UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-36522
Investar Holding Corporation
(Exact name of registrant as specified in its charter)
| Louisiana | 27-1560715 | ||||
| (State or other jurisdiction of | (I.R.S. Employer |
10500 Coursey Boulevard, Baton Rouge, Louisiana 70816
(Address of principal executive offices, including zip code)
(225) 227-2222
(Registrant’s telephone number, including area code)
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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☒ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | ||||||||
| 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the issuer’s class of common stock, as of the latest practicable date, is as follows: Common stock, $1.00 par value, 9,828,413 shares outstanding as of November 5,2024.
GLOSSARY OF DEFINED TERMS
Below is a listing of certain acronyms, abbreviations and defined terms, among others, used throughout this Quarterly Report on Form 10-Q.
| AFS |
– |
Available For Sale |
| ALCO |
– |
Asset/Liability Committee |
| Annual Report | – | Investar Holding Corporation’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 7, 2024 |
| ASC |
– |
Accounting Standards Codification |
| ASU |
– |
Accounting Standards Update |
| ATM |
– |
Automated Teller Machine |
| Bank | – | Investar Bank, National Association |
| BOLI |
– |
Bank Owned Life Insurance |
| BTFP | – | Bank Term Funding Program |
| CECL |
– |
Current Expected Credit Loss |
| Company | – | Investar Holding Corporation and its wholly-owned subsidiary the Bank (also, “we,” “our,” or “us”) |
| FASB |
– |
Financial Accounting Standards Board |
| FDIC |
– |
Federal Deposit Insurance Corporation |
| FHLB |
– |
Federal Home Loan Bank |
| FRB |
– |
Federal Reserve Bank of Atlanta |
| GAAP |
– |
U.S. Generally Accepted Accounting Principles |
| HTM |
– |
Held To Maturity |
| ITM | – | Interactive Teller Machine |
| ROU |
– |
Right-Of-Use |
| RSU | – | Restricted Stock Unit |
| SBIC |
– |
Small Business Investment Company |
| SEC | – | U.S. Securities and Exchange Commission |
| SOFR |
– |
Secured Overnight Financing Rate |
| U.S. |
– |
United States |
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
| September 30, 2024 | December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 28,869 | $ | 28,285 | ||||
| Interest-bearing balances due from other banks | 57,471 | 3,724 | ||||||
| Cash and cash equivalents | 86,340 | 32,009 | ||||||
| Available for sale securities at fair value (amortized cost of $ and $, respectively) | 350,646 | 361,918 | ||||||
| Held to maturity securities at amortized cost (estimated fair value of $ and $, respectively) | 18,302 | 20,472 | ||||||
| Loans | 2,155,846 | 2,210,619 | ||||||
| Less: allowance for credit losses | (28,103 | ) | (30,540 | ) | ||||
| Loans, net | 2,127,743 | 2,180,079 | ||||||
| Equity securities at fair value | 2,434 | 1,180 | ||||||
| Nonmarketable equity securities | 13,951 | 13,417 | ||||||
| Bank premises and equipment, net of accumulated depreciation of $ and $, respectively | 41,795 | 44,183 | ||||||
| Other real estate owned, net | 4,739 | 4,438 | ||||||
| Accrued interest receivable | 14,324 | 14,366 | ||||||
| Deferred tax asset | 14,719 | 16,910 | ||||||
| Goodwill and other intangible assets, net | 41,844 | 42,320 | ||||||
| Bank owned life insurance | 61,667 | 58,797 | ||||||
| Other assets | 24,069 | 25,066 | ||||||
| Total assets | $ | 2,802,573 | $ | 2,815,155 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing | $ | 437,734 | $ | 448,752 | ||||
| Interest-bearing | 1,849,674 | 1,806,975 | ||||||
| Total deposits | 2,287,408 | 2,255,727 | ||||||
| Advances from Federal Home Loan Bank | 63,500 | 23,500 | ||||||
| Borrowings under Bank Term Funding Program | 109,000 | 212,500 | ||||||
| Repurchase agreements | 12,994 | 8,633 | ||||||
| Subordinated debt, net of unamortized issuance costs | 36,494 | 44,320 | ||||||
| Junior subordinated debt | 8,709 | 8,630 | ||||||
| Accrued taxes and other liabilities | 38,926 | 35,077 | ||||||
| Total liabilities | 2,557,031 | 2,588,387 | ||||||
| Commitments and contingencies (Note 11) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, par value per share; shares authorized | — | — | ||||||
| Common stock, $ par value per share; shares authorized; and shares issued and outstanding, respectively | 9,828 | 9,748 | ||||||
| Surplus | 146,393 | 145,456 | ||||||
| Retained earnings | 127,860 | 116,711 | ||||||
| Accumulated other comprehensive loss | (38,539 | ) | (45,147 | ) | ||||
| Total stockholders’ equity | 245,542 | 226,768 | ||||||
| Total liabilities and stockholders’ equity | $ | 2,802,573 | $ | 2,815,155 | ||||
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share data)
(Unaudited)
| Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| INTEREST INCOME |
||||||||||||||||
| Interest and fees on loans |
$ | 32,764 | $ | 28,892 | $ | 97,060 | $ | 84,764 | ||||||||
| Interest on investment securities: |
||||||||||||||||
| Taxable |
2,755 | 3,055 | 8,338 | 9,402 | ||||||||||||
| Tax-exempt |
228 | 216 | 680 | 440 | ||||||||||||
| Other interest income |
1,101 | 997 | 2,282 | 1,927 | ||||||||||||
| Total interest income |
36,848 | 33,160 | 108,360 | 96,533 | ||||||||||||
| INTEREST EXPENSE |
||||||||||||||||
| Interest on deposits |
15,729 | 11,733 | 45,439 | 27,488 | ||||||||||||
| Interest on borrowings |
3,263 | 3,958 | 10,651 | 13,016 | ||||||||||||
| Total interest expense |
18,992 | 15,691 | 56,090 | 40,504 | ||||||||||||
| Net interest income |
17,856 | 17,469 | 52,270 | 56,029 | ||||||||||||
| Provision for credit losses |
(945 | ) | (34 | ) | (2,779 | ) | (2,486 | ) | ||||||||
| Net interest income after provision for credit losses |
18,801 | 17,503 | 55,049 | 58,515 | ||||||||||||
| NONINTEREST INCOME |
||||||||||||||||
| Service charges on deposit accounts |
828 | 806 | 2,437 | 2,292 | ||||||||||||
| Gain (loss) on call or sale of investment securities, net |
1 | — | (382 | ) | (1 | ) | ||||||||||
| (Loss) gain on sale or disposition of fixed assets, net |
— | (367 | ) | 427 | (1,284 | ) | ||||||||||
| (Loss) gain on sale of other real estate owned, net |
(4 | ) | 23 | 708 | (114 | ) | ||||||||||
| Gain on sale of loans |
— | — | — | 75 | ||||||||||||
| Servicing fees and fee income on serviced loans |
— | 2 | — | 12 | ||||||||||||
| Interchange fees |
403 | 399 | 1,208 | 1,280 | ||||||||||||
| Income from bank owned life insurance |
459 | 357 | 1,310 | 1,046 | ||||||||||||
| Change in the fair value of equity securities |
174 | 22 | 254 | (89 | ) | |||||||||||
| Legal settlement |
1,122 | — | 1,122 | — | ||||||||||||
| Other operating income |
561 | 395 | 1,958 | 1,566 | ||||||||||||
| Total noninterest income |
3,544 | 1,637 | 9,042 | 4,783 | ||||||||||||
| Income before noninterest expense |
22,345 | 19,140 | 64,091 | 63,298 | ||||||||||||
| NONINTEREST EXPENSE |
||||||||||||||||
| Depreciation and amortization |
760 | 900 | 2,359 | 2,871 | ||||||||||||
| Salaries and employee benefits |
9,982 | 9,463 | 28,823 | 28,140 | ||||||||||||
| Occupancy |
652 | 618 | 1,929 | 2,288 | ||||||||||||
| Data processing |
880 | 888 | 2,710 | 2,590 | ||||||||||||
| Marketing |
121 | 83 | 234 | 234 | ||||||||||||
| Professional fees |
473 | 516 | 1,363 | 1,472 | ||||||||||||
| Gain on early extinguishment of subordinated debt |
— | — | (502 | ) | — | |||||||||||
| Other operating expenses |
3,312 | 3,306 | 10,037 | 9,595 | ||||||||||||
| Total noninterest expense |
16,180 | 15,774 | 46,953 | 47,190 | ||||||||||||
| Income before income tax expense |
6,165 | 3,366 | 17,138 | 16,108 | ||||||||||||
| Income tax expense |
784 | 585 | 2,993 | 2,968 | ||||||||||||
| Net income |
$ | 5,381 | $ | 2,781 | $ | 14,145 | $ | 13,140 | ||||||||
| EARNINGS PER SHARE |
||||||||||||||||
| Basic earnings per share |
$ | 0.55 | $ | 0.28 | $ | 1.44 | $ | 1.33 | ||||||||
| Diluted earnings per share |
0.54 | 0.28 | 1.43 | 1.33 | ||||||||||||
| Cash dividends declared per common share |
0.105 | 0.10 | 0.305 | 0.295 | ||||||||||||
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net income | $ | 5,381 | $ | 2,781 | $ | 14,145 | $ | 13,140 | ||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Investment securities: | ||||||||||||||||
| Unrealized gain (loss), available for sale, net of tax expense (benefit) of $, ($), $ and ($), respectively | 10,523 | (11,287 | ) | 6,306 | (11,540 | ) | ||||||||||
| Reclassification of realized (gain) loss, available for sale, net of tax benefit of $, $, $ and $, respectively | (1 | ) | — | 302 | 1 | |||||||||||
| Total other comprehensive income (loss) | 10,522 | (11,287 | ) | 6,608 | (11,539 | ) | ||||||||||
| Total comprehensive income (loss) | $ | 15,903 | $ | (8,506 | ) | $ | 20,753 | $ | 1,601 | |||||||
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in thousands, except share data)
(Unaudited)
| Accumulated | ||||||||||||||||||||
| Other | Total | |||||||||||||||||||
| Common | Retained | Comprehensive | Stockholders’ | |||||||||||||||||
| Stock | Surplus | Earnings | (Loss) Income | Equity | ||||||||||||||||
| Three months ended: | ||||||||||||||||||||
| September 30, 2023 | ||||||||||||||||||||
| Balance at beginning of period | $ | 9,831 | $ | 145,347 | $ | 112,344 | $ | (49,165 | ) | $ | 218,357 | |||||||||
| Surrendered shares | — | (7 | ) | — | — | (7 | ) | |||||||||||||
| Dividends declared, $ per share | — | — | (977 | ) | — | (977 | ) | |||||||||||||
| Stock-based compensation | 2 | 525 | — | — | 527 | |||||||||||||||
| Shares repurchased | (53 | ) | (624 | ) | — | — | (677 | ) | ||||||||||||
| Net income | — | — | 2,781 | — | 2,781 | |||||||||||||||
| Other comprehensive loss, net | — | — | — | (11,287 | ) | (11,287 | ) | |||||||||||||
| Balance at end of period | $ | 9,780 | $ | 145,241 | $ | 114,148 | $ | (60,452 | ) | $ | 208,717 | |||||||||
| September 30, 2024 | ||||||||||||||||||||
| Balance at beginning of period | $ | 9,829 | $ | 145,918 | $ | 123,510 | $ | (49,061 | ) | $ | 230,196 | |||||||||
| Surrendered shares | — | (7 | ) | — | — | (7 | ) | |||||||||||||
| Dividends declared, $ per share | — | — | (1,031 | ) | — | (1,031 | ) | |||||||||||||
| Stock-based compensation | 1 | 518 | — | — | 519 | |||||||||||||||
| Shares repurchased | (2 | ) | (36 | ) | — | — | (38 | ) | ||||||||||||
| Net income | — | — | 5,381 | — | 5,381 | |||||||||||||||
| Other comprehensive income, net | — | — | — | 10,522 | 10,522 | |||||||||||||||
| Balance at end of period | $ | 9,828 | $ | 146,393 | $ | 127,860 | $ | (38,539 | ) | $ | 245,542 | |||||||||
| Accumulated | ||||||||||||||||||||
| Other | Total | |||||||||||||||||||
| Common | Retained | Comprehensive | Stockholders’ | |||||||||||||||||
| Stock | Surplus | Earnings | (Loss) Income | Equity | ||||||||||||||||
| Nine months ended: | ||||||||||||||||||||
| September 30, 2023 | ||||||||||||||||||||
| Balance at beginning of period | $ | 9,902 | $ | 146,587 | $ | 108,206 | $ | (48,913 | ) | $ | 215,782 | |||||||||
| Cumulative effect of adoption of ASU 2016-13, net | — | — | (4,295 | ) | (4,295 | ) | ||||||||||||||
| Surrendered shares | (21 | ) | (330 | ) | — | — | (351 | ) | ||||||||||||
| Options exercised | 8 | 97 | — | — | 105 | |||||||||||||||
| Dividends declared, $ per share | — | — | (2,903 | ) | — | (2,903 | ) | |||||||||||||
| Stock-based compensation | 82 | 1,384 | — | — | 1,466 | |||||||||||||||
| Shares repurchased | (191 | ) | (2,497 | ) | — | — | (2,688 | ) | ||||||||||||
| Net income | — | — | 13,140 | — | 13,140 | |||||||||||||||
| Other comprehensive loss, net | — | — | — | (11,539 | ) | (11,539 | ) | |||||||||||||
| Balance at end of period | $ | 9,780 | $ | 145,241 | $ | 114,148 | $ | (60,452 | ) | $ | 208,717 | |||||||||
| September 30, 2024 | ||||||||||||||||||||
| Balance at beginning of period | $ | 9,748 | $ | 145,456 | $ | 116,711 | $ | (45,147 | ) | $ | 226,768 | |||||||||
| Surrendered shares | (94 | ) | (1,385 | ) | — | — | (1,479 | ) | ||||||||||||
| Options exercised | 96 | 1,263 | — | — | 1,359 | |||||||||||||||
| Dividends declared, $ per share | — | — | (2,996 | ) | — | (2,996 | ) | |||||||||||||
| Stock-based compensation | 97 | 1,345 | — | — | 1,442 | |||||||||||||||
| Shares repurchased | (19 | ) | (286 | ) | — | — | (305 | ) | ||||||||||||
| Net income | — | — | 14,145 | — | 14,145 | |||||||||||||||
| Other comprehensive income, net | — | — | — | 6,608 | 6,608 | |||||||||||||||
| Balance at end of period | $ | 9,828 | $ | 146,393 | $ | 127,860 | $ | (38,539 | ) | $ | 245,542 | |||||||||
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
| Nine months ended September 30, |
||||||||
| 2024 |
2023 |
|||||||
| Net income |
$ | 14,145 | $ | 13,140 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
2,359 | 2,871 | ||||||
| Provision for credit losses |
(2,779 | ) | (2,486 | ) | ||||
| Net accretion of purchase accounting adjustments |
(40 | ) | (233 | ) | ||||
| Provision for other real estate owned |
233 | — | ||||||
| Net accretion of securities |
(12 | ) | (62 | ) | ||||
| Loss on call or sale of investment securities, net |
382 | 1 | ||||||
| (Gain) loss on sale or disposition of fixed assets, net |
(427 | ) | 1,284 | |||||
| (Gain) loss on sale of other real estate owned, net |
(708 | ) | 114 | |||||
| Gain on sale of loans to First Community Bank |
— | (75 | ) | |||||
| Gain on early extinguishment of subordinated debt |
(502 | ) | — | |||||
| FHLB stock dividend |
(139 | ) | (591 | ) | ||||
| Stock-based compensation |
1,442 | 1,466 | ||||||
| Deferred taxes |
404 | (286 | ) | |||||
| Net change in value of bank owned life insurance |
(1,310 | ) | (1,046 | ) | ||||
| Amortization of subordinated debt issuance costs |
64 | 71 | ||||||
| Change in the fair value of equity securities |
(254 | ) | 89 | |||||
| Income from legal settlement |
(1,122 | ) | — | |||||
| Net change in: |
||||||||
| Accrued interest receivable |
42 | (756 | ) | |||||
| Other assets |
126 | 5,375 | ||||||
| Accrued taxes and other liabilities |
4,314 | 7,075 | ||||||
| Net cash provided by operating activities |
16,218 | 25,951 | ||||||
| Cash flows from investing activities: |
||||||||
| Proceeds from sales of investment securities available for sale |
7,906 | 2,364 | ||||||
| Purchases of securities available for sale |
(15,634 | ) | (107,904 | ) | ||||
| Purchases of securities held to maturity |
(1,500 | ) | (12,556 | ) | ||||
| Proceeds from maturities, prepayments and calls of investment securities available for sale |
27,031 | 91,630 | ||||||
| Proceeds from maturities, prepayments and calls of investment securities held to maturity |
3,664 | 808 | ||||||
| Proceeds from redemption or sale of nonmarketable equity securities |
1,872 | 17,150 | ||||||
| Purchases of nonmarketable equity securities |
(2,267 | ) | (2,728 | ) | ||||
| Purchases of equity securities at fair value |
(1,000 | ) | — | |||||
| Net decrease in loans |
53,356 | 22,312 | ||||||
| Proceeds from sales of other real estate owned |
1,984 | 1,484 | ||||||
| Proceeds from sales of fixed assets |
1,340 | 42 | ||||||
| Purchases of loans |
— | (35,887 | ) | |||||
| Purchases of fixed assets |
(388 | ) | (904 | ) | ||||
| Proceeds from surrender of bank owned life insurance |
8,440 | — | ||||||
| Purchases of bank owned life insurance |
(10,000 | ) | — | |||||
| Purchases of other investments |
(140 | ) | (552 | ) | ||||
| Distributions from investments |
112 | 225 | ||||||
| Cash paid for branch sale to First Community Bank, net of cash received |
— | (596 | ) | |||||
| Net cash provided by (used in) investing activities |
74,776 | (25,112 | ) | |||||
| INVESTAR HOLDING CORPORATION |
| CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED |
| (Amounts in thousands) |
| (Unaudited) |
| Cash flows from financing activities: |
||||||||
| Net increase in customer deposits |
31,750 | 141,787 | ||||||
| Net increase in repurchase agreements |
4,361 | 13,930 | ||||||
| Net decrease in short-term FHLB advances |
— | (333,500 | ) | |||||
| Net (decrease) increase in borrowings under the BTFP |
(103,500 | ) | 235,800 | |||||
| Proceeds from long-term FHLB advances |
60,000 | — | ||||||
| Repayment of long-term FHLB advances |
(20,000 | ) | (30,000 | ) | ||||
| Cash dividends paid on common stock |
(2,940 | ) | (2,864 | ) | ||||
| Proceeds from stock options exercised |
1,359 | 105 | ||||||
| Payments to repurchase common stock |
(305 | ) | (2,688 | ) | ||||
| Extinguishment of subordinated debt |
(7,388 | ) | — | |||||
| Net cash (used in) provided by financing activities |
(36,663 | ) | 22,570 | |||||
| Net change in cash and cash equivalents |
54,331 | 23,409 | ||||||
| Cash and cash equivalents, beginning of period |
32,009 | 40,259 | ||||||
| Cash and cash equivalents, end of period |
$ | 86,340 | $ | 63,668 | ||||
| SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES |
||||||||
| Transfer from loans to other real estate owned |
$ | 1,810 | $ | 3,930 | ||||
| Transfer from bank premises and equipment to other real estate owned |
— | 1,425 |
See accompanying notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with GAAP. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three and nine month periods ended September 30, 2024 are not necessarily indicative of the results that may be expected for the entire fiscal year. These statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2023, including the notes thereto, which were included as part of the Company’s Annual Report.
Nature of Operations
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses. While management uses available information to recognize credit losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, changes in conditions of our borrowers’ industries or changes in the condition of individual borrowers. The Company adopted ASU 2016-13 effective January 1, 2023, which changed how the Company accounts for the allowance for credit losses. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for credit losses may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
Other estimates that are susceptible to significant change in the near term relate to the allowance for off-balance sheet credit losses, the fair value of stock-based compensation awards, the determination of other-than-temporary impairments of securities, and the fair value of financial instruments and goodwill. Rapidly changing inflation rates and rising interest rates have made certain estimates more challenging, including those discussed above.
Certain reclassifications have been made to prior period balances to conform to the current period presentation.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recent Accounting Pronouncements
FASB “Disclosure Improvements” Update No. 2023-06 (“ASU 2023-06”). In October 2023, the FASB issued ASU 2023-06, which amends the disclosure or presentation requirements related to various topics. The amendment is intended to align GAAP with the SEC’s regulations. ASU 2023-06 is required to be applied prospectively, and early adoption is prohibited. For reporting entities subject to the SEC’s existing disclosure requirements, the effective dates of ASU 2023-06 will be the date on which the SEC’s removal of that related disclosure requirement from Regulation S-X or Regulation S-K becomes effective. If by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed and will not become effective for any entities. ASU 2023-06 is not expected to have a material impact on the Company’s consolidated financial statements.
FASB ASC Topic 740 “Income Taxes - Improvements to Income Tax Disclosures” Update No. 2023-09 (“ASU 2023-09”). In December 2023, the FASB issued ASU 2023-09, which enhances the transparency and decision usefulness of income tax disclosures. ASU 2023-09 requires disclosure of additional categories of information about federal, state and foreign income taxes in the rate reconciliation table and requires companies to provide more information about the reconciling items in some categories if a quantitative threshold is met. The adoption of ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 and is not expected to have a material impact on the Company’s consolidated financial statements.
NOTE 2. EARNINGS PER SHARE
The following is a summary of the information used in the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2024 and 2023 (in thousands, except share data).
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Earnings per common share – basic | ||||||||||||||||
| Net income | $ | 5,381 | $ | 2,781 | $ | 14,145 | $ | 13,140 | ||||||||
| Less: income allocated to participating securities | — | — | — | (2 | ) | |||||||||||
| Net income allocated to common shareholders | 5,381 | 2,781 | 14,145 | 13,138 | ||||||||||||
| Weighted average basic shares outstanding | 9,828,776 | 9,814,727 | 9,808,841 | 9,867,781 | ||||||||||||
| Basic earnings per common share | $ | 0.55 | $ | 0.28 | $ | 1.44 | $ | 1.33 | ||||||||
| Earnings per common share – diluted | ||||||||||||||||
| Net income allocated to common shareholders | $ | 5,381 | $ | 2,781 | $ | 14,145 | $ | 13,138 | ||||||||
| Weighted average basic shares outstanding | 9,828,776 | 9,814,727 | 9,808,841 | 9,867,781 | ||||||||||||
| Dilutive effect of securities | 73,672 | 2,880 | 83,662 | 8,042 | ||||||||||||
| Total weighted average diluted shares outstanding | 9,902,448 | 9,817,607 | 9,892,503 | 9,875,823 | ||||||||||||
| Diluted earnings per common share | $ | 0.54 | $ | 0.28 | $ | 1.43 | $ | 1.33 | ||||||||
The weighted average shares that have an antidilutive effect in the calculation of diluted earnings per common share and have been excluded from the computations above are shown below.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Stock options | 7,405 | — | 6,367 | 8,886 | ||||||||||||
| RSUs | 401 | 58,153 | 4,420 | 70,267 | ||||||||||||
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Debt Securities
The amortized cost and approximate fair value of investment securities classified as AFS are summarized below as of the dates presented (dollars in thousands).
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Amortized Cost | Gains | Losses | Value | |||||||||||||
| September 30, 2024 | ||||||||||||||||
| Obligations of the U.S. Treasury and U.S. government agencies and corporations | $ | 20,298 | $ | 93 | $ | (266 | ) | $ | 20,125 | |||||||
| Obligations of state and political subdivisions | 17,748 | 4 | (1,870 | ) | 15,882 | |||||||||||
| Corporate bonds | 28,322 | — | (2,623 | ) | 25,699 | |||||||||||
| Residential mortgage-backed securities | 261,627 | 71 | (37,261 | ) | 224,437 | |||||||||||
| Commercial mortgage-backed securities | 71,620 | 304 | (7,421 | ) | 64,503 | |||||||||||
| Total | $ | 399,615 | $ | 472 | $ | (49,441 | ) | $ | 350,646 | |||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Amortized Cost | Gains | Losses | Value | |||||||||||||
| December 31, 2023 | ||||||||||||||||
| Obligations of the U.S. Treasury and U.S. government agencies and corporations | $ | 20,383 | $ | 100 | $ | (440 | ) | $ | 20,043 | |||||||
| Obligations of state and political subdivisions | 18,768 | 11 | (2,076 | ) | 16,703 | |||||||||||
| Corporate bonds | 30,097 | — | (3,741 | ) | 26,356 | |||||||||||
| Residential mortgage-backed securities | 274,950 | 14 | (42,919 | ) | 232,045 | |||||||||||
| Commercial mortgage-backed securities | 75,085 | 208 | (8,522 | ) | 66,771 | |||||||||||
| Total | $ | 419,283 | $ | 333 | $ | (57,698 | ) | $ | 361,918 | |||||||
The Company calculates realized gains and losses on sales of debt securities under the specific identification method. Proceeds from sales of investment securities classified as AFS and gross gains and losses are summarized below for the periods presented (dollars in thousands).
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Proceeds from sales | $ | — | $ | — | $ | 7,906 | $ | 2,364 | ||||||||
| Gross gains | $ | — | $ | — | $ | — | $ | 1 | ||||||||
| Gross losses | $ | — | $ | — | $ | (383 | ) | $ | (2 | ) | ||||||
The amortized cost and approximate fair value of investment securities classified as HTM are summarized below as of the dates presented (dollars in thousands).
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Amortized Cost | Gains | Losses | Value | |||||||||||||
| September 30, 2024 | ||||||||||||||||
| Obligations of state and political subdivisions | $ | 16,212 | $ | 42 | $ | (170 | ) | $ | 16,084 | |||||||
| Residential mortgage-backed securities | 2,090 | — | (156 | ) | 1,934 | |||||||||||
| Total | $ | 18,302 | $ | 42 | $ | (326 | ) | $ | 18,018 | |||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Amortized Cost | Gains | Losses | Value | |||||||||||||
| December 31, 2023 | ||||||||||||||||
| Obligations of state and political subdivisions | $ | 18,163 | $ | 314 | $ | (82 | ) | $ | 18,395 | |||||||
| Residential mortgage-backed securities | 2,309 | — | (191 | ) | 2,118 | |||||||||||
| Total | $ | 20,472 | $ | 314 | $ | (273 | ) | $ | 20,513 | |||||||
Securities are classified in the consolidated balance sheets according to management’s intent. The Company had no securities classified as trading as of September 30, 2024 or December 31, 2023.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The approximate fair value of AFS securities and unrealized losses, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized below as of the dates presented (dollars in thousands).
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| September 30, 2024 | ||||||||||||||||||||||||
| Obligations of the U.S. Treasury and U.S. government agencies and corporations | $ | 280 | $ | (1 | ) | $ | 7,635 | $ | (265 | ) | $ | 7,915 | $ | (266 | ) | |||||||||
| Obligations of state and political subdivisions | 1,608 | (24 | ) | 13,698 | (1,846 | ) | 15,306 | (1,870 | ) | |||||||||||||||
| Corporate bonds | 252 | (4 | ) | 25,447 | (2,619 | ) | 25,699 | (2,623 | ) | |||||||||||||||
| Residential mortgage-backed securities | — | — | 219,078 | (37,261 | ) | 219,078 | (37,261 | ) | ||||||||||||||||
| Commercial mortgage-backed securities | 1,275 | (23 | ) | 45,690 | (7,398 | ) | 46,965 | (7,421 | ) | |||||||||||||||
| Total | $ | 3,415 | $ | (52 | ) | $ | 311,548 | $ | (49,389 | ) | $ | 314,963 | $ | (49,441 | ) | |||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||
| Obligations of the U.S. Treasury and U.S. government agencies and corporations | $ | 1,268 | $ | (7 | ) | $ | 9,284 | $ | (433 | ) | $ | 10,552 | $ | (440 | ) | |||||||||
| Obligations of state and political subdivisions | — | — | 15,425 | (2,076 | ) | 15,425 | (2,076 | ) | ||||||||||||||||
| Corporate bonds | 468 | (28 | ) | 25,888 | (3,713 | ) | 26,356 | (3,741 | ) | |||||||||||||||
| Residential mortgage-backed securities | 2,705 | (421 | ) | 228,415 | (42,498 | ) | 231,120 | (42,919 | ) | |||||||||||||||
| Commercial mortgage-backed securities | 1,085 | (35 | ) | 50,271 | (8,487 | ) | 51,356 | (8,522 | ) | |||||||||||||||
| Total | $ | 5,526 | $ | (491 | ) | $ | 329,283 | $ | (57,207 | ) | $ | 334,809 | $ | (57,698 | ) | |||||||||
At September 30, 2024, 665 of the Company’s AFS debt securities had unrealized losses totaling 13.6% of the individual securities’ amortized cost basis and 12.4% of the Company’s total amortized cost basis of the AFS investment securities portfolio. At such date, 649 of the 665 securities had been in a continuous loss position for over 12 months.
The approximate fair value of HTM securities, and unrealized losses, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized below as of the dates presented (dollars in thousands).
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| September 30, 2024 | ||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | 10,427 | $ | (37 | ) | $ | 2,615 | $ | (133 | ) | $ | 13,042 | $ | (170 | ) | |||||||||
| Residential mortgage-backed securities | — | — | 1,934 | (156 | ) | 1,934 | (156 | ) | ||||||||||||||||
| Total | $ | 10,427 | $ | (37 | ) | $ | 4,549 | $ | (289 | ) | $ | 14,976 | $ | (326 | ) | |||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | — | $ | — | $ | 3,064 | $ | (82 | ) | $ | 3,064 | $ | (82 | ) | ||||||||||
| Residential mortgage-backed securities | — | — | 2,118 | (191 | ) | 2,118 | (191 | ) | ||||||||||||||||
| Total | $ | — | $ | — | $ | 5,182 | $ | (273 | ) | $ | 5,182 | $ | (273 | ) | ||||||||||
Unrealized losses are generally due to changes in market interest rates. The Company has the intent to hold these securities either until maturity or a forecasted recovery, and it is more likely than not that the Company will not have to sell the securities before the recovery of their amortized cost basis. Due to the nature of the investments, current market prices, and the current interest rate environment, the Company determined that these declines were not attributable to credit losses at September 30, 2024 or December 31, 2023.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The amortized cost and approximate fair value of investment debt securities, by contractual maturity, are shown below as of the dates presented (dollars in thousands). Actual maturities may differ from contractual maturities due to mortgage-backed securities whereby borrowers may have the right to call or prepay obligations with or without call or prepayment penalties and certain callable bonds whereby the issuer has the option to call the bonds prior to contractual maturity.
| Securities Available For Sale | Securities Held To Maturity | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| September 30, 2024 | ||||||||||||||||
| Due within one year | $ | 9,415 | $ | 9,310 | $ | 960 | $ | 955 | ||||||||
| Due after one year through five years | 27,931 | 27,259 | 2,748 | 2,615 | ||||||||||||
| Due after five years through ten years | 31,689 | 29,113 | 3,000 | 3,042 | ||||||||||||
| Due after ten years | 330,580 | 284,964 | 11,594 | 11,406 | ||||||||||||
| Total debt securities | $ | 399,615 | $ | 350,646 | $ | 18,302 | $ | 18,018 | ||||||||
| Securities Available For Sale | Securities Held To Maturity | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| December 31, 2023 | ||||||||||||||||
| Due within one year | $ | 1,034 | $ | 1,027 | $ | 960 | $ | 961 | ||||||||
| Due after one year through five years | 28,620 | 27,623 | 2,556 | 2,582 | ||||||||||||
| Due after five years through ten years | 43,634 | 39,971 | 4,647 | 4,621 | ||||||||||||
| Due after ten years | 345,995 | 293,297 | 12,309 | 12,349 | ||||||||||||
| Total debt securities | $ | 419,283 | $ | 361,918 | $ | 20,472 | $ | 20,513 | ||||||||
Accrued interest receivable on the Company’s investment securities was $1.7 million at both September 30, 2024 and December 31, 2023, and is included in “Accrued interest receivable” on the accompanying consolidated balance sheets.
At September 30, 2024, securities with a carrying value of $127.3 million were pledged to secure certain deposits, borrowings, and other liabilities, compared to $296.2 million in pledged securities at December 31, 2023.
Equity Securities
Equity securities at fair value include marketable securities in corporate stocks and mutual funds and totaled $2.4 million and $1.2 million at September 30, 2024 and December 31, 2023, respectively.
Nonmarketable equity securities primarily consist of FHLB stock and FRB stock. Members of the FHLB and FRB are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock and FRB stock are carried at cost, restricted as to redemption, and periodically evaluated for impairment based on the ultimate recovery of par value. Both cash and stock dividends are reported as income. Nonmarketable equity securities also include investments in our other correspondent banks including Independent Bankers Financial Corporation and First National Bankers Bank stock. These investments are carried at cost which approximates fair value. The balance of nonmarketable equity securities at September 30, 2024 and December 31, 2023 was $14.0 million and $13.4 million, respectively.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Company’s loan portfolio consists of the following categories of loans as of the dates presented (dollars in thousands).
| September 30, 2024 | December 31, 2023 | |||||||
| Construction and development | $ | 166,954 | $ | 190,371 | ||||
| 1-4 Family | 403,097 | 413,786 | ||||||
| Multifamily | 85,283 | 105,946 | ||||||
| Farmland | 7,173 | 7,651 | ||||||
| Commercial real estate | 966,741 | 937,708 | ||||||
| Total mortgage loans on real estate | 1,629,248 | 1,655,462 | ||||||
| Commercial and industrial | 515,273 | 543,421 | ||||||
| Consumer | 11,325 | 11,736 | ||||||
| Total loans | $ | 2,155,846 | $ | 2,210,619 | ||||
Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loan origination fees, net of direct loan origination costs and commitment fees, are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable. Unamortized premiums and discounts on loans, included in the total loans balances above, were $0.1 million and $0.2 million at September 30, 2024 and December 31, 2023, respectively, and unearned income, or deferred fees, on loans was $1.1 million at both September 30, 2024 and December 31, 2023, and is also included in the total loans balance in the table above.
The tables below provide an analysis of the aging of loans as of September 30, 2024 and December 31, 2023 (dollars in thousands).
| September 30, 2024 | ||||||||||||||||||||||||
| Current | 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 Days or More Past Due | Total | > 90 Days and Accruing | |||||||||||||||||||
| Construction and development | $ | 166,929 | $ | 19 | $ | — | $ | 6 | $ | 166,954 | $ | — | ||||||||||||
| 1-4 Family | 398,759 | 285 | 1,735 | 2,318 | 403,097 | — | ||||||||||||||||||
| Multifamily | 85,283 | — | — | — | 85,283 | — | ||||||||||||||||||
| Farmland | 7,173 | — | — | — | 7,173 | — | ||||||||||||||||||
| Commercial real estate | 966,016 | 298 | — | 427 | 966,741 | — | ||||||||||||||||||
| Total mortgage loans on real estate | 1,624,160 | 602 | 1,735 | 2,751 | 1,629,248 | — | ||||||||||||||||||
| Commercial and industrial | 514,869 | 296 | 44 | 64 | 515,273 | — | ||||||||||||||||||
| Consumer | 11,176 | 45 | 9 | 95 | 11,325 | — | ||||||||||||||||||
| Total loans | $ | 2,150,205 | $ | 943 | $ | 1,788 | $ | 2,910 | $ | 2,155,846 | $ | — | ||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||
| Current | 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 Days or More Past Due | Total | > 90 Days and Accruing | |||||||||||||||||||
| Construction and development | $ | 189,746 | $ | — | $ | 55 | $ | 570 | $ | 190,371 | $ | — | ||||||||||||
| 1-4 Family | 406,014 | 3,031 | 1,720 | 3,021 | 413,786 | — | ||||||||||||||||||
| Multifamily | 105,946 | — | — | — | 105,946 | — | ||||||||||||||||||
| Farmland | 7,651 | — | — | — | 7,651 | — | ||||||||||||||||||
| Commercial real estate | 937,272 | 48 | 359 | 29 | 937,708 | — | ||||||||||||||||||
| Total mortgage loans on real estate | 1,646,629 | 3,079 | 2,134 | 3,620 | 1,655,462 | — | ||||||||||||||||||
| Commercial and industrial | 542,206 | 259 | 488 | 468 | 543,421 | — | ||||||||||||||||||
| Consumer | 11,552 | 57 | 82 | 45 | 11,736 | — | ||||||||||||||||||
| Total loans | $ | 2,200,387 | $ | 3,395 | $ | 2,704 | $ | 4,133 | $ | 2,210,619 | $ | — | ||||||||||||
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The tables below provide an analysis of nonaccrual loans as of September 30, 2024 and December 31, 2023 (dollars in thousands).
| September 30, 2024 | ||||||||||||
| Nonaccrual with No Allowance for Credit Loss | Nonaccrual with an Allowance for Credit Loss | Total Nonaccrual Loans | ||||||||||
| Construction and development | $ | 24 | $ | — | $ | 24 | ||||||
| 1-4 Family | 1,325 | 1,665 | 2,990 | |||||||||
| Multifamily | — | — | — | |||||||||
| Farmland | — | — | — | |||||||||
| Commercial real estate | 735 | — | 735 | |||||||||
| Total mortgage loans on real estate | 2,084 | 1,665 | 3,749 | |||||||||
| Commercial and industrial | 39 | 231 | 270 | |||||||||
| Consumer | 76 | 25 | 101 | |||||||||
| Total loans | $ | 2,199 | $ | 1,921 | $ | 4,120 | ||||||
| December 31, 2023 | ||||||||||||
| Nonaccrual with No Allowance for Credit Loss | Nonaccrual with an Allowance for Credit Loss | Total Nonaccrual Loans | ||||||||||
| Construction and development | $ | 577 | $ | 212 | $ | 789 | ||||||
| 1-4 Family | 2,937 | 1,241 | 4,178 | |||||||||
| Multifamily | — | — | — | |||||||||
| Farmland | — | — | — | |||||||||
| Commercial real estate | 216 | — | 216 | |||||||||
| Total mortgage loans on real estate | 3,730 | 1,453 | 5,183 | |||||||||
| Commercial and industrial | 59 | 409 | 468 | |||||||||
| Consumer | 74 | 45 | 119 | |||||||||
| Total loans | $ | 3,863 | $ | 1,907 | $ | 5,770 | ||||||
Nonaccrual and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the borrower’s debt service capacity is considered through the analysis of current financial information, if available, and/or current information with regard to the collateral position. Regulatory provisions would typically require the placement of a loan on nonaccrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on nonaccrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and payment of future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower. No material interest income was recognized in the consolidated statements of income on nonaccrual loans for the nine months ended September 30, 2024 and 2023.
Collateral Dependent Loans
Collateral dependent loans are loans for which the repayments, on the basis of our assessment at the reporting date, are expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Loans that do not share risk characteristics are excluded from the loan pools and evaluated on an individual basis, and the Company has determined to evaluate collateral dependent loans individually for impairment. The allowance for credit losses for collateral dependent loans is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The Company’s collateral dependent loans include all nonaccrual loans shown in the tables above at September 30, 2024 and December 31, 2023. The types of collateral that secure collateral dependent loans are discussed under “Portfolio Segment Risk Factors” below.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Portfolio Segment Risk Factors
The following describes the risk characteristics relevant to each of the Company’s loan portfolio segments.
Construction and Development - Construction and development loans are generally made for the purpose of acquisition and development of land to be improved through the construction of commercial and residential buildings. The successful repayment of these types of loans is generally dependent upon a commitment for permanent financing from the Company, or from the sale of the constructed property. These loans carry more risk than commercial or residential real estate loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market, and state and local government regulations. One such risk is that loan funds are advanced upon the security of the property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and to calculate related loan-to-value ratios. The Company attempts to minimize the risks associated with construction lending by limiting loan-to-value ratios as described above. In addition, as to speculative development loans, the Company generally makes such loans only to borrowers that have a positive pre-existing relationship with us. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding excessive concentrations in any one business or industry. Construction and development loans are primarily secured by residential and commercial properties, which are under construction and/or redevelopment.
1-4 Family - The 1-4 family portfolio mainly consists of residential mortgage loans to consumers to finance a primary residence. The majority of these loans are secured by first liens on residential properties located in the Company’s market areas and carry risks associated with the creditworthiness of the borrower and changes in the value of the collateral and loan-to-value-ratios. The Company manages these risks through policies and procedures such as limiting loan-to-value ratios at origination, employing experienced underwriting personnel, requiring standards for appraisers, and not making subprime loans. In the third quarter of 2023, the Company exited the consumer mortgage origination business.
Multifamily - Multifamily loans are normally made to real estate investors to support permanent financing for multifamily residential income producing properties that rely on the successful operation of the property for repayment. This management mainly involves property maintenance and collection of rents due from tenants. This type of lending carries a lower level of risk, as compared to other commercial lending. In addition, underwriting requirements for multifamily properties are stricter than for other nonowner-occupied property types. The Company manages this risk by avoiding concentrations with any particular customer. Multifamily loans are primarily secured by first liens on multifamily real estate.
Farmland - Farmland loans are often for land improvements related to agricultural endeavors and may include construction of new specialized facilities. These loans are usually repaid through the conversion to permanent financing, or if scheduled loan amortization begins, for the long-term benefit of the borrower’s ongoing operations. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Farmland loans are primarily secured by raw land.
Commercial Real Estate - Commercial real estate loans are extensions of credit secured by owner occupied and nonowner-occupied collateral. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Commercial real estate loans typically depend on the successful operation and management of the businesses that occupy these properties or the financial stability of tenants occupying the properties. Nonowner-occupied commercial real estate loans typically are dependent, in large part, on the owner’s ability to rent the property and the ability of the tenants to pay rent, whereas owner-occupied commercial real estate loans typically are dependent, in large part, on the success of the owner’s business. General market conditions and economic activity may impact the performance of these types of loans, including fluctuations in the value of real estate, new job creation trends, and tenant vacancy rates. The Company attempts to limit risk by analyzing a borrower’s cash flow and collateral value on an ongoing basis. The Company also typically requires personal guarantees from the principal owners of the property, supported by a review of their personal financial statements, as an additional means of mitigating our risk. The Company manages risk by avoiding concentrations in any one business or industry. Commercial real estate loans are primarily secured by office and industrial buildings, warehouses, retail shopping facilities and various special purpose commercial properties.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Commercial and Industrial - Commercial and industrial loans receive similar underwriting treatment as commercial real estate loans in that the repayment source is analyzed to determine its ability to meet cash flow coverage requirements as set forth by Bank policies. Repayment of these loans generally comes from the generation of cash flow as the result of the borrower’s business operations. Commercial lending generally involves different risks from those associated with commercial real estate lending or construction lending. Although commercial loans may be collateralized by equipment or other business assets (including real estate, if available as collateral), the repayment of these types of loans depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors). Thus, the general business conditions of the local economy and the borrower’s ability to sell its products and services, thereby generating sufficient operating revenue to repay us under the agreed upon terms and conditions, are the chief considerations when assessing the risk of a commercial loan. The liquidation of collateral, if any, is considered a secondary source of repayment because equipment and other business assets may, among other things, be obsolete or of limited resale value. The Company actively monitors certain financial measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors. Commercial and industrial loans also include public finance loans made to governmental entities, which can be taxable or tax-exempt, and are generally repaid using pledged revenue sources including income tax, property tax, sales tax, and utility revenue, among other sources. Commercial and industrial loans are primarily secured by accounts receivable, inventory and equipment.
Consumer - Consumer loans are offered by the Company in order to provide a full range of retail financial services to its customers and include auto loans, credit cards, and other consumer installment loans. Typically, the Company evaluates the borrower’s repayment ability through a review of credit scores and an evaluation of debt to income ratios. Repayment of consumer loans depends upon key consumer economic measures and upon the borrower’s financial stability and is more likely to be adversely affected by divorce, job loss, illness and personal hardships than repayment of other loans. A shortfall in the value of any collateral also may pose a risk of loss to the Company for these types of loans. Consumer loans include loans primarily secured by vehicles and unsecured loans.
Credit Quality Indicators
Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The following definitions are utilized for risk ratings, which are consistent with the definitions used in supervisory guidance:
Pass - Loans not meeting the criteria below are considered pass. These loans have high credit characteristics and financial strength. The borrowers at least generate profits and cash flow that are in line with peer and industry standards and have debt service coverage ratios above loan covenants and our policy guidelines. For some of these loans, a guaranty from a financially capable party mitigates characteristics of the borrower that might otherwise result in a lower grade.
Special Mention - Loans classified as special mention possess some credit deficiencies that need to be corrected to avoid a greater risk of default in the future. For example, financial ratios relating to the borrower may have deteriorated. Often, a special mention categorization is temporary while certain factors are analyzed or matters addressed before the loan is re-categorized as either pass or substandard.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower or the liquidation value of any collateral. If deficiencies are not addressed, it is likely that this category of loan will result in the Bank incurring a loss. Where a borrower has been unable to adjust to industry or general economic conditions, the borrower’s loan is often categorized as substandard.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as recorded assets is not warranted. This classification does not mean that the assets have absolutely no recovery or salvage value, but rat