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, 2023
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-36522
Investar Holding Corporation
(Exact name of registrant as specified in its charter)
| Louisiana | 27-1560715 | ||||
| (State or other jurisdiction of | (I.R.S. Employer |
10500 Coursey Boulevard, Baton Rouge, Louisiana 70816
(Address of principal executive offices, including zip code)
(225) 227-2222
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common stock, $1.00 par value per share | ISTR | The Nasdaq Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☒ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | ||||||||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the issuer’s class of common stock, as of the latest practicable date, is as follows: Common stock, $1.00 par value, 9,917,350 shares outstanding as of May 1, 2023.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 30,571 | $ | 30,056 | ||||
| Interest-bearing balances due from other banks | 722 | 10,010 | ||||||
| Federal funds sold | — | 193 | ||||||
| Cash and cash equivalents | 31,293 | 40,259 | ||||||
| Available for sale securities at fair value (amortized cost of $ and $, respectively) | 406,107 | 405,167 | ||||||
| Held to maturity securities at amortized cost (estimated fair value of $ and $, respectively) | 8,048 | 8,305 | ||||||
| Loans | 2,109,044 | 2,104,767 | ||||||
| Less: allowance for credit losses | (30,521 | ) | (24,364 | ) | ||||
| Loans, net | 2,078,523 | 2,080,403 | ||||||
| Equity securities | 24,617 | 27,254 | ||||||
| Bank premises and equipment, net of accumulated depreciation of $ and $, respectively | 47,698 | 49,587 | ||||||
| Other real estate owned, net | 662 | 682 | ||||||
| Accrued interest receivable | 12,947 | 12,749 | ||||||
| Deferred tax asset | 16,434 | 16,438 | ||||||
| Goodwill and other intangible assets, net | 42,864 | 43,147 | ||||||
| Bank owned life insurance | 57,715 | 57,379 | ||||||
| Other assets | 24,761 | 12,437 | ||||||
| Total assets | $ | 2,751,669 | $ | 2,753,807 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing | $ | 508,241 | $ | 580,741 | ||||
| Interest-bearing | 1,637,406 | 1,501,624 | ||||||
| Total deposits | 2,145,647 | 2,082,365 | ||||||
| Advances from Federal Home Loan Bank | 300,116 | 387,000 | ||||||
| Federal funds purchased | 440 | — | ||||||
| Subordinated debt, net of unamortized issuance costs | 44,248 | 44,225 | ||||||
| Junior subordinated debt | 8,545 | 8,515 | ||||||
| Accrued taxes and other liabilities | 34,215 | 15,920 | ||||||
| Total liabilities | 2,533,211 | 2,538,025 | ||||||
| Commitments and contingencies (Note 9) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, par value per share; shares authorized | — | — | ||||||
| Common stock, $ par value per share; shares authorized; and shares issued and outstanding, respectively | 9,901 | 9,902 | ||||||
| Surplus | 146,027 | 146,587 | ||||||
| Retained earnings | 106,780 | 108,206 | ||||||
| Accumulated other comprehensive loss | (44,250 | ) | (48,913 | ) | ||||
| Total stockholders’ equity | 218,458 | 215,782 | ||||||
| Total liabilities and stockholders’ equity | $ | 2,751,669 | $ | 2,753,807 | ||||
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share data)
(Unaudited)
| Three months ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| INTEREST INCOME |
||||||||
| Interest and fees on loans |
$ | 27,359 | $ | 21,726 | ||||
| Interest on investment securities: |
||||||||
| Taxable |
3,085 | 1,814 | ||||||
| Tax-exempt |
105 | 141 | ||||||
| Other interest income |
428 | 186 | ||||||
| Total interest income |
30,977 | 23,867 | ||||||
| INTEREST EXPENSE |
||||||||
| Interest on deposits |
6,221 | 976 | ||||||
| Interest on borrowings |
4,583 | 1,070 | ||||||
| Total interest expense |
10,804 | 2,046 | ||||||
| Net interest income |
20,173 | 21,821 | ||||||
| Provision for credit losses |
388 | (449 | ) | |||||
| Net interest income after provision for credit losses |
19,785 | 22,270 | ||||||
| NONINTEREST INCOME |
||||||||
| Service charges on deposit accounts |
740 | 667 | ||||||
| (Loss) gain on call or sale of investment securities, net |
(1 | ) | 6 | |||||
| (Loss) gain on sale or disposition of fixed assets, net |
(859 | ) | 373 | |||||
| (Loss) gain on sale of other real estate owned, net |
(142 | ) | 41 | |||||
| Swap termination fee income |
— | 3,344 | ||||||
| Gain on sale of loans |
75 | 33 | ||||||
| Servicing fees and fee income on serviced loans |
6 | 21 | ||||||
| Interchange fees |
438 | 498 | ||||||
| Income from bank owned life insurance |
336 | 292 | ||||||
| Change in the fair value of equity securities |
(4 | ) | 11 | |||||
| Other operating income |
487 | 580 | ||||||
| Total noninterest income |
1,076 | 5,866 | ||||||
| Income before noninterest expense |
20,861 | 28,136 | ||||||
| NONINTEREST EXPENSE |
||||||||
| Depreciation and amortization |
1,052 | 1,155 | ||||||
| Salaries and employee benefits |
9,334 | 9,021 | ||||||
| Occupancy |
1,024 | 641 | ||||||
| Data processing |
875 | 1,006 | ||||||
| Marketing |
69 | 21 | ||||||
| Professional fees |
633 | 379 | ||||||
| Other operating expenses |
3,188 | 3,210 | ||||||
| Total noninterest expense |
16,175 | 15,433 | ||||||
| Income before income tax expense |
4,686 | 12,703 | ||||||
| Income tax expense |
874 | 2,600 | ||||||
| Net income |
$ | 3,812 | $ | 10,103 | ||||
| EARNINGS PER SHARE |
||||||||
| Basic earnings per share |
$ | 0.38 | $ | 0.98 | ||||
| Diluted earnings per share |
0.38 | 0.97 | ||||||
| Cash dividends declared per common share |
0.095 | 0.085 | ||||||
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
(Unaudited)
| Three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net income | $ | 3,812 | $ | 10,103 | ||||
| Other comprehensive income (loss): | ||||||||
| Investment securities: | ||||||||
| Unrealized gain (loss), available for sale, net of tax expense (benefit) of $ and , respectively | 4,662 | (17,259 | ) | |||||
| Reclassification of realized loss (gain), available for sale, net of tax expense of $ and $, respectively | 1 | (5 | ) | |||||
| Derivative financial instruments: | ||||||||
| Change in fair value of interest rate swaps designated as cash flow hedges, net of tax expense of $ and $, respectively | — | 3,172 | ||||||
| Reclassification of realized gain, interest rate swap termination, net of tax expense of $ and $, respectively | — | (2,642 | ) | |||||
| Total other comprehensive income (loss) | 4,663 | (16,734 | ) | |||||
| Total comprehensive income (loss) | $ | 8,475 | $ | (6,631 | ) | |||
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in thousands, except share data)
(Unaudited)
| Accumulated | ||||||||||||||||||||
| Other | Total | |||||||||||||||||||
| Common | Retained | Comprehensive | Stockholders’ | |||||||||||||||||
| Stock | Surplus | Earnings | Income (Loss) | Equity | ||||||||||||||||
| Three months ended: | ||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||
| Balance at beginning of period | $ | 10,343 | $ | 154,932 | $ | 76,160 | $ | 1,163 | $ | 242,598 | ||||||||||
| Surrendered shares | (14 | ) | (258 | ) | — | — | (272 | ) | ||||||||||||
| Dividends declared, $ per share | — | — | (876 | ) | — | (876 | ) | |||||||||||||
| Stock-based compensation | 58 | 324 | — | — | 382 | |||||||||||||||
| Shares repurchased | (77 | ) | (1,467 | ) | — | — | (1,544 | ) | ||||||||||||
| Net income | — | — | 10,103 | — | 10,103 | |||||||||||||||
| Other comprehensive loss, net | — | — | — | (16,734 | ) | (16,734 | ) | |||||||||||||
| Balance at end of period | $ | 10,310 | $ | 153,531 | $ | 85,387 | $ | (15,571 | ) | $ | 233,657 | |||||||||
| March 31, 2023 | ||||||||||||||||||||
| Balance at beginning of period | $ | 9,902 | $ | 146,587 | $ | 108,206 | $ | (48,913 | ) | $ | 215,782 | |||||||||
| Cumulative effect of adoption of ASU 2016-13, net | — | — | (4,295 | ) | — | (4,295 | ) | |||||||||||||
| Surrendered shares | (10 | ) | (177 | ) | — | — | (187 | ) | ||||||||||||
| Options exercised | 8 | 97 | — | — | 105 | |||||||||||||||
| Dividends declared, $ per share | — | — | (943 | ) | — | (943 | ) | |||||||||||||
| Stock-based compensation | 47 | 386 | — | — | 433 | |||||||||||||||
| Shares repurchased | (46 | ) | (866 | ) | — | — | (912 | ) | ||||||||||||
| Net income | — | — | 3,812 | — | 3,812 | |||||||||||||||
| Other comprehensive income, net | — | — | — | 4,663 | 4,663 | |||||||||||||||
| Balance at end of period | $ | 9,901 | $ | 146,027 | $ | 106,780 | $ | (44,250 | ) | $ | 218,458 | |||||||||
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
| Three months ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Net income |
$ | 3,812 | $ | 10,103 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
1,052 | 1,155 | ||||||
| Provision for credit losses |
388 | (449 | ) | |||||
| Amortization of purchase accounting adjustments |
(89 | ) | (63 | ) | ||||
| Net amortization of securities |
45 | 449 | ||||||
| Loss (gain) on call or sale of investment securities, net |
1 | (6 | ) | |||||
| Loss (gain) on sale or disposition of fixed assets, net |
859 | (373 | ) | |||||
| Loss (gain) on sale of other real estate owned, net |
142 | (41 | ) | |||||
| Gain on sale of loans to First Community Bank |
(75 | ) | — | |||||
| FHLB stock dividend |
(186 | ) | (9 | ) | ||||
| Stock-based compensation |
433 | 382 | ||||||
| Deferred taxes |
(116 | ) | 87 | |||||
| Net change in value of bank owned life insurance |
(336 | ) | (292 | ) | ||||
| Amortization of subordinated debt issuance costs |
23 | 23 | ||||||
| Change in the fair value of equity securities |
4 | (11 | ) | |||||
| Loans held for sale: |
||||||||
| Originations |
— | (624 | ) | |||||
| Proceeds from sales |
— | 1,277 | ||||||
| Gain on sale of loans |
— | (33 | ) | |||||
| Net change in: |
||||||||
| Accrued interest receivable |
(198 | ) | 186 | |||||
| Other assets |
5,487 | 1,636 | ||||||
| Accrued taxes and other liabilities |
1,125 | 6,814 | ||||||
| Net cash provided by operating activities |
12,371 | 20,211 | ||||||
| Cash flows from investing activities: |
||||||||
| Proceeds from sales of investment securities available for sale |
2,364 | — | ||||||
| Purchases of securities available for sale |
(7,632 | ) | (103,011 | ) | ||||
| Proceeds from maturities, prepayments and calls of investment securities available for sale |
10,209 | 17,453 | ||||||
| Proceeds from maturities, prepayments and calls of investment securities held to maturity |
254 | 323 | ||||||
| Proceeds from redemption or sale of equity securities |
4,000 | 213 | ||||||
| Purchases of equity securities |
(1,182 | ) | (1,293 | ) | ||||
| Net increase in loans |
(18,671 | ) | (1,166 | ) | ||||
| Proceeds from sales of other real estate owned |
794 | 859 | ||||||
| Proceeds from sales of fixed assets |
— | 2,510 | ||||||
| Purchases of fixed assets |
(324 | ) | (317 | ) | ||||
| Purchases of other investments |
(279 | ) | — | |||||
| Distributions from investments |
37 | 3 | ||||||
| Cash paid for branch sale to First Community Bank, net of cash received |
(596 | ) | — | |||||
| Net cash used in investing activities |
(11,026 | ) | (84,426 | ) | ||||
| INVESTAR HOLDING CORPORATION |
| CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED |
| (Amounts in thousands) |
| (Unaudited) |
| Cash flows from financing activities: |
||||||||
| Net increase in customer deposits |
77,883 | 65,630 | ||||||
| Net increase in federal funds purchased |
440 | — | ||||||
| Net decrease in repurchase agreements |
— | (4,478 | ) | |||||
| Net decrease in short-term FHLB advances |
(56,884 | ) | — | |||||
| Repayment of long-term FHLB advances |
(30,000 | ) | — | |||||
| Cash dividends paid on common stock |
(943 | ) | (829 | ) | ||||
| Proceeds from stock options exercised |
105 | — | ||||||
| Payments to repurchase common stock |
(912 | ) | (1,544 | ) | ||||
| Net cash (used in) provided by financing activities |
(10,311 | ) | 58,779 | |||||
| Net change in cash and cash equivalents |
(8,966 | ) | (5,436 | ) | ||||
| Cash and cash equivalents, beginning of period |
40,259 | 97,041 | ||||||
| Cash and cash equivalents, end of period |
$ | 31,293 | $ | 91,605 |
See accompanying notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of 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, 2023 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, 2022, 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 8, 2023.
Nature of Operations
The Company is a financial holding company, headquartered in Baton Rouge, Louisiana that 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, professionals and small to medium-sized businesses. The Company’s primary markets are in south Louisiana, southeast Texas and Alabama. At March 31, 2023, the Company operated 20 full service branches located in Louisiana, full service branches located in Texas and full service branches located in Alabama, and had 332 full-time equivalent 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 credit losses. While management uses available information to recognize credit losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, changes in conditions of our borrowers’ industries or changes in the condition of individual borrowers. As described below under “Accounting Standards Adopted in 2023,” the Company adopted Accounting Standards Update (“ASU”) 2016-13 effective January 1, 2023, which changed how the Company accounts for the allowance for credit losses. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for credit losses may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
Other estimates that are susceptible to significant change in the near term relate to the allowance for off-balance sheet credit losses, the fair value of stock-based compensation awards, the determination of other-than-temporary impairments of securities, and the fair value of financial instruments and goodwill. Rapidly changing inflation rates and rising interest rates have made certain estimates more challenging, including those discussed above.
Reclassifications
Certain reclassifications have been made to prior period balances to conform to the current period presentation.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accounting Standards Adopted in 2023
FASB ASC Topic 326 “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments” Update No. 2016-13 (“ASU 2016-13”). ASU 2016-13 became effective for the Company as a smaller reporting company on January 1, 2023. ASU 2016-13, also referred to as the Current Expected Credit Loss (“CECL”) standard, requires financial assets measured on an amortized cost basis, including loans and held-to-maturity debt securities, to be presented at an amount net of an allowance for credit losses, which reflects expected losses for the full life of the financial asset. Unfunded lending commitments are also within the scope of this topic.
CECL 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. The CECL methodology requires that lifetime expected credit losses be recorded at the time the financial asset is originated or acquired, and be adjusted each period as a provision for credit losses for changes in expected lifetime credit losses. Under prior GAAP, credit losses were not recognized until the occurrence of the loss was probable and entities, in general, did not attempt to estimate credit losses for the full life of financial assets.
ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the lifetime credit loss estimate. The Company developed a CECL model methodology that calculates expected credit losses over the life of the portfolio by analyzing the composition, characteristics and quality of the loan and securities portfolios, as well as prevailing economic conditions and forecasts. The Company’s CECL calculation estimates loan losses using a combination of discounted cash flow and remaining life analyses. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, when necessary, the model reverts back to the historical loss rates adjusted for qualitative factors related to current conditions using a four-quarter reversion period. The Company adopted ASU 2016-13 using the modified retrospective approach for all loans and off-balance sheet credit exposures measured at amortized cost, other than purchased credit deteriorated (“PCD”) financial assets. Results for reporting periods beginning after December 31, 2022 are presented in accordance with ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP.
ASU 2016-13 also amended the accounting model for purchased financial assets and replaced the guidance for purchased credit impaired (“PCI”) financial assets with the concept of PCDs. For PCD assets, the CECL estimate is recognized through the allowance for credit losses with an offset to the amortized cost basis of the PCD asset at the date of acquisition. Subsequent changes in the allowance for credit losses for PCD assets are recognized through a provision for credit losses on loans. The Company used the prospective transition approach for PCD loans that were previously classified as PCI and accounted for under ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). As permitted under ASU 2016-13, the Company did not reassess whether PCI assets meet the criteria of PCD assets as of the date of adoption.
The Company adopted ASU 2016-13 on January 1, 2023, and recorded a one-time, cumulative effect adjustment as shown in the table below (dollars in thousands).
| December 31, 2022 | Impact of ASU 2016-13 Adoption | January 1, 2023 | ||||||||||
| Assets: | ||||||||||||
| Allowance for credit losses | $ | (24,364 | ) | $ | (5,865 | ) | $ | (30,229 | ) | |||
| Deferred tax asset | 16,438 | 1,142 | 17,580 | |||||||||
| Remaining purchase discount on loans(1) | (818 | ) | 422 | (396 | ) | |||||||
| Liabilities: | ||||||||||||
| Reserve for unfunded loan commitments(2) | 372 | (6 | ) | 366 | ||||||||
| Stockholders’ Equity | ||||||||||||
| Retained earnings | 108,206 | (4,295 | ) | 103,911 | ||||||||
| (1) For PCD loans, formerly classified as PCI, the Company applied the guidance under CECL using the prospective transition approach. As a result, the Company adjusted the amortized cost basis of the PCD loans to reclassify the purchase discount to the allowance for credit losses on January 1, 2023. |
| (2) The allowance for credit losses on unfunded loan commitments is included in “Accrued taxes and other liabilities” in the accompanying consolidated balance sheets. The related provision for credit losses on unfunded loan commitments is included in “Provision for credit losses” in the accompanying consolidated statement of income for the three months ended March 31, 2023. |
In addition, ASU 2016-13 amends the accounting for credit losses on available for sale (“AFS”) securities, requiring expected credit losses on AFS securities to be recorded in an allowance for credit losses rather than as a write-down of the securities’ amortized cost basis when management does not intend to sell or believes that it is not more likely than not that they will be required to sell the securities prior to recovery of the securities’ amortized cost basis. If management has the intent to sell or believes it is more likely than not the Company will be required to sell an impaired available for sale security before recovery of the amortized cost basis, the credit loss is recorded as a direct write-down of the amortized cost basis. Declines in the fair value of AFS securities that are not considered credit related are recognized in accumulated other comprehensive income. In addition, expected credit losses on held to maturity (“HTM”) securities are required to be recorded in an allowance for credit losses rather than as a write-down of the securities’ amortized cost basis. The Company’s AFS and HTM securities portfolios were not materially impacted by the adoption of ASU 2016-13 due to the composition of the portfolios, which consists primarily of U.S. Treasury and U.S. government agencies and corporations securities and mortgage-backed securities. Due to the nature of the investments, current market prices, and the current interest rate environment, the Company determined that the declines in the fair values of the HTM and AFS securities portfolio were not attributable to credit losses. The Company will apply the provisions of ASU 2016-13 to debt securities that have an other-than-temporary impairment on a prospective basis. Accordingly, there was no adjustment made to the amortized cost basis upon adoption. The adoption of ASU 2016-13 did not have a significant impact on the Company’s regulatory capital ratios.
The allowance for credit losses is measured on a pool basis when similar risk characteristics exist and is maintained at an amount which management believes is a current estimate of the expected credit losses for the full life of the relevant pool of loans and related unfunded lending commitments. For modeling purposes, loan pools include: agriculture and farmland, automotive, commercial and industrial, construction and development, commercial real estate - non-owner occupied and multifamily, commercial real estate - owner occupied, credit cards, home equity lines of credit and junior liens, consumer, residential senior liens, and other loans, which primarily consist of public finance. Management periodically reassesses each pool to confirm the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary. The loss rates computed for each pool and expected pool-level funding rates are applied to the related unfunded lending commitments to calculate an allowance for credit losses.
Loans that do not share similar risk characteristics with other loans are excluded from the loan pools and individually evaluated for impairment. Individually evaluated loans are loans for which it is probable that all the amounts due under the contractual terms of the loan will not be collected.
FASB ASC Topic 326 “Financial Instruments – Credit Losses, Troubled Debt Restructurings and Vintage Disclosures” Update No. 2022-02 (“ASU 2022-02”). ASU 2022-02 became effective for the Company on January 1, 2023 and is applied prospectively. ASU 2022-02 amends Topic 326 to eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors that have adopted ASU 2016-13 and, instead, requires that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendment also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases. The adoption of ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
FASB ASC Topic 848 “Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting” Update No. 2020-04 (“ASU 2020-04”) and FASB ASC Topic 848 “Reference Rate Reform: Deferral of the Sunset Date” Update No. 2022-06 (“ASU 2022-06”). 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. ASU 2020-04 became effective as of March 12, 2020 and could be adopted any time during the period of January 1, 2020 through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, which deferred the sunset date of ASU 2020-04 from December 31, 2022 to December 31, 2024. The Company is currently evaluating the provisions of the amendments and the impact on its future consolidated financial statements.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2023 and 2022 (in thousands, except share data).
| Three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Earnings per common share - basic | ||||||||
| Net income | $ | 3,812 | $ | 10,103 | ||||
| Less: income allocated to participating securities | (1 | ) | (16 | ) | ||||
| Net income allocated to common shareholders | 3,811 | 10,087 | ||||||
| Weighted average basic shares outstanding | 9,908,931 | 10,335,334 | ||||||
| Basic earnings per common share | $ | 0.38 | $ | 0.98 | ||||
| Earnings per common share - diluted | ||||||||
| Net income allocated to common shareholders | $ | 3,811 | $ | 10,087 | ||||
| Weighted average basic shares outstanding | 9,908,931 | 10,335,334 | ||||||
| Dilutive effect of securities | 83,536 | 70,449 | ||||||
| Total weighted average diluted shares outstanding | 9,992,467 | 10,405,783 | ||||||
| Diluted earnings per common share | $ | 0.38 | $ | 0.97 | ||||
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, | ||||||||
| 2023 | 2022 | |||||||
| Stock options | 6,011 | — | ||||||
| Restricted stock awards | — | 11 | ||||||
| Restricted stock units | 7,760 | 3,328 | ||||||
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Debt Securities
The amortized cost and approximate fair value of investment securities classified as AFS are summarized below as of the dates presented (dollars in thousands).
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Amortized Cost | Gains | Losses | Value | |||||||||||||
| March 31, 2023 | ||||||||||||||||
| Obligations of the U.S. Treasury and U.S. government agencies and corporations | $ | 29,786 | $ | 148 | $ | (526 | ) | $ | 29,408 | |||||||
| Obligations of state and political subdivisions | 19,967 | 15 | (2,142 | ) | 17,840 | |||||||||||
| Corporate bonds | 33,731 | — | (3,251 | ) | 30,480 | |||||||||||
| Residential mortgage-backed securities | 294,561 | 13 | (42,887 | ) | 251,687 | |||||||||||
| Commercial mortgage-backed securities | 84,287 | 274 | (7,869 | ) | 76,692 | |||||||||||
| Total | $ | 462,332 | $ | 450 | $ | (56,675 | ) | $ | 406,107 | |||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Amortized Cost | Gains | Losses | Value | |||||||||||||
| December 31, 2022 | ||||||||||||||||
| Obligations of the U.S. Treasury and U.S. government agencies and corporations | $ | 30,370 | $ | 134 | $ | (699 | ) | $ | 29,805 | |||||||
| Obligations of state and political subdivisions | 21,098 | 7 | (2,727 | ) | 18,378 | |||||||||||
| Corporate bonds | 33,477 | — | (3,535 | ) | 29,942 | |||||||||||
| Residential mortgage-backed securities | 298,867 | 10 | (47,026 | ) | 251,851 | |||||||||||
| Commercial mortgage-backed securities | 83,504 | 179 | (8,492 | ) | 75,191 | |||||||||||
| Total | $ | 467,316 | $ | 330 | $ | (62,479 | ) | $ | 405,167 | |||||||
The Company calculates realized gains and losses on sales of debt securities under the specific identification method. Proceeds from sales of investment securities classified as AFS and gross gains and losses are summarized below for the periods presented (dollars in thousands).
| Three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Proceeds from sales | $ | 2,364 | $ | — | ||||
| Gross gains | $ | 1 | $ | — | ||||
| Gross losses | $ | (2 | ) | $ | — | |||
The amortized cost and approximate fair value of investment securities classified as HTM are summarized below as of the dates presented (dollars in thousands).
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Amortized Cost | Gains | Losses | Value | |||||||||||||
| March 31, 2023 | ||||||||||||||||
| Obligations of state and political subdivisions | $ | 5,411 | $ | 2 | $ | (43 | ) | $ | 5,370 | |||||||
| Residential mortgage-backed securities | 2,637 | — | (202 | ) | 2,435 | |||||||||||
| Total | $ | 8,048 | $ | 2 | $ | (245 | ) | $ | 7,805 | |||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Amortized Cost | Gains | Losses | Value | |||||||||||||
| December 31, 2022 | ||||||||||||||||
| Obligations of state and political subdivisions | $ | 5,538 | $ | 1 | $ | (127 | ) | $ | 5,412 | |||||||
| Residential mortgage-backed securities | 2,767 | — | (257 | ) | 2,510 | |||||||||||
| Total | $ | 8,305 | $ | 1 | $ | (384 | ) | $ | 7,922 | |||||||
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, 2023 or December 31, 2022.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The approximate fair value of AFS securities and unrealized losses, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized below as of the dates presented (dollars in thousands).
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||
| Obligations of the U.S. Treasury and U.S. government agencies and corporations | $ | 12,995 | $ | (250 | ) | $ | 2,904 | $ | (276 | ) | $ | 15,899 | $ | (526 | ) | |||||||||
| Obligations of state and political subdivisions | 8,174 | (249 | ) | 9,500 | (1,893 | ) | 17,674 | (2,142 | ) | |||||||||||||||
| Corporate bonds | 11,492 | (610 | ) | 18,988 | (2,641 | ) | 30,480 | (3,251 | ) | |||||||||||||||
| Residential mortgage-backed securities | 46,871 | (2,865 | ) | 203,435 | (40,022 | ) | 250,306 | (42,887 | ) | |||||||||||||||
| Commercial mortgage-backed securities | 15,568 | (725 | ) | 42,845 | (7,144 | ) | 58,413 | (7,869 | ) | |||||||||||||||
| Total | $ | 95,100 | $ | (4,699 | ) | $ | 277,672 | $ | (51,976 | ) | $ | 372,772 | $ | (56,675 | ) | |||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| Obligations of the U.S. Treasury and U.S. government agencies and corporations | $ | 16,017 | $ | (688 | ) | $ | 1,013 | $ | (11 | ) | $ | 17,030 | $ | (699 | ) | |||||||||
| Obligations of state and political subdivisions | 13,695 | (1,427 | ) | 4,524 | (1,300 | ) | 18,219 | (2,727 | ) | |||||||||||||||
| Corporate bonds | 19,606 | (1,170 | ) | 10,085 | (2,365 | ) | 29,691 | (3,535 | ) | |||||||||||||||
| Residential mortgage-backed securities | 134,419 | (18,122 | ) | 116,132 | (28,904 | ) | 250,551 | (47,026 | ) | |||||||||||||||
| Commercial mortgage-backed securities | 27,181 | (2,632 | ) | 32,432 | (5,860 | ) | 59,613 | (8,492 | ) | |||||||||||||||
| Total | $ | 210,918 | $ | (24,039 | ) | $ | 164,186 | $ | (38,440 | ) | $ | 375,104 | $ | (62,479 | ) | |||||||||
The approximate fair value of HTM securities, and unrealized losses, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized below as of the dates presented (dollars in thousands).
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | 3,493 | $ | (43 | ) | $ | — | $ | — | $ | 3,493 | $ | (43 | ) | ||||||||||
| Residential mortgage-backed securities | 52 | (2 | ) | 2,384 | (200 | ) | 2,436 | (202 | ) | |||||||||||||||
| Total | $ | 3,545 | $ | (45 | ) | $ | 2,384 | $ | (200 | ) | $ | 5,929 | $ | (245 | ) | |||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | 3,536 | $ | (127 | ) | $ | — | $ | — | $ | 3,536 | $ | (127 | ) | ||||||||||
| Residential mortgage-backed securities | 2,510 | (257 | ) | — | — | 2,510 | (257 | ) | ||||||||||||||||
| Total | $ | 6,046 | $ | (384 | ) | $ | — | $ | — | $ | 6,046 | $ | (384 | ) | ||||||||||
At March 31, 2023, 787 of the Company’s debt securities had unrealized losses totaling 13.0% of the individual securities’ amortized cost basis and 12.3% of the Company’s total amortized cost basis of the investment securities portfolio. At such date, 574 of the 787 securities had been in a continuous loss position for over 12 months.
Unrealized losses are generally due to changes in market interest rates. The Company has the intent to hold these securities either until maturity or a forecasted recovery, and it is more likely than not that the Company will not have to sell the securities before the recovery of their amortized cost basis. Due to the nature of the investments, current market prices, and the current interest rate environment, the Company determined that these declines were not attributable to credit losses at March 31, 2023 or December 31, 2022.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The amortized cost and approximate fair value of investment debt securities, by contractual maturity, are shown below as of the dates presented (dollars in thousands). Actual maturities may differ from contractual maturities due to mortgage-backed securities whereby borrowers may have the right to call or prepay obligations with or without call or prepayment penalties and certain callable bonds whereby the issuer has the option to call the bonds prior to contractual maturity.
| Securities Available For Sale | Securities Held To Maturity | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| March 31, 2023 | ||||||||||||||||
| Due within one year | $ | 1,989 | $ | 1,962 | $ | 915 | $ | 916 | ||||||||
| Due after one year through five years | 34,341 | 33,525 | 960 | 961 | ||||||||||||
| Due after five years through ten years | 50,883 | 47,639 | 3,536 | 3,493 | ||||||||||||
| Due after ten years | 375,119 | 322,981 | 2,637 | 2,435 | ||||||||||||
| Total debt securities | $ | 462,332 | $ | 406,107 | $ | 8,048 | $ | 7,805 | ||||||||
| Securities Available For Sale | Securities Held To Maturity | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| December 31, 2022 | ||||||||||||||||
| Due within one year | $ | 1,082 | $ | 1,072 | $ | 915 | $ | 915 | ||||||||
| Due after one year through five years | 32,452 | 31,394 | 960 | 961 | ||||||||||||
| Due after five years through ten years | 52,093 | 48,229 | 3,663 | 3,536 | ||||||||||||
| Due after ten years | 381,689 | 324,472 | 2,767 | 2,510 | ||||||||||||
| Total debt securities | $ | 467,316 | $ | 405,167 | $ | 8,305 | $ | 7,922 | ||||||||
Accrued interest receivable on the Company’s investment securities was $1.7 million at both March 31, 2023 and December 31, 2022, and is included in “Accrued interest receivable” on the accompanying consolidated balance sheets.
At March 31, 2023, securities with a carrying value of $198.2 million were pledged to secure certain deposits, borrowings, and other liabilities, compared to $165.7 million in pledged securities at December 31, 2022.
Equity Securities
Equity securities primarily consist of Federal Home Loan Bank (“FHLB”) stock and Federal Reserve Bank of Atlanta (“FRB”) stock. Members of the FHLB and FRB are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock and FRB stock 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, 2023 and December 31, 2022 was $23.4 million and $26.0 million, respectively.
In addition, equity securities include marketable securities in corporate stocks and mutual funds and totaled $1.2 million at both March 31, 2023 and December 31, 2022.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Company’s loan portfolio consists of the following categories of loans as of the dates presented (dollars in thousands).
| March 31, 2023 | December 31, 2022 | |||||||
| Construction and development | $ | 210,274 | $ | 201,633 | ||||
| 1-4 Family | 401,329 | 401,377 | ||||||
| Multifamily | 80,980 | 81,812 | ||||||
| Farmland | 10,731 | 12,877 | ||||||
| Commercial real estate | 967,157 | 958,243 | ||||||
| Total mortgage loans on real estate | 1,670,471 | 1,655,942 | ||||||
| Commercial and industrial | 425,093 | 435,093 | ||||||
| Consumer | 13,480 | 13,732 | ||||||
| Total loans | $ | 2,109,044 | $ | 2,104,767 | ||||
Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loan origination fees, net of direct loan origination costs and commitment fees, are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable. Unamortized premiums and discounts on loans, included in the total loans balances above, were $0.3 million and $0.8 million at March 31, 2023 and December 31, 2022, respectively, and unearned income, or deferred fees, on loans was $1.2 million and $1.3 million at March 31, 2023 and December 31, 2022, respectively and is also included in the total loans balance in the table above.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below provides an analysis of the aging of loans as of March 31, 2023 (dollars in thousands).
| March 31, 2023 | ||||||||||||||||||||||||
| Current | 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 Days or More Past Due | Total | > 90 Days and Accruing | |||||||||||||||||||
| Construction and development | $ | 210,033 | $ | 8 | $ | — | $ | 233 | $ | 210,274 | $ | 113 | ||||||||||||
| 1-4 Family | 397,211 | 2,423 | 1,075 | 620 | 401,329 | — | ||||||||||||||||||
| Multifamily | 80,980 | — | — | — | 80,980 | — | ||||||||||||||||||
| Farmland | 10,692 | — | — | 39 | 10,731 | — | ||||||||||||||||||
| Commercial real estate | 965,383 | 1,254 | — | 520 | 967,157 | — | ||||||||||||||||||
| Total mortgage loans on real estate | 1,664,299 | 3,685 | 1,075 | 1,412 | 1,670,471 | 113 | ||||||||||||||||||
| Commercial and industrial | 423,225 | 1,093 | 40 | 735 | 425,093 | 11 | ||||||||||||||||||
| Consumer | 13,222 | 71 | 98 | 89 | 13,480 | — | ||||||||||||||||||
| Total loans | $ | 2,100,746 | $ | 4,849 | $ | 1,213 | $ | 2,236 | $ | 2,109,044 | $ | 124 | ||||||||||||
The table below provides an analysis of nonaccrual loans as of March 31, 2023 and December 31, 2022 (dollars in thousands).
| March 31, 2023 | December 31, 2022(1) | |||||||||||||||
| Nonaccrual With No Allowance for Credit Loss | Nonaccrual with an Allowance for Credit Loss | Total Nonaccrual Loans | Total Nonaccrual Loans | |||||||||||||
| Construction and development | $ | 121 | $ | — | $ | 121 | $ | 372 | ||||||||
| 1-4 Family | 1,603 | 41 | 1,644 | 1,207 | ||||||||||||
| Multifamily | — | — | — | — | ||||||||||||
| Farmland | 39 | — | 39 | 62 | ||||||||||||
| Commercial real estate | 1,897 | 242 | 2,139 | 6,032 | ||||||||||||
| Total mortgage loans on real estate | 3,660 | 283 | 3,943 | 7,673 | ||||||||||||
| Commercial and industrial | 1,458 | 59 | 1,517 | 2,183 | ||||||||||||
| Consumer | 43 | 73 | 116 | 130 | ||||||||||||
| Total loans | $ | 5,161 | $ | 415 | $ | 5,576 | $ | 9,986 | ||||||||
(1) Nonaccrual loans previously reported as of December 31, 2022 excluded $0.5 million of nonaccrual acquired impaired loans being accounted for under ASC 310-30.
The table below provides an analysis of the aging of loans as of December 31, 2022 (dollars in thousands).
| December 31, 2022 | ||||||||||||||||||||||||||||||||
| 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 | $ | 201,048 | $ | 101 | $ | — | $ | 112 | $ | 372 | $ | 585 | $ | — | $ | 201,633 | ||||||||||||||||
| 1-4 Family | 394,846 | 2,614 | 1,220 | 1,188 | 1,207 | 6,229 | 302 | 401,377 | ||||||||||||||||||||||||
| Multifamily | 81,812 | — | — | — | — | — | — | 81,812 | ||||||||||||||||||||||||
| Farmland | 12,601 | 152 | 62 | — | 62 | 276 | — | 12,877 | ||||||||||||||||||||||||
| Commercial real estate | 951,908 | 181 | 22 | — | 5,523 | 5,726 | 609 | 958,243 | ||||||||||||||||||||||||
| Total mortgage loans on real estate | 1,642,215 | 3,048 | 1,304 | 1,300 | 7,164 | 12,816 | 911 | 1,655,942 | ||||||||||||||||||||||||
| Commercial and industrial | 432,438 | 406 | 15 | 51 | 2,183 | 2,655 | — | 435,093 | ||||||||||||||||||||||||
| Consumer | 13,347 | 171 | 27 | — | 130 | 328 | 57 | 13,732 | ||||||||||||||||||||||||
| Total loans | $ | 2,088,000 | $ | 3,625 | $ | 1,346 | $ | 1,351 | $ | 9,477 | $ | 15,799 | $ | 968 | $ | 2,104,767 | ||||||||||||||||
Nonaccrual and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the borrower’s debt service capacity is considered through the analysis of current financial information, if available, and/or current information with regard to the collateral position. Regulatory provisions would typically require the placement of a loan on nonaccrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on nonaccrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and payment of future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.
Collateral Dependent Loans
Collateral dependent loans are loans for which the repayments, on the basis of our assessment at the reporting date, are expected to be provided substantially through the operation or sale of the collateral and the borrower was experiencing financial difficulty. Loans that do not share risk characteristics are excluded from the loan pools and evaluated on an individual basis, and the Company has determined to evaluate collateral dependent loans individually for impairment. The allowance for credit losses for collateral dependent loans is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The Company’s collateral dependent loans include all nonaccrual loans shown in the table above. The types of collateral that secure collateral dependent loans are discussed under “Portfolio Segment Risk Factors” below.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Portfolio Segment Risk Factors
The following describes the risk characteristics relevant to each of the Company’s loan portfolio segments.
Construction and Development - Construction and development loans are generally made for the purpose of acquisition and development of land to be improved through the construction of commercial and residential buildings. The successful repayment of these types of loans is generally dependent upon a commitment for permanent financing from the Company, or from the sale of the constructed property. These loans carry more risk than commercial or residential real estate loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market, and state and local government regulations. One such risk is that loan funds are advanced upon the security of the property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and to calculate related loan-to-value ratios. The Company attempts to minimize the risks associated with construction lending by limiting loan-to-value ratios as described above. In addition, as to speculative development loans, the Company generally makes such loans only to borrowers that have a positive pre-existing relationship with us. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding excessive concentrations in any one business or industry. Construction and development loans are primarily secured by residential and commercial properties, which are under construction and/or redevelopment.
1-4 Family - The 1-4 family portfolio mainly consists of residential mortgage loans to consumers to finance a primary residence. The majority of these loans are secured by first liens on residential properties located in the Company’s market areas and carry risks associated with the creditworthiness of the borrower and changes in the value of the collateral and loan-to-value-ratios. The Company manages these risks through policies and procedures such as limiting loan-to-value ratios at origination, employing experienced underwriting personnel, requiring standards for appraisers, and not making subprime loans.
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. Multifamily loans are primarily secured by first liens on multifamily real estate.
Farmland - Farmland loans are often for land improvements related to agricultural endeavors and may include construction of new specialized facilities. These loans are usually repaid through the conversion to permanent financing, or if scheduled loan amortization begins, for the long-term benefit of the borrower’s ongoing operations. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Farmland loans are primarily secured by raw land.
Commercial Real Estate - Commercial real estate loans are extensions of credit secured by owner occupied and 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. Commercial real estate loans typically depend on the successful operation and management of the businesses that occupy these properties or the financial stability of tenants occupying the properties. Nonowner-occupied commercial real estate loans typically are dependent, in large part, on the owner’s ability to rent the property and the ability of the tenants to pay rent, whereas owner-occupied commercial real estate loans typically are dependent, in large part, on the success of the owner’s business. General market conditions and economic activity may impact the performance of these types of loans, including fluctuations in the value of real estate, new job creation trends, and tenant vacancy rates. The Company attempts to limit risk by analyzing a borrower’s cash flow and collateral value on an ongoing basis. The Company also typically requires personal guarantees from the principal owners of the property, supported by a review of their personal financial statements, as an additional means of mitigating our risk. The Company manages risk by avoiding concentrations in any one business or industry. Commercial real estate loans are primarily secured by office and industrial buildings, warehouses, retail shopping facilities and various special purpose commercial properties.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Commercial and Industrial - Commercial and industrial loans receive similar underwriting treatment as commercial real estate loans in that the repayment source is analyzed to determine its ability to meet cash flow coverage requirements as set forth by Bank policies. Repayment of these loans generally comes from the generation of cash flow as the result of the borrower’s business operations. Commercial lending generally involves different risks from those associated with commercial real estate lending or construction lending. Although commercial loans may be collateralized by equipment or other business assets (including real estate, if available as collateral), the repayment of these types of loans depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors). Thus, the general business conditions of the local economy and the borrower’s ability to sell its products and services, thereby generating sufficient operating revenue to repay us under the agreed upon terms and conditions, are the chief considerations when assessing the risk of a commercial loan. The liquidation of collateral, if any, is considered a secondary source of repayment because equipment and other business assets may, among other things, be obsolete or of limited resale value. The Company actively monitors certain financial measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors. Commercial and industrial loans also include public finance loans made to governmental entities, which can be taxable or tax-exempt, and are generally repaid using pledged revenue sources including income tax, property tax, sales tax, and utility revenue, among other sources. Commercial and industrial loans are primarily secured by accounts receivable, inventory and equipment.
Consumer - Consumer loans are offered by the Company in order to provide a full range of retail financial services to its customers and include auto loans, credit cards, and other consumer installment loans. Typically, the Company evaluates the borrower’s repayment ability through a review of credit scores and an evaluation of debt to income ratios. Repayment of consumer loans depends upon key consumer economic measures and upon the borrower’s financial stability, and is more likely to be adversely affected by divorce, job loss, illness and personal hardships than repayment of other loans. A shortfall in the value of any collateral also may pose a risk of loss to the Company for these types of loans. Consumer loans include loans primarily secured by vehicles and unsecured loans.
Refer to Note 1. Summary of Significant Accounting Policies – Accounting Standards Adopted in 2023 for loan pools used for modeling purposes, which are aggregated into the portfolio segments shown above.
Credit Quality Indicators
Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The following definitions are utilized for risk ratings, which are consistent with the definitions used in supervisory guidance:
Pass - Loans not meeting the criteria below are considered pass. These loans have high credit characteristics and financial strength. The borrowers at least generate profits and cash flow that are in line with peer and industry standards and have debt service coverage ratios above loan covenants and our policy guidelines. For some of these loans, a guaranty from a financially capable party mitigates characteristics of the borrower that might otherwise result in a lower grade.
Special Mention - Loans classified as special mention possess some credit deficiencies that need to be corrected to avoid a greater risk of default in the future. For example, financial ratios relating to the borrower may have deteriorated. Often, a special mention categorization is temporary while certain factors are analyzed or matters addressed before the loan is re-categorized as either pass or substandard.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower or the liquidation value of any collateral. If deficiencies are not addressed, it is likely that this category of loan will result in the Bank incurring a loss. Where a borrower has been unable to adjust to industry or general economic conditions, the borrower’s loan is often categorized as substandard.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as recorded assets is not warranted. This classification does not mean that the assets have absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these assets.
INVESTAR HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below presents the Company’s loan portfolio by year of origination, category, and credit quality indicator as of March 31, 2023 (dollars in thousands).
| March 31, 2023 | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | Revolving Loans Converted to Term Loans | Total | ||||||||||||||||||||||||||||
| Construction and development | ||||||||||||||||||||||||||||||||||||
| Pass | $ | 4,092 | $ | 8,133 | $ | 11,737 | $ | 4,666 | $ | 1,483 | $ | 5,732 | $ | 168,694 | $ | 3,139 | $ | 207,676 | ||||||||||||||||||
| Special Mention | — | — | 787 | — | — | — | — | — | 787 | |||||||||||||||||||||||||||
| Substandard | — | 142 | 142 | — | — | 77 | 1,450 | — | 1,811 | |||||||||||||||||||||||||||
| Total construction and development | $ | 4,092 | $ | 8,275 | $ | 12,666 | $ | 4,666 | $ | 1,483 | $ | 5,809 | $ | 170,144 | $ | 3,139 | $ | 210,274 | ||||||||||||||||||
| Current-period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| 1-4 Family residential | ||||||||||||||||||||||||||||||||||||
| Pass | $ | 14,591 | $ | 99,639 | $ | 81,460 | $ | 63,823 | $ | 30,213 | $ | 69,465 | $ | 36,456 | $ | 1,259 | $ | 396,906 | ||||||||||||||||||
| Special Mention | — | — | 497 | — | — | 562 | — | — | 1,059 | |||||||||||||||||||||||||||
| Substandard | — | 292 | 168 | — | 408 | 2,405 | 91 | — | 3,364 | |||||||||||||||||||||||||||
| Total 1-4 family residential | $ | 14,591 | $ | 99,931 | $ | 82,125 | $ | 63,823 | $ | 30,621 | $ | 72,432 | $ | 36,547 | $ | 1,259 | $ | 401,329 | ||||||||||||||||||
| Current-period gross charge-offs | $ | (22 | ) | $ | — | $ | — | $ | — | $ | (20 | ) | $ | — | $ | — | $ | — | $ | (42 | ) | |||||||||||||||
| Multifamily | ||||||||||||||||||||||||||||||||||||
| Pass | $ | 1,398 | $ | 45,056 | $ | 13,259 | $ | 4,529 | $ | 640 | $ | 10,445 | $ | 4,923 | $ | 730 | $ | 80,980 | ||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Total multifamily | $ | 1,398 | $ | 45,056 | $ | 13,259 | $ | 4,529 | $ | 640 | $ | 10,445 | $ | 4,923 | $ | 730 | $ | 80,980 | ||||||||||||||||||
| Current-period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Farmland | ||||||||||||||||||||||||||||||||||||
| Pass | $ | 958 | $ | 1,486 | $ | 759 | $ | 1,135 | $ | 1,202 | $ | 3,773 | $ | 1,379 | $ | — | $ | 10,692 | ||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | 39 | — | — | 39 | |||||||||||||||||||||||||||
| Total farmland | $ | 958 | $ | 1,486 | $ | 759 | $ | 1,135 | $ | 1,202 | $ | 3,812 | $ | 1,379 | $ | — | $ | 10,731 | ||||||||||||||||||
| Current-period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||
| Pass | $ | 36,634 | $ | 244,524 | $ | 217,923 | $ | 186,943 | $ | 90,029 | $ | 133,844 | $ | 21,283 | $ | 27,749 | $ | 958,929 | ||||||||||||||||||
| Special Mention | — | — | 185 | — | — | — | — | — | 185 | |||||||||||||||||||||||||||
| Substandard | — | — | (22 | ) | 1,148 | 469 | 5,641 | 807 | — | 8,043 | ||||||||||||||||||||||||||
| Total commercial real estate | $ | 36,634 | $ | 244,524 | $ | 218,086 | $ | 188,091 | $ | 90,498 | $ | 139,485 | $ | 22,090 | $ | 27,749 | $ | 967,157 | ||||||||||||||||||
| Current-period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Commercial & industrial | ||||||||||||||||||||||||||||||||||||
| Pass | $ | 11,879 | $ | 165,148 | $ | 40,688 | $ | 17,940 | $ | 9,591 | $ | 17,165 | $ | 154,769 | $ | 1,412 | $ | 418,592 | ||||||||||||||||||
| Special Mention | — | — | — | — | — | — | 4,680 | — | 4,680 | |||||||||||||||||||||||||||
| Substandard | — | 91 | — | 250 | 1,176 | 123 | 181 | — | 1,821 | |||||||||||||||||||||||||||
| Total commercial and industrial | $ | 11,879 | $ | 165,239 | $ | 40,688 | $ | 18,190 | $ | 10,767 | $ | 17,288 | $ | 159,630 | $ | 1,412 | $ | 425,093 | ||||||||||||||||||
| Current-period gross charge-offs | $ | — | $ | — | $ | (190 | ) | $ | — | $ | — | $ | — | $ | (190 | ) | $ | — | $ | (380 | ) | |||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Pass | $ | 2,193 | $ | 4,249 | $ | 2,366 | $ | 1,301 | $ | 550 | $ | 1,771 | $ | 881 | $ | — | $ | 13,311 | ||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Substandard | — | 11 | 3 | 31 | 9 | 115 | — | — | 169 | |||||||||||||||||||||||||||
| Total consumer | $ | 2,193 | $ | 4,260 | $ | 2,369 | $ | 1,332 | $ | 559 | $ | 1,886 | $ | 881 | $ | — | $ | 13,480 | ||||||||||||||||||
| Current-period gross charge-offs | $ | (36 | ) | $ | (7 | ) | $ | (8 | ) | $ | (1 | ) | $ | (5 | ) | $ | (25 | ) | $ | (6 | ) | $ | — | $ | (88 | ) | ||||||||||
| Total loans | ||||||||||||||||||||||||||||||||||||
| Pass | $ | 71,745 | $ | 568,235 | $ | 368,192 | $ | 280,337 | $ | 133,708 | $ | 242,195 | $ | 388,385 | $ | 34,289 | $ | 2,087,086 | ||||||||||||||||||
| Special Mention | — | — | 1,469 | — | — | |||||||||||||||||||||||||||||||