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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. On January 1, 2023 the Company adopted ASU 2016-13, which introduced a new model known as CECL. Refer to Note 1. Summary of Significant Accounting Policies for more information on the adoption of ASU 2016-13. For the three months ended September 30, 2023, the $34,000 negative provision for credit losses on the consolidated statement of income includes a $0.4 million negative provision for loan losses and a $0.4 million provision for unfunded loan commitments. For the nine months ended September 30, 2023, the $2.5 million negative provision for credit losses on the consolidated statement of income includes a $2.7 million negative provision for loan losses and a $0.2 million provision for unfunded loan commitments. 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. 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. 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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

_____________________________________

 

FORM 10-Q

_____________________________________

 

(Mark One)

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

For the quarterly period ended September 30, 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
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, 9,759,688 shares outstanding as of October 30, 2023.

 

 

 
 

TABLE OF CONTENTS

 

Part I. Financial Information

 
     

Item 1.

Financial Statements (Unaudited)

3

 

Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022

3

 

Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022

4

 

Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2023 and 2022

5

 

Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022

6

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022

8

 

Notes to the Consolidated Financial Statements

10

 

Note 1. Summary of Significant Accounting Policies

10

 

Note 2. Earnings Per Share

12
 

Note 3. Investment Securities

13
 

Note 4. Loans and Allowance for Credit Losses

16
  Note 5. Borrowings Under Bank Term Funding Program 26
 

Note 6. Stockholders’ Equity

26
 

Note 7. Derivative Financial Instruments

27
 

Note 8. Fair Values of Financial Instruments

28
 

Note 9. Income Taxes

32
 

Note 10. Commitments and Contingencies

32
 

Note 11. Leases

33
  Note 12. Subsequent Events 33

Item 2.

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

34

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

59

Item 4.

Controls and Procedures

59
     

Part II. Other Information

 
     

Item 1A.

Risk Factors

60

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities 

60

Item 6.

Exhibits

62

Signatures

63

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

  

September 30, 2023

 

December 31, 2022

  

(Unaudited)

     

ASSETS

        

Cash and due from banks

 $27,084  $30,056 

Interest-bearing balances due from other banks

  36,584   10,010 

Federal funds sold

     193 

Cash and cash equivalents

  63,668   40,259 
         

Available for sale securities at fair value (amortized cost of $481,296 and $467,316, respectively)

  404,485   405,167 

Held to maturity securities at amortized cost (estimated fair value of $19,815 and $7,922, respectively)

  20,044   8,305 

Loans

  2,103,022   2,104,767 

Less: allowance for credit losses

  (29,778)  (24,364)

Loans, net

  2,073,244   2,080,403 

Equity securities

  13,334   27,254 

Bank premises and equipment, net of accumulated depreciation of $21,646 and $22,025, respectively

  44,764   49,587 

Other real estate owned, net

  4,438   682 

Accrued interest receivable

  13,633   12,749 

Deferred tax asset

  20,989   16,438 

Goodwill and other intangible assets, net

  42,496   43,147 

Bank owned life insurance

  58,425   57,379 

Other assets

  30,013   12,437 

Total assets

 $2,789,533  $2,753,807 
         

LIABILITIES

        

Deposits:

        

Noninterest-bearing

 $459,519  $580,741 

Interest-bearing

  1,749,914   1,501,624 

Total deposits

  2,209,433   2,082,365 

Advances from Federal Home Loan Bank

  23,500   387,000 

Borrowings under Bank Term Funding Program

  235,800    

Repurchase agreements

  13,930    

Subordinated debt, net of unamortized issuance costs

  44,296   44,225 

Junior subordinated debt

  8,602   8,515 

Accrued taxes and other liabilities

  45,255   15,920 

Total liabilities

  2,580,816   2,538,025 
         

Commitments and contingencies (Note 10)

        
         

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; 9,779,688 and 9,901,847 shares issued and outstanding, respectively

  9,780   9,902 

Surplus

  145,241   146,587 

Retained earnings

  114,148   108,206 

Accumulated other comprehensive loss

  (60,452)  (48,913)

Total stockholders’ equity

  208,717   215,782 

Total liabilities and stockholders’ equity

 $2,789,533  $2,753,807 

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except share data)

(Unaudited)

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2023

   

2022

   

2023

   

2022

 

INTEREST INCOME

                               

Interest and fees on loans

  $ 28,892     $ 23,924     $ 84,764     $ 67,415  

Interest on investment securities:

                               

Taxable

    3,055       2,769       9,402       6,817  

Tax-exempt

    216       105       440       375  

Other interest income

    997       204       1,927       590  

Total interest income

    33,160       27,002       96,533       75,197  
                                 

INTEREST EXPENSE

                               

Interest on deposits

    11,733       1,315       27,488       3,198  

Interest on borrowings

    3,958       2,220       13,016       4,733  

Total interest expense

    15,691       3,535       40,504       7,931  

Net interest income

    17,469       23,467       56,029       67,266  
                                 

Provision for credit losses

    (34 )     1,162       (2,486 )     1,654  

Net interest income after provision for credit losses

    17,503       22,305       58,515       65,612  
                                 

NONINTEREST INCOME

                               

Service charges on deposit accounts

    806       820       2,292       2,291  

(Loss) gain on call or sale of investment securities, net

                (1 )     6  

Loss on sale or disposition of fixed assets, net

    (367 )     (103 )     (1,284 )     (191 )

Gain (loss) on sale of other real estate owned, net

    23       50       (114 )     7  

Swap termination fee income

                      8,077  

Gain on sale of loans

                75       37  

Servicing fees and fee income on serviced loans

    2       17       12       61  

Interchange fees

    399       511       1,280       1,544  

Income from bank owned life insurance

    357       341       1,046       959  

Change in the fair value of equity securities

    22       (27 )     (89 )     (102 )

Other operating income

    395       1,056       1,566       2,220  

Total noninterest income

    1,637       2,665       4,783       14,909  

Income before noninterest expense

    19,140       24,970       63,298       80,521  
                                 

NONINTEREST EXPENSE

                               

Depreciation and amortization

    900       1,087       2,871       3,364  

Salaries and employee benefits

    9,463       9,345       28,140       27,429  

Occupancy

    618       810       2,288       2,202  

Data processing

    888       861       2,590       2,594  

Marketing

    83       84       234       188  

Professional fees

    516       460       1,472       1,338  

Loss on early extinguishment of subordinated debt

                      222  

Other operating expenses

    3,306       3,320       9,595       9,615  

Total noninterest expense

    15,774       15,967       47,190       46,952  

Income before income tax expense

    3,366       9,003       16,108       33,569  

Income tax expense

    585       1,699       2,968       6,758  

Net income

  $ 2,781     $ 7,304     $ 13,140     $ 26,811  
                                 

EARNINGS PER SHARE

                               

Basic earnings per share

  $ 0.28     $ 0.74     $ 1.33     $ 2.64  

Diluted earnings per share

    0.28       0.73       1.33       2.62  

Cash dividends declared per common share

    0.10       0.095       0.295       0.27  

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Amounts in thousands)

(Unaudited)

 

  

Three months ended September 30,

  

Nine months ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Net income

 $2,781  $7,304  $13,140  $26,811 

Other comprehensive loss:

                

Investment securities:

                

Unrealized loss, available for sale, net of tax benefit of $3,054, $4,739, $3,123 and $13,210, respectively

  (11,287)  (17,829)  (11,540)  (49,709)

Reclassification of realized loss (gain), available for sale, net of tax expense of $0, $0, $0 and $1, respectively

        1   (5)

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

           (1)

Derivative financial instruments:

                

Change in fair value of interest rate swaps designated as cash flow hedges, net of tax expense of $0, $0, $0 and $1,151, respectively

           4,329 

Reclassification of realized gain, interest rate swap termination, net of tax expense of $0, $0, $0 and $1,697, respectively

           (6,380)

Total other comprehensive loss

  (11,287)  (17,829)  (11,539)  (51,766)

Total comprehensive (loss) income

 $(8,506) $(10,525) $1,601  $(24,955)

 

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

  

Loss

  

Equity

 

Three months ended:

                    

September 30, 2022

                    

Balance at beginning of period

 $10,025  $148,230  $93,888  $(32,774) $219,369 

Surrendered shares

  (1)  (5)        (6)

Options exercised

  3   32         35 

Dividends declared, $0.095 per share

        (945)     (945)

Stock-based compensation

  1   501         502 

Shares repurchased

  (127)  (2,603)        (2,730)

Net income

        7,304      7,304 

Other comprehensive loss, net

           (17,829)  (17,829)

Balance at end of period

 $9,901  $146,155  $100,247  $(50,603) $205,700 
                     

September 30, 2023

                    

Balance at beginning of period

 $9,831  $145,347  $112,344  $(49,165) $218,357 

Surrendered shares

     (7)        (7)

Dividends declared, $0.10 per share

        (977)     (977)

Stock-based compensation

  2   525         527 

Shares repurchased

  (53)  (624)        (677)

Net income

        2,781      2,781 

Other comprehensive loss, net

           (11,287)  (11,287)

Balance at end of period

 $9,780  $145,241  $114,148  $(60,452) $208,717 

 

See accompanying notes to the consolidated financial statements.

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY, CONTINUED

(Amounts in thousands, except share data)

(Unaudited)

 

              

Accumulated

     
              

Other

  

Total

 
  

Common

      

Retained

  

Comprehensive

  

Stockholders’

 
  

Stock

  

Surplus

  

Earnings

  

Income (Loss)

  

Equity

 

Nine months ended:

                    

September 30, 2022

                    

Balance at beginning of period

 $10,343  $154,932  $76,160  $1,163  $242,598 

Surrendered shares

  (20)  (369)        (389)

Options exercised

  10   123         133 

Dividends declared, $0.27 per share

        (2,724)     (2,724)

Stock-based compensation

  77   1,294         1,371 

Shares repurchased

  (509)  (9,825)        (10,334)

Net income

        26,811      26,811 

Other comprehensive loss, net

           (51,766)  (51,766)

Balance at end of period

 $9,901  $146,155  $100,247  $(50,603) $205,700 
                     

September 30, 2023

                    

Balance at beginning of period

 $9,902  $146,587  $108,206  $(48,913) $215,782 

Cumulative effect of adoption of ASU 2016-13, net

        (4,295)     (4,295)

Surrendered shares

  (21)  (330)        (351)

Options exercised

  8   97         105 

Dividends declared, $0.295 per share

        (2,903)     (2,903)

Stock-based compensation

  82   1,384         1,466 

Shares repurchased

  (191)  (2,497)        (2,688)

Net income

        13,140      13,140 

Other comprehensive loss, net

           (11,539)  (11,539)

Balance at end of period

 $9,780  $145,241  $114,148  $(60,452) $208,717 

 

See accompanying notes to the consolidated financial statements.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited) 

 

   

Nine months ended September 30,

 
   

2023

   

2022

 

Net income

  $ 13,140     $ 26,811  

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

               

Depreciation and amortization

    2,871       3,364  

Provision for credit losses

    (2,486 )     1,654  

Net accretion of purchase accounting adjustments

    (233 )     (131 )

Net (accretion) amortization of securities

    (62 )     899  

Loss (gain) on call or sale of investment securities, net

    1       (6 )

Loss on sale or disposition of fixed assets, net

    1,284       191  

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

    114       (7 )

Gain on sale of loans to First Community Bank

    (75 )      

Loss on early extinguishment of subordinated debt

          222  

FHLB stock dividend

    (591 )     (50 )

Stock-based compensation

    1,466       1,371  

Deferred taxes

    (286 )     (588 )

Net change in value of bank owned life insurance

    (1,046 )     (959 )

Amortization of subordinated debt issuance costs

    71       42  

Change in the fair value of equity securities

    89       102  

Loans held for sale:

               

Originations

          (624 )

Proceeds from sales

          1,281  

Gain on sale of loans

          (37 )

Net change in:

               

Accrued interest receivable

    (756 )     (560 )

Other assets

    5,375       (1,646 )

Accrued taxes and other liabilities

    7,075       2,220  

Net cash provided by operating activities

    25,951       33,549  
                 

Cash flows from investing activities:

               

Proceeds from sales of investment securities available for sale

    2,364        

Purchases of securities available for sale

    (107,904 )     (180,590 )

Purchases of securities held to maturity

    (12,556 )      

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

    91,630       49,271  

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

    808       868  

Proceeds from redemption or sale of equity securities

    17,150       326  

Purchases of equity securities

    (2,728 )     (10,204 )

Net decrease (increase) in loans

    22,312       (125,988 )

Proceeds from sales of other real estate owned

    1,484       4,145  

Proceeds from sales of fixed assets

    42       4,692  

Purchases of loans

    (35,887 )      

Purchases of fixed assets

    (904 )     (743 )

Purchases of bank owned life insurance

          (5,000 )

Purchases of other investments

    (552 )     (643 )

Distributions from investments

    225       25  

Cash paid for branch sale to First Community Bank, net of cash received

    (596 )      

Net cash used in investing activities

    (25,112 )     (263,841 )

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Amounts in thousands)

(Unaudited)

 

Cash flows from financing activities:

               

Net increase (decrease) in customer deposits

    141,787       (67,859 )

Net increase in federal funds purchased

          168  

Net increase (decrease) in repurchase agreements

    13,930       (5,783 )

Net (decrease) increase in short-term FHLB advances

    (333,500 )     279,600  

Net increase in borrowings under the Bank Term Funding Program

    235,800        

Repayment of long-term FHLB advances

    (30,000 )     (25,000 )

Cash dividends paid on common stock

    (2,864 )     (2,609 )

Proceeds from stock options exercised

    105       133  

Payments to repurchase common stock

    (2,688 )     (10,334 )

Proceeds from subordinated debt, net of issuance costs

          19,548  

Extinguishment of subordinated debt

          (18,600 )

Net cash provided by financing activities

    22,570       169,264  

Net change in cash and cash equivalents

    23,409       (61,028 )

Cash and cash equivalents, beginning of period

    40,259       97,041  

Cash and cash equivalents, end of period

  $ 63,668     $ 36,013  
                 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES

               

Transfer from loans to other real estate owned

  $ 3,930     $ 3,317  

Transfer from bank premises and equipment to other real estate owned

    1,425       525  

 

See accompanying notes to the consolidated financial statements.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Investar Holding Corporation (the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with GAAP. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three and nine month periods ended September 30, 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  September 30, 2023 , the Company operated 20 full service branches located in Louisiana, two full service branches located in Texas and seven full service branches located in Alabama and had 328 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.

 

Acquisition Accounting - Loan Purchase Agreement
 
In August 2023, the Company entered into a loan purchase agreement to acquire commercial and industrial revolving lines of credit, and related accrued interest, with an unpaid principal balance of $162.7 million in two tranches. The purchase of the first tranche, consisting of revolving lines of credit with an unpaid principal balance of $35.8 million and total commitments of $61.1 million, was completed on September 15, 2023. The purchase of the second tranche, consisting of revolving lines of credit with an unpaid principal balance of $127.0 million and total commitments of $176.7 million, was completed on October 3, 2023. The revolving lines of credit are variable-rate and short-term in nature with varying renewal terms.  See Note 12. Subsequent Events.  
 
The Company follows the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805,  “Business Combinations”  (“ASC 805”)  to determine the appropriate accounting treatment for an acquisition. ASC 805 prescribes  an initial fair value screen to determine if substantially all of the fair value of the assets acquired is concentrated in a single asset or group of similar assets. If the initial screen test is met, the assets acquired represent an asset acquisition rather than a business combination. If the transaction is deemed to be an asset acquisition, the cost accumulation and allocation model is used in which the cost of the acquisition is allocated on a relative fair value basis to the assets acquired. The Company concluded that the loan purchase agreement did not qualify as a business combination as substantially all of the fair value of the assets acquired is concentrated in a single group of similar assets and accounted for it as an asset acquisition in accordance with ASC 805 using a cost accumulation and allocation model.
 

Reclassifications

 

Certain reclassifications have been made to prior period balances to conform to the current period presentation.

 

10

 

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 (“HTM”) 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 statements of income for the three and nine months ended September 30, 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 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 Companys 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 - nonowner-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.

 

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 implemented a plan to transition all loans and other financial instruments, including certain indebtedness, with attributes that are either directly or indirectly influenced by LIBOR to its preferred replacement index, the Secured Overnight Financing Rate (“SOFR”). As of September 30, 2023, the Company has transitioned all loans and certain indebtedness. The adoption of ASU 2022-06 did not have a material impact on the Company’s consolidated financial statements.

 

11

 
 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2. EARNINGS PER SHARE

 

The following is a summary of the information used in the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2023 and 2022 (in thousands, except share data).

 

  

Three months ended September 30,

  

Nine months ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Earnings per common share - basic

                

Net income

 $2,781  $7,304  $13,140  $26,811 

Less: income allocated to participating securities