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Investar Holding Corp - Quarter Report: 2023 March (Form 10-Q)

istr20230331_10q.htm
 

 

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
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, 9,917,350 shares outstanding as of May 1, 2023.

 

 

 
 

TABLE OF CONTENTS

 

Part I. Financial Information

 
     

Item 1.

Financial Statements (Unaudited)

3

 

Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022

3

 

Consolidated Statements of Income for the three months ended March 31, 2023 and 2022

4

 

Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2023 and 2022

5

 

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2023 and 2022

6

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022

7

 

Notes to the Consolidated Financial Statements

9

 

Note 1. Summary of Significant Accounting Policies

9

 

Note 2. Earnings Per Share

11
 

Note 3. Investment Securities

12
 

Note 4. Loans and Allowance for Credit Losses

15
 

Note 5. Stockholders’ Equity

25
 

Note 6. Derivative Financial Instruments

26
 

Note 7. Fair Values of Financial Instruments

27
 

Note 8. Income Taxes

32
 

Note 9. Commitments and Contingencies

32
 

Note 10. Leases

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

56

Item 4.

Controls and Procedures

56
     

Part II. Other Information

 
     

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 6.

Exhibits

59

Signatures

60

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

INVESTAR HOLDING CORPORATION

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 $462,332 and $467,316, respectively)

  406,107   405,167 

Held to maturity securities at amortized cost (estimated fair value of $7,805 and $7,922, 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 $21,670 and $22,025, 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, no par value per share; 5,000,000 shares authorized

      

Common stock, $1.00 par value per share; 40,000,000 shares authorized; 9,900,648 and 9,901,847 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.

 

 

 

INVESTAR HOLDING CORPORATION

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.

 

 

 

INVESTAR HOLDING CORPORATION

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 $1,261 and ($4,587), respectively

  4,662   (17,259)

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

  1   (5)

Derivative financial instruments:

        

Change in fair value of interest rate swaps designated as cash flow hedges, net of tax expense of $0 and $843, respectively

     3,172 

Reclassification of realized gain, interest rate swap termination, net of tax expense of $0 and $702, 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.

 

 

 

INVESTAR HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(Amounts in thousands, except share data)

(Unaudited)

 

              

Accumulated

     
              

Other

  

Total

 
  

Common

      

Retained

  

Comprehensive

  

Stockholders’

 
  

Stock

  

Surplus

  

Earnings

  

Income (Loss)

  

Equity

 

Three months ended:

                    

March 31, 2022

                    

Balance at beginning of period

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

Surrendered shares

  (14)  (258)        (272)

Dividends declared, $0.085 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, $0.095 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.

 

 

 

INVESTAR HOLDING CORPORATION

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.

 

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Investar Holding Corporation (the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with GAAP. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three month period ended March 31, 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, two full service branches located in Texas and six 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.

 

9

 

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 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 - 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.

 

10

 
 

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 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 

 

11

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3. INVESTMENT SECURITIES

 

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.

 

12

 

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.

 

13

 

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 Companys 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.

 

14

 

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.

 

15

 

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 Companys 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. 

 

16

 

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.

 

17

 

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.

 

18

 

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         562   4,680      6,711 

Substandard

     536   291   1,429   2,062   8,400   2,529      15,247 

Total loans

 $71,745  $568,771  $369,952  $281,766  $135,770  $251,157  $395,594  $34,289  $2,109,044 
                                     

Current-period gross charge-offs

 $(58) $(7) $(198) $(1) $(25) $(25) $(196) $  $(510)

 

The table below presents the Company’s loan portfolio by category and credit quality indicator as of  December 31, 2022 (dollars in thousands) under the previous incurred loss methodology.

 

  

December 31, 2022

 
      

Special

             
  

Pass

  

Mention

  

Substandard

  

Doubtful

  

Total

 

Construction and development

 $198,967  $1,593  $1,073  $  $201,633 

1-4 Family

  399,143      2,234      401,377 

Multifamily

  81,812            81,812 

Farmland

  12,815      62      12,877 

Commercial real estate

  942,927   6,101   9,215      958,243 

Total mortgage loans on real estate

  1,635,664   7,694   12,584      1,655,942 

Commercial and industrial

  427,430   5,140   2,336   187   435,093 

Consumer

  13,636      96      13,732 

Total loans

 $2,076,730  $12,834  $15,016  $187  $2,104,767 

 

The Company had no loans that were classified as doubtful or loss at March 31, 2023. The Company had no loans that were classified as loss at  December 31, 2022

 

19

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Loan Participations and Sold Loans

 

Loan participations and whole loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The balance of the participations and whole loans sold was $19.7 million and $16.9 million at March 31, 2023 and  December 31, 2022, respectively. The unpaid principal balance of these loans was approximately$99.9 million and $92.9 million at March 31, 2023 and  December 31, 2022, respectively.

 

Loans to Related Parties

 

In the ordinary course of business, the Company makes loans to related parties including its executive officers, principal stockholders, directors and their immediate family members, as well as to companies of which these individuals are principal owners. Loans outstanding to such related party borrowers amounted to approximately $63.4 million and $97.0 million as of March 31, 2023 and  December 31, 2022, respectively.

 

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

 

  

March 31, 2023

  

December 31, 2022

 

Balance, beginning of period

 $96,977  $97,606 

New loans/changes in relationship

  1,178   14,570 

Repayments/changes in relationship

  (34,743)  (15,199)

Balance, end of period

 $63,412  $96,977 

 

20

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Allowance for Credit Losses

 

Effective January 1, 2023, the Company adopted ASU 2016-13, which uses the CECL accounting methodology for the allowance for credit losses. 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. 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 portfolio, as well as prevailing economic conditions and forecasts. The CECL calculation estimates credit losses using a combination of discounted cash flow and remaining life analyses. The Company evaluates the adequacy of the allowance for credit losses on a quarterly basis. 

 

The allowance for credit losses is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. For each pool of loans, the Company evaluates and applies qualitative adjustments to the calculated allowance for credit losses based on several factors, including, but not limited to, changes in current and expected future economic conditions, changes in the nature and volume of the portfolio, changes in levels of concentrations, changes in the volume and severity of past due loans, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry. Loans that do not share similar risk characteristics with other loans are excluded from the loan pools and individually evaluated for impairment. For collateral dependent loans where the borrower is experiencing financial difficulty, which we evaluate independently from the loan pool, the expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral, which is based on third party appraisals. Individually evaluated loans that are not collateral dependent are evaluated based on a discounted cash flow methodology. Credits deemed uncollectible are charged to the allowance for credit losses. Provisions for credit losses and recoveries on loans previously charged off are adjusted to the allowance for credit losses.

 

Refer to Note 1. Summary of Significant Accounting Policies for more information on the adoption of ASU 2016-13.

 

The Company made the accounting policy election to exclude accrued interest receivable from the amortized cost of loans and the estimate of the allowance for credit losses. Accrued interest receivable on the Company’s loans was $11.0 million and $10.8 million at  March 31, 2023 and  December 31, 2022, respectively, and is included in “Accrued interest receivable” on the accompanying consolidated balance sheets.

 

The table below shows a summary of the activity in the allowance for credit losses for the three months ended March 31, 2023 and 2022 (dollars in thousands).

 

  

Three months ended March 31,

 
  

2023

  

2022

 

Balance, beginning of period

 $24,364  $20,859 

ASU 2016-13 adoption impact(1)

  5,865    

Provision for credit losses on loans(2)

  556   (449)

Charge-offs

  (510)  (329)

Recoveries

  246   1,007 

Balance, end of period

 $30,521  $21,088 

 

(1On 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.

(2) The $0.4 million provision for credit losses on the consolidated statement of income includes a $0.6 million provision for loan losses and a $0.2 million negative provision for unfunded loan commitments for the three months ended March 31, 2023.

 

The following tables outline the activity in the allowance for credit losses by collateral type for the three months ended March 31, 2023 and 2022, and show both the allowance and portfolio balances for loans individually and collectively evaluated for impairment as of  March 31, 2023 and 2022 (dollars in thousands).

 

  

Three months ended March 31, 2023

 
  

Construction &

              

Commercial

  

Commercial &

         
  

Development

  

1-4 Family

  

Multifamily

  

Farmland

  

Real Estate

  

Industrial

  

Consumer

  

Total

 

Allowance for credit losses:

                                

Beginning balance

 $2,555  $3,917  $999  $113  $10,718  $5,743  $319  $24,364 

ASU 2016-13 adoption impact

  (75)  4,712   (84)  (99)  676   793   (58)  5,865 

Provision for credit loss on loans

  519   58   (5)  16   30   (100)  38   556 

Charge-offs

     (42)           (380)  (88)  (510)

Recoveries

  42   5         103   69   27   246 

Ending balance

 $3,041  $8,650  $910  $30  $11,527  $6,125  $238  $30,521 

Ending allowance balance for loans individually evaluated for impairment

     40         77   18   50   185 

Ending allowance balance for loans collectively evaluated for impairment

  3,041   8,610   910   30   11,450   6,107   188   30,336 

Loans receivable:

                                

Balance of loans individually evaluated for impairment

  332   1,850      39   2,545   1,574   117   6,457 

Balance of loans collectively evaluated for impairment

  209,942   399,479   80,980   10,692   964,612   423,519   13,363   2,102,587 

Total period-end balance

 $210,274  $401,329  $80,980  $10,731  $967,157  $425,093  $13,480  $2,109,044 

 

  

Three months ended March 31, 2022

 
  

Construction &

              

Commercial

  

Commercial &

         
  

Development

  

1-4 Family

  

Multifamily

  

Farmland

  

Real Estate

  

Industrial

  

Consumer

  

Total

 

Allowance for credit losses:

                                

Beginning balance

 $2,347  $3,337  $673  $383  $9,354  $4,411  $354  $20,859 

Provision for credit loss on loans

  45   (3)  (83)  13   256   (677)     (449)

Charge-offs

           (54)  58   (286)  (47)  (329)

Recoveries

  16   70         1   908   12   1,007 

Ending balance

 $2,408  $3,404  $590  $342  $9,669  $4,356  $319  $21,088 

Ending allowance balance for loans individually evaluated for impairment

                 468   74   542 

Ending allowance balance for loans acquired with deteriorated credit quality

           156            156 

Ending allowance balance for loans collectively evaluated for impairment

  2,408   3,404   590   186   9,669   3,888   245   20,390 

Loans receivable:

                                

Balance of loans individually evaluated for impairment

  508   996      74   12,940   12,518   186   27,222 

Balance of loans acquired with deteriorated credit quality

     327      657   636      61   1,681 

Balance of loans collectively evaluated for impairment

  200,714   366,197   52,500   17,565   894,634   301,575   15,356   1,848,541 

Total period-end balance

 $201,222  $367,520  $52,500  $18,296  $908,210  $314,093  $15,603  $1,877,444 

 

Loan Modifications to Borrowers Experiencing Financial Difficulty

 

In January 2023, the Company adopted ASU 2022-02, which eliminated the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. ASU 2022-02 became effective for us on January 1, 2023. See Note 1. Summary of Significant Accounting Policies – Accounting Standards Adopted in 2023.

 

Occasionally, the Company modifies loans to borrowers in financial distress by providing certain concessions, such as principal forgiveness, term extension, an other-than-insignificant payment delay, an interest rate reduction, or a combination of such concessions. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses. Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off. During the three months ended March 31, 2023, the Company did not provide any modifications under these circumstances to borrowers experiencing financial difficulty. 

 

21

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following disclosures are presented under GAAP in effect prior to the adoption of CECL that are no longer applicable or required. The Company has included these disclosures to address the applicable prior periods.
 
Pre-Adoption  of CECL - Impaired Loans
 

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

 

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

 

The following table contains information on the Company’s impaired loans at December 31, 2022 (dollars in thousands).

 

  

December 31, 2022

 
  

Recorded Investment

  

Unpaid Principal Balance

  

Related Allowance

 

With no related allowance recorded:

            

Construction and development

 $366  $375  $ 

1-4 Family

  1,005   1,082    

Farmland

  62   70    

Commercial real estate

  5,746   21,016    

Total mortgage loans on real estate

  7,179   22,543    

Commercial and industrial

  1,996   2,530    

Consumer

  34   45    

Total

  9,209   25,118    
             

With related allowance recorded:

            

Construction and development

  225   498   26 

1-4 Family

  474   484   46 

Commercial real estate

  190   190   36 

Total mortgage loans on real estate

  889   1,172   108 

Commercial and industrial

  245   292   112 

Consumer

  96   123   63 

Total

  1,230   1,587   283 
             

Total loans:

            

Construction and development

  591   873   26 

1-4 Family

  1,479   1,566   46 

Farmland

  62   70    

Commercial real estate

  5,936   21,206   36 

Total mortgage loans on real estate

  8,068   23,715   108 

Commercial and industrial

  2,241   2,822   112 

Consumer

  130   168   63 

Total

 $10,439  $26,705  $283 

 

22

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Presented in the table below is the average recorded investment of the impaired loans and the related amount of interest income recognized during the time within the period that the loans were impaired. The average recorded investment is calculated based on the month-end balance of the loans during the period reported (dollars in thousands).

 

  

Three months ended March 31,

 
  

2022

 
  

Average

  

Interest

 
  

Recorded

  

Income

 
  

Investment

  

Recognized

 

With no related allowance recorded:

        

Construction and development

 $511  $4 

1-4 Family

  1,013   6 

Farmland

  75    

Commercial real estate

  12,806   6 

Total mortgage loans on real estate

  14,405   16 

Commercial and industrial

  8,463   26 

Consumer

  63    

Total

  22,931   42 
         

With related allowance recorded:

        

Commercial and industrial

  3,926    

Consumer

  108    

Total

  4,034    
         

Total loans:

        

Construction and development

  511   4 

1-4 Family

  1,013   6 

Farmland

  75    

Commercial real estate

  12,806   6 

Total mortgage loans on real estate

  14,405   16 

Commercial and industrial

  12,389   26 

Consumer

  171    

Total

 $26,965  $42 

 

23

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Pre-Adoption of CECL - Troubled Debt Restructurings

 

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company granted a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan was classified as a TDR. The Company strived to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before such loans reach nonaccrual status. These modified terms included rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases in which the Company granted the borrower new terms that provided for a reduction of either interest or principal, or otherwise included a concession, the Company identified the loan as a TDR and measured any impairment on the restructuring as previously noted for impaired loans.

 

During the three months ended March 31, 2022, one loan was modified as a TDR through an adjustment to maturity. For the three-month period ended March 31, 2022, the Company had no TDRs for which there was a payment default within the 12 months following the restructure date.

 

At  December 31, 2022, there were no available balances on loans classified as TDRs that the Company was committed to lend.

 

24

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5. STOCKHOLDERS EQUITY

 

Accumulated Other Comprehensive (Loss) Income

 

Activity within the balances in accumulated other comprehensive (loss) income is shown in the tables below (dollars in thousands).

 

  

Three months ended March 31,

 
  

2023

  

2022

 
  

Beginning of Period

  

Net Change

  

End of Period

  

Beginning of Period

  

Net Change

  

End of Period

 

Unrealized (loss) gain, available for sale, net

 $(43,137) $4,662  $(38,475) $4,882  $(17,259) $(12,377)

Reclassification of realized (gain) loss, available for sale, net

  (5,777)  1   (5,776)  (5,772)  (5)  (5,777)

Unrealized gain, transfer from available for sale to held to maturity, net

  1      1   2      2 

Change in fair value of interest rate swaps designated as cash flow hedges, net

  7,830      7,830   3,501   3,172   6,673 

Reclassification of realized gain, interest rate swap termination, net

  (7,830)     (7,830)  (1,450)  (2,642)  (4,092)

Accumulated other comprehensive (loss) income

 $(48,913) $4,663  $(44,250) $1,163  $(16,734) $(15,571)

 

25

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS

 

As part of its liability management, the Company has historically utilized pay-fixed interest rate swaps to manage exposure against the variability in the expected future cash flows (future interest payments) attributable to changes in the 1-month LIBOR associated with the forecasted issuances of 1-month fixed rate debt arising from a rollover strategy. To mitigate credit risk, securities were pledged to the Company by the counterparties in an amount greater than or equal to the gain position of the derivative contracts. Conversely, securities were pledged to the counterparties by the Company in an amount greater than or equal to the loss position of the derivative contracts, if applicable. The derivative contracts were between the Company and two counterparties. At  March 31, 2023 and  December 31, 2022 the Company had no current or forward starting interest rate swap agreements, other than interest rate swaps related to customer loans, described below. The interest rate swaps were determined to be fully effective during the periods presented, and therefore no amount of ineffectiveness has been included in net income. 

 

In the first quarter of 2022, the Company voluntarily terminated interest rate swaps with a total notional amount of $55.0 million in response to market conditions and as a result of excess liquidity. Unrealized gains of $2.6 million, net of tax expense of $0.7 million, were reclassified from “Accumulated other comprehensive (loss) income” as of  March 31, 2022 and recorded as “Swap termination fee income” in noninterest income in the accompanying consolidated statements of income for the three months ended  March 31, 2022.

 

For the three months ended  March 31, 2022, a gain of $3.2 million, net of a $0.8 million tax expense, has been recognized in “Other comprehensive income (loss)” in the accompanying consolidated statements of comprehensive income (loss) for the change in fair value of the interest rate swaps.

 

There were no assets or liabilities recorded in the accompanying consolidated balance sheets at March 31, 2023 or  December 31, 2022 associated with the swap contracts, other than interest rate swaps related to customer loans, described below.

 

Customer Derivatives Interest Rate Swaps

 

The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC Topic 815, “Derivatives and Hedging”, and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, “Fair Value Measurement and Disclosure” (“ASC 820”). The Company did not recognize any gains or losses in other operating income resulting from fair value adjustments of these swap agreements during the three months ended March 31, 2023 and 2022. A March 31, 2023 the Company had notional amounts of $147.2 million in interest rate swap contracts with customers and $147.2 million in offsetting interest rate swap contracts with other financial institutions. The fair value of the swap contracts consisted of gross assets of $17.0 million and gross liabilities of $17.0 million recorded in “Other assets” and “Accrued taxes and other liabilities”, respectively, in the accompanying consolidated balance sheet at  March 31, 2023.

 

26

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 7. FAIR VALUES OF FINANCIAL INSTRUMENTS

 

In accordance with ASC 820, disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, is required. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Fair value is best determined based upon quoted market prices or exit prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows, and the fair value estimates may not be realized in an immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

 

If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

 

The Company holds Small Business Investment Company qualified funds and other investment funds that do not have a readily determinable fair value. In accordance with ASC 820, these investments are measured at fair value using the net asset value practical expedient and are not required to be classified in the fair value hierarchy. At  March 31, 2023 and  December 31, 2022, the fair values of these investments were $3.0 million and $2.8 million, respectively, and are included in “Other assets” in the accompanying consolidated balance sheets.

 

Fair Value Hierarchy

 

In accordance with ASC 820, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value.

 

Level 1 – Valuation is based upon quoted prices for identical assets or liabilities traded in active markets.

 

Level 2 – Valuation is based upon observable inputs other than quoted prices included in level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 – Valuation is based upon unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

 

Cash and Due from Banks – For these short-term instruments, fair value is the carrying value. Cash and due from banks is classified in level 1 of the fair value hierarchy.

 

Federal Funds Sold – The fair value is the carrying value. The Company classifies these assets in level 1 of the fair value hierarchy.

 

Investment Securities and Equity Securities – Where quoted prices are available in an active market, the Company classifies the securities within level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include exchange-traded equity securities.

 

If quoted market prices are not available, the Company estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within level 2 of the valuation hierarchy if observable inputs are available, include obligations of the U.S. Treasury and U.S. government agencies and corporations, obligations of state and political subdivisions, corporate bonds, residential mortgage-backed securities, commercial mortgage-backed securities, and other equity securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies those securities in level 3.

 

27

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Based on market reference data, which may include reported trades; bids, offers or broker/dealer quotes; benchmark yields and spreads; as well as other reference data, management monitors the current placement of securities in the fair value hierarchy to determine whether transfers between levels may be warranted. At March 31, 2023 and  December 31, 2022, the majority of our level 3 investments were obligations of state and political subdivisions. The Company estimated the fair value of these level 3 investments using discounted cash flow models, the key inputs of which are the coupon rate, current spreads to the yield curves, and expected repayment dates, adjusted for illiquidity of the local municipal market and sinking funds, if applicable. Option-adjusted models may be used for structured or callable notes, as appropriate.

 

Loans – The fair value of portfolio loans, net is determined using an exit price methodology. The exit price methodology continues to be based on a discounted cash flow analysis, in which projected cash flows are based on contractual cash flows adjusted for prepayments for certain loan types (e.g. residential mortgage loans and multifamily loans) and the use of a discount rate based on expected relative risk of the cash flows. The discount rate selected considers loan type, maturity date, a liquidity premium, cost to service, and cost of capital, which is a level 3 fair value estimate.

 

Loans held for sale are measured using quoted market prices when available. If quoted market prices are not available, comparable market values or discounted cash flow analyses may be utilized. The Company classifies these assets in level 3 of the fair value hierarchy.

 

Deposit Liabilities – The fair values disclosed for noninterest-bearing demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). These noninterest-bearing deposits are classified in level 2 of the fair value hierarchy. All interest-bearing deposits are classified in level 3 of the fair value hierarchy. The carrying amounts of variable-rate (for example interest-bearing checking, savings, and money market accounts), fixed-term money market accounts, and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

 

Short-Term Borrowings – The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings approximate their fair values. The Company classifies these borrowings in level 2 of the fair value hierarchy.

 

Long-Term Borrowings, including Junior Subordinated Debt Securities – The fair values of long-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt is therefore classified in level 3 in the fair value hierarchy.

 

Subordinated Debt Securities – The fair value of subordinated debt is estimated based on current market rates on similar debt in the market. The Company classifies this debt in level 2 of the fair value hierarchy.

 

Derivative Financial Instruments – The fair value for interest rate swap agreements is based upon the amounts required to settle the contracts. These derivative instruments are classified in level 2 of the fair value hierarchy.

 

28

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value of Assets and Liabilities Measured on a Recurring Basis

 

Assets and liabilities measured at fair value on a recurring basis are summarized in the table below as of the dates indicated (dollars in thousands).

 

      

Quoted Prices in

  

Significant Other

  

Significant

 
      Active Markets for  Observable  Unobservable 
  

Estimated

  

Identical Assets

  

Inputs

  

Inputs

 
  

Fair Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

March 31, 2023

                

Assets:

                

Obligations of the U.S. Treasury and U.S. government agencies and corporations

 $29,408  $  $29,408  $ 

Obligations of state and political subdivisions

  17,840      12,568   5,272 

Corporate bonds

  30,480      30,012   468 

Residential mortgage-backed securities

  251,687      251,687    

Commercial mortgage-backed securities

  76,692      76,692    

Equity securities

  1,241   1,241       

Interest rate swaps - gross assets

  16,982      16,982    

Total assets

 $424,330  $1,241  $417,349  $5,740 

Liabilities:

                

Interest rate swaps - gross liabilities

 $16,982  $  $16,982  $ 
                 

December 31, 2022

                

Assets:

                

Obligations of the U.S. Treasury and U.S. government agencies and corporations

 $29,805  $  $29,805  $ 

Obligations of state and political subdivisions

  18,378      12,413   5,965 

Corporate bonds

  29,942      29,463   479 

Residential mortgage-backed securities

  251,851      251,851    

Commercial mortgage-backed securities

  75,191      75,191    

Equity securities

  1,245   1,245       

Total assets

 $406,412  $1,245  $398,723  $6,444 

 

Equity securities balances in the table above do not reflect balances of stock held in correspondent banks.

 

The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the Company’s ability to observe inputs to the valuation may cause reclassification of certain assets or liabilities within the fair value hierarchy. The tables below provide a reconciliation for assets measured at fair value on a recurring basis using significant unobservable inputs, or level 3 inputs, for the three months ended March 31, 2023 and 2022 (dollars in thousands).

 

  

Obligations of State and

     
  

Political Subdivisions

  

Corporate Bonds

 

Balance at December 31, 2022

 $5,965  $479 

Realized gains (losses) included in earnings

      

Unrealized losses included in other comprehensive income (loss)

  (667)  (11)

Purchases

      

Sales

      

Maturities, prepayments, and calls

  (26)   

Transfers into level 3

      

Transfers out of level 3

      

Balance at March 31, 2023

 $5,272  $468 

 

29

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

  

Obligations of State and

     
  

Political Subdivisions

  

Corporate Bonds

 

Balance at December 31, 2021

 $22,114  $488 

Realized gains (losses) included in earnings

      

Unrealized (losses) gains included in other comprehensive (loss) income

  (1,077)  17 

Purchases

      

Sales

      

Maturities, prepayments, and calls

  (25)   

Transfers into level 3

      

Transfers out of level 3

  (5,000)   

Balance at March 31, 2022

 $16,012  $505 

 

There were no liabilities measured at fair value on a recurring basis using level 3 inputs at March 31, 2023 and  December 31, 2022. For the three months ended March 31, 2023 and 2022, there were no gains or losses included in earnings related to the change in fair value of the assets measured on a recurring basis using significant unobservable inputs held at the end of the period.

 

The following table provides quantitative information about significant unobservable inputs used in fair value measurements of level 3 assets measured at fair value on a recurring basis at March 31, 2023 and  December 31, 2022 (dollars in thousands).

 

  

Estimated

       
  

Fair Value

  

Valuation Technique

 

Unobservable Inputs

 

Range of Discounts

March 31, 2023

          

Obligations of state and political subdivisions

 $5,272  

Option-adjusted discounted cash flow model; present value of expected future cash flow model

 

Bond appraisal adjustment(1)

 

0% - 11%

Corporate bonds

  468  

Option-adjusted discounted cash flow model; present value of expected future cash flow model

 

Bond appraisal adjustment(1)

 

7%

           

December 31, 2022

          

Obligations of state and political subdivisions

 $5,965  

Option-adjusted discounted cash flow model; present value of expected future cash flow model

 

Bond appraisal adjustment(1)

 

0% - 12%

Corporate bonds

  479  

Option-adjusted discounted cash flow model; present value of expected future cash flow model

 

Bond appraisal adjustment(1)

 

4%

 

(1) Fair values determined through valuation analysis using coupon, yield (discount margin), liquidity and expected repayment dates.

 

Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis

 

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Quantitative information about assets measured at fair value on a nonrecurring basis based on significant unobservable inputs (level 3) is summarized below as of  March 31, 2023 and  December 31, 2022. There were no liabilities measured on a nonrecurring basis at March 31, 2023 or December 31, 2022 (dollars in thousands).

 

  

Estimated

        

Weighted Average

  

Fair Value

  

Valuation Technique

 

Unobservable Inputs

 

Range of Discounts

 

Discount

March 31, 2023

            

Loans individually evaluated for impairment

 $603  

Discounted cash flows; underlying collateral value

 

Collateral discounts and estimated costs to sell

 

1% - 100%

 

25%

             

December 31, 2022

            

Impaired loans

 $4,033  

Discounted cash flows; underlying collateral value

 

Collateral discounts and estimated costs to sell

 

4% - 100%

 

53%

 

30

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The estimated fair values of the Company’s financial instruments are summarized in the table below as of the dates indicated (dollars in thousands).

 

  

March 31, 2023

 
  

Carrying

  

Estimated

             
  

Amount

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

 

Financial assets:

                    

Cash and due from banks

 $31,293  $31,293  $31,293  $  $ 

Investment securities

  414,155   413,912      402,802   11,110 

Equity securities

  24,617   24,617   1,241   23,376    

Loans, net of allowance

  2,078,523   1,974,527         1,974,527 

Interest rate swaps - gross assets

  16,982   16,982      16,982    
                     

Financial liabilities:

                    

Deposits, noninterest-bearing

 $508,241  $508,241  $  $508,241  $ 

Deposits, interest-bearing

  1,637,406   1,508,477         1,508,477 

FHLB short-term advances and federal funds purchased

  277,056   277,056      277,056    

FHLB long-term advances

  23,500   22,528         22,528 

Junior subordinated debt

  8,545   8,545         8,545 

Subordinated debt

  45,000   44,241      44,241    

Interest rate swaps - gross liabilities

  16,982   16,982      16,982    

 

  

December 31, 2022

 
  

Carrying

  

Estimated

             
  

Amount

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

 

Financial assets:

                    

Cash and due from banks

 $40,066  $40,066  $40,066  $  $ 

Federal funds sold

  193   193   193       

Investment securities

  413,472   413,089      401,233   11,856 

Equity securities

  27,254   27,254   1,245   26,009    

Loans, net of allowance

  2,080,403   1,997,287         1,997,287 
                     

Financial liabilities:

                    

Deposits, noninterest-bearing

 $580,741  $580,741  $  $580,741  $ 

Deposits, interest-bearing

  1,501,624   1,314,407         1,314,407 

FHLB short-term advances

  333,500   333,500      333,500    

FHLB long-term advances

  53,500   52,147         52,147 

Junior subordinated debt

  8,515   8,515         8,515 

Subordinated debt

  45,000   42,980      42,980    

 

31

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 8. INCOME TAXES

 

The income tax expense and the effective tax rate included in the consolidated statements of income are shown in the table below for the periods presented (dollars in thousands).

 

  

Three months ended March 31,

 
  

2023

  

2022

 

Income tax expense

 $874  $2,600 

Effective tax rate

  18.7%  20.5%

 

For the three month period ended March 31, 2023, the effective tax rate differs from the statutory tax rate of 21% primarily due to tax exempt interest income earned on certain loans, investment securities, and bank owned life insurance. For the three month period ended March 31, 2022, the effective tax rate differs from the statutory tax rate of 21% primarily due to tax exempt interest income earned on certain investment securities and bank owned life insurance.

 

 

NOTE 9. COMMITMENTS AND CONTINGENCIES

 

Unfunded Commitments

 

The Company is a party to financial instruments with off-balance-sheet risk entered into in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit consisting of loan commitments and standby letters of credit, which are not included in the accompanying financial statements. 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 credit losses on loans. The reserve for unfunded loan commitments was $0.2 million and $0.4 million at  March 31, 2023 and  December 31, 2022, respectively, and is included in “Accrued taxes and other liabilities” in the accompanying consolidated balance sheets.

 

Commitments to extend credit are agreements to lend money with fixed expiration dates or termination clauses. The Company applies the same credit standards used in the lending process when extending these commitments, and periodically reassesses the customer’s creditworthiness through ongoing credit reviews. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral is obtained based on the Company’s assessment of the transaction. Substantially all standby letters of credit issued have expiration dates within one year.

 

The table below shows the approximate amounts of the Company’s commitments to extend credit as of the dates presented (dollars in thousands).

 

  

March 31, 2023

  

December 31, 2022

 

Loan commitments

 $354,941  $333,040 

Standby letters of credit

  15,347   11,379 

 

Additionally, at March 31, 2023, the Company had unfunded commitments of $1.7 million for its investments in Small Business Investment Company qualified funds and other investment funds.

 

32

 

INVESTAR HOLDING CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 10. LEASES

 

The Company’s primary leasing activities relate to certain real estate leases entered into in support of the Company’s branch operations. The Company’s lease agreements under which its branch locations are operated have all been designated as operating leases. The Company does not lease equipment under operating leases, nor does it have leases designated as finance leases.

 

The Company determines if an arrangement is a lease at inception. Operating leases, with the exception of short-term leases, are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in “Bank premises and equipment, net” and “Accrued taxes and other liabilities”, respectively, in the accompanying consolidated balance sheets. Operating lease ROU assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease pre-payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease. When it is reasonably certain that the Company will exercise an option to extend a lease, the extension is included in the lease term when calculating the present value of lease payments.

 

Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which the Company has elected to account for separately, as the non-lease component amounts are readily determinable.

 

Quantitative information regarding the Company’s operating leases is presented below as of and for the three months ended March 31, 2023 and 2022 (dollars in thousands).

 

  

March 31,

 
  

2023

  

2022

 

Total operating lease cost

 $125  $152 

Weighted-average remaining lease term (in years)

  7.6   7.6 

Weighted-average discount rate

  3.1%  2.9%

 

At  March 31, 2023, the Company’s operating lease ROU assets and related liabilities were $2.3 million and $2.4 million, respectively, and have remaining terms ranging from 1 to 9 years, including extension options if the Company is reasonably certain they will be exercised.

 

Future minimum lease payments due under non-cancelable operating leases at March 31, 2023 are presented below (dollars in thousands).

 

Remainder of 2023

 $302 

2024

  325 

2025

  336 

2026

  339 

2027

  341 

Thereafter

  1,012 

Total

 $2,655 

 

At March 31, 2023, the Company had not entered into any material leases that have not yet commenced.

 

The Bank owns its corporate headquarters building, the first floor of which is occupied by multiple tenants. All tenant leases are operating leases. The Bank, as lessor, recognized lease income of $0.1 million for each of the three month periods ended March 31, 2023 and 2022.

 

On January 27, 2023, the Bank completed the previously announced sale of certain assets, deposits and other liabilities associated with the Alice and Victoria, Texas branch locations to First Community Bank. Upon the completion of the sale, the Bank recorded $0.3 million of occupancy expense to terminate the remaining contractually obligated lease payments due under non-cancelable operating leases.

 

33

 
 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Note Regarding Forward-Looking Statements

 

When included in this Quarterly Report on Form 10-Q, or in other documents that Investar Holding Corporation (the “Company,” “we,” “our,” or “us”) files with the Securities and Exchange Commission (“SEC”) or in statements made by or on behalf of the Company, words like “may,” “should,” “could,” “predict,” “potential,” “believe,” “think,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “outlook” and similar expressions or the negative version of those words are intended to identify forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a variety of risks and uncertainties that could cause actual results to differ materially from those described therein. The Company’s forward-looking statements are based on assumptions and estimates that management believes to be reasonable in light of the information available at the time such statements are made. However, many of the matters addressed by these statements are inherently uncertain and could be affected by many factors beyond management’s control. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors include, but are not limited to, the following, any one or more of which could materially affect the outcome of future events:

 

 

the significant risks and uncertainties for our business, results of operations and financial condition, as well as our regulatory capital and liquidity ratios and other regulatory requirements caused by business and economic conditions generally and in the financial services industry in particular, whether nationally, regionally or in the markets in which we operate, including risks and uncertainties caused by recent disruptions in the banking industry discussed herein, potential continued higher inflation and interest rates, supply and labor constraints, the war in Ukraine, uncertainty regarding whether the United States Congress will raise the statutory debt limit and the ongoing COVID-19 pandemic;

 

 

our ability to achieve organic loan and deposit growth, and the composition of that growth;

 

 

changes (or the lack of changes) in interest rates, yield curves and interest rate spread relationships that affect our loan and deposit pricing, including potential continued increases in interest rates in 2023;

 

 

our ability to identify and enter into agreements to combine with attractive acquisition candidates, finance acquisitions, complete acquisitions after definitive agreements are entered into, and successfully integrate and grow acquired operations;

 

 

our adoption on January 1, 2023 of FASB ASC Topic 326 Financial Instruments Credit Losses: Measurement of Credit Losses on Financial Instruments Update No. 2016-13 (“ASU 2016-13”), and inaccuracy of the assumptions and estimates we make in establishing reserves for credit losses and other estimates;

 

 

changes in the quality or composition of our loan portfolio, including adverse developments in borrower industries or in the repayment ability of individual borrowers;

 

 

a reduction in liquidity, including as a result of a reduction in the amount of deposits we hold or other sources of liquidity, which may continue to be adversely impacted by the recent disruptions in the banking industry causing bank depositors to move uninsured deposits to other banks or alternative investments outside the banking industry;

 

 

changes in the quality and composition of, and changes in unrealized losses in, our investment portfolio, including whether we may have to sell securities before their recovery of amortized cost basis and realize losses;

 

 

the extent of continuing client demand for the high level of personalized service that is a key element of our banking approach as well as our ability to execute our strategy generally;

 

 

our dependence on our management team, and our ability to attract and retain qualified personnel;

 

 

the concentration of our business within our geographic areas of operation in Louisiana, Texas and Alabama;

 

 

concentration of credit exposure;

 

 

any deterioration in asset quality and higher loan charge-offs, and the time and effort necessary to resolve problem assets;

 

 

cessation of the one-week and two-month U.S. dollar settings of LIBOR as of December 31, 2021 and the announced cessation of the remaining U.S. dollar LIBOR setting after June 30, 2023, and the related effect on our LIBOR-based financial products and contracts, including, but not limited to, hedging products, debt obligations, investments and loans;

 

 

ongoing disruptions in the oil and gas industry due to the significant fluctuations in the price of oil and natural gas;

 

 

data processing system failures and errors;

 

 

cyberattacks and other security breaches;

 

 

potential impairment of our goodwill and other intangible assets;

 

 

our potential growth, including our entrance or expansion into new markets, and the need for sufficient capital to support that growth;

 

 

 

the impact of litigation and other legal proceedings to which we become subject;

 

 

competitive pressures in the commercial finance, retail banking, mortgage lending and consumer finance industries, as well as the financial resources of, and products offered by, competitors;

 

 

the impact of changes in laws and regulations applicable to us, including banking, securities and tax laws and regulations and accounting standards, as well as changes in the interpretation of such laws and regulations by our regulators;

 

 

changes in the scope and costs of FDIC insurance and other coverages;

 

 

governmental monetary and fiscal policies, including the potential for the Federal Reserve Board to raise target interest rates multiple times during 2023;

 

 

hurricanes, tropical storms, tropical depressions, floods, winter storms, and other adverse weather events, all of which have affected the Company’s market areas from time to time; other natural disasters; oil spills and other man-made disasters; acts of terrorism, an outbreak or intensifying of hostilities including the war in Ukraine or other international or domestic calamities, acts of God and other matters beyond our control; and

 

 

other circumstances, many of which are beyond our control.

 

These factors should not be construed as exhaustive. Additional information on these and other risk factors can be found in Item 1A. “Risk Factors” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Special Note Regarding Forward-Looking Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 8, 2023 (the “Annual Report”) and in Part II Item 1A. “Risk Factors” of this report.

 

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on any forward-looking statement as a prediction of future events. We expressly disclaim any obligation or undertaking to update our forward-looking statements, and we do not intend to release publicly any updates or changes in our expectations concerning the forward-looking statements or any changes in events, conditions or circumstances upon which any forward-looking statement may be based, except as required by law.

 

Company Overview

 

This section presents management’s perspective on the consolidated financial condition and results of operations of the Company and its wholly-owned subsidiary, Investar Bank, National Association (the “Bank”). The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes thereto included herein, and the audited consolidated financial statements for the year ended December 31, 2022, including the notes thereto, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report.

 

Through the Bank, we provide full banking services, excluding trust services, tailored primarily to meet the needs of individuals, professionals, and small to medium-sized businesses. Our primary areas of operation are south Louisiana, including Baton Rouge, New Orleans, Lafayette, Lake Charles, and their surrounding areas; southeast Texas, primarily Houston and its surrounding area; and Alabama, including York and Oxford and their surrounding areas. Our Bank commenced operations in 2006 and we completed our initial public offering in July 2014. On July 1, 2019, the Bank changed from a Louisiana state bank charter to a national bank charter and its name changed to Investar Bank, National Association. Our strategy includes organic growth through high quality loans and growth through acquisitions, including whole-bank acquisitions and strategic branch acquisitions. At March 31, 2023, we operated 28 full service branches comprised of 20 full service branches in Louisiana, two full service branches in Texas, and six full service branches in Alabama. We have completed seven whole-bank acquisitions since 2011 and regularly review acquisition opportunities. In addition to our branches acquired through acquisitions, during our last three fiscal years and year-to-date March 31, 2023, we opened two de novo branch locations. As of March 31, 2023 and December 31, 2022, estimated uninsured deposits represented approximately 32% and 34%, respectively, of our total deposits.

 

We closed five branches during our last three fiscal years, and one in Louisiana during the first quarter of 2023, as we continued to evaluate opportunities to improve our branch network efficiency, leverage our digital initiatives and further reduce costs. Four of the branches had been acquired, and the closures involved anticipated synergies that resulted in significant cost savings. In 2022, we sold these five former branch locations and three tracts of land that were being held for future branch locations. On January 27, 2023, we completed our previously announced sale of certain assets, deposits and other liabilities associated with our Alice, Texas and Victoria, Texas branch locations to First Community Bank in order to focus more on our core markets. Of the Bank’s entire branch network, these two locations were geographically the most distant from our Louisiana headquarters. 

 

Our principal business is lending to and accepting deposits from individuals and small to medium-sized businesses in our areas of operation. We generate our income principally from interest on loans and, to a lesser extent, our securities investments, as well as from fees charged in connection with our various loan and deposit services. Our principal expenses are interest expense on interest-bearing customer deposits and borrowings, salaries and employee benefits, occupancy costs, data processing and other operating expenses. We measure our performance through our net interest margin, return on average assets, and return on average equity, among other metrics, while seeking to maintain appropriate regulatory leverage and risk-based capital ratios.

 

 

Certain Events That Affect Period-over-Period Comparability

 

Rising Inflation and Interest Rates. During the entirety of 2021, the federal funds target rate was 0% to 0.25%, and it remained at that rate until March 2022. Inflation reached a near 40-year high in late 2021, driven in large part by economic recovery from the ongoing COVID-19 pandemic, and continued to be high during 2022 and 2023. In response, the Federal Reserve raised interest rates seven times during 2022 and twice in the first quarter of 2023. Between the first quarter of 2022 and the first quarter of 2023, the Federal Reserve has made incremental increases to the target rate, raising, on a cumulative basis, the target rate from 0% to 0.25% by 475 basis points to 4.75% to 5.00%.

 

The Federal Reserve increased the target rate again on May 3, 2023 to 5.00% to 5.25%, and may increase rates again during the remainder of 2023.

 

Recent Disruptions in the Banking Industry. Between March 10, 2023 and March 12, 2023, state banking supervisors closed Silicon Valley Bank (“SVB”) and Signature Bank and named the FDIC as receiver. At the time of closure, they were among the 30 largest U.S. banks. While the reasons for their failure are complex and have not been fully investigated, reports indicate that, among other things, both banks had grown in asset size in recent periods at a faster rate than their peers, had large proportions of uninsured deposits (approximately 87.5% and 89.7% of total deposits, respectively) and high unrealized losses on investment securities. SVB’s business strategy focused on serving the technology and venture capital sectors, and Signature Bank had significant exposure to deposits from the digital asset industry. Prior to their closure, both banks experienced sudden and rapid deposit withdrawals. These events caused bank deposit customers, particularly those with uninsured deposits, to become concerned regarding the safety of their deposits, and in some cases caused customers to withdraw deposits. In response to the disruptions, among other things, the Federal Reserve announced a new Bank Term Funding Program (“BTFP”) to provide eligible banks with loans of up to one-year maturity backed by collateral pledged at par value. On April 24, 2023, San Francisco-based First Republic Bank, also among the 30 largest U.S. banks, reported a large deposit outflow and substantially reduced net income. First Republic Bank also had a large proportion of uninsured deposits (67% as of December 31, 2022). On May 1, 2023, regulators seized First Republic Bank and sold all of its deposits and most of its assets to JPMorgan Chase Bank.

 

In response to the disruptions and related publicity, we formed an internal task force that included members of our Asset/Liability Committee (“ALCO”). The task force met frequently to review our liquidity position and liquidity sources, and oversaw the Bank’s process to qualify for the BTFP in case needed. In addition, we took steps to inform our customers about our financial position, liquidity and insured deposit products. As of March 31, 2023, estimated uninsured deposits represented approximately 32% of our total deposits. For additional information, see “Discussion and Analysis of Financial Condition – Deposits, Liquidity and Capital Resources” and Part II. Item 1A. Risk Factors.

 

Adoption of ASU 2016-13. As discussed throughout this report, we adopted ASU 2016-13 on January 1, 2023, and recorded a one-time, cumulative effect adjustment that increased the allowance for credit losses by $5.9 million and decreased retained earnings, net of tax, by $4.3 million.

 

Sale of Two Branches to First Community Bank. On January 27, 2023, we completed the previously announced sale of certain assets, deposits and other liabilities associated with the Alice and Victoria, Texas locations to First Community Bank, a Texas state bank located in Corpus Christi, Texas. We sold approximately $13.9 million in loans and $14.5 million in deposits.

 

Branch Closures. We closed one branch location in Baton Rouge, Louisiana and one branch location in Westlake, Louisiana in May 2022. We closed one branch in Central, Louisiana in March 2023. We do not expect to open de novo branches during the remainder of 2023.

 

COVID-19 Pandemic. The COVID-19 pandemic and related governmental control measures severely disrupted financial markets and overall economic conditions in 2020 and 2021. While the impact of the pandemic and the associated uncertainties remained in 2022 and 2023, there has been significant progress made with COVID-19 vaccination levels, which has resulted in the easing of restrictive measures in the United States. At the same time, many industries continue to experience supply chain disruptions and labor shortages. Inflation has also increased significantly, and in response the Federal Reserve has raised the federal funds target rate multiple times in 2022 and 2023, as discussed above. Oil and gas prices have also been volatile due in part to the pandemic and the war in Ukraine. On April 10, 2023, the COVID-19 national emergency was ended by Congress, and the national public health emergency is set to end on May 11, 2023. For additional information, see our Annual Report, Item 1A. Risk Factors, Risks Related to our Business “The ongoing COVID-19 pandemic, or a similar health crisis, may adversely affect our business, employees, borrowers, depositors, counterparties and third-party service providers.”

 

Subordinated Debt Issuance and Redemption. In April 2022, we completed a private placement of $20.0 million in aggregate principal amount of our 5.125% Fixed-to-Floating Subordinated Notes due 2032 (the “2032 Notes”). In June 2022, we used the majority of the proceeds to redeem $18.6 million of our 2017 issuance of 6.00% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “2027 Notes”). We utilized the remaining proceeds for share repurchases and for general corporate purposes.

 

 

Overview of Financial Condition and Results of Operations

 

For the three months ended March 31, 2023, net income was $3.8 million, or $0.38 per basic and diluted common share, compared to net income of $10.1 million, or $0.98 and $0.97 per basic and diluted common share, for the three months ended March 31, 2022. Net income decreased primarily due to a $4.8 million decrease in noninterest income and a $1.6 million decrease in net interest income. The decrease in noninterest income is mainly attributable to $3.3 million in swap termination fees recorded during three months ended March 31, 2022 and a loss on sale or disposition of fixed assets of $0.9 million during the three months ended March 31, 2023, resulting from the sale of the Alice and Victoria, Texas branches, compared to a gain on sale or disposition of fixed assets of $0.4 million for three months ended March 31, 2022. The decrease in net interest income was a result of an $8.8 million increase in interest expense partially offset by a $7.1 million increase in interest income. At March 31, 2023, the Company and Bank each were in compliance with all regulatory capital requirements, and the Bank was considered “well-capitalized” under the FDIC’s prompt corrective action regulations. Other key components of our performance for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 are summarized below.

 

 

Total loans increased $4.3 million, or 0.2%, to $2.11 billion at March 31, 2023, compared to $2.10 billion at December 31, 2022. Excluding loans associated with the Alice and Victoria, Texas branches sold to First Community Bank, total loans increased $18.2 million, or 0.9%, to $2.11 billion at March 31, 2023, compared to $2.09 billion at December 31, 2022.

 

 

Credit quality metrics improved as nonperforming loans were 0.27% of total loans at March 31, 2023, compared to 0.54% at December 31, 2022.

 

 

On January 1, 2023, Investar adopted ASU 2016-13. Also referred to as the Current Expected Credit Loss (“CECL”) standard, ASU 2016-13 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. Upon adoption, we recorded a one-time, cumulative effect adjustment to increase the allowance for credit losses by $5.9 million and reduce retained earnings, net of tax, by $4.3 million.

 

 

Total deposits increased $63.3 million, or 3.0%, to $2.15 billion at March 31, 2023, compared to $2.08 billion at December 31, 2022. Noninterest-bearing deposits decreased $72.5 million, or 12.5%, to $508.2 million at March 31, 2023, compared to $580.7 million at December 31, 2022. Time deposits and brokered time deposits increased, and other deposit categories decreased. As of March 31, 2023, estimated uninsured deposits represented approximately 32% of our total deposits. 

 

 

Net interest income for the three months ended March 31, 2023 was $20.2 million, a decrease of $1.6 million, or 7.6%, compared to $21.8 million for the three months ended March 31, 2022, driven primarily by an increase in the rates paid on interest-bearing liabilities partially offset by increases in the volume and yield earned on interest-earning assets. 

 

 

We experienced pressure on our net interest margin as interest rates rose rapidly and we raised rates offered on deposits and incurred higher costs on our borrowings. For the three months ended March 31, 2023, our net interest margin was 3.13%, compared to 3.75% for the three months ended March 31, 2022.

 

 

Return on average assets decreased to 0.57% for the three months ended March 31, 2023, compared to 1.60% for the three months ended March 31, 2022. Return on average equity was 7.04% for the three months ended March 31, 2023 compared to 16.64% for the three months ended March 31, 2022.

 

 

During the three months ended March 31, 2023, we paid $0.9 million to repurchase 45,975 shares of common stock, compared to paying $1.5 million to repurchase 77,248 shares of common stock during the three months ended March 31, 2022, and we paid $0.9 million in cash dividends on our common stock, compared to $0.8 million in the first quarter of 2022.

 

 

We held $31.3 million of cash and cash equivalents at March 31, 2023 and maintained $899.3 million of available funding from Federal Home Loan Bank advances, the BTFP, and unsecured lines of credit with correspondent banks. Although we do not plan to utilize the BTFP, our borrowing capacity under the BTFP is $181.1 million as of April 30, 2023, based on the value of unpledged securities available to be used as collateral, valued at par value as permitted under the program. Cash and cash equivalents and available funding represent 136% of uninsured deposits at March 31, 2023.

 

 

Accumulated other comprehensive loss improved $4.7 million, or 9.5%, to $44.3 million for the quarter ended March 31, 2023, compared to $48.9 million for the quarter ended December 31, 2022. Available for sale securities comprised 98% of total investment securities at March 31, 2023 and December 31, 2022.

 

 

Discussion and Analysis of Financial Condition

 

Loans

 

General. Loans constitute our most significant asset, comprising 77% and 76% of our total assets at March 31, 2023 and December 31, 2022, respectively. Total loans increased $4.3 million, or 0.2%, to $2.11 billion at March 31, 2023, compared to $2.10 billion at December 31, 2022. The increase in loans was primarily the result of organic growth. Given the rising interest rate environment, we are emphasizing origination of high margin loans that promote long-term profitability.

 

The table below sets forth the balance of loans outstanding by loan type as of the dates presented, and the percentage of each loan type to total loans (dollars in thousands). 

 

   

March 31, 2023

   

December 31, 2022

 
           

Percentage of

           

Percentage of

 
   

Amount

   

Total Loans

   

Amount

   

Total Loans

 

Construction and development

  $ 210,274       10.0 %   $ 201,633       9.6 %

1-4 Family

    401,329       19.0       401,377       19.1  

Multifamily

    80,980       3.8       81,812       3.9  

Farmland

    10,731       0.5       12,877       0.6  

Commercial real estate

                               

Owner-occupied

    433,585       20.6       445,148       21.1  

Nonowner-occupied

    533,572       25.3       513,095       24.4  

Total mortgage loans on real estate

    1,670,471       79.2       1,655,942       78.7  

Commercial and industrial

    425,093       20.2       435,093       20.7  

Consumer

    13,480       0.6       13,732       0.6  

Total loans

  $ 2,109,044       100 %   $ 2,104,767       100 %

 

At March 31, 2023, the Company’s business lending portfolio, which consists of loans secured by owner-occupied commercial real estate properties and commercial and industrial loans, was $858.7 million, a decrease of $21.6 million, or 2.4%, compared to $880.2 million at December 31, 2022. The decrease in the business lending portfolio is primarily driven by tighter underwriting standards and lower demand due to economic pressures. We also experienced a $20.5 million increase in nonowner-occupied loans due to organic growth. 

 

 

The following table sets forth loans outstanding at March 31, 2023, which, based on remaining scheduled repayments of principal, are due in the periods indicated. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported below as due in one year or less (dollars in thousands).

 

   

One Year or Less

   

After One Year Through Five Years

   

After Five Years Through Ten Years

   

After Ten Years Through Fifteen Years

   

After Fifteen Years

   

Total

 

Construction and development

  $ 110,753     $ 41,812     $ 29,783     $ 10,228     $ 17,698     $ 210,274  

1-4 Family

    49,276       82,103       50,221       24,053       195,676       401,329  

Multifamily

    4,238       62,754       12,462       446       1,080       80,980  

Farmland

    4,231       4,649       1,851                   10,731  

Commercial real estate

                                               

Owner-occupied

    23,765       83,987       206,899       110,116       8,818       433,585  

Nonowner-occupied

    36,436       270,168       176,254       50,497       217       533,572  

Total mortgage loans on real estate

    228,699       545,473       477,470       195,340       223,489       1,670,471  

Commercial and industrial

    163,922       89,557       102,267       61,347       8,000       425,093  

Consumer

    3,391       8,368       1,182       374       165       13,480  

Total loans

  $ 396,012     $ 643,398     $ 580,919     $ 257,061     $ 231,654     $ 2,109,044  

 

Loan Concentrations. Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At March 31, 2023 and December 31, 2022, we had no concentrations of loans exceeding 10% of total loans other than loans in the categories listed in the table above.

 

 

Investment Securities

 

We purchase investment securities primarily to provide a source for meeting liquidity needs, with return on investment a secondary consideration. We also use investment securities as collateral for certain deposits and other types of borrowings. Investment securities represented 15% of our total assets and totaled $414.2 million at March 31, 2023, an increase of $0.7 million, or 0.2%, from $413.5 million at December 31, 2022. The increase in investment securities at March 31, 2023 compared to December 31, 2022 was driven by a $1.5 million increase in commercial mortgage-backed securities and a $0.5 million increase in corporate bonds partially offset by decreases in all other categories of investments compared to December 31, 2022.

 

The table below shows the carrying value of our investment securities portfolio by investment type and the percentage that such investment type comprises of our entire portfolio as of the dates indicated (dollars in thousands).

 

   

March 31, 2023

   

December 31, 2022

 
   

Balance

   

Percentage of Portfolio

   

Balance

   

Percentage of Portfolio

 

Obligations of the U.S. Treasury and U.S. government agencies and corporations

  $ 29,408       7.1 %   $ 29,805       7.2 %

Obligations of state and political subdivisions

    23,251       5.6       23,916       5.8  

Corporate bonds

    30,480       7.4       29,942       7.2  

Residential mortgage-backed securities

    254,324       61.4       254,618       61.6  

Commercial mortgage-backed securities

    76,692       18.5       75,191       18.2  

Total

  $ 414,155       100 %   $ 413,472       100 %

 

The investment portfolio consists of available for sale (“AFS”) and held to maturity (“HTM”) securities. We classify debt securities as HTM if management has the positive intent and ability to hold the securities to maturity. HTM debt securities are stated at amortized cost. Securities not classified as HTM are classified as AFS. As of March 31, 2023, AFS securities comprised 98% of our total investment securities.

 

We adopted ASU 2016-13 effective January 1, 2023. Due to the nature of the investments, current market prices, and the current interest rate environment, we determined that the declines in the fair values of the AFS and HTM securities portfolio were not attributable to credit losses. Accordingly, there was no adjustment made to the amortized cost basis upon adoption. The carrying values of our AFS securities are adjusted for unrealized gains or losses not attributable to credit losses as valuation allowances, and any gains or losses are reported on an after-tax basis as a component of other comprehensive income (loss). For additional information regarding accounting for our investment securities upon the adoption of ASU 2016-13, see Note 1. Summary of Significant Accounting Policies – Accounting Standards Adopted in 2023 in the Notes to Consolidated Financial Statements contained in Part I Item 1. “Financial Statements” included herein.

 

The table below sets forth the stated maturities and weighted average yields of our investment debt securities based on the amortized cost of our investment portfolio at March 31, 2023 (dollars in thousands).

 

   

One Year or Less

   

After One Year Through Five Years

   

After Five Years Through Ten Years

   

After Ten Years

 
   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

 

Held to maturity:

                                                               

Obligations of state and political subdivisions

  $ 915       5.88 %   $ 960       5.88 %   $ 3,536       3.59 %   $       %

Residential mortgage-backed securities

                                        2,637       3.06  

Available for sale:

                                                               

Obligations of the U.S. Treasury and U.S. government agencies and corporations

    619       2.88       13,664       4.02       15,073       5.92       430       5.65  

Obligations of state and political subdivisions

    92       3.42       1,843       2.42       9,117       2.40       8,915       2.78  

Corporate bonds

    600       4.23       12,581       3.56       16,550       4.45       4,000       2.69  

Residential mortgage-backed securities

                            6,102       2.75       288,459       2.26  

Commercial mortgage-backed securities

    678       2.76       6,253       3.84       4,041       2.96       73,315       3.42  
    $ 2,904             $ 35,301             $ 54,419             $ 377,756          

 

The maturity of mortgage-backed securities reflects scheduled repayments based upon the contractual maturities of the securities. Weighted average yields on tax-exempt obligations have been computed on a fully tax equivalent basis assuming a federal tax rate of 21%.

 

As of March 31, 2023, we had $56.7 million in unrealized losses, primarily attributable to investment debt securities with contractual maturities due after 10 years, and $0.5 million in unrealized gains in our AFS investment securities portfolio. For additional information, see Note 3. Investment Securities in the Notes to Consolidated Financial Statements contained in Part I Item 1. “Financial Statements” herein.

 

 

Deposits

 

The following table sets forth the composition of our deposits and the percentage of each deposit type to total deposits at March 31, 2023 and December 31, 2022 (dollars in thousands).

 

   

March 31, 2023

   

December 31, 2022

 
   

Amount

   

Percentage of Total Deposits

   

Amount

   

Percentage of Total Deposits

 

Noninterest-bearing demand deposits

  $ 508,241       23.7 %   $ 580,741       27.9 %

Interest-bearing demand deposits

    538,515       25.1       565,598       27.1  

Money market deposit accounts

    180,402       8.4       208,596       10.0  

Savings accounts

    137,336       6.4       155,176       7.5  

Brokered time deposits

    146,270       6.8       9,990       0.5  

Time deposits

    634,883       29.6       562,264       27.0  

Total deposits

  $ 2,145,647       100 %   $ 2,082,365       100 %

 

Total deposits were $2.15 billion at March 31, 2023, an increase of $63.3 million, or 3.0%, compared to $2.08 billion at December 31, 2022Time deposits and brokered time deposits increased, and other deposit categories decreased. The majority of the increase in time deposits at March 31, 2023 compared to December 31, 2022 is due to existing customer funds migrating from other deposit categories. Beginning in the fourth quarter of 2022, management utilized brokered time deposits, entirely in denominations of less than $250,000, to secure fixed cost funding and reduce short-term borrowings. We were able to offset core deposit decreases with time deposits and brokered time deposits. The weighted average duration of brokered time deposits at March 31, 2023 was approximately 17 months with a weighted average rate of 4.91%.

 

Our deposit mix shifted as interest rates rose, as noninterest-bearing deposits as a percentage of total deposits decreased to 23.7% at March 31, 2023 compared to 27.9% at December 31, 2022. Brokered time deposits and time deposits as a percentage of total deposits increased to 6.8% and 29.6%, respectively, at March 31, 2023 compared to 0.5% and 27.0%, respectively, at December 31, 2022.

 

 

Borrowings

 

At March 31, 2023, total borrowings include federal funds purchased through unsecured lines of credit with First National Bankers Bank and The Independent Bankers Bank, advances from the Federal Home Loan Bank (“FHLB”), subordinated debt issued in 2019 and 2022, and junior subordinated debentures assumed through acquisitions.

 

We had no securities sold under agreements to repurchase at March 31, 2023 and December 31, 2022. Our advances from the FHLB were $300.1 million at March 31, 2023, a decrease of $86.9 million, or 22.5%, from FHLB advances of $387.0 million at December 31, 2022. FHLB advances are used to fund increased loan and investment activity that is not funded by deposits or other borrowings.

 

We had $0.4 million of federal funds purchased through our unsecured lines of credit at March 31, 2023 and no outstanding balances drawn at December 31, 2022. The carrying value of the subordinated debt was $44.2 million at both March 31, 2023 and December 31, 2022. The $8.5 million in junior subordinated debt at both March 31, 2023 and December 31, 2022 represents the junior subordinated debentures that we assumed through acquisitions.

 

The average balances and cost of short-term borrowings for the three months ended March 31, 2023 and 2022 are summarized in the table below (dollars in thousands).

 

   

Average Balances

   

Cost of Short-term Borrowings

 
   

March 31, 2023

   

March 31, 2022

   

March 31, 2023

   

March 31, 2022

 

Federal funds purchased, FHLB advances and other short-term borrowings

  $ 301,033     $ 52       4.80 %     0.66 %

Securities sold under agreements to repurchase

          5,564             0.15  

Total short-term borrowings

  $ 301,033     $ 5,616       4.80 %     0.15 %

 

The main source of our short-term borrowings are advances from the FHLB. The rate charged for these advances is directly tied to the Federal Reserve Bank’s federal funds target rate. As previously discussed, the Federal Reserve has raised the federal funds target rate multiple times in 2022 and 2023. As of March 31, 2023, the federal funds target rate was 4.75% to 5.00%.

 

2032 Notes. On April 6, 2022, we entered into a Subordinated Note Purchase Agreement with certain institutional accredited investors and qualified institutional buyers (the “Purchasers”) under which we issued $20.0 million in aggregate principal amount of our 2032 Notes to the Purchasers at a price equal to 100% of the aggregate principal amount of the 2032 Notes. The 2032 Notes were issued under an indenture, dated April 6, 2022 (the “Indenture”), by and among the Company and UMB Bank, National Association, as trustee.

 

The 2032 Notes have a stated maturity date of April 15, 2032 and will bear interest at a fixed rate of 5.125% per year from and including April 6, 2022 to but excluding April 15, 2027 or earlier redemption date. From April 15, 2027 to but excluding the stated maturity date or earlier redemption date, the 2032 Notes will bear interest at a floating rate equal to the then current three-month term secured overnight financing rate (“SOFR”), plus 277 basis points. As provided in the 2032 Notes, the interest rate on the 2032 Notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR. The 2032 Notes may be redeemed, in whole or in part, on or after April 15, 2027 or, in whole but not in part, under certain other limited circumstances set forth in the Indenture. Any redemption we made would be at a redemption price equal to 100% of the principal balance being redeemed, together with any accrued and unpaid interest to the date of redemption. 

 

Principal and interest on the 2032 Notes are subject to acceleration only in limited circumstances in the case of certain bankruptcy and insolvency-related events with respect to us. The 2032 Notes are the unsecured, subordinated obligations of the Company and rank junior in right of payment to our current and future senior indebtedness and to our obligations to our general creditors. The 2032 Notes are intended to qualify as tier 2 capital for regulatory purposes. 

 

We used the majority of the net proceeds to redeem our 2027 Notes in June 2022 and utilized the remaining proceeds for share repurchases and general corporate purposes.

 

For a description of our 2029 Notes, which are outstanding at March 31, 2023, and our 2027 Notes, which have been redeemed as of March 31, 2023, see our Annual Report, Part II Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations Discussion and Analysis of Financial Condition Borrowings 2029 Notes and 2027 Notes” and Note 11 to the financial statements included in such report.

 

Stockholders Equity

 

Stockholders’ equity was $218.5 million at March 31, 2023, an increase of $2.7 million compared to December 31, 2022. The increase is primarily attributable to a $4.7 million decrease in accumulated other comprehensive loss due to an increase in the fair value of the Bank’s AFS securities portfolio and $3.8 million of net income for the quarter, partially offset by the adoption of the CECL standard, reflected as a one-time, cumulative effect adjustment to retained earnings that decreased retained earnings by $4.3 million after tax. Stockholders’ equity was also reduced during the quarter by the payment of $0.9 million in dividends and $0.9 million to repurchase shares.

 

 

Results of Operations

 

Net Interest Income and Net Interest Margin

 

Net interest income, our principal source of earnings, is the difference between the interest income generated by interest-earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of interest-earning assets and interest-bearing liabilities, yields earned on loans and investments and rates paid on deposits and other borrowings, the level of nonperforming loans, the amount of noninterest-bearing liabilities supporting interest-earning assets, and the interest rate environment.

 

The primary factors affecting net interest margin are changes in interest rates, competition, and the shape of the interest rate yield curve. The Federal Reserve Board sets various benchmark rates, including the federal funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. The Federal Reserve increased the federal funds target rate a total of seven times during 2022 and, as of March 31, 2023, twice during 2023 to 4.75% to 5.00%, as discussed in Certain Events That Affect Period-over-Period Comparability – Rising Inflation and Interest Rates. 

 

Three months ended March 31, 2023 vs. three months ended March 31, 2022. Net interest income decreased 7.6% to $20.2 million for the three months ended March 31, 2023 compared to $21.8 million for the same period in 2022. The decrease is primarily due to an increase in both volume of and rates paid on interest-bearing liabilities partially offset by increases in both the volume of interest-earning assets and the yield earned on those assets. Average short-term borrowings increased $295.4 million, as we utilized advances from the FHLB to fund loan growth and investment activity, and resulted in a $3.6 million increase in interest expense compared to the same period in 2022. Average time deposits increased $181.0 million primarily due to higher rates offered and customer funds migrating from other deposit categories, which resulted in a $3.2 million increase in interest expense compared to the same period in 2022. Average brokered time deposits were $67.1 million during the three months ended March 31, 2023 compared to none during the three months ended March 31, 2022. Average loans increased $241.2 million primarily due to organic growth, which in addition to higher loan yields, resulted in a $5.6 million increase in interest income compared to the same period in 2022. Our yield on interest-earning assets increased as did our rate paid on interest-bearing liabilities primarily as a result of the overall increase in prevailing interest rates.

 

Interest income was $31.0 million for the three months ended March 31, 2023, compared to $23.9 million for the same period in 2022. Loan interest income made up substantially all of our interest income for the three months ended March 31, 2023 and 2022, although interest on investment securities contributed 10.3% of interest income during the first quarter of 2023 compared to 8.2% during the first quarter of 2022. An increase in interest income of $3.0 million can be attributed to the change in the volume of interest-earning assets, and an increase of $4.1 million can be attributed to an increase in the yield earned on those assets. The overall yield on interest-earning assets was 4.80% and 4.10% for the three months ended March 31, 2023 and 2022, respectively. The loan portfolio yielded 5.27% and 4.73% for the three months ended March 31, 2023 and March 31, 2022, respectively, while the yield on the investment portfolio was 2.72% for the three months ended March 31, 2023 compared to 1.90% for the three months ended March 31, 2022. The increase in the overall yield on interest-earning assets compared to the quarter ended March 31, 2022 was primarily driven by a 54 basis point increase in the yield on the loan portfolio and an 87 basis point increase in the yield on the taxable investment securities portfolio.

 

Interest expense was $10.8 million for the three months ended March 31, 2023, an increase of $8.8 million compared to interest expense of $2.0 million for the three months ended March 31, 2022. An increase of $7.9 million resulted from the increase in the cost of interest-bearing liabilities, primarily short-term borrowings and time deposits, and an increase in interest expense of $0.8 million resulted from the change in volume of interest-bearing liabilities. Average interest-bearing liabilities increased approximately $249.1 million for the three months ended March 31, 2023 compared to the same period in 2022 as average short- and long-term borrowings increased by $268.1 million while average interest-bearing deposits decreased by $19.0 million. As previously discussed, the federal funds target rate was 4.75% to 5.00% as of March 31, 2023, which affects the rate we pay for immediately available overnight funds, long-term borrowings, and deposits. We increased rates offered on our interest-bearing products in order to remain competitive in our markets. The cost of deposits increased 137 basis points to 1.62% for the three months ended March 31, 2023 compared to 0.25% for the three months ended March 31, 2022 as a result of the utilization of brokered time deposits to secure fixed cost funding and reduce short-term borrowings, increases in both the average balance of and rates paid for time deposits, and an increase in rates paid for interest-bearing demand deposits. The cost of interest-bearing liabilities increased 175 basis points to 2.23% for the three months ended March 31, 2023 compared to 0.48% for the same period in 2022, due to both a higher average balance of and an increased cost of short-term borrowings, the cost of which is driven by the Federal Reserve’s federal funds rate and increase in the cost of deposits.

 

Net interest margin was 3.13% for the three months ended March 31, 2023, a decrease of 62 basis points from 3.75% for the three months ended March 31, 2022. The decrease in net interest margin was primarily driven by a 175 basis point increase in the cost of interest-bearing liabilities partially offset by a 70 basis point increase in the yield on interest-earning assets. We experienced margin pressure beginning late in 2022, which continued into 2023. We raised rates offered on deposits and incurred higher costs on our borrowings compared to the three months ended March 31, 2022. We may experience additional pressure on our net interest margin if our cost of funds increases faster than the yield on our interest-earning assets.

 

 

Average Balances and Yields. The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or paid and the average yield or rate paid on each such category for the three months ended March 31, 2023 and 2022. Averages presented in the table below are daily averages (dollars in thousands).

 

   

Three months ended March 31,

 
   

2023

   

2022

 
           

Interest

                   

Interest

         
   

Average

   

Income/

           

Average

   

Income/

         
   

Balance

   

Expense(1)

   

Yield/ Rate(1)

   

Balance

   

Expense(1)

   

Yield/ Rate(1)

 

Assets

                                               

Interest-earning assets:

                                               

Loans

  $ 2,103,989     $ 27,359       5.27 %   $ 1,862,775     $ 21,726       4.73 %

Securities:

                                               

Taxable

    459,099       3,085       2.73       395,828       1,814       1.86  

Tax-exempt

    16,496       105       2.58       22,248       141       2.58  

Interest-earning balances with banks

    35,513       428       4.89       77,461       186       0.97  

Total interest-earning assets

    2,615,097       30,977       4.80       2,358,312       23,867       4.10  

Cash and due from banks

    31,356                       44,900                  

Intangible assets

    43,000                       43,928                  

Other assets

    76,695                       134,491                  

Allowance for credit losses

    (30,325 )                     (20,800 )                

Total assets

  $ 2,735,823                     $ 2,560,831                  

Liabilities and stockholders’ equity

                                               

Interest-bearing liabilities:

                                               

Deposits:

                                               

Interest-bearing demand deposits

  $ 736,083     $ 1,594       0.88 %   $ 965,574     $ 339       0.14 %

Brokered demand deposits

                      3,188       2       0.27  

Savings deposits

    146,093       16       0.04       180,568       21       0.05  

Brokered time deposits

    67,088       773       4.68                    

Time deposits

    608,401       3,838       2.56       427,313       614       0.58  

Total interest-bearing deposits

    1,557,665       6,221       1.62       1,576,643       976       0.25  

Short-term borrowings(2)

    301,033       3,562       4.80       5,616       2       0.15  

Long-term debt

    102,604       1,021       4.04       129,904       1,068       3.33  

Total interest-bearing liabilities

    1,961,302       10,804       2.23       1,712,163       2,046       0.48  

Noninterest-bearing deposits

    550,503                       586,556                  

Other liabilities

    4,328                       15,803                  

Stockholders’ equity

    219,690                       246,309                  

Total liabilities and stockholders’ equity

  $ 2,735,823                     $ 2,560,831                  

Net interest income/net interest margin

          $ 20,173       3.13 %           $ 21,821       3.75 %

 

(1)

Interest income and net interest margin are expressed as a percentage of average interest-earning assets outstanding for the indicated periods. Interest expense is expressed as a percentage of average interest-bearing liabilities for the indicated periods.

(2) For additional information, see Discussion and Analysis of Financial Condition  Borrowings.

 

 

   

Three months ended March 31, 2023 vs.

 
   

Three months ended March 31, 2022

 
   

Volume

   

Rate

   

Net(1)

 

Interest income:

                       

Loans

  $ 2,813     $ 2,820     $ 5,633  

Securities:

                       

Taxable

    290       982       1,272  

Tax-exempt

    (37 )           (37 )

Interest-earning balances with banks

    (101 )     343       242  

Total interest-earning assets

    2,965       4,145       7,110  

Interest expense:

                       

Interest-bearing demand deposits

    (81 )     1,335       1,254  

Brokered demand deposits

    (2 )           (2 )

Savings deposits

    (4 )     (1 )     (5 )

Brokered time deposits

    774             774  

Time deposits

    260       2,964       3,224  

Short-term borrowings

    113       3,447       3,560  

Long-term debt

    (224 )     177       (47 )

Total interest-bearing liabilities

    836       7,922       8,758  

Change in net interest income

  $ 2,129     $ (3,777 )   $ (1,648 )

 

(1)

Changes in interest due to both volume and rate have been allocated entirely to rate.

 

 

Noninterest Income

 

Noninterest income includes, among other things, service charges on deposit accounts, gains and losses on calls or sales of investment securities, gains and losses on sales or dispositions of fixed assets and other real estate owned, swap termination fee income, servicing fees and fee income on serviced loans, interchange fees, income from bank owned life insurance, and changes in the fair value of equity securities. We expect to continue to develop new products that generate noninterest income, and enhance our existing products, in order to diversify our revenue sources.

 

Three months ended March 31, 2023 vs. three months ended March 31, 2022. Total noninterest income decreased $4.8 million, or 81.7%, to $1.1 million for the three months ended March 31, 2023 compared to $5.9 million for the three months ended March 31, 2022. The decrease in noninterest income is mainly attributable to $3.3 million in swap termination fees recorded during the three months ended March 31, 2022 and a loss on sale or disposition of fixed assets of $0.9 million during the three months ended March 31, 2023, resulting from the sale of the Alice and Victoria, Texas branches, compared to a gain on sale or disposition of fixed assets of $0.4 million for three months ended March 31, 2022.

 

Swap termination fees of $3.3 million were recorded during the three months ended March 31, 2022 when the Bank voluntarily terminated a number of its interest rate swap agreements in response to market conditions. We had no remaining current or forward starting interest rate swap agreements at March 31, 2023, other than interest rate swaps related to customer loans described in Note 6. Derivative Financial Instruments in the Notes to Consolidated Financial Statements contained in Part I Item 1. “Financial Statements” included herein.

 

Noninterest Expense

 

Three months ended March 31, 2023 vs. three months ended March 31, 2022. Total noninterest expense was $16.2 million for the three months ended March 31, 2023, an increase of $0.7 million, or 4.8%, compared to the same period in 2022. The increase is primarily a result of $0.7 million in expenses as a result of the sale of the Alice and Victoria, Texas branch locations and a $0.2 million increase in salaries and employee benefits, partially offset by a $0.1 million decrease in depreciation and amortization. As a result of the sale of the Alice and Victoria, Texas branches, we recorded $0.4 million of occupancy expense primarily to terminate the remaining contractually obligated lease payments, $0.1 million of salaries and employee benefits for severance, $0.1 million of professional fees for legal and consulting services, and $0.1 million of depreciation and amortization to accelerate the amortization of the remaining core deposit intangible. The increase in salaries and employee benefits compared to the same period in 2022 is primarily due to an increase in health insurance claims. The decrease in depreciation and amortization compared to the same period in 2022 is primarily due to the closure of two branch locations in 2022.

 

Income Tax Expense

 

Income tax expense for the three months ended March 31, 2023 and 2022 was $0.9 million and $2.6 million, respectively. The effective tax rate for the three months ended March 31, 2023 and 2022 was 18.7% and 20.5%, respectively.

 

For the three months ended March 31, 2023, the effective tax rate differs from the statutory tax rate of 21% primarily due to tax exempt interest income earned on certain loans, investment securities, and bank owned life insurance. For the three months ended March 31, 2022, the effective tax rate differs from the statutory tax rate of 21% primarily due to tax exempt interest income earned on certain investment securities and bank owned life insurance.

 

Risk Management

 

The primary risks associated with our operations are credit, interest rate and liquidity risk. Higher inflation also presents risk. Credit, inflation and interest rate risk are discussed below, while liquidity risk is discussed in this section under the heading Liquidity and Capital Resources below.

 

Credit Risk and the Allowance for Credit Losses

 

General. The risk of loss should a borrower default on a loan is inherent in any lending activity. Our portfolio and related credit risk are monitored and managed on an ongoing basis by our risk management department, the board of directors’ loan committee and the full board of directors. We utilize a ten point risk-rating system, which assigns a risk grade to each borrower based on a number of quantitative and qualitative factors associated with a loan transaction. The risk grade categorizes the loan into one of five risk categories, based on information about the ability of borrowers to service the debt. The information includes, among other factors, current financial information about the borrower, historical payment experience, credit documentation, public information and current economic trends. These categories assist management in monitoring our credit quality. The following describes each of the risk categories, which are consistent with the definitions used in guidance promulgated by federal banking regulators.

 

 

Pass (grades 1-6) – Loans not falling into one of the categories 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 (grade 7) – 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 (grade 8) – Loans rated 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 (grade 9) – Doubtful loans are substandard loans with one or more additional negative factors that makes full collection of amounts outstanding, either through repayment or liquidation of collateral, highly questionable and improbable.

 

 

Loss (grade 10) – Loans classified as loss have deteriorated to such a point that it is not practicable to defer writing off the loan. For these loans, all efforts to remediate the loan’s negative characteristics have failed and the value of the collateral, if any, has severely deteriorated relative to the amount outstanding. Although some value may be recovered on such a loan, it is not significant in relation to the amount borrowed.

 

At March 31, 2023 and December 31, 2022, there were no loans classified as loss. There were no loans classified as doubtful at March 31, 2023, compared to $0.2 million at December 31, 2022. At March 31, 2023 and December 31, 2022, there were $15.2 million and $15.0 million, respectively, of loans classified as substandard, and $6.7 million and $12.8 million, respectively, of loans classified as special mention.

 

An independent loan review is conducted annually, whether internally or externally, on at least 40% of commercial loans utilizing a risk-based approach designed to maximize the effectiveness of the review. Internal loan review is independent of the loan underwriting and approval process. In addition, credit analysts periodically review certain commercial loans to identify negative financial trends related to any one borrower, any related groups of borrowers, or an industry. All loans not categorized as pass are put on an internal watch list, with quarterly reports to the board of directors. In addition, a written status report is maintained by our special assets division for all commercial loans categorized as substandard or worse. We use this information in connection with our collection efforts.

 

If our collection efforts are unsuccessful, collateral securing loans may be repossessed and sold or, for loans secured by real estate, foreclosure proceedings initiated. The collateral is generally sold at public auction for fair market value, with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. If the loan balance is greater than the sales proceeds, the deficient balance is charged-off.

 

Allowance for Credit Losses. Effective January 1, 2023, we adopted ASU 2016-13, which uses the CECL accounting methodology for the allowance for credit losses. Upon adoption, we recorded a one-time, cumulative effect adjustment to increase the allowance for credit losses by $5.9 million. The allowance for credit losses was $30.5 million and $24.4 million at March 31, 2023 and December 31, 2022, respectively. The CECL methodology requires that lifetime expected credit losses be recorded at the time the financial asset is originated or acquired.

 

Under ASU 2016-13, the allowance for credit losses on loans is measured on a pool basis when similar risk characteristics exist. The Company’s CECL calculation estimates credit losses using a combination of the discounted cash flow and remaining life methods, as appropriate, depending on the certain portfolio factors including but not limited to size, complexity, and history. The discounted cash flow analysis estimates future cash flows for the loan pool and discounts the cash flows to produce a net present value and ultimately the allowance requirement for the pool. The remaining life method applies a loss rate to a given pool of loans over the estimated remaining life of the given pool. 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 on unfunded amounts. For each pool of loans, management also evaluates and applies qualitative adjustments to the calculated allowance for credit losses based on several factors, including, but not limited to, changes in current and expected future economic conditions, changes in the nature and volume of the portfolio, changes in levels of concentrations, changes in the volume and severity of past due loans, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry.

 

Loans that do not share similar risk characteristics are individually evaluated and are excluded from the pooled loan analysis. The allowance for credit losses on loans that are individually evaluated is based on a comparison of the recorded investment in the loan with either the expected cash flows discounted using the loan’s original effective interest rate, observable market price for the loan or the fair value of the collateral underlying certain collateral dependent loans. We evaluate the adequacy of the allowance for credit losses on a quarterly basis. This evaluation is complex and inherently subjective, as it requires estimates by management that are inherently uncertain and therefore susceptible to significant revision as more information becomes available. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and provision for credit loss on loans in those future periods.

 

We maintain a separate allowance for credit losses on unfunded loan commitments, which is included in “Accrued taxes and other liabilities” in the accompanying consolidated balance sheets. The allowance for credit losses is increased by the provision for credit losses and decreased by charge-offs, net of recoveries. For the three months ended March 31, 2023 and 2022, the provision for credit losses was $0.4 million and negative $0.4 million, respectively.

 

Refer to Note 1. Summary of Significant Accounting Policies – Accounting Standards Adopted in 2023 for information regarding our adoption of ASU 2016-13. 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 U.S. GAAP as discussed in the Annual Report in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates.”

 

 

 

The following table presents the allocation of the allowance for credit losses by loan category and the percentage of loans in each loan category to total loans as of the dates indicated (dollars in thousands).

 

   

March 31, 2023

   

December 31, 2022

 
   

Allowance for Credit Losses

   

% of Loans in each Category to Total Loans

   

Allowance for Credit Losses

   

% of Loans in each Category to Total Loans

 

Mortgage loans on real estate:

                               

Construction and development

  $ 3,041       10.0 %   $ 2,555       9.6 %

1-4 Family

    8,650       19.0       3,917       19.1  

Multifamily

    910       3.8       999       3.9  

Farmland

    30       0.5       113       0.6  

Commercial real estate

    11,527       45.9       10,718       45.5  

Commercial and industrial

    6,125       20.2       5,743       20.7  

Consumer

    238       0.6       319       0.6  

Total

  $ 30,521       100 %   $ 24,364       100 %

 

The following table presents the amount of the allowance for credit losses allocated to each loan category as a percentage of total loans as of the dates indicated.

 

   

March 31, 2023

   

December 31, 2022

 

Mortgage loans on real estate:

               

Construction and development

    0.15 %     0.12 %

1-4 Family

    0.41       0.18  

Multifamily

    0.04       0.05  

Farmland

          0.01  

Commercial real estate

    0.55       0.51  

Commercial and industrial

    0.29       0.27  

Consumer

    0.01       0.02  

Total

    1.45 %     1.16 %

 

As discussed above, the balance in the allowance for credit losses is principally influenced by the provision for credit losses on loans and net loan loss experience. Additions to the allowance for credit losses are charged to the provision for credit losses on loans. Losses are charged to the allowance as incurred and recoveries on losses previously charged to the allowance are credited to the allowance at the time the recovery is collected.

 

The table below reflects the activity in the allowance for credit losses and key ratios for the periods indicated (dollars in thousands).

 

   

Three months ended March 31,

 
   

2023

   

2022

 

Allowance at beginning of period

  $ 24,364     $ 20,859  

ASU 2016-13 adoption impact

    5,865        

Provision for credit losses on loans(1)

    556       (449 )

Net (charge-offs) recoveries

    (264 )     678  

Allowance at end of period

  $ 30,521     $ 21,088  

Total loans - period end

    2,109,044       1,877,444  

Nonaccrual loans - period end

    5,576       25,641  
                 

Key ratios:

               

Allowance for credit losses to total loans - period end

    1.45 %     1.12 %

Allowance for credit losses to nonaccrual loans - period end

    547.36 %     82.24 %

Nonaccrual loans to total loans - period end

    0.26 %     1.37 %

 

(1) The $0.4 million provision for credit losses on the consolidated statement of income includes a $0.6 million provision for loan losses and a $0.2 million negative provision for unfunded loan commitments for the three months ended March 31, 2023.

 

 

The allowance for credit losses to total loans increased to 1.45% at March 31, 2023 compared to 1.12% at March 31, 2022, and the allowance for credit losses to nonaccrual loans ratio increased to 547% at March 31, 2023 compared to 82% at March 31, 2022. The increases in the allowance for credit losses to total loans and allowance for credit losses to nonaccrual loans compared to March 31, 2022, is primarily due to the one-time, cumulative effect adjustment to increase the allowance for credit losses by $5.9 million recorded upon adoption of ASU 2016-13 on January 1, 2023. Nonaccrual loans were $5.6 million, or 0.26% of total loans, at March 31, 2023, a decrease of $20.1 million compared to $25.6 million, or 1.37% of total loans at March 31, 2022. The decrease in nonaccrual loans is primarily due to large paydowns on one loan relationship impacted by Hurricane Ida in the third quarter of 2021. Many of the loans comprising the total relationship were placed on nonaccrual following the impairment in the third quarter of 2021.

 

The following table presents the allocation of net (charge-offs) recoveries by loan category for the periods indicated (dollars in thousands).

 

   

Three months ended March 31,

 
   

2023

   

2022

 
     

Net Recoveries (Charge-offs)

   

Average Balance

     

Ratio of Net Charge-offs to Average Loans

     

Net Recoveries (Charge-offs)

   

Average Balance

     

Ratio of Net Charge-offs to Average Loans

 

Mortgage loans on real estate:

                                               

Construction and development

  $ 42     $ 198,551       (0.02 )%   $ 16     $ 208,768       (0.01 )%

1-4 Family

    (37 )     402,405       0.01       70       364,740       (0.02 )

Multifamily

          80,536                   57,470        

Farmland

          11,136             (54 )     19,043       0.28  

Commercial real estate

    103       969,667       (0.01 )     59       884,271       (0.01 )

Commercial and industrial

    (311 )     428,806       0.07       622       311,812       (0.20 )

Consumer

    (61 )     12,888       0.47       (35 )     16,671       0.21  

Total

  $ (264 )   $ 2,103,989       0.01 %   $ 678     $ 1,862,775       (0.04 )%

 

Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for credit losses on loans. Net charge-offs include recoveries of amounts previously charged off. For the three months ended March 31, 2023, net charge-offs were $0.3 million, or 0.01%, of the average loan balance for the period. Net recoveries for the three months ended March 31, 2022 were $0.7 million, or 0.04%, of the average loan balance for the period.

 

Management believes the allowance for credit losses at March 31, 2023 is sufficient to provide adequate protection against losses in our portfolio. However, there can be no assurance that this allowance will prove to be adequate over time to cover ultimate losses in connection with our loans. This allowance may prove to be inadequate due to higher inflation and interest rates than anticipated, other unanticipated adverse changes in the economy, the scope and duration of the COVID-19 pandemic and its continued influence on the economy, or discrete events adversely affecting specific customers or industries. Our results of operations and financial condition could be materially adversely affected to the extent that the allowance is insufficient to cover such changes or events. Effective January 1, 2023, we adopted ASU 2016-13, which uses the CECL accounting methodology for the calculating the allowance for credit losses. 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 for changes in expected lifetime credit losses. The CECL methodology replaces multiple prior impairment models under U.S. GAAP that generally required that a loss be “incurred” before it was recognized, and represents a significant change from prior U.S. GAAP. Please refer to Note 1. Summary of Significant Accounting Policies – Accounting Standards Adopted in 2023, in the Notes to Consolidated Financial Statements for information regarding our adoption of ASU 2016-13, effective January 1, 2023.

 

Nonperforming Assets. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Loans are ordinarily placed on nonaccrual when a loan is specifically determined to be impaired or when principal and interest is delinquent for 90 days or more. Additionally, management may elect to continue the accrual when the estimated net available value of collateral is sufficient to cover the principal balance and accrued interest. It is our policy to discontinue the accrual of interest income on any loan for which we have reasonable doubt as to the payment of interest or principal. 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. Nonperforming loans were $5.7 million, or 0.27% of total loans, at March 31, 2023, a decrease of $5.6 million compared to $11.3 million, or 0.54% of total loans, at December 31, 2022. The decrease in nonperforming loans compared to December 31, 2022 is mainly attributable to large paydowns on one loan relationship impacted by Hurricane Ida.

 

Restructured Loans

 

Effective January 1, 2023, we adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”, which eliminated the accounting guidance for troubled debt restructurings (“TDRs”). Prior to our adoption of ASU 2022-02, we accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as a TDR.

 

 

Other Real Estate Owned. Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are initially recorded at fair value at the time of foreclosure, less estimated selling cost. Losses arising at the time of foreclosure of properties are charged to the allowance for credit losses. Other real estate owned with a cost basis of $0.9 million was sold during the three months ended March 31, 2023 resulting in a loss of $0.1 million for the period. Other real estate owned with a cost basis of $0.8 million was sold during the three months ended March 31, 2022, resulting in a gain of $41,000 for the period. At March 31, 2023, approximately $0.7 million of loans secured by 1-4 family residential property were in the process of foreclosure.

 

The table below provides details of our other real estate owned as of the dates indicated (dollars in thousands).

 

   

March 31, 2023

   

December 31, 2022

 

1-4 Family

  $ 139     $ 682  

Commercial real estate

    523        

Total other real estate owned

  $ 662     $ 682  

 

Changes in our other real estate owned are summarized in the table below for the periods indicated (dollars in thousands).

 

   

Three months ended March 31,

 
   

2023

   

2022

 

Balance, beginning of period

  $ 682     $ 2,653  

Additions

    916       1,620  

Sales of other real estate owned

    (936 )     (819 )

Balance, end of period

  $ 662     $ 3,454  

 

Impact of Inflation. Inflation reached a near 40-year high in late 2021 primarily due to effects of the ongoing pandemic and continued rising through June 2022. Since June 2022, the rate of inflation has decelerated; however, it has remained at historically high levels through April 2023. When the rate of inflation accelerates, there is an erosion of consumer and customer purchasing power. Accordingly, this could impact our business by reducing our tolerance for extending credit, and our customer’s desire to obtain credit, or causing us to incur additional provisions for credit losses resulting from a possible increased default rate. Inflation may lead to lower loan re-financings. Inflation may also increase the costs of goods and services we purchase, including the costs of salaries and benefits. In response to higher inflation, the Federal Reserve increased the federal funds target rate during 2022 and 2023 as discussed in Certain Events That Affect Period-over-Period Comparability – Rising Inflation and Interest Rates. For additional information, see Interest Rate Risk below, and Item 1A. “Risk Factors – Risks Related to our Business – Changes in interest rates could have an adverse effect on our profitability,” in our Annual Report.

 

 

Interest Rate Risk

 

Market risk is the risk of loss from adverse changes in market prices and rates. Since the majority of our assets and liabilities are monetary in nature, our market risk arises primarily from interest rate risk inherent in our lending and deposit activities. A sudden and substantial change in interest rates may adversely impact our earnings and profitability because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. Accordingly, our ability to proactively structure the volume and mix of our assets and liabilities to address anticipated changes in interest rates, as well as to react quickly to such fluctuations, can significantly impact our financial results. To that end, management actively monitors and manages our interest rate risk exposure.

 

The ALCO has been authorized by the board of directors to implement our asset/liability management policy, which establishes guidelines with respect to our exposure to interest rate fluctuations, liquidity, loan limits as a percentage of funding sources, exposure to correspondent banks and brokers and reliance on non-core deposits. The goal of the policy is to enable us to maximize our interest income and maintain our net interest margin without exposing the Bank to excessive interest rate risk, credit risk and liquidity risk. Within that framework, the ALCO monitors our interest rate sensitivity and makes decisions relating to our asset/liability composition. 

 

Net interest income simulation is the Bank’s primary tool for benchmarking near term earnings exposure. Given the ALCO’s objective to understand the potential risk/volatility embedded within the current mix of assets and liabilities, standard rate scenario simulations assume total assets remain static (i.e. no growth). The Bank may also use a standard gap report in its interest rate risk management process. The primary use for the gap report is to provide supporting detailed information to the ALCO’s discussion.

 

The Bank has particular concerns with the utility of the gap report as a risk management tool because of difficulties in relating gap directly to changes in net interest income. Hence, the income simulation is the key indicator for earnings-at-risk since it expressly measures what the gap report attempts to estimate.

 

Short term interest rate risk management tactics are decided by the ALCO where risk exposures exist out into the 1 to 2 year horizon. Tactics are formulated and presented to the ALCO for discussion, modification, and/or approval. Such tactics may include asset and liability acquisitions of appropriate maturities in the cash market, loan and deposit product/pricing strategy modification, and derivatives hedging activities to the extent such activity is authorized by the board of directors.

 

Since the impact of rate changes due to mismatched balance sheet positions in the short-term can quickly and materially affect the current year’s income statement, they require constant monitoring and management.

 

Within the gap position that management directs, we attempt to structure our assets and liabilities to minimize the risk of either a rising or falling interest rate environment. We manage our gap position for time horizons of one month, two months, three months, 4-6 months, 7-12 months, 13-24 months, 25-36 months, 37-60 months and more than 60 months. The goal of our asset/liability management is for the Bank to maintain a net interest income at risk in an up or down 100 basis point environment at less than (5)%. At March 31, 2023, the Bank was within the policy guidelines for asset/liability management.

 

 

The table below depicts the estimated impact on net interest income of immediate changes in interest rates at the specified levels.

 

As of March 31, 2023

Changes in Interest Rates (in basis points)

 

Estimated Increase/Decrease in Net Interest Income(1)

+300

 

(9.4)%

+200

 

(6.6)%

+100

 

(3.1)%

-100  

2.1%

 

(1)

The percentage change in this column represents the projected net interest income for 12 months on a flat balance sheet in a stable interest rate environment versus the projected net interest income in the various rate scenarios.

 

The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business assumptions are based upon our experience, business plans and published industry experience. Key assumptions include asset prepayment speeds, competitive factors, the relative price sensitivity of certain assets and liabilities, and the expected life of non-maturity deposits. However, there are a number of factors that influence the effect of interest rate fluctuations on us which are difficult to measure and predict. For example, a rapid drop in interest rates might cause our loans to repay at a more rapid pace and certain mortgage-related investments to prepay more quickly than projected. This could mitigate some of the benefits of falling rates as are expected when we are in a negatively-gapped position. Conversely, a rapid rise in rates could give us an opportunity to increase our margins and stifle the rate of repayment on our mortgage-related loans which would increase our returns; however, we may need to increase the rates we offer to maintain or increase deposits, which would adversely impact our margins. As a result, because these assumptions are inherently uncertain, actual results will differ from simulated results.

 

Liquidity and Capital Resources

 

Liquidity. Liquidity is a measure of the ability to fund loan commitments and meet deposit maturities and withdrawals in a timely and cost-effective way. Cash flow requirements can be met by generating net income, attracting new deposits, converting assets to cash or borrowing funds. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, loan prepayments, loan sales and borrowings are greatly influenced by general interest rates, economic conditions and the competitive environment in which we operate. To minimize funding risks, we closely monitor our liquidity position through periodic reviews of maturity profiles, yield and rate behaviors, and loan and deposit forecasts. Excess short-term liquidity is usually invested in overnight federal funds sold.

 

Our core deposits, which are deposits excluding time deposits greater than $250,000 and deposits of municipalities and other political entities, are our most stable source of liquidity to meet our cash flow needs due to the nature of the long-term relationships generally established with our customers. Maintaining the ability to acquire these funds as needed in a variety of markets, and within ALCO compliance targets, is essential to ensuring our liquidity. At March 31, 2023 and December 31, 2022, 73% and 70% of our total assets, respectively, were funded by core deposits.

 

Our investment portfolio is another alternative for meeting our cash flow requirements. Investment securities generate cash flow through principal payments and maturities, and they generally have readily available markets that allow for their conversion to cash. At March 31, 2023, 98% of our investment securities portfolio was classified as AFS and we had gross unrealized losses in our AFS investment securities portfolio of $56.7 million and gross unrealized gains of $0.5 million. The sale of securities in a loss position would cause us to record a loss on sale of investment securities in noninterest income in the period during which the securities were sold. Some securities are pledged to secure certain deposit types or short-term borrowings, such as FHLB advances, which impacts their liquidity. 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.

 

Other sources available for meeting liquidity needs include advances from the FHLB, repurchase agreements and other borrowings. FHLB advances are primarily used to match-fund fixed rate loans in order to minimize interest rate risk and also may be used to meet day to day liquidity needs, particularly if the prevailing interest rate on an FHLB advance compares favorably to the rates that we would be required to pay to attract deposits. At March 31, 2023, the balance of our outstanding advances with the FHLB was $300.1 million, a decrease from $387.0 million at December 31, 2022. The total amount of the remaining credit available to us from the FHLB at March 31, 2023 was $654.1 million. At March 31, 2023, our FHLB borrowings were collateralized by approximately $963.0 million of our loan portfolio and $0.5 million of our investment securities.

 

Beginning in March 2023, we are eligible to borrow from the Federal Reserve’s Bank Term Funding Program (“BTFP”), which provides additional contingent liquidity through the pledging of certain qualifying securities and other assets. The BTFP is a one year program ending March 11, 2024, and we can borrow any time during the term and can repay the obligation at any time without penalty. Although we do not plan to utilize the BTFP, our borrowing capacity under the BTFP is $185.6 million as of March 31, 2023 based on the value of unpledged securities available to be used as collateral, valued at par value as permitted under the program. 

 

Repurchase agreements are contracts for the sale of securities which we own with a corresponding agreement to repurchase those securities at an agreed upon price and date. Our policies limit the use of repurchase agreements to those collateralized by investment securities. We had no repurchase agreements outstanding at March 31, 2023 and December 31, 2022. 

 

 

We maintain unsecured lines of credit with other commercial banks totaling $60.0 million. These lines of credit are federal funds lines of credit and are used for overnight borrowing only. The lines of credit mature at various times within the next year. The total amount of the remaining credit available to us from federal funds lines of credit at March 31, 2023 was $59.6 million.

 

At March 31, 2023, we held $31.3 million of cash and cash equivalents and maintained $899.3 million of available funding from Federal Home Loan Bank Advances, the BTFP, and unsecured lines of credit with correspondent banks. Cash and cash equivalents and available funding represent 136% of uninsured deposits of $682.9 million at March 31, 2023.

 

In addition, at March 31, 2023 and December 31, 2022, we had $45.0 million in aggregate principal amount of subordinated debt outstanding. In April 2022, we completed a private placement of $20.0 million in aggregate principal amount of our 2032 Notes, and used the majority of the proceeds to redeem $18.6 million of our 2027 Notes in June 2022. See discussion above under Discussion and Analysis of Financial Condition Borrowings  2032 NotesFor additional information on our 2027, 2029, and 2032 Notes, see our Annual Report for the year ended December 31, 2022, Part II Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Discussion and Analysis of Financial Condition – Borrowings” and Note 11 to the financial statements included in such report.

 

Our liquidity strategy is focused on using the least costly funds available to us in the context of our balance sheet composition and interest rate risk position. Accordingly, we target growth of noninterest-bearing deposits. Although we cannot directly control the types of deposit instruments our customers choose, we can influence those choices with the interest rates and deposit specials we offer. At March 31, 2023, we held $146.3 million of brokered time deposits and no brokered demand deposits, as defined for federal regulatory purposes, to secure fixed cost funding and reduce short-term borrowings. At December 31, 2022, we held $10.0 million of brokered time deposits and no brokered demand deposits, as defined for federal regulatory purposes. The Bank has historically used brokered demand deposits to satisfy the required borrowings under its interest rate swap agreements. We hold QwickRate® deposits, included in our time deposit balances, which we obtain through a qualified network to address liquidity needs when rates on such deposits compare favorably with deposit rates in our markets. At March 31, 2023, we held $26.4 million of QwickRate® deposits, a decrease compared to $26.5 million at December 31, 2022.

 

The following table presents, by type, our funding sources, which consist of total average deposits and borrowed funds, as a percentage of total funds and the total cost of each funding source for the three months ended March 31, 2023 and 2022.

 

   

Percentage of Total Average Deposits and Borrowed Funds

   

Cost of Funds

 
   

Three months ended March 31,

   

Three months ended March 31,

 
   

2023

   

2022

   

2023

   

2022

 

Noninterest-bearing demand deposits

    22 %     25 %     %     %

Interest-bearing demand deposits

    29       42       0.88       0.14  

Brokered demand deposits

                      0.27  

Savings accounts

    6       8       0.04       0.05  

Brokered time deposits

    3             4.68        

Time deposits

    24       19       2.56       0.58  

Short-term borrowings

    12             4.80       0.15  

Long-term borrowed funds

    4       6       4.04       3.33  

Total deposits and borrowed funds

    100 %     100 %     1.74 %     0.36 %

 

Capital Management. Our primary sources of capital include retained earnings, capital obtained through acquisitions, and proceeds from the sale of our capital stock and subordinated debt. We may issue additional common stock and debt securities from time to time to fund acquisitions and support our organic growth. In April 2022, we completed a private placement of $20.0 million in aggregate principal amount of our 2032 Notes, which are structured to quality as Tier 2 capital for regulatory purposes, and used the majority of the proceeds to redeem $18.6 million of our 2027 Notes in June 2022.

 

During the three months ended March 31, 2023, we paid $0.9 million in dividends, compared to $0.8 million during the three months ended March 31, 2022. We declared dividends on our common stock of $0.095 per share during the three months ended March 31, 2023 compared to dividends of $0.085 per share during the three months ended March 31, 2022. On April 21, 2022 and September 21, 2022, the board of directors approved an additional 400,000 shares and 300,000 shares, respectively, of our common stock for repurchase. The Company had 340,739 shares of its common stock remaining authorized for repurchase under the program at March 31, 2023. During the three months ended March 31, 2023, the Company paid $0.9 million to repurchase 45,975 shares of its common stock, compared to paying $1.5 million to repurchase 77,248 shares of its common stock during the three months ended March 31, 2022.

 

 

We are subject to various regulatory capital requirements administered by the Federal Reserve and the OCC which specify capital tiers, including the following classifications for the Bank under the OCC’s prompt corrective action regulations.

 

                   

Capital Tiers(1)

Tier 1 Leverage Ratio

 

Common Equity

Tier 1 Capital Ratio

 

Tier 1 Capital Ratio

 

Total Capital Ratio

 

Ratio of Tangible to Total Assets

Well capitalized

5% or above

 

6.5% or above

 

8% or above

 

10% or above

   

Adequately capitalized

4% or above

 

4.5% or above

 

6% or above

 

8% or above

   

Undercapitalized

Less than 4%

 

Less than 4.5%

 

Less than 6%

 

Less than 8%

   

Significantly undercapitalized

Less than 3%

 

Less than 3%

 

Less than 4%

 

Less than 6%

   

Critically undercapitalized

               

2% or less

 

(1)

In order to be well capitalized or adequately capitalized, a bank must satisfy each of the required ratios in the table. In order to be undercapitalized or significantly undercapitalized, a bank would need to fall below just one of the relevant ratio thresholds in the table. In order to be well capitalized, the Bank cannot be subject to any written agreement or order requiring it to maintain a specific level of capital for any capital measure. Pursuant to regulatory capital rules, the Company has made an election not to include unrealized gains and losses in the investment securities portfolio for purposes of calculating “Tier 1” capital and “Tier 2” capital.

 

The Company and the Bank each were in compliance with all regulatory capital requirements at March 31, 2023 and December 31, 2022. The Bank also was considered “well-capitalized” under the OCC’s prompt corrective action regulations as of these dates.

 

The following table presents the actual capital amounts and regulatory capital ratios for the Company and the Bank as of the dates presented (dollars in thousands). 

 

   

Actual

   

Minimum Capital Requirement for Bank to be Well Capitalized Under Prompt Corrective Action Rules

 
   

Amount

   

Ratio

   

Amount

   

Ratio

 

March 31, 2023

                               

Investar Holding Corporation:

                               

Tier 1 leverage capital

  $ 229,343       8.30 %   $       %

Common equity tier 1 capital

    219,843       9.64              

Tier 1 capital

    229,343       10.06              

Total capital

    302,081       13.24              

Investar Bank:

                               

Tier 1 leverage capital

    268,189       9.72       137,898       5.00  

Common equity tier 1 capital

    268,189       11.78       148,150       6.50  

Tier 1 capital

    268,189       11.78       182,339       8.00  

Total capital

    296,679       13.03       227,923       10.00  
                                 

December 31, 2022

                               

Investar Holding Corporation:

                               

Tier 1 leverage capital

  $ 231,048       8.53 %   $       %

Common equity tier 1 capital

    221,548       9.79              

Tier 1 capital

    231,048       10.21              

Total capital

    300,009       13.25              

Investar Bank:

                               

Tier 1 leverage capital

    267,603       9.89       135,344       5.00  

Common equity tier 1 capital

    267,603       11.83       147,044       6.50  

Tier 1 capital

    267,603       11.83       180,977       8.00  

Total capital

    292,339       12.92       226,221       10.00  

 

 

Off-Balance Sheet Transactions

 

Swap Contracts. The Bank historically has entered into interest rate swap contracts, some of which are forward starting, to manage exposure against the variability in the expected future cash flows (future interest payments) attributable to changes in the 1-month LIBOR associated with the forecasted issuances of 1-month fixed rate debt arising from a rollover strategy. An interest rate swap is an agreement whereby one party agrees to pay a fixed rate of interest on a notional principal amount in exchange for receiving a floating rate of interest on the same notional amount for a predetermined period of time, from a second party. At March 31, 2023 and December 31, 2022 we had no current or forward starting interest rate swap agreements, other than interest rate swaps related to customer loans, described below. For additional information, see Note 6. Derivative Financial Instruments in the Notes to Consolidated Financial Statements contained in Part I Item 1. “Financial Statements” included herein.

 

During the three months ended March 31, 2022, we voluntarily terminated interest rate swap agreements with a total notional amount of $55.0 million in response to market conditions and as a result of excess liquidity. Unrealized gains of $2.6 million, net of tax expense of $0.7 million, were reclassified from “Accumulated other comprehensive (loss) income” as of March 31, 2022 and recorded as “Swap termination fee income” in noninterest income in the accompanying consolidated statements of income for the three months ended March 31, 2022.

 

For the three months ended March 31, 2022, a gain of $3.2 million, net of a $0.8 million tax expense, has been recognized in “Other comprehensive income (loss)” in the accompanying consolidated statements of comprehensive income (loss) for the change in fair value of the interest rate swaps.

 

The Company also enters into interest rate swap contracts that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC Topic 815, “Derivatives and Hedging”, and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, “Fair Value Measurements”. The Company did not recognize any gains or losses in other income resulting from fair value adjustments during the three months ended March 31, 2023 and 2022. AMarch 31, 2023 we had notional amounts of $147.2 million in interest rate swap contracts with customers and $147.2 million in offsetting interest rate swap contracts with other financial institutions. The fair value of the swap contracts consisted of gross assets of $17.0 million and gross liabilities of $17.0 million recorded in “Other assets” and “Accrued taxes and other liabilities”, respectively, in the accompanying consolidated balance sheet.

 

Unfunded Commitments. The Bank enters into loan commitments and standby letters of credit in the normal course of its business. Loan commitments are made to meet the financing needs of our customers, while standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. The credit risks associated with loan commitments and standby letters of credit are essentially the same as those involved in making loans to our customers. Accordingly, our normal credit policies apply to these arrangements. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the customer. Loan commitments are also evaluated in a manner similar to the allowance for credit losses on loans. The reserve for unfunded loan commitments is included in “Accrued taxes and other liabilities” in the accompanying consolidated balance sheets and was $0.2 million and $0.4 million at March 31, 2023 and December 31, 2022, respectively.

 

Loan commitments and standby letters of credit do not necessarily represent future cash requirements, in that while the customer typically has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon in full or at all. Substantially all of our standby letters of credit expire within one year. Our unfunded loan commitments and standby letters of credit outstanding are summarized below as of the dates indicated (dollars in thousands):

 

   

March 31, 2023

   

December 31, 2022

 

Loan commitments

  $ 354,941     $ 333,040  

Standby letters of credit

    15,347       11,379  

 

The Company closely monitors the amount of remaining future commitments to borrowers in light of prevailing economic conditions and adjusts these commitments as necessary. The Company intends to continue this process as new commitments are entered into or existing commitments are renewed.

 

Additionally, at March 31, 2023, the Company had unfunded commitments of $1.7 million for its investment in Small Business Investment Company qualified funds and other investment funds.

 

For the three months ended March 31, 2023 and for the year ended December 31, 2022, except as disclosed herein and in the Company’s Annual Report, we engaged in no off-balance sheet transactions that we believe are reasonably likely to have a material effect on our financial condition, results of operations, or cash flows.

 

Lease Obligations. The Company’s primary leasing activities relate to certain real estate leases entered into in support of the Company’s branch operations. The Company’s branch locations operated under lease agreements have all been designated as operating leases. The Company does not lease equipment under operating leases, nor does it have leases designated as finance leases.

 

The following table presents, as of March 31, 2023, contractually obligated lease payments due under non-cancelable operating leases by payment date (dollars in thousands).

 

Less than one year

  $ 383  

One to three years

    665  

Three to five years

    680  

Over five years

    927  

Total

  $ 2,655  

 

On January 27, 2023, we completed the sale of certain assets, deposits and other liabilities associated with the Alice and Victoria, Texas branch locations to First Community Bank. Upon the completion of the sale, we recorded $0.3 million of occupancy expense to terminate the remaining contractually obligated lease payments due under non-cancelable operating leases.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Quantitative and qualitative disclosures about market risk as of December 31, 2022 are set forth in the Company’s Annual Report in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management.” Please refer to the information in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Risk Management” in this report for additional information about the Company’s market risk for the three months ended March 31, 2023; except as discussed therein, there have been no material changes in the Company’s market risk since December 31, 2022.

 

Item 4. Controls and Procedures

 

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective for ensuring that information the Company is required to disclose in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

There were no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 

 

 

PART II. OTHER INFORMATION

 

Item 1A. Risk Factors

 

We are supplementing the risk factors described under Part I. Item 1A. “Risk Factors” of our Annual Report with the risk factor set forth below, which should be read in conjunction with the risk factors and other disclosures in this report and in our Annual Report. 

 

Recent disruptions in the banking industry, particularly if continuing or worsening, and related regulatory responses, could have a material adverse effect on the Bank, including its liquidity and costs.

 

Recent highly-publicized bank failures have caused significant disruptions in the banking industry. These industry developments have negatively impacted overall customer confidence in the safety of their deposits, particularly uninsured deposits, at some regional banks. As a result, customers may choose to move deposits to, or maintain deposits with, larger financial institutions or move funds to investment alternatives outside the banking industry, which could materially adversely impact our liquidity, cost of funds, loan funding capacity, net interest margin, capital and results of operations. The rapid failures of SVB and Signature Bank highlighted risks associated with advances in technology that increase the speed at which information, concerns and rumors can spread through traditional and new media, and increase the speed at which deposits can be moved from bank to bank or outside the banking system, heightening liquidity concerns of traditional banks. While regulators and large banks have taken steps designed to increase liquidity at regional banks and strengthen depositor confidence in the broader banking industry, there can be no guarantee that these steps will succeed. In addition, regulators may adopt new regulations or increase FDIC insurance costs, which could increase our costs of doing business. For more information on the Company’s liquidity position, see Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the headings “Certain Events That Affect Period-over-Period Comparability,” “Discussion and Analysis of Financial Condition – Deposits” and “Liquidity and Capital Resources.”

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Unregistered Sales of Equity Securities

 

None.

 

 

Issuer Purchases of Equity Securities

 

The table below provides information with respect to purchases made by the Company of shares of its common stock during each of the months during the three month period ended March 31, 2023.

 

Period

 

(a) Total Number of Shares (or Units) Purchased(1)

   

(b) Average Price Paid per Share (or Unit)

   

(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

   

(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Be Purchased Under the Plans or Programs

 

January 1, 2023 - January 31, 2023

    2,500     $ 20.55       2,500       384,214  

February 1, 2023 - February 28, 2023

    27,523       20.30       27,134       357,080  

March 1, 2023 - March 31, 2023

    25,488       18.95       16,341       340,739  
      55,511     $ 19.69       45,975       340,739  

 

(1)

Includes 9,536 shares surrendered to cover the payroll taxes due upon the vesting of restricted stock.

(2) On April 21, 2022, the Company announced that its board of directors authorized the repurchase of an additional 400,000 shares of the Company’s common stock under its stock repurchase plan, and on September 21, 2022, the Company announced that its board of directors authorized an additional 300,000 shares of the Company’s common stock under its stock repurchase plan.

 

Because we are a holding company with no material business activities, our ability to pay dividends is substantially dependent upon the ability of the Bank to transfer funds to us in the form of dividends, loans and advances. The Bank’s ability to pay dividends and make other distributions and payments to us depends upon the Bank’s earnings, financial condition, general economic conditions, compliance with regulatory requirements and other factors. In addition, the Bank’s ability to pay dividends to us is itself subject to various legal, regulatory and other restrictions under federal banking laws that are described in Part I Item 1 “Business”, of our Annual Report.

 

In addition, as a Louisiana corporation, we are subject to certain restrictions on dividends under the Louisiana Business Corporation Act. Generally, a Louisiana corporation may pay dividends to its shareholders unless, after giving effect to the dividend, either (1) the corporation would not be able to pay its debts as they come due in the usual course of business or (2) the corporation’s total assets are less than the sum of its total liabilities and the amount that would be needed, if the corporation were to be dissolved at the time of the payment of the dividend, to satisfy the preferential rights of shareholders whose preferential rights are superior to those receiving the dividend. In addition, our existing and future debt agreements limit, or may limit, our ability to pay dividends. Under the terms of our 5.125% Fixed-to-Floating Rate Subordinated Notes due 2029, we may not pay a dividend if either we or the Bank, both immediately prior to the declaration of the dividend and after giving effect to the payment of the dividend, would not maintain regulatory capital ratios that are at “well capitalized” levels for regulatory capital purposes. We are also prohibited from paying dividends upon and during the continuance of any Event of Default under such notes. Under the terms of our 5.125% Fixed-to-Floating Rate Subordinated Notes due 2032, we are prohibited from paying dividends upon and during the continuance of any Event of Default under such notes. Finally, our ability to pay dividends may be limited on account of the junior subordinated debentures that we assumed through acquisitions. We must make payments on the junior subordinated debentures before any dividends can be paid on our common stock.

 

 

Item 6. Exhibits

 

Exhibit No.

 

Description of Exhibit

     

3.1

 

Restated Articles of Incorporation of Investar Holding Corporation(1)

     

3.2

 

Amended and Restated By-laws of Investar Holding Corporation(2)

     

4.1

 

Specimen Common Stock Certificate(3)

     

4.2

 

Indenture, dated March 24, 2017, by and between Investar Holding Corporation and Wilmington Trust, National Association, as Trustee(4)

     

4.3

 

Supplemental Indenture, dated March 24, 2017, by and between Investar Holding Corporation and Wilmington Trust, National Association, as Trustee(5)

     

4.4

 

Form of 5.125% Fixed to Fluctuation Rate Subordinated Note due 2029(6)

     

4.5

 

Form of Registration Rights Agreement, dated December 20, 2019, by and between Investar Holding Corporation and the purchasers set forth therein(7)

     
4.6   Indenture, dated April 6, 2022, by and among Investar Holding Corporation and UMB Bank, National Association, as trustee(8)
     
4.7   Form of 5.125% Fixed-to-Floating Rate Subordinated Note due 2032(9)
     
4.8   Form of Subordinated Note Purchase Agreement, dated April 6, 2022, by and among Investar Holding Corporation and the several purchasers identified on the signature pages thereto(10)
     
4.9   Form of Registration Rights Agreement, dated April 6, 2022, by and among Investar Holding Corporation and the several purchasers identified on the signature pages thereto(11)
     

31.1

 

Certification of the Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     

31.2

 

Certification of the Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     

32.1

 

Certification of the Principal Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     

32.2

 

Certification of the Principal Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     

101.INS

 

Inline XBRL Instance Document

     

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

     

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

     

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

     

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

     

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

     

104

 

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

 

 

(1)

Filed as exhibit 3.1 to the Registration Statement on Form S-1 of the Company filed with the SEC on May 16, 2014 and incorporated herein by reference.

 

(2)

Filed as exhibit 3.2 to the Registration Statement on Form S-4 of the Company filed with the SEC on October 10, 2017 and incorporated herein by reference.

 

(3)

Filed as exhibit 4.1 to the Registration Statement on Form S-1 of the Company filed with the SEC on May 16, 2014 and incorporated herein by reference.

 

(4)

Filed as exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on March 24, 2017 and incorporated herein by reference.

 

(5)

Filed as exhibit 4.2 to the Current Report on Form 8-K filed with the SEC on March 24, 2017 and incorporated herein by reference.

 

(6)

Filed as exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on November 14, 2019 and incorporated herein by reference.

 

(7)

Filed as exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on December 24, 2019 and incorporated herein by reference.

  (8) Filed as exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on April 7, 2022 and incorporated herein by reference.
  (9) Filed as exhibit 4.2 to the Current Report on Form 8-K filed with the SEC on April 7, 2022 and incorporated herein by reference.
  (10) Filed as exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on April 7, 2022 and incorporated herein by reference.
  (11) Filed as exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on April 7, 2022 and incorporated herein by reference.

 

The Company does not have any long-term debt instruments under which securities are authorized exceeding 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company will furnish to the SEC, upon its request, a copy of all long-term debt instruments.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

INVESTAR HOLDING CORPORATION

     

Date: May 4, 2023

 

/s/ John J. D’Angelo 

   

John J. D’Angelo

   

President and Chief Executive Officer

   

(Principal Executive Officer)

     

Date: May 4, 2023

 

/s/ John R. Campbell 

   

John R. Campbell

   

Chief Financial Officer

   

(Principal Financial Officer)

 

60