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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 June 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, 10,423,938 shares outstanding as of August 4, 2021.

 

 

 

 

 

TABLE OF CONTENTS

 

Part I. Financial Information

 
     

Item 1.

Financial Statements (Unaudited)

4

 

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

4

 

Consolidated Statements of Income for the three and six months ended June 30, 2021 and 2020

5

 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020

6

 

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

7

 

Consolidated Statements of Cash Flows for the six months ended June 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)

 

  

June 30, 2021

  

December 31, 2020

 
  

(Unaudited)

     

ASSETS

        

Cash and due from banks

 $36,775  $25,672 

Interest-bearing balances due from other banks

  229,498   9,696 

Federal funds sold

  500    

Cash and cash equivalents

  266,773   35,368 
         

Available for sale securities at fair value (amortized cost of $267,706 and $263,913, respectively)

  269,360   268,410 

Held to maturity securities at amortized cost (estimated fair value of $12,007 and $12,649, respectively)

  11,812   12,434 

Loans, net of allowance for loan losses of $20,445 and $20,363, respectively

  1,927,375   1,839,955 

Equity securities

  16,725   16,599 

Bank premises and equipment, net of accumulated depreciation of $17,566 and $15,830, respectively

  62,588   56,303 

Other real estate owned, net

  1,490   663 

Accrued interest receivable

  12,205   12,969 

Deferred tax asset

  508   1,360 

Goodwill and other intangible assets, net

  43,973   32,232 

Bank owned life insurance

  50,462   38,908 

Other assets

  9,636   5,980 

Total assets

 $2,672,907  $2,321,181 
         

LIABILITIES

        

Deposits:

        

Noninterest-bearing

 $582,109  $448,230 

Interest-bearing

  1,678,057   1,439,594 

Total deposits

  2,260,166   1,887,824 

Advances from Federal Home Loan Bank

  82,500   120,500 

Repurchase agreements

  6,713   5,653 

Subordinated debt, net of unamortized issuance costs

  42,943   42,897 

Junior subordinated debt

  8,320   5,949 

Accrued taxes and other liabilities

  21,550   15,074 

Total liabilities

  2,422,192   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; 10,413,390 and 10,608,869 shares issued and outstanding, respectively

  10,413   10,609 

Surplus

  155,847   159,485 

Retained earnings

  80,867   71,385 

Accumulated other comprehensive income

  3,588   1,805 

Total stockholders’ equity

  250,715   243,284 

Total liabilities and stockholders’ equity

 $2,672,907  $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 June 30,

  

Six months ended June 30,

 
  

2021

  

2020

  

2021

  

2020

 

INTEREST INCOME

                

Interest and fees on loans

 $23,135  $22,118  $44,762  $43,787 

Interest on investment securities

  1,009   1,455   2,188   3,150 

Other interest income

  203   229   366   486 

Total interest income

  24,347   23,802   47,316   47,423 
                 

INTEREST EXPENSE

                

Interest on deposits

  2,114   4,190   4,416   9,222 

Interest on borrowings

  1,068   1,273   2,101   2,527 

Total interest expense

  3,182   5,463   6,517   11,749 

Net interest income

  21,165   18,339   40,799   35,674 
                 

Provision for loan losses

  114   2,500   514   6,260 

Net interest income after provision for loan losses

  21,051   15,839   40,285   29,414 
                 

NONINTEREST INCOME

                

Service charges on deposit accounts

  607   405   1,098   976 

Gain on sale of investment securities, net

  1,721   1,178   2,321   1,350 

Loss on sale of fixed assets, net

        (2)   

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

  (5)     (5)  26 

Gain on sale of loans

  46      46    

Servicing fees and fee income on serviced loans

  65   96   129   216 

Interchange fees

  501   347   889   642 

Income from bank owned life insurance

  311   233   534   423 

Change in the fair value of equity securities

  91   248   156   (578)

Other operating income

  745   1,424   1,281   1,965 

Total noninterest income

  4,082   3,931   6,447   5,020 

Income before noninterest expense

  25,133   19,770   46,732   34,434 
                 

NONINTEREST EXPENSE

                

Depreciation and amortization

  1,278   1,149   2,484   2,182 

Salaries and employee benefits

  9,916   8,572   18,611   16,525 

Occupancy

  676   536   1,313   1,067 

Data processing

  973   786   1,719   1,479 

Marketing

  71   78   112   110 

Professional fees

  378   429   736   823 

Acquisition expense

  1,641   255   2,002   1,006 

Other operating expenses

  3,027   2,675   5,792   5,195 

Total noninterest expense

  17,960   14,480   32,769   28,387 

Income before income tax expense

  7,173   5,290   13,963   6,047 

Income tax expense

  1,485   1,016   2,915   1,165 

Net income

 $5,688  $4,274  $11,048  $4,882 
                 

EARNINGS PER SHARE

                

Basic earnings per share

 $0.54  $0.39  $1.05  $0.44 

Diluted earnings per share

  0.53   0.39   1.04   0.44 

Cash dividends declared per common share

  0.08   0.06   0.15   0.12 

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

  

Three months ended June 30,

  

Six months ended June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Net income

 $5,688  $4,274  $11,048  $4,882 

Other comprehensive income (loss):

                

Unrealized gain (loss) on investment securities:

                

Unrealized gain (loss), available for sale, net of tax expense (benefit) of $263, $766, ($110) and $916, respectively

  988   2,883   (413)  3,445 

Reclassification of realized gain, net of tax expense of $361, $247, $487 and $283, respectively

  (1,360)  (931)  (1,834)  (1,067)

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

     (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 (benefit) expense of ($541), ($369), $1,071 and ($1,036), respectively

  (2,035)  (1,387)  4,030   (3,898)

Total other comprehensive (loss) income

  (2,407)  564   1,783   (1,521)

Total comprehensive income

 $3,281  $4,838  $12,831  $3,361 

 

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:

                    

June 30, 2020

                    

Balance at beginning of period

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

Surrendered shares

  (2)  (14)        (16)

Dividends declared, $0.06 per share

        (653)     (653)

Stock-based compensation

  4   445         449 

Shares repurchased

  (102)  (1,082)        (1,184)

Net income

        4,274      4,274 

Other comprehensive income, net

           564   564 

Balance at end of period

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

June 30, 2021

                    

Balance at beginning of period

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

Surrendered shares

     (6)        (6)

Dividends declared, $0.08 per share

        (819)     (819)

Stock-based compensation

  1   493         494 

Shares repurchased

  (24)  (462)        (486)

Net income

        5,688      5,688 

Other comprehensive loss, net

           (2,407)  (2,407)

Balance at end of period

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

 

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

 

Six months ended:

                    

June 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)  (293)        (308)

Options exercised

  3   43         46 

Dividends declared, $0.12 per share

        (1,313)     (1,313)

Stock-based compensation

  52   780         832 

Shares repurchased

  (429)  (7,414)        (7,843)

Net income

        4,882      4,882 

Other comprehensive loss, net

           (1,521)  (1,521)

Balance at end of period

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

June 30, 2021

                    

Balance at beginning of period

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

Surrendered shares

  (19)  (343)        (362)

Options exercised

  8   107         115 

Dividends declared, $0.15 per share

        (1,566)     (1,566)

Stock-based compensation

  65   829         894 

Shares repurchased

  (250)  (4,231)        (4,481)

Net income

        11,048      11,048 

Other comprehensive income, net

           1,783   1,783 

Balance at end of period

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

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited) 

 

  

Six months ended June 30,

 
  

2021

  

2020

 

Net income

 $11,048  $4,882 

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

        

Depreciation and amortization

  2,484   2,182 

Provision for loan losses

  514   6,260 

Amortization of purchase accounting adjustments

  (825)  (705)

Net amortization of securities

  1,970   1,113 

Gain on sale of investment securities, net

  (2,321)  (1,350)

Loss on sale of fixed assets, net

  2    

Loans held for sale:

        

Originations

  (3,660)   

Proceeds from sales

  3,706    

Gain on sale of loans

  (46)   

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

  5   (26)

FHLB stock dividend

  (21)  (754)

Stock-based compensation

  894   832 

Deferred taxes

  390   (866)

Net change in value of bank owned life insurance

  (531)  (423)

Amortization of subordinated debt issuance costs

  46   28 

Change in the fair value of equity securities

  (156)  578 

Net change in:

        

Accrued interest receivable

  1,601   (5,788)

Other assets

  (489)  (713)

Accrued taxes and other liabilities

  6,533   (1,085)

Net cash provided by operating activities

 $21,144  $4,165 
         

Cash flows from investing activities:

        

Proceeds from sales of investment securities available for sale

 $137,803  $40,538 

Purchases of securities available for sale

  (128,945)  (52,888)

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

  48,653   28,530 

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

  607   343 

Proceeds from redemption or sale of equity securities

  574   2,371 

Purchases of equity securities

  (523)  (2,277)

Net decrease (increase) in loans

  32,775   (77,570)

Proceeds from sales of other real estate owned

  23   131 

Purchases of other real estate owned

  (501)   

Proceeds from sales of fixed assets

  3    

Purchases of fixed assets

  (3,124)  (4,972)

Purchases of bank owned life insurance

  (8,000)  (6,000)

Purchase of other investments

  (40)   

Distributions from investments

  17   14 

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

 $87,434  $(82,541)

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Amounts in thousands)

(Unaudited)

 

Cash flows from financing activities:

        

Net increase in customer deposits

 $165,559  $145,013 

Net increase in repurchase agreements

  1,060   1,913 

Net (decrease) increase in short-term FHLB advances

  (38,000)  30,000 

Repayments of long-term FHLB advances

     (3,100)

Cash dividends paid on common stock

  (1,426)  (1,339)

Proceeds from stock options and warrants exercised

  115   46 

Payments to repurchase common stock

  (4,481)  (7,843)

Payments of stock issuance costs

     (45)

Net cash provided by financing activities

 $122,827  $164,645 
         

Net change in cash and cash equivalents

 $231,405  $86,269 

Cash and cash equivalents, beginning of period

  35,368   44,695 

Cash and cash equivalents, end of period

 $266,773  $130,964 

 

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 six month periods ended June 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 June 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 357 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  June 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 June 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, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term modifications of 90 days or less, in the form of deferrals of payment of principal and interest, principal only, or interest only, and fee waivers. As of June 30, 2021, the balance of loans participating in the 90-day deferral program was $0.3 million, or 0.01% 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 June 30, 2021 and 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. At both  June 30, 2021 and  December 31, 2020 the reserve for unfunded loan commitments was $0.2 million.

 

Acquisition Accounting

 

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

 

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

 

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

 

Reclassifications

 

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

 

Concentrations of Credit Risk

 

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

 

Accounting Standards Adopted in 2021

 

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

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Accounting Pronouncements Not Yet Adopted

 

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

 

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

 

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

 

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

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 2. BUSINESS COMBINATIONS

 

PlainsCapital

 

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

 

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

 

Purchase price:

    

Cash paid

 $11,162 
     

Fair value of assets acquired:

    

Cash and cash equivalents

  353 

Loans

  45,299 

Bank premises and equipment

  2,770 

Core deposit intangible asset

  170 

Other assets

  163 

Total assets acquired

  48,755 
     

Fair value of liabilities acquired:

    

Deposits

  36,973 

Other liabilities

  1,084 

Total liabilities assumed

  38,057 
     

Fair value of net assets acquired

  10,698 

Goodwill

 $464 

 

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

 

Cheaha Financial Group, Inc.

 

On  April 1, 2021, the Company completed the previously announced 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. The acquisition added $240.7 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 $11.4 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.

 

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

  863 

Total assets acquired

  240,653 
     

Fair value of liabilities acquired:

    

Deposits

  206,986 

Notes payable

  2,327 

Other liabilities

  1,655 

Total liabilities assumed

  210,968 
     

Fair value of net assets acquired

  29,685 

Goodwill

 $11,382 


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 $1.6 million and $2.0 million are included in acquisition expense in the accompanying consolidated statements of income for the three and six months ended June 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 $0.3 million and $1.0 million are included in acquisition expense for the three and six months ended June 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 six months ended June 30, 2021 and 2020 (in thousands, except share data).

 

  

Three months ended June 30,

  

Six months ended June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Earnings per common share - basic

                

Net income

 $5,688  $4,274  $11,048  $4,882 

Less: income allocated to participating securities

  (14)  (21)  (34)  (28)

Net income allocated to common shareholders

  5,674   4,253   11,014   4,854 

Weighted-average basic shares outstanding

  10,414,875   10,882,084   10,461,910   11,012,581 

Basic earnings per common share

 $0.54  $0.39  $1.05  $0.44 
                 

Earnings per common share - diluted

                

Net income allocated to common shareholders

 $5,674  $4,253  $11,014  $4,854 

Weighted-average basic shares outstanding

  10,414,875   10,882,084   10,461,910   11,012,581 

Dilutive effect of securities

  127,032      80,254   26,373 

Total weighted average diluted shares outstanding

  10,541,907   10,882,084   10,542,164   11,038,954 

Diluted earnings per common share

 $0.53  $0.39  $1.04  $0.44 

 

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 June 30,

  

Six months ended June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Stock options

  6,188      1,363   43 

Restricted stock awards

  25   28,360   252   9,565 

Restricted stock units

     102,064   53,756   74,847 

 

 

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

 

June 30, 2021

                

Obligations of U.S. government agencies and corporations

 $25,336  $