, and financial guarantees is estimated to be approximately the fees charged for these arrangements.

 

The estimated fair values of the Company's financial instruments as of December 31, 2020 and 2019, are as follows:

 

    2020     2019  
   

Carrying

Amount

    Fair Value    

Carrying

Amount

    Fair Value  
    (In Thousands)  
Financial assets:                                

Cash and cash equivalents

  $ 15,341     $ 15,341     $ 11,255     $ 11,255  

Securities available-for-sale

    84,786       84,786       69,267       69,267  

Securities held-to-maturity

    15       15       694       697  

Restrictive equity investments

    282       282       275       275  

Mortgage loans held-for-sale

    185       185              

Loans, net

    126,495       128,934       119,606       120,512  

Accrued interest receivable

    988       988       882       882  
                                 
Financial liabilities:                                

Deposits

    201,690       199,406       178,803       172,483  

Accrued interest payable

    400       400              

Borrowings

    3,093       3,093       3,093       3,093  
                                 
Unrecognized financial instruments:                                

Commitments to extend credit

    16,975       170       15,066       151  

Standby letters of credit

    68       1       89       1  

Credit card guarantees

    53       1       49        

 

The Company’s assets and liabilities recorded at fair value have been categorized in the following tables based upon a fair value hierarchy in accordance with ASC Topic 820 (Note 2).

 

49

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

17.

FAIR VALUES OF FINANCIAL INSTRUMENTS CONTINUED

 

Items Measured at Fair Value on a Recurring Basis

The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019:

 

    December 31, 2020  
            Fair Value Measurement at Report Date Using  
    Fair Value    

Quoted Prices

in Active

Markets

Level 1

   

Significant

Other

Observable

Inputs

Level 2

   

Significant

Unobservable

Inputs

Level 3

 
Securities available-for-sale:                                

State and municipal

  $ 64,881,340     $     $ 64,881,340     $  
Mortgage-backed:                                

GSE residential

    19,904,365             19,904,365        

Marketable equity

    364       364              
                                 

Total assets at fair value

  $ 84,786,069     $ 364     $ 84,785,705     $  

 

 

    December 31, 2019  
            Fair Value Measurement at Report Date Using  
    Fair Value    

Quoted Prices

in Active

Markets

Level 1

   

Significant

Other

Observable

Inputs

Level 2

   

Significant

Unobservable

Inputs

Level 3

 
Securities available-for-sale:                                

State and municipal

  $ 43,806,318     $     $ 43,806,318     $  
Mortgage-backed:                                

GSE residential

    25,459,983             25,459,983        

Marketable equity

    364       364              
                                 

Total assets at fair value

  $ 69,266,665     $ 364     $ 69,266,301     $  

 

50

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

17.

FAIR VALUES OF FINANCIAL INSTRUMENTS CONTINUED

 

The valuation techniques used to measure fair value for the items in the table above are as follows:

 

Securities available-for-sale – Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, fair values are estimated using pricing models and discounted cash flows that consider standard input factors, such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include GSE obligations, corporate bonds, and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, the securities are classified in Level 3.

 

Items Measured at Fair Value on a Nonrecurring Basis

The following fair value hierarchy tables presents information about the Company’s assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2020 and 2019:

 

    December 31, 2020  
            Fair Value Measurement at Report Date Using  
    Fair Value    

Quoted Prices

in Active

Markets

Level 1

   

Significant

Other

Observable

Inputs

Level 2

   

Significant

Unobservable

Inputs

Level 3

 

Impaired loan, net

  $ 2,918,196     $     $     $ 2,918,196  
Foreclosed real estate                        
                                 

Total assets

  $ 2,918,196     $     $     $ 2,918,196  

 

51

                                        

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

17.

FAIR VALUES OF FINANCIAL INSTRUMENTS – CONTINUED

 

    December 31, 2019  
            Fair Value Measurement at Report Date Using  
    Fair Value    

Quoted Prices

in Active

Markets

Level 1

   

Significant

Other

Observable

Inputs

Level 2

   

Significant

Unobservable

Inputs

Level 3

 

Impaired loan, net

  $ 3,148,738     $     $     $ 3,148,738  
Foreclosed real estate                        
                                 

Total assets

  $ 3,148,738     $     $     $ 3,148,738  

                            

The valuation techniques used to measure fair value for the items in the table above are as follows:

 

Impaired Loans – Nonrecurring fair value adjustments to loans reflect full or partial writedowns that are based on the loan’s observable market price or current appraised value of the collateral. Loans subjected to nonrecurring fair value adjustments based on the current appraised value of the collateral may be classified as Level 2 or Level 3 depending on the type of asset and the inputs to the valuation. When appraisals are used to determine impairment, and these appraisals require significant adjustments to market-based valuation inputs or apply an income approach based on unobservable cash flows to measure fair value, the related loans subjected to nonrecurring fair value adjustments are typically classified as Level 3 due to the fact that Level 3 inputs are significant to the fair value measurement.

 

Foreclosed Real Estate – Nonrecurring fair value adjustments to foreclosed real estate reflect full or partial writedowns that are based on the real estate’s observable market price or current appraised value of the collateral as adjusted by management on occasion for estimated selling expenses and market discounts.

 

 

18.

SUBSEQUENT EVENTS

 

The Company has entered into a definitive agreement to be acquired by another financial institution. This transaction is scheduled to close in the second quarter of 2021 at an amount that is yet to be determined. This transaction will initiate the payment of the change of control provision of the employment agreements. The calculated change of control payment is in excess of $880,000; however, the individuals with the change of control provision in their employment agreement have agreed to accept a payment of $400,000, which will be paid from Cheaha Financial Group before closing (see Note 12).

 

52

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

19.

CONDENSED PARENT COMPANY INFORMATION

 

Statements of Financial Condition at December 31:

 

ASSETS

 

   

2020

   

2019

 

CASH AND DUE FROM BANKS

  $ 219,328     $ 45,950  

SECURITIES AVAILABLE-FOR-SALE

    364       364  

OTHER INVESTMENT SECURITIES

    93,000       93,000  

INVESTMENT IN SUBSIDIARY (equity method) –eliminated upon consolidation

    31,256,967       28,090,065  

DEFERRED TAX ASSET

    108,000        

INCOME TAXES RECEIVABLE

    96,273       451,496  

OTHER ASSETS

    459        
                 

TOTAL ASSETS

  $ 31,774,391     $ 28,680,875  

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

LIABILITIES                

Long-term debt

  $ 3,093,000     $ 3,093,000  

Accrued change in control compensation

    400,000        

Accrued interest payable

    2,350       2,750  
                 

TOTAL LIABILITIES

    3,495,350       3,095,750  
                 

STOCKHOLDERS' EQUITY

    28,279,041       25,585,125  
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 31,774,391     $ 28,680,875  

 

53

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

19.

CONDENSED PARENT COMPANY INFORMATION CONTINUED

 

Statements of Income for the Years Ended December 31:

 

   

2020

   

2019

 

INCOME

               

Dividends from subsidiary – eliminated upon consolidation

  $ 1,500,000     $ 4,205,000  

Other dividends

    2,367       3,957  
                 

TOTAL INCOME

    1,502,367       4,208,957  
                 

EXPENSES

               

Change in control compensation

    400,000        

Professional fees

    352,509       184,140  

Interest on debt

    78,150       131,123  

Other operating expenses

    9,510       7,385  
                 

TOTAL EXPENSES

    840,169       322,648  
                 

INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY

    662,198       3,886,309  
                 

INCOME TAX BENEFIT

    180,062       39,600  
                 

INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY

    842,260       3,925,909  
                 
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY     1,880,122       (1,207,755 )
                 
NET INCOME   $ 2,722,382     $ 2,718,154  

 

54

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

19.

CONDENSED PARENT COMPANY INFORMATION CONTINUED

 

Statements of Cash Flows for the Years Ended December 31:

 

   

2020

   

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 2,722,382     $ 2,718,154  
                 

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

               

Equity in undistributed income of subsidiary

    (1,880,122 )     1,207,755  

Change in deferred tax asset

    (108,000 )      

Change in income taxes receivable

    355,223        

Change in accrued change of control compensation

    400,000        

Change in accrued interest payable

    (400 )      

Change in other, net

    (459 )     (39,599 )
                 

Net cash provided by operating activities

    1,488,624       3,886,310  
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Cash dividends

    (1,284,910 )     (3,854,730 )

Purchase of treasury stock

    (30,336 )      
                 

Net cash used in financing activities

    (1,315,246 )     (3,854,730 )
                 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    173,378       31,580  
                 

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

    45,950       14,370  
                 

CASH AND CASH EQUIVALENTS AT END OF YEAR

  $ 219,328     $ 45,950  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

               
Cash paid during the year for interest   $ 78,550     $ 131,123  

 

55

Exhibit 99.3

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(Amounts in thousands)

(Unaudited)

 

   

March 31, 2021

       

ASSETS

     

Cash and due from banks

 

$

48,977

Interest-bearing deposits with other banks

   

202

Cash and cash equivalents

   

49,179

       
Available for sale securities at fair value      60,378
Held to maturity securities at amortized cost     

15

Loans, net of allowance for loan losses    

120,028

Mortgage loans held for sale    

331

Bank premises and equipment, net of accumulated depreciation    

3,875

Other equity securities    

211

Accrued interest receivable

   

837

Deferred tax asset

   

192

Bank owned life insurance

   

3,023

Other assets

   

12

Total assets

 

$

238,081

       

LIABILITIES

     

Deposits:

     

Noninterest-bearing

 

$

103,988

Interest-bearing

   

101,921

Total deposits

   

205,909

Junior subordinated debt

   

3,093

Accrued taxes and other liabilities

   

1,542

Total liabilities

   

210,544

       

STOCKHOLDERS EQUITY

     

Preferred stock

   

Common stock

   

5

Surplus

   

4,544

Retained earnings

   

21,951

Accumulated other comprehensive income

   

1,037

Total stockholders’ equity

   

27,537

Total liabilities and stockholders’ equity

 

$

238,081

 

 

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(Amounts in thousands, except share data)

(Unaudited)

 

   

Three months ended

March 31, 2021

       

INTEREST INCOME

     

Interest and fees on loans

 

$

2,254

Interest on investment securities

   

326

Other interest income

   

6

Total interest income

   

2,586

       

INTEREST EXPENSE

     

Interest on deposits

   

285

Interest on borrowings

   

13

Total interest expense

   

298

Net interest income

   

2,288

       

Provision for loan losses

   

Net interest income after provision for loan losses

    2,288
       

NONINTEREST INCOME

     

Service charges on deposit accounts

   

179

Change in the fair value of equity securities

   

254

Other operating income

   

92

Total noninterest income

   

525

Income before noninterest expense

   

2,813

       

NONINTEREST EXPENSE

     

Salaries and employee benefits

   

897

Occupancy

   

301

Data processing

   

150

Marketing

   

26

Professional fees

   

459

Other operating expenses

   

643

Total noninterest expense

   

2,476

Income before income tax expense

   

337

Income tax expense

   

143

Net income

 

$

194

       
Earnings per share:      

Basic earnings per share

 

$

0.38

Diluted earnings per share

    0.38
Average common shares outstanding      
Basic    

513,332

Diluted     513,332

 

 

 

Exhibit 99.4

 

Unaudited Pro Forma Condensed Combined Financial Information

 

The following unaudited pro forma condensed combined financial statements are based on the separate historical financial statements of Investar Holding Corporation (“Investar”) and Cheaha Financial Group, Inc. (“Cheaha”) and are adjusted to give effect to the April 1, 2021 acquisition of Cheaha.

 

The unaudited pro forma condensed combined balance sheet as of March 31, 2021 is presented as if the merger with Cheaha and the transactions that occurred therewith had occurred on March 31, 2021. The unaudited pro forma condensed combined income statements for the year ended December 31, 2020 and the three months ended March 31, 2021 are presented as if the merger and transactions that occurred therewith had occurred on January 1, 2020. The historical consolidated financial information has been adjusted to reflect factually supportable items that are directly attributable to the merger and, with respect to the income statements only, expected to have a continuing impact on consolidated results of operations.

 

The acquisition has been accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805 - Business Combinations. Under the acquisition method of accounting, the total purchase consideration of the acquisition is allocated to the tangible assets and identifiable intangible assets and liabilities assumed based on their relative fair values. The excess of the purchase consideration over the net tangible and identifiable intangible assets is recorded as goodwill. The purchase price allocation is preliminary because valuation of the net tangible and identifiable intangible assets is still being finalized. Accordingly, the pro forma adjustments related to the purchase price allocation and certain other adjustments are preliminary and have been made solely for the purpose of preparing the unaudited pro forma condensed combined financial statements. The estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date).

 

The unaudited pro forma condensed combined financial statements have been prepared for illustrative purposes only and are not intended to represent or be indicative of the consolidated financial position or results of operations in future periods or the results that actually would have been achieved if Investar and Cheaha had been a combined company during the period presented. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. The unaudited pro forma condensed combined statement of operations does not reflect any operating efficiencies and/or cost savings that the Company may achieve with respect to the combined companies.

 

These unaudited pro forma condensed combined financial statements should be read in conjunction with Investar’s historical consolidated financial statements and accompanying notes included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as well as Cheaha’s historical consolidated financial statements and related notes for the year ended December 31, 2020 which are included as Exhibit 99.2 to this Current Report filed on Form 8-K/A.

 

 

 

 

INVESTAR HOLDING CORPORATION

PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of March 31, 2021

(Amounts in thousands)

(Unaudited)

 

   

Historical

           
   

Investar Holding Corporation

 

Cheaha Financial

Group Inc.

 

Pro Forma Adjustments

     

Pro Forma Combined

                     

ASSETS

                   

Cash and cash equivalents

 

99,467

   

49,179

    (41,067 ) (1)    

107,579

 

Available for sale securities

 

301,433

   

60,378

    334   (2)    

362,145

 

Held to maturity securities

 

11,966

   

15

   

       

11,981

 

Loans

 

1,845,970

   

121,372

    (1,308 ) (3)     1,966,034  

Less: allowance for loan losses

 

(20,423

)

 

(1,344

)

 

1,344

  (4)    

(20,423

)

Net loans

 

1,825,547

   

120,028

   

36

       

1,945,611

 
Mortgage loans held for sale       331             331  

Other equity securities

 

16,763

   

211

   

       

16,974

 

Bank premises and equipment, net

 

56,631

   

3,875

    1,636   (5)    

62,142

 

Other real estate owned, net

 

1,518

       

       

1,518

 

Accrued interest receivable

 

12,868

   

837

   

       

13,705

 

Goodwill 

 

28,144

   

   

11,270

  (6)    

39,414

 
Other intangible assets   3,857         848   (7)     4,705  

Bank owned life insurance

 

39,131

   

3,023

   

       

42,154

 

Other assets

 

10,631

   

204

   

(107

) (8)    

10,728

 

Total assets

 

$

2,407,956

   

$

238,081

   

$

(27,050 )      

$

2,618,987

 
                     

LIABILITIES

                   

Deposits:

                   

Noninterest-bearing

 

$

515,487

   

$

103,988

   

$

       

$

619,475

 

Interest-bearing

 

1,494,393

   

101,921

    1,077   (9)    

1,597,391

 

Total deposits

 

2,009,880

   

205,909

    1,077        

2,216,866

 

Advances from Federal Home Loan Bank

 

82,500

   

   

       

82,500

 

Repurchase agreements

 

4,274

   

   

       

4,274

 

Subordinated debt, net of unamortized issuance costs

 

42,920

       

       

42,920

 

Junior subordinated debt

 

5,962

    3,093     (764 ) (10)    

8,291

 

Accrued taxes and other liabilities

 

14,169

   

1,542

   

174

  (11)    

15,885

 

Total liabilities

 

2,159,705

   

210,544

    487        

2,370,736

 
                     

STOCKHOLDERS EQUITY

                   

Total stockholders equity

 

248,251

   

27,537

    (27,537 )      

248,251

 

Total liabilities and stockholders equity

 

$

2,407,956

   

$

238,081

   

$

(27,050 )      

$

2,618,987

 

 

See accompanying notes to the unaudited pro forma condensed combined financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

For the three months ended March 31, 2021

(in thousands, except share data)

(Unaudited)

 

   

Historical

         
   

Investar Holding Corporation

  Cheaha Financial Group Inc.  

Pro Forma Adjustments

   

Pro Forma Combined

                   

Interest and fee income

 

$

22,969

 

$

2,586

 

$

95

  (12)

$

25,650

 

Interest expense

 

3,335

 

298

 

(66

) (13)(14)

3,567

 

Net interest income

 

19,634

 

2,288

 

161

   

22,083

 

Provision for loan losses

 

400

 

     

400

 

Net interest income after provision for loan losses

 

19,234

 

2,288

 

161

   

21,683

 

Noninterest income

 

2,365

 

525

 

   

2,890

 

Noninterest expense

 

14,809

 

2,476

 

(908

) (15)(16)(17)

16,377

 

Income before income tax expense

 

6,790

 

337

 

1,069

   

8,196

 

Income tax expense

 

1,430

 

143

  224   (18)

1,797

 

Net Income

 

$

5,360

 

$

194

 

$

845

   

$

6,399

 
                   

Earnings per share:

                 

Basic earnings per share

 

$

0.51

 

$

0.38

       

$

0.61

Diluted earnings per share

 

 

0.51

 

 

0.38

       

 

0.61

                   

Average common shares outstanding

                 

Basic

 

10,509,468

 

513,332

  (513,332 )   10,509,468  

Diluted

 

10,567,173

  513,332   (513,332 )   10,567,173  

 

See accompanying notes to the unaudited pro forma condensed combined financial statements.

 

INVESTAR HOLDING CORPORATION

PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

For the year ended December 31, 2020

(in thousands, except share data)

(Unaudited)

 

   

Historical

         
   

Investar Holding Corporation

  Cheaha Financial Group Inc.  

Pro Forma Adjustments

   

Pro Forma Combined

                   

Interest and fee income

 

$

93,794

 

$

10,129

  733   (12)

$

104,656  

Interest expense

 

20,260

 

1,781

  (467 ) (13)(14)

21,574

 

Net interest income

 

73,534

 

8,348

  1,200    

83,082

 

Provision for loan losses

 

11,160

 

      11,160  

Net interest income after provision for loan losses

 

62,374

  8,348   1,200    

71,922

 

Noninterest income

 

12,096

  1,161  

   

13,257

 

Noninterest expense

 

57,131

 

6,188

 

302

  (15)(16)

63,621

 

Income before income tax expense

 

17,339

 

3,321

 

898

   

21,558

 

Income tax expense

 

3,450

 

599

  189   (18)

4,238

 

Net Income

 

$

13,889

 

$

2,722

 

$

709

   

$

17,320

 
                   

Earnings per share:

                 

Basic earnings per share

 

$

1.27

 

$

5.30

       

$

1.60

Diluted earnings per share

 

 

1.27

 

 

5.30

       

 

1.59

                   

Average common shares outstanding

                 

Basic

 

10,850,936

 

542,500

  (542,500 )   10,850,936  

Diluted

 

10,865,847

 

542,500

  (542,500 )   10,865,847  

 

See accompanying notes to the unaudited pro forma condensed combined financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

NOTE 1. BASIS OF PRESENTATION

 

Effective April 1, 2021, Investar Holding Corporation (NASDAQ: ISTR) (“Investar”), the holding company for Investar Bank, completed its acquisition of Cheaha Financial Group, Inc. (“Cheaha”), the holding company for Cheaha Bank, in Oxford, Alabama. The acquisition was completed pursuant to the terms of the Agreement and Plan of Reorganization (the “Reorganization Agreement”), dated January 21, 2021, by and among Investar, Cheaha, Investar Bank and High Point Acquisition, Inc., a Louisiana corporation and wholly-owned subsidiary of Investar (“Merger Subsidiary”). Pursuant to the Reorganization Agreement, the Merger Subsidiary was merged with and into Cheaha, with Cheaha as the surviving corporation. Immediately following the initial merger, Cheaha was merged with and into Investar, with Investar as the surviving corporation, and then Cheaha Bank was merged with and into Investar Bank, with Investar Bank as the surviving bank. The mergers took place in immediate succession.

 

Under the terms of the Reorganization Agreement, each of the issued and outstanding shares of Cheaha common stock was converted into and represents the right to receive $80.00 in cash from Investar. In the aggregate, Cheaha’s shareholders received approximately $41.1 million in cash consideration as a result of the merger.

 

The unaudited pro forma condensed combined balance sheet and statements of income, including per share data, are presented after giving effect to the merger. The pro forma financial information assumes that the merger with Cheaha occurred on January 1, 2020 for purposes of the unaudited pro forma condensed combined statement of income and on March 31, 2021 for the purposes of the unaudited pro forma condensed combined balance sheet and gives effect to the merger, for purposes of the unaudited pro forma condensed combined statement of income, as if it had been effective during the entire period.

 

The merger will be accounted for using the acquisition method of accounting; accordingly, the difference between the purchase price over the estimated fair value of the assets acquired (including identifiable intangible assets) and liabilities assumed will be recorded as goodwill.

 

The pro forma financial information includes estimated adjustments to record the assets and liabilities of Cheaha at their respective fair values and represents management’s estimates based on available information. The pro forma adjustments included herein will likely be revised as additional information becomes available and as additional analysis is performed. The final allocation of the purchase price will be determined after completion of a final analysis to determine the fair values of Cheaha’s tangible and identifiable intangible assets and liabilities as of the closing date and any differences could be material.

 

NOTE 2. PRO FORMA ADJUSTMENTS

 

The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information. All adjustments are based on current valuations, estimates and assumptions that are subject to change and such change could be material.

 

1. Cash consideration paid to the shareholders of Cheaha.

2. Fair value adjustment on investment securities available for sale based on quoted market prices or prices quoted for similar financial instruments.

3. Adjustment represents the fair value adjustments of loans. The purchase accounting adjustment for the acquired loan portfolio is based on (1) current market interest rates and (2) Investar’s initial evaluation of credit deterioration identified in Cheaha’s loan portfolio.

4. Adjustment reflects elimination of Cheahas historical allowance for loan losses. Purchased loans acquired in a business combination are required to be recorded at fair value and the recorded allowance of the acquired company may not be carried over.

5. Adjustment reflects the fair value of fixed assets acquired.

6. Goodwill of $11.3 million was recorded as a result of the total purchase price paid by Investar and the fair value of assets purchased exceeding the fair value of liabilities assumed.

7. Adjustment represents the recognition of the fair value of acquired core deposit intangible. The core deposit intangible is calculated as the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base.

8. Adjustment represents adjustments to other assets, including deferred taxes associated with the adjustments to record the assets and liabilities of Cheaha at fair value.

9. Adjustment reflects the fair value premium on time deposits which was calculated by discounting future contractual payments at a current market interest rate.

10. Adjustment represents the fair value discount adjustment to trust preferred long-term debt obligations.

11. Adjustment to other liabilities, including accounts payable and deferred taxes associated with the adjustments to record the assets and liabilities of Cheaha at fair value.

12. Interest income on loans was adjusted to reflect the amortization of the loan premium and the accretion of the credit discount on a level-yield method over the estimated remaining terms to maturity of the loans acquired.

13. Interest expense on deposits was adjusted to reflect the amortization of the time deposit fair value premium over the remaining life of the deposits. The estimated amount of the amortization is $85,000 for the three months ended March 31, 2021 and $541,000 for the year ended December 31, 2020.

14. Interest expense on borrowings was adjusted to reflect the amortization of the fair value adjustment to the trust preferred long-term debt obligations. The estimated amount of the amortization is $19,000 for the three months ended March 31, 2021 and $74,000 for the year ended December 31, 2020.

15. Represents the amortization of the core deposit intangible over an estimated useful life of ten years using the sum of the years digits method assuming the merger closed on January 1, 2020. The estimated amount of the amortization is $36,000 for the three months ended March 31, 2021 and $135,000 for the year ended December 31, 2020.

16. Adjustment represents the additional depreciation expense related to the fair value of fixed assets acquired. The estimated amount of additional depreciation is $42,000 for the three months ended March 31, 2021 and $167,000 for the year ended December 31, 2020.

17. Adjustment represents the elimination of historical nonrecurring transaction costs of $986,000 incurred during the three months ended March 31, 2021 that directly related to the Cheaha acquisition.

18. Adjustment represents the net federal tax effect of the pro forma adjustments using Investar’s statutory tax rate of 21%.

 

 

 

 

 

 

 

NOTE 3. PRO FORMA ALLOCATION OF PURCHASE PRICE

 

The following table shows the pro forma allocation of the consideration paid for Cheaha’s common equity to the acquired identifiable assets and liabilities assumed and the pro forma goodwill generated from the transaction.

 

Purchase price:

     

Cash paid

   

$

41,067

 
       

Identifiable assets:

     

Cash and cash equivalents

    49,208

Investment securities

    60,938

Net loans

    120,395

Bank premises and equipment

    5,511
Core deposit intangible     848

Bank owned life insurance

    3,023

Other assets

    905

Total identifiable assets

   

240,828

 
       

Identifiable liabilities:

     

Deposits

    206,986
Notes payable     2,329

Other liabilities

    1,716

Total identifiable liabilities

   

211,031

 
       

Net assets acquired

    29,797  

Resulting goodwill

   

$

11,270