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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

_____________________________________

 

FORM 10-Q

_____________________________________

 

(Mark One)

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

For the quarterly period ended March 31, 2021

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
incorporation or organization)

(I.R.S. Employer
Identification No.)

 

10500 Coursey Boulevard, Baton Rouge, Louisiana 70816

(Address of principal executive offices, including zip code)

(225) 227-2222

(Registrants 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, 10,413,331 shares outstanding as of May 3, 2021.

 

 

 

 

TABLE OF CONTENTS

 

Part I. Financial Information

 
     

Item 1.

Financial Statements (Unaudited)

4

 

Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020

4

 

Consolidated Statements of Income for the three months ended March 31, 2021 and 2020

5

 

Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020

6

 

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2021 and 2020

7

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020

8

 

Notes to the Consolidated Financial Statements

10

 

Note 1. Summary of Significant Accounting Policies

10

 

Note 2. Business Combinations

15

 

Note 3. Earnings Per Share

16

 

Note 4. Investment Securities

16

 

Note 5. Loans and Allowance for Loan Losses

19

 

Note 6. Stockholders’ Equity

29

 

Note 7. Derivative Financial Instruments

29

 

Note 8. Fair Values of Financial Instruments

30

 

Note 9. Income Taxes

35

 

Note 10. Commitments and Contingencies

35

 

Note 11. Leases

36

 

Note 12. Subsequent Events

37

Item 2.

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

38

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

64

Item 4.

Controls and Procedures

64

     

Part II. Other Information

65

     

Item 1A.

Risk Factors

65

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

65

Item 6.

Exhibits

67

Signatures

69

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

   

March 31, 2021

   

December 31, 2020

 
   

(Unaudited)

         

ASSETS

               

Cash and due from banks

  $ 29,970     $ 25,672  

Interest-bearing balances due from other banks

    69,400       9,696  

Federal funds sold

    97        

Cash and cash equivalents

    99,467       35,368  
                 

Available for sale securities at fair value (amortized cost of $299,310 and $263,913, respectively)

    301,433       268,410  

Held to maturity securities at amortized cost (estimated fair value of $12,341 and $12,649, respectively)

    11,966       12,434  

Loans, net of allowance for loan losses of $20,423 and $20,363, respectively

    1,825,547       1,839,955  

Equity securities

    16,763       16,599  

Bank premises and equipment, net of accumulated depreciation of $16,803 and $15,830, respectively

    56,631       56,303  

Other real estate owned, net

    1,518       663  

Accrued interest receivable

    12,868       12,969  

Deferred tax asset

          1,360  

Goodwill and other intangible assets, net

    32,001       32,232  

Bank owned life insurance

    39,131       38,908  

Other assets

    10,631       5,980  

Total assets

  $ 2,407,956     $ 2,321,181  
                 

LIABILITIES

               

Deposits:

               

Noninterest-bearing

  $ 515,487     $ 448,230  

Interest-bearing

    1,494,393       1,439,594  

Total deposits

    2,009,880       1,887,824  

Advances from Federal Home Loan Bank

    82,500       120,500  

Repurchase agreements

    4,274       5,653  

Subordinated debt, net of unamortized issuance costs

    42,920       42,897  

Junior subordinated debt

    5,962       5,949  

Accrued taxes and other liabilities

    14,169       15,074  

Total liabilities

    2,159,705       2,077,897  
                 

STOCKHOLDERS’ EQUITY

               

Preferred stock, no par value per share; 5,000,000 shares authorized

           

Common stock, $1.00 par value per share; 40,000,000 shares authorized; 10,436,493 and 10,608,869 shares issued and outstanding, respectively

    10,436       10,609  

Surplus

    155,822       159,485  

Retained earnings

    75,998       71,385  

Accumulated other comprehensive income

    5,995       1,805  

Total stockholders’ equity

    248,251       243,284  

Total liabilities and stockholders’ equity

  $ 2,407,956     $ 2,321,181  

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except share data)

(Unaudited)

 

   

Three months ended March 31,

 
   

2021

   

2020

 

INTEREST INCOME

               

Interest and fees on loans

  $ 21,627     $ 21,669  

Interest on investment securities

    1,179       1,695  

Other interest income

    163       257  

Total interest income

    22,969       23,621  
                 

INTEREST EXPENSE

               

Interest on deposits

    2,302       5,032  

Interest on borrowings

    1,033       1,254  

Total interest expense

    3,335       6,286  

Net interest income

    19,634       17,335  
                 

Provision for loan losses

    400       3,760  

Net interest income after provision for loan losses

    19,234       13,575  
                 

NONINTEREST INCOME

               

Service charges on deposit accounts

    491       571  

Gain on sale of investment securities, net

    600       172  

Loss on sale of fixed assets, net

    (2 )      

Gain on sale of other real estate owned, net

          26  

Servicing fees and fee income on serviced loans

    64       120  

Interchange fees

    388       295  

Income from bank owned life insurance

    223       190  

Change in the fair value of equity securities

    65       (826 )

Other operating income

    536       541  

Total noninterest income

    2,365       1,089  

Income before noninterest expense

    21,599       14,664  
                 

NONINTEREST EXPENSE

               

Depreciation and amortization

    1,206       1,033  

Salaries and employee benefits

    8,695       7,953  

Occupancy

    637       531  

Data processing

    746       693  

Marketing

    41       32  

Professional fees

    358       394  

Acquisition expense

    361       751  

Other operating expenses

    2,765       2,520  

Total noninterest expense

    14,809       13,907  

Income before income tax expense

    6,790       757  

Income tax expense

    1,430       149  

Net income

  $ 5,360     $ 608  
                 

EARNINGS PER SHARE

               

Basic earnings per share

  $ 0.51     $ 0.05  

Diluted earnings per share

    0.51       0.05  

Cash dividends declared per common share

    0.07       0.06  

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

(Unaudited)

 

   

Three months ended March 31,

 
   

2021

   

2020

 

Net income

  $ 5,360     $ 608  

Other comprehensive income (loss):

               

Unrealized (loss) gain on investment securities:

               

Unrealized (loss) gain, available for sale, net of tax (benefit) expense of ($372) and $149, respectively

    (1,401 )     562  

Reclassification of realized gain, net of tax expense of $126 and $36, respectively

    (474 )     (136 )

Fair value of derivative financial instruments:

               

Change in fair value of interest rate swaps designated as a cash flow hedge, net of tax expense (benefit) of $1,612 and ($667), respectively

    6,065       (2,511 )

Total other comprehensive income (loss)

    4,190       (2,085 )

Total comprehensive income (loss)

  $ 9,550     $ (1,477 )

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(Amounts in thousands, except share data)

(Unaudited)

 

                           

Accumulated

         
                           

Other

   

Total

 
   

Common

           

Retained

   

Comprehensive

   

Stockholders’

 
   

Stock

   

Surplus

   

Earnings

   

Income (Loss)

   

Equity

 

Three months ended:

                                       

March 31, 2020

                                       

Balance at beginning of period

  $ 11,229     $ 168,658     $ 60,198     $ 1,891     $ 241,976  
Stock issuance costs           (45 )                 (45 )

Surrendered shares

    (13 )     (279 )                 (292 )

Options exercised

    3       43                   46  

Dividends declared, $0.06 per share

                (660 )           (660 )

Stock-based compensation

    48       335                   383  

Shares repurchased

    (327 )     (6,332 )                 (6,659 )

Net income

                608             608  

Other comprehensive loss, net

                      (2,085 )     (2,085 )

Balance at end of period

  $ 10,940     $ 162,380     $ 60,146     $ (194 )   $ 233,272  
                                         

March 31, 2021

                                       

Balance at beginning of period

  $ 10,609     $ 159,485     $ 71,385     $ 1,805     $ 243,284  

Surrendered shares

    (19 )     (337 )                 (356 )
Options exercised     8       107                   115  

Dividends declared, $0.07 per share

                (747 )           (747 )

Stock-based compensation

    64       336                   400  

Shares repurchased

    (226 )     (3,769 )                 (3,995 )

Net income

                5,360             5,360  

Other comprehensive income, net

                      4,190       4,190  

Balance at end of period

  $ 10,436     $ 155,822     $ 75,998     $ 5,995     $ 248,251  

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited) 

 

   

Three months ended March 31,

 
   

2021

   

2020

 

Net income

  $ 5,360     $ 608  

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

               

Depreciation and amortization

    1,206       1,033  

Provision for loan losses

    400       3,760  

Amortization of purchase accounting adjustments

    (140 )     (299 )

Net amortization of securities

    919       538  

Gain on sale of investment securities, net

    (600 )     (172 )

Loss on sale of fixed assets, net

    2        

Gain on sale of other real estate owned, net

          (26 )

FHLB stock dividend

    (11 )     (715 )

Stock-based compensation

    400       383  

Deferred taxes

    367       (347 )

Net change in value of bank owned life insurance

    (223 )     (190 )

Amortization of subordinated debt issuance costs

    23       5  

Change in the fair value of equity securities

    (65 )     826  

Net change in:

               

Accrued interest receivable

    101       (851 )

Other assets

    933       (1,270 )

Accrued taxes and other liabilities

    782       (2,500 )

Net cash provided by operating activities

  $ 9,454     $ 783  
                 

Cash flows from investing activities:

               

Proceeds from sales of investment securities available for sale

  $ 17,123     $ 16,572  

Purchases of securities available for sale

    (74,334 )     (47,882 )

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

    21,505       15,014  

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

    458       151  

Proceeds from redemption or sale of equity securities

    435       2,371  

Purchases of equity securities

    (523 )     (820 )

Net decrease in loans

    13,789       6,322  

Proceeds from sales of other real estate owned

          131  

Purchases of other real estate owned

    (501 )      

Purchases of fixed assets

    (1,429 )     (1,759 )

Distributions from investments

          7  

Cash paid for acquisition of PlainsCapital branches, net of cash acquired

          (10,761 )

Net cash used in investing activities

  $ (23,477 )   $ (20,654 )

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Amounts in thousands)

(Unaudited)

 

Cash flows from financing activities:

               

Net increase (decrease) in customer deposits

  $ 122,074     $ (15,803 )

Net (decrease) increase in repurchase agreements

    (1,379 )     737  

Net (decrease) increase in short-term FHLB advances

    (38,000 )     36,721  

Repayments of long-term FHLB advances

          (600 )

Cash dividends paid on common stock

    (693 )     (679 )

Proceeds from stock options and warrants exercised

    115       46  

Payments to repurchase common stock

    (3,995 )     (6,659 )

Payments of stock issuance costs

          (45 )

Net cash provided by financing activities

  $ 78,122     $ 13,718  
                 

Net change in cash and cash equivalents

  $ 64,099     $ (6,153 )

Cash and cash equivalents, beginning of period

    35,368       44,695  

Cash and cash equivalents, end of period

  $ 99,467     $ 38,542  

 

See accompanying notes to the consolidated financial statements.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Investar Holding Corporation (the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with GAAP. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three month period ended March 31, 2021 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, 2020, including the notes thereto, which were included as part of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 10, 2021.

 

Nature of Operations

 

The Company, headquartered in Baton Rouge, Louisiana, provides full banking services, excluding trust services, through its wholly-owned banking subsidiary, Investar Bank, National Association (the “Bank”), a national bank, primarily to meet the needs of individuals and small to medium-sized businesses. The Company’s primary markets are in Louisiana, Texas and Alabama. At March 31, 2021, the Company operated 24 full service branches located in Louisiana, five full service branches located in Texas and six full service branches located in Alabama, and had 319 employees.

 

Principles of Consolidation

 

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

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material.

 

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for loan losses may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

 

Other estimates that are susceptible to significant change in the near term relate to the determination of other-than-temporary impairments of securities, and the fair value of financial instruments and goodwill.

 

The ongoing COVID-19 pandemic has made certain estimates more challenging, including those discussed above, as the pandemic is unprecedented in recent history, continues to evolve, and its future effects are impossible to predict with any certainty.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Investment Securities

 

The Company’s investments in debt securities are accounted for in accordance with applicable guidance contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), which requires the classification of securities into one of the following categories:

 

 

Securities available for sale (“AFS”): available for sale securities consist of bonds, notes, and debentures that are available to meet the Company’s operating needs. These securities are reported at fair value.

 

 

Securities to be held to maturity (“HTM”): bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.

 

Unrealized holding gains and losses, net of tax, on AFS debt securities are reported as a net amount in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses on the sale of debt securities are determined using the specific-identification method.

 

The Company follows FASB guidance related to the recognition and presentation of other-than-temporary impairment. The guidance specifies that if an entity does not have the intent to sell a debt security and it is not more likely than not that the Company will be required to sell the security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.

 

Equity Securities

 

The Company is a member of the Federal Home Loan Bank (“FHLB”) system. Members of the FHLB 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 is carried at cost, is restricted as to redemption, and is periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. 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 equity securities in our correspondent banks at  March 31, 2021 and  December 31, 2020 was $15.0 million and $14.9 million, respectively.

 

In addition, equity securities include marketable securities in corporate stocks and mutual funds. The estimated fair value of equity securities totaled $1.8 million and $1.7 million at March 31, 2021 and  December 31, 2020, respectively.

 

Loans

 

The Company’s loan portfolio categories include real estate, commercial and consumer loans. Real estate loans are further categorized into construction and development, 1-4 family residential, multifamily, farmland and commercial real estate loans. The consumer loan category includes loans originated through indirect lending. Indirect lending, which is lending initiated through third-party business partners, is largely comprised of loans made through automotive dealerships.

 

Loans for which management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off are stated at unpaid principal balances, adjusted by an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loans are ordinarily placed on nonaccrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more; however, management may elect to continue the accrual when the estimated net realizable value of collateral is sufficient to cover the principal balance and the accrued interest. Any unpaid interest previously accrued on nonaccrual loans is reversed from income. Interest income, generally, is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period of repayment performance by the borrower.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The Company’s impaired loans include troubled debt restructurings and performing and non-performing loans for which full payment of principal or interest is not expected. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of its collateral. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is required as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.

 

The Company follows the FASB accounting guidance on sales of financial assets, which includes participating interests in loans. For loan participations that are structured in accordance with this guidance, the sold portions are recorded as a reduction of the loan portfolio. Loan participations that do not meet the criteria are accounted for as secured borrowings.

 

Treatment of Loan Modifications Pursuant to the CARES Act and Interagency Statement

 

Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) enacted on March 27, 2020 provides that from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), we may elect to suspend GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (“TDRs”) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic. The Consolidated Appropriations Act, 2021 (“CAA”) enacted on December 27, 2020 extended the applicable period to the earlier of January 1, 2022 or 60 days after the national emergency termination date.

 

In addition, our banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the staff of the FASB that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

 

Accordingly, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term modifications of 90 days or less, in the form of deferrals of payment of principal and interest, principal only, or interest only, and fee waivers. As of March 31, 2021, the balance of loans participating in the 90-day deferral program was $11.2 million, or 0.6% of the total loan portfolio, compared to $5.9 million, or 0.3% of the total loan portfolio, at December 31, 2020. In accordance with Section 4013 of the CARES Act and the interagency statement, we have not accounted for such loans as TDRs, nor have we designated them as past due or nonaccrual. We are continuing to support borrowers experiencing financial hardships related to the pandemic, and we expect to process additional deferrals requested by qualified borrowers. Therefore, we may experience fluctuations in the balance of loans participating in the deferral program.

 

Allowance for Loan Losses

 

The allowance for loan losses is estimated through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance is an amount that management believes will be adequate to absorb probable losses inherent in the loan portfolio as of the balance sheet date based on evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Credits deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance. Past due status is determined based on contractual terms.

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. Based on management’s review and observations made through qualitative review, management may apply qualitative adjustments to determine loss estimates at a group and/or portfolio segment level as deemed appropriate. Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in its portfolio and portfolio segments. The Company utilizes an internally developed model that requires judgment to determine the estimation method that fits the credit risk characteristics of the loans in its portfolio and portfolio segments. Qualitative and environmental factors that may not be directly reflected in quantitative estimates include: asset quality trends, changes in loan concentrations, new products and process changes, changes and pressures from competition, changes in lending policies and underwriting practices, trends in the nature and volume of the loan portfolio, changes in experience and depth of lending staff and management and national and regional economic trends. Changes in these factors are considered in determining changes in the allowance for loan losses. The impact of these factors on the Company’s qualitative assessment of the allowance for loan losses can change from period to period based on management’s assessment of the extent to which these factors are already reflected in historic loss rates. The uncertainty inherent in the estimation process is also considered in evaluating the allowance for loan losses.

 

In the ordinary course of business, the Bank enters into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses. The reserve for unfunded lending commitments is included in accrued taxes and other liabilities in the consolidated balance sheet. At March 31, 2021 and  December 31, 2020 the reserve for unfunded loan commitments was $0.3 million and $0.2 million, respectively.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Acquisition Accounting

 

Business combinations are accounted for under the acquisition method of accounting. Purchased assets and assumed liabilities are recorded at their respective acquisition date fair values, and identifiable intangible assets are recorded at fair value. If the consideration given exceeds the fair value of the net assets received, goodwill is recognized. If the fair value of the net assets received exceeds the consideration given, a bargain purchase gain is recognized. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available.

 

Loans acquired in a business combination are recorded at their estimated fair value as of the acquisition date. The fair value of loans acquired is determined using a discounted cash flow model based on assumptions regarding the amount and timing of principal and interest prepayments, estimated payments, estimated default rates, estimated loss severity in the event of defaults, and current market rates. Estimated credit losses are included in the determination of fair value; therefore, an allowance for loan losses is not recorded on the acquisition date. The fair value adjustment is amortized over the life of the loan using the effective interest method, except for those loans accounted for under ASC Topic 310-30, discussed below. An allowance for acquired loans not accounted for under ASC Topic 310-30 is only recorded to the extent that the reserve requirement exceeds the remaining fair value adjustment.

 

The Company accounts for acquired impaired loans under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). An acquired loan is considered impaired when there is evidence of credit deterioration since origination and it is probable, at the date of acquisition, that we will be unable to collect all contractually required payments. ASC 310-30 prohibits the carryover of an allowance for loan losses for acquired impaired loans. Over the life of the acquired loans, we continually estimate the cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. As of the end of each fiscal quarter, we evaluate the present value of the acquired loans using the effective interest rates. For any increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life, while we recognize a provision for loan loss in the consolidated statement of operations if the cash flows expected to be collected have decreased.

 

Reclassifications

 

Certain reclassifications have been made to the 2020 financial statements to be consistent with the 2021 presentation, if applicable.

 

Concentrations of Credit Risk

 

The Company’s loan portfolio consists of the various types of loans described in Note 5. Loans and Allowance for Loan Losses. Real estate or other assets secure most loans. The majority of loans have been made to individuals and businesses in the Company’s market of southeast Louisiana. Customers are dependent on the condition of the local economy for their livelihoods and servicing their loan obligations. The Company does not have any significant concentrations in any one industry or individual customer.

 

Accounting Standards Adopted in 2021

 

FASB ASC Topics 321, 323, and 815 InvestmentsEquity Securities (Topic 321), InvestmentsEquity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) ASU No. 2020-01. ASU 2020-01 became effective for the Company on January 1, 2021. The ASU clarifies the interaction among ASC 321, ASC 323, and ASC 815 for equity securities, equity method investments, and certain financial instruments to acquire equity securities. It clarifies whether re-measurement of equity investments is appropriate when observable transactions cause the equity method to be triggered or discontinued. ASU 2020-01 also provides that certain forward contracts and purchased options to acquire equity securities will be measured under ASC 321 without an assessment of subsequent accounting upon settlement or exercise. The adoption of ASU 2020-01 did not have a material impact on the consolidated financial statements.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Accounting Pronouncements Not Yet Adopted

 

FASB ASC Topic 326 Financial Instruments Credit Losses: Measurement of Credit Losses on Financial Instruments Update No. 2016-13. The FASB issued ASU No. 2016-13 in June 2016. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. We are currently evaluating the potential impact of ASU 2016-13 on our financial statements. In that regard, we have formed a cross-functional working group, under the direction of our Chief Financial Officer and our Chief Risk Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology. We have developed an implementation plan to include assessment of processes, portfolio segmentation, model development, system requirements and the identification of data and resource needs, among other things. We have also selected a third-party vendor solution to assist us in the application of ASU 2016-13.

 

The adoption of ASU 2016-13 is likely to result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses on debt securities. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as the prevailing economic conditions and forecasts, as of the adoption date.

 

This amendment was originally effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In July 2019, the FASB proposed changes that would delay the effective date for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. In October 2019, the FASB voted in favor of finalizing its proposal to delay the effective date of this standard to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. ASU 2016-13 will be effective for the Company on January 1, 2023. The Company expects to adopt the standard as soon as practicable, based upon progress on the implementation plan. Adoption prior to the revised effective date of January 1, 2023 is permitted by the ASU.

 

FASB ASC Topic 848 Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting” Update No. 2020-04. In March 2020, the FASB issued ASU 2020-04, which is intended to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 2. BUSINESS COMBINATIONS

 

PlainsCapital

 

On February 21, 2020, the Company completed the acquisition of the Alice and Victoria, Texas branch locations of PlainsCapital Bank (“PlainsCapital”), a wholly-owned subsidiary of Hilltop Holdings Inc., for an aggregate cash consideration of approximately $11.2 million. The acquisition added $48.8 million in total assets, including $45.3 million in loans, and $37.0 million in deposits. As consideration paid was in excess of the net fair value of acquired assets, the Company recorded $0.5 million of goodwill. Goodwill resulted from a combination of synergies and cost savings, and further expansion into south Texas with the addition of two branch locations.

 

The table below shows the allocation of the consideration paid for certain assets, deposits and other liabilities associated with the Alice and Victoria, Texas locations of PlainsCapital and the goodwill generated from the transaction (dollars in thousands).

 

Purchase price:

       

Cash paid

  $ 11,162  
         

Fair value of assets acquired:

       

Cash and cash equivalents

    353  

Loans

    45,299  

Bank premises and equipment

    2,770  

Core deposit intangible asset

    170  

Other assets

    163  

Total assets acquired

    48,755  
         

Fair value of liabilities acquired:

       

Deposits

    36,973  

Other liabilities

    1,084  

Total liabilities assumed

    38,057  
         

Fair value of net assets acquired

    10,698  

Goodwill

  $ 464  

 

The fair value of net assets acquired includes a fair value adjustment to loans as of the acquisition date. The adjustment for the acquired loan portfolio is based on current market interest rates at the time of acquisition, and the Company’s initial evaluation of credit losses identified. The contractually required principal and interest payments of the loans acquired from PlainsCapital total $51.3 million. No loans acquired from PlainsCapital were considered to be purchased credit impaired loans.

 

Acquisition Expense

 

Acquisition related costs of $0.4 million and $0.8 million are included in acquisition expenses in the accompanying consolidated statements of income for the three months ended March 31, 2021 and 2020, respectively. For the three months ended March 31, 2021, these costs are related to the acquisition of Cheaha Financial Group, Inc. which was completed on April 1, 2021. See Note 12. Subsequent Events for further acquisition details. For the three months ended March 31, 2020, these costs include system conversion and integrating operations charges, as well as legal and consulting expenses primarily related to the acquisition of two branches from PlainsCapital.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 3. EARNINGS PER SHARE

 

The following is a summary of the information used in the computation of basic and diluted earnings per share for the three months ended March 31, 2021 and 2020 (in thousands, except share data).

 

   

Three months ended March 31,

 
   

2021

   

2020

 

Earnings per common share - basic

               

Net income

  $ 5,360     $ 608  

Less: income allocated to participating securities

    (20 )     (3 )

Net income allocated to common shareholders

    5,340       605  

Weighted-average basic shares outstanding

    10,509,468       11,143,078  

Basic earnings per common share

  $ 0.51     $ 0.05  
                 

Earnings per common share - diluted

               

Net income allocated to common shareholders

  $ 5,340     $ 605  

Weighted-average basic shares outstanding

    10,509,468       11,143,078  

Dilutive effect of securities

    57,705       68,265  

Total weighted average diluted shares outstanding

    10,567,173       11,211,343  

Diluted earnings per common share

  $ 0.51     $ 0.05  

 

The weighted average shares that have an antidilutive effect in the calculation of diluted earnings per common share and have been excluded from the computations above are shown below.

 

   

Three months ended March 31,

 
   

2021

   

2020

 

Stock options

          3,782  

Restricted stock awards

    209       295  

Restricted stock units

    8,242       64,780  

 

 

NOTE 4. INVESTMENT SECURITIES

 

The amortized cost and approximate fair value of investment securities classified as AFS are summarized below as of the dates presented (dollars in thousands).

 

           

Gross

   

Gross

         
           

Unrealized

   

Unrealized

   

Fair

 
   

Amortized Cost

   

Gains

   

Losses

   

Value

 

March 31, 2021

                               

Obligations of U.S. government agencies and corporations

  $ 38,230     $ 160     $ (54 )   $ 38,336  

Obligations of state and political subdivisions

    22,094       712       (95 )     22,711  

Corporate bonds

    29,206       433       (131 )     29,508  

Residential mortgage-backed securities

    138,163       1,955       (752 )     139,366  

Commercial mortgage-backed securities

    71,617       647       (752 )     71,512  

Total

  $ 299,310     $ 3,907     $ (1,784 )   $ 301,433  

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

           

Gross

   

Gross

         
           

Unrealized

   

Unrealized

   

Fair

 
   

Amortized Cost

   

Gains

   

Losses

   

Value

 

December 31, 2020

                               

Obligations of U.S. government agencies and corporations

  $ 36,648     $ 201     $ (28 )   $ 36,821  

Obligations of state and political subdivisions

    21,650       490       (3 )     22,137  

Corporate bonds

    27,583       348       (223 )     27,708  

Residential mortgage-backed securities

    119,934       2,675       (11 )     122,598  

Commercial mortgage-backed securities

    58,098       1,202       (154 )     59,146  

Total

  $ 263,913     $ 4,916     $ (419 )   $ 268,410  

 

Proceeds from sales of investment securities AFS and gross gains and losses are summarized below for the periods presented (dollars in thousands).

 

   

Three months ended March 31,

 
   

2021

   

2020

 

Proceeds from sale

  $ 17,123     $ 16,572  

Gross gains

  $ 602     $ 182  

Gross losses

  $ (2 )   $ (10 )

 

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

 

March 31, 2021

                               

Obligations of state and political subdivisions

  $ 8,106     $ 217     $     $ 8,323  

Residential mortgage-backed securities

    3,860       158             4,018  

Total

  $ 11,966     $ 375     $     $ 12,341  

 

           

Gross

   

Gross

         
           

Unrealized

   

Unrealized

   

Fair

 
   

Amortized Cost

   

Gains

   

Losses

   

Value

 

December 31, 2020

                               

Obligations of state and political subdivisions

  $ 8,225     $ 12     $     $ 8,237  

Residential mortgage-backed securities

    4,209       203             4,412  

Total

  $ 12,434     $ 215     $     $ 12,649  

 

Securities are classified in the consolidated balance sheets according to management’s intent. The Company had no securities classified as trading as of March 31, 2021 or December 31, 2020.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The number of AFS securities, fair value, and unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized below as of the dates presented (dollars in thousands). There were no HTM securities in a continuous loss position as of March 31, 2021 or December 31, 2020.

 

           

Less than 12 Months

   

12 Months or More

   

Total

 
                   

Unrealized

           

Unrealized

           

Unrealized

 
   

Count

   

Fair Value

   

Losses

   

Fair Value

   

Losses

   

Fair Value

   

Losses

 

March 31, 2021

                                                       

Obligations of U.S. government agencies and corporations

    10     $ 6,658     $ (47 )   $ 5,754     $ (7 )   $ 12,412     $ (54 )

Obligations of state and political subdivisions

    5       2,726       (95 )                 2,726       (95 )

Corporate bonds

    15       3,921       (114 )     1,983       (17 )     5,904       (131 )

Residential mortgage-backed securities

    40       56,937       (752 )                 56,937       (752 )

Commercial mortgage-backed securities

    53       20,922       (624 )     13,140       (128 )     34,062       (752 )

Total

    123     $ 91,164     $ (1,632 )   $ 20,877     $ (152 )   $ 112,041     $ (1,784 )

 

           

Less than 12 Months

   

12 Months or More

   

Total

 
                   

Unrealized

           

Unrealized

           

Unrealized

 
   

Count

   

Fair Value

   

Losses

   

Fair Value

   

Losses

   

Fair Value

   

Losses

 

December 31, 2020

                                                       

Obligations of U.S. government agencies and corporations

    12     $ 9,080     $ (19 )   $ 4,043     $ (9 )   $ 13,123     $ (28 )

Obligations of state and political subdivisions

    4       505       (3 )     204             709       (3 )

Corporate bonds

    22       6,970       (133 )     2,559       (90 )     9,529       (223 )

Residential mortgage-backed securities

    6       11,070       (11 )                 11,070       (11 )

Commercial mortgage-backed securities

    26       6,921       (57 )     7,965       (97 )     14,886       (154 )

Total

    70     $ 34,546     $ (223 )   $ 14,771     $ (196 )   $ 49,317     $ (419 )

 

Unrealized losses are generally due to changes in interest rates. Beginning in the first quarter of 2020, the COVID-19 pandemic has led to ongoing disruption and volatility in the capital markets, causing fluctuations of fair values across asset classes. 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 investment, current market prices, and the current interest rate environment, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2021 or December 31, 2020.

 

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

 

   

Securities Available For Sale

   

Securities Held To Maturity

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

Cost

   

Value

   

Cost

   

Value

 

March 31, 2021

                               

Due within one year

  $ 1,493     $ 1,503     $ 830     $ 851  

Due after one year through five years

    14,095       14,291       2,745       2,845  

Due after five years through ten years

    65,135       65,986       4,531       4,626  

Due after ten years

    218,587       219,653       3,860       4,019  

Total debt securities

  $ 299,310     $ 301,433     $ 11,966     $ 12,341  

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

   

Securities Available For Sale

   

Securities Held To Maturity

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

Cost

   

Value

   

Cost

   

Value

 

December 31, 2020

                               

Due within one year

  $ 1,669     $ 1,691     $ 830     $ 832  

Due after one year through five years

    12,937       13,014       2,745       2,751  

Due after five years through ten years

    64,159       64,865       4,650       4,654  

Due after ten years

    185,148       188,840       4,209       4,412  

Total debt securities

  $ 263,913     $ 268,410     $ 12,434     $ 12,649  

 

At March 31, 2021, securities with a carrying value of $101.0 million were pledged to secure certain deposits, borrowings, and other liabilities, compared to $84.6 million in pledged securities at December 31, 2020.

 

 

NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES

 

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

 

   

March 31, 2021

   

December 31, 2020

 

Construction and development

  $ 190,816     $ 206,011  

1-4 Family

    341,266       339,525  

Multifamily

    60,844       60,724  

Farmland

    24,145       26,547  

Commercial real estate

    829,880       812,395  

Total mortgage loans on real estate

    1,446,951       1,445,202  

Commercial and industrial

    380,534       394,497  

Consumer

    18,485       20,619  

Total loans

  $ 1,845,970     $ 1,860,318  

 

Unamortized premiums and discounts on loans, included in the total loans balances above, were $1.6 million and $1.8 million at March 31, 2021 and  December 31, 2020, respectively, and unearned income, or deferred fees, on loans was $4.1 million and $3.2 million at March 31, 2021 and  December 31, 2020, respectively.

 

In the second quarter of 2020, the Bank began participating as a lender in the Small Business Administration’s (“SBA”) and U.S. Department of Treasury’s Paycheck Protection Program (“PPP”) as established by the CARES Act and enhanced by the Paycheck Protection Program and Health Care Enhancement Act and the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”). The PPP was established to provide unsecured low interest rate loans to small businesses that have been impacted by the COVID-19 pandemic. The PPP loans are 100% guaranteed by the SBA. The loans have a fixed interest rate of 1% with deferred payments, and if originated before June 5, 2020, mature two years from origination, or if made on or after June 5, 2020, five years from origination. PPP loans are forgiven by the SBA (which makes forgiveness payments directly to the lender) to the extent the borrower uses the proceeds of the loan for certain purposes (primarily to fund payroll costs) during a certain time period following origination and maintains certain employee and compensation levels. Lenders receive processing fees from the SBA for originating the PPP loans which are based on a percentage of the loan amount. In July 2020, the CARES Act was amended to extend the SBA’s authority to make commitments under the PPP, which had previously expired on June 30, 2020. The PPP resumed taking applications on July 6, 2020, and the new deadline to apply for a PPP loan ended on August 8, 2020. On December 27, 2020, the CAA, a $900 billion aid package, was enacted that renewed the PPP and allocated additional funding for new first time PPP loans under the original PPP and also authorized second draw PPP loans for certain eligible borrowers that had previously received a PPP loan. The SBA began accepting applications on the next round of the PPP in January 2021, and the application period was extended from  March 31, 2021 to May 31, 2021, subject to the availability of funds. Congress passed the American Rescue Plan Act of 2021, an additional $1.9 trillion stimulus package, including additional funding for the PPP, in March 2021. At March 31, 2021 and  December 31, 2020 the Company’s loan portfolio included PPP loans with balances of $106.6 million and $94.5 million, respectively, all of which are included in commercial and industrial loans.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

   

March 31, 2021

 
   

Accruing

                                 
           

30-59 Days

   

60-89 Days

   

90 Days or More

           

Total Past Due

   

Acquired

         
   

Current

   

Past Due

   

Past Due

   

Past Due

   

Nonaccrual

   

& Nonaccrual

   

Impaired Loans

   

Total Loans

 

Construction and development

  $ 190,249     $ 50     $     $     $ 517     $ 567     $     $ 190,816  

1-4 Family

    338,679       1,186       89       61       876       2,212       375       341,266  

Multifamily

    60,844                                           60,844  

Farmland

    22,141                         303       303       1,701       24,145  

Commercial real estate

    826,077       79             40       3,150       3,269       534       829,880  

Total mortgage loans on real estate

    1,437,990       1,315       89       101       4,846       6,351       2,610       1,446,951  

Commercial and industrial

    373,092       77       20       1,604       5,741       7,442             380,534  

Consumer

    18,074       67       14             293       374       37       18,485  

Total loans

  $ 1,829,156     $ 1,459     $ 123     $ 1,705     $ 10,880     $ 14,167     $ 2,647     $ 1,845,970  

 

   

December 31, 2020

 
   

Accruing

                                 
           

30-59 Days

   

60-89 Days

   

90 Days or More

           

Total Past Due

   

Acquired

         
   

Current

   

Past Due

   

Past Due

   

Past Due

   

Nonaccrual

   

& Nonaccrual

   

Impaired Loans

   

Total Loans

 

Construction and development

  $ 205,002     $ 488     $     $     $ 521     $ 1,009     $     $ 206,011  

1-4 Family

    335,710       1,085       734             1,615       3,434       381       339,525  

Multifamily

    60,724                                           60,724  

Farmland

    24,333       297             216             513       1,701       26,547  

Commercial real estate

    807,243       1,472       118             1,771       3,361       1,791       812,395  

Total mortgage loans on real estate

    1,433,012       3,342       852       216       3,907       8,317       3,873       1,445,202  

Commercial and industrial

    386,607       359       273       105       6,907       7,644       246       394,497  

Consumer

    20,135       79       21             346       446       38       20,619  

Total loans

  $ 1,839,754     $ 3,780     $ 1,146     $ 321     $ 11,160     $ 16,407     $ 4,157     $ 1,860,318  

 

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 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.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Certain borrowers are currently experiencing difficulties meeting their contractual payment obligations because of the adverse economic effects attributable to the COVID-19 pandemic. As a result, loan customers may apply for payment deferrals, or portions thereof, for up to 90 days. In the absence of other contributing factors, these short-term modifications made on a good faith basis are not considered TDRs, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status if the loans were not past due or on non-accrual status prior to the deferral. See Note 1. Summary of Significant Accounting Policies for further discussion.

 

Loans Acquired with Deteriorated Credit Quality

 

The Company accounts for certain loans acquired as acquired impaired loans under ASC 310-30 due to evidence of credit deterioration at acquisition and the probability that the Company will be unable to collect all contractually required payments. The acquired impaired loans had no accretable yield recorded for the three months ended March 31, 2021 and 2020.

 

Portfolio Segment Risk Factors

 

The following describes the risk characteristics relevant to each of the Company’s loan portfolio segments.

 

Construction and Development - Construction and development loans are generally made for the purpose of acquisition and development of land to be improved through the construction of commercial and residential buildings. The successful repayment of these types of loans is generally dependent upon a commitment for permanent financing from the Company, or from the sale of the constructed property. These loans carry more risk than commercial or residential real estate loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market, and state and local government regulations. One such risk is that loan funds are advanced upon the security of the property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and to calculate related loan-to-value ratios. The Company attempts to minimize the risks associated with construction lending by limiting loan-to-value ratios as described above. In addition, as to speculative development loans, the Company generally makes such loans only to borrowers that have a positive pre-existing relationship with us. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding excessive concentrations in any one business or industry.

 

1-4 Family - The 1-4 family portfolio mainly consists of residential mortgage loans to consumers to finance a primary residence. The majority of these loans are secured by properties located in the Company’s market areas and carry risks associated with the creditworthiness of the borrower and changes in the value of the collateral and loan-to-value-ratios. The Company manages these risks through policies and procedures such as limiting loan-to-value ratios at origination, employing experienced underwriting personnel, requiring standards for appraisers, and not making subprime loans.

 

Multifamily - Multifamily loans are normally made to real estate investors to support permanent financing for multifamily residential income producing properties that rely on the successful operation of the property for repayment. This management mainly involves property maintenance and collection of rents due from tenants. This type of lending carries a lower level of risk, as compared to other commercial lending. In addition, underwriting requirements for multifamily properties are stricter than for other non-owner-occupied property types. The Company manages this risk by avoiding concentrations with any particular customer.

 

Farmland - Farmland loans are often for land improvements related to agricultural endeavors and may include construction of new specialized facilities. These loans are usually repaid through the conversion to permanent financing, or if scheduled loan amortization begins, for the long-term benefit of the borrower’s ongoing operations. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Commercial Real Estate - Commercial real estate loans are extensions of credit secured by owner occupied and non-owner occupied collateral. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Repayment is commonly derived from the successful ongoing operations of the property. General market conditions and economic activity may impact the performance of these types of loans, including fluctuations in the value of real estate, new job creation trends, and tenant vacancy rates. The Company attempts to limit risk by analyzing a borrower’s cash flow and collateral value on an ongoing basis. The Company also typically requires personal guarantees from the principal owners of the property, supported by a review of their personal financial statements, as an additional means of mitigating our risk. The Company manages risk by avoiding concentrations in any one business or industry.

 

Commercial and Industrial - Commercial and industrial loans receive similar underwriting treatment as commercial real estate loans in that the repayment source is analyzed to determine its ability to meet cash flow coverage requirements as set forth by Bank policies. Repayment of these loans generally comes from the generation of cash flow as the result of the borrower’s business operations. Commercial lending generally involves different risks from those associated with commercial real estate lending or construction lending. Although commercial loans may be collateralized by equipment or other business assets (including real estate, if available as collateral), the repayment of these types of loans depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors). Thus, the general business conditions of the local economy and the borrower’s ability to sell its products and services, thereby generating sufficient operating revenue to repay us under the agreed upon terms and conditions, are the chief considerations when assessing the risk of a commercial loan. The liquidation of collateral, if any, is considered a secondary source of repayment because equipment and other business assets may, among other things, be obsolete or of limited resale value. The Company actively monitors certain financial measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors.

 

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.

 

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.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

The table below presents the Company’s loan portfolio by category and credit quality indicator as of the dates presented (dollars in thousands).

 

   

March 31, 2021

 
           

Special

                         
   

Pass

   

Mention

   

Substandard

   

Doubtful

   

Total

 

Construction and development

  $ 189,087     $ 1,212     $ 517     $     $ 190,816  

1-4 Family

    339,250             2,016             341,266  

Multifamily

    60,203             641             60,844  

Farmland

    22,141             2,004             24,145  

Commercial real estate

    814,704       4,978       10,198             829,880  

Total mortgage loans on real estate

    1,425,385       6,190       15,376             1,446,951  

Commercial and industrial

    355,582       2,259       22,046       647       380,534  

Consumer

    18,155             330             18,485  

Total loans

  $ 1,799,122     $ 8,449     $ 37,752     $ 647     $ 1,845,970  

 

   

December 31, 2020

 
           

Special

                         
   

Pass

   

Mention

   

Substandard

   

Doubtful

   

Total

 

Construction and development

  $ 198,139     $ 7,352     $ 520     $     $ 206,011  

1-4 Family

    337,829             1,696             339,525  

Multifamily

    60,724                         60,724  

Farmland

    24,846             1,701             26,547  

Commercial real estate

    801,244       4,729       6,422             812,395  

Total mortgage loans on real estate

    1,422,782       12,081       10,339             1,445,202  

Commercial and industrial

    379,451       4,794       9,343       909       394,497  

Consumer

    20,235             384             20,619  

Total loans

  $ 1,822,468     $ 16,875     $ 20,066     $ 909     $ 1,860,318  

 

The Company had no loans that were classified as loss at March 31, 2021 or December 31, 2020.

 

Loan Participations and Sold Loans

 

Loan participations and whole loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The balance of loans serviced for others was $50.3 million and $53.5 million at March 31, 2021 and  December 31, 2020, respectively. The unpaid principal balance of these loans was approximately$137.8 million and $154.0 million at March 31, 2021 and  December 31, 2020, respectively.

 

Loans to Related Parties

 

In the ordinary course of business, the Company makes loans to related parties including its executive officers, principal stockholders, directors and their immediate family members, as well as companies in which these individuals are principal owners. Loans outstanding to such related party borrowers amounted to approximately $94.7 million and $96.4 million as of March 31, 2021 and  December 31, 2020, respectively.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The table below shows the aggregate principal balance of loans to such related parties as of the dates presented (dollars in thousands).

 

   

March 31, 2021

   

December 31, 2020

 

Balance, beginning of period

  $ 96,390     $ 98,093  

New loans

    3,545       12,443  

Repayments and changes in relationship

    (5,211 )     (14,146 )

Balance, end of period

  $ 94,724     $ 96,390  

 

Allowance for Loan Losses

 

The table below shows a summary of the activity in the allowance for loan losses for the three months ended March 31, 2021 and 2020 (dollars in thousands).

 

   

Three months ended March 31,

 
   

2021

   

2020

 

Balance, beginning of period

  $ 20,363     $ 10,700  

Provision for loan losses

    400       3,760  

Loans charged off

    (405 )     (262 )

Recoveries

    65       35  

Balance, end of period

  $ 20,423     $ 14,233  

 

The following tables outline the activity in the allowance for loan losses by collateral type for the three months ended March 31, 2021 and 2020, and show both the allowance and portfolio balances for loans individually and collectively evaluated for impairment as of  March 31, 2021 and 2020 (dollars in thousands).

 

   

Three months ended March 31, 2021

 
   

Construction &

                           

Commercial

   

Commercial &

                 
   

Development

   

Farmland

   

1-4 Family

   

Multifamily

   

Real Estate

   

Industrial

   

Consumer

   

Total

 

Allowance for loan losses:

                                                               

Beginning balance

  $ 2,375     $ 435     $ 3,370     $ 589     $ 8,496     $ 4,558     $ 540     $ 20,363  

Provision

    (140 )     (40 )     127       107       547       (122 )     (79 )     400  

Charge-offs

                (134 )                 (215 )     (56 )     (405 )

Recoveries

    10             6             2       5       42       65  

Ending balance

  $ 2,245     $ 395     $ 3,369     $ 696     $ 9,045     $ 4,226     $ 447     $ 20,423  

Ending allowance balance for loans individually evaluated for impairment

                            175       81       103       359  

Ending allowance balance for loans acquired with deteriorated credit quality

          210                                     210  

Ending allowance balance for loans collectively evaluated for impairment

    2,245       185       3,369       696       8,870       4,145       344       19,854  

Loans receivable:

                                                               

Balance of loans individually evaluated for impairment

    774       302       1,532             6,654       8,159       298       17,719  

Balance of loans acquired with deteriorated credit quality

          1,701       375             534             37       2,647  

Balance of loans collectively evaluated for impairment

    190,042       22,142       339,359       60,844       822,692       372,375       18,150       1,825,604  

Total period-end balance

  $ 190,816     $ 24,145     $ 341,266     $ 60,844     $ 829,880     $ 380,534     $ 18,485     $ 1,845,970  

 

   

Three months ended March 31, 2020

 
   

Construction &

                           

Commercial

   

Commercial &

                 
   

Development

   

Farmland

   

1-4 Family

   

Multifamily

   

Real Estate

   

Industrial

   

Consumer

   

Total

 

Allowance for loan losses:

                                                               

Beginning balance

  $ 1,201     $ 101     $ 1,490     $ 387     $ 4,424     $ 2,609     $ 488     $ 10,700  

Provision

    340       62       1,003       (36 )     1,439       683       269       3,760  

Charge-offs

                (160 )                 (7 )     (95 )     (262 )

Recoveries

    13             4                   2       16       35  

Ending balance

  $ 1,554     $ 163     $ 2,337     $ 351     $ 5,863     $ 3,287     $ 678     $ 14,233  

Ending allowance balance for loans individually evaluated for impairment

                                  13       175       188  

Ending allowance balance for loans acquired with deteriorated credit quality

                                               

Ending allowance balance for loans collectively evaluated for impairment

    1,554       163       2,337       351       5,863       3,274       503       14,045  

Loans receivable:

                                                               

Balance of loans individually evaluated for impairment

    1,097             1,763             47       155       512       3,574  

Balance of loans acquired with deteriorated credit quality

          2,264       405             1,564       1,042       38       5,313  

Balance of loans collectively evaluated for impairment

    190,500       27,109       326,562       61,709       774,743       312,653       27,631       1,720,907  

Total period-end balance

  $ 191,597     $ 29,373     $ 328,730     $ 61,709     $ 776,354     $ 313,850     $ 28,181     $ 1,729,794  

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Impaired Loans

 

The Company considers a loan to be impaired when, based on current information and events, the Company determines that it will not be able to collect all amounts due according to the loan agreement, including scheduled interest payments. Determination of impairment is treated the same across all classes of loans. When the Company identifies a loan as impaired, it measures the impairment based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole (remaining) source of repayment for the loans is the operation or liquidation of the collateral. In these cases when foreclosure is probable, the Company uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If the Company determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), the Company recognizes impairment through an allowance estimate or a charge-off to the allowance.

 

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual, contractual interest is credited to interest income when received, under the cash basis method.

 

The following tables contain information on the Company’s impaired loans, which include TDRs, discussed in more detail below, and nonaccrual loans individually evaluated for impairment for purposes of determining the allowance for loan losses. The average balances are calculated based on the month-end balances of the loans during the period reported (dollars in thousands).

 

   

March 31, 2021

 
   

Recorded Investment

   

Unpaid Principal Balance

   

Related Allowance

 

With no related allowance recorded:

                       

Construction and development

  $ 774     $ 782     $  

1-4 Family

    1,532       1,588        
Farmland     302       302        

Commercial real estate

    5,341       5,410        

Total mortgage loans on real estate

    7,949       8,082        

Commercial and industrial

    8,074       9,325        

Consumer

    127       145        

Total

    16,150       17,552        
                         

With related allowance recorded:

                       

Commercial real estate

    1,313       1,344       175  

Total mortgage loans on real estate

    1,313       1,344       175  

Commercial and industrial

    85       85       81  

Consumer

    171       212       103  

Total

    1,569       1,641       359  
                         

Total loans:

                       

Construction and development

    774       782        

1-4 Family

    1,532       1,588        
Farmland     302       302        
Commercial real estate     6,654       6,754       175  
Total mortgage loans on real estate     9,262       9,426       175  
Commercial and industrial     8,159       9,410       81  

Consumer

    298       357       103  

Total

  $ 17,719     $ 19,193     $ 359  

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

   

December 31, 2020

 
   

Recorded Investment

   

Unpaid Principal Balance

   

Related Allowance

 

With no related allowance recorded:

                       

Construction and development

  $ 782     $ 800     $  

1-4 Family

    2,280       2,353        

Commercial real estate

    6,666       6,721        

Total mortgage loans on real estate

    9,728       9,874        
Commercial and industrial     8,841       9,953        

Consumer

    126       143        

Total

    18,695       19,