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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 September 30, 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, 10,343,494 shares outstanding as of November 1, 2021.

 

 

 

 

TABLE OF CONTENTS

 

Part I. Financial Information

 
     

Item 1.

Financial Statements (Unaudited)

4

 

Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020

4

 

Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020

5

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020

6

 

Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020

7

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020

9

 

Notes to the Consolidated Financial Statements

11

 

Note 1. Summary of Significant Accounting Policies

11

 

Note 2. Business Combinations

16

 

Note 3. Earnings Per Share

17

 

Note 4. Investment Securities

17

 

Note 5. Loans and Allowance for Loan Losses

20

 

Note 6. Stockholders’ Equity

32

 

Note 7. Derivative Financial Instruments

33

 

Note 8. Fair Values of Financial Instruments

34

 

Note 9. Income Taxes

39

 

Note 10. Commitments and Contingencies

39

 

Note 11. Leases

40

Item 2.

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

41

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

68

Item 4.

Controls and Procedures

68

     

Part II. Other Information

69

     

Item 1A.

Risk Factors

69

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

69

Item 6.

Exhibits

71

Signatures

72

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

   

September 30, 2021

   

December 31, 2020

 
   

(Unaudited)

         

ASSETS

               

Cash and due from banks

  $ 45,404     $ 25,672  

Interest-bearing balances due from other banks

    304,587       9,696  

Federal funds sold

    500        

Cash and cash equivalents

    350,491       35,368  
                 

Available for sale securities at fair value (amortized cost of $274,312 and $263,913, respectively)

    274,387       268,410  

Held to maturity securities at amortized cost (estimated fair value of $11,936 and $12,649, respectively)

    11,407       12,434  

Loans held for sale

    300        

Loans, net of allowance for loan losses of $20,567 and $20,363, respectively

    1,860,091       1,839,955  

Equity securities

    16,783       16,599  

Bank premises and equipment, net of accumulated depreciation of $18,579 and $15,830, respectively

    61,619       56,303  

Other real estate owned, net

    635       663  

Accrued interest receivable

    11,732       12,969  

Deferred tax asset

    1,493       1,360  

Goodwill and other intangible assets, net

    44,283       32,232  

Bank owned life insurance

    50,767       38,908  

Other assets

    12,060       5,980  

Total assets

  $ 2,696,048     $ 2,321,181  
                 

LIABILITIES

               

Deposits:

               

Noninterest-bearing

  $ 597,452     $ 448,230  

Interest-bearing

    1,706,189       1,439,594  

Total deposits

    2,303,641       1,887,824  

Advances from Federal Home Loan Bank

    78,500       120,500  

Repurchase agreements

    6,580       5,653  

Subordinated debt, net of unamortized issuance costs

    42,966       42,897  

Junior subordinated debt

    8,352       5,949  

Accrued taxes and other liabilities

    19,685       15,074  

Total liabilities

    2,459,724       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; 10,343,416 and 10,608,869 shares issued and outstanding, respectively

    10,344       10,609  

Surplus

    154,527       159,485  

Retained earnings

    70,054       71,385  

Accumulated other comprehensive income

    1,399       1,805  

Total stockholders’ equity

    236,324       243,284  

Total liabilities and stockholders’ equity

  $ 2,696,048     $ 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 September 30,

   

Nine months ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 

INTEREST INCOME

                               

Interest and fees on loans

  $ 23,220     $ 21,866     $ 67,982     $ 65,653  

Interest on investment securities

    1,021       1,356       3,209       4,506  

Other interest income

    232       172       598       658  

Total interest income

    24,473       23,394       71,789       70,817  
                                 

INTEREST EXPENSE

                               

Interest on deposits

    1,854       3,404       6,270       12,626  

Interest on borrowings

    1,071       1,284       3,172       3,811  

Total interest expense

    2,925       4,688       9,442       16,437  

Net interest income

    21,548       18,706       62,347       54,380  
                                 

Provision for loan losses

    21,713       2,500       22,227       8,760  

Net interest (loss) income after provision for loan losses

    (165 )     16,206       40,120       45,620  
                                 

NONINTEREST INCOME

                               

Service charges on deposit accounts

    650       441       1,748       1,417  

Gain on sale of investment securities, net

          939       2,321       2,289  

Loss on sale of fixed assets, net

          (5 )     (2 )     (5 )

(Loss) gain on sale of other real estate owned, net

                (5 )     26  

Swap termination fee income

    1,835             1,835        

Gain on sale of loans

    73             119        

Servicing fees and fee income on serviced loans

    38       85       167       301  

Interchange fees

    504       387       1,393       1,029  

Income from bank owned life insurance

    304       234       838       657  

Change in the fair value of equity securities

    48       (31 )     204       (609 )

Other operating income

    462       1,351       1,743       3,316  

Total noninterest income

    3,914       3,401       10,361       8,421  

Income before noninterest expense

    3,749       19,607       50,481       54,041  
                                 

NONINTEREST EXPENSE

                               

Depreciation and amortization

    1,264       1,203       3,748       3,385  

Salaries and employee benefits

    9,770       8,228       28,381       24,753  

Occupancy

    662       604       1,975       1,671  

Data processing

    715       816       2,434       2,295  

Marketing

    57       88       169       198  

Professional fees

    382       343       1,118       1,166  

Acquisition expense

    446       52       2,448       1,058  

Other operating expenses

    3,085       2,717       8,877       7,912  

Total noninterest expense

    16,381       14,051       49,150       42,438  

(Loss) income before income tax (benefit) expense

    (12,632 )     5,556       1,331       11,603  

Income tax (benefit) expense

    (2,648 )     1,089       267       2,254  

Net (loss) income

  $ (9,984 )   $ 4,467     $ 1,064     $ 9,349  
                                 

EARNINGS PER SHARE

                               

Basic (loss) earnings per share

  $ (0.95 )   $ 0.41     $ 0.10     $ 0.85  

Diluted (loss) earnings per share

    (0.95 )     0.41       0.09       0.85  

Cash dividends declared per common share

    0.08       0.07       0.23       0.19  

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Net (loss) income

  $ (9,984 )   $ 4,467     $ 1,064     $ 9,349  

Other comprehensive (loss) income:

                               

Unrealized (loss) gain on investment securities:

                               

Unrealized (loss) gain, available for sale, net of tax (benefit) expense of ($331), ($32), ($441) and $883, respectively

    (1,246 )     (122 )     (1,659 )     3,323  

Reclassification of realized gain, available for sale, net of tax expense of $0, $197, $487 and $481, respectively

          (741 )     (1,834 )     (1,808 )

Unrealized loss, transfer from available for sale to held to maturity, net of tax benefit of $0 for all respective periods

    (1 )           (1 )     (1 )

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 $135, $49, $1,206 and ($987), respectively

    508       184       4,538       (3,714 )

Reclassification of realized gain, interest rate swap termination, net of tax expense of $385, $0, $385 and $0, respectively

    (1,450 )           (1,450 )      

Total other comprehensive loss

    (2,189 )     (679 )     (406 )     (2,200 )

Total comprehensive (loss) income

  $ (12,173 )   $ 3,788     $ 658     $ 7,149  

 

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:

                                       

September 30, 2020

                                       

Balance at beginning of period

  $ 10,840     $ 161,729     $ 63,767     $ 370     $ 236,706  

Surrendered shares

          (5 )                 (5 )

Dividends declared, $0.07 per share

                (698 )           (698 )

Stock-based compensation

    2       422                   424  

Shares repurchased

    (212 )     (2,736 )                 (2,948 )

Net income

                4,467             4,467  

Other comprehensive loss, net

                      (679 )     (679 )

Balance at end of period

  $ 10,630     $ 159,410     $ 67,536     $ (309 )   $ 237,267  
                                         

September 30, 2021

                                       

Balance at beginning of period

  $ 10,413     $ 155,847     $ 80,867     $ 3,588     $ 250,715  

Surrendered shares

          (5 )                 (5 )

Options exercised

    39       579                   618  

Dividends declared, $0.08 per share

                (829 )           (829 )

Stock-based compensation

    1       441                   442  

Shares repurchased

    (109 )     (2,335 )                 (2,444 )

Net loss

                (9,984 )           (9,984 )

Other comprehensive loss, net

                      (2,189 )     (2,189 )

Balance at end of period

  $ 10,344     $ 154,527     $ 70,054     $ 1,399     $ 236,324  

 

See accompanying notes to the consolidated financial statements.

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY, CONTINUED

(Amounts in thousands, except share data)

(Unaudited)

 

                           

Accumulated

         
                           

Other

   

Total

 
   

Common

           

Retained

   

Comprehensive

   

Stockholders’

 
   

Stock

   

Surplus

   

Earnings

   

Income (Loss)

   

Equity

 

Nine months ended:

                                       

September 30, 2020

                                       

Balance at beginning of period

  $ 11,229     $ 168,658     $ 60,198     $ 1,891     $ 241,976  

Stock issuance costs

          (45 )                 (45 )

Surrendered shares

    (15 )     (298 )                 (313 )

Options exercised

    3       43                   46  

Dividends declared, $0.19 per share

                (2,011 )           (2,011 )

Stock-based compensation

    54       1,202                   1,256  

Shares repurchased

    (641 )     (10,150 )                 (10,791 )

Net income

                9,349             9,349  

Other comprehensive loss, net

                      (2,200 )     (2,200 )

Balance at end of period

  $ 10,630     $ 159,410     $ 67,536     $ (309 )   $ 237,267  
                                         

September 30, 2021

                                       

Balance at beginning of period

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

Surrendered shares

    (19 )     (348 )                 (367 )

Options exercised

    47       686                   733  

Dividends declared, $0.23 per share

                (2,395 )           (2,395 )

Stock-based compensation

    66       1,270                   1,336  

Shares repurchased

    (359 )     (6,566 )                 (6,925 )

Net income

                1,064             1,064  

Other comprehensive loss, net

                      (406 )     (406 )

Balance at end of period

  $ 10,344     $ 154,527     $ 70,054     $ 1,399     $ 236,324  

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited) 

 

   

Nine months ended September 30,

 
   

2021

   

2020

 

Net income

  $ 1,064     $ 9,349  

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

               

Depreciation and amortization

    3,748       3,385  

Provision for loan losses

    22,227       8,760  

Amortization of purchase accounting adjustments

    (1,249 )     (933 )

Net amortization of securities

    2,839       1,850  

Gain on sale of investment securities, net

    (2,321 )     (2,289 )

Loss on sale of fixed assets, net

    2       5  

Loss (gain) on sale of other real estate owned, net

    5       (26 )

FHLB stock dividend

    (31 )     (116 )

Stock-based compensation

    1,336       1,256  

Deferred taxes

    136       (1,328 )

Net change in value of bank owned life insurance

    (835 )     (657 )

Amortization of subordinated debt issuance costs

    69       48  

Change in the fair value of equity securities

    (204 )     609  

Loans held for sale:

               

Originations

    (7,195 )      

Proceeds from sales

    7,014        

Gain on sale of loans

    (119 )      

Net change in:

               

Accrued interest receivable

    2,074       (5,145 )

Other assets

    (3,898 )     10  

Accrued taxes and other liabilities

    3,960       (3,490 )

Net cash provided by operating activities

  $ 28,622     $ 11,288  
                 

Cash flows from investing activities:

               

Proceeds from sales of investment securities available for sale

  $ 137,803     $ 56,466  

Purchases of securities available for sale

    (156,204 )     (117,860 )

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

    68,444       44,676  

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

    1,003       839  

Proceeds from redemption or sale of equity securities

    574       2,503  

Purchases of equity securities

    (523 )     (4,607 )

Net decrease (increase) in loans

    78,644       (93,191 )

Proceeds from sales of other real estate owned

    878       131  

Purchases of other real estate owned

    (501 )      

Proceeds from sales of fixed assets

    3        

Purchases of fixed assets

    (3,293 )     (6,364 )

Purchases of bank owned life insurance

    (8,000 )     (6,000 )

Purchase of other investments

    (123 )      

Proceeds from sales of other investments

          1,762  

Distributions from investments

    20       16  

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

          (10,761 )

Cash paid for acquisition of Cheaha Financial Group, net of cash acquired

    8,112        

Net cash provided by (used in) investing activities

  $ 126,837     $ (132,390 )

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Amounts in thousands)

(Unaudited)

 

Cash flows from financing activities:

               

Net increase in customer deposits

  $ 209,190     $ 89,915  

Net increase in repurchase agreements

    927       2,928  

Net (decrease) increase in short-term FHLB advances

    (42,000 )     50,000  

Repayments of long-term FHLB advances

          (3,100 )

Cash dividends paid on common stock

    (2,261 )     (1,993 )

Proceeds from stock options and warrants exercised

    733       46  

Payments to repurchase common stock

    (6,925 )     (10,791 )

Payments of stock issuance costs

          (45 )

Net cash provided by financing activities

  $ 159,664     $ 126,960  
                 

Net change in cash and cash equivalents

  $ 315,123     $ 5,858  

Cash and cash equivalents, beginning of period

    35,368       44,695  

Cash and cash equivalents, end of period

  $ 350,491     $ 50,553  

 

See accompanying notes to the consolidated financial statements.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Investar Holding Corporation (the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with GAAP. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three and nine month periods ended September 30, 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 September 30, 2021, the Company operated 23 full service branches located in Louisiana, five full service branches located in Texas and six full service branches located in Alabama, and had 348 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  September 30, 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 September 30, 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, the Company is offering short-term modifications made in response to COVID-19 to qualified 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 September 30, 2021, the balance of loans participating in the 90-day deferral program was $0.9 million, or 0.05% 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.

 

Loans Held for Sale

 

Loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value. For loans carried at the lower of cost or fair value, gains and losses on loan sales (sales proceeds minus carrying value) are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan. At September 30, 2021, there were $0.3 million in loans held for sale and at December 31, 2020, there were no loans held for sale.

 

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.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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. The reserve for unfunded loan commitments was $0.5 million and $0.2 million at  September 30, 2021 and  December 31, 2020, respectively.

 

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 and validation, 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.

 

Cheaha Financial Group, Inc.

 

On  April 1, 2021, the Company completed the acquisition of Cheaha Financial Group, Inc. (“Cheaha”) and its wholly-owned subsidiary, Cheaha Bank, in Oxford, Alabama for an aggregate cash consideration of approximately $41.1 million. After fair value adjustments, including $0.7 million to other liabilities and $0.2 million to other assets recorded in the three months ended September 30, 2021, the acquisition added $240.8 million in total assets, including $120.4 million in loans, and $207.0 million in deposits. As consideration paid was in excess of the net fair value of acquired assets, the Company recorded $11.9 million of goodwill. Goodwill resulted from a combination of synergies and cost savings, and further expansion into Alabama with the addition of four branch locations.

 

The table below shows the allocation of the consideration paid for Cheaha's common equity to the acquired identifiable assets and liabilities assumed and the goodwill generated from the transaction (dollars in thousands). The fair values listed below, primarily related to loans and deferred tax assets and liabilities, are subject to refinement for up to one year after the closing date of the acquisition as additional information becomes available.

 

Purchase price:

       

Cash paid

  $ 41,067  
         

Fair value of assets acquired:

       

Cash and cash equivalents

    49,179  

Investment securities

    60,938  

Loans

    120,395  

Bank premises and equipment

    5,407  

Core deposit intangible asset

    848  

Bank owned life insurance

    3,023  

Other assets

    1,012  

Total assets acquired

    240,802  
         

Fair value of liabilities acquired:

       

Deposits

    206,986  

Notes payable

    2,327  

Other liabilities

    2,366  

Total liabilities assumed

    211,679  
         

Fair value of net assets acquired

    29,123  

Goodwill

  $ 11,944  


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 Cheaha total $134.8 million. Loans acquired from Cheaha that are considered to be purchased credit impaired loans had a balance of $0.2 million at the time of acquisition. The contractually required principal and interest payments of these loans total $0.2 million, of which $0.1 million is not expected to be collected.

 

Acquisition Expense

 

Acquisition related costs of $0.4 million and $2.4 million are included in acquisition expense in the accompanying consolidated statements of income for the three and nine months ended September 30, 2021, respectively, and include system conversion and integrating operations charges, as well as legal and consulting expenses, for the acquisition of Cheaha which was completed on April 1, 2021 and the operational conversion of Cheaha that was completed on June 18, 2021. Acquisition related costs of $0.1 million and $1.1 million are included in acquisition expense for the three and nine months ended September 30, 2020, respectively, and include system conversion and integrating operations charges, as well as legal and consulting expenses, related to both the acquisition of Bank of York in November 2019 and 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 and nine months ended September 30, 2021 and 2020 (in thousands, except share data).

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 

(Loss) earnings per common share - basic

                               

Net (loss) income

  $ (9,984 )   $ 4,467     $ 1,064     $ 9,349  

Less: loss (income) allocated to participating securities

    23       (21 )     (2 )     (50 )

Net (loss) income allocated to common shareholders

    (9,961 )     4,446       1,062       9,299  

Weighted average basic shares outstanding

    10,398,787       10,759,791       10,440,638       10,927,702  

Basic (loss) earnings per common share

  $ (0.95 )   $ 0.41     $ 0.10     $ 0.85  
                                 

(Loss) earnings per common share - diluted

                               

Net (loss) income allocated to common shareholders

  $ (9,961 )   $ 4,446     $ 1,062     $ 9,299  

Weighted average basic shares outstanding

    10,398,787       10,759,791       10,440,638       10,927,702  

Dilutive effect of securities

          1,826       88,226       14,057  

Total weighted average diluted shares outstanding

    10,398,787       10,761,617       10,528,864       10,941,759  

Diluted (loss) earnings per common share

  $ (0.95 )   $ 0.41     $ 0.09     $ 0.85  

 

Due to the net loss for the three months ended September 30, 2021, the exercise or conversion of any outstanding stock options, restricted stock awards, and restricted stock units increases the number of shares in the denominator of the calculation of diluted (loss) earnings per share and results in a lower loss per share. The Company excludes the effect of these shares from the loss per share calculation as their effect is antidilutive. Therefore, diluted loss per share is the same as basic loss per share for the three months ended September 30, 2021.

 

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,

 
   

2021

   

2020

   

2021

   

2020

 

Stock options

    80,586             51       54  

Restricted stock awards

    323       16,060       294       12,611  

Restricted stock units

    44,336       68,861       29,066       73,519  

 

 

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

 

September 30, 2021

                               

Obligations of U.S. government agencies and corporations

  $ 23,064     $ 172     $ (31 )   $ 23,205  

Obligations of state and political subdivisions

    26,503       499       (96 )     26,906  

Corporate bonds

    27,778       268       (222 )     27,824  

Residential mortgage-backed securities

    127,227       1,080       (999 )     127,308  

Commercial mortgage-backed securities

    69,740       414       (1,010 )     69,144  

Total

  $ 274,312     $ 2,433     $ (2,358 )   $ 274,387  

 

 

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 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,

 
   

2021

   

2020

   

2021

   

2020

 

Proceeds from sale

  $     $ 15,928     $ 137,803     $ 56,466  

Gross gains

  $     $ 939     $ 2,323     $ 2,300  

Gross losses

  $     $     $ (2 )   $ (11 )

 

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, 2021

                               

Obligations of state and political subdivisions

  $ 7,862     $ 380     $     $ 8,242  

Residential mortgage-backed securities

    3,545       149             3,694  

Total

  $ 11,407     $ 529     $     $ 11,936  

 

           

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 September 30, 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 September 30, 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

 

September 30, 2021

                                                       

Obligations of U.S. government agencies and corporations

    5     $ 1,453     $ (29 )   $ 760     $ (2 )   $ 2,213     $ (31 )

Obligations of state and political subdivisions

    9       5,197       (96 )                 5,197       (96 )

Corporate bonds

    16       7,031       (169 )     2,447       (53 )     9,478       (222 )

Residential mortgage-backed securities

    59       78,177       (990 )     1,013       (9 )     79,190       (999 )

Commercial mortgage-backed securities

    59       35,536       (968 )     7,904       (42 )     43,440       (1,010 )

Total

    148     $ 127,394     $ (2,252 )   $ 12,124     $ (106 )   $ 139,518     $ (2,358 )

 

           

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 September 30, 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

 

September 30, 2021

                               

Due within one year

  $ 26     $ 26     $ 830     $ 836  

Due after one year through five years

    13,026       13,196       2,745       2,928  

Due after five years through ten years

    49,030       49,716       4,288       4,479  

Due after ten years

    212,230       211,449       3,544       3,693  

Total debt securities

  $ 274,312     $ 274,387     $ 11,407     $ 11,936  

 

 

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 September 30, 2021, securities with a carrying value of $119.1 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, excluding loans held for sale, consists of the following categories of loans as of the dates presented (dollars in thousands).

 

   

September 30, 2021

   

December 31, 2020

 

Construction and development

  $ 215,247     $ 206,011  

1-4 Family

    362,249       339,525  

Multifamily

    58,972       60,724  

Farmland

    21,376       26,547  

Commercial real estate

    868,473       812,395  

Total mortgage loans on real estate

    1,526,317       1,445,202  

Commercial and industrial

    335,008       394,497  

Consumer

    19,333       20,619  

Total loans

  $ 1,880,658     $ 1,860,318  

 

Unamortized premiums and discounts on loans, included in the total loans balances above, were $2.1 million and $1.8 million at September 30, 2021 and  December 31, 2020, respectively, and unearned income, or deferred fees, on loans was $2.7 million and $3.2 million at September 30, 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 application period for the renewed PPP lasted from January 1, 2021 to May 31, 2021. At September 30, 2021 and  December 31, 2020 the Company’s loan portfolio included PPP loans with balances of $41.9 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, excluding loans held for sale, as of the dates presented (dollars in thousands).

 

   

September 30, 2021

 
   

Accruing

                                 
   

Current

   

30-59 Days Past Due

   

60-89 Days Past Due

   

90 Days or More Past Due

   

Nonaccrual

   

Total Past Due & Nonaccrual

   

Acquired Impaired Loans

   

Total Loans

 

Construction and development

  $ 214,652     $ 20     $     $     $ 575     $ 595     $     $ 215,247  

1-4 Family

    358,638       773       431       111       1,936       3,251       360       362,249  

Multifamily

    58,337             635                   635             58,972  

Farmland

    19,596                         79       79       1,701       21,376  

Commercial real estate

    851,944       382                   15,511       15,893       636       868,473  

Total mortgage loans on real estate

    1,503,167       1,175       1,066       111       18,101       20,453       2,697       1,526,317  

Commercial and industrial

    319,687       804       2,279       25       12,213       15,321             335,008  

Consumer

    18,986       54       10             217       281       66       19,333  

Total loans

  $ 1,841,840     $ 2,033     $ 3,355     $ 136     $ 30,531     $ 36,055     $ 2,763     $ 1,880,658  

 

   

December 31, 2020

 
   

Accruing

                                 
   

Current

   

30-59 Days Past Due

   

60-89 Days Past Due

   

90 Days or More Past Due

   

Nonaccrual

   

Total Past Due & Nonaccrual

   

Acquired Impaired Loans

   

Total Loans

 

Construction and development

  $ 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)

 

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 and nine months ended September 30, 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, excluding loans held for sale, by category and credit quality indicator as of the dates presented (dollars in thousands).

 

   

September 30, 2021

 
           

Special

                         
   

Pass

   

Mention

   

Substandard

   

Doubtful

   

Total

 

Construction and development

  $ 212,519     $ 824     $ 1,904     $     $ 215,247  

1-4 Family

    355,491             6,758             362,249  

Multifamily

    57,885             1,087             58,972  

Farmland

    19,595             1,781             21,376  

Commercial real estate

    843,326       3,938       21,209             868,473  

Total mortgage loans on real estate

    1,488,816       4,762       32,739             1,526,317  

Commercial and industrial

    305,691       2,853       25,882       582       335,008  

Consumer

    18,996             337             19,333  

Total loans

  $ 1,813,503     $ 7,615     $ 58,958     $ 582     $ 1,880,658  

 

   

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